Industry Committee on May 3rd, 2016

[The Chair, Liberal, Dan Ruimy]

Good afternoon. Welcome to the 11th meeting of the Standing Committee on Industry, Science and Technology.

Today will be an exciting day, because we have some of our favourite people here. We have the Canadian Space Agency and the Business Development Bank of Canada.

We'll start off today with the BDC. We have Michael Denham, president and chief executive officer; Jérôme Nycz, executive-vice-president, BDC Capital; and Paul Buron, executive vice-president and chief financial and risk officer.

You have 10 minutes. Please go ahead.

[Michael Denham, President and Chief Executive Officer, Business Development Bank of Canada (BDC)]

Mr. Chair, distinguished members of the committee, we are pleased to be with you today.

First, I will tell you about our mandate at the BDC as well as about our clients and services. Then I will talk about what distinguishes us from other financial institutions. Finally, I will deal with three steps that Canadian entrepreneurs must take in order to prosper in the current economic climate.

I've been at BDC since August 2015. I've had the opportunity to meet with hundreds of entrepreneurs, both clients and non-clients of BDC. I firmly believe the success of the bank resides in being attentive to entrepreneurs in order to be in a position to efficiently respond to their ever-changing needs. We must also address these needs in collaboration with other players when appropriate. This is part of the reason why I'm so pleased to be here today and to receive your perspectives on BDC, on entrepreneurship, and on innovation in Canada. In total, BDC has over 700 clients in your constituencies, so I'm looking forward to a good exchange of views.

BDC is a different kind of bank. It's the only bank dedicated exclusively to entrepreneurs. Since 1995 our mandate, as a crown corporation, has been to support Canadian entrepreneurship, with a focus on small and medium-sized enterprises. To be clear, we're not a lender of last resort, we do not provide grants, and we do not provide subsidies. BDC is financially sustainable, it does not receive appropriations from Parliament, and it has been paying dividends to the government yearly since 1997. Over the past five years this has totalled $291 million. BDC's revenues reflect the success of the entrepreneurs we support. The profits generated are fully reinvested in our balance sheet and subsequently used to support more entrepreneurs.

I think I'm preaching to the choir when I say SMEs are a key driver of Canada's economy. You all know this. Canada has more than one million SMEs, which generate nearly 40% of our nation's GDP. In terms of our portfolio, BDC currently has more than $26 billion committed to 40,000 direct and indirect clients. Most of our clients have between 20 and 100 employees, and our median loan size for fiscal year 2016 was approximately $100,000. Our clients operate in sectors such as manufacturing, tourism, ICT, oil and gas, clean technology, and other high-tech industries throughout the country.

I'm aware of your interest in manufacturing, and I'm happy to tell you manufacturing represents about 23% of our total loan portfolio. I can speak further to this and the needs of the sector during the question period. Our support to entrepreneurs comes in three forms: loans, so they have the capital they need; investments, including venture capital, as well as subordinated financing; and consulting services, because entrepreneurs need more than just money to succeed.

What makes us a different kind of bank? First, we're a complementary lender. Our tools and services are available to credit-worthy businesses and fill out or complete those of regular financial institutions. We also partner with these institutions on joint transactions to help reduce the risk. This fiscal year alone we authorized more than 3,000 transactions jointly with our partners.

Second, BDC takes on more risk, and we price accordingly. BDC provides support for underserved sectors and markets, as well as for higher-risk projects. Overall we take much greater credit risk than regular financial institutions. In fact, we have eight times less investment grade loans in our book than do regular institutions. In the majority of transactions, we price a minimum of two percentage points above the bank's prime rate, and our portfolio is also quite different from commercial banks. This translates into initiatives targeted toward women, as well as aboriginal entrepreneurs. We also partner with Futurpreneur Canada to support young entrepreneurs, and we've been developing approaches to address the specific needs of key industries such as aerospace, automotive, and shipbuilding. We've also been providing specialized support to SMEs affected by the lower price of oil.

We're also different because we're a patient lender, and we're there for the long haul through good times and through bad. We have two teams that are dedicated to taking care of clients who are having a hard time. Our business restructuring unit, or what we call BRU, and the special accounts team, work to help firms recuperate. Rather than simply liquidating, the focus of the BRU team is client rehabilitation and bringing them back into operations. We've rehabilitated 187 companies over the past five years and put them back into the healthy stream. That's tens of thousands of jobs that have been saved and more than 500 million dollars' worth of files resolved.

As a development bank, we also invest heavily in non-financial services. We provide affordable advisory services to help SMEs address challenges, such as operational efficiency, international growth, and business management skills.

