Government Operations Committee on April 30th, 2009
A recording is available from Parliament.
On the agenda
- Liliane saint pierre Assistant Deputy Minister, Acquisitions Branch, Department of Public Works and Government Services
- John Connell Director General, Small Business Policy Branch, Department of Industry
- Shereen Miller Director General, Small and Medium Enterprises Sector, Acquisitions Branch, Department of Public Works and Government Services
- Denis Martel Director, Research and Analysis, Small Business Policy Branch, Department of Industry
The Chair Derek Lee
I call the meeting to order.
Colleagues, we're continuing our study of federal government procurement, with specific reference to small and medium-sized enterprises.
We're delighted to have with us today two representatives from each of two government departments. Each play different roles with respect to either procurement or small and medium-sized business, but we're looking forward to continuing our conversation with these departments because of the roles they play.
We have, from Public Works, Liliane saint pierre, ADM, Acquisitions Branch, who has appeared before us previously; and Shereen Miller, director general, small and medium enterprises sector of the Acquisitions Branch, and she has also appeared before us.
From the Department of Industry, John Connell, director general, Small Business Policy Branch; and Denis Martel, director, research and analysis, Small Business Policy Branch.
Thank you for appearing today. Members like to think of these two-hour meetings as quality time.
I know each of you has a presentation before we get into the thick of the meeting, so if it's all right, I'll look to Public Works to lead off, unless the witnesses would like to change the order. I invite your opening remarks, and then I'll turn to Industry Canada when you've completed.
Ms. saint pierre.
Liliane saint pierre Assistant Deputy Minister, Acquisitions Branch, Department of Public Works and Government Services
Good morning, and thank you very much.
Mr. Chairman, members of the Committee, we are pleased to be here again today as part of your study of small and medium enterprise access to the federal procurement process. I am Liliane saint pierre, Assistant Deputy Minister, Acquisitions Branch at Public Works and Government Services Canada. With me today is Shereen Benzvy Miller, the Director General responsible for the Office of Small and Medium Enterprises.
Mr. Chair, since we have previously appeared before you on these matters, my remarks will be very brief. I would just like to reiterate that PWGSC recognizes that SMEs are a vital engine of economic activity in Canada and that they make a valuable contribution to government procurement.
In fiscal year 2007-08, Public Works and Government Services Canada purchased more than $4.8 billion worth of goods and services from Canadian SMEs. This constitutes 49 per cent of the total value of transactions between the government and Canadian businesses, an increase from 43 per cent in 2005-06, and from 46 per cent in 2006-07.
The Office of Small and Medium Enterprises was created in 2005 to assist SMEs in accessing government business. OSME provides information and training services to SMEs wishing to do business with the government and help them as they navigate the government procurement system. It also studies the impact of government buying patterns and other factors related to SMEs, and it works with SMEs to identify the key barriers for them in procurement.
Since its inception, OSME has assisted more than 40,000 businesses and individuals across Canada, an average of 16,000 a year.
Mr. Chair, I want to thank the committee for its study on the ability of SMEs to access federal government procurement opportunities. I understand this is your last meeting on this issue and that you will be preparing a report in the months ahead.
We look forward to the Committee's report and recommendations.
We would now be very pleased to answer any questions you may have.
The Chair Derek Lee
Thank you very much.
Now we'll turn to John Connell from Industry Canada.
John Connell Director General, Small Business Policy Branch, Department of Industry
Good morning, Mr. Chairman, and thank you very much. My name is John Connell. I am the Director General of the Small Business Policy Branch at Industry Canada. With me today is Denis Martel, the Director of Research and Analysis at the Small Business Policy Branch.
I would like to begin by thanking you for your invitation. We are very pleased to have this opportunity to talk to you today of our work with small business.
I really want to underscore what a pleasure it is to be here. I have a lot of respect for your work and for ministers as well, and I embed those values in the organization I lead, so it is generally a pleasure and an honour to be here.
