EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, May 31, 1995

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[English]

The Chairman: Good afternoon and welcome, ladies and gentlemen. This afternoon we are considering Bill C-91, an act to continue the Federal Business Development Bank under the name ``Business Development Bank of Canada'' and amendments.

Appearing this afternoon is the Hon. John Manley, Minister of Industry. I believe he's accompanied by Mr. Beaudoin, the president and CEO of the Federal Business Development Bank.

Welcome, gentlemen.

Mr. Minister, I believe you have an opening statement.

Hon. John Manley (Minister of Industry): I have an opening statement that I hope will set some of the framework for the bill we're proposing. As you mentioned,

[Translation]

Mr. Beaudoin is here with me this morning and this afternoon to answer any technical questions.

[English]

I believe the bill is an important element in creating the supportive environment for small and medium-sized businesses that will contribute to rebuilding a lasting prosperity.

As this committee well knows, small business employs more than half of Canadians working in the private sector. Since early in the 1980s, small business has created 87% of all new jobs in Canada. SMEs will continue to provide jobs and create prosperity for Canadians. Our goal is to create an environment in which entrepreneurs can continue to crate jobs for Canadians and contribute to the creation of wealth.

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[Translation]

We are acting on that understanding and moving towards that goal. In 1994, we asked private sector and public sector groups and organizations - including this committee - how government can create a supportive environment for smalll business growth.

Everyone agreed that small business has a vast and too often untapped potential for creating more jobs and wealth. To tap that potential, the groups and organizations we consulted said the government must reduce the deficit. We must develop more efficient, effective and relevant small business programs.

Finally, we must recognize and act upon the fact that government alone cannot create the vibrant small business sector this country needs.

[English]

From this advice and counsel, we developed in our plan, Building a More Innovative Economy - the orange book - a wide range of initiatives to promote small business growth in Canada. In the vital area of financing we have pressed the banks to improve their relationship with small business. We've taken steps to ease access to capital for innovative projects. We're refocusing federal government financing programs to fill in the gaps left by the private sector.

At our urging, the Canadian Bankers Association has developed a code of conduct that will help ensure accountability, understandable contracts, more efficient credit processing and an effective method of dealing with complaints. Member banks are incorporating these standards into their own codes of conduct.

The federal regional agencies ACOA, FORD-Q, WED and FedNor have refocused their programs almost entirely on small business. The agencies now focus on recoverable contributions and providing information to business.

Late in 1994, we revised the Small Business Loans Act to increase the lending ceiling to $12 billion to meet the growing business demand for the program. Effective April 1, we implemented additional changes to put the program on a cost recovery basis, thus complementing our overall deficit reduction targets, and to improve targeting to the businesses that most need the program.

[Translation]

In the next few weeks, we will be tabling additional SBLA amendments, to continue moving the program to full cost recovery and provide additional (minor) improvements relating to borrowers and lenders.

The small business policy review indicated quite clearly that one of the most immediate challenges facing small business is access to financing. A critical element of the government's efforts to improve this access was the review of the role and mandate of the Federal Business Development Bank.

[English]

Since it was started 51 years ago as the Industrial Development Bank, the bank has helped Canadian businesses respond to the changing demands of the economy through timely and innovative financing and management services. As the economy changes again, the time has come to change the Federal Business Development Bank.

This committee recognized this in its report, Taking Care of Small Business, and recommended that the Federal Business Development Bank:

be refocused as a complementary lender to small and medium-sized businesses, and that it be authorized to use new financial instruments to fulfil its mandate.

Bill C-91 updates the bank's mandate. It builds on the bank's experience and skills to provide the financial and managerial leadership small business needs in the knowledge economy without abandoning traditional lending sectors.

The bill changes the name of the bank to the Business Development Bank of Canada. The Business Development Bank of Canada will be an important element in supporting small businesses because it will be able to fill what might be called the gaps confronting small businesses in all regions of the country.

[Translation]

These gaps have developed because small businesses have adapted to the knowledge-based economy requirements more rapidly than financial institutions.

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Small businesses cannot afford to wait for financial institutions to catch up and close the gaps - and the Canadian economy cannot afford to wait.

The first gap is the risk gap - the gap resulting from the unwillingness of many lenders to make loans to small businesses, even at high-interest rates. The bank, building on its years of experience with small business, has developed several innovative financing programs designed to help high-risk small businesses.

[English]

Bill C-91 secures continued access to financing for business by increasing its capital base. The changes are needed now, as the bank nears its $3.2 billion statutory ceiling. If this issue is not addressed, the bank could be forced to ration credit in the near future, depriving worthy applicants of loans they can use to create jobs.

The second gap is what might be called the size gap. There's a cost in assessing a company's plans and financing proposals and in monitoring a firm's progress. The assessment cost is roughly the same for a $1 million loan as it is for a $50,000 loan. Often the assessment cost for a small loan exceeds the potential return for lenders or investors.

Financial institutions generally do not have methods to evaluate the lending or investment risks for businesses in the new economy. This is the knowledge gap, which means they have difficulty assessing the risks of a business whose prime asset is human - an idea, a software program or specialized knowledge. Bill C-91 means a bank can continue to work with innovative small businesses in sectors at the threshold of the new economy.

Finally there is the flexibility gap - the unwillingness of lenders to finance promising business on flexible terms. The bank has already started to close the flexibility gap with a pilot patient capital program, which postpones repayment for up to three years - the time when a company can develop its products or services and markets. This provides sufficient time to build the cashflows needed to service conventional repayment schedules. If this program proves successful, Bill C-91 allows the bank to extend it throughout the country.

[Translation]

Bill C-91 also gives the bank the mandate to increase co-operation and create partnerships with regional agencies and federal financial institutions like the Canadian Commercial Corporation and the Export Development Corporation. The capital base of the bank would be increased by the bill so it can continue to meet small business needs.

The government's investments will be converted to common shares. The government will be the only owner of these common shares. The bill allows the bank to issue new hybrid capital instruments to public and private investors, shareholders, with the approval of the governor in counsel.

[English]

I assure you the technical details of the bill have been carefully examined. It's one part of the future we are building for Canada's small businesses and our prosperity. This bill having been referred to committee in advance of second reading, I welcome your suggestions for improvements.

I feel the bank is one area in which the government can effectively complement the marketplace by providing leadership in addressing the needs of small businesses in the knowledge economy.

Mr. Beaudoin and I are most prepared to respond to your questions and comments.

[Translation]

Mr. Rocheleau (Trois-Rivières): Thank you Mr. Minister. I would like to begin by sharing with you our surprise - the Official Opposition's term - at seeing the bill worded this way, because if we think back to the comments made at the Industry Committee, and especially the testimony from the representatives of the Federal Business Development Bank, a bank which is very much appreciated, no one ever talked about changes as fundamental as those set out in the bill.

Bear in mind that under the act, the FBDB was defined as a body with a specific role as a last resort lender for a specific clientele, the SMEs, for economic development. Now, it is being made into a bank which is complementary to the traditional banking system, without defining the nature of the new Business Development Bank of Canada, which is, in passing, a very pretentious title.

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I would like to know the rationale behind that. How does the government consider this legitimate and what financing needs is it responding to in intervening in such a way with respect to a body that had proven itself and that was very well respected by the industry? That is my first question.

Mr. Manley: I can simply quote the subcommittee report which states: ``The committee recommends that the mandate of the Federal Business Development Bank be confirmed and refocused as a complementary lender to small- and medium-sized businesses, and that it be authorized to use new financial instruments to fulfill its mandate.''

Mr. Rocheleau: Mr. Chairman, the parliamentary secretary, who was ever present and precious to our work, will agree with me that this is truly a complementary role to the traditional system of banks and caisses populaires in Canada and Quebec and that the bank, according to paragraph 20(b) of the former Federal Business Development Act, played a specific role as a last-resort lender.

This is being changed without any discussions and without the need to do so being expressed, at least not during the committee's work. I did not express that very well. It is all very well to hold consultations, but it is difficult to see where you dug up the legitimacy - for lack of a better term - to introduce this bill. The danger is that we are moving away from its mandate, because the word ``complementary'' is being used abusively. That may surprise you, but the word ``complimentary'' is being abused. In that past, the bank was complementary, and in our opinion, it no longer will be.

Secondly, when we talk about hybrid instruments, which is another way of saying that from now on, the bank will not only draw on government funds but also on private funds, we must remember that the act does not provide for - and this is where the danger lies, Mr. Minister - fixed interest rates - that is the amount paid on these loans from the private to the public sector. Therefore, this suggests that the bank will have to provide the most advantageous or appealing rates in order to attract private investors, thus distancing itself even more from its mandate as an economic development bank and giving it a commercial mandate like the other traditional private sector banks.

