Indigenous and Northern Affairs Committee on May 7th, 2015

[The Chair, Conservative, Blake Richards]

We'll call the meeting to order.

Welcome this morning to the 40th meeting of the Standing Committee on Aboriginal Affairs and Northern Development. We're continuing our study on access to capital.

We have two organizations with us this morning. From Community Futures North Central Development, we have Chief Marcel Moody, the chairperson of the business development committee; Mr. Tim Johnston, the manager; and Ms. Frances McIvor, chairperson. We also have with us this morning, from the Aboriginal Savings Corporation of Canada, Mr. Jean Vincent, president and general manager.

We'll start with Community Futures North Central Development. I believe, Mr. Johnston, you are making the presentation on behalf of the organization. You have 10 minutes for your opening remarks. The floor is now yours.

[Tim Johnston, Manager, Community Futures North Central Development]

Mr. Chair, thank you for the invitation to appear today. I am Tim Johnston, manager of North Central Community Futures Development Corporation Inc. I am joined today by our chairperson, Frances McIvor, an entrepreneur from Wabowden, Manitoba, and a member of the Peguis First Nation; and Chief Marcel Moody of Nisichawayasihk Cree Nation in Nelson House, who chairs our business development committee. We are grateful for the opportunity to share our comments regarding access to capital.

CFNCD was formed in 1997, with the assistance of Western Economic Diversification Canada, as a regional, community-based economic development agency. Our region covers the north central portion of Manitoba and extends from Norway House in the south to Churchill in the north. The population is approximately 35,000, and is comprised of seven first nations, seven northern affairs, and three urban industrial communities. Some unique aspects include that all five of the northern first nations that are signatories to the current Manitoba hydro development projects, as well as the Canadian city with the highest percentage of first nations residents, are within the region and members of CFNCD.

CFNCD is an aboriginal financial institution and a member of the National Aboriginal Capital Corporations Association.

CFNCD programs include business development through the provision of business loans and consultative services and support, and community development by providing support and assistance for initiatives that enhance quality of life and viability of communities. The CFNCD board is of the position that neither of these two functions can achieve success without the other. As noted in “Sharing Canada's Prosperity—A Hand Up, Not a Handout”, the final report of the Standing Senate Committee on Aboriginal Peoples in 2007:

Successful economic development depends on a community's capacity to manage and develop those resources to its economic benefit. Without this capacity, the economic value of lands and resources will be limited.

However, for today's presentation, CFNCD will focus on business development and the challenges, barriers, and opportunities relating to access to capital for first nation entrepreneurs and communities in our region.

Since inception in 1997 to March 31, 2014, CFNCD has advanced a total of $6,625,221 in loan funds designed to assist entrepreneurs for start-up, purchase, or expansion of a business. CFNCD was capitalized in 1997 with $900,000, and received $100,000 in 1998 based on demonstrated need, but has not since received any additional capitalization. The total bad debt is $576,000, of which a total of $120,000 has been recovered, meaning a loan loss rate of 8.7%, with a recovery rate of 20.9%, for a total loan loss of 6.9%. As a developmental lender, the CFNCD board is proud of this achievement.

Over the last two fiscal years, from April 1, 2012, to March 31, 2014, CFNCD has advanced 13 loans to new businesses, for a total of $404,000; advanced 14 loans to existing businesses, for a total of $633,000; rewritten four loans at a value of $122,000; leveraged $900,557; and created a total of 58 full-time and 39 part-time jobs.

The question is, how can a loan fund of $1 million achieve these results? The answer is it cannot. CFNCD has accessed additional capital in the amount of $1,075,000 by way of five loans from other sources: four from the Community Futures Investment Funds in Manitoba, and the initial loan from another AFI, Northwest Manitoba Community Futures Development Corporation in Lynn Lake.

The ability to access additional capital has been critical, but it also creates challenges. The cost of borrowing must be factored into the lending rate. Also, as the funds are borrowed, the tendency is to become more stringent in lending funds, and loans become strategic. This eliminates some borrowers from accessing capital. These challenges should not necessarily be viewed as negative, but they do impact the availability and the cost of capital for entrepreneurs.

