Indigenous and Northern Affairs Committee on Feb. 24th, 2015

[The Chair, Conservative, Blake Richards]

We'll call the meeting to order.

Welcome to the 31st meeting of the Standing Committee on Aboriginal Affairs and Northern Development. Pursuant to Standing Order 108(2), this study is on access to capital.

This is our first meeting on that particular topic. With us today we have, from the Department of Indian Affairs and Northern Development, Andrew Beynon, acting assistant deputy minister, lands and economic development; Brad Cline, acting director general, aboriginal entrepreneurship branch; and Allan Clarke, director general, policy and coordination branch.

Thank you all for being here today.

Mr. Beynon, it looks like you're giving the presentation on behalf of the officials. I will turn it over to you for your presentation, followed by questions from the members.

[Andrew Beynon, Acting Assistant Deputy Minister, Lands and Economic Development, Department of Indian Affairs and Northern Development]

Chair and honourable members, thank you for inviting us back to discuss some of the challenges experienced by first nations communities and businesses in accessing capital on reserve.

I understand that the committee has welcomed some new members since our last chance to appear before you in May, so I would like to recap some of our earlier comments for their benefit, and also to update all of you on our recent efforts to reduce barriers and increase access to capital for first nations communities and businesses.

First nations leaders continue to prioritize economic development as a means to greater self-reliance and improved quality of life for their communities. The sizeable reserve land base in Canada is growing steadily with the settlement of comprehensive and specific land claims, and through additions to reserve.

Since 2006, 873,449 acres have been added to the reserve land base. First nations are seeking to unlock the economic potential of their growing land and resource base. As population centres grow, more reserves are now located within, or very near, urban settings. This is opening up new opportunities for economic development, but also underscores the importance of effective tools for supporting access to capital.

Urban reserves in particular are providing first nations with significant fiscal and economic benefits. A recent study from the National Aboriginal Economic Development Board found that six first nations with urban reserves had collectively created over 7,000 jobs and over $77 million in annual economic activity for both their communities and neighbouring municipalities.

A growing number of first nations communities and business are achieving remarkable economic success. Membertou, Osoyoos, Whitecap Dakota, and Kamloops, among many others, are well-known examples.

Aboriginal self-employment is also on the rise. According to the 2011 census, there were more than 37,000 aboriginal people in Canada who had their own business, which is an increase of 85% since 1996.

Despite these many successes and very positive trends, access to market capital and private financing remains a significant challenge for first nations communities and businesses. On reserve, the limitations of the antiquated Indian Act present particular challenges to creating an environment that is attractive to raising capital and advancing economic opportunities.

I would like to speak a bit about Indian Act provisions that affect access to capital.

First, all first nations communities face obstacles to accessing market capital because of difficulties in leveraging land and assets on reserve. Section 89 of the Indian Act prohibits the mortgage, levy, or seizure of real and personal property of a first nation, or an individual situated on reserve.

This provision of the Indian Act was originally intended to prevent unscrupulous creditors from taking advantage of individuals, but it has now become a key obstacle to raising capital. Under this provision, first nation governments and individuals are impeded from using their assets fully as collateral to obtain access to market capital without the direct involvement of the federal government. We know that off reserve, individuals and businesses very often leverage the value of their property and assets to start, operate, and expand businesses.

Second, the Indian Act designation and leasing processes on reserve present potential structural barriers that impede the development of relationships with investors on reserve.

Leases under the Indian Act are possible if there is both a community vote to designate land and the approval of the minister for the designation. The designation provisions of the Indian Act were streamlined in the Jobs and Growth Act, 2012 by changing the community vote threshold to a simple majority, and by granting the Minister of Aboriginal Affairs and Northern Development the authority to accept designations.

This has assisted some first nations in speeding up development processes. Nevertheless, the Indian Act system, which often requires lengthy and complex lease negotiations involving our department and the Department of Justice, still results in delays, added costs, and missed opportunities.

