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EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, May 30, 1996

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[English]

The Chairman: Order, please. We resume consideration of our order of reference dated March 7, 1996 and relating to the main estimates for the fiscal year ending March 31, 1997. Is there unanimous consent that I call votes 125 and 130 under Western Economic Diversification?

Some hon. members: Agreed.

The Chairman: Minister Gerrard, would you like to introduce the witnesses with you and make any presentation you have.

Hon. Jon Gerrard (Secretary of State (Western Economic Diversification)): Mr. Chairman, hon. members, it gives me pleasure to appear before the committee for the first time in my capacity as Secretary of State for Western Economic Diversification. With me are my deputy minister, John McLure, and my senior assistant deputy minister, Mrs. Maryantonett Flumian.

Let me spend a very few moments talking about the new Western Diversification.

[Translation]

Western Diversification's mandate is to support economic diversification, coordinate federal economic development and adjustment activities in the West and help represent the Western perspective in national decision-making.

To fulfill its mandate Western Diversification is working with small and medium-sized businesses in Western Canada to help them gain better access to knowledge, capital and new markets.

Western Diversification is building partnerships with other levels of government and the private sector so that by working together we can better serve the needs of Western Canada's small and medium businesses.

[English]

Two and a half years ago, Western Diversification had four points of service in western Canada. Today we have an integrated service delivery network of ninety points of service across the west, through partnerships with Community Futures Development Corporations, Canada Business Service Centres, the Women's Enterprise Initiative, and Western Diversification offices. We're participating with major financial institutions to create a series of investment loan funds to increase access to capital for small businesses in high-growth areas. We're increasing access to capital for the small business community in rural and remote areas of western Canada.

This is a very new and re-engineered Western Diversification, an organization that has moved to a service-oriented, client-based approach, working with partners to promote economic growth and jobs in western Canada.

[Translation]

At Western Diversification, we realize that in order to increase Western Canada's wealth generating capacity, we must continue to meet every challenge and to move beyond being a region which is an efficient, large-volume producer and user of primary goods.

[English]

We need to take a lead in developing and applying new technologies. We need to be innovative, changing from a primary resource base to a value-added and diversified base.

One of the keys to achieving these goals is strategic information. The WD network is helping western Canadian entrepreneurs in both rural and urban areas to access the information and capital needed.

Last year the WD network responded to over 350,000 requests for information and service. This now includes electronic delivery on World Wide Web sites. For example, the Vancouver Canada Business Service Centre home page is now receiving between 40,000 and 50,000 accesses per month.

In another example, the Community Futures Development Corporations, one of the partners, responded to 81,000 requests for information last year, made more than $37 million in repayable loans to over 1,600 clients, and helped to create some 7,500 jobs. Providing better access to information is a key and important part of WD's mandate.

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WD has also established seven investment loan funds in partnership with major financial institutions. Through the loan funds WD is encouraging lending institutions to offer higher-risk financing at minimal cost to taxpayers. We have leveraged $280 million in new capital from lending institutions, committing only $36 million ourselves in loan loss reserves. That's a leverage ratio of 8:1. The loan decisions are made by banks at arm's length from WD. We are helping businesses to prepare business plans and to be competitive and effective. We are working with the private sector and that is the new role.

I should make mention of the Canadian system of delivering regional development and the report of the OECD entitled Regional Problems and Policies in Canada. Let me quote from that report:

[Translation]

The small business community in Western Canada is innovative and dynamic. It is the engine of job creation and economic growth in both urban and rural areas.

Western Diversification is proving itself to be equally innovative and dynamic, constantly pioneering new initiatives to better serve the needs of Western Canadian businesses.

[English]

The OECD highlighted the importance of a flexible regional development approach through a variety of programs and initiatives. WD is meeting the challenges.

Let me thank you, Mr. Chairman. I would be pleased to answer any questions.

The Chairman: Before you start, perhaps you or your deputy could introduce the other officials here today.

Mr. John McLure (Deputy Minister, Department of Western Economic Diversification): From the departmental staff we have Mr. Guy Brunet, the director general of the executive secretariat, and Madame Lysanne Gauvin, the director general of the finance portfolio.

Mr. Gerrard: From the minister's staff we have Sean Kirby, Scott Turbett, Barb Doan, and Jim Brennan.

The Chairman: It's a bit of a record: you're the smallest agency and you've brought the biggest gang. We'll see what contribution they make.

Nic Leblanc, do you want to start the questions?

[Translation]

Mr. Leblanc (Longueuil): Welcome to the Standing Committee on Industry, Mr. Secretary of State.

We well remember that the Western Economic Diversification Fund was set up because of the serious problems with financial institutions in 1987-88 when we observed that the western economy was particularly supported by agriculture and mining.

The western economy had to be diversified. That's why the government I was part of at the time set up that western economic development organization.

You said a few brief words about the success of this new organization. I'd like you to give us more details on the evolution and the development of that western economic development corporation.

For example, shouldn't that responsibility belong to the provinces and the chambers of commerce rather than the federal government?

Quebec has been evolving more in that direction.

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Mr. Gerrard: Historically speaking, the most important industries in Western Canada have been forestry, agriculture and mining. Today, however, we have more industries based on knowledge and information, new age industries.

[English]

In what we're doing at the moment, we have moved dramatically from what we used to do, which was primarily functioning as repayable contributions to get individual small businesses going. We have moved right away from that and have decided that in the modern era, we can best use our funds and our talents to provide information and to provide it on a network. Some examples are the Canada Business Service Centres, which serve as one-stop shops for both federal and provincial programming information; moving to electronic delivery; moving to an on-the-ground network that has built the Community Futures Development Corporations in communities of 40,000 or less. This is very important for attempting to do what we can to reverse the historic situation of relative depopulation in many areas of western Canada.

As well, in the women's enterprise area we recently moved in a way that has got a rather dramatic response, to realize the importance of businesses run by women and to have unique services for them. This transformation has occurred in the last two and a half years. To this point it is having quite considerable success.