CFNCD served as an external delivery office for aboriginal business programming from September 1998 until March 31, 2013, with Industry Canada, Indian and Northern Affairs Canada, and Aboriginal Affairs and Northern Development Canada. CFNCD then delivered programming for the First Peoples Economic Growth Fund and Louis Riel Capital Corporation until March 31, when funding constraints resulted in termination.

Unfortunately, the devolution of the program over the years reduced the CFNCD role, and our organization no longer provides this service. CFNCD was one of the most successful XDO offices in Canada because the office was located in our region, in northern Manitoba, with a full-time staff person available to assist first nation communities and entrepreneurs. As a result, significant strategic investments occurred at a local level in major infrastructure and resource sector projects.

For example, NCN, in 2005, with a contribution of $500,000, expanded the Mystery Lake Motor Hotel property in Thompson, at a total project cost of $2.8 million. This was a strategic investment, as the property is currently before the federal government as an addition to reserve. This will enable the first nation to generate revenues for reinvestment.

Another example is a $500,000 contribution received by Nisichawaysihk Construction Limited Partnership, in 2009, for construction equipment totalling $5.8 million relating to the Wuskwatim hydro project. Unfortunately, devolution has resulted in a number of changes, including reducing the contribution formulas, as well as the delivery of the program out of Winnipeg, which is approximately 750 kilometres from Thompson. This has a detrimental impact in reducing access to capital due to a lack of program visibility and presence in the region. As a result, the developmental lending role and capacity building is diminished.

The ability to build and foster long-term relationships with first nation, aboriginal, and non-aboriginal communities, as well as industry, is critical, and an opportunity to address access to capital barriers. The CFNCD board has an objective to create wealth in our region by encouraging a shift in our economy, from being based largely on social transfers to the creation of wealth. This requires participation by all stakeholders. The federal government needs to consider legislative, as well as department, program, and policy changes.

Enabling first nations to create and retain wealth for capital investment is critical. Industry and the resource sector need to increase participation and opportunities for first nations investment in major projects and developments. This will require a significant period of time, and a strategy that combines capacity building as well as creative and increased levels of support.

Improved relationships amongst stakeholders is critical. Our region has proven that strong relationships with real action can make a difference. The creation of an aboriginal accord between our largest urban centre and stakeholders in the region was a beginning. I have brought copies of the report. I apologize that it's only printed in English, but I can leave them for your information, if desired.

Since signing the aboriginal accord in 2009, the Thompson Economic Diversification Working Group has recognized that economic development in our region is dependent on partnerships with communities, aboriginal interests, and industry. Work has begun to create a northern Manitoba economic accord, with a goal of creating a set of shared values, beliefs, and principles among first nation and aboriginal communities, industry, environmental conservation, and other government and non-government agencies.

ln conclusion, some consideration of the following would be beneficial to improve access to capital.

Additional capital is required by many AFIs, including CFNCD, to meet the demonstrated need, but it should be based on performance. Additional loan capital must be available to all AFIs. Aboriginally controlled Community Futures AFIs like ours have not always felt that we are equal or full partners at the NACCA or federal government table.

An interest rate buy-down program is necessary and must bridge the gap between borrowing and lending costs. Any devolution of programs must consider the impact on the entrepreneur and communities served. If centralization is to occur, plans must be in place to ensure program accessibility, presence, and visibility. This could be accomplished by way of subcontracts with agencies such as ours.

The federal government must coordinate departmental policies and programs to maximize benefits to first nations. NCN and the City of Thompson reached a municipal services agreement in 2005, amended in 2010, and yet both parties eagerly await designation by the federal government. At a time when access to capital is an issue, the last thing that the federal government should be doing is standing in the way of first nations creating their own wealth.

ln preparing for this presentation, Mayor Dennis Fenske of the City of Thompson and NCN Chief Marcel Moody both requested that I to encourage the government to move this process forward. Program contributions and funding should focus on creating opportunities for first nation communities to participate in unique and timely economic projects in their territories. In our territory, it's hydro development. This was raised in the previously referenced report, which said:

ln addition, because financing options are often limited, communities find themselves unable to invest in infrastructure improvements or participate in large scale resource development projects.

Finally, a need exist to encourage and foster better relationships between first nation communities, industry, and non-first nation communities in order to maximize economic opportunities for first nations.

Our corporation thanks you for the opportunity and would welcome any questions.

