[Recorded by Electronic Apparatus]
Wednesday, May 10, 1995
.1541 
[English]
The Chairman: Order.
Welcome to the resumption of our discussion involving Standing Order 108(2) pursuant to our recommendations in Taking Care of Small Business.
Today we are joined by a representative: Mr. Jayson Myers, the chief economist of the Canadian Manufacturers' Association.
Welcome, Mr. Myers.
Mr. Myers, it was suggested by our colleague from the Bloc Québécois that in fact your branch in Quebec should be the witness. I understand that, after our clerk contacted that division, they suggested that the CMA head office would rather be the witness. So I'm happy to welcome you here today.
Basically, it was felt that the CMA might give a different perspective on the issue before us, a perspective different from that of the Canadian Federation of Independent Business, in fact. We're focusing on, and anxious to receive, your views on a very small review that we're conducting, which is pursuant to our Taking Care of Small Business recommendations on gaps that might be occurring in the financing and the issue of a benchmark, on which the Minister of Finance had commented in his recent budget.
I understand that you have some opening comments. Then I'll open it up to my colleagues for questions.
Mr. Jayson Myers (Chief Economist, Canadian Manufacturers' Association): Thank you for inviting me here today.
Let me introduce myself. I'm the chief economist with the Canadian Manufacturers' Association. I'm also the guy on the line when many of our small members call with financing problems - in Ontario, where our head office is located, and also from across the country, including our members in Quebec.
I have participated with the small business working committees that were organized by Finance Canada and Industry Canada last summer - the coordinator of our agile manufacturing committee, which deals with small business issues. I guess I bring my own perspective to bear, because I'm also president of my own economics research firm.
Today I consider myself to be not a home-based business but a car-based business. I have some of my own views about what works well and maybe some things that don't work well in small business financing.
I'll make a couple of remarks about the Canadian Manufacturers' Association. We have about 16,000 customers, both members and manufacturing companies that use our services. The vast majority of those customers are small businesses. About 85% of our membership base and probably over 90% of our customer base are companies with fewer than 500 employees. In fact, probably about 55% of all of the firms we deal with have fewer than 100 employees. So we deal with small businesses all the time and, yes, we do have a different perspective on their problems and their financing requirements.
.1545
Manufacturing, as you know, is benefiting right now from a very strong recovery, and 1994 has been a very good year. Profits are up, cashflow looks a lot better, shipments are up, and production's up right across the country. Small companies have been in the forefront of that recovery and in the forefront of employment creation. Of the new jobs created over the past year in the entire Canadian economy, 55% have been created in manufacturing, and small businesses probably account for 50% to 60% of those net new jobs.
So we're right on track with much of what has been said before about the importance of small business, and probably even more so because the changes in manufacturing and the recovery we're seeing have been driven by tremendous change. I think that has an effect on financing requirements, particularly from the point of view of small business.
First of all, the recovery has been export driven. I think for any business today in Canada we've seen the loss of the domestic market and often the removal of the domestic customer. The export market is the most important market today, on average, for most companies. You meet manufacturing companies selling 97% or 98% of what they produce outside this country, and most of it to the United States. Especially from a small business point of view, it puts a tremendous onus on exports and export financing and the financing of working capital to expand and develop markets outside of Canada.
We've seen a tremendous amount of specialization in design, new technology, product development, soft assets, management and people. Expansion is being driven by soft assets rather than fixed capital, and that's very important. I don't know if it's knowledge; I like to think of it as intelligence that's driving small businesses today in manufacturing.
We've also seen a tremendous degree of decentralization; a devolution of production. The unit of production in the Canadian economy today is small business as well. It's rarely the corporation or the company; it's the network or the contacts. It's your supply chain, your customer chain, the contracts you have made with individuals. Self-based employment is a very important part of manufacturing operations today.
How do you finance that? What are the financing requirements? Everything is changing more rapidly and things will probably go on changing more rapidly over the next few years than we've seen certainly over the last 20 years.
All of these changes, including the change in structure, the change in technology and asset base, the focus on cost control in order to raise cash to invest in your company in expansion, the onus on productivity improvement and cutting overhead - these all change financing requirements for small manufacturers. It is very important today to understand those changes. They are not just up to the banks or government to understand; the manufacturers have to begin to understand them themselves and the public has to understand them. But certainly the financing economy today is much different from what it was even five years ago and we have to learn how to deal with that. I'm going to come back to that in a second.
I'd like to recognize that we're talking about small bank financing, and this is an important issue. I'd like to recognize the progressive steps that have been made by all of the chartered banks, the banking community in general, as well as small venture capital and equity companies. The message is getting through and there is certainly much more of an onus on the banking community in relation to small businesses. We've seen quite a bit of effort being put into small business financing.
