[Recorded by Electronic Apparatus]
Thursday, October 19, 1995
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[English]
The Chairman: Ladies and gentlemen, our main item of business today is to hear witnesses from Industry Canada about the Small Business Loans Act, Bill C-99.
Before we do that, I would like to briefly go over an item of unfinished business that the committee dealt with yesterday afternoon. Normally we would go in camera, but I'm going to beg the indulgence of my colleagues, simply asking them to review the changes we agreed to yesterday to make sure they faithfully reflect what we decided upon.
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If we run into heavy weather because of some unanticipated problem, we might at that point delay the discussion to the end. Maybe that would be the most useful thing to do, rather than get people to leave the room, go in camera and have them come back. Let's see if there's a possibility that we can finish off this text so I can present it to the House on Tuesday.
We've actually voted on it, subject to editorial changes, so we have a bit of room to manoeuvre if we've goofed up on a date, a word or a verb or have dropped a line or something. Let me ask my colleagues who were present yesterday to have a quick look at any area of concern they had yesterday. I direct this particularly to Mr. Schmidt. I want to make sure that what was number 14 -
Mr. Schmidt (Okanagan -Centre): They've gotten rid of all the handicaps now, because we don't have numbers on it.
The Chairman: Yes, okay. What a tricky thing to have done.
It's on page 4 of the latest document, where we've taken out all the numbers just to throw you off your track. I would ask you to have a look at that. That was going to be picked up at what we'll now call the end of the document.
The major discussion yesterday was on the text of page 4 under ``Performance Benchmarks'', and then, on page 16, the changes that reflected that under (c) and (e).
I beg the indulgence of all of the people at the back of the room who wonder what the heck we're talking about here.
There's also one change I should draw to your attention. We are now labelling the statistical package that we're asking of the banks ``Quarterly Statistics'' so that we can refer to it in brief form. That's a title we didn't have under (d). It's just a labelling device. Our researchers may have to put some of that labelling in the text just to make it clear what we're referring to, but it's not a substantive change.
I'll let Mr. Schmidt and Mr. Mayfield have a look to make sure they think we've done the right thing here.
Mr. Mitchell, do (c) and (e) reflect your...?
Mr. Mitchell (Parry Sound - Muskoka): They do. I've read them as well. You made the change to October 31 and the other changes we discussed all appear to be in there.
The Chairman: Good.
Are there any other things you picked up en route? You'll keep an eye on the text for us just to make sure.
An hon. member: Yes.
The Chairman: We recovered that lost paragraph, like the lost weekend. It's now on page 5, the second paragraph. We agreed we'd move it forward in the discussions, but without the famous last sentence.
A paragraph variously known to its friends as 27 or 29, depending on the previous copies, is now on page 5, paragraph number 2, without the famous last sentence. Do you remember we kept dropping the whole thing and then not the last sentence?
Are we okay?
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So we don't have to pass it again. It was passed subject to this little review. I will then take it as passed. Without a dissident report from the Reform, the deadline for hearing from the Bloc is at 5 p.m. today. If we haven't received a dissident report from the Bloc, it will be deemed not to have had one and it will be, in one way or another, a unanimous report.
I want to say that I have not attempted to be funny about this with the Bloc members. I have been in touch with the office to remind them that if they have concerns, they are to be expressed by this time. I've given them ample opportunity to respond. They seem to be distracted elsewhere.
I thank you very much for that. We now move on to the main event. I thank you again for your indulgence in letting us clean up this bit of unfinished business.
Mr. Schmidt: Is there anything else on the agenda on C-99?
The Chairman: Not to my knowledge.
The Clerk of the Committee: No.
Mr. Schmidt: I'd like to introduce a motion and I'd just like to serve notice now.
The Chairman: Fine. Will you remind me so I won't forget? Now you have us all interested. What could he be up to?
Mr. Schmidt: I think you'll like this.
The Chairman: Now you have us really curious.
May I suggest that we turn our attention to our witnesses. We have three of them, although you only see two. We have Peter Sagar, Director General of Entrepreneurship and Small Business Office. We have Marie-Josée Thivierge, Acting Director of Small Business Loans Administration, and we have Connie Edlund, who's the Director of the Small Business Loans Act Re-engineering...I feel like there's something missing there, like department, section, project.
Ms Connie Edlund (Director, Small Business Loans Administration, Re-engineering, Department of Industry): SBLA comes under Small Business Loans Administration, Re-engineering.
The Chairman: That does make a complete sentence. Okay.
Mr. Sagar, I'll leave it to you to tell us what we're going to be looking at.
Mr. Peter Sagar (Director General, Entrepreneurship and Small Business Office, Department of Industry): Mr. Chairman and members of the committee, thank you for inviting us here. It's always a pleasure. It doesn't seem like that in the days before, but right now it's a pleasure.
The Chairman: You wait; we're not done with you.
Mr. Sagar: I know the members of this committee are not strangers to the SBLA. It has received a lot of the committee's attention over the past many years, I suppose. Rather than go into great details about the program and the presentation, I thought I'd focus my comments this morning on the amendments contained in Bill C-99 for your consideration before its referral to the committee. We have prepared a small deck, which has been circulated by the chairman. I'd ask you to just accept that as tabled. I'll speak briefly to the first few pages of that deck.
The Small Business Loans Act is a remarkably successful and long-lived program, which is now in its 34th year. It has received an enormous amount of support in its broad form, including some recent studies. I should just comment on a couple of those.
Informetrica, which studied the program in the past couple of years, found that the program cost taxpayers in the order of only $2,600 per full-time job created. Professors Haines and Riding found the program is largely meeting its objectives of targeting small, often start-up companies that most need support. Roughly 65% of the respondents see average sales increases of $341,000 annually, and 88% of them reported an average of 5.3 new jobs created following their SBLA loans granted.
The program is also a significant demonstration of the public sector working with the private sector. The staff of just 17 people here in Ottawa administers the program. In 1994-95 it delivered 67,900 loans with an average size of $64,000. The total loans outstanding now amount to just over $6 billion. Of the lending, 75% is done by banks, with the rest being done by caisse populaires, credit unions, private companies and others.
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As you know, the program has been revised a number of times in recent years in attempts to fine-tune it to the needs of the economy. Bill C-99 continues with this process of fine-tuning and responds to a number of the comments made by this committee and others recently.
Bill C-99 is intended to enable the program to continue to provide access to term debt financing for small businesses and, in parallel, relieve the burden of the program on Canadian taxpayers in the future.
Essentially, and without simplifying too much, the amendments to the program fall into two broad categories. Three amendments are designed largely to help small borrowers.
In the first respect we're seeking the authority to make regulations with respect to the release of security, including personal guarantees. This is a very minor issue within the context of the administration of the bill, but it is important for individual borrowers.
Under the existing system, which allows the taking of guarantees, we do not have the authority to release an individual borrower from that guarantee, even when the loan has been over half paid. We're now seeking that authority.
We're also seeking the authority to allow the transfer of personal guarantees, such as when a company is sold. At present, under a partnership, for example, if a company is transferred that holds an SBLA loan, the current partner cannot retrieve his personal guarantee on the loan, even after he no longer has a connection to the partner. So it is just a minor thing to allow that to happen effectively under the program.
The Chairman: I have a technical point. Could it be the release of the security or the reduction of the security? In other words, if you're halfway through you won't have people on the hook for just as much.
Oh, we're making regulations that allow that. Sorry.
Ms Marie-Josée Thivierge (Acting Director, Small Business Loans Administration, Department of Industry): That's correct. The regulations we're proposing will allow the release of their security. Obviously one had to look at what the criteria would be to put that into effect. So the act allows us to do that.