I'll say a little about myself to begin with. I'm a career public servant. I've been in the economic development field for about 29 or 30 years in my career, with recent experience in the Department of Finance and the Privy Council Office. I've been in my current position for approximately five years.
That means leading a team of about 140 people at the Department of Industry in respect of research, analysis, and policy development on small and medium-sized enterprises. It's the entire focus of the work we do, and we support the Minister of Industry in respect of his interests in that area, with the Department of Industry Act having assigned responsibilities to the minister for small businesses in respect of all matters that are not assigned to other ministers, departments, and agencies.
What I'd like to do, with your indulgence, is to provide a short deck on small business activities in the department, challenges and opportunities that we see facing the sector, and kind of an overview of recent initiatives in support of small business. I'm doing that on the understanding from the clerk of the committee that you had a general interest in knowing a little bit more about small businesses generally.
I can tell you emphatically that I'm not an expert on procurement. I'm not mandated to look at procurement in any way, although I certainly stay in touch with my colleagues in Public Works and Government Services to assess, on an ongoing basis, how small businesses may or may not be impacted by current government policies in this field. As well, of course, Industry Canada has a role in procurement, which is another section of the department. The industry sector is the main one. So the IRB policies and everything like that are found there.
I would ask you to bear that in mind in respect of any questions you may have for me.
Would you like me to go through this deck? I can circulate it now. It might take about 10 minutes for me to present it.
The Chair Derek Lee
I think it would be a good idea, because one of the reasons you're here today is to provide a backdrop for the committee members to ensure that we have a good grasp of the small business sector as we embark on dealing with the procurement process. So please go ahead. It will be instructive and useful.
Director General, Small Business Policy Branch, Department of Industry
I'm happy to do so.
On page 1, we'll start off with some key facts about small business Clearly they're the largest segment of the Canadian business population. About 98% of all business establishments in Canada fall into the SME category, and you can see that 74% of them have fewer than 10 employees, and 57% have only one to four employees, a category of firm that we call micro enterprise. In totality, those firms account for about half of the private sector workforce, or 5.1 million people employed in Canada right now.
In the kinds of studies that Denis undertakes for me—and please put all the tough questions to him on this one—over 80% of net job creation between 1993 and 2003 was accounted for by small business enterprises. Large firms actually shed jobs over those years. It can change, depending on the year, but the long-term trends that we're seeing are a lot more heavy lifting, a lot more job creation by small business, with some restructuring in respect of larger enterprise.
Clearly they're a major economic engine, with firms with fewer than 50 employees accounting for 26% of gross domestic product. They help with constant renewal of the economy. So it's kind of an image where economists—I'm not one—will talk about Keynesian views, where the economy is essentially stable and government intervenes to even out the bumps, or Schumpetarian, where firms enter and exit all the time, and there's massive job destruction going on. I think that's what we're seeing in this small business sector. So 140,000 new firms are being created in Canada every year, and that exceeds the exits by about 8,000, but you have a lot of firms that are just heading out of business for a variety of reasons. It's a very dynamic vision of the economy that is driven by small business creation and exits.
On the next page, it's found in all sectors, but particularly in the service sector, where you see a lot of entry/exit concentrated in retail trade, accommodation, food manufacturing, and construction sectors.
On the next page we see that small businesses reflect the diversity of the Canadian population. We see that in terms of gender, about two-thirds of business enterprise is owned and operated by men, 17% is owned by women, and 19% are partnerships. We've certainly seen a lot of trends for women's entrepreneurship being up over the last decade or so.
On minority status, the stats are there for you; about 10% of all enterprise is lead by a visible minority, 2% aboriginal, and so forth. You can see that.
It's heavily concentrated in terms of age in the 30 to 64 category, and very much an issue—and I'm sure you would have heard this from the CFIB—is the number of businesses led by persons of a certain age, who are now looking to exit their enterprise and need to have a plan to do that. Just like we've seen with a lot of demographics, a lot of the labour force is getting older. That's very true of small business owners as well. So we need to think about policies and measure that will help them do that.