[Translation]

Mr. Leblanc: You're also the Secretary of State for Science, Research and Development. What was your role in terminating funding for the Varennes tokamak?

Mr. Gerrard: The decision concerning the Varennes tokamak is not the responsibility of Western Economic Diversification.

Mr. Leblanc: I know.

Mr. Gerrard: The decision was made by the Department of Natural Resources and the Minister is appearing today before the Standing Committee on National Resources where she can explain her decision.

Mr. Leblanc: I understand you very well. You mentioned earlier that you wanted to develop new technologies. It seems rather unfair to me that the Secretary of State for Science, Research and Development and Western Economic Diversification, who comes from Western Canada, is increasing grants for developing research in pure science at the TRIUMF Centre in Vancouver and cutting funding for the Quebec tokamak which, although a long-term scientific project, also has short-term economic impacts.

It's a bit hard to take. I didn't intend making comparisons or bringing up competition between the West and the East. As a Quebecker, I have problems understanding why subsidies are being withdrawn from such a centre which is presently in an expansionary phase and where 11 million dollars are being invested to upgrade it as we speak. Maybe my question is not quite relevant, but I'm putting it just the same.

[English]

Mr. Gerrard: Let me give you a little background on the decision in relationship to TRIUMF. When we were elected, the hope and expectation of many people in British Columbia was that we would proceed with a KAON factory. The anticipated cost of this was in the order of $1 billion. We looked at the situation and we realized there was no way we could afford that from a fiscal point of view. Also, the industrial and international partners were not ready to come to the table with that sort of an effort.

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So after a lot of work, consultation and effort to re-engineer what had been the KAON factory program, we cut it back very considerably. It is true that with some support from Western Diversification we ended up with a much smaller program, but one that in fact is not only a pan-Canadian national one for particle physics in Canada but also provides an on-ramp for Canadian physicists in terms of their participation in CERN, the largest particle physics institute in the world.

So we converted what was a huge project to a much smaller one. We made sure it had a national and international dimension and that the partners were there, and in the end we were able to proceed with funding TRIUMF.

The Chairman: Mr. Mayfield.

Mr. Mayfield (Cariboo - Chilcotin): Thank you very much, Mr. Gerrard, for coming to the committee today.

It occurs to me, sir, that the amount of money being loaned is being backed up by substantial loan loss reserve funds. I believe for the $280 million you mentioned there's a $36 million reserve. In the recent announcement of $25 million to the tourist industry, $5 million of that is for loan losses, I believe. That last amount stacks up to about 20%, in my mind.

So I want to ask about Western Diversification. In supporting these six industry sectors, how much of the $280 million that's being let out do you expect to get back? Do you have any idea of that? Have you given that any thought?

Second, these loan programs are designed for projects of greater than perceived risk than the regular lending institutions are prepared to accept, and therefore they are in addition to and not a replacement of loans under the regular financing systems. Doesn't this mean that the $280 million is really designed to subsidize bank losses incurred under their own small business portfolios?

Finally, relating to the Senate banking committee, Mr. Kirby is quoted as saying:

These are the questions I put before you.

Mr. Gerrard: In looking at how lending decisions are made, when you move from the areas that historically banks have been very involved with, in mortgages, and understand very well, into areas that are much higher-risk, which are more knowledge-intensive, where you need skills related to understanding biotechnology as well as managing loans, the experience is that banks have been reluctant to move into higher-risk areas, and that by partnering with banks, using the expertise within Western Diversification to help ensure that the business enterprise, when it starts, has the soundest business plan and foundation, this kind of partnership enables the banks to take the higher risk but does so because of the knowledge input we're providing with an overall risk, mitigated by the fact that we are putting in the experience and the knowledge as well.

This is important not only for banks like the Royal Bank but also for the federal Business Development Bank in terms of getting into higher-risk areas and making sure these areas of the economy grow. Because these areas are the areas that in fact often have the best capability for more employment and higher growth.

Mr. Mayfield: But, sir, the problem is, these programs have been going on for some time now, and the results are lacking. It seems to me we need to adopt a different philosophy.

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I'd like to ask you, would it not be in the best interests of the business community, and even of those small businesses trying to get off the ground, to have a greater advantage in lowering government costs that they must support, to provide a better economic climate for these to flourish in? The problem is that the money is spent but the long-term results simply are not there. Would you not agree with that?

Mr. Gerrard: The program in which we are providing the loan loss reserves to enable banks and other financial institutions participating in this higher-risk lending only began approximately a year ago. So the long-term returns are not yet in. What is clear is that there is significant demand, and that we have a fair number of loans already out and many more in the process under this. These are loans that would not have been made, and businesses that would not have expanded or grown or been started, without this kind of help.

I think this is analogous to what we have done in a sense in rural areas with the Community Futures Development Corporation. What is now interesting is that after a period of something like ten years, this last year Community Futures and local-based entrepreneurship enhancement resulted in something like 7,500 jobs across western Canada. In fact, that is just under 10% of all the new jobs created last year in western Canada. I think that's not bad a record.

Mr. Mayfield: Mr. Chairman, may Mr. Hill take over the remainder of my time?

The Chairman: Yes, of course.

Mr. Hill (Prince George - Peace River): How much time is left, Mr. Chairman?

The Chairman: About four minutes.

Mr. Hill: Thank you.

Mr. Minister, it's my understanding that Western Economic Diversification is also working in concert with the infrastructure program, administering some of those funds. Is that true?

Mr. Gerrard: Western Diversification administers the infrastructure program for western Canada. That's correct.

Mr. Hill: Is any of that money left?

Mr. Gerrard: At this point, something over 95% of the funds have been allocated.

Mr. Hill: So how much is left? Do you know the dollar figure?

Mr. Gerrard: We'll get you that information in a minute or two.