[The Chair, Conservative, Blake Richards]

Thank you very much.

Next we'll turn to Mr. Vincent for your opening remarks, and then we'll go to questions from members.

The next 10 minutes are yours.

[Jean Vincent, President and General Manager, Aboriginal Savings Corporation of Canada]

Thank you, Mr. Chairman.

Mr. Richards, members of Parliament, Chief Moody, and speakers, thank you for giving me the opportunity to talk about access to capital and some solutions that we have developed over time.

If you don't mind, I will continue in French in order to be more efficient, given the time that's in front of me.

I would like to talk to you about the problem of First Nations’ lack of access to capital. My colleagues here today, members of the National Aboriginal Capital Corporation Association (NACCA), have explained this problem very well. My organization has also been a member of NACCA since 1992.

First among the factors at play in the problem of First Nations’ lack of access to capital is section 89 of the Indian Act, which stipulates that the property of an Indian on a reserve is not subject to seizure. Another factor is that communities are located a very long way from the large financial centres. Aboriginal communities are also clearly characterized by cultural differences. A traditional banker, who is not fully aware of an environment, will generally be hesitant to provide financing.

Aboriginal people generally have difficulty in securing access to capital. Aboriginal entrepreneurs are not immune from this reality. That is why, in 1995, the federal government, in conjunction with First Nations, launched the Canadian Aboriginal Economic Development Strategy by injecting $345 million into First Nations. That sum included $200 million to create SOCCA, the native commercial credit corporation. I am the President and General Manager of SOCCA, which was established in 1992 with an initial capitalization of $5 million, plus an additional $3 million that came from the federal government, for a total capitalization of $8 million.

From 1992 to today, we have provided $60 million in loans. We have invested in more than 500 business projects, for a total of 650 business loans. The capital of $8 million is now $11 million. Our capital has borne fruit. For SOCCA, I feel that the best is yet to come.

Another of SOCCA’s accomplishments is that we have opened the door to establishing partnerships. We have been working for a number of years with the Mouvement Desjardins in Quebec and with the Royal Bank of Canada. We see SOCCA as a kind of pioneer. It has opened doors and introduced the aboriginal market to major financial institutions. Over time, we have seen that large banks and credit unions, once reluctant to provide financing to aboriginal communities, have become more and more involved, having recognized that good business opportunities exist there.

SOCCA has been involved in education and development. By so doing, it has prepared the market, in a way. At the beginning, we financed small companies and those companies, with a positive experience of credit, quietly moved to large financial institutions. In 2005, in the course of its activities, SOCCA noticed that communities had other kinds of needs, specifically in housing, which was a very serious problem.

I will not go through all the details with you, but you know that aboriginal communities all across Canada have a housing backlog that runs into billions of dollars. Solutions must be found. In 2005, SOCCA started another organization, the Aboriginal Savings Corporation of Canada. To begin with, it was a pilot project. The corporation had no capital and relied on SOCCA’s financial capabilities.

The pilot project consisted in testing the market and issuing $1 million in bonds for sale to First Nations’ members who had a taste for saving. The first bond issue was around $1 million, but our objective was actually more modest.

We told ourselves that, if we sold $500,000 worth, it would be a success. The day before the bonds were issued, we had already reached the million. After the pilot project, we continued issuing bonds. Since 2005, we have had 18 bond issues with a total capital of $22.3 million. Basically, the bonds have all been sold to the members of eight different First Nations.

In 2012, we also opened the market to large institutions. Three bought Aboriginal Savings Corporation of Canada bonds, including the Native Benefits Plan, the aboriginal pension fund in Quebec, which today is a half-billion-dollar fund.

To whom do we make loans? Basically, the money assembled from the bond issues is lent out for the communities’ housing needs. To date, we have 57 borrowers and we have made loans totalling $24 million. The market we are targeting first and foremost is made up of solvent individuals who wish to own their own homes. We also work with First Nations band councils that have their own housing funds. When the funds need capital, they can come to us for a loan. We also make loans for community housing projects.

The loans we make come with training programs tailored to the reality of the communities we serve, depending on their level of advancement.

One of the objectives for ourselves and for the Aboriginal Savings Corporation of Canada is to change the way in which things are done, to change mindsets, and to move from a system of dependence in a community to a system based on responsibility.

