Finance Committee on June 11th, 2009

[John McCallum, Liberal, Markham—Unionville, ON]

Actually, that question was directed more to Mr. Poloz, because it was you who said the first cheques would be out in a few weeks, I believe, in your statement. Wasn't it EDC that said that?

[Jean-René Halde]

No, CSCF is our program, and the formal commitment letters went out May 15. The behaviour should be changing as we speak. The companies are building the various asset-backed securities, and as soon as they submit them, they'll get the cheques.

[The Chair, Conservative, James Rajotte]

You have about 30 seconds left.

[John McCallum, Liberal, Markham—Unionville, ON]

Okay, but I think it might be incomplete.

But it's still correct to say that of the $12 billion, no cheques have yet gone out and the first cheques will be out in a few weeks. That's what you said, so I take that to be the truth.

[Jean-René Halde]

That is technically correct.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you.

Monsieur Carrier, s'il vous plaît.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Thank you, Mr. Chair.

Gentlemen, I would like to welcome you and thank you for being here today.

I listened attentively to your presentations, and I realize that they are complementary. Mr. Poloz's presentation contains some interesting figures. As for the Business Development Bank of Canada, we heard that it did not want to get into the details of its investments.

I am a member for Quebec, where the forest industry is very much in the news. We heard from industry representatives, who were calling loudly for loan guarantees, something the government has refused up to now, stating that they are illegal. Export Development Canada, which focuses more on promoting importing or exporting by our businesses, provided 446 forestry sector businesses with $2 billion worth of support. Close to half of those businesses are from Quebec. It would be interesting to know, for information purposes, what type of support you have granted to forestry companies.

[Stephen Poloz]

Thank you for your question.

In general, we support these companies by providing insurance called accounts receivable insurance. If the company sold lumber or pulp and paper to an American firm, for example, it will have accumulated corporate debt. We insure that debt for 60 or 90 days, or something like that. Then, the company can show the EDC insurance to its bank, which will increase its credit. That is a type of guarantee. It is a sort of triangle formed by the business, EDC and the bank.

It is an indirect method of increasing the credit margin available to that company. This structure is very popular among forestry sector businesses in Quebec. There are also direct loans, but they are not very common.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

So, you help the forest industry primarily by offering loan guarantees. How would you quantify these guarantees? They have virtually no worth, unless they are calculated the way an insurance company would do. You calculate the risks of non-payment, which allows you to come up with a total of $1 billion.

[Stephen Poloz]

It is easy to quantify because businesses in Quebec or Canada must declare the exact amounts of their exports to the United States or elsewhere. We insure 90% of the amount declared and the remaining 10% represents the company's risk. It is a type of risk sharing in the contract. Then, the company can show this insurance to the bank and receive credit, because it is guaranteed by EDC.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

In your opinion, is it because of the current economic uncertainty that this amount has increased so much over the past year? And did this help our companies' export?

[Stephen Poloz]

The amount depends on the export level. For example, for a purchase of $100 million made in the United States this year, the amount would be less if the same purchase had totalled $150 million last year. It depends on export levels. It is a matter of arithmetic.

This year, exports are lower than usual, lower than last year. Under this arrangement, they are probably at the lowest level. However, at the same time, this arrangement works very well with the banks, that is, very smoothly.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

I would now like to address a question to Mr. Halde.

[The Chair, Conservative, James Rajotte]

You have one minute left, Mr. Carrier.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Mr. Halde, as for your actions with regard to the forest industry, which are not detailed in your presentation, how have you been able to help the industry, which is currently in crisis?

[Jean-René Halde]

The existing programs and—we hope very soon—the guarantee program for lines of credit are, of course, accessible to all businesses, including those in the forestry sector.

Currently, our portfolio, which is technically defined by Industry Canada as being part of the forestry sector, amounts to $560 million. This includes more than just sawmills. I also includes people who process wood and so on. People who manufacture fence posts would be included as well. It is not just forestry in the sense that you and I might understand it. All the programs are available. In my opinion, the BCAP, the program that enhances working capital for businesses, can be very useful to forestry producers.

That said, I would remind you that our job as bankers is still to stretch risk as much as possible while ensuring that the business remains solvent, that is creditworthy. However, we do go as far as we can. Our risk appetite is still much greater than that of a traditional financial institution.

[The Chair, Conservative, James Rajotte]

Merci.

We'll go to Mr. Wallace, please.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chair.

Thank you for coming back. I was one of the ones advocating for you to reappear after you were here a few months ago. From our perspective, we're looking for your leadership in terms of helping us get the money out the door, as Mr. McCallum has been talking about.