Third, legislative barriers to moneys management impede first nations' abilities to leverage own-source revenues to access market capital.

Indian band moneys are held in the consolidated revenue fund and, pursuant to sections 61 to 69 of the Indian Act, can only be expended for the use and benefit of the band. Except for bands that have authority to manage their own revenue moneys, all expenditures under this Indian Act provision must be authorized by the minister. These provisions have the effect of delaying the disbursement of a first nation's own moneys, particularly capital moneys, which are generated from on-reserve activities, such as natural resource extraction, or from the sale of reserve lands. Revenues from leasings do not carry the same restrictions but are still subject to certain administrative requirements for their access.

Finally, first nations have limited access to financing and are generally unable to raise the capital required for major projects. Although first nation communities can collect property tax under section 83 of the Indian Act and under the First Nations Fiscal Management Act, only 150 of 617 Indian Act first nations are actively collecting some form of property taxation.

Long-term debt provides many advantages over the cash-based approach to financing infrastructure projects, which is a common practice among most first nations, and which is heavily reliant on federal transfers. Comparatively, off reserve, local governments can use cash financing from significant tax bases, but also have access to public debt borrowing, for example, turning to the municipal bond markets, and project financing opportunities, for example, turning to public-private partnerships. Over the past 40 years, most provincial governments have set up finance authorities that have the ability to issue long-term collective debt on behalf of municipalities.

I'll turn to key measures to address these impediments. I will discuss some of the key legislative, program, and institutional arrangements that have helped reduce barriers for first nations in gaining access to market capital.

One of the key strategies the federal government has undertaken to address structural barriers has been the development of a number of optional legislative tools. These optional regimes, including, for example, the First Nations Fiscal Management Act, the First Nations Land Management Act, and the First Nations Commercial and Industrial Development Act, as well as the First Nations Oil and Gas and Moneys Management Act, provide participating first nation governments with the ability to remove themselves from many of the antiquated and restrictive provisions of the Indian Act. Together, these acts provide ways for first nation governments to leverage on-reserve real property taxation and own-source revenues in order to gain access to capital markets, gain control over their financial management, gain control over the designation of lands on reserve, develop comprehensive regulatory regimes to manage major economic development projects on reserve, and control oil and gas revenue moneys earned on reserve. In total, first nation communities can use such opt-in legislation to remove themselves from 48 sections of the Indian Act that are recognized as barriers to economic development.

The First Nations Land Management Act and the First Nations Fiscal Management Act have been taken up actively, and are reported by first nations who participate to be useful tools in enhancing access to capital. For example, a benefits review of the first nations land management regime completed by KPMG and associates in 2014 affirmed that first nations operating under the regime view their ability to borrow money for capital investments under the act as a significant economic advantage, and they have reported increased attractiveness to investors as well as better partnership opportunities.

In June 2014 the First Nations Finance Authority issued its first bond, which was a major breakthrough for first nations seeking to build both the quality of life infrastructure improvements such as on-reserve housing as well as manage investments and major resource projects. Through pooled borrowing that was secured by projected future first nations revenues to be obtained through property taxation, $90 million was raised on behalf of 14 borrowing members with a competitive credit rating from Moody's of A3. I would note for committee members that this is a higher rating, for example, than those given to pipeline companies like Enbridge and TransCanada.

With the success of this very first inaugural bond, interest in the first nations financial management regime has grown among first nations across the country. As of February 2015, 75 first nations are exercising property taxation jurisdiction under the act; 45 have met the financial performance requirements established by the First Nations Financial Management Board, and 38 are eligible to borrow through the First Nations Finance Authority. There is currently more than $200 million in unused borrowing capacity that can be deployed over the next two to five years among the current 38 finance authority members.

[The Chair, Conservative, Blake Richards]

Excuse me for a second, Mr. Beynon.

