[Recorded by Electronic Apparatus]
Wednesday, June 7, 1995
.1534 
[English]
The Chairman: Order.
As the order of the day we're considering Bill C-91, An Act to continue the Federal Business Development Bank under the name Business Development Bank of Canada.
I am pleased to welcome today the president of the Federal Business Development Bank, François Beaudoin, and Don Layne, senior vice-president for corporate affairs.
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Gentlemen, welcome.
Colleagues, I remind you that I made this decision to bring officials in from the FBDB because it will facilitate the clause-by-clause consideration next week. So this isn't really a ``formal'' clause-by-clause, but it's almost a clause-by-clause, because there will be a very brief presentation by Mr. Beaudoin. We'll go through the issues and questions you may have so we can get a goodly amount of our work done before the clause-by-clause consideration. This is the beauty of the bill being referred to us at this stage, because we can do it in a less structured environment.
I'm informed that the Canadian Bankers Association, which was going to appear and then was not, as there are some timing issues for them, now will not be appearing. As a consequence, they will be submitting some of their issues in a written form, which our researcher will receive. If we receive them in time, we'll be putting them to officials from the FBDB next week.
Are there any questions on procedure? What I understand will happen is that we will meet next Tuesday and go through the bill clause by clause. Then it will be given to our researcher and presented in a report to the House for Thursday.
Is that correct?
The Clerk of the Committee: Yes.
Mr. Schmidt (Okanagan Centre): That means that we will not have any witnesses appearing before the committee except in the form of a letter.
The Chairman: That's right.
Mr. Schmidt: And that letter will be discussed here?
The Chairman: The letter will be circulated to members. The letter will be available to you if we receive it prior to the clause-by-clause consideration.
I assume that you will also be the presenters for the clause-by-clause, so we're really getting two kicks at this. The clause-by-clause on a formal basis will be next week, but today our meeting is like a clause-by-clause. Once we get that information, we might want to use it in the clause-by-clause questioning.
If any member has an amendment or change that they wish to suggest, obviously we would like to have them by next Tuesday. You will work with the researcher.
Is there no legislative counsel for amendment drafts?
The Clerk: No, but the office is available for that.
The Chairman: The Office of the Legislative Counsel is available to members if they wish to have assistance in crafting amendments to the bill that they think will be helpful or relevant.
Mr. Schmidt: There has been a suggestion that there has been a backlog and the Legislative Counsel is doing this in some kind of order, which means, given the experience so far, that there wouldn't be time for them to do this by next Tuesday. Have arrangements been made so that this somehow will jump the queue and we shall indeed get access to the Legislative Counsel?
The Chairman: That's a good question.
Does the clerk know the answer to that?
The Clerk: No. I will check on that.
Mr. Schmidt: That's quite critical.
The Chairman: Yes.
Perhaps the clerk could check that out now. I am advised by the House leader's office that this bill is at the top of their pile -
Mr. Schmidt: Then we'd have to do the others, sure.
The Chairman: - and that they have had discussions with other parties, and that this bill is agreed as -
Mr. Mills, is that correct?
Mr. Mills (Broadview - Greenwood): Yes. We've got to get this bill done immediately, because the bank will be out of business if we don't.
The Chairman: Hold on. I think Mr. Schmidt is saying that's fine, but if he needs some amendments, he needs to have somebody to assist him. So we should make sure that's -
Mr. Schmidt: Yes. That's the point. The queue probably has to be jumped, because -
The Chairman: We'll jump it then.
[Translation]
Mr. Rocheleau (Trois-Rivières): It must be understood, Mr. Chairman, that the traditional banks, for example, will not be testifying. People will not come to testify because -
[English]
The Chairman: No. All of the possible witnesses have been contacted by our clerk. Either our clerk or our researcher has been dealing with a number of witnesses, including some recent suggestions by the Reform Party last week. All have refused. The only one that had acknowledged positively is the Canadian Bankers Association, but they just cannot attend at either of the times we've suggested.
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[Translation]
Mr. Rocheleau: Are we to understand that we will not be getting the reaction of these people to the bill before the clause-by-clause examination?
[English]
The Chairman: In fairness, Mr. Rocheleau, if we hear nothing from them, the presumption is that they have nothing substantive to offer, that they have no comment to make. I can only presume that silence is assent, as we say in law.
[Translation]
Mr. Rocheleau: Yes.
[English]
The Chairman: They've been encouraged; they've been asked. It was suggested that we'd be interested in receiving their views on the changes that are being proposed, and none of them, except the Canadian Bankers Association, had any suggestions to offer.
The CBA indicated to me in a conversation I had with Mr. McInnes, who is present, that there would be a letter coming. We would presumably receive that letter within the next couple of days. In that letter we would be given the advice of what the CBA position is vis-à-vis some changes in the bank.
The CBA officials have met with our researcher and have given our researcher a sense of the kinds of things they were interested in as a subject, and our researcher perhaps may assist us with some questions to officials either today or next week when we do clause-by-clause.
[Translation]
Mr. Rocheleau: Agreed.
[English]
Mr. Mitchell (Parry Sound - Muskoka): I'm sorry for arriving late, Mr. Chairman. I might have missed this, but are you saying that the CBA is not going to appear here?
The Chairman: That's correct.
Mr. Mitchell: But the CBA is providing recommendations and suggestions. I have a concern: if the CBA wants to provide recommendations and suggestions, I believe they should be doing it publicly in front of this committee and not behind closed doors to the researcher.
The Chairman: It's not behind closed doors, Mr. Mitchell. The CBA letter will be a public document. It's like a report that's filed. It will be public because it'll be made in an open way to our committee.
Mr. Mitchell: I thought I heard you say that they were meeting with the research staff.
The Chairman: No, I didn't. I said they had a preliminary discussion with the research staff. I spoke to some officials from the CBA and I had a sense of the kinds of things in which the CBA was interested, but as you might expect it's a large member-organization and they were seeking information from their people in Toronto.
Dr. Thomas has indicated to me that he had a sense from them of the kinds of things they may consider, but we don't have anything. I have nothing else to offer you other than what I know, and that's what I'm informing you of.
Mr. Mitchell: Okay, as long as their recommendations and suggestions are done publicly, whether it's by letter or testimony.
The Chairman: That's what I indicated.
Mr. Mitchell: Okay.
Ms Bethel (Edmonton East): I wonder whether there should be questions from us for clarification. Perhaps we may want to see them. Would they come if they were invited?
The Chairman: They have been invited, for two weeks.
Ms Bethel: They usually come to make their presentation and we ask questions for clarification.
The Chairman: They have a scheduling problem that's inconsistent with the demands the minister has made on our committee to present the bill through the House system. All I can do is ask them to attend.
They can offer suggestions to, in their view, improve the quality of or make some changes to the bill.
Could I offer a suggestion, Ms Bethel, that any of the members who may want to privately meet with the CBA and find out what some of their concerns are?
Ms Bethel: We've always had that option.
The Chairman: That option is available to you. Some members may wish to do that and at that time ask these officials the kinds of questions the CBA might have offered.
I presume, since we don't have any witnesses, that everybody's basically happy about the bill. That's the only presumption I can make.
Mr. Schmidt: On a point of order, Mr. Chairman, if they have a scheduling problem and we have been flexible as a committee to hear witnesses if at all possible, it strikes me as quite erroneous for you to suggest that they agree with everything just because they have a scheduling problem. I take exception to that remark.
The Chairman: No, Mr. Schmidt, in fairness to me, I think you're taking my one comment out of context. I'm talking about everyone other than the CBA. The CBA has clearly made it known that they have some issues, but I can't do anything about the schedule.
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Mr. McClelland (Edmonton Southwest): I would like to have on record the fact that the CBA is not able to find time to witness to this is really a cop-out by the CBA because they don't want to answer questions. I want that on the record, because if I were in business and I saw looming on the horizon an entity that could be a significant competitor - although it might be a complement and not a competitor - I would at least want the opportunity to have a few words on record.
The Chairman: Colleagues, I think this is a tempest in a teapot. I've never known the CBA to be shy about any issue.
Mr. Mills: I've never known the CBA not to be present on Parliament Hill in some member's office any hour of the day. I think they're one of the best lobby teams in all of Canada. I can't understand for the life of me why they couldn't find someone to find an hour to appear before this committee. I'm with the Reform Party on this. I think it's a farce.
The Chairman: Noted. Mr. Beaudoin.
Mr. François Beaudoin (President and Chief Executive Officer, Federal Business Development Bank): Thank you, Mr. Chairman. I'd like to thank the committee again for inviting us today.
[Translation]
I wish to thank the members of the committee for giving us once again the opportunity to appear before them today.
[English]
First and foremost, with your permission, Mr. Chairman, I'd like to table on behalf of the Minister of Industry a series of answers to questions that were raised last week by various members of the committee but that were not fully dealt with because of the lack of time or their very specific nature. I hope members will find these answers useful and informative.
The minister responsible for the bank, the Honourable John Manley, already addressed policy issues relative to Bill C-91 last week. He stressed the importance of this bill in creating a supportive environment for small and medium-sized businesses in Canada.
[Translation]
As for me, I also had the opportunity last week, when the Minister appeared before the committee, to address some of the technical issues and operational impacts of this bill on the Business Development Bank of Canada.