What guarantee do we have - and I ask the question of the president directly - that in its daily management, the bank won't be forced underhandedly by the government not only into being self-sufficient, but also into making a profit that will make it as attractive as possible for the private sector?

Mr. François Beaudoin (President and Chief Executive Officer, Federal Business Development Bank): First of all, we have to put things into perspective. By using private sector capital, the bank now has $3.2 billion in assets. The only amount that is not from the private sector at present is the $300 million representing national assets of the Government of Canada. So out of the $3.2 billion in assets, the bank primarily uses the private sector to fund itself.

Using private sector funding is nothing new. As you all know, that bank, contrary to other agencies, does not receive annual votes from the government, but instead, funds itself on the international financial market and pays the interest due to obtain its funds from the private sector.

The bill proposes making it possible to maintain the pattern of using private sector funds, which has been popular over the years, but doing so with a type of capital which will serve as an operating base of capital assets for the bank. As in all businesses, there must be a relationship between borrowed capital and equity capital. Maintaining this relationship is important.

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As I told the committee, over the past five years, the bank has succeeded in lending over 4 billion to SME in Canada, without any federal government-injected funds. We saw the need to recapitalize our shareholders equity and the bank's assets. As we did with our debt, we would like to have access to the private sector, pay interest which will be commensurate with the market risk assessment of the bank's operations, and finally, enable the bank through its operations to support more businesses than it did in the past.

Mr. Rocheleau: An interst rate based on profits?

Mr. Beaudoin: An interest rate based on the market assessment of the risk incurred by investing through the FBDB. Those are the rules of the marketplace. You asked me how much we will have to pay and what the interest rates would be. At present, once that act is adopted, the market will assess our operations and say we have to pay a rate which exceeds the rate for Canadian government bonds by so much. There is always a margin to be paid, and it is more or less the rate for Canadian government bonds. That would be the basis for the risk assessment.

Mr. Rocheleau: Why aren't these aspects mentioned in the act in terms of return on investments and interest rates?

Mr. Beaudoin: Because initially the bill is granting us the authority to issue bonds on the debt, sort of like laws which enable businesses to issue shares, but the amount, form and basis on which they will be issued cannot be set out ahead of time.

Mr. Rocheleau: I would like to ask a third question Mr. Chairman. We know from the committee report that loans of $50,000 or less to small business account for 30% of the bank's activities. If you increase the amount to $100,000, it represents 52% of the bank's loans. We can see where the bank could neglec its mandate to promote SME development in favour of development in Canada. Clause 4 states:

4.(1) The purpose of the bank is to support Canadian entrepreneurship...

Subclause 4(2) says:

(2) In carrying out its activities, the bank must give particular consideration to the needs of small- and medium-sized enterprises.

That is far from being a last resort.

Clause 21 says:

21. The bank may carry out other duties or functions that may be assigned to it by the designated minister in relation to the administration of any program promoting Canadian entrepreneurship,...

That is far from the Federal Business Development Bank whose only concern is to help SMEs develop. That is promoting development in Canada.

So in a context like this, are you going to continue the 52% of your activities which currently cover small businesses, which fill in an obvious need and which are recognized as being very useful in Quebec and Canada? How are you going to do that? In my mind, it's a true challenge.

Mr. Manley: If I've understood the question correctly, it's difficult for me to understand the complaint that you're making here. First of all, by giving the bank a new mandate, we have tried to emphasize the importance of small businesses. The old way of lending to businesses, which was based on the last resort, made it possible for the bank to refuse clients that may not have been able to get a first loan. So there was a tendency to increase the amount of the loan.

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With this new way of explaining the mandate, we can place more emphasis on the importance of small businesses. Small- and medium-sized businesses will undoubtedly benefit, and this will help Canada. When you have a system where 97% of new jobs are created by small - and medium-sized businesses, it is certain that the country will be the first to benefit. Bear in mind that one SME out of five in Quebec has used the services of the FBDB. I believe that it was very important for SMEs throughout Canada to have the option to go to the Bank to try to obtain a loan.

[English]

Mr. Mills (Broadview - Greenwood): Mr. Minister and Mr. Beaudoin, we thank you for delivering this renewed, retooled, refocused Business Development Bank.

Contrary to what Mr. Rocheleau said, I thought we were pretty open about our commitment to use the FBDB as an instrument to stimulate activity, not only in its own field but also in the other financial institutions. I'm surprised that Mr. Rocheleau isn't asking how many of these new branches of the Business Development Bank of Canada could be set up in Quebec right away, with all of this renewed power and these new instruments that it has.

Having said all that, with the new powers you have to expand your bank, there's an aspect of your business I'm going to hope you do not forget. It's the area called CASE, counselling assistance for small enterprises. I have heard from many of my small, newly started businesses, and women in particular, that the CASE program has been a very special benefit in helping them get started, develop business plans or even move their businesses to the next level. I'm hoping that just because you now have all this added power, you're not going to drift away from that commitment to the CASE program.

Could you maybe say here today to the committee that you're going to be as committed to that program as ever and give it the same kind of energy and focus?

Mr. Manley: Let me make a couple of comments first and then perhaps Mr. Beaudoin would like to add something.

One of the things the Baldwin study for Statistics Canada on growing small businesses demonstrated - and I know this committee looked at that study last year during the course of preparing its report - was that growing small businesses are likely to have strong management skills, among other particular focuses. I believe this is one of the areas where the Business Development Bank can make a meaningful contribution to helping small businesses grow.

This is something that's difficult if not impossible for chartered banks to engage in. The CASE program has been a model of how it can be done at relatively low expense as a complement to the other financial services the bank is providing.

You might say it's preventative rather than being an analysis of problems after they've occurred, because it enables advice to be given to enterprises when they're at the early stage - when they're doing their business plans and applying the proceeds of their financings. So I see it as a very important function for the bank to pursue.

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I also see it as very complementary - to use that word again - to the other services we are trying to provide, both through Industry Canada and in some cases through the regional development agencies with respect to strategic information and advice for businesses.

CASE program officers are going to be well informed of what kind of information can be obtained through Canada business service centres, Industry Canada and regional agencies so that they can be of assistance to entrepreneurs in making their plans for the future.

Mr. Beaudoin: There's no question that CASE will play an important role in the new Business Development Bank of Canada.

You're right, this is an important program. To give you an example, last year we did over 5,000 assignments. If you look at what other counselling firms are doing, we'd probably be placing the FBDB as the most important counselling firm in the country because of the number of number of businesses and people we reached through that program.

This program is also reaching the small end of the business, the micro-end. To look at some of the statistics, over 40% of the assignments in CASE are done with firms that have less than $250,000 in sales. So this is really dealing with businesses that need the support and the coaching.

It's also an instrument that will in the future be capitalizing on the fact that it's quite unique to see a financial institution with the ability to deliver both financing and counselling. In Canada this is unique.

I've surveyed the development banks of the world, and Canada is unique again in this area of having the ability to deliver both financing and counselling. No other country has a facility similar to we have with the Business Development Bank of Canada.

Why is it so unique? We find that increasingly we need to be not only delivering money to small business but delivering money with coaching and counselling.

I have a daughter who's sixteen; she's going through driving lessons. We'd never think of giving her the wheels without her going through driving lessons. Yet with some small businesses that are starting, if we don't provide the coaching and counselling, it's equivalent to giving people the wheels without the necessary instructions.

Increasingly with the new products we introduce, we find we need to associate financing and coaching. It's going to be an integral part of the financing we provide to small business. If they get the financing, they will get the coaching and counselling. It will be a package approach to supporting small business.

In the past, it was more ``You need one or the other? We'll provide it.'' Now we're working at integrating the two.

The Vice-Chairman (Mr. Mitchell): There are three minutes left of the ten-minute segment.

Mr. Mills: I defer the balance of my time to Mr. Ianno. Is that okay, Ian?

Mr. McClelland (Edmonton Southwest): Yes.

Mr. Ianno (Trinity - Spadina): Thank you very much for appearing. First of all, I'd like to compliment Mr. Manley and the FBDB for starting to take a more proactive role in dealing with some of the issues we've been studying, namely the access to capital for small business. I'm happy to see that some changes are being made to enable you to raise some funds, keeping in mind that it's still on a break-even basis, so in fact it comes back to the benefit of the small business person.

I have a couple of questions; they will be directed more to Minister Manley, but eventually we can go to Mr. Beaudoin.

