Industry Committee on Nov. 20th, 2014

[The Chair, Conservative, David Sweet]

Good morning, ladies and gentlemen. Bonjour à tous.

Welcome to the 30th meeting of the Standing Committee on Industry, Science and Technology. Today we're going to be looking at portions of the budget implementation act that were referred to us a couple of weeks ago.

And we have three organizations with us. I think it's just three witnesses as well. From the Canadian Manufacturers and Exporters we have Martin Lavoie, who is the director of policy; from The Conference Board of Canada, we have Glen Hodgson, senior vice-president and chief economist; and from Futurpreneur Canada, we have Julia Deans, chief executive officer.

I'll follow the order that's before me.

So, Mr. Lavoie, I think the clerk has advised you to try to stay within five minutes for your opening remarks.

Please proceed.

[Martin Lavoie, Director of Policy, Canadian Manufacturers and Exporters]

Thank you, Mr. Chair.

Mr. Chair, members of the committee, thank you for inviting me, once again, to appear before the Standing Committee on Industry, Science and Technology to speak to Bill C-43. I was asked to comment on the sections pertaining to the Business Development Bank of Canada.

Before I begin I'd like to say a few words about my organization. CME represents about 10,000 companies nationwide. We're Canada's largest trade and industry association. More than 85% of our members are small and medium-sized enterprises, and we represent every industrial sector and every export sector of the economy.

Despite the loss of jobs in the sector in rough times during the financial downturn, of course, manufacturing remains the industrial sector with the highest economic multiplier. Every dollar of value created by manufacturing companies leads to close to $3.50 of direct and indirect benefits in the economy. Manufacturers account for over half of business investment in R and D, and we also represent about two-thirds of all Canadian exports.

As you can imagine, manufacturing is characterized by its heavy dependence on capital. While you can invent a new software on your laptop in your basement, you will be limited doing mass production in your garage. The access to financing is crucial, not only to start new companies, but also to finance the growth of the manufacturing companies.

We believe that all financial institutions have an important role to play for manufacturing to succeed. Chartered banks, EDC, BDC. In terms of BDC, our members who do business with them generally like BDC because they've shown an ability to be more flexible in the terms and conditions associated with their financing.

The support that manufacturers get from BDC is quite impressive. Twenty-two per cent of BDC's financing portfolio is in manufacturing. To give you an idea of scale, manufacturing represents 13% of Canada's GDP. All subsectors of manufacturing benefit from BDC financing. I think it reflects the importance of our sector for BDC, but also the capital-intensive nature of our businesses and the financial challenges that our members are facing.

One area that is becoming crucial to our members, especially SMEs, is support for their international activities. By that I don't mean financing exports because EDC is already taking care of that. I mean providing financing services to foreign affiliates of Canadian companies, for example. This is an important new role that BDC will be able to play. An increasing share of our members are looking to grow by investing abroad, either to buy market share by taking over competitors in foreign markets or by setting up operations overseas to sell into new parts of the world. It's important that those manufacturers who value BDC as a business partner can continue to count on their support as they move forward with their plans.

I'd like to end my remarks maybe by raising the importance of BDC and chartered banks working together, and not against each other. In our view BDC and the banks must act in a responsible manner when it comes to providing financial services. For BDC it means what they're offering must provide an alternative solution to the ones offered by the chartered banks, and they've been playing this role very well so far. For chartered banks it means they should not use BDC financing as a reason to reduce the credit available to companies. We can talk about that a bit further if you want, but we've heard some complaints from our members in the past with respect to the relationship between BDC and chartered banks and I'd be happy to talk more about that.

Thank you very much for inviting me today.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Lavoie.

We'll now move onto Mr. Hodgson.

[Glen Hodgson, Senior Vice-President and Chief Economist, Conference Board of Canada]

Thank you, Mr. Chairman and members of the committee. It's a pleasure to be here. I spent about 20 years of my career at the Department of Finance and then at EDC dealing with financial crown corporations, so it's always fun to be invited back to that space. I know them far too well in terms of the government's capital structure operations.

It's a pleasure to be invited today to speak in support of the BDC amendments. I want to focus on two things.

First of all, there is the important role that the BDC played during the financial crisis in 2008. At the Conference Board, we wrote the only book I think written in Canada about the policy response to the financial crisis. I think Canada was very lucky to have the BDC and the EDC as policy instruments. Financial markets basically shut down after the financial crisis, and we had two powerful policy instruments—or even three, because Farm Credit also played a role—that we could turn to in order to fill gaps in the financial marketplace.