Today, my colleague Don Layne, Senior Vice President, Corporate Affairs, and myself are at your disposal to complete the examination of technical issues which are of interest to you in this bill, and more specifically with regard to their operational implications.
[English]
Today I'm here with the bank's senior vice-president of corporate affairs, Don Layne, to further review, discuss, and address your questions and comments on the operational and technical aspects of the bill.
As I indicated last week, we from within the bank believe this bill, if adopted by you honourable members and the upper chamber, will provide us with the appropriate modernized legislative framework to focus on serving new economy and knowledge-based enterprises.
In addition, it will enable us to increase activity in smaller loans while continuing to improve services to our traditional SME clientele in the areas of both financing and management services.
[Translation]
That small business does contribute to our Canadian economy is certainly an undisputed fact. I can assure you, ladies and gentlemen, members of the Committee, that the bank's staff is quite ready and willing to take up the challenges of a new, modern legislative framework which must be implemented to better serve the needs of SME and Canadian business people.
That being said, my colleague and I now await your questions and comments. Thank you.
[English]
The Chairman: Thank you, Mr. Beaudoin.
Colleagues, again I want to remind you that this is a fairly open discussion and because of the fact that we don't have witnesses I'm asking colleagues to have a really serious look at the view. Let's try to stay focused on the bill.
It's your time and it's your committee, but as your chair I'm trying to steer you through this specific bill, which constitutes changes to the bill. I'd ask you, if possible, to try to direct and keep your comments directed to the bill. I'm not going to rule you out of order, because it's your committee and you can handle your time any way you wish.
[Translation]
Mr. Rocheleau: My first question will concern the reasoning behind the change in the bank's role.
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That seems to be a clearly political decision, orchestrated by the minister's office or the Prime Minister's office. Your bank was well thought of in your field, a bank of last resort that played a specific role in relation to traditional players, and now everything's being changed, and now your philosophy is supposed to be based on entrepreneurship. There's nothing vaguer than that. So what is the rationale behind this? As far as I'm concerned, I'm not going to let anyone say it was the committee's work that led to this.
The committee did not recommend, neither during your testimony nor during the discussions we had here, that the Federal Business Development Bank stop being a lender of last resort. I'm sorry, but I attended all the meetings, without exception, and we never discussed such a possibility. Yet now we have the word ``complimentarity'' even though the purpose of this word, as used at the time and as suggested by the official opposition, namely the Bloc Quebecois, was merely to recognize the fact that the bank was a lender of last resort.
So I would like you to specify why the bank's mandate is being changed so fundamentally.
Mr. Beaudoin: A year ago, when I first appeared before the committee, we had an opportunity to discuss this matter, i.e. the connotation of the expression ``last resort''. If you recall, I said that this expression had a certain connotation for entrepreneurs, for the bank's customers. As you know, Mr. Rocheleau, a large part of the bank's portfolio is made up of Quebec companies. At present, one third of the bank's assets are held in Quebec.
Entrepreneurs felt that the expression bank of ``last resort'' had the connotation of being a bank for losers, for companies that are about to die. It was a bank for those people. But in fact, we are supporting more and more companies working in the field of new economy, or new technology. They may not have collateral guarantees to offer to support their costs, but often they are leaders in their respective fields.
Over the years, we have supported a number of Quebec firms. I'd like to mention some names that are familiar, companies that are quite large now. For example, we supported Industries Lassonde for a number of years, and now they are a very large firm.
Let me give you some other examples of support that we've provided in other sectors. I'm going to name a firm that finally is showing its affiliation with the Federal Business Development Bank. I'm talking about Mont Saint-Sauveur, a tourism business that needs support because this field undergoes seasonal variations.
It was no longer accurate to label these firms as firms that go to the ``bank of last resort'' or to call the bank ``bank for people who are about to give up the ghost.'' That's the kind of reaction we were getting from our clients.
Furthermore, the ``last resort'' connotation and the last resort process that our firms had to go through meant that they came to us just to be turned down. A firm would come to us to do business, and we had to say: We can't process your file, because you haven't already been turned down by two financial institutions.
Nowadays, what does making a small business go through this refusal process mean? It doesn't mean just time, it also means money, because the firm has to go see the first institution, usually a chartered bank, and say to them: I have this project, and I need financing. It also means fees to assess the file; it means analysis and assessments; it means time to look at all this. Let's assume that things don't work out with the first financial institution. Then the firm has to go through the process of being turned down a second time in order to confirm that we are playing our lender-of-last resort role, and then we have to go through the entire process once again.
Nowadays, a firm that has to go through this process risks going bankrupt twice and incurring a lot of costs.
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That's why we were saying - I was already saying it in May - that we wanted to move beyond this connotation of ``lender of last resort.'' When a firm admitted that it was dealing with the Federal Business Development Bank, it was almost like having a negative credit rating. We wanted to move on to the concept of ``complimentarity'', since people say that the bank must not compete with the private sector.
Playing a complimentary role doesn't mean competing with the private sector. Besides, considering that we have three billion dollars in assets whereas the chartered banks have $750 billion, I don't see how we could claim that we're competing with the private sector.
Furthermore, we need a private sector market company in Canada to make the economy work. We at the Federal Business Development Bank endorse this value.
We need to provide a service. Canadian and Quebec small- and medium-sized companies need to have access to top-notch service when they deal with the bank. When they come to see us, we will take their application right away, because of the concept of complimentarity. We won't tell them: Go to two other places and get turned down before dealing with us.
However, once we've received the application, we will advise the chartered bank that this firm wants to get financing because it has a particular project. We will tell the chartered bank: Here's a firm that wants financing. If you're interested, take it. But we won't slow down the process to help that firm.
That's what Canadian and Quebec small- and medium-sized businesses have been telling us about our operations. I believe that a member of the Bloc Quebecois - I was listening to the debate during first reading - said quite rightly that the Federal Business Development Bank has to improve its service. The bank believes in improving its service. That's why we have to go from this ``last resort'' connotation to the concept of complimentarity, which does not imply competition, but rather customer service, providing a service to the firms that generate the jobs that Canada needs.
Mr. Rocheleau: With respect to guarantees for small- and medium-sized businesses, I get the impression that economic development through small business is less and less of a concern, but that no one is saying so officially. You just have to read section 4, which sets out the bank's purpose:
- 4. (1) The purpose of the bank is to support Canadian entrepreneurship...
- ...in relation to the administration of any program supporting Canadian entrepreneurship...
- As an afterthought, the bill quickly mentions that small business must not be forgotten, and that
it does deserve a helping hand. This is found in subsection 4(2):
- (2) In carrying out its activities, the bank must give particular consideration to the needs of
small and medium-sized enterprises.
Mr. Beaudoin: What you generally outlined was support to small business, which is not being changed. When you compare the old act to the bill, you can see that it still focuses on small- and medium-sized businesses.
A number of directions will emerge when this bill is passed. Among these directions is the bank's clear intent that it should continue to provide exemplary support to the sector comprising loans of less then $100,000. The bank has tested - and I was talking about this last week - concepts such as microloans, which are loans of less than $25,000. So you can already see what direction we are taking.
.1600
We are currently carrying out a pilot project throughout Canada to test the markets where we can serve these firms with loans of less than $25,000, by making use of the Federal Business Development Bank's special features, namely offering consulting and training services, not just financing. We have been combining these strengths, which is not done anywhere else in the world, and this leads us to believe that we will be able to support small businesses effectively and at the same time reach our own objective of cost recovery. We don't want the bank to become a tax burden. This has been made clear in the directions that the bank must take. We think that we can serve the smallest segments of the market by combining consulting, training and financing.
What guarantee do we have? It's in the act, as it was previously. Each year you will see our corporate plan, which will specify the kind of activities that we are going to be involved in. Our auditors will be carrying out annual audits. A special review will be conducted, as required under the Financial Administration Act, and along with the Auditor General's report and reports from external auditors, you will have the assurance that the bank's mandate as set out in the act will be truly met.
Each year you receive our annual report. When I look at the breakdown, I can see that we are ahead of several financial institutions when it comes to giving detailed information about loans, broken down by category and by amount. You will receive all the information, and you will be able to see whether any deterioration occurs. With the new products, such as the microloan, our objective is to go farther than we're currently going.
Mr. Rocheleau: My last question has to do with section 20, which states that the bank will be able to deal directly with the provincial agencies. Gentlemen, you know just how touchy and sensitive we are about that particular point.
I would like to hear what kind of respect you have for the entire Quebec economic development structure, as well as any other similar provincial structure that might exist. I would imagine that Ontario has similar claims too, and even concerns.
You know just how touchy we are about this point in Quebec. Have you mentally ruled out the Government of Quebec? Are you in favor of development, acknowledging that the Government of Quebec is the level of government promoting regional development?
A few moments ago you were telling me - and the minister recently announced this - that an agreement has now been signed between FORD-Q and the Federal Business Development Bank. Where does the Government of Quebec stand? We know that with this agreement, the bank will have considerable financial influence. It will have power that it didn't have previously, financial power that it had completely lost. We know that it no longer had any funding, and that it had become an empty shell. We can anticipate just how much importance FORD-Q may take from now on, with this financial support from the bank. So in your view, how important is the Government of Quebec in the area of regional development?