That's all very important. It's good to see the codes of conduct, the ombudspeople that the banks have put in place, and an attempt by all of the banks, including FBDB and a number of the small investment pools and capital pools, to get at the heart of industrial innovation and the changing financing requirements. We should recognize that these are good steps. They should continue.
I'm certainly not here to sort of bash anybody, but I do recognize there are still a lot of problems out there dealing with the changes going on in restructuring and small business - problems that we have to look at. I also think we have to look for some constructive solutions.
.1550
Are there problems out there in financing? Yes there still are. Our survey of advanced manufacturing technology acquisition and diffusion that we undertook last February shows much the same as other surveys that have been recently undertaken, that there's a tremendous dependence among small manufacturing companies on bank financing.
About 85% of 500-odd respondents to our survey said they will look to the banks to finance acquisition of advanced manufacturing technology - largely computer-based manufacturing systems and automation systems - and 92% will look primarily at their own cashflow. There is a very low level of take-up on equity and some pretty creative financing, including everything from using your Visa card to looking at sweat equity, equity in kind, angels, and other sources of capital. This is all encouraging to see, but the reality of the situation is that the overwhelming dependence is still on bank financing.
You were asking what some of the problems were. There always seem to be problems with financing from banks. Only 4.7% said there were problems in financing fixed capital acquisition. That doesn't seem to be as much of a problem as other areas.
In the survey, 24.8% said they expect to have or have had problems in financing acquisitions of new advanced technology, largely because these technologies are no longer fixed capital. They're technologies you can disassemble, where the asset value in real terms is component parts lying around the shop floor. It's very difficult to finance that on a fixed capital, balance sheet type of financing.
In spite of improved cashflow, 48% of companies report they have experienced difficulties in securing working capital related to technology acquisition and expansion over the past year, and 68% report they feel their relationship with the bank is insecure. We weren't any more definitive than that. That's not taking into consideration questions about seed capital, major expansion activity, and so forth.
There are major problems, and I'd very briefly like to talk about two types of problems that come up. I'm not going to talk about the failure to get loans. I think it's quite true that the money is there and there is a problem on the part of small businesses and small manufacturing companies in presenting business cases. That is something to be improved on by the small business sector.
One problem is the working relationship with the banks. Second, problems arise because of the different nature of investment today; the changes in the financing requirements. I'd like to classify those in terms of off-balance-sheet financing. There are problems with that.
First, let me turn to the relationship between banks and manufacturing companies. On the whole I think the relationship is quite good. But as I say, I'm on the receiving end of phone calls so I really want to tell you about some of the problems I receive.
I think we have to recognize that small businesses are different animals. First of all, they're small. It may seem pretty obvious, but their credit demands tend to be relatively small. As a car-based business my credit demands have been very small and often that's hard to manage, especially on the part of a large bureaucratic organization such as a bank, because the management of those small accounts is very labour intensive, and to tell you the truth there's not much negotiating leverage.
The relationship between a small business person and a bank is not the same as an ordinary customer to a manufacturing establishment anyway. I've heard it nicely described as the relationship between a father and a son, and maybe not so nicely described as the relationship between a dentist undertaking a root canal and his patient. I think it's somewhere in between. But the relationship is not even, and I think that is recognized by small businesses.
.1555
Small businesses are strapped for money. They're strapped for time. They're strapped for resources. They're under tremendous cashflow pressures. They are really strapped for the resources that they use and, at least in manufacturing, they're focusing on manufacturing. They're focusing on their markets, on their services. They're not financiers. They don't have the time to devote to that.
They're different because they need a bit of slack. It's difficult enough to meet payroll on a Friday and to keep your head above water.
All of the complaints that small businesses have about government regulation are there as well in the dealing with banks: filing papers, going through the loops to get credit, as they're seen by small businesses. These are all problems, and dealing with them requires a lot of time and a lot of resources that many small businesses simply don't have, and they pay a penalty if they can't meet them.
I talked about the uneven relationship between a banker, who has the expertise, who has the knowledge, who is a financier, on one hand, and a small business, who has the expertise about manufacturing, knows inherently where he would like to take his business, and, I hope for a majority, has a good idea about the business overall but is struggling to keep alive, struggling to keep his head above water.
To tell you the truth, going to a banker is not a nice experience. The reticence that is there to bring out problems before the bank, to talk about the problems that are there, is a major impediment to small business relations with banks.
Cashflow is important. You're not going to get financing from anybody unless you've got the equity, unless you're making money. For small businesses that's important. It's an important problem.
In manufacturing, on average in Canada there is a 2.5% after-tax return on sales. That means that, for the average manufacturing company, out of every eight-hour production shift it takes about seven hours and forty-five minutes simply to break even, simply to cover your operating costs, and you're paying taxes over another five minutes. On average, you've got ten minutes to make money to reinvest in your company and to build up your equity.