The BDC was asked to do some exceptional things. It was able to do so fairly quickly. I think that anything we can do in legislation to actually expedite that process.... Because this won't be the last financial crisis we'll face. It may be the biggest that most of us will see in our lifetimes, but we know from academic research that there have been 200 financial crises under capitalism, going back 200 years. Smart governments have tools available to deal with a crisis when it happens, and the BDC is one of those policy tools.

Ultimately, the BDC is there to build capacity and add capacity to the Canadian financial system and to do it in a very smart way without really being a cost to the taxpayer. I think the BDC has made great progress in its evolution in being a very sharp policy tool.

The other point I want to make is that international business today—or business today—is built around what we call “global value chains”. In my time at the EDC I came up with a concept called “integrative trade”, that is, looking at international businesses and the integration of all the parts: exports, imports, investment, services, and goods. The value chain part is really key for the BDC because more and more Canadian firms have to find a way to fit into the global value system, where they can actually find markets and customers abroad as well as within Canada. It's very logical that capital from the BDC should be able to follow businesses as they try to expand their business model on a global basis. Therefore, the thinking around the amendments in that area I think is very logical.

There's a real difference between the EDC and the BDC and I'm glad Martin made that point. The EDC's strength is in evaluating foreign risk: the risk of foreign buyers and the risk of foreign markets. The BDC's strength is evaluating the operations of firms operating in Canada: growth firms and small firms. Giving the BDC the capacity to play a larger role internationally I think is a very logical extension of the act. Financial and crown corporations are constantly in evolution. This is really just another step in their evolution.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Hodgson.

We'll now move on to Ms. Deans.

[Julia Deans, Chief Executive Officer, Futurpreneur Canada]

Thank you, Mr. Chair.

Good morning and happy global entrepreneurship week. My name is Julia Deans. I'm the CEO of Futurpreneur Canada which until May was known as the Canadian Youth Business Foundation or the Fondation Canadienne des Jeunes Entrepreneurs. We're the only national not-for-profit organization that's helped close to 6,000 Canadians, 18 to 39, launch businesses across the country. I'm very happy to have the opportunity to speak to you today in support of a proposed amendment in division 12 of Bill C-43.

This amendment will expand BDC's ability to support young entrepreneurs through not-for-profit organizations like ours. We have been co-funding with BDC for young entrepreneurs since 2008. With one application, a young entrepreneur can obtain a loan of up to $15,000 from Futurpreneur Canada and a further loan of up to $30,000 from the BDC. That's up to $45,000 collateral free with just one application through Futurpreneur Canada.

We work really hard to make it easy for young entrepreneurs to work with us. We use as many of our resources as possible for the front-line programs and services we provide to young entrepreneurs. Our admin costs are about 7% of our budget.

The way it works is this. Futurpreneur Canada manages the initial relationship with the young entrepreneur applying for financing and we conduct the due diligence. BDC relies on our strong track record and our sound adjudication process when it looks at applications from young entrepreneurs who also would like loans from BDC.

Since 2008, we have had close to 1,700 young people take advantage of BDC's co-funding. Last year, 44% of our young entrepreneurs also secured co-funding from BDC, so it's on the rise.

I should note that since October, BDC has also provided all of the financing, that's up to $45,000, for 34- to 39-year-olds. They might not strike you as young people but they are and they're often coming to entrepreneurship for the first time at that point. This is a really growing group.

Through this co-funding arrangement, BDC is able to help young entrepreneurs who are considered too risky to get mainstream financing. They're also people who are very hard for BDC to reach and who need a lot of extra support when they're starting their businesses.

The proposed amendment won't change this co-funding arrangement at all. It will, however, make it possible for us to help start more new businesses with less money from government. Right now, we raise money from governments and other sources to provide loans and services to young entrepreneurs. In the future, we plan to secure our loan capital from a private bank. This is a new relationship and so to start with, the private bank, while they get to know us, requires a guarantee. The proposed amendment will allow BDC to provide this guarantee. Given our loan repayment track record, there's a very low risk of the guarantee ever being called upon and BDC will price the guarantee accordingly.

This amendment will mean that the money we raise to provide services to young entrepreneurs will be leveraged to raise private sector money for the loan capital. This could be up to $50 million of new money from the private sector going into the hands of young entrepreneurs in the next five years. It will also mean a reduced ask of governments and improve our future sustainability and our capacity to help grow more successful businesses in the future.

Thank you.

[The Chair, Conservative, David Sweet]

Thank you very much, Ms. Deans.