Mr. Beaudoin: I'm pleased that you've asked me this question, because a great deal was said about it in the House. At times, I would have liked to have made comments as things came out, because the bank's intention in this area are very simple.
First of all, this provision is a reflection of what we've been doing for 50 years, namely, working with provincial and municipal partners, or with partners from any level throughout Canada. However, the previous act did not specify that we were able to deal with provincial bodies. As a result, lawyers often said: ``Your mandate is to support small business. Can you enter into agreements with other federal agencies or other provincial agencies?'' It was unclear whether we could.
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Nowadays, we need to work in partnership with others, just as we've had to for the past 50 years. As your committee stressed in its report, small business lacks access to capital. So we have to work in partnership with all levels of government, be it at the federal or at the provincial level.
When we provide support to a firm, we find that, more and more, we have to organize a contribution from the Fonds de solidarité, in order to support a small firm and avoid duplication of our services. You mentioned the Fonds de solidarité.
The Bank is working closely with the Fonds de solidarité in several areas, but the fund is interested in one kind of financing. The bank plays a complementary role: it rounds out the financing. Sometimes the Fonds will handle the assets; in turn, we will take on some of the longer term financing. So it's important to specify in our act that we are encouraged to work in partnership with others.
There's nothing in our act that will exempt provincial agencies from their obligation to get authorization from the provincial government to have dealings with us. That obligation will remain. It's a provincial area of jurisdiction, and it will remain so. The provincial agency will have to make sure that it is authorized to have dealings with us. Provincial agencies do that. There are many joint programs.
For example, there's the support system for exporters. This reminds me of the training that we provide to exporters through our New Exporters to Overseas Markets Program. We are working with Quebec's Department of Industry that provides us with the target markets that make financial contributions to this program, and to entrepreneurs. The bank works to train these people and sometimes will take them to overseas markets, but it does this with the assistance of federal and provincial partners, because resources are limited these days.
Unless we join together to pool these resources, we may miss the boat in terms of the support that we have to provide to our small- and medium-sized businesses. This is the purpose behind section 20, which is leading many people to set pen to paper, but which in the final analysis is just an operational provision which won't change the bank's way of operating at all, which was to work in partnership with others.
Mr. Rocheleau: Thank you, Mr. Beaudoin.
[English]
The Chairman: If colleagues agree, we might as well stay with the opposition.
Mr. Schmidt.
Mr. Schmidt: Thank you for appearing a second time and for making some of your officials available yesterday on an informal basis.
I still have the question I had originally, which has to do with the definition of ``complementary''. My colleague from the Bloc asked the question as well, but I'm not quite satisfied with the answer you've given.
On one hand, you don't want to be a bank of last resort; on the other hand, it seems to me that an interest premium will be charged to people who come to you as customers. If you're a bank of first resort, if they come to you for the first time, how do you not then actually become a bank of last resort simply by virtue of charging an extra percentage point? They will automatically go elsewhere first.
Mr. Beaudoin: That's one basic element. The bank needs the premium it charges on its loans in order basically to adhere to its cost-recovery mandate. But built into the process will be the fact that when a small business comes our way to obtain financing, we will take the application; we will then notify the chartered bank to the effect that this application has come our way and we're looking at it, but we will tell them, ``If you're interested, then you do the deal.'' It will be beneficial to the business, because most likely it will get a lower interest rate by dealing with the chartered bank.
However, we don't want to put the small business through the process of having to go to financial institutions only to be turned down and then coming back to us saying, ``I've been turned down. I'm no longer in business. You've got only a couple of days until you must give me an answer.'' This was taking time and was giving the connotation of a bank for losers, which is not what small business is all about.
Small businesses are the leading edge in terms of the future of this country, in terms of the employment growth. This is really what's behind ``complementary''.
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Mr. Schmidt: That really is a process thing. That's a matter of how you do it, it's not a matter of definition. It seems to me the definition itself suggests that you are adding something to someone, and that just isn't happening here. It seems to me what you are doing is by virtue of your operation you are becoming a bank of last resort; whether you like it or not that's what you are.
The other point is if you are definitely going to go into the cost-recovery business, which you clearly are, and you go into the marketplace to borrow money in the first place, you do have to get into a premium interest rate in most instances to do your business. Are you then not almost automatically getting into the business of competing directly for the larger customer at the risk of minimized - Indeed, you could be in direct conflict with some of the charter banks, or other financial institutions, for that matter.
Mr. Beaudoin: I guess it's not been clear if larger loans have been less risky for the chartered banks. I look at what the involvement -
Mr. Schmidt: But that's been the interpretation.
Mr. Beaudoin: Not at the FBDB. We've been able to show that we can service small business and do it on a cost-recovery basis. I'm not sure, even if we had that mandate to serve the large real estate deals, that's someone else's - The fact of the matter is for us at the bank, it's not clear that larger loans are necessarily less risky.
Mr. Schmidt: Perhaps that's sort of a red herring, but go after those customers that are the preferred ones whether they are larger or smaller, the ones that everybody wants. That's where the competition will be.
Regarding the complementary part of it, I think you're going to have an awful lot of difficulty unless you really clearly identify what it is you're complementary in. I don't believe that you've done it. You've tried, and I appreciate the effort, but I don't think it's satisfactory.
Mr. Don Layne: (Senior Vice-President, Corporate Affairs, Federal Business Development Bank): As you know, the charter banks concentrate on short-term financing and for 50 years the FBDB and the IDB have been in long-term financing. That's the basic complementary relationship.
Mr. Schmidt: Why don't you say that in the definition then?
Mr. Layne: I think the term ``complementary'' is defined. It's well known in terms of legalese if there's no jurisprudence you go to the dictionary, and that's been explained before. We can define the word complementary in the act, but you'd get basically -
Mr. Mills: There is an important difference.
Mr. Layne: Yes, there is a complementary clause in this act. It doesn't exist in the Farm Credit Act; it doesn't exist in the EDC Act. It's obvious we won't be in the market to the full extent that the Farm Credit and EDC are. In effect, small business owners are going to be prejudiced a bit when they come to the FBDB versus a farmer going to FCC or an exporter going to EDC.
Mr. Schmidt: You just anticipated my second question.
Mr. Layne: They have fairer access to financing than the small business owner would have, even with this complementary clause. It's clear the bank will now be competing; otherwise this clause would not have been in the act. It would just have been removed as it is for FCC and EDC. The market realities are that if you can get the terms and conditions from the private sector, private sector customers will stay with the private sector. The reality is they will come to the Federal Business Development Bank only if they're having difficulty finding that particular financing. In all cases, our clients are clients that had a bank or credit union and that's where the additional top-up concept comes from.
Mr. Schmidt: I think the very nature of the answer you've given, especially at the end, again suggests that really it's somebody having difficulty elsewhere that is coming, so you're really a bank of last resort still. I don't want to labour the point any further. I think we'll leave it there. I really would like to suggest you define it a little more clearly.
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I want to get into two other issues in another section.
The Chairman: Mr. Mills is asking if he could ask you a question.
Mr. Mills: Before you move to your second question, Mr. Chairman, I'd like to ask another question.
The Chairman: Put it as a point of order.
Mr. Mills: I'm trying to understand where you're coming from with the concern for ``complementary''. Would you prefer the word ``competitive''?
Mr. Schmidt: I think the answer to that question is tied into some other provisions in the act, Mr. Chairman, because I do want to ask the question with regard to the acquisition of certain subsidiaries the bank might wish to acquire.
There are other provisions in this act that allow the Business Development Bank of Canada as constituted here, or as being envisioned here, to be able to buy subsidiaries, to do whatever subsidiaries they wanted to. At least in a theoretical way, they could acquire other financial institutions.
Mr. Mills: That's right.
Mr. Schmidt: As a consequence they could buy, for example, a crown corporation -
Mr. Mills: - or another bank -
Mr. Schmidt: - or another bank, or an insurance company, or an investment dealership, or a trust company.
Mr. Mills: They can take over all the banks and then we could really get things right. Is that what you're worried about?
Mr. Schmidt: No, I'm not worried about that. I'm just asking if that is the kind of authority and power that exists in this act. I think it is. I think it's possible for this bank to be able to extend into all of these areas if it wishes to. It is not excluded.
That is my question. Are these excluded? If they are not excluded, then obviously they are in competition and complementary is a meaningless term.
Mr. Mills: Do you have a problem if the bank competes against the other financial institutions?
Mr. Schmidt: Absolutely yes, in principle, because they're a crown corporation, which means the other institutions are competing against the Government of Canada.
Mr. Mills: Except that we handicap them with this higher interest rate.
Mr. Schmidt: I want to ask the question. Can we buy these other subsidiaries?
Mr. Mills: That's fair enough. I just wanted a clarification.
The Chairman: Carry on.
Mr. Beaudoin: The power to have subsidiaries is not new. It was contained in the old act. It's to permit involvement if there are ever situations in which we need to get involved. The interpretation we have had in the past, and would probably continue with the new act, is if you acquire a subsidiary, it's subject to the same principles as the parent company. Therefore, they would need to be applied in complement in the operations of the subsidiary. This is in the FAA.