Mr. Hill: I've heard that one of the projects applying for some of that fund is to move the CN piggyback terminal in Winnipeg from the Fort Rouge yard to Transcona. Do you have any information on that?

Mr. Gerrard: First of all, the number of dollars not allocated at this point equals approximately $8 million. I can't comment particularly on that particular infrastructure project.

Mr. Hill: So at this point in time you don't know what projects are pending to utilize that$8 million?

Mr. Gerrard: There is a procedure for the allocation of the infrastructure. That procedure goes through a number of steps that involve particularly local community input. So there needs to be local municipal input. In this case it is a Winnipeg project. That goes up a level before it is approved. So I may not see it until a lot of the groundwork and the recommendations have come from the local government level and from the province.

Mr. Hill: I can pick up on this later, thanks.

The Chairman: Tony, do you have a question?

Mr. Ianno (Trinity - Spadina): Yes. Thank you, Mr. Murray, for allowing me to speak first.

I'm impressed by what I read on page two of your document, that 7,500 jobs have been created with I guess a total of $281 million. I believe that works out to roughly $5,000 per job.

Mr. Gerrard: In the last fiscal year, 7,500 jobs, based on loan activity of $37 million -

Mr. Ianno: From the federal government.

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Mr. Gerrard: This is from the Community Futures Development Corporations.

Mr. Ianno: Right.

Mr. Gerrard: We provided to them an initial start-up loan portfolio. That doesn't mean all the $37 million necessarily came from us.

Mr. Ianno: What was the total amount of money used to create 7,500 jobs? I'm not talking just government; I'm talking total package. Is that $300 million, roughly?

Mr. Gerrard: We'll get that for you in a moment.

Mr. Ianno: Loan loss ratio on these loans: do you have that? The banks generally are at below 1% in their loan loss ratio. On $300 million, or $281 million, I would assume that's approximately $3 million a year. Do you have a figure of more than that as being used?

Mr. Gerrard: Because that program is relatively new - only over the last year - it's too early to give you numbers on that particular program.

Mr. Ianno: The only one I'm curious about is the overall figure. I'm very impressed that for a small amount of money 7,500 jobs would be created. How does that compare with the industry standard? Would you have that information, or could you get it for us?

Mr. Gerrard: The funds through the Community Futures Development Corporations were $37 million. These leveraged funds from banks and other lending sources of about $67 million, to provide a total of $104 million. If you divide the $37 million by 7,500, you get a dollar-per-job figure from a government investment point of view. If you divide the total by the 7,500, you get it from a total investment point of view.

Mr. Ianno: In other words, I would have to divide 7,500 into $104 million.

Mr. Gerrard: That's correct.

Mr. Ianno: In other words it would be approximately... Is it $12,000 or $1,200 per job?

Mr. Gerrard: It would be about $12,000, I would think.

Mr. McLure: It's about $12,000.

Mr. Ianno: Can you provide us at some point in the future, if you don't have it available, how that compares with the industry's standard out in the private sector? I'm just curious how much money is required per job from a loan perspective.

Mr. Gerrard: Okay. We don't have that information, but we will get it for you.

Mr. Ianno: Thank you very much.

The Chairman: Ian Murray.

Mr. Murray (Lanark - Carleton): Thank you, Mr. Chairman.

Dr. Gerrard, thank you for joining us today.

I think I should state my biases up front, as an MP from eastern Ontario. I've always been very jealous of the rest of the country where they have these regional development programs. In fact, it has caused me some problems, because just across the Ottawa River from my riding is FORD-Q and it's not in my riding. I'm philosophically opposed to these programs, but I have problems with them from the point of view of economics as well.

I want to ask you this first of all. If someone in Vancouver or Calgary can qualify for help from WD, is everyone out west included in this? It's for all of western Canada. It's not for pockets of...

Mr. Gerrard: This program is for all of western Canada: British Columbia, Alberta, Saskatchewan, and Manitoba. It includes urban as well as rural. Certain services we provide, for instance the Canada Business Service Centres, are being provided by Industry Canada, I believe it is, for eastern Ontario, so certain of the things we are doing, particularly information provision, are available in eastern Ontario.

Mr. Murray: Right. I guess I'm looking at this one from the point of view of businesses being able to compete with firms in other parts of the country with additional help from government.

I don't want to belabour that too much. I just came out of a meeting with some people from Atlantic Canada who were complaining about the effect of ACOA on their businesses, so maybe it's a bad morning to be talking about this.

I want to ask you about something I think government can be involved in. I was interested in your figures on information requests, 350,000 requests for information and service. It's a staggering number. It's more than 1,000 every working day. I'm not sure what that includes, but I'm just suggesting that a role for government is to help educate budding entrepreneurs or current business people on how to be successful in business.

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I was wondering if you could break that down a bit for me. What do those requests amount to and what kind of role is WD playing on the education side?

Mr. Gerrard: Let me talk to the 81,000 of those requests that came through the Community Futures Development Corporations. These are corporations that cover areas of rural western Canada. There are 75 of them. They include individuals who are skilled at helping in the preparation of business plans and in the start-up and training of entrepreneurs. They bring together volunteer boards on which there are individuals with varied skills in the community to provide advice and guidance to help make wise investment decisions.

When you divide the 81,000 by the 75 Community Futures, you're talking about 1,000 requests per Community Future.

When you break it down, it is handleable because we have in fact a broad-based, on-the-ground organization. It is also handleable because, as we move to WEB page services and things like that, clients can help themselves. The Canada Business Service Centre in British Columbia is a virtual A to Z of how to start up and run and manage a small business, so entrepreneurs who want to get that information in the evening, or on their own time and from their own location, can go there and get a lot of useful information. And that can be backed up, where necessary, by person-to-person contact.

Mr. Murray: On the question of supporting entrepreneurs when loan decisions are made by the banks, on page 2 of your remarks you talk about helping SMEs in high-growth sectors. Then at the top of page 3 it says ``The loan decisions are made by the banks - at arms length from WD''. Is there any time when WD applies some of its own expertise to this, or is it totally a question of just backing up the loans and letting the banks do all of the investigative work?