Finally, our employees also make us a different kind of bank. We have a team of 2,200 employees. Many of them are former entrepreneurs. They are true development bankers and a big part of why BDC is able to make a difference. They work from 108 locations across Canada and have more than 315,000 interactions with our clients in a given year. This gives us a deep understanding of the needs of entrepreneurs and of the reality in which they operate.

You asked us to talk about the current situation for Canadian entrepreneurs. Three aspects are critically important if entrepreneurs are to succeed. They are innovation, productivity and exporting.

Simply put, innovation is key to competitiveness. The 2015 BDC study “The Five Do's and Five Don'ts of Successful Businesses” shows that top-performing companies regularly introduce new products and new services. We work with SMEs to make them more innovative in many ways.

We have consulting mandates that help entrepreneurs think about their businesses in new ways. We also have flexible loans to help them adopt information technologies in the workplace, and through our venture capital investments we support innovative start-ups. In fact, BDC is the biggest venture capital investor in Canada with more than $2 billion under management.

One of the companies we've invested in is called D-Wave. We're proud to have been an early investor in D-Wave back in 2002, and we've been part of each of their subsequent 15 rounds of financing. Today, we have over $24 million committed to this high-tech B.C.-based company, and their quantum computer is 3,600 times faster than a normal computer and is used by Google and NASA alike. This is just one of many hundreds of future-looking investments that we've made.

The second challenge for business is productivity. To increase their productivity, firms need to start by measuring how efficient their operations are, compare themselves to peers, and identify which issues to tackle first. They need to invest in the machinery, equipment, and technology to make their businesses more productive, and by way of our flexible tools, such as equipment loans and consulting mandates, we're helping thousands of SMEs increase their productivity.

The third challenge is exporting. We believe that not enough Canadian SMEs are exporting. This is keeping them from reaching scale and impeding their growth. The recent trade agreements signed by Canada represent a tremendous opportunity for SMEs, but they need help to get there.

BDC helps SMEs become export-ready with flexible loans and consulting mandates to help them prepare and execute an export strategy. We offer these services while working very closely with our partners in the trade commissioner service and EDC.

Let me tell you about one of our clients, Louisbourg Seafoods, which expanded to a new market. They're a fast-growing, family-operated seafood harvesting and processing company in Cape Breton with over 500 employees. They're a big employer in the area and they decided to diversify their markets when the recession hit and reduced their U.S. sales. BDC helped them to develop strong relationships with buyers in China to enter that new market. They're now successfully exporting there in addition to their markets in Europe and the U.S. While their high-quality, traceable, and sustainable seafood is making its mark in foreign markets, they remain true to their core values of family and community.

We're so proud that we've been able to help this fine Canadian company.

To conclude, investing in these three essential areas—innovation, productivity, and exports—will help our entrepreneurs become more competitive, more efficient, and more growth-oriented, and BDC is here to help them.

As CEO, I am focused on increasing access to our services, fuelling innovation and business growth, and finally making it as easy as possible for entrepreneurs to do business with us. While we do all of this, we'll maintain our role as a complementary lender.

Rest assured that we will do our best to stay in tune with the needs of Canadian entrepreneurs.

I am happy to tell you more about what we are doing to increase access to us and to improve our clients' experience.

I would like to conclude by telling you that I am very proud to be at the head of an organization with so much talent, vitality, and passion for entrepreneurs. I am very happy to observe that we all share the same objective, to encourage innovation and growth in our SMEs in Canada.

Thank you.

[The Chair, Liberal, Dan Ruimy]

Thank you, very much.

Now we will move to the Canadian Space Agency.

We have Sylvain Laporte, president; Luc Brûlé, vice-president; Manon Larocque, acting director general of policy; and Marie-Claude Guérard, chief financial officer.

You have 10 minutes.

[Sylvain Laporte, President, Canadian Space Agency]

Thank you, Mr. Chairman. I'm pleased today to have the opportunity to present to you the Canadian Space Agency.

I understand that paper copies of our slide presentation have been handed out. To make sure we're all following, I will read out the title of the slide I am speaking to.

With respect to our mandate and objectives, the CSA, which was established in 1989 with the objective of promoting the peaceful use and development of space, supports the Minister of Innovation, Science and Economic Development in delivering the Canadian space program.

The program is reliant on a highly innovative space sector. The government acts as an anchor customer and funds advanced R and D initiatives. The long lead times to develop and launch missions in space, and the costs and risks, require that we work in partnerships domestically and internationally to ensure success.

The next page is entitled “Organizational Structure and Budget”.

In 1999, the government established the agency's annual base budget at $300 million, with the possibility of requesting additional support from cabinet for major state projects.