Mr. Layne: According to the FAA, the subsidiary cannot have more powers than the parent crown corporation can. A lot of the BDBC Act has to be read in the context of the Financial Administration Act, which takes precedence over this act unless Ottawa is specifically excluded.
Mr. Schmidt: If that's the case, would that mean a given subsidiary could have the same powers as the BDBC, in which case loaning possibility for any subsidiary would be as large as $18 billion?
Mr. Layne: No.
Mr. Schmidt: That's the sense of power the FBDB has.
Mr. Layne: It would be contained. The BDBC would have a limit.
Mr. Schmidt: It has a limit of $18 billion. If the subsidiary -
Mr. Beaudoin: A subsidiary, accounting-wise, would need to be consolidated. The consolidated statements would be the guiding statements for comparing it to the ceiling.
Mr. Schmidt: The BDBC could then do all its business through a subsidiary if it wanted to.
Mr. Beaudoin: I don't see why we'd do that.
Mr. Schmidt: I want to understand exactly what's involved here. You see, we have a number of crown corporations that do similar things. There are Canada Mortgage and Housing, Farm Credit Corporation, and Export Development Corporation under the Canadian Commercial Corporation. All of these are in a similar business to that of the BDBC, in particular sectors.
Mr. Beaudoin: Let me give you an example. It's not something that's in the short-term listing of activities to undertake, but this is something we eventually could be looking at.
Last year we talked about the need for working capital, the fact that lines of credit were often deficient in supporting the growth of small business. We will not be getting into lines of credit as a result of this revised legislation. We will not be taking deposits, that's been cleared and said. However, we're going to continue to top up the lines of credit available from the chartered banks.
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It could be that down the road we will want to offer factoring facilities to small business. This is very limited at this stage. It's an industry that really has limited applications in Canada. Yet it's a way to support the working capital requirements of small business. It could be that the BDBC will want to get into factoring and create a subsidiary that will provide factoring on a complementary basis to small basis.
Mr. Schmidt: Following on that, could the BDBC, if it wanted to get into lines of credit, simply buy a trust company that has deposit-taking facilities and thereby get into the deposit-taking business?
Mr. Beaudoin: For reasons similar to those we explained, our interpretation is that, no, according to the FAA the powers of a subsidiary have to be guided by the powers of the parent company. There would probably be a need to amend the act to permit the bank to acquire a company, like a trust company, that's involved in deposit-taking.
Mr. Layne: I should add that the bank would not be able to create subsidiaries on its own. It has to go through GIC approval. So it's not as if tomorrow we would just go out - Again, this is according to the Financial Administration Act.
Mr. Schmidt: I agree; it's the Governor in Council. I quite agree that would be there. The question remains that the act itself would permit it to happen through the GIC, which really takes it outside of Parliament.
Mr. Layne: But within the powers of the parent crown.
Mr. Mitchell: I'm going to come back to the same point as the opposition was making and try to understand this in my own mind better by asking a couple of specific questions.
Would it be the intent of FBDB to offer cash management services to your clients?
Mr. Beaudoin: Under the management services, where we offer training and counselling, if the training was required on how to manage basically the cashflows. But we wouldn't be getting into the actual cash management, because we don't have the powers to do it.
Mr. Mitchell: So you could not offer payroll services, for instance.
Mr. Beaudoin: We could not.
Mr. Mitchell: You couldn't position for -
Mr. Beaudoin: Payroll services. To the extent that -
Mr. Bélanger (Ottawa - Vanier): But they're complementary.
Mr. Beaudoin: I know it's not the issue. Is deposit-taking involved? By our powers clause in the proposed act, under subclause 14(2) we can make only loans, investments, and guarantees. Here we're getting into services that are not really part of the mandate of the bank.
Mr. Mitchell: So it's your understanding that this bill does not give you the authority to offer cash-management services.
Mr. Beaudoin: Except on a counselling basis.
Mr. Mitchell: But you know the type of services I am referring to.
Mr. Beaudoin: Oh yes, very much so.
Mr. Mitchell: That can't happen?
Mr. Beaudoin: That's my interpretation: we can't.
Mr. Mitchell: The second issue is on one of your answers in response to one of our questions. It says that you are going to have an administrative procedure that will require the Business Development Bank to notify a prospective client's financial institution prior to making a loan. Would that mean that if I'm a entrepreneur and I go to the local office of the FBDB to get a $100,000 term credit, the FBDB will inform my bank, whether I want them to be informed or not? Will that be a condition of the credit?
Mr. Beaudoin: That's exactly the constraint we're putting on small business through this complementary notion.
Mr. Mitchell: Will it be in your literature that it will exist in that way?
Mr. Beaudoin: Yes. That's to adhere to that mandate of complementarity. Otherwise, we'd be competing just like any other financial institution, like EDC or Farm Credit are doing with their respective clienteles.
Mr. Mitchell: That's even if they're not a borrower from somewhere else?
Mr. Beaudoin: If they're not a borrower from somewhere else?
Mr. Layne: Even if they're not a borrower, we'd still notify the principal lending institution.
A voice: What if there isn't one?
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Mr. Mitchell: They don't have an operating facility. All they do is maintain a current account. And you're going to advise that bank that they're going for a term loan.
Mr. Beaudoin: If they don't have -
Mr. Mitchell: If they don't have an operating facility, they don't have any other term loans, all they have is a current account with bank A, and they come into FBDB for a term loan, you will advise bank A that in fact they're getting a term loan.
Mr. Beaudoin: Yes. We will advise.
Mr. Mitchell: Okay.
You have an administrative procedure right now, if I understand it correctly, that says if you're an existing client with FBDB and you wish to borrow additional funds, you will do that without referring back to the chartered bank.
Mr. Beaudoin: No. We have to basically confirm the non-availability of funds, whether you're an existing or a new customer. We need to ascertain the availability of funds, even if it's an existing customer.
Mr. Mitchell: I'm going to discuss that a little bit...maybe not here. I suspect that in practice that's not occurring, but we'll talk about that afterwards.
I wanted to talk about the change in the capital structure. Basically, there's still the 12:1 restriction, which can be raised to 15:1, but there is no restriction on the capital base. On part of it there is - $1.5 billion - but in terms of common shares, it's unlimited so long as the common shares are at $100. Is that right?
Mr. Beaudoin: The total equity is the amount that's specified in the act. It will include common shares and everything.
Mr. Mitchell: But there's no cap on the number of common shares the government can purchase, is there?
Mr. Beaudoin: But the cap is the dollar amount that is specified in the act that will come into play in limiting what can be injected into the PDP, the $1 billion -
Mr. Layne: The $1.5 billion.
Mr. Mitchell: If I'm reading my notes correctly, the $1.5 billion consists of unlimited common shares with the power value of $100 each and unlimited preferred at the surplus included in the share capital stemming from the sale of common shares over and above $100. Then the rest of the instruments can't exceed $1.5 billion.
I just want to make this clear that the government cannot invest any more than $1.5 billion.
Mr. Beaudoin: That's the way it's been structured.
Mr. Mitchell: I was under the impression that the government could put as much into commons shares as it wanted to.
Okay, so you have essentially an $18-billion cap.
Mr. Beaudoin: Exactly. That's how it has been built.
Mr. Schmidt: May we clarify one step further. Does that mean that all of those six instruments, such as hybrid instruments, surplus, contributed surplus, retained earnings, preferred shares and common shares, all of those, whatever that amount is, including parliamentary appropriation, whatever combination, has to not ever exceed $1.5 billion?
Mr. Beaudoin: Exactly. That's how it's been structured.
Mr. Schmidt: So you could have it all in common shares, you could have it all in retained earnings, or any combination of those, as long as that bottom line isn't exceeded.
Mr. Beaudoin: Yes. We want to have something simple that could be monitored and no -
Mr. Schmidt: I just want to make sure that we're absolutely clear on this, and the point has been made. That's all; I wanted to be sure.
Mr. Mitchell: I have one more quick question, if you don't mind.
In a situation in which a regional development agency might be wanting to establish a patient capital fund or something like that, I understand you'll be able to participate in that. Will you enter into a tender process if the development agency chooses to go to tender with the other banks, or will you only do it if the other banks decline to enter into that agreement with the regional development agencies?
Mr. Beaudoin: We've gone through this process recently with the WED. The WED is approaching different players for different purposes, and as a result - it's been mentioned at this committee - an agreement between the Royal Bank and WED has been established for working capital purposes in certain sectors. We are finalizing an agreement with WED to provide patient capital. We dealt with WED directly, knowing that this area of patient capital is one that is not addressed in the marketplace at all. We're actually the first ones to come up with a product that will address that requirement in the market.
Maybe that process is -
Mr. Mitchell: Let me ask the question more clearly, then. FBDB, in your opinion, will not enter into an agreement with a regional development agency that a chartered bank would be willing to enter into. Is that correct?
.1630
Mr. Beaudoin: Don, do you have a comment?
Mr. Layne: It's unlikely they would enter into an agreement with FBDB when a chartered bank is willing to do it. It's not FBDB or a chartered bank; it's two completely different markets that are served by the chartered banks and by FBDB. Again we're still complementary; we're not out there competing and getting the first line of good business. Generally the policies of different government departments have been to deal with the chartered banks - and we've seen this with the SBLA program -
Mr. Mitchell: So, the first thing you did when the Western Diversification Fund approached you was ask them if they had approached the charters yet.