Managerial experience: 71% have more than 10 years of experience in those businesses. That can be counted upon for a great value-add in their enterprise.
Some 72% are urban, 28% rural, and 9% are exporting outside of Canada. Those are the numbers, but when we look at the volume of exporting, we see a lot more activity by small businesses, and of course they can be very involved in supply chains as well.
On the next slide on page 4, I call your attention to the fact that high-growth firms drive economic growth. This is a special area of focus for our branch. We tend to distinguish between traditional firms like the ma and pa shops, the micro firms that are essentially in existence to achieve income for their owners, managers, and employees, and then the other firms that really focus on growth, and growing the enterprise, whether through applications of new technologies, exporting, or what have you. So these are really important firms in the economy. And that's reflected in the fact...there are pretty good studies we've undertaken in the branch, and they're 100% samples of all firms in Canada, marrying up StatsCan employment registered data with the business incorporation data.
We're able to go back and track quite comprehensively and find that of the 7% of firms that existed in 1993, if we track those over to 2003, they've accounted for 50% of net job creation over those 10 years, and 60% of that creation was accounted for by small business. They're found in all sectors. This isn't just a high-tech story. We see it in a combination of services, retail merchandising, amusement, recreational services, right across an awful lot of sectors. We have very talented business people establishing businesses, getting them going, doing the heavy lifting in their communities, and creating tons and tons of jobs for Canadians.
We think those kinds of firms face very difficult and different challenges than traditional firms. In respect of financing, for example, they'll be more in need of risk capital versus debt-based or traditional loans from banks. They need specialized and firm-specific skills to be able to grow an enterprise at a very rapid rate. They tend to be more involved in supply chains and exporting and the development of new products and processes.
I'd like to speak now to the current economic downturn and the small business challenges. It clearly has had a significant impact on small business. At the same time, about two-thirds of business owners in a recent poll said they're concerned about the economy, but they're also displaying confidence that the situation could improve over the next six months or so. We see various strategies that they've been undertaking to cut costs, including not taking a salary themselves, which has emerged as a significant one, and doing a lot to avoid laying off staff and get to the other side of the current crisis.
On the other hand, CFIB data is showing that growth expectations are declining on the part of the members they survey. As of March 2009, 20% of surveyed businesses had plans to expand, while 14% expected to cut back. Those numbers are a deterioration from the previous poll. I'll let you read those numbers yourselves.
Credit concerns are clearly the top-of-mind issue on the part of many small businesses, and a lot of the business associations had flagged that.
Next we provide just some general data, but evidence suggests that credit for SMEs has tightened and the banks in Canada are continuing to report tighter conditions in whatever they're saying to the Bank of Canada in the bank's lending surveys. Moreover, the SMEs themselves are saying, through the CFIB business barometer, that they have deteriorated access to bank financing. A lot of that is because the cost of capital to the banks has increased quite significantly. Anyone who has purchased long-term bonds from the banks lately can see that.
Secondly, we've had major sectors, major parts of the financial services sector, that have essentially ceased to function. Whether that's in respect of the leasing companies or others that traditionally were providing innovative kinds of financing, they're no longer there. Some of that has gone over to the banks, but not all, that's for sure. So I think we're seeing some of that in the reporting by SMEs. They rely on debt financing as their main source of capital. In fact, 25% of the total value of all outstanding business loans in Canada are accounted for by SMEs. In any given year, 20% of them will seek financing, and 80% of those loan applications will be approved.
So not everybody gets credit approved, and it's clear that not all business propositions are creditworthy. But at the same time, we feel that there are structural barriers in the marketplace, including where there are simply not cost structures on the part of financial institutions where they can provide a profitable loan to small businesses. You can have many businesses that are start-ups and don't have the business history or the collateral to be able to obtain a loan from the bank.
Thirdly, a lot of them are more in that high-growth area, where we get a lot of small businesses with untested business ideas and it's not clear that they're going to generate much cashflow in their business plans ahead. So that's another candidate for growth capital.