Mr. Sagar: I should point out that the security on these loans is limited to 25% of the value of the loan, so when you've paid over half of it back, you're down to a very small part of a small loan.
We are seeking to establish an annual administration fee on lenders and prohibit its pass-through to borrowers, except in the form of the interest rate. This fee was established under regulation in April of this year. At this point we are just codifying it as an administration fee within the legislation and tying it into the interest rate pass-through.
We are seeking to improve the position of low-volume lenders under the act. At present there is within the act something called a 90:50:10 law, which allows small lenders who are disadvantaged by the current laws to get a greater recovery on their overall portfolios. We would be happy to explain this to you in some detail. But essentially we are proposing to double the amount that would be covered by 95% coverage from $125,000 to $250,000, and double the amount that would be covered by 50% recovery from $125,000 to $250,000. The remainder of the portfolio would be as such.
Mr. Bélanger (Ottawa - Vanier): Did you say 95% or 85%?
Mr. Sagar: It's 90% for the first tranche, 50% for the second tranche, and 10% as it is for all the lenders.
This is important again for small lenders, but in the context of the overall volume of the program, where the vast majority of lending is done by the largest 10 or 11 lenders, it has virtually no impact on the government's exposure. So it should enable smaller lenders to enter into the program without disadvantaging the government overall.
Those are the three elements of the program that should help small borrowers and, in the latter case, small lenders as well.
To improve the program administration, which deals in part with the cost-recovery elements, we are seeking authority to create regulations for the establishment of a claims processing fee. This is not something we contemplate establishing at this time, but we feel it's important to have that ability in the event that the quality of claims being filed by the lenders should deteriorate significantly. It's fundamentally just the question that an inadequate claim forces us to do some of the work that should be done by the lenders. If we have this sort of leverage, we should be able to avoid that situation.
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Mr. Schmidt: What kind of parameters are we looking at here?
Mr. Sagar: Marie-Josée does all of the claims processing so I'm going to pass to her on this issue.
Ms Thivierge: At the moment we haven't actually sat down and developed criteria for looking into a claims processing fee. We are trying to monitor the quality of the claims coming in, and what we're seeing is that in fact quite a bit of work could be done better by some of the lenders. Through the re-engineering exercise with Mrs. Edlund, we're trying to monitor the performance of the lenders and communicate to them when there are some areas of improvement. With time, we'll monitor that closely.
Because of the expected increase in volume of claims over the next few years, if the quality of the claims submitted is not improved and the cost burden falls onto the administration of my staff - the seventeen - and we cannot deal with the volume although we've attempted to put in place some improvement measures with the lenders, we'll contemplate that fee. I think it's really a measure in place to say okay, we want to be consistent with the government's view that we have to move to cost recovery. We'll contemplate that measure to the extent possible if we can't try to improve the quality of what comes in through other measures. But no criteria have been developed at this stage.
Mr. Schmidt: I will follow up, Mr. Chairman, on that study done by Haines, where the suggestion was made - and this was sort of a cost-benefit analysis - that if this happened and the maximum goes from $125,000 to $250,000, the exposure virtually doubles from what it was before. I think the average size of the loans will increase substantially as well. Do you anticipate that the claims will also rise in the same proportion? In other words, if you had claims of $300 million for a total indebtedness of $300 million, will this now move to four times that $1.2 billion?
Ms Thivierge: An increase in claims is to be expected. When we look at the loans outstanding on our books, we're looking at $6 billion. With a lost rate of about 5%, you'll be seeing a take-up in the program cost in future years.
That being said, the program with the changes introduced in 1993 was very successful. Registrations went up quite a lot, and as a result of that, it is anticipated that at the end you will see an increase in claims. We're trying to monitor that situation closely, knowing very well, based on that Riding and Haines study as well as on the Informetrica one and on our own past experience, that a loan is registered in one day but the repayment period is ten years. In fact, we start seeing claims coming in during years three, four and five. As for the huge volume take-up last year and the year before, we won't be able to assess the specific impact for another twelve to eighteen months, but we're monitoring that very closely.
Mr. Schmidt: Here's my bottom line. Although it's suggested this is really only giving us power to do so, isn't it almost a predetermined condition that you're going to do this? You're going to have an increase in claim numbers. That means the cost is going to go up. Therefore, if the idea is that you're going to monitor it and see if the cost goes up substantially, then you'll do it, and if it doesn't, you won't. The point is you've already guaranteed, I think, that it is going to increase, so you're going to have to introduce a claims fee.
Ms Thivierge: I'll ask Connie to speak to that. Connie is directly linked with a re-engineering exercise taking place where we hope to address to some extent the whole issue of the volume and how we deal with that volume.
The Chairman: Sorry. I'm guilty of starting this process of asking questions en route just for clarity's sake. Perhaps, if you wouldn't mind, we could hold that as a point to come back to. If we don't go through the overview and note the points and then come back to them, I have a terrible feeling that we may get bogged down into some interesting detail that will, unfortunately, keep us from finishing the task at hand. So let's hold that point, if that's okay, Mr. Schmidt, and then come back to it.
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Mr. Schmidt: Okay.
Mr. Mills (Broadview - Greenwood): Mr. Chairman, I have no problem with that, but I've just been asked to go to the House to speak on a bill. They are short a speaker.
I want to put one question on the record before I go.
The Chairman: Sure.
Mr. Mills: It has to do with the reporting. We're asking all the banks of Canada to report quarterly on loan activity in every municipality of the country. You must have a central registry on all of these loans that you're approving or signing off on, right?
Would it be possible for the department to give the members of the committee a sort of mirror of what we're asking the banks to do? In other words, break down by municipality and sector the number of loans that are in the system under the Small Business Loans Act.
I'm curious as to what sectors are using up this Small Business Loans Act. What part of the country is it? Where are we getting our greatest loan-loss activity? That 5% is a very high loan loss.
The Chairman: In order to help our witnesses, who haven't had the benefit of actually looking at our document, it might be a little speculative at this point to know whether the way in which you collect information is consistent with the way in which we hope the banks are collecting information.
I don't mean to cut you off, but I was going to suggest that you take a look at this thing, which we actually passed, and get back to us in one form or another to say whether it's doable or useful and what your views of it are. I don't know if you have anything to add to that.
Ms Edlund: Actually, I can answer that very quickly.
I'm working quite a bit with the chartered banks, which really are about 80% of our volume. We're looking at doing exactly that. That's what re-engineering is about.
We're able to divide our database. We should be able to look, by industry statistics first, at where our loans are going, which is fairly basic, but also where we're finding the most claims. We're also able to break that down to geographical areas.
As for whether or not it will go down to municipalities, that becomes more difficult. That's because we would actually have to measure that out and pull it off specifically.
However, for a standard report, I would say that within six months we should be able to come up with a series. In fact, we can then split that down by lending institution and also do that on an average by chartered bank and compare it with other financial lending institutions.
That's a good portion of what I'm doing now. As a result, we're developing a new computer system to allow us to do that. Previously, we were not able to do it with the information.
Also, very quickly, to that end, we've introduced new claim and registration forms, which, as of July 1, will require more information, most of which the banks were already doing for their own databases. But there was no way of compiling. We're the only people who can compile a comparative of one to another. An individual bank can't do that because they don't have the whole picture.
So that is in process, if that helps.
The Chairman: I'd like to suggest that when I've tabled this report, which you heard the last of on Monday or Tuesday, then you can react to it and perhaps get back to us as to how useful or doable that exercise would be.