One is on the SBLA and of course the great growth. Many of the banks are very happy to lend out, with 100% growth and government-guaranteed money. Could the FBDB not play more of a role in that, considering that it's government funded and considering that they are playing a very effective role in lending to small business and in increasing capacity so the leveraging can be done more effectively?

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Secondly, taking ACOA, FORD-Q, etc., into the equation and knowing that at least the positive changes towards cost recovery on a loan basis are more geared to small business - which I totally agree with - is there a good connection to the FBDB, CASE and all the other things so that we get a better return? Is there any connection between the two organizations so that overall Canadians are benefiting?

Last, will the size of the loans be geared more towards smaller businesses? Yes, we know the cost of administering, but look at the Bank of Montreal, which is lending 33% of its portfolio to small business and is doing a faster rate of profit than the other banks. So there probably is a system for administering smaller-sized loans and still getting a good return.

Mr. Manley: Thank you for the questions.

As I mentioned earlier, we do hope and the intention is that the focus will move increasingly to smaller-sized loans. That's one of the shifts in the mandate. We see it as one of the gaps that exist in the current system. Because of the cost of the due diligence that's being done in smaller investments or loans, this is a gap we can usefully fill using the Business Development Bank.

With respect to the regional agencies, yes, there is an increasingly cooperative arrangement being pursued in the case of each of the regional agencies. Memoranda of understanding are being prepared, or in some cases have been negotiated, that will enable greater cooperation between them.

I think Mr. Martin may have made some comments yesterday with respect to FORD-Q and the relationship it can have with the bank in Quebec, because the leverage is available where the repayable format is being used. We think that's a promising direction, both for the bank and for the regional agencies.

There's more work to be done there. It looks promising. We'll be pursuing it.

The SBLA fills a different function. It continues to be a key part of our small business strategy. As you know, we moved it to a different basis so that it is self-funding. The legislation concerning that will probably be before you before too much longer, in fact. SBLA lending is for very targeted, limited purposes; it is very much seen as part of the overall banking relationship a customer may have with a particular bank.

I'm not sure that's part of the suite of services we're trying to provide through the Business Development Bank, but in the other respects, yes, definitely.

Mr. Ianno: Is taking deposits from the existing clients of the SBLA a possibility sometime in the future?

Mr. Manley: We haven't provided in this legislation for deposit-taking. It would require a further revision to the statute in order to make the Business Development Bank of Canada a deposit-taking institution.

Our focus in this legislation is to make the bank a complementary player in the financial services community, focusing on the things we've talked about. The fact that it is not deposit-taking means it will clearly be working with the regular financial institutions that are dealing with its customers. Every customer of the Business Development Bank of Canada will also, by necessity, be a customer of another financial institution.

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Mr. McClelland: The very first question that has to be asked and that should be answered on the continuation of the FBDB into the new bank is, is it necessary? What is this new venture going to be doing that is not already being done in the marketplace today? Why should the government get involved in setting up yet another crown corporation, this time competing in the financial sector, while at the same time trying to get rid of crown corporations such as CN?

It doesn't make any sense at all for us, as a government, to be getting ourselves further involved in the private sector. This is a fundamental question that really needs to be asked. Is it the role of the government to compete with existing private sector businesses?

Mr. Manley: No, it's not. That's why we've set it up in this legislation as complementary to the financial institutions, and not competitive with them. With respect to the preamble, I'd also mention that of course we're not setting up a crown corporation. We're changing the focus of an existing crown corporation, a fifty-year-old crown corporation that I think has proved its usefulness.

If we were trying to compete with existing financial institutions, we'd need a good deal more capital than we're expecting we'll be able to attract, even with the hybrid financial instruments. We would be opening it up as a deposit-taking institution. Then it might be on a footing where you could begin to say this is a competitor for the existing financial institutions. It's not doing that at all.

On the contrary, as I tried to outline, we have identified some gaps in the marketplace. Markets don't always operate with perfect efficiency in a country as diverse as Canada. I believe we have some real barriers to the creation of jobs in the small business sector. They include the gap that exists with respect to small loans and the fact that it's taken a while to overcome the gap that exists with respect to how to lend to knowledge-based industries, and so on.

Those gaps exist, and I think this bank can play a meaningful role in bridging them. Therefore it has an appropriate role to play in the suite of financial services that have to be available to enterprises in Canada.

Mr. McClelland: Thank you. Can I go on to another question, please?

Some hon. members: Oh, oh!

Mr. McClelland: To many people it just makes sense to ask if we're going to have a national Business Development Bank, why on earth do we have competing government agencies like Western Diversification, ACOA, FedNor and those sorts of things? Are there definite plans on the books now to subsume the regional development activities of the government into the Business Development Bank? If not, why not?

Mr. Manley: There are not, and the reason is, again, a different role is being played by the regional development agencies. In many cases they are catalysts of economic activity at a very local level. In other ways they are the means by which small business finds access to the variety of programs and other pieces of information in the necessary relationship that exists between the federal government and enterprises.

They have a much greater presence on the ground in the regions in which they exist. They are funded entirely differently, as you know. They're funded out of parliamentary votes, whereas the bank itself is financed through its own operations.

Mr. McClelland: But these agencies are now becoming more self-funding, and the well has dried up or is in the process of drying up. So they have to be self-liquidating.

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I'll leave that be. I give the rest of my time to my colleague.

Mr. Schmidt (Okanagan Centre): Thank you both for appearing.

I'd like to clarify a couple of provisions within the bill. It's immaterial to me who answers; the point is to answer the technical questions.

One of them has to do with the definition of a hybrid capital instrument. What are we talking about?

Mr. Beaudoin: I'll give you one definition.

Mr. Schmidt: I have lots of definitions; I want to know which one you mean here.

Mr. Beaudoin: It's a very official one. The Office of the Superintendent of Financial Institutions describes it as an unsecured, subordinated debt that is fully paid up. Hybrid instruments are instruments that are not redeemable at the initiative of the holder but may be redeemable by the issuer after an initial term of five years, with the prior consent of the superintendent. They are available to participate in losses without triggering a cessation of ongoing operations, and they allow the service obligations to be deferred, as with cumulative preferred shares, where the profitability of the bank would not support payment.

This is a new term, but it's starting to be recognized in the market. The Office of the Superintendent has issued that definition. Hybrid instruments are used extensively by private sector chartered banks. Commonly they're called subordinated debt or preferred shares. They're considered, for the capitalization purposes of the Bank for International Settlements, as tier 2. It's really a different category from tier 1, which is common shares.

That's basically the definition of hybrid instruments.

Mr. Schmidt: But that doesn't totally answer the question, because there are, I think, six different financial instruments that make up the capitalization of the bank: common shares, preferred shares, hybrid instruments, parliamentary appropriations, retained capital, and contributions from surplus. You distinguish between preferred shares and hybrid financial instruments, so clearly they can't be the same. You say they're used in the same way, but they can't be the same, because you've distinguished between them in listing them the way you have.

Mr. Beaudoin: They're all included, but in the case of the Business Development Bank, preferred shares would be held by the government.

Mr. Schmidt: What is the order of preference in the event that profits are to be distributed? The board has the power to determine who will be given dividends and also the rate of those dividends and of the preferred shares. I suppose we have to pay something. Do these hybrid instruments have some sort of return attached to them?

Mr. Beaudoin: Normally subordinate debt doesn't have a return, except for a fixed interest rate that is attached to the instrument.

Mr. Schmidt: Okay. In the event that the bank isn't profitable, who gets paid first?

Mr. Beaudoin: The interest on the subordinated debt has to be paid before any amount of money would flow back to the government, obviously, because they have that priority.

Mr. Schmidt: That clarifies how you're going to be doing that.

The question that arises in another section, then, is on the power the bank now has to enter into options and futures contracts. As I read the bill, there's no limitation on the extent to which you can trade in derivatives. That means you have the potential, or the power exists, to gamble or speculate with public funds.

Mr. Beaudoin: Let me clarify one thing. The activity the bank has in derivatives is nothing new, because currently we need to use derivatives on an ongoing basis to adhere to a policy we have to match assets and liabilities.

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In other words, when the bank provides a floating-rate loan to a customer, it borrows floating-rate money. For one-year maturity we try to use one-year money. We sometimes borrow into U.S. dollars or pounds.

Mr. Schmidt: With all due respect, that's not a derivative; that's broad borrowing -

Mr. Beaudoin: No, that's a derivative.

Mr. Schmidt: That's not an option. Let's talk about options and futures contracts. What you're describing is neither of those.