Now we'll go in a rotation. Colleagues, you're going to have the luxury of five full minutes because the remarks were quite concise from all of our witnesses.

So, we'll begin with Mr. Lake.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you, Mr. Chair.

And thank you to the witnesses today.

I'm really enjoying this. This BIA process is kind of interesting, to have different groups come before us an hour at a time and to learn some new things.

I'm going to start with Ms. Deans if I could. Could you use the opportunity right now to explain your organization to a young potential entrepreneur who doesn't know about your organization? How might you be able to help them, maybe in terms of a change in legislation and maybe in terms of what you do in relation to what BDC does?

[Julia Deans]

Let's say you're a young person with a great idea for a business. You probably are not one of the 10% who has a great business plan. You're going to come to us directly or through one of our 250 partners across Canada, youth-serving agencies or economic development agencies.

We're going to help you get your business plan in order. We have an online business plan writer that 30,000 people have used. It's amazing, if you know anybody who wants to start a business. We're going to get your business plan to a point at which you have a good cash flow for the first couple of years and we feel that it's sound. Then we can lend you up to $45,000, $30,000 of it from BDC, with this one application. You're not having to run around seeing lots of different people.

Before you get the money, you're going to be assigned a volunteer mentor, and you will have that person working with you for two years. We have close to 3,000 volunteer mentors across Canada. It may be a restaurateur who is going to help you because you're a restaurateur. It may be a financier who's going to help you because you're an art gallery owner and don't have those skills. Then we're going to provide you with networking and resources and other things to help you get through your first five years.

If you don't have any collateral, we're not looking for that. We're looking for a good business plan and good creditworthiness. If at any time you want to repay the loan, we let you do that, which is novel as well.

I guess the final thing is that if things go wrong for you, which often they do, we don't punt you to collections. We call you and ask what's going on and how we can help you get through this period. It might be a case of changing the terms of your loan or giving you some advice that's going to help you figure out how to get your business back on track.

The end result is that generally in Canada, just under 50% of start-ups are successful after five years. Our success rate is 50% to 60%. These are young people with no collateral, and they repay their loans at a rate somewhere between 80% and 90%, depending on the year. That money then goes to help more young people.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

That's impressive.

Mr. Lavoie, I'm going to switch gears. I'm going to give you the opportunity to elaborate. You talked about the importance of BDC and banks working together, and earlier you said you might have more to add. I was making a note, because you sounded as if you might have more to add. I'm going to throw the ball to you and let you go with it.

[Martin Lavoie]

It''s that transparent, is it?

First of all, one thing some members report to us is that they sometimes feel that their banker is feeling competition from the BDC. But in their view, the loans they get from BDC are very often their unsecured loans, and the bank was not interested in the first place anyway, so they don't understand why, from their banker's point of view, there seems to be this kind of competition going on.

We've heard from members in some cases, for example, that their banker had told them they had to disclose all their communications with BDC. On two occasions in the last six months I've heard companies saying that the bank told their client they could not take a BDC loan without the approval of the bank, which is new to me.

In many cases, what we hear is that when they take a BDC loan the bank would right away either increase the interest rate on other loans or would pull back certain loans within a certain period of time. I've seen as short as three months.

In their view it doesn't make sense, because by providing an unsecured loan, let's say to access new markets or just because they're growing their business, BDC is doing a favour to the bank. They're helping the company to succeed and to grow and eventually to repay their other loans.

I don't want this to sound as though it is based on a survey of some sort. Many of our members of course have good relationships with their banks, and they wouldn't call me to tell me that, but these are things that I hear. I don't know that I'm the right person to receive those complaints. Maybe there should be some kind of mechanism—I don't know whether it would be the bank's ombudsman or somebody else—to whom I could send those specific cases.

And I don't want to sound as if all the banks are like this, because sometimes they would change banks and another bank would act differently. But these are things that I keep hearing about: this kind of tension sometimes between chartered banks and BDC in the marketplace.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Lavoie and Mr. Lake.

Mr. Côté is next for five minutes.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Thank you, Mr. Chair.

I also want to thank our witnesses for being here this morning.

I first want to bring up the fact that today's meeting is divided into two parts. The second part will be a discussion of recommendations to be proposed to the Standing Committee on Finance.

I think this is fairly disrespectful to our witnesses. At the end of the day, these are not optimal conditions, as there is no way to hold discussions outside this room before those recommendations are submitted. In any case, a committee normally has the privilege of proposing amendments.