Mr. Gerrard: To manage the overall operation, we have put in place for each of these loan funds a board of knowledgeable people, and through Western Diversification we give assistance to firms with their business plans.

We're working with people in biotechnology areas who often have a science background but not much in the way of a business background. So instead of WD working in the area of assessing the proposal, what we are doing in a very proactive way is helping the business people have the best possible proposals so that when they go to the bank, their chances of getting the loan will be optimized.

Mr. Murray: Thanks, Mr. Chairman.

The Chairman: Thank you.

Mr. Leblanc.

[Translation]

Mr. Leblanc: I have a policy question for you. Have you ever thought of redistributing a part of the GST to the regions to empower people in the field to give them incentives to increase their productivity and increase the value added to the abundant natural resources you have available, or even to promote tourism? Wouldn't it be more profitable to give more responsibilities to the people at those levels by giving them part of the GST so that they can pull themselves up by their bootstraps, instead of providing money from Ottawa that people always have to come and beg for? It's probably a policy question, but have you ever thought about it? It seems to me it would be a means of empowering people at the local and regional level.

[English]

Mr. Gerrard: In the way Western Diversification is now working, we are increasingly putting the responsibility on the people in the local areas. These Community Futures Development Corporations are an excellent example, because they rely on the expertise primarily of local volunteers as well as the people who operate the centres. We are finding that they're working with a great deal of autonomy and flexibility.

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This kind of flexibility, in which we are providing support in a changing world to local communities to take responsibility, seems to be working very well.

It continues to be important for us to be involved in providing a network and support, because some of the things that are happening in terms of information on export markets and electronic information can be provided much more easily on a larger scale.

There is also an important role for Western Diversification in strategically building bridges across provincial barriers in the west so we maximize the capabilities and the synergisms, the knowledge that is there, in order to build the growth of the economy and get more jobs.

[Translation]

Mr. Leblanc: Even though I may be less familiar with the western economy, I know that in Quebec what often happens is that the federal or provincial government gives a hand to the regions to develop tourism, amongst others. We know that it costs a lot to operate the whole system where applicants are forever petitioning higher levels. If we directly remitted to the different regions part of the GST or of the provincial sales tax, we could motivate the people there to increase business. They wouldn't have to petition senior levels anymore, prepare all kinds of files, go cap-in-hand to the minister every day or every month for funds. They could really take charge of themselves this way. The more business is generated in their region, the more taxes would be collected and the portion of taxes directly sent back to them would be higher.

A friendly bit of advice: wouldn't that be a good way for you to sell the GST that you're having problems in getting Western Canada to accept?

[English]

Mr. Gerrard: I don't want to get too far into the potential difficulties in having a GST in which you get very different amounts back in different regions, but let me make one point. We have worked in a number of instances to see how we can bring together the federal, provincial and municipal partners to get the most effective local economic development and entrepreneurship. So we have a good partnership in an activity business link in Edmonton, between the Edmonton Economic Development Association, the Government of Alberta and the Government of Canada.

In Tawatinaw, which is a rural region, we have a strong, integrated partnership among the Community Futures at the federal level, other departments such as Agriculture's PFRA, and several provincial departments to coordinate the regional development. We are experimenting with how we can do this best to have institutions that really provide much more of a single window for an entrepreneur, who is less interested in which level of government it is than in getting on with starting and growing a business.

The Chairman: Mr. Mayfield.

Mr. Mayfield: Thank you very much.

I'd like to come back to a point I raised earlier, and that is the cost of the loan loss funds. I mentioned earlier that for $20 million being put up by the Business Development Bank, $5 million is being put up by Western Diversification.

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It strikes me that the Business Development Bank previously only gave loans after the customer brought a letter of refusal from a bank. Since the reorganization, that's no longer the case. There is still a premium paid by the customer because of the higher risk, and yet I see that Western Diversification is supplementing these funds, subsidizing them. Are you not open to the charge of subsidizing other government agencies with this? Why is that necessary?

You have said that this is not in any competition with the banks, but I cannot see how it is not competing with the banks by giving subsidies that are not available to the private institutions. This is all done with taxpayers' money. How do you explain that, sir?

Mr. Gerrard: In the loan investment fund you're talking about, which is in the area of tourism, there are many areas that the banks handle without problems. One has to realize that there are a number of industries in tourism that are faced with a short season, unpredictability, and difficulties that relate uniquely to the tourism industry, which make certain activities of a particular high-risk nature. These investments have not been occurring because of the risk factors involved.

In effect, what we have done is develop a partnership between Western Diversification and, in this case, the Business Development Bank of Canada for individual loans made under that portfolio. We share the risk. We acknowledge the expertise of the Business Development Bank in handling the loan portfolio and in managing the lending and making sure everything is optimized before the loan is made. From a Western Diversification point of view, we have particular knowledge input related to the tourism industry and to the development of certain aspects of the business plan, so we can bring together this joint expertise.

Even when we have done this, you must realize that the loans that are made under these investment funds are made at a premium; that is, they are at prime plus 3% or 4%. So the regular entrepreneur who has a regular risk proposal is still going to go first to the bank because what we are providing is a higher risk and an alternate approach.

It is our experience that in order to facilitate economic development in western Canada, part of the role of government is to fill the gaps that are not being filled adequately by financial institutions operating as they normally do. This is our endeavour to make sure that this important gap is filled and we really can get on with the task of creating jobs and developing and improving economic growth, and tourism in this case, in western Canada.

Mr. Mayfield: So in fact Western Diversification is subsidizing other government agencies in doing this.

Mr. Gerrard: We're working in partnership. We are sharing the risk. The funds we provide are provided as a repayable contribution and we fully expect to get a very high percentage of that back after a number of years so that we can then reinvest it in other areas.