Mr. Beaudoin: Well, on the borrowings in foreign currencies, when we swap the money back into Canadian dollars, it is considered a derivative. When we protect the repayment of that debt in a foreign currency by taking a forward contract, that is -

Mr. Schmidt: I used the term ``derivative''. The terms in the bill are ``options and futures contracts''. Would you please restrict your comments, then, to those two terms?

Mr. Beaudoin: A forward contract is a kind of option. Basically you need to be getting foreign exchange at a fixed rate. That is part of the treasury operation. Currently we have these derivatives, and they're used solely for managing our assets and liabilities. So it's not going to be anything new.

Mr. Schmidt: But that's very different, if you use it as a hedge. What you've described is using the options and the forward contracts as hedges against fluctuations in currency and in interest rates.

Mr. Beaudoin: Exactly.

Mr. Schmidt: I have no problem with that at all as long as the bill does not preclude you from actually entering into the market for trading those contracts in themselves. That's the issue I'm raising here. The bill allows you to do the hedging, but it goes well beyond that and allows you to enter into the actual trading of the derivatives - the speculative trading. It does not preclude you from doing that.

Mr. Beaudoin: No.

Mr. Schmidt: Therefore I think the bill is deficient. It gives you power that, as a taxpayer, I don't think I want to give you. You can't gamble with my money.

I think you can, according to this.

Mr. Beaudoin: No, because the bank is subject to a borrowing plan that is reviewed annually by the Minister of Finance. All the activities of the bank in swaps, options and derivatives in general are reviewed with scrutiny every year under the borrowing plan of the bank. It's been established from the beginning by the Minister of Finance that the activities of the bank are not to be for speculative purposes.

Mr. Schmidt: There is absolutely nothing in this bill, as it is written at this time, that precludes you from entering into the speculative market.

You're saying you don't want to do that. Well, that's fine. I respect and honour that, and I want to be sure that's the case. But it should then be written into the act, if that's really what you want to be restricted to do. That's my point.

Mr. Mills: How do you define ``speculative''?

Mr. Schmidt: You leave it outside the hedging provision.

Mr. Manley: The problem is here rather than where Mr. Schmidt is going. The issue is that there is one shareholder in this institution.

What is the purpose of speculating in the manner you're concerned about?

Mr. Schmidt: It's very simple.

Mr. Manley: The purpose is to make money.

Mr. Schmidt: Of course.

Mr. Manley: This bank is intended to finance its own activities, but it does not have a shareholder looking to increase its profitability in that sense. It's acting under the very direct instructions of its shareholder - in this case, actually, not its shareholder, but the Minister of Finance - for the purpose of managing the financial portfolio it has.

If you have in mind events that occurred in the U.K., it's quite unlike a private institution. In that case, much of the problem arose from the fact that not only was the institution in existence for the purpose of making profits, but its traders were motivated to engage in the transactions because their remuneration was targeted to commissions on transactions.

We just don't have the same situation here at all. We have a power that exists solely for the purposes of hedging the financial transactions the bank is legitimately engaged in.

The Chairman: I'm going to have to jump in here, because I've given you two and a half more minutes than I've given everybody else.

Mr. Schmidt: Thank you so much, Mr. Chairman. Isn't that wonderful?

The Chairman: Yes, I have a new toy. Since I've been getting so much aggravation from you people about time, I have it right down to the second now.

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Mr. Mitchell (Parry Sound - Muskoka): I don't share the concern of the opposition, which seems to be that you might make money. It's not really a genuine concern.

One of the things I do want to ask you, though, is this. Under the provisions of this legislation, you will be paying for your equity for the first time. If that equity comes out of the private sector or even if it comes from the government, you're going to pay for it. Does that mean the rate of interest you will have to charge the small business individual who will utilize your services will have to go up to cover the cost of your paying for your equity?

Mr. Beaudoin: Not necessarily. I think it's going to be a matter of balancing the books. We will have to provide for the remuneration on that capital. Whether we get it from the public, the government or private sources, we do indirectly have to provide for that return. It really amounts to the same thing.

Mr. Mitchell: Yes, but if I understand this correctly, under the old act, the equity portion - not the part you worked the market in but the capitalization - came from the government without a return. That's going to change, though.

Mr. Beaudoin: Our debt-to-equity ratios were out of line, as they are. Everything else being equal, the recapitalization is going to permit us to lower our debt and put it under capital. So really we're displacing the amount we're paying under debt and putting it under capital. The increment will be marginal.

Mr. Mitchell: Okay. You talk about having increased amounts to lend to small business. Let's assume this bill will come into effect July 1. What would be your projection of the increase in lending that would occur in the next twelve months? Do you have any kind of handle on how much extra money you'd be able to put out on the street?

Mr. Beaudoin: It all depends on demand. If we are to adhere to our complementary role, we will have to....

It all depends on the response from the private sector. The work of this committee is having its effect. We're seeing increased involvement on the part of the private sector in supporting small business. Our role is going to be to fill the gaps.

That's the difficulty in giving you a precise amount; it depends on the extent to which the private sector is going to support small business. Our projection is that next year we're probably going to expend close to $900 million on small business financing in Canada.

Mr. Mitchell: Are you going to be in a position to provide equity capital to the small business market in incremental amounts under $500,000?

One of the gaps out there is providing equity capital to small business for amounts under $500,000. The bank has done that to a certain extent in the past. Are you going to be able to expand that part of your operation? Would an entrepreneur be able to come to the FBDB and look for an equity injection of, let's say, $100,000 or $75,000? Are you going to be capable of coming down to that level?

Mr. Beaudoin: Two initiatives are going to be introduced. They are pilot tested.

On one hand we have the micro-loan initiatives, which will deal with the really small end of the market - loans below $25,000. That level will be covered with that new product, and it will be associated with case counselling and financing as an integral part of supporting small business.

The second initiative will be patient capital, which will provide the amounts you are talking about. Really the gap is below $1 million, because below that level the venture capital industry is really not geared to support these transactions. We see patient capital transactions starting in the $75,000 range and going up to $500,000. That's the target market.

Mr. Mitchell: Are you undertaking any particular activities that are going to see an increase of availability in rural Canada? Are you doing anything in particular for rural Canada?

Mr. Beaudoin: Rural Canada is going to continue to be a major focus of the bank. Sixty percent of our activities are now in rural Canada, but we see demand and the gaps continuing to exist. They are lessening, perhaps, in urban areas but they are continuing to be significant in rural areas, and it will be taking continued attention from the bank to serve that market.

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[Translation]

Mr. Leroux (Richmond - Wolfe): As you know, Quebec is the only province where the Federal Office of Regional Development has 13 offices. They are quite scattered throughout the province, and this situation does not exist elsewhere. With its new mandate, FORD-Q wants to coordinate federal services, departments and agencies. It wants to be the delivery arm. An agreement has been signed between FORD and the Federal Business Development Bank to this effect.

Regional development in Quebec is decentralized and structured by sector. This structure is both administrative, and in other sectors, political. The government has granted authority over regional development to various organizations, and they report to the Government of Quebec.

These organizations include the municipalities, the regional municipalities, school boards, cegeps, universities, regional health commissions, the Société québécoise de développement de la main-d'oeuvre, regional development councils and regional labour force councils. All these organizations report directly to the government, and the government is the only authority with the power to sign agreements.

However, ever since the 35th Parliament began, all bills have included a provision allowing a minister or his agencies to sign or enter into agreements with local agencies directly, without any statement that this can be done only after entering into an agreement with the Government of Quebec. The bills always include a provision allowing the federal government to sign agreements directly with local agencies.

How do you explain this decision to include this provision in the bill, even though it totally contravenes the procedures of the Government of Quebec, which must authorize any agreement with regional development agencies that report directly to it?

[English]

Mr. Manley: Mr. Chairman, we've heard this question raised in the House a few times. I don't understand it. The entities the member talks about are creatures of another level of government. There's no power in the federal government, under any law, to authorize those creatures to sign contracts or do anything else that their parent doesn't want them to do. I don't know what he's worried about.

[Translation]

Mr. Leroux: Section 20 is very specific: you are giving the bank the right to sign agreements directly with agencies or persons, and even the right to act as an agent. You are granting this power in the bill. When the Industry Act was overhauled, you even gave yourself authority to enter directly into agreements with local regional development agencies, without mentioning Quebec's authority to sign agreements through its department of intergovernmental affairs. I don't know why you don't understand this. It seems pretty clear to me.

[English]

Mr. Manley: I don't get it, because it's a ridiculous comment. Those entities can't go and sign on their own accord. If the Quebec government doesn't want them to sign, they don't sign. I don't know what life is like when you have to go around looking for ways to take offence all the time. This has nothing to do with the power of agencies in the province of Québec.