Innovative firms are particularly challenged. We find that 30% of growth firms seek debt financing in any year, and only 54% of those are approved. So again, there's this kind of difference between a traditional and a growth firm in terms of their success in obtaining financing. As I've said, these are the candidates for equity financing, and about 5% of those SMEs in any year will ask for venture capital or other types of equity financing.
This type of financing represents almost half of the total financing going to those innovative firms. Right now, I think it's fair to say that the B.C. industry is in crisis. Its activity is at the lowest level since the mid-1990s. It fell 36% last year, and part of the problem is that the returns from venture capital in Canada have been exceedingly poor. They have not been able to attract capital into the space from pension plans and other institutional investors. That has sort of dried up and is kind of an issue that is of current concern at the Department of Industry.
We've said that financing is a concern on their part. So, too, is having a competitive marketplace, which means a competitive tax regime and a supportive regulatory environment with minimal paper burden. The whole idea of support for innovation that I have referenced, the challenges and needs, are also in the area of exporting human capital and what we call the culture of entrepreneurship.
The next page demonstrates that the tax regime is becoming more competitive for small business. The small business tax rate has been reduced to 11% from 12%, effective January 1, 2008, and moreover the threshold at which businesses qualify for the reduced small business tax rate has been increased in recent years, the most recent being under Budget 2008, to $500,000.
In the department, in my branch in particular, we have something called the Canada small business financing program. It provides loans of up to $350,000, and $500,000 for real estate transactions, to small businesses with revenues under $5 million per annum. Those maximum loan rates were increased under Budget 2009, as was the cap on lenders in terms of the amount that we can reimburse them for loan losses under the program. We do about $1 billion of financing under the CSBFP in any year right now, or about 9,000 loans per annum to small businesses.
We're also responsible in our branch for the Business Development Bank of Canada. It's reporting actually to Parliament through the Minister of Industry, and we serve as a bit of a go-between in that respect. We take a great interest in the corporate plans and strategies of the bank in trying to ensure that they line up with our understanding of small business financing needs. I think it pertinent that a capital injection of $250 million was made in January 2009; the $100 million is pending for a working capital guarantee product that the government had announced.
The 2009 Budget Implementation Act increased the capital limit of the BDC from $1.5 billion to $3 billion. So there's an opportunity to put additional capital into the BDC to lever incremental lending to small businesses. Moreover, there was the announcement of the Canadian Secured Credit Facility, which is simply an initiative that will be taken through the BDC to address securitization problems in respect of auto leasing and other firms.
Of other measures supporting small business and youth entrepreneurship that have been taken recently, one is the Canada Business Network, and the department receives $15 million per annum ongoing--it's in our A-base now--for the network. This is essentially a one-stop service. I understand the committee had some interest in this, for government information service. It's not transactional; you can't kind of go on and get a corporate permit or anything like that, but it does bring together all pertinent business information from federal, provincial, and municipal levels of government. We provide the service; we provide that information on the Internet through a national toll-free telephone service and at 13 in-person service centres in each province and territory in Canada.
I'd also like to talk about a program we have called BizPal. It's essentially an online wizard for accessing permits and licences, again from federal, provincial, and municipal governments. The idea there is that if you're in a particular municipality, we'll map out all the permits and licences you need. And you can get that in a matter of minutes, versus having to go through the trouble and the runaround of applying to different levels of government and different departments and agencies within those levels of government to get the permits you need to start, establish, or grow your business.
I also want to flag the one-time grant of $10 million that was made to the Canadian Youth Business Foundation. This is a small group that's based in Toronto that provides first-time financing of up to $15,000 for youth entrepreneurs, and they combine that with a mentor. It's something we've supported quite enthusiastically in the department, given the contribution made toward building an entrepreneurial culture.
It's very clear from a lot of the studies we've undertaken that Canada has a tremendous entrepreneurial culture and that our business start-up rates are among the most impressive in the world. We lack an ability to grow enterprise, but just the outreach and support given to young entrepreneurs in this country who are creating tremendous value, including the youth from university research and some of the companies they are creating....