Today, the base budget is approximately $260 million. The actual budget is greater than that amount because of our two major programs.

The first is the international space station, for which Canadian participation was reconfirmed until 2024 in the recent federal budget. That budget provides for additional funding in the order of $379 million, spread over the next eight years.

The second is the RADARSAT Constellation Mission. This is a constellation of three earth-observation satellites that will be put into orbit in 2018. This constellation costs $1.2 billion and will provide data to more than 20 federal departments.

At the CSA we have established four key areas of activity. The first is exploration, which is about exploring our universe, or looking out. This includes our very visible and successful Canadian astronauts and international space station programs, as well as planetary exploration and astronomy, two areas with significant Canadian scientific expertise.

The satellites area includes earth observation, communication satellites, and scientific missions that look down at earth and into the atmosphere to provide services that support our way of life. For example, our flagship RADARSAT earth observation satellite supports ice monitoring, disaster management, environmental monitoring, and security and sovereignty, to name a few activities.

Technology development, our third pillar, supports the advancement of science, technology, and expertise in the space sector, both in industry and in academia.

Finally, the awareness and inspiration area is aimed at supporting the growth of the future generation of scientists and engineers who will pursue careers in STEM areas.

I'll go to the next page, “Space is ubiquitous”.

John H. Chapman, founder of Canada's space program, once stated:

In the second century of Confederation, the fabric of Canadian society will be held together by strands in space just as strongly as railway and telegraphy held together the scattered provinces in the last century.

Albeit little known, our society is increasingly dependent on the services that satellite systems provide. Such basic services as banking transactions, ATM transactions, the Internet, traffic lights, and air, road, and ship navigation are often taken for granted.

Next is “Space inspires Canadians”.

Space is a source of inspiration and pride for Canadians young and old.

When Canadians are asked what they know about the space program, two aspects stand out. First, the Canadarm, which is essential for assembly and operations on the international space station. We have gained unparalleled media coverage for this robotic technology. Second, our astronauts.

Commander Hadfield's mission on the space station in 2012-2013 resulted in an unprecedented frenzy in both traditional and social media. The indisputable interest for the mission was felt in classrooms and living rooms all over Canada.

The next slide is about the science and innovation benefits of space.

In addition to inspiring the Canadian population, space science and technology investments have led to finding solutions to concrete problems on earth. Robotics technologies are finding applications in the medical area, particularly for neurosurgery and breast cancer screening. Vision systems developed for planetary exploration are now used for navigating mines and guiding helicopter landings. Scientific experiments on the ISS have led to bone regeneration material in support of treatments for osteoporosis. Earth observation systems are also finding new applications in fields such as precision farming.

Let's talk now about the Canadian space sector.

The space program's success is tied to the health of our Canadian space sector. Over the last five years, the sector's revenue growth at 3.7% is about double the average growth of the Canadian economy. Canadian firms have become leading experts in robotics, optics, satellite communications, and space-based radar technologies. The industry is highly successful in exporting, with half of its revenues consistently generated abroad.

To remain successful, the space program must continue looking at the opportunities and challenges that lie ahead. Our key partners are examining options to join in the deep space human exploration of the moon and Mars. Canada is participating in these discussions.

Increased commercialization of space is expected to greatly reduce costs, thereby providing more affordable access to space. With more access comes greater product offering. As the scope and access to services provided through space assets increase, direct benefits are anticipated for our economy and for Canadians broadly.

The next generation of space systems are influenced by new disruptive technologies. Continued investment in R and D will keep Canada in a privileged position to stay competitive and at the leading edge.

In conclusion, the space program has the potential to make a major contribution to the quality of life of Canadians and to our economy. Space can contribute to a significant number of government priorities dealing with climate change and the development of remote regions. It can also enhance safety and security in Canada and overseas.

The global space context is presently going through major changes. However, Canada's reputation as a leader in certain niche areas of science and technology makes it possible for us to remain a major partner in the future.

Once again, thank you for giving us the opportunity to make this presentation to the committee on the various facets of the Canadian Space Agency.

[The Chair, Liberal, Dan Ruimy]

Thank you very much for that inspiring.... I can speak only for myself. I started remembering the lunar module's landing when I was, I don't know, nine years old. It is incredible to think that we are a part of that, so thank you very much.

We are going to go right to Mr. Longfield. You have seven minutes.

[Lloyd Longfield, Liberal, Guelph, ON]

Thank you, Mr. Chair.

Thank you for the wonderful presentations.

I said it before the meeting. This is one of my favourite parts of being a parliamentarian. We get the coolest presentations of what is going on, right at the ground floor, so thank you for being here.