[Translation]

Mr. Leroux: I believe this is far from being a ridiculous comment. If you call this ridiculous, you can call the bill ridiculous, since you're granting yourself this power. Why not change the wording? You clearly want to give yourself the power to act directly. Why not mention the power of the provincial government, which is the only authority to sign interprovincial agreements and act as agents, under the Loi sur le conseil exécutif, among others? If this is ridiculous, why did you include such a clause? What do you get out of doing this?

[English]

Mr. Manley: This is a bill to create the Federal Business Development Bank of Canada. It creates its powers. It has the power to enter into agreements. It can only enter into agreements with entities that have the power to enter into agreements with it.

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Mr. Chairman, if Mr. Leroux has a problem with the authorities creating these regional development branches in the province of Quebec, I suggest he take it up with Quebec City, because if those naughty agencies are going to go along signing agreements with the Business Development Bank of Canada without the permission of the provincial government, then they ought to be put into line.

We have no intention of signing contracts with unauthorized parties.

[Translation]

Mr. Rocheleau: I don't think Mr. Leroux is the one with the problem. Our concern is historical in nature. We know that the Federal Government of Canada has never been shy, considering its spending power, to intervene in provincial areas of jurisdiction, particularly in Quebec, by offering ``goodies''. Given that an exemption is provided for in the way things are organized for Quebec, whereby the creatures of the Quebec Government can be exempted from regulations, with the permission of the Government of Quebec, we are perfectly aware how this is going to operate, Mr. Minister. You will offer to $200,000, $500,000 or a million dollars to an organization, as long as the Government of Quebec does the same. We have already seen this in the past, and that's what we fear with this power that you are granting yourself. You aren't setting limits on yourselves in this bill. You're not saying: Once an initial agreement has been entered into with the Government of Quebec or another province, we will enter into agreements with agencies of the Government of Quebec, but first we will respect the provincial government's jurisdiction. That's what the issue is, Mr. Minister.

Mr. Manley: I believe that we have demonstrated during this Parliament that we have been able to work with both governments that were elected in Quebec. Both have signed agreements with our government. We have an existing process with the Federal Office of Regional Development-Quebec. We have made a lot of progress with the Federal Business Development Bank, even in Quebec.

If the goal is to create a clear framework, perhaps the Bloc members of Parliament will be able to convince their colleagues that this is necessary. As far as I'm concerned, I don't think it's necessary at all. It's clear that we are creating a federal corporation with this bill. According to the Constitution, banks are clearly the responsibility of the federal government, so I don't think there's any problem.

The fact is that Mr. Rocheleau, Mr. Leroux and their colleagues don't want the government to have any presence in Quebec, because they have other objectives. One out of every hundred small or medium-sized businesses in Quebec found this bank's assistance to be important for its growth. Small business is ready to accept the presence of this bank.

Mr. Leroux: They must like us a lot, because in the West, when Minister Axworthy was asked....

[English]

The Chairman: Mr. Discepola, please.

Mr. Discepola (Vaudreuil): Minister, I just think if they had their way they would build a fence around Quebec and keep it sheltered. They criticize us for centralizing authority. They want to decentralize it to Quebec in order that they can recentralize into another government called the Quebec government. That's where they're coming from.

Mr. Minister, I guess I'm a bit more pessimistic in some of the approaches, having heard the testimony of the big six banks. As you indicated in your response to Mr. Ianno, I had hoped that the Federal Business Development Bank would be able to occupy that vacuum that I feel banks are incapable, are unwilling, or do not want to fill. I could find more adjectives that I really would prefer, but I'll keep it to that.

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When I heard your response to Mr. Ianno on the SBLAs, for example, it seemed to me that if the new mandate of the bank is to, first of all, move from a cost recovery basis, I think you will have to go into more of a profit base - this frightens me but I'll get into that later. I thought that maybe you could have looked at other instruments, such as the SBLAs, which are guaranteed by government anyway.

What I'm driving at is that it took us the better part of almost three months to convince banks, let alone get them to understand why we were after it, but the commitment we wanted was lending targets in the $100,000 range. They were coming to this committee always with $500,000, $1 million, $1 million-plus. We had to get them down to $50,000 or $100,000. I think we'll get them to that level.

This led me to believe that they are unwilling or, maybe for cost purposes as you mentioned before, unable to lend to small borrowers. In your presentation you said that's where the crux of the matter is.

Through this legislation, my hope had been to get that $50,000 or that $100,000 into the hands of those entrepreneurs who desperately need it. So I have a concern when we're moving from a cost-recovery-based system with the Federal Business Development Bank into a system where we're looking at hybrid methods of capitalizing in which, indirectly or not - even Mr. Mitchell alluded to it - you're going to have to give a return on investment to your investors.

This then led to another problem I saw in dealing with the banks and their testimony, which was that small businesses want that access and are prepared to pay a little bit more of a premium if they have to. It wasn't a question of not getting it. It was a question of give it to me and I'll pay you 1% or 2%,, or more stringent terms.

You had that flexibility before because it was only cost recovery. You weren't compelled to make billion-dollar profits because your shareholders demanded it, as the six banks have been doing the past couple of years.

If you're going to go through a new capital base, for example, and new instruments of financing your activities, how can you assure us that you're not going to pull the plug, like the banks do right now, on short-term notice...that you will not withdraw from a sector or an activity because all of a sudden it doesn't please you any more? These are the things I'm hearing small business people in my riding tell me about.

Do you understand where I'm coming from? You're going to be driven by producing a profit to your shareholder. Whether it's the government or not, you're going to be compelled to. As a result, maybe the charges will go up. More importantly, the access I was hoping to get to the small-business people may not be motivating enough for you to do, because you're going to need a certain ``return'' on your investments also.

Mr. Manley: We don't really need a return on our investment in that sense, the way the shareholders of the banks expect to receive a return on their investments. After all, bank shares are competing with other shares and with other financial instruments to provide an adequate return to the investor.

Mr. Mills: If you're not competitive, they're going to go elsewhere.

Mr. Manley: We don't need to do that. We do need to generate enough revenue to pay our costs. Therefore, there's pressure to retain control of costs. But we don't need to generate a 12% or 11% return on investment, as the private financial institutions are expected to do. That gives us that much more leeway to begin with.

We do need to pay the costs of the capital that we will be raising in the markets. As Mr. Beaudoin has explained, that does give us, though, a greater range of flexibility in terms of the amount we have out there and I think the leverage will give us the ability to lend -

Mr. Discepola: I guess my concern is will the new bank be focused on lending in that $50,000 to $100,000 range?

Mr. Manley: That's one of the purposes.

This is very much the direction in which we as a government have asked the bank to take its portfolio. One of the purposes of the statute is to create the flexibility, by enabling it to broaden its lending base, to do exactly that.

In addition to the fact that we're running out of money, my belief is that to operate on the existing limits, together with the other restrictions that existed on the bank, it was impossible to make a lot of progress on the small loan side and still operate on a cost recovery basis. Greater flexibility should enable both of those objectives to be achieved.

.1645

Ms Bethel (Edmonton East): Minister, has the FBDB done an assessment on gaps as they relate to individual provinces, rural SMEs, the special needs of aboriginals, urban reserves, the north, the disabled, and women?

Mr. Beaudoin: We haven't conducted specific studies. We observe these gaps on an ongoing basis. They're quite significant in the various areas you mention.

Ms Bethel: If an in-depth assessment hasn't been done, how do you determine what changes or programs you need in the way of counselling, coaching, and/or a loan?

Mr. Beaudoin: We're very much demand driven. The nature of the applications we receive indicate the types of needs that need to be serviced. This is how we've been able to ascertain, for instance, that in the new economy there were companies that everyone thought venture capital would be able to service, but we observed that below $1 million these companies were not really attractive. Therefore, this directed us toward creating new instruments, such as patient capital and venture loans. This is how it happens in the bank. The process involves dealing with the customer base on an ongoing basis.

Ms Bethel: We've had these discussions with the banks as well in terms of how well they're meeting the clients' needs. All of the ones I mentioned are clients. They're all gaps. How do you propose to evaluate your programs in terms of customer service?

Mr. Beaudoin: Customer service is an important focus of the bank. In both management services and financial services we write to our customers on a quarterly basis in order to assess the level of satisfaction, the strong points, and the weak points we need to improve.

