Finance Committee on June 11th, 2009

[Thomas Mulcair, NDP, Outremont, QC]

Thank you, Mr. Chair.

I would like to welcome Mr. Poloz and the president of the BDC, Mr. Halde. My first question will be to him. I will borrow an expression he used earlier, risk appetite, to distinguish between his bank and traditional banks that we are more familiar with.

I will also have a second question to ask him in the seven minutes during which I will have the pleasure of conversing with him. I wonder what suggestions he could make to us. Many questions have been asked, and we may have certain ideas as to the answers, but are there specific things parliamentarians could do to make his life easier and thus do more to help our economy recover?

Earlier, he gave an excellent explanation to Mr. Wallace, saying that BDC is prepared to go as far as it can in terms of risk. He compared BDC to charter banks, among others. Has BDC conducted objective analyses to determine whether its appetite for paperwork is greater?

During your presentation, when speaking about mortgages, you said that it is not efficient or cost-effective to add to the paperwork. Something I hear very often is that people are very satisfied when they work with BDC. However, they also say that they like paper. Have you performed objective analyses of the number of forms people dealing with BDC must fill out as compared to charter banks? Is that simply a reflection of the increased risk?

[Jean-René Halde]

There are two parts to my answer.

Analyses clearly prove that we take on more risk than other financial institutions. We do benchmarking, and we can easily prove that the risks we take on are greater.

As for paperwork, we try to keep it to a minimum. To be frank, our technological platform is old, and we are in the process of replacing it. Next year, once this computer project is completed, we will finally have arrived in the 21^st century, and we will be able to reduce paperwork considerably. So there is really no link between the two. We simply happen to have an old technological platform, which we are currently updating.

[Thomas Mulcair, NDP, Outremont, QC]

I appreciate the witness' honesty. It is very refreshing.

Let's go now to my second question. Having been a high-level official in the public service and having also been elected as a member, I always try to respect the difference between these two roles. So I am not trying to get partisan with you.

However, there is something I would like to know. It was implicit in Mr. McCallum's questions earlier. Today, there is a report being tabled, and we will begin to check what monies were actually spent in other sectors.

With regard to paperwork, are there things that fall under the government's responsibility that could be changed to make your work easier?

[Jean-René Halde]

That is an excellent question, and I must admit that I had not thought about it. Usually, we are the ones who must be accountable. I would like to think about it before I answer your question.

You know, we at the Business Development Bank of Canada are fairly independent, and thus interactions with the shareholder are infrequent.

I will think about it and get back to you with an answer.

[Thomas Mulcair, NDP, Outremont, QC]

Are you satisfied with the sums at your disposal to do your work at this time? Does the shareholder look after you properly?

[Jean-René Halde]

The shareholder was kind enough to promise us additional capital so that we could do our work properly. Obviously, if the number of applications rises, as in the case of the Canadian Secured Credit Facility, then additional capital will be required. However, given what we have to do now, everything is fine.

I have another more technical detail to mention. We will soon reach our limit of paid-in capital. So this will have to be reviewed eventually. However, for the time being, our capital is sufficient to do what we have to do.

[Thomas Mulcair, NDP, Outremont, QC]

Earlier, Mr. Carrier brought up the forestry sector with you. I will share with you our political analysis of the situation.

We believe that it was a mistake to systematically and across the board reduce the taxes paid by large corporations. By definition, a company that had not made a profit and thus did not pay taxes did not benefit from these reductions. Inevitably, the oil patch and the banks were the ones that received the lion's share of these tax reductions. The forestry and manufacturing sectors were already in big trouble before the current crisis.

We also believe that, since the Second World War, successive generations of Canadians, who live in the second largest country in the world in terms of surface area and who helped build the country and give it value, have accomplished a tour de force, especially given that today, the population is just over 30 million. However, in our opinion, the economy has been substantially destabilized over the past three or four years. That is our political argument.

Considering what I said to you earlier, even though I do not want to lead you down a political path, according to the way you see things, is it part of your written or assumed mandate to adopt a balanced approach? Despite the fact that you must make a profit, do you still try to help sectors that are important in a given province but that are in trouble, like the forestry and manufacturing sectors? Do you try to get things back on track to avoid job losses in these sectors, which have been so hard hit?

[Jean-René Halde]

Our role is clearly to try to find the gaps. So we try to work for sectors that are less accessible to the private market. For example, we know that the tourism industry has been hard hit by the current crisis. So we are working very hard to help that industry. The manufacturing sector has also been hard hit, of course, especially given the declining demand. So we are also working hard to help that sector out.

Earlier, Mr. Poloz referred to a loan that was granted to Clearwater. We helped Clearwater because it is an excellent company in the fishing sector, but it has experienced difficulties because of the economic crisis. So we try to work as hard as possible to help out sectors that are in genuine need.

[Thomas Mulcair, NDP, Outremont, QC]

I practised commercial law for many years. The BDC was in the same building as my riding office when I was the member for Laval. I can tell you that I heard only good things from everyone about your work.

[Jean-René Halde]

Thank you very much, that is greatly appreciated.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Mulcair.

We'll now go to Mr. McKay, please.

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

Mr. Poloz, you said in your presentation that EDC had about $9.5 billion in loan commitments under the Canada Account, including $4.2 billion to GM and Chrysler to help them restructure. Have you provisioned for that loan?

[Stephen Poloz]

Thank you for the question.

The Canada Account is a separate facility that is actually run by the government itself, and EDC is simply the agent that takes care of the transactions on behalf of the government, so the loans that appear on Canada Account are government risk as opposed to EDC risk. The provisioning, therefore, is taken by the Department of Finance in the context of their actual budget lines. EDC works with Finance to recommend a provisioning rate, depending on the actual commercial risk that's being undertaken, so it is provisioned, but it is not provisioned on EDC's provisions.

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

So when the Prime Minister says we're not likely to see any of that money back, he's probably right?

[Stephen Poloz]

That's a difficult judgment for me to make. The restructuring plans are very good plans. I think the economy will recover next year. Car sales will recover, so I think there's a reasonable expectation.

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

What advice is EDC giving to the Department of Finance for the purposes of provisioning that particular loan?

[Stephen Poloz]

A loan of that degree of risk would normally be provisioned on the order of 30% or 40%. That would be normal commercial practice. These rules of thumb are followed by almost all banks, including EDC.

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

Do you mean there's a 40% writeoff?

[Stephen Poloz]

It's just a provision to ensure that you have a reasonable amount of funds in the vault in case there is a writeoff. It's attaching a probability based on the rating. Let's say it's a triple-C rating or a double-B rating; these are formulas all banks follow. The provisioning rates would vary from as low as 4% or 5% for a very high-quality loan to something over 30% for a lower-quality loan. You have not written the loan off at all, but you've taken some insurance against it.

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

Are you saying that even for companies on the precipice of bankruptcy, there's still a rate of 30% to 40%?

[Stephen Poloz]

I'm generalizing. In response to your question, I don't actually know exactly what provision rate was chosen for these particular loans.

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

Just on the face of it, it would seem that 100% would be the only rate that seems anywhere close to sensible.

[Stephen Poloz]

The honourable member is correct in thinking that it's obviously not a commercial loan in the usual sense, and that therefore the provisioning rate would theoretically be higher. However, it is a very complicated process to choose that rate, and I don't really know what the government has chosen.

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

I just was not clear about whether this actually came off your books. What you're telling me is that it doesn't come off your books; you are merely an administrative agent. If in fact you were writing $4.5 billion off your books, you'd pretty well be looking at losses for the next few years.

[Stephen Poloz]

That would be a very difficult scenario for us.