It's a desire on our part to put in place all the support and encouragement we can give to these absolutely outstanding young entrepreneurs. If you have ever met them, including those supported by the CYBF, you'll know what I mean.
In terms of innovative small businesses, Budget 2009 expanded support under IRAP, which assists with technology transfer challenges to small and medium-sized enterprise. Moreover, it helped them hire over 1,000 graduates in the new internship program.
Finally, I will just reference the scientific research and experimental development tax incentive program, which is arguably, so we hear from many businesses, one of the single most important things the government can do to help with their research and development and drive toward innovation.
Those are some of the things we are focusing on at the Department of Industry right now.
The Chair Derek Lee
Thank you very much for that bird's-eye view. You've touched an awful lot of territory. On behalf of members, I want to acknowledge the scope of the information and facilitation and financing for small business that's contained in your overview.
Our focus today is not on all of that, for sure, but I very much appreciate the overview.
Before I turn to Ms. Hall Findlay, Monsieur Gourde, a number of members had been anticipating receipt of a report or a business plan from Public Works with reference to procurement, and I understand you may have something to say about that before we engage the witnesses.
Jacques Gourde Lotbinière—Chutes-de-la-Chaudière, QC
Yes, Mr. Chairman.
I want to inform Committee members that the “Final Consultation Report: Government Enterprise Network Services” will soon be released. To ensure that Committee members have the time to read the report, I would suggest that we reserve some time in the coming weeks to do that.
The Chair Derek Lee
Thank you for that.
The document we've been waiting for is almost ready. Subject to what members feel, we may have to schedule another meeting to deal with that and other related issues. I just want to get that on the record. Thank you very much.
I'll turn to Ms. Hall Findlay.
Martha Hall Findlay Willowdale, ON
Thank you, Mr. Chair.
Thank you all for being here this morning.
Ms. saint pierre, you mentioned that today we are holding our last meeting on the federal procurement process, but we are still awaiting the report. We have just been told that it will soon be released. However, we were told that we would receive it in March, and it is already the end of April. We need to have it as soon as possible, in order to carry out our work effectively.
I have just been given a partial answer to the question I wanted to put to Ms. saint pierre.
So I will actually go to another question I had. I also want to thank Mr. Connell very much for the breadth of the presentation.
I have all sorts of questions about venture capital, about the goal of Industry Canada with SMEs.
I wasn't sure, Ms. Miller, if you were going to be presenting or not, but I do want to ask you a question, and perhaps the two of you from Public Works can answer.
We have been hearing over the course of a number of the committee meetings about SMEs, of course, because of the whole question of procurement. I will say for the record that certainly we in opposition--but my sense is that most--were very supportive of the role of small and medium enterprises. We're very concerned here on this end that we're continuing to hear frustration from small and medium enterprises specifically, and from associations about the challenges in accessing federal procurement.
I understand from Mr. Connell that that's not your job at Industry Canada. If we have time, I'd love your comments on why that isn't actually part of your job, because you're expending a lot of effort helping small businesses in other ways, and obviously federal procurement is a tremendous opportunity for many small and medium enterprises.
One of the recurring themes that we've been hearing is that your office, OSME, does not have enough of a mandate, that it is a persuasive office more than anything else, that it does not have any hard ability to ensure that certain things happen in terms of government procurement.
We had an excellent presentation by a fellow from the equivalent office, the federal procurement office, in the United States. He had some really excellent ideas about their office and the much stronger-sounding mandate within their equivalent of OSME, which is also spread out through other departments as opposed to being located in just one place. I'd love it if you could comment on that.
Again, Mr. Connell, if we have a bit of time, I'd like your comments on why Industry Canada isn't in fact involved in helping get access to the federal procurement process.
Assistant Deputy Minister, Acquisitions Branch, Department of Public Works and Government Services
Mr. Chair, Madame Findlay, I would first like, with your agreement, to make a comment on the release of the report you had in support of what Deputy Gourde said, and then turn to Shereen Miller, director general of OSME, to answer the question related to the role in comparison to what is happening with the U.S. government in the presentation.