Dependence in a community is when tenants see their housing as first and foremost an obligation that the band council has to them. Housing is too often seen as their due, not as an opportunity for a future investment in their heritage.

Tenants basically depend on the band councils. In turn, band councils depend on governments for ministerial guarantees and financial contributions. We have to acknowledge that, in the current climate of austerity—a very popular word in Quebec at the moment—money is not always on the table and not always available.

The lenders collect all the profits and take almost no risk. They make the loans, they make money and they are backed by ministerial guarantees. The big losers, in fact, are band councils, who pay the bills knowing that a ministerial guarantee ultimately means that their operating budgets are going to be reduced.

That system has to be changed and everyone involved must be given responsibility. That includes the lenders, who clearly are going to want to continue making a profit and getting some performance from their capital. However, we need to educate them so that borrowers take risks—borrowers and band councils—but also First Nations members with a home or housing of some kind. They also have to assume some responsibility.

Rather than to have them as tenants, our objective is to make them homeowners. When you own your home, you are inclined to take care of it. You are inclined to maintain it because it may become one of the major assets in your legacy, and when you retire.

However, we must not be under any illusions. Moving from a system of dependence to a system of responsibility is not going to happen overnight. It will take time.

We need pilot projects, pioneers and organizations with development as their mission that are going to quietly create a housing market in the communities. That is much like we did with the entrepreneurs with the Native Commercial Credit Corporation and it is what we intend to do with the Aboriginal Savings Corporation of Canada. The change will be gradual. We will have to be patient, but we are also going to need the commitment and support of the government to allow the changes to happen.

Rather than opting for a system of ministerial guarantees, the government should consider the possibility of providing the means to make the investment products offered to investors and those with money work. What must be guaranteed, then, are the sources of capital rather than the loans. The management of the risk and the loans must be left in the hands of the organizations that know the market well and who specialize in it.

Thank you.

[The Chair, Conservative, Blake Richards]

Thank you, Mr. Vincent.

Next we will have members' questions.

We'll be moving to Ms. Ashton first.

You have seven minutes.

[Niki Ashton, NDP, Churchill, MB]

Thank you very much.

Thank you to all of our witnesses for joining us today. You travelled quite a bit to get here.

My first question is directed at North Central Development.

Mr. Johnston, you referred to a partnership with NCN, particularly with regard to a parcel of land that is owed to NCN and that has yet to receive approval from the federal government despite a delay of 18 years. We know that the treaty land entitlement process is an immense barrier to economic development in our region.

I'd like to begin by asking Chief Moody what this situation means for NCN. To both of you, how important is it to move forward?

[Chief Marcel Moody, Chairperson, Business Development Committee, Community Futures North Central Development]

Without stating the obvious, I think it's critical that we get our lands transferred to reserve.

We have a property in Thompson. It's known as the Mystery Lake property. There's a hotel and a bar. There are about four acres of land. We've been trying to convert that property to an urban reserve for the last 12 years. It's been a slow and cumbersome process. The file is finally here in Ottawa. It's before the Treasury Board.

It has taken us that long. Over that time we have lost between $20 million and $30 million because that property hasn't been converted to a reserve. It's taking such a long time for the property to be converted that a lot of revenue that's been lost. That has had a major negative impact on what we're able to do as a community. sure.

The support from the mayor and council of Thompson has been great. As you know, Tim Johnston was our mayor before. The support has been always been there from Thompson. It's a process that's so slow, and it really impedes our ability to move forward as a community.

[Tim Johnston]

Mr. Chair, I appreciate the question.

The Mystery Lake property is an example of aboriginal business development programming working, in that the acquisition of the property by NCN was done with the assistance of Aboriginal Business Canada financing, in addition to the expansion I spoke to.

One of the comments we make is that the challenge, when we're talking access to capital, is that we have to encourage first nations to create capital. Unfortunately, right now, at the federal level there are real challenges with doing that between programs and policies among departments, which counteract, in many ways, the ability of first nations to accumulate wealth.

When we talk about access to capital, it's interesting that we put barriers in front of first nations to accumulating wealth, which creates capital for investment. Mystery Lake is a prime example of this problem. The process has been under way for 12 years, including many years prior to that in negotiations. The agreement was signed in 2005. It's 2015. This is absolutely a shame.