Does it bother you to have to study amendments to the Business Development Bank of Canada Act as part of an omnibus bill and to come here when the committee has no power to make any amendments that would reflect your recommendations?

My question is for Mr. Lavoie.

[Martin Lavoie]

I haven't given that much thought this morning, but since you are raising the question, I will comment.

Over the past few years, I have often been invited to appear before a committee where discussions frequently concerned a much broader bill. I didn't know amendments could not be proposed. I personally have no amendment to put forward. I think that the proposed amendments are related to the 10-year-old review of the BDC, at the organization's request.

Generally speaking, I don't see why the committee could not issue recommendations.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Okay.

Our recommendations are one thing, but there is another problem. Unfortunately, the Standing Committee on Finance will be overburdened, as I saw when I was sitting on that committee. This makes the process terribly cumbersome, as well as questionable in terms of validity.

When it comes to amendments to the Business Development Bank of Canada Act, we could easily agree with certain aspects and potentially vote with the government. However, that will not be impossible, as any positive aspects are buried in the omnibus bill.

I will talk about the proposed amendments. I must admit that expanding the mandate related to the funding the BDC provides to support projects outside Canada has some merit. On the other hand, I am wondering whether this might not divert BDC funds that could otherwise be used for the Canadian domestic market.

I think Mr. Hodgson brought up the 2008 crisis. Although the BDC is definitely not at the level of major chartered banks, its counter-cyclical intervention to support economic activity is very significant.

Do you think this amendment could decrease the BDC's capacity to respond? Could it divert part of the BDC's funding to foreign markets?

[Glen Hodgson]

I guess I have two responses.

First of all, the extension of BDC's powers to extend credit beyond Canada's borders is the logical extension of Canadian business today. The world doesn't stop at our border. In fact, more and more we're integrated into a global economy. If we want our small companies that are growing to succeed in the world, we have to ensure that they have access to credit, frankly, wherever they go.

It's great to have a strong instrument like BDC available within Canada. Adding that power simply allows them to follow their clients, and ensure that their balance sheet and operations are always strong. I don't know how it would take away anything from their Canadian operations, in fact.

Here I'll draw upon my experience at EDC, where I worked for 10 years. We were given, on an ongoing basis, new opportunities to grow, new challenges, and you simply find the expertise you need in the market. EDC has to compete for talent in the private market, with the banks quite often, with private capital, with venture capital.

They don't take away any of their domestic operations; they simply add capacity. As a dynamic, organic organization, they're able to do that over time. As we were at EDC, it gives people a chance to actually build new skills as individuals and to really strengthen the fabric of the whole bank. I see it as a positive, organic process, adding capacity within the bank.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Thank you.

[The Chair, Conservative, David Sweet]

Ms. Bateman, for five minutes.

[Joyce Bateman, Conservative, Winnipeg South Centre, MB]

Thank you very much, Mr. Chair. Thank you to all our witnesses for your testimony and for your support of the changes that are being proposed. It's very nice when people, who are going to be directly impacted by those changes, come to tell us that this is the right thing to do. It's very much appreciated.

I want to follow up on a few of the comments some of you have made.

To Ms. Deans first, you mentioned that you're not looking for collateral from youth; you're looking for a business plan and for good creditworthiness. If a young person of 22 has a brilliant idea and you're able to help them with a business plan, how do they demonstrate creditworthiness?

How do you assess that? I'm just curious. How could I help somebody to say, “This is what you have to do to succeed”?

[Julia Deans]

We use the same sorts of diagnostics that a bank would use, so we have a matrix. We look at their credit reports and things to see if they've had any issues. Unfortunately, you'd be surprised at how many 22-year-olds have blown their credit scores because of cellphone bills, gym, and things of that sort.

We're not worried about student loans and things, but things that really damage their creditworthiness because we do need the repayment. When we find that they have an issue, we often counsel them through that or get them help, so that they can restore their credit scores.

[Joyce Bateman, Conservative, Winnipeg South Centre, MB]

Okay, I was just curious.

[Julia Deans]

It's not a huge percentage, but it's pretty sad how many people have found themselves in that position.

[Joyce Bateman, Conservative, Winnipeg South Centre, MB]

That's very helpful.

You also mentioned in your remarks—I think you were answering Mike's question—how you work with regional development agencies.

How do you?

[Julia Deans]

I think I was referring to economic development agencies so that might be—

[Joyce Bateman, Conservative, Winnipeg South Centre, MB]

Yes. Like where I come from we have Western Economic Diversification and FedNor, all of these groups. How do you work with them to make sure that your client doesn't get lost in the bureaucracy?