I am going to start with a few questions for BDC. I have been fortunate to work with BDC through Innovation Guelph, one of the innovation centres in Ontario, working with the partnerships you talked about a little bit, and also the partnerships you have with financial institutions.

I see BDC as a very collaborative organization. The people you have working out of Kitchener who service our area are top notch, and there is no “but” in that statement. It is terrific to have your support for innovation.

I am very interested in the metrics you are using, and whether those are available in some form, when you talk about innovation, productivity, and exports. The large document you gave us in background talks about what you have done globally in terms of your numbers, but not so much by sector. I wonder whether we could see, by sector, how you are measuring productivity, innovation, and exports, and whether that could help us in our next study, which is going to be on manufacturing success and manufacturing strategies.

Do you have any kinds of templates or results that you can share with us on how you develop your measure of success with the businesses you are working with?

[Michael Denham]

Thank you for the question, and thank you for the positive feedback on BDC. It's very nice to hear.

Again, I wanted to make sure that we were organized from our end to properly answer all your questions so we brought Paul Buron who is our CFO and Jérôme who is our EVP for BDC Capital, which is where our venture capital and subordinated financing exists. I hope that with the three of us here we can answer all your questions.

Your question relates to innovation, productivity, and exports, and specifically how we track the performance of our clients vis-à-vis innovation, productivity, and exports. Again, with 45,000 clients in total it's hard to get an aggregate picture of their performance.

I have two answers to your question. First, one thing we do look at as a source of input is the amount of loans and consulting mandates we do to support innovation, productivity, and exports. On our balance scorecard, one of our closely watched numbers is the combined total of those activities.

I know this doesn't answer your question directly, but we're tracking the activity we have under way to support clients in these regards.

On aggregate we don't have the data we'd like to have in how innovative our 45,000 clients are in the productivity improvements that we're affecting across those clients as well as the export. But on a case-by-case basis we're involved in working with them. We do have regular dialogue and follow-on work, especially around consulting on the extent to which our support has moved the needle on those three fronts.

We don't have the aggregate picture yet. We'd like to get it. We're working on it.

[Lloyd Longfield, Liberal, Guelph, ON]

Okay. Thanks.

It's right at the client level and I was thinking of one of your field people, whether they keep track of their individual clients on those terms and then consolidate numbers. I could leave that on the floor because I'd like just one more question, and I'm watching the clock closely here.

Do you have similar defaults to other financial institutions on the risk profiles that you take on, or because you take on higher risks do you also have higher default rates?

[Paul Buron, Executive Vice-President and Chief Financial and Risk Officer, Business Development Bank of Canada (BDC)]

Thank you for the question.

As Michael has explained, when we lend to entrepreneurs we assess their risk and we follow their activities and their progress toward their projects. We have conditions in our loans as well, but we are very patient with this so we'll not put a business in default just for ratios. We're going to step in before that and make sure we understand the problem and support the entrepreneurs in more difficult times.

When they are in true difficulties, when they become delinquent in their payments, then it becomes more serious and we put all our people to work to support and help the entrepreneurs get through. If not, we have to act as we have to act.

[Lloyd Longfield, Liberal, Guelph, ON]

That's part of the consulting feature of business, I guess.

[Michael Denham]

If you compare us to commercial banks in terms of provisions for losses and downgrades to impaired, we're four times the level of commercial banks.

[Lloyd Longfield, Liberal, Guelph, ON]

That's exactly what I was looking for. Thank you very much.

Over to the Canadian Space Agency, again I've been very fortunate to work with your organization over the years through previous work I was doing in robotics, and what a first-class institute you have.

Sometimes we think we're investing in things outside our atmosphere, and you briefly touched on a lot of impact locally and across Canada. The University of Guelph is doing food research around growing tomatoes on Mars. We're doing things around zero gravity, automation that could be used in aerospace. Materials development is being done in other parts of Canada.

With a minute left—I'm watching that, Mr. Chair—could you comment on the return on investment of your agency across Canada, beyond what we do outside our atmosphere?

[Sylvain Laporte]

Thank you, that's a great question because it allows us to boast of some of our achievements in utilizing what we've developed in space and how we bring it back to earth. ISS is all about robots, and MDA has been very successful in using that technology in adapting robots for surgery.

We do a lot of medical research on the ISS, and we've been able to develop new miniaturized analysis gear that will now be deployed in the north or in emergencies, which replaces the very bulky cabinet-sized equipment that you would find in a hospital. The miniaturization has been very beneficial.

[The Chair, Liberal, Dan Ruimy]

Thank you very much.

We will go to Mr. Dreeshen. You have seven minutes.