That's if you can get a copy of it. Perhaps Ms Trauttmansdorff can send a copy over to you.
Ms Edlund: Certainly.
The Chairman: I think it sounds like a very interesting way of coming at it as well.
Is that okay for you, then?
Mr. Mills: Thank you.
The Chairman: We'll now push on. I don't want to completely cut people off. If there's a lack of clarity in the explanation on the way through, I want people to feel comfortable just asking those sorts of questions, but I don't want to get into too great a level of detail until we've gone through the presentation.
Mr. Sagar: We'll try not to delay the questioning much beyond the next minute, so we can move quickly on to this process.
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I must say that, having immersed myself in the program, for obvious reasons, for the past week or so, I've become absolutely convinced of the importance of having different percentages for different things. This is a program that deals almost entirely with percentages, and the capacity to get lost in them is infinite. So I'm quite sympathetic to anybody who wants to raise a question about which percentage is which on which point.
I just want to speak briefly to two other amendments, which are both to improve the efficiency of the delivery of the program.
We are seeking in Bill C-99 the authority to change the percentage of the guarantee offered by the government on the program by regulation, as opposed to through an act of Parliament.
The reason for that is to enable us to proceed more quickly than is possible through an act to change the percentages. Although it's not to be done with brilliant speed, we have to consult and put processes in place with the lenders to get these things done.
We had sought in this act to decrease the level of government exposure, from 90% to 85%, more quickly than was currently foreseen. It is currently scheduled to move to a guarantee level of 85% on an individual loan as of January 1.
As a result of the timing, we obviously won't be able to accelerate that process. Had we been able to do that through regulation, we could have done it obviously by midsummer and reduced the government's exposure.
This will also enable us to fine-tune the loan to meet the changing needs and requirements of borrowers and lenders throughout the program, again more quickly than is possible under the current legislation.
I should emphasize that this applies only to the level of the guarantee rate offered by the government, not to the rest of the program.
The loan, as I mentioned, does seek the authority to accelerate the decline in the government guarantee rate, as it happens with the delays in implementing the bill and the need to bring forward the changes en masse. We will not be able to do that. That will simply happen on January 1, as foreseen, at any rate.
Finally, I should point out that the regulatory changes that will accompany the bill, aside from some very minor housekeeping ones, relate to the release of security. We will create within the regulations the ability to release lender's security and to transfer the personal guarantees, and we will make a technical amendment to allow for the consistent treatment between fixed- and floating-rate loans in terms of how interest is accrued on a lender's claim. This is an infinitely minor technical amendment to the overall bill.
Mr. Chairman, I'm at your disposal now to answer questions and provide further explanations of the bill, as you see fit.
The Chairman: Fine. I turn it over to the Reform Party. They may wish to come back to the point on which I so rudely interrupted them. I don't know.
Mr. Schmidt: I didn't think you were particularly rude, Mr. Chairman. I didn't interpret it that way. I understand you wanted to get through the bill, which we did.
Here's the point I wanted to pursue to its logical conclusion. Say the total number of loans outstanding, the average size per loan, and the number of loans are going to increase. The loss rate is 5% now. It's logical that it will then increase as well. Consequently, as for the suggestion that you're going to monitor this thing to determine whether or not you're going to have more costs is.... It's obvious it's going to cost more.
So the question now becomes, what will be the criteria? At what level will you now impose fees? Is it going to be at the current level, which will affect everything above that level? If that's the case, then 50% of the loans.... It will be at least that. The loan level is, what, $12 billion, according to the new legislation?
Mr. Sagar: There's an overall cap of $12 million worth of loans to be authorized under the current phase of the period of this program.
I should perhaps try to differentiate briefly between what we see as the processing fee on a claim versus the loss rate on the program.
Mr. Schmidt: But each loss is a claim.
Mr. Sagar: Yes, but we have, in effect, entered into a contract with the lenders to say that if you provide us with certain information in a certain form, we will process your claims. Each of those claims is an individual transaction.
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What we are seeking, if they do not live up to their side of this contract by giving us proper, complete and timely documentation, is the ability to charge them a fee for processing the claim. It is independent of what the loss rate on the program will be. It really is simply a way of getting them to stick to that side of the equation.
The program loss rate itself, while we have a historical rate -
Mr. Schmidt: I'm sorry. I quite agree and I understand that. It's just a logical extension that if the loss rate remains constant, the number of claims is going to go up. Really, it's just the volume that's going to increase. So whether they do it as well as before or better, it isn't going to matter. You're still going to have a higher cost to administer this program.
Mr. Sagar: That's true, but we intend to bear those costs. We are suggesting to the lenders that we aren't prepared to bear the costs from inadequate work on their part. We will absorb the volume shifts but not a quality shift, if you like, in the claims.
Mr. Schmidt: Yes. I guess the real crunch question is will you impose a claims fee?
Ms Edlund: Maybe I can answer that. There are two ways of addressing it. We've forecasted a definite increase, a substantial five to seven times increase in the number of claims. It's simply a mathematical exercise.
One of the things that became very apparent to us, even as we started seeing what was submitted, was that claims came to us as bad as if everything had been tossed into a shoe box and then submitted. As you can imagine, that makes it like an accounting operation. In some cases we get them very clean. But we actually started assessing them and recognizing there were a number of areas in which the work just wasn't being done properly.
Consequently, we introduced a couple of things. One, there's a working paper format for a claim form and they're now required to do it right. So that cuts down on the amount of work within the office. That is part of it.
Secondly, we are really looking very closely at a post-payment verification process, where we can actually go to sampling. But in order to go to sampling, we have to have a quality increase in the claims. We've been working quite consistently with the lenders to try to increase quality. If their quality improves significantly, we wouldn't have to look to the same extent at each individual claim. So that will capture some of the volume and our risk or the exposure wouldn't be increased substantially.
However, in those cases where you've got lenders who continually, for whatever reason, send in shoe-box-type claims, and it requires that one might have to hire people to actually process those claims, there would be an ability to recover the costs that the department has to put out to process those claims. Either the lenders pay it or we pay it. That was the context in which the ability to levy a processing fee would come in.
It could only be in terms of recovery of those costs that are directly paid; otherwise the money would go into the consolidated revenue fund. This is the only way it could come back in to offset the cost through the department as well. So it's not meant as a money grab. It's more to offset administrative costs in those cases and in that context.
Mr. Schmidt: You didn't answer my question, but I understand what you're saying.
Mr. Sagar: I'd be happy to come back to it. Could I just comment, though, going back to the Haines-Riding study and cost recovery? The admin costs of this program are actually minuscule compared to the overall costs from the actual claims. So processing is a relatively inexpensive operation.
When we did the calculations for the way the program has been restructured, we took into account the Haines-Riding study and the risk factors that were associated in that study. That's where the 5% to 5.5% anticipated loss rate comes from. It was taking that into account.
The goal of the program, to move on to cost recovery, is that we have a 2% registration fee up front, which now in effect knocks our risk outstanding to between 3% and 3.5%. We have a 1.25% annual administration fee on the outstanding balance on the loans, which taken over the loan is the equivalent of roughly that 3% to 3.5%.
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So if we think in terms of loans made after April of this year, we are moving on a cost-recovery basis on the exposure of the government. Whether or not that will also cover any increases in administration fees depends, of course, on the loss rate that is actually achieved, which in turn will depend on how well the economy performs, on sectoral shifts that occur within the program, and, frankly, on how well some of the lenders manage their portfolios.
