Finance Committee on April 2nd, 2008

[Jean-René Halde]

It means that in a period of uncertainty like today, the risk spreads in the private market are relatively high, and because we can borrow at government rates, we are getting better rates.

Let me provide you with a couple of examples, if I may. If we were to borrow from the consolidated revenue fund today for a one-year bond, we would pay about 2.8%. If were to borrow that in the private market, we would probably have an extra 10 or 15 basis points added on to that. However, if you had to go to a 20- or 30-year bond, borrowing from Ottawa right now would be at about 4%, but the spreads in the private market would be closer to 60 or 70 basis points.

[John McKay, Liberal, Scarborough—Guildwood, ON]

So it's a significant advantage you gain by simply going from an effective guarantee of your borrowings to direct borrowing, if you will.

[Jean-René Halde]

It is in today's environment, but a couple of years ago, when we were borrowing in international markets via structured notes and with the guarantee of the government, we would end up with very favourable borrowing rates.

So it all depends on the market's volatility, but clearly, it simplifies our life and enables us to have easy borrowing facilities. It's very much a function of the market, and right now, as we know, it's a bit of an unstable market.

[John McKay, Liberal, Scarborough—Guildwood, ON]

So it would make no difference to how your books would look, because your indebtedness would just...?

[Jean-René Halde]

The interest payment goes one place instead of another, but in terms of our profit and loss statement, it's a payment of interest.

[John McKay, Liberal, Scarborough—Guildwood, ON]

But is there a difference in how the Government of Canada's books look?

[Jean-René Halde]

I don't believe so, because the bank is consolidated overall.

[John McKay, Liberal, Scarborough—Guildwood, ON]

So it's still—

[Jean-René Halde]

I'm not an accountant by profession, so I would prefer to check that before making a solid statement. I believe we get consolidated in the whole government.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Obviously the volatility of the dollar has led to some interesting difficulties for some of your borrowers. Can you enlighten the committee as to how that is affecting them, and does it affect particular sectors more than others?

[Jean-René Halde]

There are sectors that are....

As I responded earlier, I don't think we should focus strictly on the asset-backed commercial paper, because a range of issues have affected our small and medium-sized businesses. So if you're in the tourism sector, the rise of the Canadian dollar has probably affected you a lot more than other factors.

The key areas, the ones where we have the highest levels of impaired loans, are tourism and manufacturing. Those are the two key sectors that seem most impacted by the overall economic environment.

[John McKay, Liberal, Scarborough—Guildwood, ON]

So it would be reasonable to assume that the volatility of the dollar is the key driver in the impairment of the loan.

[Jean-René Halde]

I think that's probably overstating it, because there are other factors.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Well, nothing happens in isolation.

[Jean-René Halde]

Exactly.

[John McKay, Liberal, Scarborough—Guildwood, ON]

But you have fingered the two sectors that are probably the most dollar-sensitive.

[Jean-René Halde]

Those two sectors are definitely dollar-sensitive, but if you're a manufacturer you're also quite sensitive to the emerging economies and what's coming in from other countries, and to your ability to export to the U.S. and the level of demand from the U.S.

There are multiple other factors, but clearly, what you mentioned is important.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We'll now move to Mr. Vincent, for five minutes.

[Robert Vincent, Bloc, Shefford, QC]

Good afternoon.

On page 12 of your document, it says:

Today, manufacturers can no longer grow if they have no positioning strategies in regard to improving productivity and maximizing supply chain value.

On page 11, it says:

In addition, manufacturers must also...

[The Chair, Conservative, Rob Merrifield]

Our interpreter is having a bit of a problem. If you maybe just slow down a little bit, it will be all right.

[Robert Vincent, Bloc, Shefford, QC]

I will start reading again:

In addition, manufacturers must also have a global view of their supply chain. They should consider adding imported components to their production to raise the economies of scale and cost competitiveness.

At that point, you are telling those companies to find suppliers elsewhere, to abandon components made in Quebec or in Canada and to import them. But that is a problem, and I will give you an example from my own riding. A plastics manufacturer pays 4 cents for the raw materials he needs to produce a plastic part a foot long. He tells me that he can buy the same part ready-made in China for 4 cents. Even if he changed his assembly line, laid off all his employees and used nothing but machines, he could not match the price from China.

Have you told the government specifically what you can do about that? What suggestions have you made to the government about globalization in general and about China in particular?

[Jean-René Halde]

First, our role is not to make policy, it is to implement it. That is what we try to do to the best of our ability. As to the advice that we provide to companies, we suggest that they conduct a very precise analysis of their situation to find out if...In some cases, it is possible to produce in Canada, to be efficient and very competitive. In other cases, it is much more difficult. In still other cases, there is virtually no choice but to import some parts, for example, because it is the only way to be as competitive as possible. So the correct solution is different for each business. Do they need to be more innovative, to have market penetration that was different from what they first planned for?

There are many questions. That is why we use consultants to help companies find the right answer. There is no stock answer. In some cases, the answer is difficult; in others, it is easier. Each company must be examined individually in order to find a solution. The market is a difficult place. I would like to have a definitive answer, but there isn't one.

[Robert Vincent, Bloc, Shefford, QC]

Do you think that the time will come when the BDC will no longer be able to invest in our companies because we can never be competitive with China without some kind of policy putting a surcharge on Chinese products? We know that we cannot compete fairly with a country that has competitive power that is different from ours.

[Jean-René Halde]

You understand that I cannot comment on any policy matter at all. I do not feel that it is our role to do so. As I said earlier, we implement policies.

The BDC's role, specifically the role of our consulting group, is to try to find the best solution possible, one company at a time. I can assure you that we do it very well.

[Robert Vincent, Bloc, Shefford, QC]

Let us use the example of that plastics manufacturer who comes to you and says that his competitors are buying the plastic part in China cheaper than his cost of production. What could you suggest?