For a small business it's even worse. It's seven hours and fifty-two minutes on average and about three and a half or four minutes to pay taxes. That leaves, on average, four to five minutes to make money to build up your equity. That's a tremendous problem that, on average, all small businesses are facing.
We're not seeing cashflow get better this year; if anything, we see some worrying signs out there right now.
The Chairman: Mr. Myers, I'm going to interrupt you just a bit. You've been speaking for about 15 minutes. If you will wrap up your presentation, then I'm going to throw it open to colleagues for questions. We have a very specific purpose in mind for this particular review that we're conducting, and I'd like to try to stay focused. You're making some interesting and important points, but as the chair I've got to rein it in a bit.
Mr. Myers: Let me just touch on a couple of points, though, that I think relate to what you're trying to get at in benchmarking. It comes down in part to the relationship between manufacturing and banks and their operations.
Part of the problem of course is filling the market gaps, the absence of lending in certain markets. Let me give you a feel for some of the complaints I've had from companies over the past two weeks.
One complaint that I get quite often is that companies with the same credit-worthiness are not being financed equally across the country. Certainly the financing for small business conditions seems to be the best in Quebec. In other countries, especially in the Maritimes, there is a feeling.... I think many companies have come up against a situation where a company that is credit-worthy or that would probably get financing in central Canada, has much better access to venture capital, equity capital, in central Canada - that that is absent in places such as Newfoundland and New Brunswick, regardless of the strength of the business in terms of receivables.
.1600
Over the past week I've heard of problems from banks, particularly about service charges. It would seem to me that a lot of the chartered banks are moving to a situation where service charges are covering many of the non-banking services they're providing to companies. This is a tremendous problem and will become much more of a problem because those service charges hit the cashflow of small businesses, and many of the service charges are not geared to the fact that businesses are small and don't have the resources.
Let me say that I think, in talking about solutions to some of the problems that come up in the business relationship with the banks, it's important to take a look at what the banks are doing. Best business practice is something that banks should be following, and the introduction of an ombudsman who overlooks banking has been a step forward. I think it has to be local and I don't think it can be imposed from without. I think it has to be adopted by the banking community itself. I also think the benchmarks you're looking at have to be performance standards that are used and applied by the banks, and it has to come from the top down. The small business sector is an important customer base for the banks and this has to be built into the banking operations. I don't think performance standards should be applied from without; they should not be mandated with the reticent banks standing back and saying they can't deal with this. I think they have to be adopted.
I've read the Canadian Bankers Association's submission to the committee. I think many of the benchmarks they've suggested are good ones and I'm glad to see that initiative go ahead.
Let me just conclude by getting onto the changing nature of manufacturing and the changing nature of financing requirements. This is very important.
The main problem in banking today is not, I don't think, a balance sheet assessment of risk and opportunity; it's off-balance-sheet problems, both the risks and the opportunities. Although I've heard a lot about low risk versus high risk, I don't think that's a very good distinction. The real estate market is full of risks, as we've seen over the past several years. The problems are not balance sheet problems, they're non-balance sheet problems even there. It should be a distinction between good risk and bad risk, and the assessment of that risk depends on an understanding of the changes that are occurring in business today, especially in manufacturing, the changes in technology, the changes in the market, and the need to finance on working capital where often there are no fixed assets. That's very important and I think that's something that has to be built into the benchmarks that you're developing and perhaps added to some of those suggested by the bankers association.
I'd like to say, though, that the adoption of bank performance benchmarks has to be meaningful; they have to be local, they have to be adopted by the banks themselves in a meaningful way to help them run their businesses and to help them serve their clientele.
But I think there's a lot that has to be done within banks and within government to appreciate the changes that are taking place in business, and those performance benchmarks must reflect those changes in technology, in financing small assets, in working capital financing, and off-balance-sheet financing. The type of benchmarks that you perhaps should be looking at should perhaps also look at ratios of service charges to income earned on spreads on small business loans. I think this would be an interesting thing to look at; it's a ratio that would give you an indication of off-balance-sheet financing.
As to the adoption of that and the training that goes into that in banks, it's going to be very difficult for large organizations that have been brought up on traditional accounting measures and balance sheet operations to move to an appreciation of valuations of risk and off-balance-sheet measures, but I think the benchmarks that you're using have to reflect that change.
I have a lot more I could say, and economists go on too long, but I'll open myself up to questions now.
The Chairman: On which end?
Mr. Myers: Both.
The Chairman: Thank you, Mr. Myers.
We'll start this afternoon with Mr. Leroux from the Bloc.
.1605
[Translation]
Mr. Leroux (Richmond - Wolfe): Thank you for your presentation, Mr. Myers. You gave us a rather good idea of the profile of the companies associated with your organization and of your concerns. You did survey your members and determine that access to credit was more difficult for companies in a given category, and also more difficult in some regions compared to others.
