[Recorded by Electronic Apparatus]
Thursday, October 19, 1995
.0908 
[English]
The Vice-Chairman (Mr. Volpe): Good morning, colleagues. I'm glad to see that everybody here is a little bit more conscious of the time this morning. I thank you all for being here.
The order of the day is that we're continuing, pursuant to Standing Order 108(2), a study of small and medium-sized businesses in the globalized economy: the Canadian experience.
This morning we have with us witnesses and guests on the topic of export financing and insurance from the private sector. From Caisse centrale Desjardins we have Monsieur Jean-Guy Langelier from Montreal, Quebec.
[Translation]
Good morning. Welcome to the committee.
[English]
And we have Mr. Trung Nguyen, vice-president.
Welcome.
We also have Mr. Doug Williamson, senior vice-president of business banking from the Royal Bank.
From the HongKong Bank of Canada we have Mr. Lindsay Gordon, who comes to us from Vancouver; he is executive vice-president. And we have Mr. David Hunter, assistant vice-president of trade services, from the same bank.
I've already explained to the witnesses that we might be called to the House for a vote at 10 o'clock. In a little while we'll double-check to see whether in fact that vote is going to take place and if we can make some accommodation not to be there. But if we are required to be in the House, we will have to interrupt our proceedings at about 10:10 or shortly thereafter for at least one half-hour.
Without further ado, I'm going to call on Mr. Jean-Guy Langelier to begin with his presentation.
[Translation]
Mr. Jean-Guy Langelier (President, Caisse centrale Desjardins du Québec): Thank you, Mr. Chairman.
Ladies and gentlemen members of the committee: firstly, I would like to thank you for your invitation and introduce to you my colleague Mr. Trung Nguyen, vice-chairman, International Affairs.
We are pleased to share with the members of the committee our thoughts on the challenges that small and medium-sized businesses must face if they are to penetrate foreign markets, and on the various assistance programs the public and private sectors can establish to benefit them.
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Canada has always been a country whose economic growth depends largely on international trade. For a number of years, Canada's international trade has been limited to a very small percentage of businesses, primarily large, among which the 80/20 rule has prevailed. The vast majority of Canadian and Quebec SMBs are reluctant to export; they consider exporting a high-wire activity involving a great deal of uncertainty.
Over the past 10 years, because of the globalization of markets, economic circumstances have become very unstable and uncertain and, furthermore, extremely competitive. Thus SMBs must now operate in circumstances that have changed profoundly.
In order to survive, SMBs are compelled to broaden their horizons and develop foreign markets. In order to help them penetrate these markets, the various levels of government have always made available, and continue to make available, many programs providing information and financial assistance to SMBs. Potential SMB clients sometimes become confused by the sheer volume of public and parapublic programs and stakeholders in the field of international trade.
Assistance programs have too often been developed in isolation by a single level of government, department or agency in order to respond to a specific request or meet the needs of a specific sector.
Examples include federal programs developed by the Department of Foreign Affairs, the Export Development Corporation, the Canadian Commercial Corporation, the Canadian International Development Agency, the Business Development Bank of Canada, and Industry Canada - not to mention programs set up by the provincial governments. The various agencies of both levels of government offer programs targeting the same client group; sometimes this situation results in confusion, overlap and duplication among the programs. In addition, in the past few years these agencies have customized programs for specific countries and even for specific regions of specific countries. The number of programs has skyrocketed, but they all share one shortcoming: a lack of information about financing.
The lack of information about financing is one of these programs' greatest weakness. As I mentioned earlier, a broad range of programs is available to SMBs. Some agencies provide grants allowing individual SMBs to explore foreign markets. Other agencies make it possible for SMBs to visit foreign countries during trade missions. Lastly, some programs help SMBs display their products and services at trade fairs.
When SMBs manage to make a sale, they may encounter problems, for a number of reasons: their financial structure may not be sound enough to complete the sale; the country's credit risk may not be acceptable to the federal and provincial government agencies involved; the evaluation process is too lengthy, especially for sales of low value; once financing is in place, SMBs discover that their financing structures are not competitive with offers made by competitors in other countries.
Allow me to go into a little more detail about these reasons. The various government agencies providing assistance to SMBs in seeking out foreign markets are not responsible for ensuring that SMBs have the expertise and resources required to enter the international markets. Some SMBs develop foreign markets for which no Canadian financing is available, either because the country is not eligible for government programs, or because the financing limit set by government agencies for the country has already been reached. A foreign country's eligibility may also be suspended for political reasons.
In the vast majority of cases, applications from small businesses take longer to process, because information is often missing, or because the sale is of low value; as a result, these applications are not given the desired priority.
However, we emphasize that a major shift took place in the past year, when the federal and provincial governments set up new programs better adapted to the needs of SMBs: the mid-term financing program and the foreign receivable financing program.
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Since these are new programs, it is too early to evaluate their effectiveness. However, there are clear indication of the government's firm intent to provide financial assistance to exporting SMBs.
Increasingly, SMBs complain that the interest rates they pay are too high in comparison with those paid by their competitors. Canada has a long way to go in this regard. Its approach, still too conventional, respects all the consensus rules established by OECD countries and puts Canadian SMBs at a disadvantage, particularly in relation to competitors in signatory countries that respect only the spirit of the consensus. For example, Canada always requires a deposit from foreign buyers, and grants financing based on market rates; other countries, through a series of arrangements, manage not to require a deposit or demand only a bare minimum, and provide financing at favourable rates.
It is our view that, in the current circumstances, a new approach would be desirable. It is in our interest to develop a more cooperative approach among the various public and private sector stakeholders. It is also very much in the interest of the various government departments and agencies to coordinate their efforts and programs more effectively. The main private sector stakeholders and the financial institutions must be called on to contribute, each one doing its share.
It would be wrong to claim that developing foreign markets is the exclusive responsibility of a particular agency or stakeholder. The relationships between financial institutions and government agencies should be imbued with a spirit of cooperation, so that they can better serve SMBs, their common client group.
Financial institutions are generally very well informed about the financial needs of their client groups. Their branches' special relations with businesses, and the extent of their distribution network, are uneven. Financial institutions have no choice but to meet the needs of SMBs, just as SMBs have no choice but to use the network of bank branches and Desjardins credit unions for their international transactions. Since an SMB is by definition a company whose destiny and survival rest in the hands of one or two individuals, it is in everyone's interest to simplify procedures and provide SMBs with prompt, accurate information.
Programs developed for SMBs must be simple to use, involve a minimum of red tape and, preferably, offer single-window service.
Finally, SMBs themselves must recognize that the welfare state is a thing of the past and that they must become more involved and agree to share the risk with other stakeholders.
As you know, SMBs are a natural client group of the Mouvement Desjardins, and a client group to which we are devoted. Like all other stakeholders, we are aware of the changes that have taken place in Canada's economy. Over the past three years, we have taken the initiative of setting up an action plan that will help our SMBs better offset the risks these new circumstances present. For example, we regularly organize information seminars on international trade. The purposes of these seminars, aimed at commercial credit officers in credit unions and presidents of SMBs, are to demystify the field of international trade, and to make participants aware of the importance of export markets and various ways to explore them: sound strategic planning, and identification of various stakeholders and financial tools.
In addition, we actively participate in working groups set up by both levels of government in order to help SMBs operate in foreign markets.
This year we organized a trade mission to Israel and hosted a trade mission from Mexico. These missions were organized in cooperation with our correspondent banks and involved the various Canadian and Quebec government authorities as well. These missions were a first, since they were organized by a financial institution specifically for SMBs. Furthermore, the cooperation and assistance received from the various stakeholders was extraordinary.
This fact demonstrates without any doubt that cooperation is working, and that partnership between the public and private sectors is not only possible but also desirable, as long as we all realize that SMBs are the main agents of economic renewal. It is our job to do all we can to help SMBs in their activities on foreign markets.
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Thank you.
The Vice-Chair (Mr. Volpe): Thank you very much.
[English]
Mr. Doug Williamson.
Mr. Doug Williamson (Senior Vice-President, Royal Bank of Canada): Mr. Chairman and members of the committee, I would like to thank you for the opportunity to appear before this committee in your continuing pursuit of what seems to be the never-ending challenge of how to broaden Canada's export base to include more small businesses.
It's been said by many people that there is no policy as domestic in nature as international trade policy, and the reason for that is quite interesting. It lies in the need for government and industry, including the financial sector, to develop new sorts of domestic partnerships in pursuit of our international trade objectives. As important as the policy issues are, I would suggest to you the process of arriving at the policies is where the rubber really hits the road, and it's in this area that we as Canadians have failed to act. We have been unable to achieve the consensus on the broader, longer-term, strategic objectives of the country.
Before I begin my short remarks, let me assure you there will be no commercials for the Royal Bank, nor will I be an apologist for things we may have been lacking in, either real or perceived. The reason for that is quite simple. We need to move on.
In our view there's a need to focus on three principal areas of the debate, and to do so more vigorously. The first one is the ability to look at radical measures and other trade models. Second is to build bridges between communities that have not existed before. Third is finally to get to grips with applying the full power of our collective creativity. Anything short of an ability to do that will leave Canada behind as we move toward the third millennium. We will lose more ground to our international trading partners and to the vitally important aspect of our social obligation toward job creation in the long term. It's that important.
The new agenda needs some focus, and I am going to propose some areas of focus to you. The first is on the very real challenges and impediments that impact on the nature and future prospects of foreign trade by Canada's SMEs.
The second is on getting the SME community to think global and introducing new mechanisms for them in that regard that go beyond beyond government subsidies and grants and taxpayer-funded, government-run programs.
Third, the agenda needs to focus on the future role of financial institutions and others, including big business, government, and industry trade associations. We all need to be focused on enabling trade, not subsidizing it for the benefit of a few special interest groups.
Finally, we need to get the SME community involved in trading in their own name and in their own right, not simply as subcontractors and suppliers to larger multinational corporations. I'll return to that issue a little later.
To do so, we need to pierce some myths - myths that never were reality and certainly are not reality today in the new global economy. What are those myths?
First, we must correct the historical myths around small business trade: what it is, what it is not, and what the real impediments are. We must balance and merge the various various perspectives in line with a three-part formula that includes financing, foreign market knowledge, and foreign marketing skills - a three-headed approach.
.0925
We must offer an alternative proposal to SME exporters to get around the self-created structural barriers that we have built. And we must focus on solutions and circumspect relationships between the financial community, its social obligation, its economic responsibility, and the willingness of small business to do its part.
Finally, we must focus on solutions that take into account the realities, and not the myths, of the real financing issues facing small business. Today, we make our problem far worse by not realizing that the game has changed and by not acknowledging that our trading partners have embraced and repositioned themselves in the new global economy far better than we.
What have we done wrong? We have not accepted that the very nature of trade financing has changed. We have not acknowledged, to use the politically correct term, that we are an export-challenged nation.
Neither have we recognized that, as important as trade is, the real growth globally is in foreign direct investment. We have to look at both parts of that equation in order to get a true picture of our international or global activity.
Neither have we reached an accord on the role and participation of the financial community, big business, and we do not practise what they talk about in the United States, which is pluralistic activism.
Similarly, number five, we have not repaired and rebuilt our national export infrastructure to focus it on the high-value propositions. Nor have we broadened, deepened and diversified the small business export base.
Most fatally, we have not focused on properly set parameters for the knowledge-based industry segment of the new economy. That needs addressing.