Mr. Mayfield: If you're expecting that high percentage back, why is there a 20% debt loss fund provided? That's 1 in 5.

Mr. Gerrard: In overall funds the loan loss reserve has averaged 1 in 8, or about 12%. In the particular instance of tourism it is higher because of the nature of the risk profile. What we are doing in sharing the risk is enabling higher-risk lending than would have occurred. Let me give you an example.

In a traditional loan portfolio that a bank might have, you would have a bank manager managing 200 loans or more as part of the portfolio. The experience has been that when you get into the knowledge-intensive, really high-risk areas, bank managers are having to manage a portfolio of 10 or 20 loans. This is a tremendous increase in terms of human involvement, in making these loans and making sure very close tabs are kept on what's happening. This provides a perspective on why it becomes important to have a partnership that is going to be effective in bringing the best human support we can to the entrepreneurs who are risking their capital as well as ours.

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The Chairman: Next we have Mr. Shepherd.

Mr. Shepherd (Durham): Thank you very much, Mr. Chairman.

I certainly encourage and appreciate your desire to create small and medium-sized companies in the west, and I understand the problems of capitalizing them. But it seems to me we're using old economy methodologies to finance a new economy. We're using lending. We are using debt capital. As we discuss this, it seems to me from a government's perspective all we can do is lose. We are providing loan capital. We don't make a substantive return on this because it is based on interest rates and so forth. Yet we're financing high-risk ventures. So there isn't really a return on the money. In fact, as history has shown there is a loss to the government through write-offs.

You talk about partnerships. Why aren't we doing more equity-type financing for these companies, looking for a percentage return to the government in the area of possible royalties or something more related to the success of these companies than we're doing now?

Mr. Gerrard: In the very early stages of small enterprizes, it is in the nature of those enterprizes that they traditionally will start off with a loan and, as they grow, move into equity-type funds.

I take you back to the Community Futures Development Corporations and the loans that in this case are made by the corporations based on local individual knowledge and expertise at the community level. The returns here, when you're looking at 7,500 jobs in the last year across western Canada, are quite substantial. They are substantial in terms of jobs and in starting companies across western Canada, particularly in rural areas where the expertise and the knowledge has traditionally been less as far as getting into certain new ventures is concerned.

This is an important and fundamental activity. We have dealt with the situation in many parts of rural western Canada where young people have left because they haven't seen any opportunities. This has been going on for 60 years. Quite frankly, it was urgent to try to reverse this situation, to recognize there is very considerable local potential and to nourish this and build job opportunities locally for young people as well as for old people.

Mr. Shepherd: I guess what I'm saying is that if you looked at a conventional loan, why don't we do this? I wonder why we don't say, in view of the fact that we're taking a higher risk, we'll loan you x number of dollars at conventional rates. But we also want 20% of the shares of the company. You can get a return. If these are successful companies, we'll get a return on this 20%. We'll then turn around and expand the fund and use it for more emerging companies.

Mr. Gerrard: I take your comments to heart. I think there is much less experience across government in loaning and using equity instruments than there is in the more traditional areas. But at this point we're actually working on developing an equity instrument with one of the major banks.

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I think it is also fair to point out that in the way Western Diversification used to operate, and in certain of the strategic initiatives we are pursuing and will pursue, royalties and returns of this kind certainly have been part of the repayment stream.

Technology Partnerships Canada, which is a national program, certainly uses that. Western Diversification works back and forth to make sure we don't duplicate something being done nationally. At the same time, when working in areas like equities and royalties, we make sure we use the expertise generated across government to develop flexible and needed programs in the west.

Mr. Shepherd: To look at another aspect, it seems to me in the past some of these companies would appear, certainly in press reports I've read, to not have needed the financing in the first place. I know we're talking about a different kind of animal than we were just talking about. The examples of some well-heeled companies brings us to a little bit of what Mr. Mayfield was getting at. But I'm more concerned we're subsidizing the banks.

I heard a comment the other day in the industry committee from one of our banks that Farm Credit Corporation is chasing them out of town. I'm very concerned that the banks are being subsidized. In other words, the funds would have been available to these companies in any case. But because the banks want us to secure them, they've relied on our guarantees as an additional source of collateral.

What do we do to ensure this isn't happening? What do we do to ensure we're only loaning to those people who are emerging and who clearly couldn't get normal institutionalized financing?

Mr. Gerrard: Let me -

The Chairman: Please make it just a very quick response. Mr. Shepherd took awhile.

Mr. Gerrard: In the Community Futures program I talked about the $37 million and the $67 million. A large part of the $67 million comes from banks. So in fact when we start lending we enhance the total lending capability. There are a number of instances - Eriksdale in Manitoba is an example - where the local Community Futures has a partnership with the local credit union through which they can both benefit.

Generally, I think the experience has been that by enhancing the economy of a local community you enhance, at the same time, the possibilities for the banks and for employment. I think these are actually very positive.

[Translation]

Mr. Leblanc: Who decided how the funds would be allocated: $30 million for biotechnology, $100 million for agriculture and $25 million for knowledge-based industries? Is it the federal government or the local or regional people themselves?

Mr. Gerrard: A partnership between Western Economic Diversification Canada and the financial institution is set up for each investment program. It's a joint decision.

[English]

In fact, we negotiated an arrangement with each financial institution. That financial institution and that loan arrangement were based on what was needed in terms of the profile of the industry. The arrangement was also based on our estimates at the initial stages of what would be the uptake from both sides.

[Translation]

Mr. Leblanc: Were the amounts and percentages shown for agriculture, mining, tourism and the other areas established based on demand or were they determined in advance?

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[English]

Mr. Gerrard: We did some consultations with sector leaders within the industry in order to have an estimate of the demand.

We have limited resources. The banks have limited resources. We also made a decision in terms of what we could invest in each individual program, so the final results reflect that.