Mr. Beaudoin: No, in this case it was clear. Patient capital is simply not available in the market. This is a perfect example of complementarity. It's introducing a product that is not available and working together with a partner, the regional agency. So we didn't go around and check with the chartered banks.
Now, if they want to participate in the fund, that's available. This is the model we're pursuing in Atlantic Canada with the Atlantic Investment Fund, where it's going to be a pooled approach. The banks are considering joining that fund, the provincial governments are considering joining that fund, and FBDB and ACOA are going to be partners. These are sectors where there's a lack of funds. The whole area of venture capital, patient capital, by definition is a complement to the availability of funds in the economy.
Mr. Mitchell: To wrap it up, the difficulty is - and I can understand where some people around this table have difficulty - that the definition of complementary rests with the FBDB. I suspect that you might find as you go along and define what is complementary that the private sector that is impacted by your definition might suggest that perhaps they have a different definition from yours. I think that's where people have a little bit of knot about this.
Mr. Layne: I have one comment, Mr. Chairman. It more than just rests with the FBDB. It has to stand up to public scrutiny, including scrutiny by this committee and by Parliament.
You will recall that the Auditor General does a special examination. You can be sure, especially on this particular issue, they'll be looking to see how this is implemented, and if there is a problem, they'll present their report to Parliament. It's not just: the FBDB can do anything it wants. We are subject to scrutiny, any variation of -
The Chairman: I want to jump in here because there is some concern. Could you consider the issue, so that you might come back to our committee for clause-by-clause? You might have a suggestion or a brainstorm over the next few days. It is an issue. It's basically, yes, our committee can do something, but we'd rather do it with your advice and counsel.
So how could that notion be made stronger in this bill? I think that's the question you're hearing, and we'd ask you to go back to your officials, Mr. President, to see if there's a way we can deal with it before we do clause-by-clause.
Colleagues, is that a fair...?
Mr. Layne: There is only one caveat, Mr. Chairman. This is government policy; it has to come to the minister, as opposed to the bank.
The Chairman: Well, we can do it or you can do it. We hear you; we're at first reading. We have the ``power''. Whether the government wants to accept it is another issue, but we'd rather do it cooperatively. You're hearing that - committee members want it, we'd like you to have it, and we think it would be a better bill for it. So go back to your powers and get us some information on it.
Mr. Mills, Mr. Discepola is actually next on the list.
Mr. Mills: Yes, but it's a short intervention, to pick up on one of Andy Mitchell's points.
On this notion of calling the customer's bank, at what point do you do that? Do you do it after you've approved the loan or before?
Mr. Beaudoin: Before we deal with an application, the customer has to confirm for us that he has been turned down by two financial institutions. Then we have to basically write to these two financial institutions to have on record the fact that they've been turned down by these two financial institutions.
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This is something that is reviewed by our internal auditors, and is reviewed by the Auditor General. It's a very precise process that we have to go through to establish that this is last resort.
Mr. Mitchell: You won't have to do that with the new legislation.
Mr. Beaudoin: No, but we'll have to notify and have evidence that notification has been given to the chartered bank.
The Chairman: Mr. McClelland, on the same point.
Mr. McClelland: I'll preface this by saying that any bank that I've ever dealt with has said that as part of doing business with them, I have to sign a contract saying I won't do business with any other financial institution without first being referred. So I have to be referred. Check it out. You check any commercial account, at any chartered bank anywhere, and when you sign your agreement letter - which you do every year - one of the articles in that will say that you will not do business with any other financial institution without first getting the permission of the institution you are doing business with.
Does that then mean the FBDB in its renewed form will take security second to the primary financial institution?
Mr. Beaudoin: Oh, very much so. That we already do. We take second position on a regular basis; on a mortgage, if it's long-term financing - financing of building or equipment - we take second position. If you look at the working capital for growth program, where it's a complement to a line of credit, we take second position to the security the bank has on receivables and inventory. That will continue to be the case.
As to the clause you're referring to, taken literally, I think the anti-trust legislation would come into play. I don't think they're as limiting as -
Mr. McClelland: I think they are. Having signed them, I think they are. Maybe I was taken for a ride. Mr. Mitchell, having been in the banking business, might be able to -
The Chairman: He was one of the writers.
Mr. Mitchell: Those agreements are there. You can get around what you're concerned with by simply stipulating it as a condition of the credit as opposed to a condition of your relationship, that you're not allowed to go have further borrowings as a condition of your existing borrowings with that lender. That's a pretty standard clause in commitment letters.
[Translation]
Mr. Discepola (Vaudreuil): First, for the benefit of my colleague, Mr. Rocheleau, I would like to bring to your attention the ninth recommendation of our report on funding small and medium-sized businesses, because he criticized the new mandate of the bank.
Mr. Rocheleau, the ninth recommendation clearly stipulates:
- The committee recommends that the Federal Business Development Bank's role as a
secondary lender to small and medium-sized businesses be confirmed and redefined. The Bank
should also be allowed to use new financial instruments to better fulfill its mission.
I have a question for Mr. Beaudoin.
Mr. Rocheleau: Mr. Discepola, we are the ones who used the word ``complementary'' to confirm the fact that the bank is a last resort lending institution. The word ``complementary'' is what distinguishes the Federal Business Development Bank from traditional banks. We worded the recommendation that way because the committee did not agree on anything and, as you may remember, this is the consensus we reached.
[English]
The Chairman: You'd like to put the word ``Canada'' in it, then. That's complementary.
[Translation]
Mr. Rocheleau: The change didn't escape us. The small business bank became the Federal Business Development Bank.
Mr. Discepola: Mr. Rocheleau, the bill which we...
[English]
Mr. Mills: Stand by, Mr. Rocheleau.
The Chairman: Mr. Discepola.
[Translation]
Mr. Discepola: In my view, the bill is trying to implement the committee's recommendations.
Mr. Rocheleau: I don't agree. I suppose that's what you call flexibility. That's the way Mr. Mills sees change.
Mr. Discepola: Mr. Beaudoin, I have a question for you. Under your new mandate, will you be able to make loans to non-profit organizations? I don't mean senior citizens' organizations or the like, but rather...
In Quebec, some non-profit organizations run small and medium-sized businesses and, up to now, have not had access to traditional financing.
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Will your bank henceforth be in a position, with the new bill, to lend to these businesses?
Mr. Beaudoin: Yes, to the extent that there is a business operation and that it is not, as you were saying, a golden age club or a bikers' club, which are not the type of business that the Business Development Bank of Canada would finance.
[English]
Mr. Mills: Your money would be safe. Just try to get it back!
[Translation]
Mr. Discepola: But, as I was saying earlier, the sheltered workshops,
[English]
the sheltered workshops, who actually run small businesses themselves and employ handicapped people, is essentially the only difference.
Mr. Beaudoin: As long as there is a commercial operation behind it and it's an entrepreneur-based organization, that would be supported under the proposed act.
Mr. Discepola: Very good. Thank you.
Mr. Murray (Lanark - Carleton): Actually, we've bounced all around this, and it relates to the question of complementarity and also bank of last resort, but I just still don't get it, the understanding that you'd be encouraging businesses now to come to visit the Development Bank first, if they so chose. They wouldn't have to be turned down any more by another bank.
At the same time, well, I was looking at the briefing notes here, which say that you have to notify prospective clients, and financial institutions, prior to a loan being made. It says also since all clients of FBDB are also clients of another branch of an institution, this will give the other institution a chance to make a loan.
Again, I come back to the same thing Mr. Mitchell raised a number of times. Why would they necessarily be customers of another financial institution? I just don't see why.
Mr. Beaudoin: To be in business you need a current account to operate. That's why, by its nature, any business has a financial institution that it is dealing with. We will not be permitted under the new legislation to have current accounts or to make deposits, and that's the reason we're saying every enterprise has to have a financial institution it's dealing with and our process will call for notifying that financial institution that we've got this application.
Mr. Murray: If a first-time borrower, who has never dealt with another institution, knocks on your door, there's no problem. They can come to you first.
Mr. Beaudoin: Oh yes, but again, they have a current account. If they have been incorporated just to start the company, they will probably have an opening balance sheet. It may be $100 to reflect that there is a business that has been incorporated, so by the very nature, where is the $100?
Mr. Murray: I still don't see why they couldn't come to you first, though, under this, why yours couldn't be the first door they knocked on. They've got some money in their pocket, they may not even have a bank account.
Mr. Layne: We don't have the powers to set up current accounts and accept deposits.
Mr. Murray: I see.
Mr. Layne: We just don't have those powers, so you have to go elsewhere to set up your business account. If you need a loan, in nine out of ten cases you stay with your bank, if you're getting good service. So we will never be the first stop in setting up a business. We just don't have those powers.
Mr. Mitchell: Sure you can. If somebody's entering the market for the first time, if they haven't started their business but have a prospective business, if they've got $20,000 sitting in their savings account and if they can get the debt capital, they will eventually make the move to start the business. So they haven't opened a bank account yet, they haven't done anything. They're seeking out their credit first. That person might not have a business account. In fact, they're not likely to have a business account.