Frankly, the solution does not require a great deal of thinking or conversation on our part. Other nations are practising what we are still talking about. Much has been written an discussed about this whole area. We have simply failed to act.
I'm going to suggest to you some things we need to do. We need to redefine the challenge from one of trade finance to the broader and more useful trade-enabling perspective, which includes financing but does not erroneously and mistakenly place it at the centre of the win-or-lose proposition for foreign trade. We must be prepared to create new financing instruments and partnerships that take into account the broader national goal.
I would point to Denmark as an example for you to study with respect to how they form consortia, including large and small companies, and a financial community, in order to pursue trade opportunities.
Third, we must focus our national financing efforts on three things: pre-export assistance; supporting the manufacturing of goods in progress; and supporting the purchase or discounting of receivables, both domestic and foreign.
We must also ask for other groups in our society to change their views and roles. We must re-create and redefine trade associations. They have to become activists, not lobbyists. They have to focus their efforts on markets and market intelligence. The trade associations must be prepared to provide capital, both equity and debt, to their members.
Others will need to change as well. Big business has a responsibility here to act as a mentor and a partner in the same way that happens in Japan, Germany, Sweden, and a number of other countries I could mention to you.
We must find a way for the banks and the other financial institutions to finally wake up to using and getting leverage off their vast international networks of intelligence and contacts.
We must find a way to structure and enhance the role of equity finance for both domestic sellers and exporters, as well as foreign buyers or importers.
.0930
Let me just quickly expand on that. There are several initiatives. One is aimed at equity participation with the foreign buyer to help secure the relationship with the exporter that ties the trade flows into longer-term commitments. It may then cross over into a second element into equity investment in foreign suppliers and distributors, again for the same reason: to secure longer-term relationships.
We must also think about the new dimensions of trade strategy and what I call the three pillars of opportunity: those that lie within strategic industries in which Canada has an advantage over others in the world; those that stem from areas in which we have product superiority over others in the world; and the identification of unique strategic foreign opportunities in which Canada has an advantage of over the rest of the world.
Say we can pull this together. Picture, for instance, the way we could leverage our natural resource sector, together with our global environmental engineering skills in order to secure business in places like the Czech Republic or Chile. It's three pillars of strength directed in a strategic way at strategic markets.
Finally, before I close, let me refer you to Robert Reich, now of the Clinton administration. He talks about the three logistical partners you need in this. In his book The Work of Nations he calls them: the problem solver, the problem identifier and the strategic broker. I really do recommend that book to the committee.
His views in this regard are based on a very simple analysis of human nature, which demonstrates that risk sharing and reward really do work. Few incentives are as powerful as membership on a team that is engaged in a common task, sharing the risks of defeat and the rewards of victory.
Thank you very much.
The Vice-Chairman (Mr. Volpe): Thank you, Mr. Williamson. I'm almost tempted to follow that analogy up and examine some of the failures and successes of the last World Cup in the U.S. just last summer.
Anyway, you've given the committee a lot of ``whats'' to think about. I'm sure the committee members are writing down questions about ``hows'' as we get into the question and answer session.
Mr. Williamson: Thank you, Mr. Chairman. Copies of this presentation are available in French and English afterward.
The Vice-Chairman (Mr. Volpe): Okay. Thank you very much.
From the HongKong Bank of Canada, Mr. Lindsay Gordon and David Hunter.
Mr. Lindsay Gordon (Executive Vice-President, HongKong Bank of Canada): Good morning, Mr. Chairman, members of the committee. Thank you for inviting us to participate today.
My name is Lindsay Gordon. I'm an executive vice-president with HongKong Bank of Canada. With me today is David Hunter, who is assistant vice-president in charge of trade services for HongKong Bank.
HongKong Bank, with its head office in Vancouver, was among the initial group of 12 foreign-owned banks chartered in July 1981. It is now the seventh-largest bank in Canada, with assets in excess of $18 billion and more then 110 branches, which are in nine provinces.
We are part of the HSBC Holdings PLC of London. With assets in excess of $450 billion and with more than 3,000 offices in 69 countries, the HSBC group is one of the world's largest financial service organizations.
That organization was founded some 130 years ago to serve the needs of the merchants of the China coast and finance the growing trade between China, Europe and the United States. In that sense, you might say that trade finance is in our blood and has been the mainstay of our corporation worldwide since its very beginning.
We offer a full line of retail and commercial banking services that place a special emphasis on intermediate- and small-business lending. Let me give you some statistics that illustrate this point: 88% of our total loan accounts, or about 20% of our total loan balances, are for amounts of less than $500,000. If you use the small business loan definition of loans under $1 million, then 93% of our total loans are to small business.
As our bank is focused on the small and medium-sized business market, loans to large corporate borrowers are not a principal part of our business. We do lend to the corporate market, but less than 1% of our loans are larger than $10 million.
.0935
Our focus on small and intermediate business is not just something that happened. We recognized from our very beginning that this market was, at that time, both important as a source of economic growth and a prime potential user of international trade finance. Moreover, to be frank, we did not have the resources to pursue the large corporate accounts even if we had wanted to. We found a rich and eager market in small and medium-sized enterprises, and in that sense have never looked back.
Along the way we've had two significant changes in our organization. The first was in 1986 when we absorbed the Bank of British Columbia. With that move we changed from a small institution specialized in business lending, financed primarily in the wholesale market, to a multi-province-based, retail-focused bank. Then in May 1990 we absorbed Lloyds Bank Canada, formerly the Continental Bank. This merger doubled our branch networks, substantially increased our exposure in eastern Canada, and made us truly bilingual with branches in eight Quebec communities. We went from the second-largest international bank to the largest.
HongKong Bank of Canada is well set up to receive inquiries from small businesses regarding their import- or export-based trading opportunities. Unlike our larger domestic rivals, HongKong Bank of Canada has chosen not to have a specialized trade finance group. We have concentrated on ensuring that this trade finance knowledge is spread throughout the bank system, and we have provided extensive trade finance training to a large proportion of our bank's lenders, to people who service small and medium-sized enterprises. Of the 250 commercial account managers spread across our 110 branches, over 150 have received sound training in a formal week-long course on finance of international trade, and ongoing experience-based development as trade bankers.
As a consequence, when some calls or walks in the door of one of our branches, he is more likely to meet someone who has not only had first-hand knowledge of the trade finance product range with existing accounts that employ the trade services of the bank, but also someone with an interest in facilitating access to the network resources of the HongKong Bank Group worldwide.
There is a business reality that this missionary work will lead to some material financial service activity with HongKong Bank either in Canada or abroad. A quick determination of the likelihood will inevitably screen out some inquiries. However, I believe our reputation in the marketplace is that we are genuinely concerned with developing trade-related business with the smaller end of the commercial market, on the presumption that it can be conducted on safe, sound and secure principles of commercial banking.
Specific activities conducted at the local level include active membership in the local and regional chambers of commerce, including leadership in international trade committees; availability of executive and branch management for trade-related presentations to accounting and law firms and other industry associations; active support of the Canadian Importers Association and the Canadian Exporters' Association; customer and prospect seminars on issues relevant to trade training and related developments; seminars on related treasury products to assist in risk management for small and medium-sized enterprises; special pricing arrangements for preferred smaller trade customers and foreign exchange services; trade and credit information drawn from our global network of client relationships as well as local market knowledge - I should mention in particular our country profiles, which provide essential background information on each nation, the basic rules governing trade, investment, travel, etc. - and finally, good working relationships with the organizers of trade missions, particularly to Asia.
The trade services of HongKong Bank of Canada and of the group are fundamentally rooted in supporting the middle market, including smaller companies. HongKong Bank of Canada's commercial bankers are ready to invest the time and effort with legitimate inquiries to assist both in the fundamental business decisions associated with expanding an export or import trading activity, and with the development of appropriate financial solutions and support for their trading business.
This has allowed HongKong Bank of Canada to aggressively grow its market share on the import and export side in the delivery of core trade services. For example, one niche where we are recognized as a leader is in the provision of documentary credits to facilitate trade. Some $15 billion of DCs are issued annually to support Canadian exports and imports. While HongKong Bank of Canada's total assets represent only a little more than 2% of the total Canadian bank assets, our share of the DC trade finance business is several multiples higher than that.
All that said, small and medium-sized businesses wishing to export to Asia face some difficult hurdles. For one, selling into Asia is a different proposition than selling into North America or even Europe. Concluding the first deal often takes two or three prolonged meetings, which are usually spaced over several months. That can constitute a substantial cost in air travel for a small business. Finding the right agent to use in the Far East often takes just as long and is of key importance to the Canadian manufacturer or exporter.
.0940
Third, there are, of course, language and cultural differences, which can be overcome by acculturation courses and perhaps with the aid of a recent immigrant to Canada from the target market country. It is my belief, however, that our customers are provided with a comprehensive and effective trade finance service aimed at helping them to sell in this, the fastest-growing market in the world.
Allow me now to briefly mention some issues that are particularly important to new or emerging exporters, which are typically smaller companies. The first is access to working capital financing. Banks, by definition, are low-risk lenders. They have to be, since $19 out of $20 they lend is their depositors' money.
Banks look to the value of their security as the second way out. This is where foreign country and buyer risk can create difficulties. Collecting and enforcing receivable security can be problematic in many countries. Furthermore, credit risk can be substantially higher for work-in-progress financing associated with high-value-added but low-salvage-value capital exports.
In recognition of these impediments, EDC's master accounts receivable guarantee program, the MARG program, and CCC's progress payments program are focused on these needs and, if properly administered, will give the banking community confidence to expand working capital facilities with smaller exporters.
The second issue is access to buyer-risk transfer mechanisms. Smaller exporters are less able to sustain the impact of credit losses on export sales, and thus are more reliant upon the means of transferring the buyer risk from the exporter to an alternate party. By and large there is both a competitive array of credit insurance alternatives in Canada and sufficient capacity by the Canadian banks to assume the foreign buyer risk, particularly for terms under one year.
EDC, for the most part, provides excellent service to the Canadian export community. However, for medium- and longer-term financing, EDC sometimes competes directly with banks, occasionally to the point of negating the incentive for banks to be active term lenders to buyers in emerging markets seeking Canadian exports.
The third issue is access to commercial information. New exporters have limited familiarity with sources of commercial information that are important to their market development activities. Recent government actions, such as the road map to exporting and export financing as well as the top ten export programs, have helped.
In other developed countries, small exporters have access to highly developed and cooperative commercial information networks. In this country banks can often help in providing credit information concerning potential buyers. Too often, however, the new exporter is simply overwhelmed by the number of programs and confused by the apparent duplication between federal and provincial export development programs. There is a need to continue to streamline the access to information for small exporters.
Allow me to conclude, please, with a limited number of recommendations. First, whenever possible, banks should be used to intermediate the payment risk between buyer and supplier. Banks are in the best position to evaluate and assume their own customers' credit risk and take another bank's risk. The classic example is the documentary credit, which supports over $500 billion U.S. of the world's trade.
Second, government support programs for export financing should be focused on the assumption of risks where the banks' capacities end thereby avoiding overlap. These programs should also be run on a cost-recovery basis.
Third, successful strategies for new exporters breaking into international markets are learned, not taught. Smaller companies could learn from the best practices of others, including the larger companies, and that is something that export trade groups could facilitate.
Thank you very much.
The Vice-Chairman (Mr. Volpe): Thank you, Mr. Gordon.
I'll go directly to questions from our colleagues.
Mr. Bergeron.