[Niki Ashton, NDP, Churchill, MB]

Thank you for making that strong point.

Speaking to some of the more broader challenges that you faced as North Central Development, I'm wondering what you would be able to do as North Central if you had access to more funds. What could first nations in northern Manitoba and Manitobans expect from that?

[Tim Johnston]

In response to the question, there are two points. When we look at our own loan fund, which was capitalized at a million dollars, we lend approximately $600,000 a year. Our terms are one to five years. The math says we can't do it. Our fund would require an amount of $2.5 million to meet the current demand we see in the region.

Interestingly enough, one of the challenges that has been put forward by AFIs is that they're not sustainable in the current market conditions in terms of interest rates. In fact, with the loan loss rate of 6.9%, we are sustainable even at these low interest rates.

Again, I think performance and demand is critical, but a loan fund in our region would require $2.5 million, based on the $1 million. We've borrowed $1 million of that amount. We continue to look at unique ways to create a larger loan fund. That's our specific fund.

In terms of aboriginal business Canada funding, we used to flow approximately $500,000 to $1 million dollars a year in contributions. Those are critical because, as has been pointed out, during the transition over the last 20 years in northern Manitoba we have moved away from funding small projects—which, quite frankly, had a larger or a higher risk attached to them—to looking strategically at major investments for long-term returns, such as the participation of NCN in the Wuskwatim hydro project. That will earn returns as a partner as long as that dam is operating, but it took $4 million in a contribution leveraging other private funds in order to get there. We've got to start thinking more strategically. Quite frankly, that means that contributions will need to be larger if we want to minimize the risk in the long haul.

[Niki Ashton, NDP, Churchill, MB]

Thank you for that feedback.

I'm wondering if you could speak a bit about the kind of lending needs you see in the region where you operate.

[Tim Johnston]

I think what we've seen, as I noted, is a transition over time. Quite frankly, northern Manitoba is active in terms of development. There are major hydro developments taking place. As I noted, all five of the first nations that are signatories of the Manitoba Hydro development are within our region. There are unique opportunities there.

In the past, unfortunately, we focused on the wrong areas in terms of funding. We often focus purely on job creation. The unfortunate part of that is that when the project's done, the job is done. One of the things we've seen with the NCN example with Wuskwatim is that if you create partnerships, and if you create unique opportunities to establish businesses that provide service, that has a far greater success for a longer impact.

For example, moving outside of hydro, the mining industry right now has a series of regulations. I just happened to attend a session in Saskatoon on green mining. We have to encourage and support first nations to look at providing the services the mining industry requires, not on a specific short-term basis but long term. We know that the environmental regulations are increasing. Why are first nations not at the table with businesses providing those types of services?

We need to be more creative in our outlook and provide the support to do that. There are great examples in this country, such as B.C. and southern Ontario, where we've seen some of those things.

From our position in northern Manitoba, we have a unique economic opportunity with the hydro developments. We need to be strategic in our investments, and both levels of senior government have to do the same.

[The Chair, Conservative, Blake Richards]

Thank you very much.

We'll move now to Mr. Seeback for the next seven minutes.

[Kyle Seeback, Conservative, Brampton West, ON]

Thanks, Mr. Chair.

Mr. Johnston, I found it interesting that you say you initially capitalized $900,000 and then another $100,000, so you have $1 million dollars worth of capital. That capital comes from the federal government, I assume. It seems to me that your institution is operating profitably because you are still able to give out money. Do you operate at a loss, or do you operate profitably?

When we heard yesterday from Francine Whiteduck, she was explaining that AFIs generally operate at an average of an 8% loss. How does your particular organization do?

[Tim Johnston]

Mr. Chair, we're one of the fortunate ones. I say that, in all honesty, partially because of our geographic location and the unique economic opportunities in the region. So we have the ability too...and we've been fortunate that many of the projects that we've lent to are successful. We are sustainable. I think Ms. Whiteduck noted that there are some AFIs that are sustainable, and we are one of them. We do that, again, because of some of the success we've had in lending.

[Kyle Seeback, Conservative, Brampton West, ON]

Does that not give you the opportunity to grow your capitalization? Is your organization structured as such so that if you make profit like a regular bank, you therefore can put that into capitalization and have more funds out to loan?