So we'll be watching it very closely. Connie is in the process of putting in a very sophisticated monitoring system that will enable us to watch trends much more closely than was ever possible before, and at a much greater level of detail.
The Chairman: Did you want to pursue anything? You have three minutes left.
Mr. Schmidt: I'm not going to get any of the answers I was looking for anyway, so there's no point in asking again. The specific question was, will you increase claims fees? There was either no answer or the answer was maybe.
The Chairman: Is that the answer, or do we have a misunderstanding?
Mr. Schmidt: Actually, that's the sum total.
Mr. Sagar: The answer is that there is no claims fee right now -
Mr. Schmidt: No, there isn't.
Mr. Sagar: - and if the quality of claims filed remains high and meets our objectives, then there will not be a claims fee. To the extent that we have claims that cause increased costs to the government in processing an individual claim, we will consider it. It would be done through a regulatory pass, which would be gazetted and all the normal procedures would be followed. But the answer is maybe. I can't -
Mr. Schmidt: So that is the answer. You said maybe. Okay.
The other question I have has to do with the last point under ``Improve Administration'', unless one of your people, Mr. Chairman, want to -
The Chairman: No. I just want you to have your full ten minutes, and then we'll come back to this side.
Mr. Schmidt: All right.
My question has to do with the shift, through regulation, to a change in the government's exposure to the loan guarantees from 90% to 85%. It doesn't really matter what the percentage is at this point. It's the principle of moving the authority to expose or to increase or decrease the risk of the Government of Canada from Parliament to cabinet.
I heard you say the rationale for that is to allow for quicker movement. Could you explain a little more fully exactly why you would want the people of Canada to in effect be disenfranchised?
Mr. Sagar: I assume that was a leading question.
Mr. Schmidt: Yes.
Some hon. members: Oh, oh!
Mr. Sagar: Let me respond appropriately as an official then.
We can see efficiency gains by moving in this way, both for the efficacy with which the program can be altered to meet the needs of economy for both borrowers and lenders, while at the same time we can recognize that this is a very significant policy issue that relates at a level that is, quite frankly, beyond my capacity to comment on as an official.
If I might, Mr. Chairman, I'd suggest that the committee might wish to resume discussion of that when the minister is available for discussion after the bill is referred to you. I don't want to duck the issue, but I think it's well beyond -
Mr. Schmidt: No, I know that.
The Chairman: I think that was a very fine answer.
Mr. Sagar: The minister may not agree, however, but that is my answer today.
The Chairman: If I may, I have on my list first Mr. Mitchell, followed by Mr. Bélanger.
Mr. Mitchell: I have a number of questions. First of all, when you made the change in fees on April 1, 1995, what was the impact on the number of registrations coming in for new loans?
Ms Thivierge: There in fact seemed to be a slight decrease, and we're talking about what we've noticed so far from -
Mr. Mitchell: I'd like you to be very specific here: the number of new loans in May 1995 as compared to May 1994.
Ms Thivierge: I'd have to get back to the committee with the exact percentage, but if we look at the first six months of this year's activity versus last year's, there is a decrease. I can provide you with the exact numbers.
Mr. Mitchell: Is it in the order of 10%, 15%, or 30%?
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Ms Thivierge: I'd be speculating. Can I provide you with it? There is a decrease. We can provide you with the exact numbers.
Mr. Mitchell: So the change indeed has curtailed the amount they have on the program?
Ms Thivierge: Yes, it has. Definitely.
Mr. Mitchell: Okay.
What is the government's unfunded liability based on 5.5% or 5% loan loss? I'm sure you have that figure.
Mr. Sagar: I should let the lady do her job, I suppose, but I've gotten used to working on my own.
The arithmetic is not terribly difficult. There's about $6 billion worth of loans outstanding, and at about a 5% loss rate, if that were to eventuate, we'd be looking at about $300 million worth of ``unfunded'' liability on the program to be spread over some number of future years, depending on the rate at which the claims flow in. How or whether that will eventuate of course is anybody's guess.
Mr. Mitchell: That's not a total issue picture, because on that $6 billion outstanding, the government has in fact collected a certain amount of key revenue.
Mr. Sagar: But you were asking about the unfunded liability.
Mr. Mitchell: Okay, so the unfunded liability is about $300 million.
Ms Edlund: In terms of that offset, it would be somewhat less than that, but when we run the sensitivities for running it over a period of years, you're seeing it depending on which year you're looking at to see the unfunded liability. So you'd have to take it on a year-by-year basis.
If my memory serves me correctly, the highest amount you do see goes into about 1997-98, where we're seeing the higher numbers. It's based on what the take-up is at a certain point in time. Does that answer it?
Mr. Mitchell: Yes, it does.
You're saying the bill will provide the ability to release security. Will the individual financial institution have to make a specific request of your administration every time they want to release a piece of security, or will they have general guidelines under which they will be able to operate?
Ms Thivierge: I believe that in fact they would have to come back to the administration, but it's something we have not looked at very carefully.
Mr. Mitchell: I suggest you do, because the administrative work of having to approve, on each individual loan you have out there, a specific release of security is going to be enormous.
Ms Thivierge: It's something we'll have to look at very closely.
Mr. Sagar: The principle is that once the loan has been 50% repaid, they would be able to release that security without having to seek our authority.
The Chairman: All of the security?
Mr. Sagar: Yes.
Mr. Mitchell: They could release parts or all of it?
Mr. Sagar: All of the security.
Mr. Mitchell: They could also keep part of it if they wanted to.
Ms Edlund: There wouldn't really be a reason for somebody to want to keep it.
Mr. Mitchell: I'll give you an example. Say you fund an 18-wheel rig for somebody. It's worth $100,000 and they put $10,000 down. You're going to take a 25% guarantee from the individual and you're also going to take a collateral mortgage over the rig. When there's $50,000 owing you might be quite willing to release the guarantee. In fact, I would suspect you would want to or you should. But you will probably want to keep your collateral mortgage on the rig.
Ms Edlund: That's correct.
Mr. Sagar: It's a release of personal guarantee, not the collateral mortgage.
Mr. Mitchell: Let's get clear here. It's not the security you're talking about.
Ms Edlund: Never.
Mr. Mitchell: It's only the guarantees you're talking about.
Ms Edlund: Exactly.
Mr. Mitchell: Okay. That's the difference there.
The Chairman: Everyone seems much happier with that response.
Ms Edlund: It was never meant to release the collateral; it's simply the security. I think they used the example, and it's very true, of a situation where you have a shareholder or a partner who has personal guarantees, the partnership dissolves, he wants out and the rest continues. They'd want to release.
Mr. Mitchell: One of the points I'm making here is that through this bill we basically have given authority through regulations. It's basically the whole ball of wax now. There are lots of significant ramifications in terms of delivery of your programs that are going to be based on those regulations, and they don't appear to have been completely thought out, because you can't provide all of those answers to us.
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To build on Werner's point, there has to be some sort of mechanism whereby we as parliamentarians can continue to exercise our oversight responsibility, because you can make significant policy changes on the SBLA through the regulatory regime with the way this bill is structured.
For example, Werner puts it in terms of risk to the Canadian taxpayer. I think if you work under a philosophy that whatever you do has to come to a zero cost, that might cover it. But the other component, and what we've been working on as a committee, is that you can curtail access to capital by regulation whereas we as a committee, trying to insist that access to capital be available, will no longer have any kind of input on that.
I don't know the correct way to change it. I recognize the need to be able to respond quickly to the marketplace if you're going to keep a cost-recovery situation, but there has to be some sort of mechanism in there so that we as parliamentarians have some sort of oversight role in the way that's done.