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[Translation]
Mr. Bergeron (Verchères): I have two questions. First, during the review of Canada's foreign policy, witnesses frequently told us that the basic problem for SMBs was access to private financing. I think that is the main reason for this round-table discussion here today: the ability of SMBs to access private financing.
The Quebec government has established a loan guarantee program; the Paillé Plan, which helps SMBs to set up.
The witnesses from the Caisse centrale Desjardins referred in their presentation to a partnership between government and the private sector, and a rearrangement of government programs whose effectiveness could not be assessed.
First, I would like to ask if it is possible to assess at the present time whether existing programs are adequate to define this new partnership between government and the private sector, or whether, as has been done in Quebec to help businesses start up, we should be considering new programs to strengthen this partnership between the private sector and government in order to help SMBs to access private financing.
Should I ask my second question immediately or would you prefer me to wait?
The Vice-Chair (Mr. Volpe): Mr. Nguyen.
Mr. Trung Nguyen (Vice-President, Caisse centrale Desjardins): As Mr. Langelier stated, the program is quite new, but as my colleagues pointed out in their presentation, it certainly addresses various shortcomings pointed out by SMBs.
As is the case with all new programs, there are inevitably adjustment periods and pilot projects which will indicate to us whether the program in fact meets real needs. There is no doubt that the establishment of this type of program is a helpful initiative by various departments and government agencies.
I would like to explain to you how we in the Caisse centrale Desjardins see our partnership with SMBs. SMBs are businesses whose future is in the hands of one or two people. They refused to define what we refer to as «parameters of amounts». They are very busy people, and the future of their business depends on one or two individuals. The purpose of the partnership we are trying to develop with them is to make their job as easy as possible.
SMBs are new on offshore markets and they need guidance. Moreover, my colleagues have spoken about the need or information and the need to go into new markets. It is this type of partnership that we are trying to develop with SMBs. We want to lead them into these markets, we assure them, provide them with the information they need and help them with the financial arrangements required to complete their transactions.
Mr. Langelier: The financing of new programs is certainly a plus and it is well focussed. You asked if the programs were adequate. That one is excellent, but I must say that there are too many of the other programs and, consequently, SMBs are not able to use them for the reasons which my colleague mentioned.
As regards to financial institutions, there are approximately 300 programs in all. By the time you find out which program is appropriate, the transaction is already finished! Particularly as regards support, it might be beneficial to bring together into one single location all the expertise from the government, public and para-public sectors, so that they can be better geared towards overall objectives. At the moment, there are too many to be of practical use.
[English]
The Vice-Chairman (Mr. Volpe): I think the question is a little bit more focused than one might normally get. Were you looking for a reaction from Mr. Williamson and Mr. Gordon as well?
[Translation]
Mr. Bergeron: Yes, of course.
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[English]
The Vice-Chairman (Mr. Volpe): Do you want to hazard it, gentlemen?
Mr. Williamson: I would simply say, Monsieur Bergeron, that there's no question the cooperation between the private and public sector in the province of Quebec is outstanding. I would say it's an example. I know it's perhaps delicate to say at the present time, but it's an outstanding example.
There is an entrepreneurial spirit in la province du Québec that quite frankly the other provinces could benefit from. The mechanisms are there, but I think it comes basically from the entrepreneurial spirit of the small business person in the province of Quebec.
Mr. Gordon: I would add one comment in response to your question. This is in general, not specifically with respect to Quebec. Are there enough programs? The answer to that is there are too many programs. Are they the right programs? That's another issue.
In Canada, particularly in terms of this federal-provincial overlap, the provincial programs are designed to be complementary to the federal programs. At the design stage and at the initial implementation stage, that objective is followed.
What seems to happen subsequently is that areas of overlap develop. What you're left with for the small exporter, which is what we're talking about today, is a relatively confusing and inefficient situation, where the support is spread through literally hundreds of programs at different levels of government. It's a very inefficient way for an exporter to access information and services to get into those foreign markets.
We need to streamline the access to the programs and to the information.
[Translation]
Mr. Bergeron: Mr. Chairman, I will not ask the question I intended to ask because you have just opened up an interesting debate on overlapping between federal and provincial export support programs for small and medium-size businesses.
I can understand what people are saying. They are saying that there are probably too many programs. They are not useless, but it becomes too complicated for small and medium-size businesses, and even for financial institutions, to manage all these programs. Therefore, consideration should be given to rationalizing federal and provincial programs.
It has been pointed out that provincial programs were often designed to complement federal programs. In other words, provincial programs are often designed to address the particular needs of businesses in a particular province and in keeping with the industrial structure of the province concerned. Would it be inconceivable to take federal programs for supporting SMB exports and decentralize them to the provinces, so as to better reflect the industrial reality of the province concerned?
[English]
The Vice-Chairman (Mr. Volpe): Monsieur Bergeron, you've only left our witnesses with about a minute to answer your question.
[Translation]
Mr. Bergeron: Good heavens!
The Vice-Chair (Mr. Volpe): Who would like to answer first?
[English]
Mr. Gordon: I'm not sure I want to touch that.
Some hon. members: Oh, oh!
Mr. Williamson: I will answer it because it's a legitimate question.
The programs should not be anchored in any particular part of the country. We should look at industry-specific programs, say for the knowledge-based industries and the high-tech sector. If we structure around industrial components rather than regional components, then we will have a more flourishing industrial sector and each province will have an opportunity to have its fair share of it. That would be my view.
The Vice-Chairman (Mr. Volpe): You're very diplomatic. That's not becoming of a banker, but that's good.
Some hon. members: Oh, oh!
Mr. Gordon: It sounds good to me. Ditto.
Some hon. members: Oh, oh!
Mr. David Hunter (Assistant Vice-President, Trade Services, HongKong Bank of Canada): The issue you're focusing on is really one of cooperation. Certainly, as financial institutions in this country have access to the full market - we're not confined necessarily to any particular regions - cooperation within the financial institution industry is achieved. It's another challenge to develop the same degree or a higher degree of cooperation amongst various government entities at the provincial and federal levels.
[Translation]
Mr. Nguyen: As Mr. Hunter pointed out, it is a matter of cooperating, sharing and becoming involved in the process of helping SMBs to successfully complete their transactions. I think everyone has a role to play in that.
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The private sector, including financial institutions and the Mouvement Desjardins, would like to see a new cooperative approach in this area.
Mr. Langelier: Clearly, decentralization to the provincial level would not be beneficial. I agree with what my colleague from the Royal Bank stated, namely that it is better to focus on particular sectors of industry. Working in the area of international trade, I do not see the competitor as being someone from a different town, village or province, but rather someone from a different country. Therefore, a more concerted effort must be made.
[English]
The Vice-Chairman (Mr. Volpe): Mr. Penson.
Mr. Penson (Peace River): Thank you, Mr. Chairman.
I would like to welcome the gentlemen to the committee this morning. I have two questions, but before I start on the questions I would just like to say that I certainly sympathize with small and medium-sized business, and even big business, to the extent that there is a great confusion on government programs out there. You have identified it again this morning, and we have heard it in the past.
In particular, in the area of financing for these companies, export financing is a good example. We see EDC, Northstar, the banking industry, the Federal Business Development Bank, and now CIDA, all in that area. EDC is now moving into domestic financing as well, so I am just wondering if I could get a reaction from the panel this morning on the Export Development Corporation operations in that area.
My understanding is that at one time the banking industry had a pretty big portion of export financing, but it has really dwindled. I think we have heard Mr. Gordon talk about how EDC competes directly with the banks on medium- and long-term financing. Isn't there a role the banks could play here if this crown corporation was disbanded for some reason or another? Would your banking industry be prepared to take over that area and offer Canadian companies the type of export financing that is required? Mr. Gordon is probably certainly aware of the U.K. model, in which they have privatized the export financing and insurance industry.
I want a reaction to that as my first question, but I don't know who wants to start.
Mr. Williamson: Let me jump in and start. I promised not to make advertisements for the Royal Bank, so I am not going to tell you what we have done with Canadian Commercial Corporation or any others. If you check the records, you will see that we have a pretty good record of collaboration, so I think there is room for collaboration.
The essence of your question is, is there more the financial community can do, and could it carry and shoulder more of the load? The answer to that is a categoric yes, and it should, but I think I am again going to come back to my comments.
The real issue is not, in our view, medium-term credit of a foreign risk-buying nature for the small-business community. It is in the provision of domestic working capital, which is certainly within the purview of the banks and other major financial institutions to provide. So I think there has to be a mind shift around this.
Where EDC's business has declined - Mr. Gordon could tell you perhaps better than I could - has been in support of the larger multinationals. I think they are two different equations. I think there is a need at the very large end for participation with government agencies. I think that at the smaller end there is plenty of opportunity for banks and others to fill in a gap and to do it more effectively, efficiently and without government money or support.
Mr. Gordon: If I could add to that in order to emphasize something that Doug has said, when we are talking about small business, the issue is access to working capital and short-term trade finance.
In that sense EDC, in its role as a provider of receivables insurance, has a fairly wide and, I think, fairly effective array of products that the banks can use to support the working capital. There are some gaps, and the MARG program, for example, is attempting to address that. I guess time will tell whether or not it is effective. It hasn't been ruled out yet; I believe it has just been done on an experimental basis.
The issue is access to working capital. The issue of where you get into this debate about EDC competing with the banks is in medium- and longer-term finance. Quite frankly, though, it is really not a big issue for small business, because although there are obviously some, small businesses are not, for the most part, involved in the export of capital equipment that requires that type of finance. That business is completely dominated by the large companies and there are very big costs associated with it.
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The smaller companies are involved, for the most part, in selling products that require shorter-term financing support. The banks do, I think, play a fairly effective role in doing that. That's not to say it's perfect, but there is a big role for the banks to play with, where needed, support for institutions like EDC, with receivables insurance. This allows the banks to give security value to South American or Asian receivables that are outside of North America.
Mr. Penson: Yes, I can understand that. But hopefully these small companies are not going to be small companies forever. The whole objective of this game is for them to grow and to take advantage of the export market. I'm therefore a little bit surprised that you wouldn't see EDC as a bit more of a competitor, one that is unfair to some extent in that they don't pay taxes and they have access to the public purse. Wouldn't you want a bigger share of that market if you had the -
Mr. Lastewka (St. Catharines): Perhaps he didn't like the [Inaudible - Editor]
Mr. Penson: No, it's a fair question.
Mr. Williamson: Mr. Chairman, it's very, very simple. The answer is that we favour more competition, not less, and I would point particularly to some of what I'm going to call - and it's not a derogatory term - ``boutique firms''. I think you have some that are going to be testifying later today, and we are in fact involved with some of those firms. I think there are great opportunities for very small-niche players to come in.
So the general answer is the more competition, the better. If it's from EDC, or if it's from ECGD, or if it's from COFACE in France, let's participate. Those that are strong will survive.
The Vice-Chairman (Mr. Volpe): I'm not sure that was exactly what Mr. Penson was after. But go ahead, Mr. Gordon.
Mr. Gordon: Are you sure you're not a politician?
I guess when you get into the issue of medium- and longer-term finance -
Mr. Penson: And you've raised that in your presentation.
Mr. Gordon: Yes. If you want to talk about the particular issue of medium-term and longer-term financing, which I emphasize is the lesser issue for small business, and ask us if there is a greater role for the banks, of course we're going to say yes. We do think there is. There are over 7,000 branches in Canada of the banks that could be used as distribution points and could be turned on for the benefit of the export community.