Mr. Beaudoin: But then it's not a business, and we're not dealing with individuals. Our act is specifying that we need to be dealing with....
Mr. Mitchell: So you won't deal with the start-up?
Mr. Layne: Well, we tell them to go set up an account first.
Mr. Discepola: I don't know why they don't open an account in a bank. It's not the end of the world, making a $1 deposit.
Mr. Bélanger: I'd like to know how this is reconciled with purpose.
The Chairman: I'd better take control of the meeting.
I'm just trying to deal with Mr. Schmidt's problem on legislative counsel.
Mr. Murray: I'd be happy to pass on my time.
The Chairman: It's not a matter of time here, it's just a matter of a cue.
Go ahead, Mr. Bélanger, do you want to ask a quick question?
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Mr. Bélanger: The answer we just got I don't think squares with clause 4 of the bill, that the purpose of the bank is to support Canadian entrepreneurship. Entrepreneurship, by definition, is...someone who's starting up a business and you're saying that you won't deal with them.
Mr. Beaudoin: As a matter of fact, that's an increased involvement we'll have, but we were talking about complementarity and I guess we will be wanting to deal with the business, first of all. It has to be a business, and a business by definition has to have an account in a financial institution.
Mr. Bélanger: An entrepreneur may not agree with you.
Mr. Beaudoin: When you open up a business, the first thing you open up is your balance sheet. It may be $1, it may be $10, but then the $10 that is the equity contributed to businesses goes into a bank account.
Mr. McClelland: Following up on that point, if we have an entrepreneur who is the delicate blooming of this flower...and goes into an account at the FBDB or whatever it's going to be called...the first person they see - now remember they're going in there full of idealism and hope, and the other part of your mandate is to nurture this, to put some fertilizer on it, and we're talking about nitrogen, not the other kind of fertilizer -
The Chairman: So you'd ask for Liberal, not Reform fertilizer?
Mr. McClelland: The first question that comes up by the person representing the bank is whether the entrepreneur has an account at another bank. When the entrepreneur says ``no'', the door gets shut in his or her face. I know it won't literally get shut in the entrepreneur's face, but don't you think that's an artificial barrier?
If the idea is to nurture entrepreneurship, and that has to be a big part of your mandate, wouldn't it make more sense to say: ``As part of what you need to do to be successful, you have to have an account at a chartered bank. When you open your account at a chartered bank, you must also apply to this chartered bank to get your loan through them, because we complement them.'' But wouldn't it be better to be able to say to the people that you'll do what you can do?
I think this provision that has been identified is really artificial, and if there's some way of getting around it, I think it might be to the benefit of everybody.
Mr. Layne: Are you saying that we shouldn't send them away, that we should deal with them?
Mr. McClelland: Yes. Would you send someone away who comes in your door looking for nurturing?
Mr. Layne: I think what you're saying is to, first of all, remove the complementary clause, so we don't have to deal with -
Mr. McClelland: There must be another way to get around that.
Mr. Layne: Secondly, we'd have to have wider powers.
Mr. Discepola: You need just a dollar to open up an account.
Mr. McClelland: It just doesn't make sense. It's a bureaucratic piece of red tape.
Mr. Mills: But the bank doesn't have the capacity, Ian, to take deposits.
Mr. McClelland: You don't have to take a deposit, but you can start up an account. You can deal with the people before they set up a commercial account. That's the point. Their point is that they can't even say hello to them unless they have a commercial account. My point is that if they wait for them to get a commercial account, it might be too late.
Mr. Mills: How often do you think that's going to happen?
Mr. McClelland: A lot.
Mr. Beaudoin: I would like to make a comment. It boils down to whether we are serious about complementarity or not. We are, and we say we're not to be competing, so we can't have our cake and eat it too. We either adhere to the notion of complementarity or we don't. Otherwise, you remove the clause and we become one of the financial institutions in the marketplace competing with the chartered banks and the other financial institutions, and that was not the direction that was given by the committee in its report.
Mr. McClelland: Thank you.
[Translation]
Mr. Rocheleau: Mr. Chairman, my comments will be in three parts.
Firstly, Mr. Beaudoin, earlier on the issue of regional development, you commented at length on the harmonious relations between the federal government, through the Business Development Bank of Canada, and the FBRD, as well as the Government of Quebec and its offshoot entities. We've always had concerns from the moment the bill was tabled. In our opinion, it would be a source of problems rather than a solution.
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I would simply like to draw the committee's attention to the motion which Mr. Guy Chevrette, the Minister of Regional Development for Quebec, tabled in the National Assembly, on June 1st last.
The motion reads as follows:
- That the Quebec National Assembly demand that the federal government review Bill
C-91 which underscores federal encroachment and increases duplication in the area of regional
development.
Second, section 21 reads as follows:
- The bank may carry out such functions as are prescribed by the minister regarding the
management of programs which promote entrepreneurship in Canada,...
Mr. Beaudoin: First, let me respond to your first point. I would like to think that Mr. Chevrette's concerns will abate after we provide some clarifications and explain our reasons for doing this. All I can say is that when small and medium-sized businesses in Quebec have access to capital, be it provincial, federal or international capital, the bottom line is money. That's what these businesses need.
Let me give you an example regarding the type of programs we have.
Mr. Rocheleau: I'm sorry, but when I referred to the provincial government and its organizations, I was not referring to small and medium-sized businesses. I was referring to organizations which depend on the Government of Quebec and which might soon be approached by the FBDB. These organizations might be tempted by what the bank has to offer, and this will force the Government of Quebec to put up the same amount of money. That's what this bill is promoting.
Mr. Beaudoin: Would it be such a bad thing to work in partnership and give each level of government the opportunity to help small and medium-sized businesses?
Mr. Rocheleau: Mr. Beaudoin, for Quebec, and no doubt for all the other provinces, this raises the issue of who takes the lead in regional development. Who is the leader? Is it the Government of Ontario, the Government of Quebec, the governments of the Prairie provinces or the other provincial governments? Or will it be the federal government which will, through underhanded means, force provinces to play the role of the bad cop? Will the provinces be forced to turn down businesses because they can't afford to help them, whereas the federal government will always find the money?
It's the same old question about the federal spending power, which, when applied, puts the provinces in an inferior position, particularly Quebec. As you know, we've had enough.
Mr. Beaudoin: Don't forget that the Development Bank won't participate in regional development. It has a commercial mandate. Its function is to loan money and not give grants.
Regarding your second point, the type of programs, I'll give you a few examples. We have the Cultural Industries Development Fund, which was originally handed over to us by the Department of Communications, which later became the Department of Canadian Heritage.
From the outset, it was a $30 million fund which was created to support the publishing, film and sound reporting industries. We worked in partnership with the department to create this fund. It's an example of joint programs.
Several years ago, the mollusk industry was experiencing some problems, and the bank worked with the Department of Fisheries and Oceans to support business people working in this area and created a loan program which helped businesses survive a transition period. There are other such areas in need.
Other examples of partnership programs include agreements we have signed with agencies in the West, in Quebec and in Atlantic Canada. We want to keep on creating these kinds of programs. We are also working in partnership with the Quebec Industrial Development Corporation. For example, the corporation might invest an equity loan in a company and the Federal Development Bank might authorize a term loan or it might increase the company's credit line. This is the kind of help or partnership we want to maintain under our new mandate.
.1655
Mr. Rocheleau: So, it's quite vast. I think we can agree on that. When wording as vague as ``the management of programs which support entrepreneurship'' is used, it's because the bank will have a very large mandate in future.
I have a final question. Can you tell me that the bank will, by issuing hybrid instruments, pay income on loans authorized by the private sector, based on the bank's profits?
Mr. Beaudoin: By definition, hybrid instruments are usually instruments on which we pay an interest rate or a dividend equivalent to an interest rate, but which is not based on a percentage of a company's profits. So it would be the equivalent of an interest rate.
Mr. Rocheleau: What will this interest rate be based on?
Mr. Beaudoin: It will be based on the perceived market risk for that specific instrument. Don't forget that these instruments won't be underwritten by the Government of Canada. The bank itself will issue them. The market's perception of this activity will set an interest rate which will probably relate to that of Canadian government bonds. We expect to pay a little more than what the federal government pays for its loans, because our money won't be guaranteed by the Canadian government.
However, the yield on those instruments won't increase even if the bank's profits climb. There will be a fixed yield.
Mr. Rocheleau: Wouldn't you be forced, from a healthy management point of view, to try to make money so there's something in it for private lenders?
Mr. Beaudoin: We will have to generate revenues to pay for our bonds, as we are doing for our current debt. As I told you last week, we have loans... Lastly, there are $2.9 billion worth of bonds borrowed on domestic and international markets on our balance sheet. The bank is required to pay back the interest. As well, regarding hybrid instruments, we must pay back interest on the bonds we will own. That's the way the bank works.
You raised an interesting point. People often don't know that the bank does not receive any money from the government on an annual basis. The bank borrows the money it lends to small and medium-sized businesses. Our mandate is to break even once we have paid interest and salaries and incurred loan losses. The bank is a one-of-a-kind instrument used by the federal government.
Mr. Rocheleau: I would like to draw your attention to the document the bank handed out a little earlier and which defines what a hybrid instrument is. The definition includes one of the characteristics as set out by the Office of the Superintendent of Financial Institutions, which is that a service may be provided at a later date when the bank does not generate enough profit to pay its bills.