The Chairman: May I make an observation? There's a point I'm not sure about. Presumably, if it goes into the regulatory regime, the oversight committee is technically the scrutiny of regulations committee. I think that's right.
I believe there is a committee that actually has the authority to look at all of these things. The question I've just asked - and I ask it out of pure naivety, because I think I know the answer - is interesting in that the relevant committees don't get those regulations as a matter of course, and of course the scrutiny of regulations committee picks and chooses the things it wishes to look at.
Now I may be straying way off course here, but technically there is an oversight provision by that particular committee. Practically, it may not occur, but maybe someone -
Mr. Schmidt: Mr. Chairman, I think that part is true. The point here is that there was a policy issue. The issue here is whether a matter like this should be determined by regulation or by legislation in Parliament. That's the issue.
As to the technicality of whether a particular regulation does what it is intended to do, that is the function of the regulatory committee.
This deals with who ought to make the determination of the liability of the people of Canada or, to put it the other way, access to capital. These are two sides of the same coin. These are very different, but there is a major policy issue here and that's why we got the answer we did. I respect -
The Chairman: To be fair, I think we would have to take it up with the minister.
Mr. Schmidt: Absolutely.
The Chairman: Sorry, I interrupted you.
Mr. Mitchell: On this technical question, Werner was talking about a processing fee for claims. Isn't it simple? If you don't get the claim in the format you want, you ship it back to the lender and say that you'll think about processing it when you are provided with a correctly completed claim. That's the end of the story. To me, that is a far more efficient way of ensuring it happens than trying to assess a fee and going into the business. Some institutions might say it's cheaper to let the government do it at a 3% cost.
Just send it back if it isn't right. It'll come back in the right format because they're risking 80% or 90% of that loan.
Ms Thivierge: One concept that should be kept in mind is the fact that when a loan goes into default an interest rate kicks in. As long as that loan has not been dealt with and the claim is not paid, it is costing government money.
We're trying to expedite the process whereby they submit good information to us so we can clearly pay the claim and so we're comfortable that they've realized on all their securities and so on, and have realized that the bottom line amount to be paid is the right amount.
Mr. Mitchell: I'll reverse that then.
Ms Thivierge: If you ship the claim back and get them to work on it longer, at the end we have to rethink -
Mr. Mitchell: But the bank as well is only earning interest for so many days after it goes on accrual. If it is going to take too much time, the bank is going to have an asset tied up on which it's not earning anything, so it will not do that.
I'm totally convinced that all you have to do is refuse to process a claim that isn't prepared properly and you'll get the quality that you're looking for without having to assess the fee, because it's costing them big-time dollars not to get you to process a claim.
Ms Edlund: There are a number of things we're taking in to try to increase the quality and that is one.
Also, one of the problems was that until July 1 the forms on which we were asking them to submit their claims were not really very good in terms of what we were asking for. They required more work. This is sort of like airing our laundry here, but it's true. We have made the changes there.
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At some point when we work with them, we will also look to improve it, but that doesn't come about by shipping them back. But in the meantime, it still costs us a lot of time and energy to go through it and send it back, then they send it back, then we send it back, and it can go three times. There has to be a stop; we have to have some way of putting in a stopgap and saying enough. Unfortunately, we do pay interest during that period as well, because we take the place of the person who has been in default.
Mr. Mitchell: Have you talked to the student loan administration about how they process the claims?
Ms Edlund: Yes, we're working very closely with them.
The Chairman: Do you have any other points, Mr. Mitchell?
Mr. Mitchell: I'll come back later.
The Chairman: Fine. I'll go back over to this side then.
Mr. Schmidt: My big questions have been asked. We'll wait for the minister.
The Chairman: We should warn him. His ears will tell him that you're in wait.
I will then go to Mr. Bélanger.
[Translation]
Mr. Bélanger: Since the proclamation of the Act, how many times have officials in charge of administering the Act requested amendments to it?
Mr. Sagar: Repeatedly. We could give you a specific answer later on.
Mr. Bélanger: If you do a study to determine how many times the department requested amendments to the Act, I would also like to know how many times the amendments were rejected. All right?
Mr. Sagar: Fine.
Mr. Bélanger: I would be very surprised if you were to find that amendments requested by the government were rejected by Parliament.
This leads me to tell my colleagues that the process of amending legislation may not be as complicated as some are suggesting, and that this may not be a good reason for trying to get carte blanche to introduce all sorts of regulations rather than going through the legislative amendment process.
Mr. Sagar: Bill C-99 contains only one change.
[English]
Mr. Bélanger: No, you're missing my point. I'm saying I would like to know how often the department sought amendment to the act and how often these amendments were not granted by Parliament.
The Chairman: Over how long a period?
Mr. Bélanger: Since the act was promulgated.
What I'm trying to determine here is how difficult it is to obtain, through the legislative process, the amendments that are sought, as opposed to getting carte blanche and getting them through the regulatory process.
The Chairman: Presumably you want an element of time between request and success.
Mr. Bélanger: Yes, that's number one.
Number two, during this program review, has any consideration been given to commercializing your operation?
The Chairman: When you say ``program'', do you mean the formal exercise that was there?
A voice: The re-engineering exercise, yes.
Mr. Bélanger: Not the re-engineering exercise; the program review.
The Chairman: You mean last year's program review as opposed to the specific re-engineering.
Mr. Bélanger: Has there ever been any consideration of commercializing your operation?
Ms Edlund: I recall a study that was done a couple of years ago. I haven't been there all that long. They had looked at in fact privatizing it.
Mr. Bélanger: Who's ``they''?
Ms Edlund: ``They'' are the consultants; I can't recall the name of the consulting group that was working with Industry Canada at that time.
They looked at the potentiality of putting it through FBDB, I think, and if my memory serves me correctly, they also looked at the potentiality of maybe another chartered bank running it or whatever.
One of the problems you do run into - and in going through that study I noted this - is the fact that because you're gathering information from all of the various lenders, they're quite concerned about disclosure of where their lending is going and their whole small business portfolio. There may be a problem that way. That was one point that was brought up.
Also, nobody seemed to want it. There wasn't enough money in it in terms of running it. They couldn't run it as cheaply as the federal government could. That was the bottom line of it.
Mr. Bélanger: Was that study ever shared with parliamentarians?
Ms Edlund: I'm just going through it in my mind. I'd have to look at it. I guess we could provide or look back for that.
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Mr. Bélanger: Would you be prepared to send members of this committee a copy of it, since you've referred to it?
Mr. Sagar: We could take notice to check it.
The short answer is that this is, in effect, an insurance program. If you could find an insurance company that was willing to run it as inexpensively and with such a low margin that the lenders would participate, then you could certainly consider privatization. But the reality is the government has some significant advantages as an impartial participant in financial markets in running this program. The lenders are quite willing to bring us all the details of their small business lending, which, as you know in trying to get information from them, they consider very confidential.
Secondly, I believe the government has a policy of running this program to support small business. So even when we move to cost recovery, we are running it at a zero margin. I don't think many private sector operators would be willing to do it that way and absorb the risks at no cost to the borrowers or lenders. It is a very fine line.
The total administrative costs within this program are under $1 million, and the bulk of that, frankly -
Mr. Bélanger: Under how much?
Mr. Sagar: Under $1 million.
Mr. Bélanger: I thought they'd lost their heads when they said ``What's a million?'' So let's not diminish the size of $1 million.
Mr. Sagar: That was some years before my time. When you're in the office looking at the program details, $1 million is not very much, but when you get home it looks like an awful lot of money.