But it really comes back to an issue of dollars and cents, and it's a public policy issue. On the one hand, EDC is expected to operate as a crown corporation on a self-sustaining basis, and that public policy mandate is not necessarily the same as it is in other countries. I therefore have to sort of throw it back to you because it's a public policy issue.
Mr. Penson: Yes, and deciding public policy is our job as members of Parliament, which is why I asked the question of you. You have a competitor out there that is a government-owned business. Given the possibility that they may not be in that business forever, or in a situation like the one in Britain, where they went to a privatized export financing industry, if you had your druthers would you or would you not prefer that in Canada?
Mr. Hunter: If you're looking for a private sector view on that question, you'd have to take into account the profitability assessment of the type of business that would be transacted. In the context of the U.K. model, where banks are asked to play a role where a significant portion of their participation carries a simple and effective guarantee of the British government, the mechanics of those transactions allow the bank to derive an acceptable level of profit.
In the Canadian context, the regime for establishing that relationship between the bank and EDC is much more complicated and transaction specific. As a result, the banking community in Canada has responded to the relative profit opportunities with respect to its limited capacity to take on difficult medium- and long-term credit risk.
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The Vice-Chairman (Mr. Volpe): I'm sure Mr. Penson and Mr. Mills will pursue that in the next round.
I just want to interrupt by telling you it looks as if that vote is cancelled and we'll be able to proceed without interruption. I'll go to Mr. Flis.
Mr. Flis (Parkdale - High Park): Thank you, Mr. Chairman. I welcome our witnesses in helping us get the small and medium-sized business into the export field.
A committee similar to this did a similar process almost fifteen years ago. At that time the committee came out with a recommendation that Canada needs a national trading corporation owned 50% by government, 50% by the private sector. The small business that cannot afford to do the market intelligence abroad, cannot put the financing together - all the problems we've heard about today...a lot of these problems would be resolved, because the small company could go through this national trading corporation.
Today we're hearing there are too many agencies and vehicles to help the small and medium-sized business and the exporter, or potential exporter, is very confused. Is it time to re-look at something like a national trading corporation, or do we have enough vehicles and agencies and programs in place now to forget the national trading corporation?
But what do you recommend in its place? What we have now does not appear to be working.
Mr. Williamson: I would support the formation of a national trading corporation, on two grounds: first, that it has an equitable shareholding interest. I think you'd have to include big business and start to squeeze those babies for some money to put in on the equity. Secondly, it would have to be strategic. It would have to be focused on strategic objectives within an overall and, dare I say it, industrial plan or strategy. On that basis, I think it could be a vehicle to help promote the strategic launching of exports for Canada. But it would have to have those two conditions: broader equity participation and a very pointed strategic aim.
[Translation]
Mr. Nguyen: My viewpoint is somewhat different from that of my colleague from the Royal Bank. As I stated, by definition SMBs have very little time. The process of setting up an agency or corporation requires a lot of time. As this is a consortium-based approach, with the government and private sector each investing 50%, you cannot be sure what direction it will take!
In my view we already have a Desjardins network in Quebec, which is able to distribute these services. Are we ready to cooperate in some way in a joint cooperation program? Perhaps we are ready to consider rearranging these programs. We should try to use the current network and distribute these services more effectively and efficiently.
[English]
The Vice-Chairman (Mr. Volpe): Mr. Flis, a supplementary; or do you want Mr. Gordon to answer?
Mr. Flis: Unless Mr. Gordon wanted to answer....
Mr. Gordon: To be honest, I really don't have a strong view one way or the other. My intuitive guess is that if you had a national trading corporation, a sort of expanded CCC - CCC is filling that role today to a certain extent, but on a much small scale - if you took that on a much larger scale, my intuitive guess about who it would benefit the most is it would end up being the large companies. I'm not sure it would be particularly effective in facilitating small companies into the export field.
But that's an intuitive guess. I don't really have any logic to it.
Mr. Flis: The whole idea was that it would not be available to the multinationals. It would be specifically geared to helping the small business potential exporter.
Let me get down to brass tacks and share with you a realistic problem.
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When I was in Quebec not long ago I ran across a firm that was exporting prefab homes to Poland. They were creating almost an entire subdivision in Poland, about 240 prefab homes. Every part of those homes was manufactured in Quebec. It would all be shipped by container and slapped up in Poland. So you're creating jobs, you're creating markets, etc. If that is successful, who knows how many such subdivisions could mushroom, not only in Poland but in other countries.
This company could not get the proper financing in Quebec. This company could not get proper financing federally. This company could not get financing through any associations, chambers of commerce, caisses populaires, etc. They finally got financing. Where did they get it? The Polish American Mortgage Bank.
Now, what the hell is wrong with our country that a firm this size with the potential of creating so many jobs would have to go to the U.S. to get financing? That's happened, and the project has gone ahead thanks to the Polish American Mortgage Bank. So where was the Royal Bank? Where was the caisse populaire?
The Vice-Chairman (Mr. Volpe): Mr. Williamson.
Mr. Williamson: I'll give our view. Our view is very simple. We looked at a prefab home to export to Argentina, very similar to the one you're talking about. What was the kicker on it? The exporter had negotiated with the Argentinians that we'd provide mortgage financing to the buyer of the homes in Argentina. That ain't our business, okay? There's always more to these stories.
The essence of what you're saying, that there's a strategic partnership with someone who knows the local market - in your instance, Poland - is exactly what I was talking about in my opening comments. Let's get the Polish community in Canada involved in that kind of mechanism. I think you have to accept that there will be international expertise. We may not have it in Canada, but we shouldn't be upset that it's obtained somewhere else. It is an example of a strategic alliance and partnership.
The other way to complete the transaction you're referring to would have been to seek out an equity partner in Poland, using the strength of the Canadian financial services industry to find someone in Poland who could solidify a longer-term relationship so that it wasn't just this one-time transaction but a longer-term transaction. That was a missed opportunity.
Mr. Gordon: Perhaps I could add a comment.
I know nothing about the company. HongKong Bank is certainly not an active lender and knows very little about Poland, but what I would say is that the issue you've outlined may be as much an access to information issue as it is an access to financing issue. Poland is a risky market, there's no doubt about it.
An export sale will only benefit the Canadian economy if we are reasonably confident that the money is going to be repaid. In this case, the very name Polish American Mortgage Bank sounds like it's a bank that would obviously know and understand that market, certainly far better than the HongKong Bank of Canada. Perhaps what should have happened is that right at the outset somebody should have been in a position to link up that Quebec company with this institution, albeit existing in the States, that has that expertise in Poland. Maybe it's as much an access to information issue as it is an access to financing issue.
Mr. Flis: They were referred to a Pol-Can Bank, but that bank was not large enough to handle such a large agreement. We'll probably be hearing a little more about it later this morning.
I used Poland because I know of this case specifically. It was drawn to my attention. But it could be any country in the world.
The Vice-Chairman (Mr. Volpe): Thank you, Mr. Flis.
We'll go into a second round. I have Mr. Bergeron.
[Translation]
Mr. Bergeron: First, I would like to clarify what I meant by the last question I asked.
I had the impression that the witnesses felt a little uncomfortable. I wouldn't dream of putting you in a difficult position and involving you against your will in the current constitutional debate! My question was quite open and impartial. A wishful rationalization was expressed and, as the various industrial sectors are often concentrated in particular regions or provinces in Canada, I suggested that the decentralization of exports support programs might perhaps be one way of rationalizing these various programs.
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I would like now to go back to the question I wanted to ask earlier. The banks often tell us that they consider there are too many risks involved in financing SMB exporting activities. Mr. Langelier said earlier that often SMBs didn't have the necessary resources or expertise to venture into foreign markets and, consequently, there were often risks involved in supporting SMB exports.
I very much appreciated the presentation by Mr. Gordon of the HongKong Bank of Canada, who said that his institution did not have specialized staff working on import support, but that in each of the branches there were people able to immediately answer questions and enquiries from SMBs.
I know that the Mouvement Desjardins has always been concerned about SMBs. I would be greatful if the witnesses could tell me if they consider that this type of service could make it easier for SMBs to access the financing and information they need in order to move into markets offshore.
Mr. Langelier: During his statement earlier, my colleague said that was believed to be the case. Information must be provided to the existing networks, that is the credit unions or the banks, which the HongKong Bank of Canada is already doing. Frankly, I must admit that at present not everyone in the Mouvement Desjardins has been trained to adequately address such issues.
As I said in our introduction, we must serve our clients, educate and further train our loan managers in the various branches so as to enable them to direct the help to business people, to examine the problems of small business owners and help them find their way through the maze of programs, or at least establish a relationship with specialists working in the institution. However, the business person's involvements must stop at the point of sale, that is at the branch of the credit union or bank, so that he or she can be given the product they need.
[English]
Mr. Gordon: I guess all I can do is reiterate and expand upon the remarks I made in my presentation that the HongKong Bank, perhaps because of its tradition in trade finance, is clearly one of our competitive strengths, and therefore, in trying to expand our business in Canada and to service the existing and potential export community, we've tried to bring that expertise to bear.
I guess because it is a competitive strength of ours, we have determined that it is extremely important that the vast majority of our branches - I can't say every branch - and the lenders in our branches have a reasonable level of familiarity with trade finance so that when an existing or potential exporter comes in and wants to talk about how they are going to get paid for goods that they might export to some Asian country, the loan account manager won't go into rigor mortis at the very mention of it, but they have an ability to respond intelligently and to deal with that company. So that has really always been the way we have operated, and it has been fairly effective for us, and we believe for our customers too.
Mr. Mills (Red Deer): I'd like to explore a couple of areas. One comes from some of our business presenters earlier, who said that one of their biggest problems in getting credit - and you mentioned that they can get help for their domestic back-up - is that banks will not consider foreign receivables as part of the evaluation of the viability of projects, and so on. One person used the example that 80% of his receivables were in the U.S. They were solid companies, solid business, but the banks would not consider them.
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I wonder if you could just comment on that.
Mr. Williamson: I will comment, but again I'm not going to advertise for the Royal Bank, because there is a direct answer to that.
The point is we have to purchase foreign receivables. We purchase foreign receivables now in 16 different currencies for 16 different countries. That's what we are doing.
It is an important issue. That's what our clients tell us. It's the same thing your constituents tell you. We have had to create a separate subsidiary to do that and we've had to go out and find a partner to help us do that, but today - 16 foreign countries. We were the first bank to do the U.S. dollar receivables.
Mr. Gordon: As far as HongKong Bank is concerned, for the most part, we do give security value to U.S. receivables. The issue of giving security value to receivables usually comes up more in the context of outside of Canada and the U.S. Typically in most cases we have not given value to the receivables; however, provided EDC insurance or similar insurance is in place, which is usually obtainable at a pretty modest cost, we will give value to those receivables to the tune of up to 90%.
In terms of trying to explain a little how a bank looks at this type of deal, banks are by definition low-risk lenders. Despite the perception, the margins we operate on are fairly small, so when a bank lends money, it always looks for what we call a second way out.
The first way out on a transaction, in terms of being repaid, is from the cashflow a company generates. However, a bank almost always looks for a second way out, which is placed on the value of the security we take. In this case it's the foreign receivables.
The problem in dealing with receivables in countries outside of North America is that it is either very difficult or very expensive to obtain an effective security interest on those receivables. That's the reason why all banks tend to be fairly reluctant to take foreign receivables outside of North America as security. But the caveat is always that with EDC insurance they are given that value, and EDC insurance is typically available.