I've had a chance to present to the committee, for instance, the fact that during the past three years the surveys have indicated a high level of satisfaction. Over 90% of the customers who deal with the FBDB are very satisfied or satisfied with our services. They've indicated areas where we needed to improve, and this has led to our total care program where we're going to be introducing a charter of rights, creating the position of ombudsman, and developing various initiatives that are presented to the committee. So this is the process we use to -

Ms Bethel: My last question, Mr. Chairman, relates to the banks, this particular bank being one of them. Are you willing to comply with all the benchmarks and information data we have asked the banks to collect?

Mr. Beaudoin: We've indicated that the bank has played a leadership role in providing information that I think has been useful for the other banks to basically responds to the demands, including the demands of this committee.

Ms Bethel: Can we expect you to come at the same time as the banks and provide that information?

Mr. Beaudoin: In the past we've always supplied to the committee the information it has indicated would be desirable from the chartered banks.

Mr. Murray (Lanark - Carleton): Minister and Mr. Beaudoin, I think I know why they're changing the name of the bank. I think you're called FDBD more often than FBDB. It happened here again this afternoon.

I have a very practical question, at least practical from my point of view as a politician. I'd like to know what I should tell my entrepreneurial constituents when they ask me what's going to be better for them when they walk into FBDB. What are they going to notice once this law has been changed when they walk into a branch of the bank and ask for financing?

Mr. Manley: Let me start on that. I think the key thing in changing the mandate is, because of its last-resort mandate this lending institution was really seen as a bank for losers, where if you could still crawl in the door after having been beaten up by chartered banks - and by the way, if you brought the documentation to prove you'd been beaten up by the chartered banks - then we would consider you. Of course, for the rest of your financial career - not to paraphrase Stephen Leacock - you would have in your history the fact you had been forced by fate or bad luck to go to the FBDB for your financial resources.

.1650

This, I think, is going to be changed by clearly playing a role as a complementary lender for enterprises that can and will succeed, and with a far less bureaucratic approach to the loan procedures that necessarily were taken before in order to fulfil that limited mandate. I think people are going to find they are dealt with in a far more efficient and positive way than was the case before.

François.

Mr. Beaudoin: I think the focus on serving a new economy, supporting the small exporters in their financing needs, supporting the coaching and training to permit these small exporters to consider export markets are going to be key elements. Products and services geared to the micro-loans and combining counselling and financing are some of the elements that are going to be evident in the FBDB.

The number one concern we've heard about in the past from our customer base is turnaround time. I heard the debate a couple of days ago, and one member mentioned that it takes too long to get an application through the FBDB. The minister alluded to that. You have to go through basically two turn-downs before you can deal with FBDB. Taxpayers are asking for better treatment nowadays, and the FBDB will be able to provide that service with its new mandate.

Mr. Murray: The minister replied to Mr. Discepola about the cost structure. In regard to the cost of due diligence on small loans, as you expressed earlier, I was thinking about the idea that commercial banks would look to attract private banking from business people to make up for the cost of providing those small loans. They'd hope to capture more of the personal banking. I'm just wondering if you have enough leeway on that margin of profit that the bank does not need to make to actually provide the loans without having significantly higher costs of borrowing. That was touched on earlier, I know, but it's a concern.

Mr. Beaudoin: There is a difference with the FBDB, and we all have to realize that. I've said that before. I've been upfront on that point. In dealing with FBDB, small businesses pay more than they would if they were dealing with a chartered bank. This is the very nature of the complementary mandate we have. We don't have access to the personal business, but we do have other tools. The new products we've introduced are geared to participating in the companies instead of as a straight interest, or a combination of those two. So to the extent the company is successful, we get to share in the profits. It's a partnership agreement with the company that we're basically creating.

In its report the committee identified the fact that the pricing in Canada is much more favourable for businesses in general than in the U.S. The issue is that it's an on-and-off situation in Canada. You're either accepted or turned down. What we're able to do at FBDB is service that higher-risk business but charge accordingly for it. This is how we're able to make ends meet.

[Translation]

Mr. Rocheleau: Before asking my question, I would like to make a comment for the benefit of the parliamentary secretary, just to remind him that it is the Bloc Québécois who is the author of the text where it is mentioned that the Federal Business Development Bank should continue to be a complementary lender for small and medium-sized businesses. We certainly did not intend for the bank to abandon its role of lender of last resort when we suggested this to the committee, Mr. Mills.

.1655

Mr. Minister, you used the word ``entrepreneurship'' twice in this bill, in clauses 4 and 21. Can you tell us what you mean when you use this very vague, fuzzy expression that can be interpreted in different ways and that can attract a great deal of criticism from us, opening the door to the entire trial that we put you through a few moments ago? What does this mean to you? It's not specified in the bill.

Mr. Manley: ``Any program supporting Canadian entrepreneurship''?

Mr. Rocheleau: This doesn't have much to do with small business. When you use an expression that's as broad as this one, you're not talking about financial assistance to small business.

Mr. Manley: I think the best approach is to start with the words used in clause 4:

4.(1) The purpose of the Bank is to support Canadian entrepreneurship by providing financial and management services and by issuing securities or otherwise raising funds or capital in support of those services.

The word ``entrepreneurship'' is general in nature, but the bank's ways of using its powers are limited by the purpose as set out in clause 4 of the bill.

Mr. Rocheleau: Mr. Chairman, clause 4 is relatively specific, but clause 21 states:

21. The Bank may carry out duties or functions that may be assigned to it by the Designated Minister in relation to the administration of any program supporting Canadian entrepreneurship...

That's quite a bit broader. That's the provision that we can put you on trial for. Furthermore, you would be dealing directly with provincial agencies. It comes as no surprise...

Mr. Manley: I'm somewhat surprised. I know entrepreneurs throughout Canada, even in Quebec. They all agree, even the chambers of commerce, on the role that the government can play by encouraging entrepreneurship. The problem for everyone in Canada, no matter where you are, is to find a way of creating wealth. As far as I'm concerned, I believe that you absolutely have to have entrepreneurship to do that.

Mr. Leroux seems to have a specific problem about the bank's power to enter into agreements with provincial agencies. As I was saying a few moments ago, the federal government does not have the power to create powers for provincial agencies. We can certainly give the Federal Business Development Bank, our tool of economic development, the power to work with any agency or any government, in a spirit of co-operation. I don't understand why the members of the Bloc Québécois see a problem with an agency that can really help create jobs for Quebecers.

.1700

Mr. Rocheleau: Mr. Minister, in clause 21, you are giving yourself the special power of requiring that the Business Development Bank of Canada get involved in such or such specific program.

Mr. Manley: Mr. Rocheleau, that is a figment of your imagination. You should consult a specialist. You see problems everywhere.

[English]

Mr. McClelland: I have one short concise question and then, if I may, I'll pass to my colleague Mr. Schmidt.

My question relates to the hybrid instruments for capitalization, $1.5 billion. You earlier said they would be interest sensitive. Will the primary capitalization of the bank be via these hybrid instruments?

Mr. Beaudoin: We'll have a combination. We would hope to convince the Government of Canada to invest in the common shares and the preferred shares of the -

Mr. McClelland: So you are hoping the Government of Canada would invest in them.

Mr. Beaudoin: Of course - not in the hybrid, but in the common and preferred shares.

Mr. McClelland: All right. But in the hybrid.

Mr. Beaudoin: Not, not in the hybrid.

Mr. McClelland: So we're just talking about the hybrid. If these hybrid shares are interest sensitive, will they be RRSP eligible?

Mr. Beaudoin: We haven't asked that question yet. We have to look into that matter.

Mr. McClelland: We are looking at the people of Canada, trying to have this spread out rather than having the banks buy these hybrid instruments. If we could spread it out to get entrepreneurs to buy these hybrid instruments, it might keep FBDB's or the new bank's toes to the fire.

Would there be the consideration of any other inducements for individuals to buy these shares, such as tax exemptions or anything of that nature, if they're patient shares? I recognize this is somewhat obtuse, but the combination of RRSP eligible and/or other strip bond-type inducements on these shares might make them very attractive to RRSP.

Mr. Beaudoin: May I answer first of all that the hybrid instruments will not likely be shares; they will be subordinated debt. So there will be units, first of all.

Mr. McClelland: Right.

Mr. Beaudoin: So in terms of providing inducements, the inducement will be in providing a return, an interest that is commensurate with the perceived risk that is involved in buying this instrument.

Mr. McClelland: But we don't know at this time if they would be RRSP eligible.

Mr. Manley: I'm a little bit rusty because I haven't practised for quite awhile, but I can't see any reason why they wouldn't be RRSP eligible as Canadian financial instruments.