Mr. Bélanger: I have my answer on this one.
Mr. Sagar: It would be very difficult, I think, to privatize, but we are constantly looking for opportunities to improve efficiency.
Mr. Bélanger: Life is boring without challenges.
If the proposals go through as presented and are acted upon, what would be the maximum exposure generated by implementing those changes to the taxpayers of the country?
Mr. Sagar: This is a difficult sort of question because you are really dealing with several issues. We will generate more revenue coming into the program, thereby reducing exposure. We hope to reduce net exposure under loans to zero through this process while pushing out the money to small businesses, enabling them to have access to it. In fact, we should not be generating net new exposure; we should be reducing it to zero overall.
Mr. Bélanger: So the doubling of the limits won't increase exposure?
Mr. Sagar: The limits have already been doubled. This act deals with loans that will be made in part after April 1, but after January 1 when the law comes into effect.
Mr. Bélanger: So there's $300 million through the loan loss. What's the rest of the exposure?
Mr. Sagar: That's outstanding.
Mr. Bélanger: I understand that. What's the rest of the possible...is it 10% of it?
Mr. Sagar: Under this loan period, we have roughly $5 billion worth of loans that can be made between now and 1998.
The goal of this is to not have any exposure net on those loans. Obviously, if the full amount goes out and we have to realize on 90% of them and if there are no recoveries at all on those losses and so on...you can do the arithmetic. I guess it's $500 million, but it's almost inconceivable that every lender would lose up to the full amount.
The Chairman: There would be total failure.
Mr. Sagar: It would have to be a meltdown scenario.
Mr. Bélanger: But an accounting firm would ask you to indicate what your maximum exposure in a worst case scenario would be. So you're looking at $500 million on the next segment in 1998, plus how much in the previous?
Mr. Sagar: The total loan ceiling in this period is about $12 billion. If we had a total meltdown, take 10% of that and you're down to $1.2 billion, with absolutely no recoveries. At that point, I think we'd all be -
The Chairman: There wouldn't be a banking system.
Mr. Sagar: The Bennett buggies would be back in style.
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Mr. Bélanger: Am I right in believing that the Auditor General would insist on knowing what the maximum exposure is?
Mr. Sagar: It would be $1.2 billion.
Mr. Bélanger: I don't want a meltdown to happen, but the exposure in actuarial terms, in accounting terms, is what is possible, is it not?
Mr. Sagar: The exposure in arithmetical terms is $1.2 billion.
Mr. Bélanger: But isn't that what the Auditor General would look for?
Mr. Sagar: I can't speak for the Auditor General. I think we would like to have a likely exposure, rather than a cataclysmic exposure.
The Chairman: Do you want to clarify that?
Mr. Mitchell: Although arithmetic would say $1.2 billion, in normal banking accounting practises you would put an evaluation on the assets you had against that, and your exposure would be the difference between the two, so it's kind of a misnomer to call it $1.2 billion.
Mr. Bélanger: But on the 10% we don't have an asset.
Mr. Mitchell: Sure you do, because they've taken security on those loans. So in the example I gave, if that $100,000 loan went down the tubes, the government would be able to sell that truck and recover a portion of the loan, plus the guarantee.
Ms Edlund: The calculation of the contingent liability is being done as part of the annual report that will be tabled shortly, over the next period of months. It will be a published figure at that time. It shows the maximum exposure on that.
Mr. Bélanger: Thank you.
The Chairman: I'm going to count on my Reform colleagues to indicate any time they want to come into the conversation.
Mr. Schmidt: As far as I'm concerned, we can talk about all kinds of other ramifications, but really they deal with the past experience of the business loans act.
I think the Haines study indicates that as the size of the firm increases, the number of defaults on loans also increases. Consequently as the loan limit increases you attract a new group of people. The volume of loans increases and so does the risk factor, disproportionately to the loan increases. If those things are all true, then I think the exposure to the people of Canada and to the government is going to be considerably larger than it has been in the past.
I'd just like to ask you specifically now, what was the actual dollar value of loans paid under the loans act, on an annual basis? What did you actually have to end up paying to lenders?
Ms Thivierge: If I were to take the 1994-95 numbers, they were -
Mr. Sagar: While she's checking the numbers for you, I'd like to mention that the Haines study was done at a particular point in time, and one of the things you will notice happened at the same period in comparing experiences, which you did, between 1991 and 1993, is that there is also a shift in the sectoral composition of the failures and a significant increase in the number of construction companies that filed claims in that period. There's a feeling that is in part responsible also for the almost counter-intuitive sense that the larger companies had higher failure rates; that it was that particular part of the economic cycle that caused a downturn in construction activity.
So we're conscious of that, but we also have tried to build into the 5% to 5.5% calculation those risk factors.
Mr. Schmidt: I think the bottom line, Mr. Chairman, is that 5% to 5.5% number. I don't think that's an unreasonable number. It makes sense to me, too. But I think the reality is we will then likely incur a liability to the public treasury of somewhere around $300 million now and about $600 million in the future under the new loan limits. That's not an unreasonable assumption to make, I don't think.
Mr. Sagar: But against that liability - and that's at the extreme end of it - we are collecting fees and moneys that offset it.
Mr. Schmidt: Yes, that's the extreme end of it, I agree. And who knows what is going to happen.
Mr. Sagar: We're generating jobs that also generate tax revenues, so where it at all nets out in the end....
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Mr. Schmidt: It's very difficult to get really hard numbers on these, and I appreciate that.
Ms Thivierge: If you wish, I can provide you with two numbers that are solid. The 1993-94 numbers that were tabled in the main estimates say that our actual claims expenditure was $28.3 million. What we're looking at now for 1994-95 - and this number will be tabled, but we still have to confirm it - is $24 million. That's our forecast today. Obviously revenues offset that for that period.
Mr. Ianno (Trinity - Spadina): Is that a reduction from the $47 million in 1993-94?
Ms Thivierge: In 1993-94 we were forecasting $57 million. The actual claim paid was $28 million. Again, forecasts are forecasts; when you get down to the actual numbers, you have variations, but the 1993-94 actual claim paid was $28.3 million.
Mr. Ianno: What's the maximum ever paid in one year?
Ms Thivierge: Historically speaking?
Mr. Ianno: You don't have to go way back, just in the last few years.
Ms Thivierge: I think the highest year was actually 1991-92. Our published number for the annual report was $40 million.
Mr. Schmidt: Moving into another area, since this new limit was actually increased on April 1, has the demand for loans under the SBLA Act decreased, or has it remained pretty well the same?
Ms Thivierge: Since April 1995?
Mr. Schmidt: Yes, in the last six months.
Ms Thivierge: It's clearly decreased.
Mr. Schmidt: It has decreased?
Ms Thivierge: It has decreased, and that's what I was saying earlier to Mr. Mitchell. This is only a forecast, but we're forecasting -
Mr. Schmidt: I'm sorry; I didn't realize. I guess I was thinking about something else. My apologies.
Mr. Ianno: In terms of the bad loans or claims that were done over the past years, once the bank has written them off and the government has paid them whatever wasn't retrieved through all the different mechanisms, what is the method of monitoring if at some point the bank does retrieve some of the moneys that they had in effect written off and were able to reclaim later? How does the government get the money back? Who is monitoring it right to the end so that in effect the Government of Canada is not left holding the bag while others collect the benefits?
Ms Thivierge: Our administration actually does that. After a claim is paid, based on the information provided by the lender, the officer makes an assessment as to whether or not there is any possibility of recoveries.