Mr. Hunter: I would like to add a further comment to clarify that a receivable, without any other form of back-up through a payment obligation, is the weakest form of obligation to pay that exists in normal commercial finance. Because of that, it is something that is very popular in a sales-culture economy such as we have in North America.
In many other parts of the world, however, the most important thing is not getting the sale but getting paid for the sale, for very obvious reasons. In those economies there's a much greater reliance on the bank to make a credit assessment and stand behind the credit of the buyer it knows, because it is privy to confidential financial information about that company. In that context, a method of payment one up from a receivable, such as a collection, or two up from a receivable, such as a documentary credit, simplifies this whole issue of whether you will get paid and, if so, when.
We've diverted from that basic principle to some degree in North America and also in Europe, in the interest of developing business relationships, but it serves Asian trade very well, and Asian trade is the fastest-growing trade in the world.
Mr. Mills: Mr. Williamson, you commented on the strategic advantages we have, the emphasis we need to put on knowledge-based industries, and that sort of thing. I guess I'd go further and say we need to build a sort of trade philosophy. We heard about the entrepreneurial spirit in Quebec.
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Mr. English, another colleague of mine on the other side, and I talked about the University of Waterloo, where 91% of the graduates in computer science courses have jobs in the U.S. It seem to me the brain drain that is now going on is really a major problem in our future ability to compete in those sorts of knowledge-based industries.
I wonder how concerned the banks are about that sort of drain of that resource.
Mr. Williamson: We are concerned enough that we commissioned a study on it that I just happen to have with me.
Mr. Mills: This wasn't a set-up.
Mr. Williamson: The brain drain occurs because we do not have a strategic plan to offer opportunities in strategically important sectors where Canada has a competitive advantage. In this country we simply do not have the financial resources to do and be all things to all people.
I would suggest that the way to alleviate the brain drain is to pick the strategically key industries for Canada where we have a natural advantage, a product advantage or a market advantage and make them attractive. We could create centres of excellence in Kitchener-Waterloo, Quebec, and Saskatoon around agriculture and biotech. Let's pick the ones where we can offer real opportunity. Health sciences and life sciences are other areas. There are all sorts of areas where Canada actually has a world-class reputation, but unless we devote the strategic resources on them rather than spreading them too thinly we'll never create, to use Michael Porter's term, the clusters of expertise that will attract highly educated researchers and others.
Mr. Lastewka: The previous question and answer kind of led into my questioning. I want to commend all three organizations on their reports because I think they help us to look at the whole strategic plan.
I don't want to put this whole thing in a simplistic way, but I think we need to have a strategic three-phase program here. One program would be the intelligence, opportunities, marketing and networks that are outside our country. Someone needs to lead that with a whole pile of other people as partners.
Phase two would include the pre-export assistance in manufacturing and making sure we have that manufacturing or service domestically, to fulfil a requirement on the global scene.
Phase three would be to make sure we have the proper exporting, financing, insurance, receivables and the whole gamut in between.
At the present time, it seems to me we have a lot of people trying to do a lot of things in all three areas and they're not experts in any one of them. But among us all, whether it's in the federal government, provincial governments, banks, institutions, trades, big business or even in the departments within the various governments, there is expertise or people who should be leading those three phases. If I'm correct in my supposition here, there are those would be best leading phase one, the intelligence/marketing/opportunity; leading the pre-export assistant in manufacturing in phase two; leading phase three, the financing and so forth.
Mr. Williamson: Pages 7 and 8 of my presentation will confirm that your view is spot on. In answer to your question on the pre-export side of things, it's the financial community; on the market intelligence, I think it's the enhanced role of trade associations in cooperation with government; and on your third one, Mr. Lastewka, just remind me....
Mr. Lastewka: Once we have the intelligence and marketing and the product and service, we need the export insurance, financing and so forth to make it happen.
Mr. Williamson: I think that is, again, an area for the financial community. There's leadership to be shown by the financial community; and the leadership has to be in cooperation with the trade associations, in the first instance, and it's around the building of networks and partnerships. I believe the major Canadian banks have that network around the world.
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Mr. Lastewka: Then why can't we get our act together?
Mr. Williamson: C'est une bon question.
The Vice-Chairman (Mr. Volpe): Has the banking industry relinquished or resisted the opportunity to show leadership?
Mr. Williamson: Mr. Chairman, I don't think we have. If you come to accept that the real issue is the working capital finance my colleague referred to, and I referred to, it is a mind shift. It's not in the area of five-year, medium-term credit for small business. It's in the domestic working capital provision. That is of course exactly the issue the banks are facing in front of the industry committee, and that is a major issue that includes a discussion about the need for equity in this; and we have to bring some equity players to the table as well. That needs those components.
Fundamentally, I think there's room for the financial community to take a leadership role. Perhaps we haven't done so in the past as best as we could. Mea culpa.
The issue has now got to the point where the national interest, and the creation of jobs, are at risk in this country. We have to step up to the plate and do more, and do it in more creative ways.
But our tolerance for dealing with unnecessary bureaucracy and committees is very low. None of this is rocket science. As I said earlier, we only need to look at what other countries have done successfully. Maybe we should tweak it slightly for Canada, but we don't need an endless review or new committees or new programs to do that. We need the will.
Mr. Lastewka: I think that's where we're at. There is no use in our debating whether the EDC sometimes competes with SMBs or financial institutions, because in the end the SMBs say even that's not good enough. So we need to find out, in a partnership, what is the best we can do for Canada, learning from everybody else in the world; and let's get on with it.
Mr. Williamson: Absolutely.
Mr. Lastewka: So why don't we get on with it?
The Vice-Chairman (Mr. Volpe): That's a good question. I'm not sure I need all three of you to answer that. But wonder if you would allow me to follow up on that theme for a moment.
You have suggested, Mr. Williamson, and I think your colleagues on either side of you have come close to saying the same thing, that there is an international experience from which we could draw and which would give us a better understanding of how to make all our businesses not only more competitive but more entrepreneurial, to use the example you suggested for some of our Quebec small and medium-sized businesses - more entrepreneurial on the world stage. If you already have that kind of experience and expertise on an international scale, could you summarize for this committee what some of those experiences might be that would, or should, be applied to Canada to make our financing and our businesses in the export market much more competitive?
Mr. Williamson: I am prepared to sit and share all of that with you, Mr. Lastewka and other members of the committee. There's a lot we can talk about, and I'm prepared to roll up my shirtsleeves and do that any time the committee wants.
In direct answer to your question, an example I referred to is Denmark. I think there's significant room in this country for big business to provide a mentoring role to small business and to provide financing to small business. If you look at the demographics of trade today, small business does export; but it exports by being a subcontractor or supplier to a Bombardier or a larger company. Therefore the small business doesn't appear on the register of major exporters. That could change if big business formed a strategic partnership with its suppliers and became a provider of capital and market experience.
There's no question Bombardier has terrific international market experience. I wonder what they're doing to share that with their suppliers. That is more along the Danish or Japanese or German model of consortia and partnership - the Japanese referred to it as keritsu. There are all sorts of things we can learn in that field.
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The second area, just as an example, has to come on the equity side. We should be able to find strategic partners in foreign countries that are prepared to take an equity position in an importer that strengthens the financial position of the importer and therefore allows the exporter to have greater security, as my colleague mentioned, on the repayment of the moneys for the Canadian exporter. I think Canada has the leverage in the international community to go into countries - Poland may be more difficult, but certainly in other countries - to create links around equity, patient capital or other forms, on behalf of the foreign buyer. It's twisting the equation. It's saying it's not really over here that we need the help, it's on the other end.
Then you get into issues around just promoting Canada as -
The Vice-Chairman (Mr. Volpe): Is that the reason why, for example, the HongKong Bank is experiencing a boom in business in Quebec - because Quebec exporters are thinking that perhaps that's the role that the HongKong Bank might provide in the Asian market?
Mr. Williamson: Absolutely. There's a point where Canada has the strength in HongKong Bank, who know that market better then we do. That is a strength, and that's why I favour competition around segments. We talk about financing, but no one has used the term ``knowledgeable financing''. Let's go to where we have the knowledgeable financing. I would concede in the Pacific Rim that's HongKong Bank, and congratulations to them.
The Vice-Chairman (Mr. Volpe): I want to listen to a two-person dialogue. Mr. Mills, I think you have a supplement? No?
Mr. Gordon: Mr. Chairman, could I just add one comment? Doug has talked about the mentoring role. In a different way, one of my recommendations is exactly the same thing - that the smaller companies learn from the best practices of the larger companies. What happens for the most part in Canada is that the knowledge to the small or medium-sized companies about how to export gets imparted by and large through intermediaries. Whether they're banks, federal government officials, or PDC people, they're all intermediaries, and the intermediaries don't do the deals. It's the companies that do the deals.
So the issue of best practices, and something I think is worth trying to develop, is to have some of the larger companies who have been successful acting almost as buddies, mentors - whatever you want to call it - to work with some of the smaller companies so that they can learn from these experiences, as opposed to depending upon getting the knowledge through intermediaries like banks and government officials.
Mr. Williamson: They need to put some skin in the games, though.
The Vice-Chairman (Mr. Volpe): Mr. Jackson.
Mr. Jackson (Bruce - Grey): Thank you very much, Mr. Chairman.
This is a very good discussion, and the object of this exercise is to learn how Canada could do better at exporting and in general generate more business activity.
Before I forget, I'd like to ask Mr. Williamson, what was the name of the book that you recommended?
Mr. Williamson: I'll send a copy to you.
Mr. Jackson: Thank you.
I want to get serious. You hear parliamentarians and small business people and a lot of stuff in the media - people whining all the time about banks not giving money. The bankers are consistently telling us that they are by definition low-risk lenders.
We also hear around this table about how the best growth rate is in the Asian Pacific. Part of the exercise of this committee is that we want to be into that culture. I mean, that's what we're talking about; it's a culture, whether it's in Quebec or wherever, and it starts with educating people in the school. We're talking about a kind of business culture. And part of the culture in Asia is not to go to the banks and whine. They have other ways of financing, because there is opportunity. If the banks are not loaning money to some small business people who are good at what they're doing, then the banks are losing opportunity.
I think a recommendation should come from this committee that some alternative sources of financing be found. That's how they do it in the Asian Pacific. They compete with these guys and then they come running after them, saying ``Hey, I'll give it to you for less than half a percent'' of whatever it is.
That's part of what must happen. Now the other problem is the overlap. You've got the federal, the provincial and the municipal levels, and politically there's a gravity for us to act. We sit there as elected officials and people say we should do something, so we have to come in with a grant and we get all this overlapping stuff. So the harmonization of that in this strategy....
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What we create is somebody else coming to a business person and expediting grants so they come into a place where there's money. The feds are giving money. They're in for a little while, they move their money around the world and play games and don't do a damn thing with it.
Part of our strategy is not this bull you hear all the time in the House, for instance, beginning with the health care. They talk to the feds about going to private clinics, which takes money out of one sector and puts it in another. Or you hear it from the rest of the people about going into the RCMP, which in some provinces is used.
The politicians muddy the waters.
So the question is -
Mr. Bergeron: We want to know the answer.
Mr. Jackson: How can you help us, number one, in developing that culture, and number two, in getting rid of this bull with all this damned overlap and the gravity for governments to get into that? We need just one definition or one way we all can cooperate in that area rather than saying ``I'll give you this'' and ``I'll give you that'' because of political pressure.