I have a couple of questions. I'll start with the BDC.

You've told us that basically, without seeing the report, it's up by 11%, but I want to focus in a little bit on the secured facility that we put together and that you've talked about. There are two segments; one is getting cheques out the door or allocated relatively soon, and then there's another round in August.

We were hearing that there were some issues in terms of setting that facility up, and that it was a new business line of sorts for BDC. I think some of us had expectations that it would be up and running, but we just don't know the mechanics of it. Do you want to give us a fairly quick overview of what it took for BDC to get this up and running and to be able to react as quickly as you have?

[Jean-René Halde]

Yes, I'd be happy to.

Clearly this was not an area of expertise for BDC, so the first thing we had to do was acquire the expertise, both by hiring people who had the relevant expertise and by getting the best consulting firms in the area. Once that was done, we had to decide on the exact program. The next step was to do a price discovery process, which meant writing to all the various stakeholders and asking how much funding they would need, given different pricing. If a company is in relatively good shape and can borrow relatively well in other markets besides securitization, they might say that past a certain number of hundreds of basis points they're really not interested and that they'll finance themselves in other ways, while others would really want that.

So we had to go through a price discovery process with all of the stakeholders, and quite candidly, it was a bit of a lengthy process, because we were waiting for them to come back to us with the information. Once that came in, we then made a selection of who should get what, in conjunction with the Department of Finance and in consultation with Industry Canada. Once that was done, the letters went out. They were initially just allocation letters telling them what they were getting. Then, about five days later, the formal, lengthy, legal letter hit them. That's what I was saying to Mr. McCallum: at that point, the behaviour of those companies should start to change.

[Mike Wallace, Conservative, Burlington, ON]

I appreciate that. We do hear in our ridings from individuals, which we've told you before, that they're not getting any response from BDC, or they're not getting a positive response. Could you explain to me again what your mandate is in terms of creditworthiness and so on? You're not a charity. It is taxpayers' money you're spending and lending out. Could you give us an overview of what your philosophy is as a bank, as a development corporation, in terms of taxpayers' money?

[Jean-René Halde]

With great pleasure. The requirement is that our long-term return on equity be greater than our long-term cost of funds, which means that we've got to be showing a small profit. We're not in the business of maximizing profit. That's what financial institutions are for. We're there to earn a return equity greater than cost of funds, which translates into our having the ability to take much more risk than a financial institution because, you know, we don't need to make 20% return on equity; we'll be happy with 4% return on equity. And that translates then into taking more risk, but still, at the end of the day when we lend to a business, we have to make the assumption that generally that money will come back.

If financial institutions stop here, we'll go here, further to the right on the risk curve, but there's only so far we can go, because there are other agencies that are in the subsidy business, the granting business. That's not our role.

So we're fearful at times that people don't appreciate that we've got a mandate but that it has an end at how much credit appetite or risk appetite we can take.

[Mike Wallace, Conservative, Burlington, ON]

I think my colleagues will have more specific questions, but I have a new question for the EDC, a general question.

During your presentation you talked about exports being down in general. I think numbers this week showed us that exports are down compared to what we were hoping for in terms of a balance, but the demand for your services is up. Can you explain that dichotomy to me?

[Stephen Poloz]

Certainly. When we're in a phase of the business cycle when risks are higher, such as now, companies are much more likely to make use of EDC's insurance services. Exporting sounds like a very easy thing of getting a sale and getting the money, but in fact there's a lag between making the sale and getting the money, and that lag can be 60 days, 90 days, 120 days, this sort of thing.

So while that's happening, the company is actually at risk of not getting paid. It's almost like lending money to the foreign company that has done the buying. And in an environment like this where the entire world is in recession, the possibility that your buyer will go bankrupt and not pay you, or just simply not pay you, is much higher than normal. So in that environment, companies are much more likely to use EDC's services to insure those receivables. We've seen this in every other business cycle also. So if you like, EDC's penetration into exports goes up during phases like this.

In addition, there is a lot of international activity that companies are doing now, which is investing in foreign economies, to build global supply chains or to get a presence in a foreign market. We call this integrative trade, and that aspect of their actions, which we help to finance, is separate and not counted in exports, although it creates exports and imports--actually, trade in both directions--down the road.

So our business activity has gone up across the board for more than one reason.

[The Chair, Conservative, James Rajotte]

Thank you. I'll go to Monsieur Mulcair, s'il vous plaît.