I just want to recall from what has been said that we are in the process of the final quality assurance review of three documents, or three pieces that we did commit to release, not only to the committee but to the industry. We expect to do that via MERX, or in the best way that's it's accessible to all. We committed to that through the business rationale related to GENS for the consultation we undertook. These are the results of that consultation, a summary of what we've heard, along with recommendations, because it's one thing to consult, but we need to analyze and see how we can take action in response to suggestions that were made by the industry.
I also want to point out--and you'll see this--that one of the main concerns you have heard at the committee related to the GENS initiative was with the inclusion of a whole array of professional services as part of the request for proposal procurement process. We've heard it, and I'm pleased to report that we are making proposals to remove the majority of the professional services as part of the scope of work for that requirement.
Martha Hall Findlay Willowdale, ON
Shereen Miller Director General, Small and Medium Enterprises Sector, Acquisitions Branch, Department of Public Works and Government Services
Good morning. Thank you again for inviting me to address a subject that is of tremendous interest to me.
I listened with interest to the presentation to you on Tuesday of my colleague Joseph Jordan, newly appointed to the US SBA, so I'm actually very pleased to have this question put to me.
Obviously, there are some substantial differences between the US SBA and OSME, not the least of which is that they're an agency and we are a sector within a federal department. They have an act that governs their mandate. We essentially have a mandate from the Federal Accountability Act action plan. They have $700 million; we have $7 million. They have 1,000 field staff; I have 25. They're aiming for 23% of the procurement envelope as a stand-aside, and we're at 49% of Public Works contracts with Canadian companies located in Canada.
Those would be the starting points for the discussion of differences, but I'm much more interested in discussing the similarities. What really struck me on Tuesday, listening to him, is that if you had erased US SBA and put in Government of Canada...he was extremely articulate about the ways in which SMEs can be helped and the many ways in which a government can do it, and actually the ways in which the Government of Canada does do it.
While it is true that OSME does not have the full mandate that US SBA has, the various pieces of the US SBA mandate are covered by various departments in the Government of Canada. For example, as you heard from my colleague, John Connell, this morning, Industry Canada and BDC do the loan piece, so that's not within the mandate of OSME.
If you parsed out the elements that other departments do, you would be left with the nugget or kernel of the five elements that Mr. Jordan outlined for you, which are very similar to OSME. While OSME's mandate is on a much smaller scale, it's very similar to what the US SBA does.
I thought I'd run through a few of the examples. For example, the US SBA and OSME both work with agencies and other government departments. With OSME, we focus mainly on Public Works because we do have a common service provider for procurement, which is Public Works, and we focus on the policies and procedures so that small business interests will be taken into account in commodity management, etc. We strive to improve the links between the supply and the demand side of procurement to influence change within government procurement, such as ongoing work we're doing with the Treasury Board Secretariat and Industry Canada. We work very closely with other partners in the government.
Like the US SBA, OSME educates and trains SMEs to encourage and assist them to participate in federal government procurement through multiple seminars and outreach programs. We facilitate discussions between SMEs and other government departments. Our regional round tables with like-minded organizations are very successful. Similarly, we do use technology to streamline our relationship. For example, like the US SBA, we have a variety of systems that enable suppliers and small businesses to access.... In Canada it would be small and medium businesses. I keep using “small business” because Joe Jordan referred to small business. That's how they define it in the United States, though you may have noted that all of his examples would have been more than our small and medium businesses. I think the language is pretty comparable. What they do and what we do is focus on the sector of the economy that isn't large multinationals, essentially. It's a definition they've chosen as a result of trade agreements.
Anyway, we use technology to enable supplier access to federal government procurement.
The Chair Derek Lee
Excuse me, I'm just going to interrupt here. It's a great answer, but it's starting to look like a presentation.
Director General, Small and Medium Enterprises Sector, Acquisitions Branch, Department of Public Works and Government Services
I'm almost done.