In your analysis of the situation were you in a position to determine why this is so, or is your comment unrelated to your study?
[English]
Mr. Myers: I think there is a problem there. You can see it on a sectoral basis. You can see it on a regional basis. In discussions with some senior people in the banking community, including the FBDB, I think maybe there's too much emphasis being placed on the sectoral performance, on regional performance.
One of the problems I've experienced over the last two weeks is a complaint that has come in from a company in Newfoundland that is complaining that the credit in Newfoundland is not readily available, and the fact that they are in Newfoundland is the reason why it is the case.
In fact, the problem was that although this company had been keeping up payments on an outstanding line of credit for three years, had always made the payment, their interest rate was raised from prime plus two to prime plus three. As to why, it was simply because they were operating in Newfoundland, or at least that was what came from the bank manager at the time. Sure, that has an impact on their balance sheet. For a manufacturing company with 80% of the sales outside the Newfoundland market, it's probably a little bit of an irrelevance, but I see too much financing that is simplistic. The gurus of the new economy talk about sectors that are likely to do well and sectors that are out, and regions of the country that are likely to do well and regions that are not going to get financing. That approach hasn't done anyone any good.
P.E.I. is the most rapidly industrializing province in Canada. As for fish processing in Newfoundland, FPI had a 65% increase in sales. If you were betting on the fishing industry in Newfoundland, that company would not be a good bet. You have to understand the company. You can't do financing on a sectoral basis or on a regional basis, and often in manufacturing we're seeing those sectoral divisions break down.
There are five companies in Toronto that produce coffee pots for Proctor Silex. There's a plastics company, there's a management services company, an electronics company, a design company, and just a general manufacturing company. The five work together in a network. They have a number of people under individual contract for those companies. Most of the work is done within companies but by smaller companies.
How do you finance something like that? What sector is that in? What section is any one of those companies in, because they can reform to produce some other product? That's the problem.
The Chairman: Thank you, Mr. Leroux. Do you have some more questions?
[Translation]
Mr. Leroux: This aspect shows for the first time that some regions are discriminated against because of their economic, geographic, or any other status. When a firm is located near its market or is operating taking into account the distribution of its products, and so on, its geographic location determines its results. I believe this to be a very important aspect.
Mr. Myers, did your survey and your analysis indicate that women entrepreneurs found it more difficult to secure credit? That issue has often been mentioned.
.1610
In conducting your survey, did you determine the percentage of women entrepreneurs among your members? Did you determine whether women entrepreneurs encountered a special problems?
[English]
Mr. Myers: I have to say we don't have any analysis specifically looking at that issue. In fact, the people on our small business committee...there are five women on that committee, and none of them have problems financing from banks or from equity sources. So my anecdotal evidence on that is not good.
Let me say, though, to go back to the first point you made, I don't see the problems in small business financing as really being outright discrimination on any part. I think there are problems in dealing with the changes that are going on in small businesses; problems in dealing, for instance, with self-employment and lending to the self-employed business person. Of course, probably women account for more than 50% of that. There are problems there. There are problems in the area of less than $100,000 loans.
I think it's more a problem of dealing with the changes in business today rather than outright discrimination. This is something the banks have to deal with, and manufacturers do too.
[Translation]
Mr. Leroux: If I made that remark, it is because issues concerning women entrepreneurs have been raised on several occassions. It would then appear that as far as you are concerned you did not notice anything special in that regard.
[English]
Mr. Myers: In manufacturing it's very difficult actually to identify businesses such that you can say, well, this is a business that is a business driven only by women; where women account for everything. Because of the ownership, because of the role of companies in production networks today, it's often difficult to make that distinction.
I think it's a problem for banks in measuring loans to women. Perhaps in some businesses it's not that difficult. In manufacturing I think it would be a hard thing for many banks to come to terms with, to try to measure.
The Chairman: I think the question he's putting to you is we heard from the CFIB a number of businesses owned by women.... I accept there's a distinction between businesses that are manufacturing and other kinds of businesses. You're telling us it's not an issue, and it's never been an issue, or you've never heard anything we should worry about from your point of view at CMA.
Mr. Myers: From the manufacturing point of view it's a problem. From our point of view, I don't see that it makes a difference whether a company is owned by a woman or by a man. I don't see a difference. I have not heard complaints from our members on the basis that, I'm a woman and therefore I'm not getting financing. From our membership, I don't hear that. I recognize there may be a feeling out there that.... CFIB has certainly been tracking that. But as I say, we've done no analysis on that.
The Chairman: You have not heard it.
Mr. Myers: I have not heard it. I may get lots of calls after this.
The Chairman: Mr. Iftody, you're chomping at the bit to ask some questions, so we'll certainly put you right on. I don't want it said of the chair that I'm not letting you lead. So again I let you lead.