[Tim Johnston]

Correct. The original capitalization of $1 million appears on our financial statements as an amount owed to the federal government. So it is a repayable contribution. Any additional funds—revenue, profit—made from lending activities, after loan loss, accrues to the fund and is used by the fund. Our board has been very clear that we limit the amount of money taken from the fund for administration purposes. This fiscal year, for example, on $80,000 in interest, which is about normal on an annual basis for that fund, a maximum of $10,000 is attributed to administrative costs relating to promoting the fund. We earn approximately $70,000 net to the fund. It stays in the fund to grow it. It's very hard to grow a fund at $70,000 when we talked about the some $500,000 loan loss. But we are sustainable, one of the few AFIs, again largely because of the unique opportunities and the strength of our region—and good lending practices, I might add.

[Kyle Seeback, Conservative, Brampton West, ON]

The average loan loss, according to Ms. Whiteduck on Tuesday, was around 5%. So up at 6.9%, you guys seem a little bit higher than average loss but still able to operate profitably. So, what's the difference between your organization and others? Is it that you've, sort of, capped this administrative cost at $10,000? Ms. Whiteduck seemed to say that the administrative cost was the issue in other organizations operating at this average at 8% loss.

[Tim Johnston]

Right. In response, you have to take a look at the type of AFI it is. Aboriginal capital corporations largely do not receive any offsetting administrative dollars. So their challenge is that they have to return a higher rate of return to offset some of that admin. For a community futures AFIs, there is some administrative funding provided by the federal government. In our case, because we are a regional development agency, we attribute a specific amount of those dollars achieved, less than 30%, to lending practices. But I think that the average may be 5%. I think to get to 5% you have a wide range. At 6.9% we're sustainable, and again, I think that's because our fund requires us to be diligent in our lending practices.

[Kyle Seeback, Conservative, Brampton West, ON]

Is your fund different from other funds then, or is that just the policies you've adopted?

[Tim Johnston]

I think it's the strategy we've adopted because our fund is so small. We can't afford to take high-risk loans, which again is an issue of access to capital. Our small loan fund necessitates that we be very strategic in our lending, which means some people who probably need dollars aren't going to get them from North Central, because we can't afford to take that high a risk.

[Kyle Seeback, Conservative, Brampton West, ON]

So, the way your organization is set up is that you get some funding for administration. Other AFIs do not get administrative cost funding, and therefore they have to take all of their administration costs out of loan interest profit and proceeds.

[Tim Johnston]

Yes, and the difference is that aboriginal capital corporations were capitalized at a much higher level than the CFs. So, we were capitalized at $1 million. Many ACCs would have been capitalized in the range of $3 million to $7 million. It's a fundamental difference.

[Kyle Seeback, Conservative, Brampton West, ON]

Do you think you can operate profitably even if you have to charge your administrative fees out of your profits?

[Tim Johnston]

I think if the loan fund were a reasonable amount of money, we could. Again, I think that in the discussion of access to capital, if we're going to do that, we and the program would have to be very strategic about what its objectives were and where it's going to place that money.

If you look historically, the program has had a tremendous transition in lending, and I think largely in terms of opportunities for first nations over the last 20, 30 years. I look just in our own region, the opportunities that NCN had with Wuskwatim weren't available in the hydro project developments of the 1970s. So I think that one of the things that we haven't done—and that's why in the presentation I talk about our need to be innovative and creative—we all too often cling to program policies that have been in place and we don't adapt to the changing circumstances in the environment in which we operate.

So, for example, in northern Manitoba, I think we have to take a look at those opportunities, and one of the things we have suggested to NACCA is that there is a need to develop a fund that will target major projects' infrastructure development. In our area it's hydro, in another area it might be mining, it might be forestry. But it's interesting that when the country moved toward infrastructure development, we as lenders didn't really respond to take advantage of many of those dollars that were put into the system that we could have leveraged. That's where I think strategically we're missing it; we are not able to respond quickly enough to the changing situation.

So the whole issue of sustainability, I think, has to be revisited and you have to take a look at how you create that optimum opportunity. But I think it's going to require some real discussion on objectives in lending. If you lend and you lose 100%, you're in trouble.