If you want my point of view at the present time, I would not favour any kind of special inducement or incentive. To use your language, I would rather keep the bank's feet to the fire as well to make sure they measure up to financial criteria when they issue the instruments, to ensure that they are bought because they are sound and not because we've added a bell or a whistle to it.

Mr. Schmidt: We could go on for some time, I'm sure, but I have one short quick question.

The word ``complementary'' keeps coming up, and I would like to ask you to please define it. I've heard things like higher interest rates. What exactly is meant? For example, subclause 14(4) is exactly on the point I'm looking at and it says that the loans, investments and guarantees are to complement those available from the commercial sector.

A complement is there to add to, to make complete, or it could be as a supplement. Somehow we seem to have a variation of definitions here, so could you clarify exactly what complement means here?

Mr. Beaudoin: The Oxford Dictionary, I guess -

Mr. Schmidt: I know what the dictionary says.

Mr. Beaudoin: - says ``that which completes''.

Mr. Schmidt: Okay, so what's not complete?

Mr. Beaudoin: Then Webster's says ``serving to fill out or complete''. So this is the notion that is involved with complementary. It's not complete. That's clear.

.1705

Mr. Schmidt: Yes, that's right.

Mr. Beaudoin: It means filling gaps. It means supporting businesses that are not able to find the financing because they're perceived as too risky in the various gaps that we described, whether it's because of size, type or risk. Basically, these are the elements that are attached to complementaries.

Mr. Schmidt: In other words, these are loans that will be granted to those businesses that can't get loans elsewhere.

Mr. Beaudoin: That are perceived to be too risky.

Mr. Schmidt: That really means it's a lender of last resort, as it was before.

Mr. Beaudoin: No, it's different. I'll give you an example.

The new instruments we're issuing are topping up the available lines of credit from the chartered banks. So this is a complement. It's not because they're -

Mr. Schmidt: It adds to it.

Mr. Beaudoin: It adds to.

Mr. Schmidt: Okay, in that sense. That's significant, because I think we do need to clarify some of those things.

Mr. Manley: To pick up on Mr. Schmidt's point, I think some of the last-resort borrowers are going to find their facility through this institution. What we're getting away from is not meeting those needs, but rather the bureaucratic processes that were set up in order to ensure they really were coming in for their last resort. I think that's a shift in the approach that is helpful.

Mr. Schmidt: The other obvious implication is that this is not limited to small businesses. This could also supplement some pretty large businesses.

Mr. Manley: It could.

Mr. Beaudoin: The bill is specific on the fact that the focus of the bank has to be on small and medium-sized businesses. That's a similar notion as was in the previous act.

Mr. Bélanger (Ottawa - Vanier): Mr. Chairman, I have about a dozen questions apart from those that have already been asked, but I suppose I cannot ask them all. Perhaps I can shorten the list a bit.

When we get to clause-by clause, will there be officials of the bank here to answer questions?

The Chairman: We're trying to schedule some time for other witnesses who now want to appear. Mr. Bélanger, I'm in your hands, but what we may do is invite the president and his officials back to give a more detailed.... Some of you have sent me notes, and many of you still have questions. The minister is here as the lead witness for his agency, I suppose, so there will be an opportunity. But I'm in your hands. I haven't really asked the bank as yet.

Mr. Bélanger: I'll just ask a few questions quickly.

In paragraph 13(5)(e) of the bill, the board may make bylaws respecting the investment of money of a fund, this being a pension fund. Will there be restrictions, or are there restrictions on the bylaws to avoid conflict of interest?

Mr. Beaudoin: There are clear guidelines.

Mr. Bélanger: I'd rather ask my questions before you answer, as I'm going to run out of time.

Has the bank ever paid dividends? What is the current share capital?

You may remember there was a bit of a kerfuffle a few years ago about some of the investments the bank had made, or loans to dubious businesses. I believe there were changes in the bylaws of the bank to restrict certain investments. Is there an opportunity to reflect some of that in the bill? In the bill, what increases the ability of using knowledge as collateral? How does the debt-to-equity ratio compare to the private sector banks?

Finally, is there an opportunity to further restrict the number of directors? I haven't looked at the current set-up. If that has been done, fine. If it hasn't been done, is there an opportunity to restrict the number of directors?

A voice: Who appoints the directors?

A voice: The shareholder -

The Chairman: I'm sorry, I missed part of that, but are you asking them to answer now, or to bring the answers back?

Mr. Bélanger: As they will.

The Chairman: What's your preference? Mr. Beaudoin, I jumped in there, and I'm advised by my researcher that you and your officials will be back.

Mr. Beaudoin: That is correct.

.1710

The Chairman: Mr. Bélanger, if Mr. Manley wants to answer any of those -

Mr. Bélanger: Yes, and leave the others -

Mr. Manley: Most of them are not what you'd particularly put in the policy area, with the possible exception of the question on loans to types of businesses and putting restrictions in the bill.

My initial reaction to that is to say that once you start trying to define what types of businesses you want to exclude, you may find yourself on a fairly sticky wicket trying to decide exactly what to include and what not to include and who to list and who not to list.

In most instances in recent years, it seems to have been pretty much taken care of by directions internally and lending practices that are pursued by the bank. We haven't had too many recent embarrassments, although we did need to issue a few explanations on a real property investment. But I think the explanations were satisfactory and people understood them. So I'm not sure that would be a useful statutory approach, although again this bill is before committee prior to second reading. If it's something that would be worth pursuing with the bank, I'm sure they'll make access available to you in order to talk about it.

The number of directors is the only other policy issue Mr. Bélanger raised, I think. As you know, we've been looking at all of the boards of directors of federal agencies and corporations. In clause 5, we have not fewer than three but no more than thirteen directors. I don't think we've filled all of the existing slots, but our endeavour has been to ensure adequate representation from all the regions of the country, with expertise in a variety of fields.

When you try to accomplish that, it's difficult to do it with many fewer than thirteen. Possibly you'd do it with ten or nine, but when you do that you get pretty limited in representation from provinces and from different sectors of the economy. Personally, I believe the range we have is about right for the task involved. I'd be inclined to stay with it.

Most of the other questions are more of a technical nature. Perhaps they could be pursued either...

The Chairman: Fair enough.

Colleagues, this is the minister's only appearance for the bill. Mr. Rock has been back a couple of times on something that he's doing, so we're a little less controversial. But Mr. Beaudoin and his officials are going to be back shortly, perhaps toward the end of the hearing.

Mr. Mills has a short question.

Mr. Mills: My question is, while the minister is here, can -

The Chairman: Okay. I have a few questions I'm going to put on the record. If the minister wants to comment, fine. If not, the officials will know what my questions will be and will be prepared to respond to them.

Mr. McClelland: Can I do the same thing, put a question on the record?

The Chairman: Sure.

Mr. Mills: Mr. Minister, one of the recommendations in our committee report was that the bank's name be changed to the Small Business Bank of Canada. I noticed that this other name has appeared. How rigid is your view or the bank's position on that? Is it something that is open for discussion when we go into clause-by-clause? Or is there a reason why the committee's recommendation was...? It came at us out of the blue that the name was changed. We were getting interesting signals. A lot of people liked that name, and I was wondering if there was a reason.

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Mr. Manley: Yes, there are a couple of reasons. First of all, let me say that it did occupy some of my thought and consideration. My belief was that the Business Development Bank of Canada name better represented what the bank was actually endeavouring to do than did the proposed name, partly because the Small Business Bank of Canada implied a full-service bank to meet all the needs of small business. The decision being taken not to provide, for example, deposit-taking facilities suggested in my mind that perhaps we were claiming to be more than we intended to be with that proposed name.

In addition, there were some trademark concerns that were raised with respect to it in terms of the descriptiveness of the name and whether it would in fact be available if we were doing it other than by an act of Parliament. In other words, if a private sector entity came in and wanted to be called the Small Business Bank of Canada, it is unlikely they would receive permission to use that name. It gave me some reservations.

I would point out to you, however, that the bill does enable the bank, in subclause 3(2), to operate under any trade name the board may approve, and as it develops and improves its suite of services to small business, it may want to emphasize that in a marketing and trade name it might use.

Mr. Mills: Thank you, Minister.

The Chairman: I have a couple of questions that I'll put on the record. You may wish to comment on them now.

One of the issues I was drawn to is the preference share issue. The requirements in this bill would ensure that the bank is wholly owned directly by the Crown. It's referred to in the Financial Administration Act. Could the shares be issued to the public? Would then the bank still be an agent of the Crown? I wondered what kind of deliberations have been going on in terms of raising equity or involving the public. I notice you've opted for something called a hybrid instrument. I'd like to get a policy reason or some technical reasons as to why we didn't get into preference shares.