I know it's highly political, but that's what we have to overcome.
Mr. Williamson: You only hit a home run if you step up to the plate. For those of us for whom the challenge is stepping up to the plate, the only opportunity is that.
On your point about being low risk-takers, I wonder if that's the case in Toronto real estate, for example. I would differ from my colleagues on the appropriate appetite of risk that banks should and can take. We have to move up the risk curve. We have to find new and different ways to do it, but we have to move up the risk curve and narrow the gap between the two of them.
If some of those things happen, then the need for this emotional debate around bank-bashing in particular will disappear, because it's not the real debate. I've tried to make that point several times. It's not a shortage of capital. It's a shortage of the right kind of capital - knowledgeable and generally domestic, not foreign, capital. I think the debate is skewed.
Mr. Langelier: You were talking about possibly reducing what we can do. Let's start with the federal government agencies. They should get together and find out where they have some duplication, and find one program. After that the financial institutions could join them.
As to the role the provinces are supposed to play, somebody mentioned before that it's supposed to be a kind of added value. What the provincial entity should look at is some kind of specific economy they have in their province. Then maybe in the strategic plan for Canada we could say that's good arithmetic.
Nevertheless, the small enterprise doesn't want to export just because they're doing such a thing. It may not be part of the strategic plan, but this business must export, and that may be where a provincial agency should act.
When it's a global strategy, we could go federal on some specific issue, with some support from different provinces - agriculture out west, for example. But first put all those corporations together and let them cut duplication themselves.
The Vice-Chairman (Mr. Volpe): I want to thank each and every one of you for having come today.
Despite the fact that a little bit of skepticism has surfaced about the value of committees and studies, I want to assure all of the witnesses - and I think I speak for all my colleagues around the table - that one of the functions of committees is to look for some of the answers to the questions you've raised in giving us some insights into financing an export-based economy. We may even call on you before we write our report to pursue some of the themes you've raised today. I think it's been a very worthwhile discussion, and I thank you very much for it.
Colleagues, we're going to take a five-minute break before the next session comes in.
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The Vice-Chairman (Mr. Volpe): Order.
In our second session, on alternatives to some of the export finance and insurance from the private sector, we have two representatives: one from Northstar Trade Finance Inc., Mr. Scott Shepherd from Richmond, B.C., president and CEO; and from St. Stanislaus/St. Casimir's Polish Parishes Credit Union Ltd., Mr. Stan Krol from Toronto, general manager.
I believe that Mr. Shepherd is prepared to go first.
Mr. Scott Shepherd (President and CEO, Northstar Trade Finance Inc.): Thank you very much, Mr. Chairman and members of the committee.
Simply put, Northstar is a new company for new export opportunities for SMEs. It was formed in recognition of a hole in the financial markets for small and medium-sized exports. Northstar has been operating for some 13 months since its original launch on September 1, 1994.
Northstar is indeed a unique export tool for Canadian small and medium-sized enterprises. Developed by an exporter for exporters, Northstar is an initiative from the private sector and the public sector, and a new entrepreneurial alliance to deal efficiently and effectively with buyer export finance transactions for amounts of from $100,000 to $3 million.
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Forgive me, because I must talk briefly about Northstar to be able to explain how it works and how it was created so you will know what we're doing.
Northstar provides loans to foreign buyers of Canadian goods and services for repayment terms of one to five years. The structure of such loans complements the marketing needs of exporters in the various international markets. In other words, they are customized on a transactional basis for the needs of the foreign buyer.
With an emphasis on commercial markets and near commercial markets, Northstar has been successful in providing export finance support for Canadian exporters in Argentina, Chile, Colombia, the United States, Finland, Germany, England, Great Britain and Mexico.
Northstar is non-bank, non-recourse financing for the foreign buyer and the exporter. This financing does not affect an exporter's line of credit. The effect of using Northstar is to increase the cashflow and significantly decrease working capital requirements for the exporter.
What are our objectives? Simply put, our goal is to provide export financing services for small and medium-sized exporters in Canada. I believe that's quite unique. This is our only niche.
We try to work cooperatively and effectively with the exporter and his banker to meet the needs of the foreign buyer in a timely manner. And I underline ``timely manner'' because international transactions are in and of themselves very complex. They take time, and unfortunately in these smaller transactions if you're not timely the deal can sometimes go to the foreign competitor.
We try to discharge our duties to the exporter and the buyer with integrity, honesty and professionalism.
Finally, and most importantly, we try to be honest and candid when advising exporters on their individual transactions, and we act as a guidepost to other export financing and other export services that may be available throughout Canada.
How did Northstar happen? As a former chief financial officer of a Canadian leader in cable television and electronics, I saw the direct impact of vendor finance on our market. Our firm was in direct competition with international multinationals that had in-house vendor financing arms.
Unfortunately, there was no way to compete in certain markets where a foreign competitor, despite in many cases never having built the equipment before, offered financing to an important foreign buyer. Despite the best Canadian quality, price and delivery, the original Canadian product was suddenly not chosen.
This was particularly evident when I saw large multinationals get out of what I would call a focus on the military-industrial complex and enter new electronics and high-tech. What were historical niche markets that were just too small for a lot of these larger companies are suddenly areas of growth. I think that fact imperils a lot of our small, high-tech companies if we don't respond and give them the proper tools.
For me, the impact of financing was abruptly clear and profound. I knew something had to be done to face this market niche and address the needs of smaller exports. I say smaller exports because even mid-sized firms have a problem financing these orders for smaller quantities of product. Indeed, unless the company has its own in-house finance arm, it's difficult for many companies, regardless of size, to take a term position for many of these small deals.
What did we do? We put together a business plan to address the export needs of the small and medium-sized exporters in an era of budgetary constraints. I felt the best chance for success of a new product would require a new private and public sector alliance to fill this unique niche.
Historically, these small transactions have been difficult for banks to make profitable or to even break on due to the cost of processing each transaction. As many of the members of the committee can imagine, it costs as much to process a $100,000 transaction as it does to process a $3 million transaction. Withholding taxes have also been a natural constraint on cross-border transactions. As a result, it has always been difficult to draw the banks into participating in these smaller loans.
The business plan, recognizing this fact, created a cost structure for Northstar operations that worked in an entrepreneurial environment at arm's length from any financial institution and on a stand-alone basis. In other words, it's small business for small business.
Run in a small business fashion, Northstar employs two excellent, cost-effective labour pools. Northstar depends on what I call ``second debut'' labour provided by senior bankers and international finance executives who have recently retired from the workforce. These people have outstanding experience and usually have a second income and a desire to continue to provide insights into international transactions. Second, Northstar relies on recent graduates to augment the experience with day-to-day administrative support and follow-up.
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I'm pleased to say that the experience and desire combined in these two groups has led to an excellent team atmosphere and knowledge growth within Northstar. The experienced executives are very supportive of the learning needs of the recent graduates and are very willing to pass along knowledge.
This cost structure is more appropriate for handling these smaller transactions. In many ways it's the best of both worlds. We have a lower cost structure and extensive experience, as well as providing a training venue for new staff for Northstar in international business.
Northstar, while a small entity, has strength of partnership. Northstar Trade Finance brings together the export strengths of the Bank of Montreal; the British Columbia Trade Development Corporation, the B.C. government; the Ontario International Trade Corporation, the Ontario government; and the federal government through the Export Development Corporation and Western Economic Diversification. The goal has been to provide an entrepreneurial framework to ensure that these small transactions are dealt with in an effective and efficient manner.
I'm pleased to say, by the way, that our board meetings, held every two months, bring together Canada in a private and public sector forum. Export issues are discussed well outside of the usual Northstar corporate business.
At the start of the process many people said this could not be done. It was said to me many times that the individual priorities and agendas of the potential partners would invariably block the successful formation and operation of Northstar. To date, this has not been the case. The Bank of Montreal has provided an initial $30 million line of credit and equity to Northstar, at the same time opening Northstar to other banks and other bank clients for participation.
The B.C. Trade Development Corporation purchased equity in Northstar despite the fact that most of the business for Northstar would probably come from Quebec and Ontario. Ontario International Trade Corporation participated despite the fact that the head office would be in Vancouver. The Export Development Corporation agreed to participate despite the fact that it required a new way of doing business to help small exporters that would be outside of the usual EDC framework. Western Economic Diversification agreed to participate despite the fact that it was a trans-Canada venture and all Canadians would benefit, directly or indirectly, including ones outside the western umbrella.
It was, in summary, and continues to be a bold experiment in SME export finance lending.
I might add that in my view, Northstar could not have been launched without the participation of all concerned. Had any one of the partners decided not to participate, it would have imperilled the initial launch of Northstar.
Ladies and gentlemen, this little company is indeed a demonstration of full strength of partnership. In an era when we seek action from our banks and provincial and federal governments for increased SME support, Northstar Trade Finance is, in my view, a true example of what can be done in support of SME exports.
I would also like to comment on the fact that this initiative was launched some three and a half years ago and initial partnerships were formed at that point. The reason I say this is that it clearly shows that all the various participants recognized there was a need to do something for small business well before the SME issue was highlighted in recent policy. They supported it because it was the right thing to do.
I would like to emphasize again the excellent, and indeed in many of these cases, the unsung support that Export Development, B.C. Trade, WED, Ontario International Trade and Bank of Montreal have provided to Northstar. I would particularly like to highlight the role of EDC and the bank. Without the risk coverage and without the initial funds for the loan portfolio, this venture would not have been launched. The senior management of all partners has shown a willingness to do something new and innovative.
I would also like to comment on the recent expansion of this product. To date, we have an agreement with HongKong Bank as well as ABN AMRO Bank to promote the product through their various branches for export finance clients. I believe this is a significant move forward and is in keeping with the strategy to involve as many exporters as possible in the use of Northstar. As well, discussions are well under way with National Westminster Bank for similar product support for Northstar.
The challenge in front of us is to further coordinate the schedule I and schedule II banks, trust companies and other financial institutions into thinking of Northstar when there is a need and carrying it as a product of choice to help small business. I can assure you that the best way for Northstar to work is through a coordinated expansion of the initial strength of partnership theme. We must all work together to ensure that SMEs are supported in the export finance realm. I believe that the best way in which to continue to support the SME export initiative, particularly with emphasis on vendor finance, is to ensure that the expansion of Northstar occurs in the marketplace.
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All I can say is that the door is open for participation. Easy access somehow must be ensured through the provincial trade agencies, international trade centres, Foreign Affairs and International Trade Canada, the chartered banks, and the regional offices of Export Development Corporation.
As mentioned, we provide vendor finance in a direct buyer credit to the foreign purchaser of Canadian equipment. The initial product line is a classic loan, standardized for a one- to five-year term, focusing on commercial and near-commercial markets.
Interestingly enough, however, after discussion with exporters throughout the year, it was discovered that many Canadian exporters ship product to distributors who then resell the product in their own local marketplace. The effect of small exporters providing these shipments to distributors has been a large accounts receivable carried on the balance-sheets of many small and medium-sized exporters. The distributor, despite best intentions, will not pay for the product shipped to him until he has the cashflow from selling it in his local market.
In response to this, Northstar has developed a new floor plan finance option for distributors of Canadian capital goods and equipment. Here, a loan for up to 100% of the export amount is provided, to be repaid to Northstar as and when the product is sold or within 360 days, whichever is earlier.