Based on that, the file is then put into a BF category and we clearly indicate to the lender that the file is kept open from the administration's point of view and that we will pursue it. On a regular basis BF letters are sent out to the lenders stating that we're asking for a status of where the file is.
We have been collecting in recovering funds on a yearly basis and so far it seems to be working okay. The period 12 lending introduced a new notion, and that is that in theory a lender has three years to submit a claim for payment and in fact must do so once they have realized on all securities.
So in fact what we're trying to achieve here is that by the time the claims come in, they have realized on the securities and recoverings won't be as burdensome as they were before. But the Crown has a responsibility to recover the funds and we've been putting energy into that.
Mr. Ianno: So someone is auditing with the banks to determine that it's all coming along, even three, four or five years later?
Ms Thivierge: Yes. We have files that have been with us and that we've been monitoring for five, six or seven years. At one point, if the lender clearly indicates that there is no possibility of recovery, then the file is closed and proper justification has to be provided to that effect.
Mr. Ianno: Thank you.
Do you have something else to add?
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Ms Edlund: One of the things they are starting to do under the new rule - and again this is to cut down on some of the administration and leave the onus on the lenders, which is what we're working on with them - is they have three years to realize on the security. But in fact if they haven't realized on all of their personal guarantees, for example, the department will actually carry a hold-back on the books.
In other words, they decrease the amount of the claim paid and the onus is on the bank to prove to the administration that it couldn't in fact collect any more. In order to close the file off, signatures are required from two bank officials from different areas to ensure that there in fact was no basis on which to collect any further.
Mr. Ianno: So if you go back five years - and let's say the average is roughly $25 million per year in terms of claims - after the three-year period, what is the percentage that's left, generally, on that basis?
Ms Edlund: We would have no idea with the new ones because we haven't seen enough coming through.
Do you mean if we had to do a special study on previous claims?
Mr. Ianno: Yes, past the three-year point.
Ms Edlund: There's actually a fair amount with personal guarantees. That basically is a lot. Certain institutions will receive their security and realize much faster in terms of collateral. The personal guarantees take awhile to realize upon, so it could easily go past three years from the date the initial default occurs. But I have no percentage for you.
Mr. Ianno: Could we get that in dollar numbers?
Mr. Sagar: We'll have a look at the data to see if we actually have that.
Mr. Ianno: Thank you.
Mr. Mayfield (Cariboo - Chilcotin): You mentioned the published figure for claims paid in 1994-95 is $28.3 million and you estimate the 1995-96 figure at $24 million. Is there more than one reason for the decrease in that? Would you just go through that so I can clearly understand what your reason for the lower estimate is?
Ms Thivierge: The numbers are fairly constant. It's not a large decrease here. If there's one, it's probably associated to some extent with lending period 12 loans, the claims having come in and then slowly tapering off.
Of the $6 billion in loans outstanding, $5.5 billion is for period 12 lending. They're those loans made after April 1993 for which, as was explained previously, we're going to start seeing claims three to five years after that.
So the slight decrease is probably the tapering off of period 11 and period 12 in that ten-year period, and we haven't yet seen the claims come in for period 12. It's probably a period where things are slowing down quite a bit before the actual take-up of period 12 loans starts coming in. That would be my best estimate as to how one explains that slight decrease.
Mr. Mayfield: What's the percentage of that decrease? I didn't actually think it was so slight.
Ms Thivierge: It was about $4 million out of $28 million.
Mr. Mayfield: I compare $24 million to $28 million; that's what I'm doing.
Ms Thivierge: One can explain it on that basis - period 10 loans and period 12 loans are really at the tail-end, and because the new loans coming in period 12 are not to come in until next year or the year after that, the bill bell-curves it, with the peak in the ten-year repayment curve. That's how you could explain it.
Connie can probably speak to that as well.
We're monitoring when claims come in for small caisses and small institutions versus large banks. Again, looking at trends, maybe smaller firms realize faster on some of the securities. They're closer to the client because of that. Again, you may see some shift between the years.
Mr. Schmidt: The question I have relates back to about a year ago, when we got some information from witnesses who appeared before this committee on the banks and how the SBLA loans were actually administered. In that particular instance we discovered that most of the actual borrowers were businesses that were three years old or more. It wasn't really meeting the start-up requirements of businesses. I think some indication was given here today that the intent of this bill is really to give start-up money to businesses that are starting up and helping them in that regard.
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In practice, in the past, that hasn't been the case. It actually created a pattern of unfair competition. If you were an old established business, you would get an SBLA loan, but if you weren't then you wouldn't get it.
So the access to capital was really restricted or, in practice, loans really went to older businesses rather than new businesses. You wonder sometimes.
The proposed legislation in no way seems to suggest there really ought to be help for all kinds of businesses. Whether they are older or younger really isn't the issue, and yet in practice there's clearly a bias.
Mr. Sagar: It's hard to judge if there is in fact a bias. In the Haines - Riding study again -
Mr. Schmidt: Yes, it says something about that.
Mr. Sagar: - table 4 shows that 20.6% of SBLA borrowers were less than one year old compared to 4.2% of non-SBLA borrowers. The program goes significantly more toward start-ups than standard banking loans.
Of the SBLA borrowers, 14.5% were between one and three years old, so actually about 35% of the SBLA borrowers were under three years old. Only 12% of the standard bank borrowers are in that category.
Mr. Schmidt: That still shows a bias, though, in favour of the older businesses and -
Mr. Sagar: These are SBLA. The SBLA borrowers are actually quite a bit younger than other bank customers.
Mr. Schmidt: That's right, but within the SBLA program the majority is still older borrowers.
Mr. Sagar: That's right, but typically firms that are getting capital for expansion, growth and so on are going to be down that road a little bit further.
Mr. Schmidt: I agree. It's moving in the right direction.
Mr. Sagar: You have to compare it to the population of businesses as a whole, where 87.5% of the businesses doing business at the banks is over three years old. It's only 64% in the SBLA, so again the bias is toward younger firms in the SBLA program. But we would never want to limit the program only to those younger firms.
Mr. Schmidt: I wouldn't either; not at all.
Mr. Sagar: There is a more striking table on average ages. If I can find it I'll refer to it in a minute.
Mr. Schmidt: This might be interesting for you as well. There was a contradiction between the various banks that came to us. One of the banks clearly told us that 75% of the loans given under SBLA would have been given under non-SBLA terms. Another bank said that wasn't the case at all. So what's your observation?
Mr. Sagar: A number of figures are thrown around as to what the incrementality of the program is. Our sense is it was probably - and I think the Haines study has it on the order of - 60% incremental, 40% non-incremental for loans that would not have otherwise been made. Borrowers themselves have different perspectives. You won't meet very many small business people who will tell you they don't think they can get a loan because they deserve it, so personal judgments there are difficult to assess. That's all historical.
We think by having the higher fees on this program we will have a much more incremental program, because if you can get a loan anywhere else at a lower price you will go there. So the higher fees, which in part achieve cost recovery, should also limit increased incrementality of the government's contribution to this program. So we're hopeful that will happen.
The number I wanted to come back to is that SBLA customers at the banks had an average age of 5.72 years. The non-SBLA borrowers from banks had a relationship with that bank that ran over 13 years. So they really are different.
Mr. Schmidt: Are you comparing the same kinds of businesses?
Mr. Sagar: These are SBLA versus non-SBLA based on a sampling done, yes.
Mr. Schmidt: Does it include large businesses?
Mr. Sagar: No, these are the same types of -
Mr. Schmidt: So this would be the $2 million in sales maximum group?