Mr. Iftody (Provencher): That will of course rest in the record. Thank you.
I was somewhat distracted by Mr. Bélanger's tie there.
Mr. Bélanger (Ottawa - Vanier): Strike that from the record.
Mr. Iftody: Thank you very much for your presentation.
A couple of things in particular have struck me. Quite frankly, after hearing at this committee - I guess it's well over a year now - presentations from reputable Canadian organizations such as yours, and the Canadian Federation of Independent Business and others, that there still is a prevalent feeling that the relationship between business people, in this case manufacturers, is a tenuous one, I was quite astounded by numbers such as 68% feeling that the relationship with their banker, being as important as it is, is, I think you said, an insecure one.
.1615
Could you perhaps explain why you think that's occurring?
In particular, I notice in economic reports that the manufacturing and export sector in Canada is doing quite well, but the retail side, for example, which you also represent - in other words, our internal economy - is really having some difficulties. I would suspect, therefore, that these people are going to be running into some problems shortly. There's a lack of confidence in terms of purchasing of these kinds of manufactured products.
Why are 68% of your members saying that they feel this way, and is it particularly hard on certain sectors that you represent?
Mr. Myers: It is, and it's really the smallest companies that are saying that, I think because of the cashflow constraints they're under. Cashflow and profitability have a huge impact on financing ability, and for good reason. But it's very important to recognize, from the point of view of a small business person and small manufacturer, the necessity for control over the operation, particularly in a period of recession. If it's going to stay in business, then the company has to be in control of the costs it's facing. They are in most cases in control of their labour costs, their input costs, the relationship with suppliers, the infrastructure they use. They can control all of that.
What happens when you walk in and your banker raises your borrowing rate overnight by 1% and, in the case I was talking about, the Newfoundland company, puts $50,000 of extra cost that you have to cover every year? What happens when you go in to negotiate a small business loan and you start with a $5,000 fee simply for getting the banker to talk about it? What happens when an $800 penalty is assessed for being one day late in monthly filing? Banking charges are probably second only to taxes as the major fixed costs that small businesses face, and those costs can change, from a small business point of view, a manufacturer's point of view, on a whim.
That's where the insecurity comes from - as well as simply the concern that, ``Gee, are they going to foreclose on me once the value of my property gets up to something they can sell off?''
I think there's a lack of understanding of bank business practices and a lack of communication between banks and small manufacturers of what best business practice is, and some of the examples that companies run up against and the horror stories out there make everybody very insecure. All of that has an impact. I hope that's something you will pick up in the benchmarking process.
The second thing is exports versus domestic economy. This recovery has been entirely export led. Our volume of export shipments never decreased. If we were only exporting, then we would never have been in recession. It's been entirely the export economy - to the extent that on average we're exporting 55% of total production today. The Canadian market is second to the American market. The Canadian market today is not as important as it was. The American market is the most important one.
Manufacturers, large and small, have lost a third of the domestic market within the last 15 years. The Canadian market share is now 44% of domestic sales manufactured goods. That creates tremendous change within manufacturing, which now is much more export oriented, much more specialized in its production.
It means that the economies of scale from domestic manufacturing are no longer there and makes it much more difficult to operate.
I'm very worried about what I see right now in terms of the outlook for manufacturing across the country. Production for the domestic market is slowing, the growth is slowing. The domestic production is falling and has been for the past five years. We've reached the peak in manufacturing, the peak of the business cycle. We're going into a period of slower growth, hopefully not a recession. But cashflow difficulties are going to increase over the next year or so and I think you're going to see a lot more companies in difficulty. You're already seeing bankruptcy rates rise. It's going to be very, very difficult for manufacturing companies and other small companies that are dependent on the domestic market. Manufacturers have been a little lucky because they've had the export side.
.1620
Mr. Iftody: I'm also worried about some of the numbers that I've been seeing. Actually, they're somewhat surprising. I guess a lot of it is structural and readjustment, but readjustment to what? Obviously if you're moving from one sector to another, it's going into the knowledge-based industries, which you referred to at the outset of your presentation.
But in terms of providing this committee with some specific help, we would like to have something in place hopefully before the economy, say in two years, takes a very deliberate downturn. If that were the case we would want to have some protection for Canadian small business so that we minimize the kind of insecurity where they feel the roof is going to cave in at any moment. We would really want in some way to compel the banks to take a much more, in my view, responsible role with their customers.
What in particular do you think we can do for those more vulnerable Canadian companies that are going to come under greater pressure as the months go by? What can this committee do with respect to their relationships to the bank? Is there something either generally or specifically that you might suggest?
Mr. Myers: I think the committee should continue to urge the banks to move in the area of assessing their lending relationship with small business. Do everything in your power to open up alternative means of financing, and recognize that's important.