As we experience the programs, it is indeed possible that those numbers may have to be renegotiated, but let us proceed and see the lending patterns. It is still fairly early.

The Chairman: We have three more questioners: Mr. Hill, Ms Brown, and Mr. Bodnar.

Go ahead.

Mr. Hill: Thank you, Mr. Chairman.

I'd like to follow up on this untapped remainder of the money for the infrastructure program in western Canada, that $8 million. I know it was parcelled out by province. Do you have a breakdown by province of much is available for each of the four western provinces out of that $8 million?

Mr. Gerrard: I will see if I can get that for you in just a minute.

Mr. Hill: What sort of priority are you aware of for the applications that come in? How are they prioritized? It is my understanding that you said 95% has been utilized, and it is my understanding that they received more applications than there was money for. I assume there is a pile of applications that have been set aside or rejected for whatever purpose, based on some form of priority where these ones got priority. Are you going to look at that pile of applications again? Or how is that $8 million going to be parcelled out? What are your plans for it?

Mr. Gerrard: There were somewhat different procedures in each province, but in each case the input in terms of decision-making, in very large measure, took in the interests of the community and the recommendations of the community and the province in terms of what we decided to fund and what we decided not to fund.

For example, I can speak to the situation in rural Manitoba. There was a management committee that included substantial representation from the Union of Manitoba Municipalities, and because they have the knowledge, they vetted all the rural proposals under this program. They ranked them, rated them, and made recommendations that were then carried through in their entirety, in fact, at the provincial and federal levels. To the very largest extent possible, we have relied on local decision-making and local recommendations.

Mr. Hill: What I'm trying to find out, Mr. Minister, is, for example, of that amount of money how much would be still available in Manitoba. Would you be reviewing the applications that were received early versus a new proposal that would come forward? What priority would you give something now versus something that was applied for a year ago and was set aside because you didn't think you'd have enough money?

Mr. Gerrard: As I indicated, the recommendations in terms of the allocation of that fund would be based on input from the local level and from the provincial level. By and large, the program ran on an initial series of applications, but I suspect some situations have arisen where there is a new proposal that has a very significant long-run benefit for the community, which the community opted for when an earlier proposal didn't come through as anticipated, for one reason or another.

Mr. Hill: I'll leave that for the moment. Maybe you can get me the breakdown by province.

.1030

Earlier in your remarks, in answer to questions from my colleagues, Mr. Mayfield andMr. Shepherd, you said that WD is not in competition because it charges 3% or 4% over prime, I believe you said, and it's primarily high-risk capital to specific sectors of the economy. Do you not agree that by charging more than prime so that you're not in competition with the banks, you're really putting that client at a higher risk?

I've been in business, and I think probably a number of people around the room have also been in business. A lot of times the straw that breaks the business back is interest rates. We saw that back in the 1980s. By charging 3% or 4% over prime to a business that's already tenuous - you've examined it, the banks have discounted it - wouldn't we be putting it at higher risk and giving it a greater chance of failing and therefore, directly, having less of a chance of getting our money back?

Mr. Gerrard: First of all, exactly as you've pointed out, I think it is much more preferable that a business get its financing from a bank, but the reality is that there are some high-risk situations.

Those high-risk situations are often associated with new areas or with potentially higher returns, which is why the entrepreneur is ready to look at higher risk. And because of the situation, it becomes even more important to have the support in terms of business plan preparation, in terms of everything we can do to support and aid an entrepreneur outside of the money-lending area, in accompaniment with that higher interest rate loan, in order to optimize the chance of success.

Our experience is that because these are areas where you have the potential for higher payback, when we match the increased input in terms of help and advice we are in fact able to lower the relative risk. That's what's really important.

The Chairman: Thank you. Ms Brown.

Ms Brown (Oakville - Milton): Thank you, Mr. Chairman.

Welcome, Mr. Gerrard.

In reading your report, I have to say that WD seems to be somewhat in sync with this committee and what we have figured out to be some of our priorities, I think: the 91% or so of your funding to businesses with 50 or fewer employees, your special focus on women entrepreneurs, achieving the 8:1 ratio of leverage and capital, and what you said in your own remarks about working towards more cooperation among the three levels of government so as to eliminate duplication. I think that's really in sync with the taxpayers as well.

As a member from Ontario, which does not have such a regional development fund, I have the same bias, so I am looking at the operating budget of $33 million, which, with grants and contributions, is scheduled to be $308 million. It seems to me we're spending about 10% to administer this money, and I wonder how that compares with the banks, which are in a similar business. Do they spend $1 to lend $9? Does anybody know that?

Mr. Gerrard: First, I think it's important to point out that we're not in the same business as the banks.

Ms Brown: I know.

Mr. Gerrard: We're providing a lot of information and knowledge support to help businesses get started, to help people. Entrepreneurs need to be able to have an easy interface with governments so they can get the appropriate registration permits and do the exporting and create the jobs.

Let me give you one illustrative example of the kinds of areas where we have operating expenses. In British Columbia, at the moment, we have a pilot program whereby we're bringing together federal and provincial departments in order to have a single window of registration.

We are now trying this out at five sites in British Columbia, and we are going to move that to an electronic format. So we're moving from what the Canada Business Service Centre is - a single window for government information - to a new single-window format for registering the business with Revenue Canada, with Employment, and with the provincial agencies.

.1035

We want to do everything we can to make it easier for business to do business in this country. Very frequently that means starting pilot programs. Our experience is that if we have successful programs like that, one way or another... Canada Business Service Centres are now operating in Ontario. These kinds of initiatives can spread and be beneficial to the whole country.

Ms Brown: I read somewhere here that you have 90 service delivery points across the west. Is that 90 offices or 45 offices and 45 information kiosks or WEB sites? What are they?