We have gone over what the normal allotted time is. I'm inclined to allow him to finish the presentation, given that it is our start to the study. Unless members tell me they want me to do otherwise, I'd be inclined to let him finish the presentation; then we should still have lots of time for questions.

It seems that is the consensus.

Please carry on, Mr. Beynon.

[Andrew Beynon]

Thank you, Mr. Chair.

In terms of the role of mainstream and aboriginal financial institutions, the Government of Canada has also been working to mitigate barriers beyond the Indian Act. Major banks and other private lenders provide a limited range of commercial financing to aboriginal business. Mainstream financial institutions focus on securing high volumes of loan activity and use formula-based risk rating approaches to screen loan applications. Most aboriginal businesses are very small, with a significant portion located in small or rural and remote communities; therefore, they often do not meet the risk profile of mainstream lenders. Aboriginal businesses are generally perceived as higher-risk by banks and mainstream lending institutions. Access to developmental loans through the network of aboriginal financial institutions is the only source of capital for many aboriginal businesses across Canada.

Through this national network of aboriginal financial institutions, the Government of Canada provided $205 million in loan capital investment between the late 1980s and 2014. It has recently surpassed 38,000 loans with $2 billion in loan value.

This network does not have enough capital, however, to help aboriginal businesses finance equity stakes in major projects. Federal efforts to increase the number of aboriginal suppliers bidding for and winning federal contracts through the procurement strategy for aboriginal business are also enabling aboriginal businesses to raise capital that can be further leveraged in growing their businesses.

Since the launch of this procurement strategy in 1996, aboriginal businesses have competed for and won more than $1 billion in contracts, with the value of set-aside contracts increasing from $49 million in 2009 to $109 million in 2012.

The government also supports aboriginal entrepreneurs through a comprehensive suite of programs that enable communities and businesses to seize economic opportunities. These programs include the aboriginal business development program, the community readiness and opportunities program, and the ministerial loan guarantee program. These programs support first nations communities in providing business services and facilitate greater use of land and resources, economic development infrastructure, and housing. By providing federal loan guarantees or contributions, they also help fill a financing gap in capital and serve to leverage private sector capital.

We have seen that barriers to accessing capital are far from absolute. Private lenders, including mainstream banks, have provided hundreds of millions of dollars in loans to first nations governments and businesses on reserves. With the Government of Canada's commitment in 2011 to settle outstanding land claims and pay out approximately $1 billion a year to bands that are owed money, aboriginal banking has become a fast-emerging market for major financial institutions, such as the Bank of Montreal, Royal Bank of Canada, and the Toronto-Dominion Bank. Furthermore, multimillion-dollar lease mortgages are common and have been used to finance resorts, casinos, community facilities, residential development, and smaller-scale community business ventures. Since 2009, the department has registered 4,289 mortgages and 5,916 lease arrangements.

I'll turn to alternative financing options and some potential innovative solutions. The First Nations Fiscal Management Act regime in particular is considered to have achieved an effective balance between affirming first nations jurisdiction and providing appropriate institutional capacity. The act not only enables participating first nations to collect property tax and access pooled borrowing regimes, but also creates an integrated system whereby the institutions created to oversee the regime provide ongoing support that mutually reinforces their respective mandates to ensure integrity of the system. For example, the act requires the first nation to possess a certificate from the Financial Management Board in order to become a borrowing member.

Similarly, for the finance authority to issue a long-term loan backed by property tax revenues, a first nation must have a borrowing law approved by the tax commission. This integrated system enhances investor certainty by certifying that participating first nations have the financial capacity and financial management systems to manage large economic development projects.

In 2012 a legislative review of the First Nations Fiscal Management Act was tabled in both Houses of Parliament. This review identified a number of suggested changes to the act, including various administrative and regulatory improvements and expansion of institutional powers.

New and innovative ways of unlocking existing capital could also be pursued. There is approximately $1 billion in Indian moneys currently held in the consolidated revenue fund that could be used as a major source of capital for first nation communities. Much of the Indian moneys held in the consolidated fund are oil and gas royalties paid to first nations which are held in trust by the Government of Canada under the Indian Act provisions.