I wouldn't want to see the government step in to mandate loans to small business, though, to require certain performance targets to be met on the part of banks. I think that would have the opposite effect; you might drive lending out of the market. It's often difficult for FBDB, for instance, to step in to where market gaps exist. Usually it has a bit of the opposite effect, at least in some of the regions I know. It helps banks to vacate the market if FBDB is there, and that's a real problem. Many of the complaints I get are about FBDB. It's not simple and I don't think there is any quick solution to this.
I think it's up to the banks to move quickly, and they've shown they're heading in this direction, introducing, as they have been doing, pilot projects and small business financing, innovative types of financing, providing bridge financing or longer-term loan financing, and perhaps giving a little bit of leeway in small business and their small business lending and reporting and administrative requirements because that's where a lot of the problems come in.
I wish there was an easy thing I could say I'd like to see the government do. I'm even afraid of benchmarking and getting banks to report. I'm afraid that's going to backfire because the banks will turn around and charge small business for this, and the cost on the service charge side will just escalate. That's a real fear.
Mr. Iftody: But you're saying it's almost as if we're being held hostage by the banks, and I just cannot accept this. I've heard this other times as well, and this committee has struggled with this leading up to our report. You're saying if we don't use benchmarks or we create an expectation for the banks, they'll sort of slide out of this situation, that they will punish small business somehow. In other words it's as if the banks were saying ``stay on bended knee while I hold a hammer over you, but if you dare try to remove yourself from that situation or bring in anyone to help you in this I'll make matters worse''.
.1625
It reminds me of a kind of financial blackmail, where the dependence on these institutions is so profound in the Canadian economy. I really think - to get back to your notion of the necessary freedom of small business to operate in a free market system - that that sort of process and that right, if you will, and the privilege of the banks to exercise their fiduciary responsibility in that process are somehow being skewed here.
I get very nervous when somebody says ``Let's not do this to the banks because they'll punish us''. We had two women testify to us who said ``Please don't tell the banks what we're saying about them here because when we go back home the bank manager will pull our loan'', and everyone sat here in silence and shock after that. I'm really troubled by those kinds of comments.
Would you speak to that, please, and tell us if we couldn't move in a way to compel banks to help out and decrease the 68% insecurity of your members, and how else we could address this problem?
Mr. Myers: Let me say a couple of things. First of all, there is a profound dependence on the banks and there is a real reluctance on the part of businesses to bring problems up. I think, in many cases, you're lucky to get people talking openly about the problems, especially in a public situation like this.
Mr. Iftody: I hope I keep being re-elected because I'll never get another bank loan for the rest of my life, the way this is.
Mr. Myers: You may not.
The Chairman: This is the last question. Could you just respond, please?
Mr. Myers: First of all, I think a part of the problem in having even an ombudsman looking at banking problems is the reticence to bring problems before that person.
But let me say this: don't underestimate the power of this committee and the effect of what you've done to date. Certainly, the thing that has been moving the banking community is the fact that this is on the political agenda, and there has been real progress there.
I guess my point is don't come in heavy-handedly; don't mandate something that will then backfire. I think there's tremendous leverage that this committee and the government in general can exert on the financing community in general - not just the banks.
There's a tremendous amount of leverage there as long as you're looking at the right things, as long as you're paying attention to the non-balance-sheet items, and the problem of service charges and business practices of banks, and asking things such as: how many people do you have on your small business loans; what's the turnover rate of loan managers here; how much training are you doing in non-balance-sheet financing issues and how do you go through that process? As long as you're asking the right questions. Don't come in and look at performance criteria, simply looking at outcomes and financing. Look at what the banks are doing and ask them questions about that.
I also think there's a tremendous number of things the government could do in deregulating other sources of capital, in equity financing, and making that more generally available. Certainly one of the biggest things the government could do, since cashflow is so important, is take a look at mandated costs from government on cashflow businesses; that's key.
Certainly I wouldn't want to see a bureaucratic solution to a problem that is, in large part, one of the large bureaucratic organization of the banks. I'd much rather see the taxes that banks pay to government on bank capital go into a separate fund that could be administered by the banks to help on small business financing, on equity financing, where instead of interest, you might get a return on sales. I'd much rather see that tax money going in there; it would be far better spent in lending to small business than tax money being spent by government.
I think there are new creative financing initiatives there, but there's a big problem. It's the banking sector that has to respond and it has to adopt that as its business objective, its goal, and every part of bank financing has to be based on that. These benchmarks can't just be something government mandates; they have to be adopted by the banks themselves. So don't come in with a sledgehammer and mandate it, but do influence it.
.1630
The Chairman: Thank you.
Mr. Harper, I think you have some questions. Then it's Mr. Mitchell.
Mr. Harper (Simcoe Centre): Thank you, Mr. Chairman. Thank you, Mr. Myers, for your presentation. I have a couple of questions.