[Earl Dreeshen, Conservative, Red Deer—Mountain View, AB]

Thank you very much, Mr. Chair.

Welcome to our guests today. It is certainly an interesting topic for all of us.

I know, Mr. Denham, some great work has been done with BDC, and I've had the opportunity to speak with many entrepreneurs who have found that working with you has been very beneficial, so I appreciate your being here and your being able to be part of the discussion that we have.

I'd like to speak to the Canadian Space Agency. I had the opportunity in 1980 to be in Moscow when the Apollo-Soyuz link-up was on display there, and then just a few years ago I saw a similar display in Washington. It's rather interesting how, depending on where you are, which one gets shined up and which one doesn't, but that's simply between the two countries involved, I assume.

I want to talk about an issue that is part of the U.S. relationship. Last November the U.S. government updated their U.S. commercial space legislation with the passing of the Spurring Private Aerospace Competitiveness and Entrepreneurship Act of 2015, which legalizes space mining. It specifically allows U.S. citizens to engage in commercial exploration and exploitation of space resources, including water and minerals.

My question is whether or not we have similar legislation provisions that would address the same issues, or whether the department would be dealing with establishing laws and regulations on space mining. I know that BDC deals with Canada and EDC with global, but perhaps you could just speak to that particular issue, please.

[Sylvain Laporte]

With respect to U.S. legislation and whether or not we have similar legislation here in Canada, the answer is no. With respect to a future desire to take on similar activities, it's currently not in our plans. As with most of my international colleagues, we use a UN committee that specializes in this kind of matter to look at regulating space from an international perspective.

[Earl Dreeshen, Conservative, Red Deer—Mountain View, AB]

That leads me to my second question. We have seen great growth as far as small satellite technology is concerned, and I would assume you would be engaged in that as well, as the cost to build and launch these satellites has got to be such that even smaller and medium-sized companies can enter the market and be players. I'm just wondering how closely they are working with the Space Agency to see these projects move forward.

[Sylvain Laporte]

To put any kind of asset in space you are required to go through a certification program. In Canada that is managed through our Global Affairs folks, in that department, to seek permission to actually put something into space.

With respect to the amount or volume of satellites going up, particularly if costs are going to come down, we, in the international community, have substantially increased our monitoring capability to make sure that we know where everything is once it's launched into space. We don't consider that to be something that is out of control, but certainly it is an area of concern with respect to potential future space debris.

[Earl Dreeshen, Conservative, Red Deer—Mountain View, AB]

You also spoke about precision farming. As someone involved in agriculture, I know how important that is.

I'm just wondering if you can give us a bit of a view as to how the Space Agency considers those important parts of industries that tie into the work that you do, and perhaps I'll then ask BDC if they look at these types of initiatives in a positive light.

[Sylvain Laporte]

With respect to those types of applications, we get access to, or provide space-based information for those purposes, and that is picked up by downstream businesses that actually build the applications using the space-based data. We don't get involved directly in terms of providing to farmers, for example, how they should look at various types of seeds for planting. From that perspective, we are one-step remote from that, so as long as the downstream businesses, the application developers, have access to the space-borne information, we're happy with that.

[Earl Dreeshen, Conservative, Red Deer—Mountain View, AB]

When it comes to things that BDC is doing for agriculture, can you give us a bit of an idea of how things are going, especially when we're dealing with these rather unique opportunities, as were mentioned earlier?

[Michael Denham]

Our direct lending to clients in agriculture is relatively low given the role that Farm Credit Canada plays in this space. Certainly there's lots of buoyancy in certain of these commodity markets. We do a fair amount of investing through our venture capital business in support of agricultural technology. Perhaps that's the best lens we would have on the agricultural questions. Jérôme could shed some light on our agricultural technology investments if you'd like.

[Earl Dreeshen, Conservative, Red Deer—Mountain View, AB]

Okay. Thank you.

[Jérôme Nycz, Executive Vice-President, BDC Capital, Business Development Bank of Canada (BDC)]

Agricultural technology is an emerging field for the VC industry and we're seeing some green shoots in the marketplace. We have a company out of Quebec City that combines cellular technology and smart irrigation that helps farmers use water and resources for their crops efficiently. That's backed by BDC as a co-investment and also by a Farm Credit venture capital fund in which we're an investor. That fund specializes in supporting that type of technology across Canada, and we've made some good progress in that regard.

As digital technology makes its way through that industry, we'll see increased opportunities, particularly for managing resources and reducing costs for the producer. There's one fund that specializes in that, and there are a couple of companies that have done quite well.

[Earl Dreeshen, Conservative, Red Deer—Mountain View, AB]

Thank you.