In a November 2014 article, Maclean's magazine highlighted the stark differences between the affluent municipality of Opportunity and the adjacent Bigstone Cree Nation. Both are located in Alberta's oil sands area. Despite receiving $231 million in cash through a 2011 land settlement and receiving comparable oil and gas royalties to Opportunity, Bigstone continues to experience terrible housing conditions, poverty, high unemployment, alcoholism, and gang violence. Without direct authority over the 77,000 hectares of land that make up its reserve, nor to the royalties that they receive, Bigstone has not been able to invest in community building initiatives and economic development projects that could transform the quality of life of its members.

I would like to conclude today by offering a few other key areas that you may wish to consider further.

The first area is financial management and financial literacy. Communities are telling us that they require support to develop these capabilities to engage in large and complex commercial transactions. According to recent studies by the National Aboriginal Economic Development Board, the Public Policy Forum, and the Task Force on Financial Literacy, financial literacy remains a significant barrier to the creation and growth of aboriginal businesses, particularly on reserve. Exploration of these issues and the next steps for targeted intervention would be useful to inform a forward policy and program agenda to address the capacity gaps.

Second, it may be useful to explore ways to strengthen the network of aboriginal financial institutions, including finding ways to promote their self-sufficiency, introduce additional capital, and have them act as a continuing source of financial literacy for aboriginal businesses and communities.

Third, efforts to modernize and improve land administration tools and processes for those first nations under the Indian Act and to further improve the First Nations Land Management Act should continue to be explored. Recent work to improve commercial leasing on reserve is an example of what the Government of Canada can do to remove or reduce barriers to economic development on reserve.

Finally, examples exist in both the mainstream economy and for more specialized targeted groups of arm's-length organizations that provide a comprehensive suite of tools to help secure financing and leverage private sector investment. As a department, I would offer that we're looking at models like Indigenous Business Australia to determine the range of services they offer, the results they have achieved, and the contributions of the public and private sectors in financing activities. Key considerations include the viability and affordability of such a model. Pending the department's findings, the committee may wish to learn more about the Indigenous Business Australia example and its potential applicability here in Canada.

ln closing, let me underscore that we are very pleased to assist the committee in any further work on this critical issue, with a view to helping improve the economic outcomes of aboriginal people in Canada.

Thank you for your time.

I'm sorry I went over time, Mr. Chair.

[The Chair, Conservative, Blake Richards]

That's not a problem at all. You've certainly helped provide us with a good background and basis for the study. Thank you very much for that.

We'll move now to the first round of questioning from members.

I now give the floor to Mr. Genest-Jourdain.

[Jonathan Genest-Jourdain, NDP, Manicouagan, QC]

Good morning, gentlemen.

Mr. Beynon, in your presentation, you identified the use of lands and resources as one element to facilitate access to capital on reserves. You know as I do that the vast majority of reserves in Canada are rather small.

Do you think that access to capitals must absolutely involve mortgaging the traditional territories of the country's aboriginal communities, rather than simply making use of the resources on reserve lands?

[Andrew Beynon]

That is a good question.

We certainly are trying to emphasize what we have observed in terms of the barriers to access to capital created by the Indian Act system in terms of on-reserve lands management. With respect to your question about off-reserve areas, there it's largely a question of solving the right partnerships between provinces, first nations directly, and industry in order to unlock those issues. It's not quite the same in terms of the barriers imposed by the Indian Act.

I do recognize the point you're making, that in order to obtain access to capital and have heavy participation of first nations in off-reserve projects, which can often be major projects, it's certainly an area that we also have to look at. My colleagues may want to speak to this as well, but it's a question of, for example, trying to work with first nations, industry, provinces, ourselves, and other federal departments to look at what the ingredients are that could lift an opportunity for participation in mining projects, forestry, etc., off reserve.