The first one is actually related to the comment that we've got perhaps two years before we're going to hit the wall. In your earlier remarks you expressed your concerns about our reliance on an export market that may in fact be deteriorating, as it is in the United States, and about the domestic market shrinking. In your estimation, do we have two years to really get a handle on this problem?
Mr. Myers: I think you're already seeing significant cost pressures in manufacturing, but particularly on the small business side. And the cashflow pressures, the problems of bank lending to small business are pretty well - You can take a look at cashflow problems and see some of the problems in lending.
I think you're already seeing it. If we wait around for two years - The problem is there right now and has been there for some time. Companies are trying to keep their heads above water. It's an ongoing problem and it's likely to get much worse over the next two years.
Mr. Harper: When your members come to you with complaints about banking, do you or does anybody in your organization take the time to investigate the validity of who the heavy is? Is it in fact the bank, or do you have a member in trouble who is using the bank as a - ?
Mr. Myers: To tell you the truth, we don't have either the staff or the resources to investigate that ourselves. If I get a problem with someone complaining about something a bank or someone else has done to him, I usually tell him to contact his local division of the manufacturers' association.
Maybe the most effective help is a sort of self-help among the members. To a certain extent there is a lot of help that can be brought to bear in perhaps smoothing things over if it's a working problem, or in coming up with alternative ways of financing. There is a lot of equity there that is being provided in kind today.
On one side, I guess you could say one of the main things that has driven the underground economy is the problem of securing financing for small business, but there's a lot of equity, such as company suppliers giving companies the materials to produce something and then taking a cut of the sales. That's going on in spades and it helps to alleviate some of the problems.
I think one of the difficulties we have is the same one many companies have. Who do you go to? Who do you contact in the bank system? Or do you not go to the ombudsman right away? Yet these problems are there and there is still a reluctance to bring the problems up. There's a problem that may exist because the bank has introduced a service charge that you didn't know anything about. You get a complaint from it, but you're not going to go to the banker and say you have a problem; you're going to come to me and maybe some time I'll appear before an industry committee and talk about these things.
Mr. Harper: I have one final question. If your members were given a choice when they've got a problem with the banking community, which do you think your members would support if you were to offer a choice of benchmarks in place, or some form of quota system, or opening it up so we've got more competition for your business out there in the financial markets?
Mr. Myers: They'd definitely support competition, but that's a long-term problem and I think the problems my members face are short-term problems that benchmarking doesn't get at either.
But I think benchmarks are a very important thing in manufacturing. They have to be effective, they have to be meaningful, and they have to lead to continuous improvement. The benchmarks won't mean anything unless the situation gets better and unless they are used by the banks in order to improve their lending to small businesses. But they probably would look at either benchmarks or quotas and roll their eyes. Certainly, competition -
Sure we need competition, not just in the banking area, but in lots of the equity area and everything else. We need deregulation in a lot of those areas, and I guess it comes down to the expectations of Canadian investors. There's risk out there and individual investors have to face that risk. If they lose money, they can't look at government to come and bail them out. That's a problem too.
.1635
But these are long-term problems and the solutions we need are short-term solutions. I think to some extent it comes down to the ways that banks operate in relation to small businesses. It has to be different; it can't be like a big business. I think that comes from the top level in the chartered banks and at FBDB and other lending institutions, and it has to be something, such as quality, that goes right throughout the system. The benchmarks may help, but the biggest thing of all would be a mandated policy aimed particularly at small business, and some of the banks are moving in that direction.
To tell you the truth, the problem with small business financing is something that just leads to tremendous frustration among our members because they don't see any simple solution. All they do see is a tremendous lack of ability to influence the situation. It is the one major cost that they don't have any control over.
Mr. Mitchell (Parry Sound - Muskoka): I have a couple of questions building on some of the others that were asked here. I gather from your testimony that you would probably agree with the comment that in the best of all worlds the marketplace itself would dictate the banks to be more responsive to small business.
I think one of the things that we've seen in this committee, and what we hear in anecdotal evidence in our constituency offices and in a number of reports, including the small business committee report, was that the marketplace is so dominated by the six or seven major players that it cannot be as responsive to the difficulties as we would like it to be.
Given that fact, the Minister of Finance made a suggestion in his budget speech of recognition that the marketplace wasn't accomplishing this and that government would have to play a role in it - he used the phrase ``benchmark'', which is open to interpretation - as a substitute or an enhancement or replacement for what the market might do in a totally open industry.
On the one hand, I've listened to you say that what this committee does by publicizing things and keeping the issue up front has done some of that work, and I've also heard you say that at the end of the day, regardless of what the external forces are, if it's not internalized in the operation of the bank, it's not going to accomplish anything. I'm interested in your opinion as to what degree of government intervention do you think needs to take place to ensure that the banks become responsive, and where do you think is the limit that that becomes self-defeating and too intrusive into the industry?