Mr. Manley: It really is a technical reason, because the lawyers advised us that it would cause problems with the Financial Administration Act. That then leads to the question: why do you have common and preferred in the statute, since the government is the only party that can own either one of them? The answer is that in the event it became acceptable policy for there to be a divided ownership of that nature - in other words, common shares held by the government, preferred shares held by outside private investors - this bill already creates the capital structure to enable us to take advantage of that. It would only require the provision to be modified for them to be held outside.

At the present time it's consistent with the broader policy with respect to crown corporations that the equity interest be restricted to the government.

The Chairman: That was of particular interest to me when I read this material. Please be ready, the next time you come, to deal with the legal issues, because I'd like to hear about those technical aspects.

My understanding is that you did consider several options. I think the committee would be interested in looking at those to see if they were absolutely firm. The nice advantage, as you said, Minister, when you came, is that it was at first reading. So if there are some changes or suggestions they may very well be put on the table.

Mr. Manley: The lawyers will be here.

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The Chairman: I have another question and then I'll conclude my comment.

You say the Business Development Bank is going to complement the private financial institutions instead of being a lender of last resort. This is sort of a political question, but if the banks in Canada were to cut lending, say, to Atlantic Canada, should we expect to see an increase in lending to Atlantic Canada by the Federal Business Development Bank?

Mr. Manley: Politicians shouldn't answer hypothetical questions. I'm surprised that one would ask one.

The Chairman: Oh well, I have a life after politics, as you do, Minister.

Mr. Manley: In journalism?

The Chairman: In law.

Mr. Manley: It is hypothetical in the way you pose it, but I think the issue is, in regions where there is inadequate access to capital, can the FBDB play a role in filling gaps? And that in essence is what the purpose of the renewed mandate really is. The gap may be regional, it may be sectoral, it may be based on size, but that is the nature of complementarity we're trying to achieve. So whether it's Atlantic Canada or eastern Ontario, I'm sure we can find a way to accommodate the reluctance of the commercial financial institutions sometimes to meet those needs.

Mr. McClelland: I have a question you can answer if you wish. Under subclause 32(1), there's a definition for the purposes of conflict of interest. A definition of ``interested person'' should probably be included, because everything refers to an ``interested person''. So who is an interested person?

Mr. Manley: It's in clause 31.

Mr. McClelland: Well, wherever it is.

Mr. Manley: The definition is in clause 31.

Mr. McClelland: All right, that was quick. Thank you.

Mr. Manley: That'll be $200, please.

Mr. McClelland: The other - and this is the part I have a greater concern about - doesn't say the bank cannot have a relationship with an interested person. It should be defined. Would it not be better if a person were seen to be an interested person, or in potential conflict, or in conflict, if the bank did not have the privilege of entering into a commercial arrangement with that person?

Mr. Manley: In other words, you would simply forbid any relationship. It's not a matter of disclosure and abstinence from participation in the decision.

Mr. McClelland: Yes. What's the point in disclosing it after the horse is out of the gate? If a person is in conflict and is recognized as an interested person, then they should be prohibited from doing business with the bank. It's not an arm's length arrangement.

Mr. Manley: As a policy matter it hasn't been raised before, but I suspect this parallels the rules with respect to other corporate transactions, either in other banks or with respect to relationships between persons related to directors and corporations where they sit on the board. In other words, the issue becomes one of (a) disclosure, and (b) abstinence from participation in the decision-making process that leads to the transaction occurring.

Mr. McClelland: But what we're talking about is that justice has to be seen to be done. In my view - and this is just for the record - this would be enhanced if the mandate of the bank or the articles of incorporation were to prohibit non-arm's length dealings.

The Chairman: Colleagues, I'm going to jump in, because we will have an opportunity to put these questions. We've heard from Mr. Beaudoin many times, anyway. I'm sure he'll be coming forward with his officials.

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Mr. Manley and Mr. Beaudoin, thank you for your appearance today.

Colleagues, there is not a meeting tomorrow. We could not line up witnesses fast enough. So the next meeting is probably going to be Tuesday. Your offices will get a call.

Mr. Beaudoin, while you're here you might as well know that the tentative date for your return with your officials will be next Thursday and you would be the last witness.

Mr. Mills: Would we do clause-by-clause then?

The Chairman: We would do clause-by-clause in the afternoon of Thursday.

Mr. Schmidt: Are we starting clause-by-clause Thursday?

The Chairman: Yes. So I just want to put everybody on notice now.

If there are witnesses who respond from the list that colleagues have given us, as well as the new names today, they will be requested to appear for Tuesday, Wednesday or Thursday morning. We'll have FBDB officials Thursday afternoon, and clause-by-clause following that, or at the same time. Maybe FBDB officials will be in the morning and clause-by-clause...

Colleagues, I'm really directing this at all of you because I want to remind you that this is a bill after first reading, so we have a pretty wide scope. But we should really understand that we'd like to have this back - I've shared that with all of our colleagues - to the House for the 12th or 13th, which is the following week.

If there are some amendments you would want to put for the government members to consider, we'd like to get those in writing. It doesn't have to be in writing but they'd like it to be in writing. Obviously they'll need to be translated, but there could be an informal chatting going on between the parliamentary secretary... he'll be responsible to disseminate that to colleagues to get a sense of whether the government is going to be responsive to your suggestions or not.

I want to remind you that this is part of the new process. It did work half okay on Bill C-43, but at the end of the day it becomes a part of an issue. There could be some good suggestions, and I just want to encourage all of us to work together as a team.

Mr. Schmidt: The only concern I have, Mr. Chairman, is that this is very significant legislation and I think it's a very, very important piece of legislation. I really want to thank the minister and Mr. Beaudoin for being here this afternoon. On the other hand, I think to force something like this too quickly may -

The Chairman: No. Agreed.

Mr. Schmidt: I really don't want us to feel pressured to the point where we don't do the kind of serious thinking that ought to be done about the bill, because we ought to treat this with the respect it deserves.

The Chairman: I hear you, Mr. Schmidt, and that's why I'm trying to lay out and share with you what I understand is the government's agenda. In other words, I'm doing it in an open, public way so that there's no hidden agenda. I know there was some concern before the break, and the chair was caught unaware. So I just want it out on the record.

Mr. Manley: If I might, Mr. Chairman, the real urgency I feel is the need to authorize the bank to resume lending practices, because we're getting very close to the cap. If we're not able to complete the legislation before the summer break, we will be declining customers who should be getting loans simply because we've reached our limits.

Mr. Schmidt: I appreciate that, Mr. Chairman. On the other hand, I think we need to recognize that there may be some kind of transitional state that might be introduced on a temporary basis, too, because once this legislation is in place it will be a guiding and determining factor for a long time. While I appreciate the exigency of reaching the cap, maybe there's a way we could get permission to get that cap changed without going over the -

The Chairman: Just a second. Minister, do you want to answer that question?

Mr. Manley: I don't know what particular concerns Mr. Schmidt may have. I certainly want to hear what they are. I don't believe this is quite as worrisome a piece of legislation as he seems to be suggesting here.

The Chairman: I'm sorry to interrupt, Minister. I don't think he saying it's worrisome. He just says there may be another mechanism to reach the cap or to bridge the gap in the cap. Perhaps you'd want to give an answer now.

Mr. Mills: What specifically about the legislation, Werner, do you want to delay it for?

Mr. Manley: To answer your question, there is not. You have to amend the statute in order to resume lending.

The Chairman: Okay. That's what I wanted on the record. That's the answer.

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Mr. Manley: You amend the statute by passing a bill.

Mr. Schmidt: This is not just amending an act. This is bringing a whole new act into place, because it does replace the existing act. It's not an amendment of an existing act.

Mr. Manley: It's continuing the bank. It's changing the name; it's changing the mandate. It's providing it with some additional powers. Much of this was discussed by this committee last year.

If you can hear the witnesses you require and give it the consideration you wish to give it, from my point of view as government I would be happy to hear what your comments and suggestions are, but within the parameters that we need to see this through the House in the timeframe necessary.

Mr. Schmidt: I want to assure the minister that we aren't here to frustrate the process or in any way to stand in the way of meeting your objective. By the same token, I feel it is difficult when we get forced into something. You may not make as good a decision as ought to be given to something as important as this.

The Chairman: Mr. Discepola, a final comment.

Mr. Discepola: The fact that it's coming here prior to second reading does not preclude us from making amendments -

The Chairman: No. That's exactly right.

Mr. Discepola: So you'll still be able to have both opportunities.

The Chairman: Thank you. We're adjourned to the call of the chair.