The effect of this new product on the SME marketplace can be immense. In one loan, we have been able to improve the working capital position of an exporter by $750,000 U.S.
We now have four floor plan financings complete and committed, with two fully disbursed and in administration mode: two in British Columbia, one in Ontario, and one in Quebec.
I'm pleased to say that this is a very promising new product, and it would not have been possible without the cooperation of EDC and the bank. It has never been done before. We are doing something new.
In the first year, Northstar has successfully approved some $11 million of total loan business for exports. These approvals have been in, as I said before, Chile, Argentina, Colombia, Mexico, Finland, Germany, Australia, New Zealand, and the U.S.A. Our pipeline consists of some 75 transactions for some $70 million Canadian of potential business.
I must underline to each of you, however, that this is not an easy path. It has not been easy. The task in front of Northstar is a challenging one. We need to provide low-cost access for all exporters and ensure that the service is easily available on a country-wide basis in both official languages.
To assist in this, the partners have funded a 1-800 number for easy access across Canada. We start our office hours at 7 a.m. Vancouver time in order to ensure that we get cross-Canada coverage and that we can reach Europe, as well as the Far East and South America, all in the same day.
To assist in this as well, we have hired a bilingual analyst to handle calls in both languages and we continue to seek new opportunities in Quebec and eastern Canada markets.
Direct discussions have been commenced with
[Translation]
the Quebec Industrial Development Corporation
[English]
and the Province of Quebec, as well as the New Brunswick and Nova Scotia governments, to participate in Northstar on a provincial level, similar to B.C. Trade and Ontario. Provided that Quebec and New Brunswick continue to participate, we will have a truly national coordinated system through the various trade entities in the provinces. Western Diversification has ensured that we now coordinate all activities with Manitoba, Alberta, and Saskatchewan. B.C. and Ontario are already on the board.
Proposals are now under way for offices in Saskatchewan and Montreal through the various provincial or federal trade groups. We are also seeking to establish one in the Maritimes region, preferably in Moncton or Halifax, to cover Atlantic Canada.
In summary, exporting is never easy, especially for SME. Providing financing for small-dollar-value exports has always been difficult because of the transaction size and cross-border issues such as withholding taxes and securitization.
Northstar is simply one solution to this problem. It is a joint venture between private sector and government that works in a complementary fashion with all banks and EDC. Underlying access is only a phone call away. Transactions can be approved on a one-off basis or bundled, and we attempt to provide a quick, seven-day, turnaround.
Ladies and gentlemen, thank you very much for the opportunity of discussing Northstar. I look forward to answering any questions you may have.
The Vice-Chairman (Mr. Volpe): Thank you, Mr. Shepherd. We'll come back to you in a few moments.
Mr. Stan Krol, the floor is yours.
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Mr. Stan Krol (General Manager, St. Stanislaus/St. Casimir's Polish Parishes Credit Union Ltd.): Thank you, Mr. Chairman.
St. Stanislaus/St. Casimir's Polish Parishes is a niche player in the Polish-Canadian community in Ontario and we are servicing small and medium-sized enterprises both here in Canada and in Poland. We work in the trenches of Canada-Poland trade.
I wish to describe some of the reasons that we are thriving in this niche market, how we solved our specific financing and settlement problems, and how government in partnership can help us do a better job in assisting Canadian small and medium-sized enterprises doing business in Poland. It is to this specific Polish experience that I wish to talk today.
We are a relatively small financial institution. St. Stanislaus was formed 50 years ago. We are the eighth-largest credit union in Ontario and the thirty-fifth in Canada.
The credit union offers a wide range of consumer and commercial banking services. We service southern Ontario, the Golden Horseshoe from Windsor to Oshawa. That's basically the background.
In Ontario, credit unions are licensed under the Credit Unions and Caisses Populaires Act, which was amended in 1994 to give credit unions a wider power and a wider bond of association. In response to this opportunity, we are currently developing comprehensive financing and banking packages for SMEs, including consulting and travel.
Currently, our credit union is also involved in the Canada-Poland Chamber of Commerce and we are constantly organizing trade delegations to Poland. Our delegations are rather smaller than the government's. We usually take three or four people and identify a specific niche interest, and we go to Poland with these people. We meet with counterparts and we try to complete the deal within a one-week period, if possible.
The general strategic plan of St. Stanislaus is to assist people to do business in eastern Europe. Poland is situated very strategically in the centre of Europe. We call it the bellybutton of Europe. You can go east and you can go west. So it's very strategically situated, and our plans are to assist people, not only in Poland but to go to Ukraine, Belarus, the Baltics, and Russia.
In 1992 St. Stanislaus founded Pol-Can Bank in Poland. It was a joint venture with a legal arm of the Polish Church in Poland. It is the only Canadian-owned bank forming this bridge between Canada and Poland.
The bank in Poland offers investment and credit facilities both in foreign currencies and the local zloty. We specialize in servicing Canadian business, Canadian tourists, and also local small and medium-sized businesses.
The credit union and the bank work together to finance trade on a relatively small scale because we are limited by our regulations. Our limits are $1.5 million per business. However, we have a very good relationship between the bank and the credit union, with very quick and efficient service. If a purchaser is dealing with our bank, we can immediately do the settlement and we can offer guarantees to exporters from Canada.
We also cooperate in advising Canadians on how to do business in Poland, how to structure joint ventures, information on the latest laws and regulations, and information about who to speak to in the various government agencies.
We've noticed that Canadians are not doing very well in Poland. Generally the Americans, Germans, and now Koreans are taking over the markets. So there's an urgent need for Canadians to receive some assistance from the government, especially in the areas of building materials and health and medical equipment.
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We believe that Canadians have a competitive advantage; however, not enough is being transacted.
Poland is a country that's going through great changes. It's in constant flux. The laws are changing from a previously communist-planned economy to a supply and demand economy. It is very important to be on top of the changes, especially the regulations in products for duties, which change from year to year.
It's extremely difficult for Canadians to obtain the latest information from local sources in Canada.
I'd like to mention a project. We are currently establishing a mutual fund, called the Poland Opportunity Fund, to go into Poland and invest in new companies that are being created by the prioritization plan of the Polish enterprises. With this fund we will be creating a research facility to research companies and to do the analysis for the investments. We feel that this facility could be utilized by government agencies in the future and develop information booklets or a database for Canadian business going into Poland.
We are aware that the embassy is creating a club, as they call it, of businessmen in Warsaw. However, this club has no place to exist. It needs a locale; it needs some funding.
The other area where we believe we will make some inroads is regarding credit ratings. It's very difficult to obtain credit ratings on people or on businesses who have been in business for one or two years. I believe that previously the gentlemen from the chartered banks expressed that they don't have the local intelligence that is needed to assess the risk in, for example, Poland, or in the other countries. This is where we have a unique advantage. Our association with the church gives us access to local clergy and we can obtain an opinion or information about people owning the business and a track record of the business. It's extremely effective, because overall we have extremely low delinquency in our loans and very few problems.
Just as a comparison, generally the banks have about 30% delinquency, but our delinquency is 1% or 2%. It's quite effective.
Also, with this facility we're trying to develop a credit reporting facility in Poland.
The other thing I'd like to mention in my presentation is the multicultural aspect of Canada. We feel that as Canadians we have a specific advantage. For instance, if you're Chinese, you probably know the Chinese market much better then I would. Since we're in the trenches and deal in Poland, we know the Polish market extremely well. So we believe that our cultural diversity should be tapped somehow by government agencies. They should work closely with the Chamber of Commerce and other organizations to develop alternative products to reduce the risk in the country so that financing costs will drop and Canadians will have a competitive advantage.
In closing, I'd like to make three recommendations.
First, as you heard previously, there is need for assistance in helping exporters in their accounts receivable.
There's also need for setting up a database for exporters to access the latest regulations in foreign countries. Government agencies could form partnerships with local businesses that deal in the specific countries to help them reduce risk and receive local intelligence on business.
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Thank you, Mr. Chairman.
The Vice-Chairman (Mr. Volpe): Thank you very much, Mr. Krol.
It's time to go to our questioners. I believe our two colleagues from the Reform Party want to share the first round.
Mr. Morrison (Swift Current - Maple Creek - Assiniboia): Welcome to our committee, gentlemen.
I would like to ask Mr. Shepherd a question that, in view of the brief time Northstar has been around, it may be premature or difficult to answer. I note this new product you have where you are effectively loaning money on distributors' inventory. Have you any idea at this stage of what sort of non-performance rate you have on that type of loan? How successful is it?
Mr. Shepherd: It's unfortunately premature for me to be able to judge it in terms of the delinquency or non-performance. The threat when you're doing a floor plan is what they call a conversion risk, where the lender essentially takes the inventory, converts it to cash through a sale and then does not remit the cash back to you.
This is mitigated to some extent because we're allowed spot audits, and when we have an agreement with an accounting firm internationally, we can send people in to actually check the inventory. This is usually the way. It's not dissimilar to a floor plan you see in car lots, where Ford Canada, GM Canada or whatever will send somebody in to actually check the inventory. That's our only fall-back.
I might add that we only do this with suppliers and distributors that are well known and have a track record. It's when the exporter is comfortable with what the buyer has demonstrated for the many years he's worked with him, and I might add that's the majority of the relationships. If you talk to these SMEs, you discover a lot of their purchasers are close personal friends and they visit each other. So I actually get a lot of comfort from that relationship as well.
Mr. Penson: Mr. Krol, when you talk about Canadian exporters needing guarantees on accounts receivable, is it the case that EDC export insurance would not offer that in Poland?
Mr. Krol: They do, but it's very expensive. That's the problem there - the cost.
Mr. Penson: Can you give me any idea of what percentage they might charge?
Mr. Krol: I can't offhand, but I know of one situation where a company, actually from Montreal, was trying to export frozen foods and the cost was so large that they just were not competitive in the bid.
Mr. Penson: It's my understanding that there is also private sector insurance out there, but EDC's cost of that export credit insurance is quite a bit lower than the private sector's. Are you suggesting it needs to be lower yet to compete? Are there other countries that have a lower rate? Is that what you're saying?
Mr. Krol: I know that in our situation in Poland, the risks are much higher than in other countries, and EDC analyses the risk and charges more. As a matter of fact, none of the banks are interested in Poland. The amount of trade between Canada and Poland last year was about $150 million, which is not very large. There's no appetite, as the banks say, to get involved in Poland.
Mr. Penson: It's very interesting that your credit union is operating there. I would encourage you. I think it's a good move, and as you said earlier, you are the people who understand that market the best. Hopefully things will improve and you'll be able to have some export insurance because the political risk will be somewhat less in the future. But I think you're certainly on the right track.
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Mr. Krol: I'd just like to mention that Poland is the fastest-growing economy in Europe. At 5%, it is out-performing all the other countries, so there are great opportunities for Canadian experts.
Mr. Penson: In addition, I understand that they have applied for membership in the European Union.
Mr. Krol: Yes, they have.
Mr. Penson: If that happens, then the stability factor might be greatly enhanced.
Mr. Krol: Through Poland you have access into the European Community.
Mr. Penson: Mr. Shepherd, you were here this morning when the panel before you was talking about certification in a lot of areas within government and how private sector small and medium-sized companies might not know where to turn because there is so much duplication. Do you not see that your company might be another of the companies that are muddying the water a little bit, in that you are offering financing that is available through the banks and EDC? My understanding is that EDC is looking at small and medium-sized companies as well now and trying to tailor its operation much more closely to them. Is this a concern to you?