[Jonathan Genest-Jourdain, NDP, Manicouagan, QC]

Thank you.

You also talked about financial literacy. I am interested in everything that relates to the social aspect.

What are the current federal programs that encourage an understanding of the financial principles involved in starting up a business and gaining access to capital? At this time, what programs are there for the first nations?

[Andrew Beynon]

I' m going to ask my colleague Brad Cline to answer your question.

[Brad Cline, Acting Director General, Aboriginal Entrepreneurship Branch, Department of Indian Affairs and Northern Development]

Thank you for the question.

We build financial literacy through a number of means. We have a program called aboriginal business and entrepreneurship development at Aboriginal Affairs and Northern Development. We have a small amount of grants and contributions funding and we work with national and regional aboriginal organizations on financial literacy projects to help build the capacity around when people want to start businesses. There are discrete projects that we do support. Also, we work with an organization called the National Aboriginal Capital Corporation Association. We provide supports to that organization through an aboriginal capacity development element, which is approximately $1.3 million. That helps with the training of board members, training of aboriginal financial institution staff. Again, we work in partnership with that national organization across that 60-member network.

[Jonathan Genest-Jourdain, NDP, Manicouagan, QC]

Thank you.

Mr. Chair, how many minutes do I have left?

[The Chair, Conservative, Blake Richards]

You have three-and-a-half minutes.

[Jonathan Genest-Jourdain, NDP, Manicouagan, QC]

I'm going to share my speaking time with my colleague.

[Jean Crowder, NDP, Nanaimo—Cowichan, BC]

Thank you, Mr. Chair. I thank the witnesses for coming.

In your presentation, there are a couple of points I want to have clarified. You mentioned the leasing process. We know that this can be a cumbersome and time-consuming process. Can you tell me what the department itself has done to streamline that leasing process? It does seem that's where it does get hung up.

[Andrew Beynon]

Thank you for the question.

There are several things. One, I alluded in my comments to some changes in legislation that Parliament adopted, which has provided some improvements. The other item I would raise for your consideration is that we have quite a lot of experience now with leasing on reserve. One of the initiatives undertaken is to develop a national commercial leasing template. Until about a year ago, we used to have inconsistent leasing practices across the country. Based on experience, we've now created a template precedent, which is what we start with and try to move more efficiently to commercial leasing. We're looking to expand that and to work, for example, on residential leasing templates. I think that those initiatives are part of a streamlining process.

I would offer to committee members that there are limits to that. With the Indian Act regime, we can take it only so far. Experience has shown that first nations that operate under the first nations land management regime, and who undertake leasing activities directly themselves, without involving the department or the Department of Justice, proceed faster.

[Jean Crowder, NDP, Nanaimo—Cowichan, BC]

With regard to the FNLMA, I think you're well aware that the interest is far greater than current capacity. What is being done to allow and support more first nations to come under the FNLMA? You cited the KPMG study. I think the committee looked at that a year or so ago. The results are quite positive. What's happening in order to ramp that up?

[Andrew Beynon]

I'm glad you asked. There are many things. First of all, let me just offer that there will be an updated KPMG report, some case studies, coming very soon, probably in the next month or so. We would be pleased to share that with committee members. Again, I think it's indicating very positive results for the first nations land management regime.

In terms of responding to the demand, we're working very closely with the Lands Advisory Board and the First Nations Land Management Resource Centre on opportunities for expansion across the country. A number of first nations have been announced as potential new entrants. When some of them advance into the regime, they will occupy spots, but we're watching very carefully, for example, any of the first nations who may, ultimately, choose not to go there or who may have had unsuccessful votes and we're looking to rapidly fill those spots. We're also looking at further opportunities for investment in the first nations land management regime over time. We're hoping to continue that expansion, because we do think that it's important.

[The Chair, Conservative, Blake Richards]

Thank you. The time has expired on that round.