Therefore, you can see that there is a commercial aspect to its operations. That's what we're denouncing. Because of its internal logic, the bank will develop a commercial mandate instead of focusing on economic development by supporting small and medium-sized businesses. Your mission will become more and more commercial. That's what we're afraid of.
Mr. Beaudoin: We will keep on meeting our financial obligations as we have in the past. That won't change. You are right, we will have to pay interest. That's obvious. We have to be fiscally responsible, because this is the way the bank operates. That won't change simply because it can go ahead with hybrid financial instruments. Fiscal responsibility will remain a tradition.
Mr. Rocheleau: Thank you.
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[English]
Mr. Valeri (Lincoln): To pick up on an earlier comment that was made, if an entrepreneur does come to your door and has not established that current account that he needs to establish, I would hope that your bank would be able to provide some direction as to where he might be able to open that account, and at the same time provide some counsel as to how you may be able to help him. So I think the idea we were talking about earlier, that the door would be slammed in the face of an entrepreneur because he did not have an account yet, isn't realistic.
Mr. Beaudoin: Maybe I can explain what is happening in reality in most cases. When the would-be entrepreneur, the start-up...we talked about the ability of the bank to support entrepreneurs in training and counselling. Typically, as a first step, we get someone who has a dream of starting a business coming in through our doors. Typically, the first person the would-be entrepreneur would meet is a case counsellor, who would give that person an outline of what is required to start a business.
The counsellor would ask if they have considered this and that. In many cases the type of assignment we do is a three-hour session with that would-be entrepreneur that would cover all the points you've mentioned, but also define what business they want to get into, give support in terms of starting a business plan to present to a financial institution, and go through the normal steps that are required to initiate the process.
Mr. Valeri: The other question I have is this. If I were an entrepreneur and my business were venture capital - I was a venture capitalist - if I was out there trying to raise funds for my expert fund and I went to chartered banks and other types of financial institutions, could I also come to the BDC? Would this act allow you to consider investment in such a fund?
Mr. Beaudoin: Investing in funds, venture capital funds?
Mr. Valeri: Yes.
Mr. Beaudoin: Yes.
Mr. Valeri: It would be able to do that?
Mr. Beaudoin: Yes, and we've done so. Currently we have investments in venture capital funds. I'll give you some examples. We're into Ventures West on the west coast, which has been one of the few venture capital funds involved in early stage, high-tech companies, and the bank has participated in the funding of that fund to permit continued investment in that sector, which is finding it very hard to obtain funding through regular venture capital sources.
Mr. Valeri: So would the criteria be the same - would I have to first be refused by chartered banks or other such types of financial institutions before you would be able to invest in such a fund?
Mr. Beaudoin: What we do in terms of global funds like that is assess whether the funds are available in the marketplace for such a...when Ventures West came to us they had gone to various financial institutions. They had been successful in obtaining support from the Bank of Montreal, which invested funds in that pool, but they said they didn't have enough to put it together and asked us to complete the financing so they could have something that was sufficient to service small business in British Columbia, in that case.
Mr. Valeri: Did your case management also play a role in the fund, or did you just provide the financing?
Mr. Beaudoin: In that case, when we invest in a fund, it's really the fund manager who is managing the investments.
Mr. Valeri: Thank you.
The Chairman: Colleagues, I've got Mr. Bélanger, Mr. Mitchell, Mr. Mills, and Mr. McClelland left.
Mr. Bélanger.
[Translation]
Mr. Bélanger: Could you tell me, Mr. Beaudoin, what type of consultation services are offered by the Bank and what is the difference between those and that of the private sector? Brokers, banks and accountants already offer a wide range of this type of services. How are those at the Bank different from those offered by the private sector?
Mr. Beaudoin: First, chartered banks do not offer consulting services as such. Their account managers can give advice to businesses, sometimes, but as for supporting business for a plan that can last...
Mr. Bélanger: Some banks would disagree with you.
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Mr. Beaudoin: Based on what we know of the market, consulting services advise people here and there, but it's not a service formally offered by the chartered banks.
Regarding the differences between consulting services provided by the development bank and the private sector, the services provided by the Development Bank are given by mostly former business people. It all started when retired business people wanted to help small and medium-sized businesses. The charter banks, on the other hand, often hire university graduates to do consultation. However, these people don't have any experience in running a business. We mostly hire people who have had experience in the business world.
Second, let's examine our service fees. Depending on the area, our fees are about a fourth or a third of what they are in the private sector. That's what someone pays to get our support. We only receive federal support for our management consulting services. We get $14 million in credit to support those management consulting services. This allows us to offer practical support at affordable cost to small and medium-sized businesses to help them set up their businesses. That's the kind of work the development bank does.
Mr. Bélanger: I'd like to come back to the issue of capital. If I understood correctly, the threshold will increase to $1.5 billion, so that would be $18 or $22.5 billion if you apply a factor of 18. I thought you said at a certain point that the bank was not allowed to put the Crown at risk. In other words, none of the instruments you will create or use to generate capital will be guaranteed by the Crown. Is that correct?
Mr. Beaudoin: Hybrid instruments will not be guaranteed by the federal government. The Bank's debt will still be underwritten by the federal government, as it is now. The bonds the Bank issues onto the market will still be underwritten by the federal government, but hybrid capital, subordinate debt and other...
Mr. Bélanger: What does the Bank intend to do? I don't think it will have several billion dollars from one day to the next. What will be your percentage of hybrid instruments compared to instruments guaranteed by the government? If this bill is passed, what will the government potential debt be?
Mr. Beaudoin: We'll get our money that way to maintain our 12 to 1 capital assets ratio.
Mr. Bélanger: So the federal maximum will be $1.5 billion.
Mr. Beaudoin: That includes hybrid instruments. The federal contribution and hybrid instruments cannot exceed $1.5 billion, and our need for capital will depend on our assets growth.
Mr. Bélanger: I see.
Mr. Beaudoin: If we increase our loans by one billion dollars a year, we will have to maintain...
Mr. Bélanger: At this point, I believe it's about $300 million.
Mr. Beaudoin: Exactly.
Mr. Bélanger: So you would go from $300 million to $1.5 or $1.2 billion dollars. What percentage of hybrid instruments would not be guaranteed by the Crown, and what percentage of instruments would be?
Mr. Beaudoin: That would all depend on the interest.
Mr. Bélanger: What do you intend to do?
Mr. Beaudoin: First, we intend to ask the federal government to support the Bank by injecting some money into its common shares. That will be our first request. However, we know the country has financial problems, so we would like to have an escape route to access other capital which would help us grow.
Mr. Bélanger: How much did you ask for?
Mr. Beaudoin: Of whom?
Mr. Bélanger: Of the government.
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Mr. Beaudoin: We need 100 million dollars in the next 12 months to pursue our growth. This will come either from the government or from the private market.
Mr. Bélanger: Thank you.
[English]
The Chairman: I've been advised that you were asking about legislative counsel. We've been able to confirm that a couple of legislative counsellors are available. Since this bill is up the queue in priorities, they would be available if any colleagues wish to prepare amendments that are available to the committee. Obviously, government amendments will be drafted on the government side. They will contact either Mr. Rocheleau or Mr. Schmidt, if you need it.
Mr. McClelland, you are next.
Mr. McClelland: Thank you.
Mr. Beaudoin, earlier you indicated that, relative to size, the new FBDB was certainly not any threat to the chartered banks based on your capital.
However, based on the lending portfolio to small businesses under $500,000, if the FBDB has an $18-billion limit, and the total of the combined outstanding loans of all the chartered banks is today $26 billion, it means that the new FBDB is going to be a huge player in this market.
I'm wondering - and again it's not your doing - and am somewhat puzzled by the absence of interest in these events from the chartered banks. I would like to know whether or not the bank has entertained purchases of these hybrid instruments or entered into any discussion with any potential investors. Is it the intention of the bank to approach the chartered banks to purchase these instruments?
Mr. Beaudoin: We've had informal discussions with some chartered banks and we've been able to ascertain, without their having the benefits of the legislation when we held these discussions, that they would consider these instruments as part of their investment portfolios and would therefore participate in the capitalization of the Business Development Bank.
Mr. McClelland: Keeping in mind that I don't think it's unworthy of us to have a healthy skepticism of the motives of the banks, is it possible to suggest that perhaps they would like nothing better than to see this continuation of the enlarged role of the FBDB happen, because it gives them a very palatable and easy escape valve from anybody they don't want to have anything to do with? They can simply say, ``Hey folks, we don't want to have anything to do with you, and go see our cousins down here at the FBDB.''
Do you suppose that could be part of their...why on earth would they want to support someone going into competition with them except that there's something in it for them?
Mr. Mills: It's a sort of institutionalized SBLA system.
Mr. McClelland: Exactly.
Mr. Beaudoin: The point is that when we were having these discussions, they were basically to explain that the new mandate was one that would not be a competitive threat and also to explain what the complementary concept was. The conclusion of the bankers was that - and they'll have to say this for themselves - this is something that they support and understand.
Mr. McClelland: You are going to get all the incubating and incur all the expenses and once it becomes profitable it will go back to the chartered banks at a lower rate.