I also notice you have one ADM for each province. I want to know how many ADMs WD has in total. If each provincial ADM of the four assigned in the west has what I would call a particular field to plow or a particular area of responsibility, for example access to capital in Manitoba, can you prove that the activity that ADM is responsible for is spread across the four provinces in a way that reflects the population? It seems to me more likely that wherever the head office for that particular activity is, that province probably has more activity simply because of the geographic location, but I'm not sure of that.

Finally, do you really need this large an appropriation? I see it's been reduced from $420 million to $308 million, but if the last utilization rate you record is 54% for 1994-95, or $220 million out of the $400 million and some, maybe you need only $250 million this year. Maybe you need only $220 million again. I keep thinking where we could get some money for Ontario, and I see $88 million right there.

I know there's no format to transfer it, but what I'm saying is that if the government's budgeting process allocates you a certain amount of money and you're not using it...and we understand why. The banks are telling us they have lots of money to lend and people aren't coming for it either. People aren't confident about taking the risk of borrowing.

It seems to me we have a need. Those of us who are members from Ontario know a lot of our young and emerging entrepreneurs could really use some extra access to capital. We'd like to have some too. How can you prove $308 million -

The Chairman: Bonnie, please decide whether you want an answer or not.

Ms Brown: Okay. On what did you base your prediction of $308 million?

Mr. Gerrard: First of all, what is important to recognize is that in that budget is a significant component of infrastructure funding. Second, the direct input of new funds from the federal government is going down - we're in the middle of this going down - by something like 87% from a year and a half ago to a year from now. There has been a significant decrease in funds.

We're working in a framework such that the repayable contributions can be reinvested. I think this is positive, in that it means there is incentive to make sure we work towards the highest level of repayability.

The activities we support...and you wondered about the 90 points of service. We are able to have so many points of service because we work in partnership with the Community Futures Development Corporations, which are 78 points of service; with the Women's Enterprise centres, which are 4; with the Canada Business Service Centres, which are 4; and with the Western Diversification offices, which are 4. It's really because we have the broad partnership that we're able to do this.

You had a question about the number of ADMs, which is five, and whether an ADM would bias the lending platform or portfolio, for example. Our experience with the loan investment program, which yes, is the responsibility of one of the ADMs, is in fact that that activity is distributed across western Canada and is being delivered very well by the offices in British Columbia, Alberta, Saskatchewan, and Manitoba.

.1040

The Chairman: Thank you.

Mr. Bodnar.

Mr. Bodnar (Saskatoon - Dundurn): I don't want an answer from the Secretary of State; I just want to make a comment with respect to something in Western Diversification.

When our caucus committee did a study on Western Diversification less than two years ago, the committee recommended that WED get out of grants that the government had gotten out of. There was also a review of businesses that were invited to the committee to speak, and the large majority, including British Columbia and Alberta, said that WED should continue to exist because banks lend money when you don't need money. They're not around when you need money, especially in the gap between the concept stage in product development and the commercialization stage. That's where banks are not available. That was confirmed in the hearings with the banks in the last few days. They needed that.

The best example of that was an Alberta manufacturer. I can get the name for you, but I don't have it with me right now. After obtaining financing from the banks, he was in the process of developing his manufacturing business, and financing was pulled part-way through it. He was on the verge of going under and WED pulled him out of this and helped by providing the financing. He had put all his money in and the banks had pulled financing. For some reason they pulled out.

That person is a successful manufacturer in Alberta today. The product is almost exclusively shipped to the United States. It's a feed mill sold by Ford. It's painted blue and it's under the Ford name.

The businesses see a continuing need for WED because WED fills a gap that the banks in the past have refused to get into. Now money is being leveraged in providing financing. Of course, the beauty of being in the Liberal Party is that we can agree to disagree. I can disagree with Mr. Murray and Ms Brown as to their positions.

The Chairman: But not with me.

Some hon. members: Oh, oh!

Mr. Bodnar: But not with Mr. Walker, no. I've never disagreed with Mr. Walker on anything.

The whole question of WED and the financing development of industry in the west has occurred because in the past the west has generally been subject to policies that have promoted only the development of raw materials in the west and have promoted the west as simply being a supplier of raw materials for what has been looked at as the central industrial machine in Ontario and Quebec. This has helped change it to a large extent.

Without WED many of the manufacturing industries that are in existence in western Canada, whether in Alberta, B.C., Saskatchewan or Manitoba, wouldn't exist today. Some of the businesses that ship exclusively to the United States or other parts of the world would not exist in Canada. I simply raise this because WED has provided a service that many don't see -

Mr. Hill: I have a point of order, Mr. Chairman.

Mr. Bodnar: This is questions and comments, and this is a comment. I didn't want an answer.

WED is providing a service and is providing employment in western Canada, which would be destroyed by the member opposite who is calling for a point of order.

The Chairman: Thank you.

Next is Mr. Mayfield.

Mr. Mayfield: Thank you very much.

I'd like to make a comment on what you have just said about the west being interested only in resource extraction. For example, freight rates, which are a federal responsibility, have militated against the west in such a way that manufacturing and secondary development have been economically possible in the central provinces in a way that has never been possible in the west.

Mr. Bodnar: That's why we got rid of the WGTA.

Mr. Mayfield: I'd like to just go on from that. Seeing as we're getting a little political, maybe we'll just pitch right in here.

Some hon. members: Oh, oh!

Mr. Mayfield: I'm really concerned about the responses you have given to my questions,Mr. Gerrard, and it's for this reason. Using Mr. Shepherd's language, we are talking about building up the old way of doing business in the new economy. Frankly, I don't believe we're going to be doing it in the new way. It looks to me like the old examples: last year five times more money went into Winnipeg than into any other western city - and, yes, the previous minister comes from Winnipeg.

.1045

When we have a $600 billion debt, why are we still discussing the utility of this wasteful department, when even the Senate agrees that it should be disbanded?

You talk about a single window. Yet it seems to me that the way this department is spreading its money around...