Mr. Sagar: Yes, or it would be the $5 million group, depending on the timeframe.
Mr. Schmidt: Because the new one is $5 million and the old one is $2 million.
Mr. Sagar: The new one is $5 million.
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Ms Thivierge: It was done just last year or so.
Mr. Schmidt: I think we're talking about two studies here. There's Haines-Riding. There was a previous one. Now there's this one. The previous one, I think, came to that other conclusion, but I don't have my reference here.
It doesn't matter. The point is that it's moving in the right direction.
Mr. Sagar: That's it.
The Chairman: I'll intervene at this moment, not to end the discussion, but to point out that we just have quorum. I have a sense it is fleeing me, and I think I would like to get your motion.
Mr. Schmidt: Do you want it now?
The Chairman: Yes, please.
Mr. Schmidt: We're going to be hearing from the banks in the next little while.
The Chairman: Right.
Mr. Schmidt: My motion is to the effect that the Standing Committee on Industry seek the authority of the House to allow an outside service to tape for rebroadcast its upcoming meetings related to its quarterly review of small business financing by banks should the House of Commons committee broadcasting facilities not be available.
The Chairman: May I suggest a friendly amendment? It might read ``by banks and other lenders''?
Mr. Schmidt: Oh, yes.
The Chairman: We need to get the House's permission to seek this if we can't get hold of the television room. We are also working with Mr. Rocheleau to try to get him on-side. When the House leaders come to take a look at it, it will take a motion of the House. Any debate or question about this?
Motion agreed to
The Chairman: It was simply just to allow us to facilitate television.
I understand that some people have to go, but I know Mr. Mitchell has one or two questions. We can carry on like the church, which is as long as two or three are gathered together.
Mr. Mitchell: Two quick points, Mr. Chairman.
Is there anything in the legislation that specifically mandates that the minister must operate the program of cost recovery?
Ms Edlund: Not to my knowledge.
Mr. Sagar: The quick answer has to be no. It never has been so, and the amendments don't carry that.
Mr. Mitchell: Although it's the purpose of the amendments to allow the minister to do that, the minister is not mandated under the legislation to move toward cost recovery.
Mr. Sagar: Not in the legislation.
Mr. Schmidt: That's interesting.
Mr. Mitchell: Second, when you made the change - I know you'll have to get back to me on this - on April 1, 1995, it applied a 1.25% annual fee on lenders' outstanding loan balances. Are outstanding loan balances calculated monthly?
Ms Edlund: It takes the average outstanding loan balance for the 12 months, so it's not payable until basically June 1 for the year ending March 31, 1996.
Mr. Mitchell: The average for the year?
Ms Edlund: Yes, they take each 12 months and average it out.
Mr. Mitchell: Could you provide to me the change in the average interest rate being charged on your new loans coming in since May, as compared to the previous year? I want to see how much the banks have passed on to the borrowers and how much of that fee they're absorbing, if any.
Ms Edlund: We looked at that preliminarily, too, because we wanted to find out what it was as well.
You did that, Marie-Josée.
Ms Thivierge: I phoned a few banks. In fact, as we speak, most of them are at prime or the mortgage rate plus 3%. This means means that they are in fact passing on that 1.25% to the borrower.
Mr. Mitchell: You indicated to me that you would provide me with statistics comparing May 1995 to May 1994 and June 1995 to June 1995.
In terms of the number of applications, I wonder if you could also provide those figures in terms of the average interest rate being charged with the new applications for 1995, compared to the applications of 1994. Can you do that?
Mr. Sagar: I am not sure we have that information, but if we do, we'll pass it on.
Ms Thivierge: I'll look into it.
Ms Edlund: We don't have that. We can give you an idea, though, in looking at them in terms of what we're seeing, but we wouldn't be able to get that specific in the arithmetic, if that's okay.
In terms of the average loan and how much they take, basically it's decreased about a half from what it was previously. We can give you, though, the actual statistics. Those are published on a quarterly basis, if that's sufficient for you.
Mr. Mitchell: But you don't compile that specifically for interest rates.
Ms Edlund: We don't have that at all.
Mr. Mitchell: You have the information; you just don't compile it.
Ms Edlund: That's right.
Mr. Mitchell: They have to advise you how much to charge them.
Ms Edlund: That's correct.
Mr. Valeri (Lincoln): But you can do that by survey.
Ms Edlund: We can take a look at the registration forms and get a sample of it, if that's all right.
Mr. Mitchell: Yes, okay.
Ms Edlund: We're interested in the same question.
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The Chairman: How many federal government employees does it require to administer this program?
Mr. Sagar: Nineteen.
The Chairman: That's interesting. That's not a lot of people, is it?
Mr. Schmidt: It's not much money, either.
The Chairman: Did the Auditor General have anything to say recently about the program? Were there any problems, criticisms or suggestions in the latest report?
Ms Edlund: Not to my knowledge.
Mr. Schmidt: No, he didn't check into it.
The Chairman: When was the last time there was a serious take-out on you guys?
Ms Edlund: There hasn't been, actually, because prior to April 1, 1993, it was such a small program, where average loans given out were $500 million or $600 million a year. It was no big splash.
It's only since April 1, 1993, that all of a sudden we have this unprecedented take-up in volume. I can imagine they may have something in the future. We're hoping we've addressed those first.
The Chairman: You only really cover fixed assets or movable equipment and those kinds of things. So this means there are whole categories of companies - software companies or intellectual property companies - where for at least that part of their activity you're just not involved. Is that right?
Mr. Sagar: We don't cover what is classified as working capital, and for must of those companies, their capital is often of that nature. It just covers their operations and that's it.
The Chairman: I don't suppose there's any serious look at changing that.
Mr. Sagar: We have looked at it, but the reality is it would be an enormously expensive undertaking. We'd be very hard-pressed to know whether in fact we weren't just substituting our loan guarantees for other lines of credit normally established for working capital.
It is a challenge, but if we have to target this program, it's probably best at the fixed -
Mr. Schmidt: So leasing of equipment would come under that category?
Mr. Sagar: Leasing is not now covered by the program. We are looking at the implications of extending the program to cover leasing as a source of fixed asset financing.
Mr. Schmidt: Okay, because that's a major contention.
It's very close to your question. That's where I thought you were going.
The Chairman: Well, I'm glad you took it there.
Mr. Sagar: I should just say that we do pay for the purchase of software-related equipment, but not for the development necessarily.
The Chairman: On the theory that you could take it back.
Mr. Sagar: Yes. That's part of the risk calculation you do on any loan.
Mr. Valeri: I have a quick clarification on the last remark you made. You're saying the SBLA is not part of the fixed asset financing method?
Mr. Sagar: It is.
Mr. Valeri: It is? Okay. I thought I understood you to say it was not.
Mr. Sagar: It's not currently covering leasing. We don't insure leases. We're looking at that issue right now.
Mr. Schmidt: We're going more and more into that area.
Mr. Sagar: It's another form of fixed asset financing and it should be looked at.
The Chairman: Thank you very much for coming before us. It's been very helpful and I think it's clarified the points we'll want to raise with the minister.
Mr. Mitchell: When is he scheduled to appear before us?
The Chairman: We'll be getting information from you in the first place, and then I suspect it will be sometime after October 30.
Mr. Bélanger: The bill is going to receive second reading.
The Chairman: Right. After the bill has received second reading, we'll be having the usual process, with the minister and clause-by-clause.
Mr. Bélanger: It would be useful to have that information beforehand.
The Chairman: Yes.
Thanks, everybody. We're adjourned.