Mr. Shepherd: This is three and a half years old. We started this process that long ago.
There's some concern on my part that we've developed something that EDC, through pressure, might wish to try to look at; but I can assure you that on the basis of cost and current access, Northstar is unique. It would not have been established. For instance, the Bank of Montreal would not have participated, the province would not have participated, and EDC would not have participated if there was not a situation where there was a hole and it was simply not available.
If it comes to the situation where it's readily available for small business, then we'll have to reappraise Northstar. I think that in some cases Northstar will have been successful in that we now have access.
The issue was access to term vendor finance for smaller exporters, smaller exports. I can assure you that it is incremental, if that's the question.
The problem I have is more or less getting it in the face of the SME, as we are a very small company. I am a personal shareholder as well in Northstar. We run a small entrepreneurial shop. We do not spend a lot of money - we do not have a lot of money - and as a consequence of that, the task in front of us is not whether it will be used or not but how we can get the exporters to know about it so that when they have a problem they will come and use it.
Mr. Penson: Are there provisions for future draws from the different partners in order to expand it? How does that sit?
Mr. Shepherd: I would say that Northstar is experimental at this point. The $30 million line is available. From our discussions with other banks as well as Bank of Montreal, I can tell you that more funds will be available if we use that. That won't be the issue.
I believe the issue is one of usage. In other words, all the small exporters to whom we talk are very interested in the product and wish to use it. I think our pipeline attests to that.
I should say also that we coordinate with EDC and the banks on a daily basis. I get a lot of referrals from the banks, and I get a lot of referrals from EDC on regional offices. I don't mean that it's not working; it is working on that side, and we coordinate it so there's not overlapping.
Mr. Penson: Do you also use concessional financing?
Mr. Shepherd: No, we are market finance. I borrow my funds on the basis of fixed-rate financing in the marketplace and then on-lend. So there's no concessional; it's pure commercial-backed.
What's nice about this is that in the old days there would have been an issue that maybe we should make a new program, and this might have come out of the consolidated revenue fund or somewhere else, where we would take a provision aside and put it. Right now we're using readily available commercial insurance, the delivery mechanisms of the provinces, and some money from the banks in order to do something in a new an innovative fashion. When we look at our choices and what we want to do in export finance, I think this is the kind of thing: EDC working together with the provinces and the feds. You just have to like it.
Mr. Penson: That, however, is one of my concerns for your operation: when I look at the partners involved, other than the Bank of Montreal you have the British Columbia government, the Ontario government, and the Western Diversification Fund. Far be it from me to suggest that there might be some changes in the future, but that's the way government seems to be going. So I guess that would be a bit of a concern.
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Mr. Shepherd: I should say that the financial side of that is not great. It's more the moral support and the delivery mechanisms and coordination - as you were saying earlier, to avoid the overlap.
I should underline again that all the provinces are welcome. Our goal is to ensure that we integrate the delivery mechanism to the regional development people. When you look at the development of SME finance and trying to deal with problems of SME finance for exports, generally one of the front lines is the bank. The second front line is usually the regional/provincial economic development person. They usually tend to go there as well. Third, it's federal foreign affairs, EDC.
So the goal is to try to get that as a net to catch the needs and have them referred in. By that nature, when you think about it, it avoids any duplication because it would have been caught in the net earlier. If it was of interest to the bank, I wouldn't see it. If it was of interest to EDC, I wouldn't see it. Then it comes back.
Mr. Penson: I certainly hope so. Thanks.
Mr. Lastewka: My first question was along the same lines as that of Mr. Penson. The way you explained your enterprise and the fact that you said just a few minutes ago that EDC, WED and the Ontario government play less of a role, it's almost like you're an extension of the Bank of Montreal: you're staying small, keeping costs down, and going into certain niches.
Let's say the British Columbia government and the Ontario government pulled out. Since they play a minor role now, you would just carry on, is that correct?
Mr. Shepherd: That's correct. From a financial contribution point of view, I would say that's correct. If the view was that they felt it was no longer applicable and they did not want to participate in terms of the delivery of the product, then I would have to reappraise why we're doing Northstar. But in terms of financial contributions, Northstar should be self-sufficient at a level somewhere between $14 million and $15 million worth of signings. That's how low our costs are.
Look at the way we run this organization. There are six people - the seventh one is on the go - for less than $30,000 a month in two offices. We're talking about a fairly lean and mean operation. These are very senior guys who are working at much less than market rate to try to get something done.
I want to underline again that it is incremental. If we don't continue to be incremental in the marketplace, then we have to reappraise it. We're not here as a new enterprise to basically go out and muddy the waters; we're here to provide a real service.
For the first time, I believe, in Canadian history, SME export finance is on a commercial basis. The reason I say this is that EDC is used to government-to-government loans or government-to-bank loans, in the form of EDC and a bank, or EDC in a commercial entity, in which the end user is a large commercial entity and the risk can be clearly identified.
I'm talking about loans that have been done for $100,000, gentlemen, for over a three-year period. We've lowered the lending threshold to such a low rate that it's never been seen before. Generally, the hurdle rate for a lot of these was $2 million to $3 million. Some could say $5 million, and some would say $1 million, but somewhere in that area was the threshold. I think my friends at the banks and EDC will agree to what I'm saying. It's just where we draw that line.
Northstar's market is generally in transactions of under $1 million. We are here to provide a service. We're all familiar with GMAC. If you drive up to the car lot and they can finance it right while you're there, it's a very appealing sales mechanism. We're here to provide that type of support for the SME guy. It's so that he has in-house access.
Mr. Lastewka: Thank you very much.
I have a question to Mr. Krol concerning clients. Is your client base mainly in Ontario in the Golden Horseshoe area now?
Mr. Krol: Yes.
Mr. Lastewka: So it's not in the province of Quebec or other provinces.
Mr. Krol: More and more is coming from Montreal. It's being referred to us by the Canada-Poland Chamber.
Mr. Lastewka: I'm not sure whether you were here on the previous panel when they had some questions about a company wanting to make exports to Poland.
Mr. Krol: Regarding the question of Mr. Flis?
Mr. Lastewka: Yes.
Mr. Krol: Yes, I heard it.
Mr. Lastewka: Do you have any comment on that?
Mr. Krol: Again, the transaction was too large for the Pol-Can Bank to handle. That was the problem.
Mr. Lastewka: Okay.
Thank you, Mr. Chairman.
The Vice-Chairman (Mr. Volpe): Mr. Flis.
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Mr. Flis: Thank you. We politicians get reminded about creating more jobs in this country. A million people are still unemployed. That should be everyone's concern.
First, I'm wondering if each witness could share with us how many employees they employ. Would you have any idea how many jobs are created for every million or billion dollars' worth of exports that are exported? I know that will vary from product to product. Can you share with us something about how your two institutions create jobs? By helping small business get into the export business, does that really create many jobs, or not?
Mr. Shepherd: As I have said already, our staff is only six, with a seventh hopefully coming on. We expect to expand that, but keep in mind the labour pools we're using. We're trying to give young people experience and really benefit from what I would only say is a real wealth of experience in the senior executive side as well. It's really useful for us.
That's beneficial. If you look at those in the labour pools who are unemployed right now, they are the youths and also the fellows who are retired, or who have been retired, who are over 50. I was going to say it's a gold mine for Northstar. With the knowledge base and the vigour of youth combined, I really enjoy it.
As for the job coefficients, we work with EDC on job calculations per transaction. I'm not trying to give you any idea, but, from memory, I believe it's anywhere from 29 person-years to 48 person-years of employment per million dollars facilitated. Those are direct jobs.
Then there are the indirect jobs. This is simply calculated by what people do with that money after you pay them. It's the multiplier effect, if you will, in the economy. Those figures are readily available. They're very fascinating because they're a lot for SMEs. If you do a million-dollar deal for the fellow, he's basically created 32 person-years of employment. That's a lot of people.
Mr. Krol: The credit union employs approximately 150 people here and in Poland. As far as how many Canadian jobs are formed with trade, it's hard to say.
In one example, for instance, one of our customers was building a commercial building in Warsaw. He brought his whole crew to Warsaw, with materials and everything. There were approximately 30 people working on that job together with a joint-venture partner in Poland. So I believe there are many hundreds of jobs being formed constantly.
Mr. Flis: The jobs actually went with the project from Canada.
Mr. Krol: Yes.
Especially in the construction field, there are huge opportunities. As you know, construction was down here in Canada, so a lot of engineers and companies went to Poland.
Mr. Flis: Right.
Mr. Krol made a very serious omission in his presentation, Mr. Chairman. He did share with the committee that the credit union is now the richest parish credit union in the world with $230 million in assets, but he forgot to mention that the head office of that credit union happens to be in the constituency of Parkdale - High Park.
I congratulate the credit union, because this Saturday it is celebrating its 50th anniversary.
This committee is looking for niches for Canadians, and I think that's a niche we haven't explored. In my own constituency I have at least three Ukrainian Canadian credit unions. I have a Latvian credit union. I have a Lithuanian credit union. There's the Polish Parishes Credit Union. These credit unions represent about one-third of the population of Canada. We really haven't looked at how we can use that infrastructure to increase our exports.
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What problems, if any, did you have with the Credit Union Central of Ontario regulations to get into the export market and create a bank offshore? It's government's role to make and to change regulations, but it's up to you business people to do the business in Canada, which you're doing very well. Could you share your opinion with the committee? Is there any need for change of regulations in the credit unions act?
Mr. Krol: It's extremely difficult to invest money outside of Canada. It's considered risk capital. The way our reserves are calculated to the ratio made it extremely difficult to get permission to invest in the bank in Poland. We finally did receive permission and we're still monitored and restricted in our actions, compared to the banks.
Mr. Flis: What changes would have to be made to the regulations? I assume this would differ from province to province. Or is there a role for the federal government in there?
Mr. Krol: Credit unions are provincially chartered, so every province is different. In B.C. the regulations are a lot looser than in Ontario. I believe in Quebec the caisses populaires have more autonomy. They work together as a system. Here in Ontario it's very divided and segmented, with everyone on his own.
It is difficult to go into these ventures. We're constantly struggling. I don't know how the federal government can assist except perhaps by advising the Ontario Minister of Finance to review that specific regulation and allow us more leeway in the bank guarantees section.
Mr. Flis: Mr. Chairman, could we ask our staff to look into this? I don't think we have to call every province before the committee, but we could see what the regulations are for permitting or not permitting credit unions to get into the export field. It's something new that no one has explored.
I think this committee would be doing something very positive, even if we came up with a definite no. I think the challenge is there. If one credit union could do it, I'm sure hundreds of others could do it. I think it would be a worthwhile contribution from this committee if jobs are created through exports through caisses populaires and credit unions.
The Vice-Chairman (Mr. Volpe): Your request is noted, Mr. Flis, and I think we can ask the staff to continue to follow up on what they've already begun, which is an examination of the credit unions as an alternative source of financing for exports. It's a point well taken and it's noted.
Mr. Alcock.
Mr. Alcock (Winnipeg South): I'll pass, Mr. Chairman, thank you.
The Vice-Chairman (Mr. Volpe): Gentlemen, it looks like you were exhaustive in your presentation. Thank you very much for taking the time and making the effort of the trip to share your experiences with us. That will all go into part of the deliberations of the committee and help shape our views about some suggestions we would make down the road.
On behalf of all my colleagues, thank you.
This meeting is adjourned until next Tuesday at 9 a.m. in room 371, West Block.