A couple of years ago, in 1994 or 1995, Ronald Southern of Spruce Meadows, a Calgary equestrian site, the prominent chairman of ATCO, a multinational company, was given WED's promise to give money to small... This is not a small business.

That's where some of the money goes.

Look at their contribution to Lateral Vector Resources, $107,520. Here in Ottawa Lateral Vector is represented by Doug Richardson, a lobbyist who's the former chief of staff of John Turner. Two years ago Mr. Richardson tried to get the government to sell CN Exploration Inc. for less than market value.

My concern, sir, is that little has changed, that the money is being set up. Provision is made for loan losses, but, sir, will you or your department give us some assurance that we're not just throwing it away to political patronage and to the provinces that favour the government in power?

Where's the newness of your program? I don't see anything new except more money.

Mr. Gerrard: I have a couple of points.

First I would challenge your figures on the expenditures in Manitoba versus the other provinces. I will provide you with some details on that. It is not five times the amount compared with the other provinces.

Mr. Mayfield: I said Winnipeg, I believe.

Mr. Gerrard: Second, one of the reasons for setting up the loan investment funds in partnership with financial institutions such as the banks is to remove the level of concerns, to the extent that they have existed in the past, about political influence over loan decision-making, because in putting the decision-making in the hands of the banks and in providing for the western diversification - the helping, the advising, the advocacy rule - we feel that we're doing this in a way that will help any businessman who has a reasonable proposition; for example, in the area of biotechnology.

This is an area that is widely realized to be of higher risk. It requires particular knowledge of the science as well as entrepreneurship and business capabilities. The advantage we can have in Western Diversification is to bring together the people and resources from across the west so that we can address the understanding of the science as well as the understanding of the entrepreneurship and the business aspects of the proposal. So what we have done is indeed a very significant move.

The particular projects that you were referring to were all from the time when Western Diversification was working in the old mode, before 1993. What you will see, and are seeing at the moment, is a very different way of working in which the final decision-makers are not in the political realm but are at the level of the banks. I believe that this is going to be better for the western Canadian economy and that it is going to nourish industries we very badly need, such as the biotechnology and information technology industries.

The Chairman: Mr. Hill, do you have a final question?

Mr. Hill: Yes. Thank you, Mr. Chairman.

I would just point out that when I was calling for a point of order previously, Mr. Chairman, I didn't think the purpose of having the minister in front of us today was to listen to Mr. Bodnar go on at great length in defence of WED. I thought the purpose, which we seldom get the opportunity of, was to question the minister about the department.

.1050

Further to that, I have a final question. I didn't really understand what you were trying to say earlier. Were you defending the fact, in your opinion, that by charging 3% or 4% over prime you weren't putting this high-risk venture at greater risk? I guess I didn't understand your answer.

Mr. Gerrard: A businessman has to operate realizing and acknowledging what the real risk is. So a bank has to operate with an interest rate, a return, which reflects the real risk of doing that business. What we are doing in operating in a framework where we have a higher interest rate is acknowledging, first of all, that where we are lending is an area of higher risk than regular bank lending. In order to try to compensate for the fact that we have to deal with a higher risk, higher interest rate levels, we can bring in the knowledge, the expertise, the help in terms of business plans, entrepreneurship -

Mr. Hill: But you could do that anyway, Mr. Minister. To follow up on what Mr. Shepherd was saying earlier, you could do that anyway and not put the business at greater risk by raising the interest simply by taking an equity position in the business. That would be working in partnership with the business without adding directly to their operating costs, would it not?

Mr. Gerrard: It sounds as if that's an easy alternate approach. Quite frankly, getting into equity situations has some other aspects that need to be looked at carefully. It's not that we're going to avoid that. As I indicated, we are looking at an equity-based approach. But I think it's important to realize that although we have changed in a major way, we have to change also in a responsible way. In getting into areas such as equity-based involvement with firms we will proceed in a cautious fashion in looking at this, and hopefully we will gain experience that will enable us to do more.

Mr. Hill: I have a final point. You used the word ``responsible''. I would say it's irresponsible of any government department to put taxpayers' money in a high-risk venture to begin with, and to compound it by charging 3% or 4% over prime and to put that business at a greater risk. I'll let it go at that.

The Chairman: Mr. Hill raised the point, and it should be the intent in every member's intervention to do with the minister... Mr. Mayfield, I would caution you and every member that although we have certain privileges as members of Parliament we should be careful in how we impute motives to people who are not here to defend themselves. Comments about Mr. Richardson and so forth are ones you should take up with Mr. Richardson, and you should not make a comment in passing.

Mr. Mayfield: May I comment on that? I am not imputing any motive to Mr. Richardson.Mr. Richardson was only making use of what was available to him. If there's any responsibility for this, it's the government's responsibility in its distribution of money. If Mr. Richardson or any of his people would take offence at what I said, I apologize for that, because this is totally a government responsibility.

The Chairman: Fine, thank you.

I'd like to thank Mr. Gerrard for being an excellent witness and explaining Western Economic Diversification to us.

We enjoyed your presence here this morning very much, in going through the estimates, and the able staff you brought with you. Thank you.

For the committee members, we have a quick point of business. We were not successful in getting enough people for a round table for Tuesday. We had decided to have a round table on science and technology on Tuesday.

[Translation]

We won't have any witnesses.

[English]

So we'll cancel and do it another day.

The government wishes to proceed with

[Translation]

Bill C-4.

[English]

Do you have any witnesses, either one of you? My recommendation is that we bring the department people here next Tuesday afternoon. The motion is that the committee schedule meetings on Bill C-4, an act to amend the Standards Council of Canada, starting on Tuesday, June 4, 1996, at 3:30 p.m.

.1055

Some hon. members: Agreed.

The Chairman: If you have witnesses, could you get in touch with either me or the parliamentary secretary as quickly as possible? We'll bring the departmental people here and if it's just considered to be housekeeping, we'll proceed clause by clause at that time. Merci beaucoup.

The meeting is adjourned.

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