Be that as it may, provided it's self-liquidating and provided the loans are at a high enough rate that it's not being subsidized by the taxpayer. Except, of course, there is a provision for subsidy by the taxpayer because it is a crown corporation. All of the nice words saying this won't happen don't mean anything because the bottom line is that's exactly what could happen.
If the hybrid instruments are interest-sensitive, they would probably have a return something in excess of or very near to that of a GIC, would they not?
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Mr. Beaudoin: Our understanding is that it would be priced off the Government of Canada bonds and there would be a risk premium attached to that base rate.
Mr. McClelland: So it would be a competitive rate, then?
Mr. Beaudoin: Oh yes, very much so.
Mr. McClelland: Then my question is that since the taxpayers and the citizens of Canada are the people who are eventually going to pick up the pieces of this thing, should they not then have the opportunity to benefit by purchasing the hybrid shares as an RRSP vehicle? Given that the response I had to the question earlier was no, there are technical reasons, why should these not be made RRSP available? Why should Canadians not be able to invest and participate in the growth of these entrepreneurial companies?
Mr. Beaudoin: There was a policy issue that was dealt with and the positioning was that we should have....
On the hybrid instruments, Don, are there restrictions on whether it's individuals or corporations?
Mr. Layne: No, there are no restrictions.
Mr. Beaudoin: So to answer your question, individuals will be able to invest in the hybrid instruments. The confusion I had was that as it stands, preferred shares are going to be held only by the minister and the government. For subordinated debt, the instrument will be available to the public in general.
So your objective could be achieved. The information we have at this stage is that the instruments would qualify for RRSP deduction. Did we get that?
Mr. McClelland: No, because the information I have is that it would not.
The Chairman: There's another minor problem here. This room is booked until 5:30 p.m., so we have a short time.
You have a short conclusion, Mr. Schmidt, and then -
A voice: You could follow up on that, because it makes sense.
A voice: Thank you.
The Chairman: Mr. Schmidt, quickly.
Mr. Schmidt: My question has to do with the cost of doing business. If you want to go to hybrid instruments.... Let's take the extreme case in which all of the $1.5 billion is hybrid instruments. I know that's theoretical, but supposing that happened, you would now have the interest. There would be the Government of Canada bonds plus a premium. You have to go to the marketplace to borrow money, which you can in turn lend. You now have a double whammy. Your profitability is now dependent upon paying out the hybrid instrument demand plus the return on the money you've borrowed.
To the degree to which you have hybrid instruments - this gets awfully extreme now - you are adding to the cost of doing business. So on the one hand, you can argue that cost recovery is your purpose. If you go into this higher level now, you in fact become a burden, really, to the financial institutions because you are going to demand extra money from these people in order to be profitable. This means you'll be going after rich customers in order to make your bank profitable or you're going to seek other ways of making money in your operation.
Mr. Beaudoin: First of all, I would hope that the first taker for recapitalizing the BDBC and the Business Development Bank will be the Government of Canada and that, depending on the availability of funds, we'll access the hybrid instruments.
The question is that if money is not available from the Government of Canada, does that mean we're not going to continue to support small business? We're saying if there is funding available through hybrid instruments, let's take it and continue supporting small business. The issue is that if we don't get that capital, we'll have to stop lending to small business. I don't think this is what we've heard is required to support the small business sector nowadays.
Mr. Schmidt: That's really not the point here. The point is -
The Chairman: This is a riveting committee today.
Mr. Schmidt: It is. Well, this is a really big thing; that's why the minister wants to push this bill through, too. Come on, Mr. Chairman, we all know what's going on here.
The Chairman: No, there's no push.
Mr. Schmidt: Oh, no, there's no push at all.
The Chairman: Take your time; we're here all day.
Mr. Discepola: It's a pull strategy.
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Mr. Schmidt: The SBLA is operating in a variety of chartered banks and other financial institutions. When you add up the costs of doing that business and your premium cost, won't you now be almost in direct conflict and direct competition with the chartered banks? You said before that you are not going to be competitive, but complementary. In fact, with the SBLA provision in the other section and your premium, the cost to the borrower will be just about identical. You are competitors.
Mr. Beaudoin: The SBLA is going to be an alternative in some cases. Don't forget that the maximum amounts are $250,000 and therefore -
Mr. Schmidt: I appreciate all that, but I'm taking issue with the fact that you are saying you won't be a competitor. I think you are going to be a competitor.
Mr. Beaudoin: With the SBLA?
Mr. Schmidt: With the chartered banks.
Mr. Beaudoin: No, not the chartered banks. There will be cases in which, between taking SBLA and FBDB, there will be a question of where are the.... You were asking me at one time about the effectiveness of SBLA versus FBDB. It has been shown that FBDB is a much more effective instrument.
Mr. Schmidt: We're in a different ball game, though, because we have a new SBL Act. You can't compare it to the past, because it's new.
Mr. Mitchell: Coming back to the complementarity issue, I'm really concerned that you are creating a bureaucracy and you will turn yourself inside out to try to please the chartered banks that you're not competing with them.
To me it should be relatively simple: you're priced higher or you offer a service that they don't offer, and that's the end of the story. So if the person is banking with you, borrowing from you, they are paying a higher price. Therefore it's complementary. Or you're providing something that the banks don't provide - by definition, or you wouldn't have it on your list of things that you do.
You don't need to go through all of these prostrations to find out whether or not you are competing with them. That seems to have been put in there simply to give them a comfort level.
I have a second point.
You get a situation in which somebody comes in and applies for credit from you. They go to the chartered bank. The chartered bank does offer the credit, but on terms that are inferior to yours. The price terms won't be inferior, but there are other conditions that will be.
Is that client forced to go to the chartered bank because they have offered credit on inferior terms, or can they choose yours?
Mr. Beaudoin: On the first point, the notification of the banks is done in part, I believe, for the benefit of the small business, because we know that dealing with FBDB is more expensive.
Mr. Mitchell: Just tell them that.
Mr. Beaudoin: In telling the bank that there is this application, if they find it to be of interest and they serve the small business and offer the financing, then most likely it will be at a lower interest rate.
Mr. Mitchell: So just tell the client that if they bank with you, if they borrow from you, then they will pay more.
An hon. member: I agree 100%.
Mr. Mitchell: Answer the second question, then, about where the conditions are inferior to yours but they are offering the credit. If you make the loan, are you in competition? Will you make the loan?
Mr. Beaudoin: If the conditions are really onerous on the small business making the application compared to what is in our opinion acceptable to support that business, then we will be making that loan.
Mr. Mills: I'm going to ask our friends, rather than answering my questions, if they could prepare and bring to me tomorrow or the following day....
When will we be getting together again?
The Chairman: At 10 a.m.
Mr. Mills: Then I would like to have before the weekend specifically a little bit more detail on your venture loan program, how it works, and also more details on the venture capital loan.
Also, do you just operate this heritage cultural fund, or do you actually make decisions as to who gets those funds?
The fourth thing I'm really curious about that is in our book has to do with the name change for the FBDB. I noticed that you did some extensive research with small businesses, as it says here, ``across the country''. I would like a copy of that survey, because it certainly doesn't match up with the survey and the experience that I've had. So I would like to get the detailed methodology and information on how it happened.
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Thank you, Mr. Chairman.
The Chairman: I want to remind colleagues that we will begin clause-by-clause on Tuesday at 10 o'clock. Today is Wednesday, so you've got some time built into that.
Mr. Beaudoin, Mr. Layne, the major revision to the FBDB in Bill C-91...when should the first review of the FBDB be considered? Presently, it's ten years. I've had the benefit of looking at this a bit just so the chair would like to make an observation. It seems to me that's a little far off, and I would like you to consider three or five years and be prepared to deal with that. If you want to offer some comments now...but I like three years myself.
Mr. Layne: I think the committee can call the bank at any time it's sitting.
Mr. Mills: Yes, quarterly.
The Chairman: No, I'm talking about the review that's built into the legislation. I would like you to give us a rationale as to why you chose ten years for your own review. It seems to me that ten years is not acceptable and I would like to look at three or five.
Mr. Mills: It goes against the spirit that we've trying to get here in this committee.
Mr. Layne: I think the ten years was copied from the Bank Act. But, again, the review could be conducted, as Mr. Mills said, quarterly.
The Chairman: No, I'm talking about the specific section of the act.
Mr. Layne: Any section of the act is up for review...and the activities of the bank.
The Chairman: Okay. Well, I'm just putting it on notice that's something I've observed as the chair and I would like to put it on the table and get some reaction from colleagues.
The newly revised Bankruptcy Act includes a section that under some general conditions makes trustees not personally liable as a trustee of a bankrupt's estate for environmental damage. The question is should there not be a similar clause that's added in this legislation that covers financial institutions like the FBDB so that if you're caught as a receiver...? I know as a lawyer that's one of the things we always look at, and I think that FBDB should have the same kind of protection that other banks have.
We talked about the complementarity. So I would also like you to look at the the definition of complementarity for the clause-by-clause. We will be coming back to you with some suggestions. I've asked our researcher - he's taking notes of the kinds of things that have been raised today for next week, and perhaps there may be some deals worked out in the next few days on the issue.
We are adjourned until 10 o'clock on Tuesday.