Now we have Mr. Strahl.

[Mark Strahl, Conservative, Chilliwack—Fraser Canyon, BC]

Thank you. If I don't ramble on too long, I'll share some time with Mr. Seeback.

My question involves the leasing provisions as well. In Chilliwack where I come from, there are many first nations that have high capacity. They're in first nations land management. They're in the finance authority. They have leased and built residential housing for primarily non-native clients who have long-term leases. I assume those people can use that leased home on reserve as an asset that they can get a loan against at the bank. I guess we'll have to ask that of the commercial lender.

Theoretically, does the Indian Act allow for a lease to a band member, or does it have to be someone who is not a band member who can lease a home on reserve?

[Andrew Beynon]

It's open to having leases to members and non-members. There is that flexibility. The same flexibility arises under the First Nations Land Management Act. As you said, in many communities they've had tremendous economic success in moving beyond their own members and looking to have major housing developments and real estate developments which involve either commercial leases or residential leases. I would just offer for committee members that for many of the creative communities, including the ones that are in your area, their success particularly when operating under the Indian Act has been in spite of those obstacles created by the Indian Act and due to tremendous creativity on their part, not because the Indian Act makes it easy to do.

[Mark Strahl, Conservative, Chilliwack—Fraser Canyon, BC]

I guess in a roundabout way I was trying to ask my question. Currently most band members are provided with a home, and I don't know what the arrangement is, but certainly they have no title to it and they live there at the pleasure of the chief and council. So I guess my question would be, if a person living in one of those homes wanted to go and start a small business to service power lines or they just needed a pickup truck and some chain saws and that kind of level of capital, if they had the ability to actually lease that home from the band, would they then be able to go the bank and say, “I need a $50,000 loan and can you give it to me”? Or are they prevented from setting up a lease structure on those community homes that would allow for that?

[Andrew Beynon]

A few communities have been very creative in securing mortgage financing despite the limitations under the Indian Act.

In answer to your question, yes, some first nations communities could choose to enter into a more robust lands and housing regime providing leasehold interest to their community members, and that would create more of an opportunity to secure financing. There are also some first nations leaders who are considering going one step further and thinking about the potential option of private property ownership or fee simple ownership on reserve to unleash even more strongly that potential to secure the value from individual homes and property.

[The Chair, Conservative, Blake Richards]

Three minutes, Mr. Seeback.

[Kyle Seeback, Conservative, Brampton West, ON]

Andrew, I want to pick up a little bit on where Jon went when you were talking about the FNMLA. I've taken a lot of time to look at that program and I think it's fantastic. Every year when I make submissions to the finance minister on where we should send some more money, I say FNMLA, because I know the good it does.

Where are we on the wait-list? What are the actual numbers? How do you see getting through those numbers to process those? It seems to me it's a critical factor in helping with capital. How long is someone on the wait-list right now?

[Andrew Beynon]

Mr. Chair, I would like to provide a very precise answer to the committee, because we maintain those statistics and the numbers are changing over time, but I'll provide some ballpark numbers. We've now moved to approximately 50 operational first nations across the country. It is a major increase from just a few years ago. In terms of developmental first nations, there are approximately 25 more who are still working their way through developing their land codes, their laws, and their systems in order to put this to a community vote. So on the horizon, there's still quite a bit of expansion going.

The waiting list is an interesting question. I would say it's approximately 25 to 50 more, but that's an ever-changing waiting list. As more and more first nations see what others have achieved, our waiting list grows or the pent-up interest grows. In terms of those who have been on the waiting list and how long they're sort of parked on that waiting list, some years ago the regime was closed to new entrants. There was quite a backlog. We've now moved through that backlog significantly so it's not a huge time length. It's not like some of the old specific claims, and so on. But we're really trying to respond to that pent-up interest.

I think you know there was a target that was set of 90 first nations by 2017. We're just working as hard as we can to try to meet that particular target.