Mr. Myers: Let me start at the upper limit. I don't think government should be mandating quotas in terms of lending. I think intervention even in filling market gaps tends to widen market gaps in terms of the provision of credit. I'm really skeptical about government's involvement in that sense.
But I think the government does have a role to play in oversight. The bank ombudsman, the small business ombudsman who is there, is certainly effective to some extent. That might be one way of pushing this benchmarking notion a little bit further and getting banks to adopt that, but it's difficult and most businesses that have problems will never go outside. Many don't even report the problem. They maybe complain to the bank.
Mr. Mitchell: Is that a problem because the ombudsman is within the organization? Are you suggesting that it would work if there was an ombudsman external to a particular bank?
Mr. Myers: I think there is a bit of a problem that the ombudsman is within the bank and looks at things from a banker's point of view. The problems are often not in just securing a loan; the problems may be due to a policy that has been made by the bank to put a large service charge, which may increase, on information services and other banking services, and it's a policy decision that's taken. So I think there is a role for third-party involvement in resolving some of the problems.
But going back to the benchmarking and the oversight that could be done by this committee or by, hopefully, a slim group of people looking at bank practices, I think that could be quite effective as long as the measures you're using are meaningful measures and get at some of these problems, at the working relationship, but also looking at this changing nature of bank lending.
.1640
Mr. Mitchell: Can you give me an example of what your industry would consider a meaningful measure for us to establish as a benchmark?
Mr. Myers: Of all the sectors in our industry that are just crying out for some form of financing today, it's probably the software industry, the software developers. There I think I'd take a look at things such as, again, off-balance-sheet items such as receivables, such as the record to date of companies in financing their loans to the banks, a working relationship with the banks, but I'd look at it in terms of an understanding of what it takes to innovate, with an understanding of what it takes for a business to be successful. That could be something as soft as understanding management practices in the business and the commitment of the personnel to the business, or the fact that your assets can walk out the door. You have to understand the management psyche. You can't do it simply by a very hard type of number. Maybe there's a role to play - I look at things like technology management.
Mr. Mitchell: Would our role be to go to the chartered banks and say, you're lending x amount of dollars to software manufacturers this year, next year that amount of lending will drop but the overall business has expanded, and there seems to be an inconsistency? Is that the type of -
Mr. Myers: Yes, I think an explanation of why that might be the case - Just simply loans to an industry based on the sales performance of the industry or the cashflow performance of an industry might in itself be an interesting measure.
Mr. Mitchell: I have one last question. You made a comment - and I think I heard this, but I want to make sure I heard it accurately. You suggested that no matter what we do as a committee that will result in the banks having to take action to respond to this, you have a grave concern that the cost of doing that will simply be passed on to the small business person and at the end of the day our attempts will be self-defeating.
Mr. Myers: It is a concern, yes. The collection of information, the filing procedures that might be required from small businesses, all have a cost. If that is passed on to small business, the effect on cashflow - No small business wants to spend their time filling out forms. We're trying to get away from that even if it means providing you with more figures.
Mr. Mitchell: Do you base that comment on your past observation of the way banks operated? What is the basis of your believing that?
Mr. Myers: The basis is, first of all, the problems small business have with paperwork already and the problems they have in meeting the filing requirements, not only on the part of banks but on the part of all financial institutions and governments.
The other concern, though, is the tendency and the policy decisions that banks seem to be taking to base more of their provision of information services and bank non-lending services on payment through service charges. That, if anything, is going to hit the small business person. So filing that and having it come through a service charge is going to take a big whack out of cashflow.
The banks themselves will say that's the trend they're going to, and I think you have to recognize that. So you don't want to put in something by which it will be required, say, for the banks to readjust their accounting procedures for small business. That will be contained within small business lending and will come out as a service charge in the end.
Mr. Mitchell: Thank you, Mr. Myers.
The Chairman: Thank you, gentlemen. I think that concludes the questions for Mr. Myers.
I want to thank you, Mr. Myers for your presentation. We're pleased, as always, to receive the interventions of the Canadian Manufacturers' Association. If you have any additional information over the course of the next few weeks, or some afterthoughts, we'd be happy to receive them, because as you know, we'll be making a report before the closing of Parliament. Benchmarks and other gaps in financing issues that we observe are going to be reported both to the Minister of Finance and the Minister of Industry. So on behalf of the committee let me thank you, Mr. Myers.
.1645
Mr. Myers: Thank you very much.
The Chairman: We're adjourned until the Canadian Chamber of Commerce appears, which will be next Tuesday at 3:30 p.m. in room 371.
The other thing I want to remind steering committee members of is that we have a meeting next Tuesday at 11 a.m.