Public Accounts Committee on Sept. 29th, 2016

[Neal Hill]

There are two levels of fees. The fund-to-funds managers collect approximately, on average, across the life of the program 0.56% of the committed capital that flows through their hands per year. That's the average across the life of the program for each of the fund-to-funds managers.

Similarly, there is a second layer of fees. This is where the bulk of the fees actually go, the underlying Canadian venture capital funds, who are receiving the bulk of the financing, charge anywhere between a 2% and 2 1/2% per year—

[Pierre Poilievre, Conservative, Carleton, ON]

I'm not actually looking for a breakdown. I'm looking for a total, which is the opposite of a breakdown. What is the total annual percentage management fee for this initiative?

[Neal Hill]

Over the life of the program, it is 19.6%—that's our calculation—of the total capital, and then the life of the program is 12 to 13 years, depending on how things turn out.

[Pierre Poilievre, Conservative, Carleton, ON]

It's 19.6% divided by 12.

[Neal Hill]

Exactly, sir. Yes.

[Pierre Poilievre, Conservative, Carleton, ON]

Okay.

I want to ask about opportunity cost. My questions here are based on two primary assumptions. One is that money is real and that money invested is not merely digits on a screen, but represents real value. Two, a dollar can only be in one place at one time.

The Auditor General has said that the initiative needs better performance indicators analysis, but I have found, with all manner of government programs geared toward economic development, that they miss half the balance sheet. They only focus on the purported benefits, not the unseen costs.

Therefore, $400 million invested through the 2012 budget is $400 million subtracted from somewhere else. That money had to have been taken out of the Canadian economy. Perhaps it was borrowed at the time, because there was a deficit in that year, but ultimately, it has to be paid back.

What methodology will Finance Canada employ to ascertain the damage done to the Canadian economy by the removal of $400 million from the hands that earned it in order to fund this initiative?

Mr. Botham.

[Richard Botham]

Maybe I'll start and then turn it over since you focused the question on Finance Canada.

We have not done any analysis specific to this $400 million. We haven't done that analysis, but there is one clarification, I think, that's required to understand your question better, and that is actually whether this is an expenditure or an investment.

It does differ, in that respect, from some other categories of expenditure that governments have undertaken. I think it's worth passing that on to my colleague to explain to you how it is treated as an investment.

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

The money that BDC uses is put to work in funds, the funds invested in companies. We at BDC have been involved in the asset class for over 20 years. We follow and monitor performance of investment at the company level and at the fund level, and we aggregate that to BDC.

In terms of investments made in the company at day one, $1 invested is worth $1 of value—

[Pierre Poilievre, Conservative, Carleton, ON]

Presuming you get it back.

[Jérôme Nycz]

At day one, the presumption is that it's worth $1.

[Pierre Poilievre, Conservative, Carleton, ON]

On day one.

[Jérôme Nycz]

That investment in the company is invested against promises of hitting a milestone at the company level. While your sales increase by 10%, while your revenues increase by x, or your profitability, we monitor the performance of the company, and we monitor it as well with other fund investors. The $1 we invest is worth something. A year later, if the company has not met their milestone, there's a reduction of the value of that investment by 25%.

Opposite to that, if that company is hitting the milestone, is progressing, and needs additional financing, if an external investor comes into the round and validates the value of the company, then there is an increase of the fair value. There's the cost aspect, and then there's the fair value.

At BDC, we monitor the cost—the $1 going into the company—and we monitor the fair value of that investment over time, validated by external investors and often U.S. investors. We report the value of that investment on fair value, and that fair value is a contribution to the net income of the bank.

[Pierre Poilievre, Conservative, Carleton, ON]

If I may, though, BDC got its money through a public offering to the Government of Canada for this initiative. Basically, it sold more shares to the Government of Canada, right? Is that a summary?

The Government of Canada had to take $400 million from somewhere. Now, you might currently account for that as an accounts receivable or say that the government has an increased asset in its share of BDC, but the bottom line is that $400 million is here, so it cannot be there. It came from somewhere. We know that.

What I'm asking is, in your doing this analysis, are you treating the $400 million as though it was created from scratch? Or are you treating it as though it was displaced, it was moved, it was taken.... It was either borrowed out of the economy or taxed out of the economy, but one way or another, it was taken away from some other place and some other use. Therefore, there is an opportunity cost. Are you considering that in your full analysis of the success or failure of this initiative?

[Richard Botham]

It's treated as an investment.

[The Chair, Conservative, Kevin Sorenson]

Thank you.

[Richard Botham]

In balance sheet terms.

[The Chair, Conservative, Kevin Sorenson]

Thank you, Mr. Poilievre. Your time is up.

We'll now move to Mr. Christopherson, please, for seven minutes.

[David Christopherson, NDP, Hamilton Centre, ON]

Thank you, Chair.

Thank you all for coming today. We appreciate it.

For the benefit of our international auditors, I want to point out that I'm a member of the third party and there aren't many benefits to not being the government, but one of them on this committee is that I'm never on the defensive because I'm never being audited. I never have to defend anything, and I always have the greatest respect for particularly the government members, who are caught in a really tough spot. They have to defend their government because they're part of a team—and that's expected of all of us—but also as a member of this committee, where we try to stay as much as we can above the partisan fray.

I make reference to my earlier comment, which calls on government members—in this case it's the former government members who are sort of defending, if you will, or have that aspect—to be willing to legitimately criticize their own government when they've done something wrong, or not as well as they should, or wasted taxpayer money. That higher calling calls upon them, while they know they have staff and others right behind them, freaking out in some cases, as they go forward and say “This is wrong and we need to ensure that it doesn't happen again.”

The reason I'm saying all of this to our guests is that this is a lot to ask of a member, and I've been on this committee for a very long time and I know how difficult it is. The other part of the equation is that someone like me, who never has to play that role, I think has an obligation when there's something close to good that the government has done, to be willing to say so. As much as colleagues will know, I just love ripping into these things. I see a colleague joining me who has been around for a long time. He knows how much I love to rip into these things when we have massive waste, and get right into it.

I have to tell you—

[John McKay, Liberal, Scarborough—Guildwood, ON]

Nothing has changed, right?

[David Christopherson, NDP, Hamilton Centre, ON]

You're right, except—hang on, John, hang on—every now and then there's an audit that comes along where somebody needs to say that with one exception, this is a pretty good audit. I had to get to page 13 before there was a recommendation. What I'd run into twice before then was that we made no recommendations in this area of examination. When there are no recommendations, that tells me a lot as a member of this committee. So I think it behooves me to say that, on balance, if everybody's audit came in roughly where this one was, a lot of the work that we do would be in the past. We would have achieved what our ultimate goal is, which is to change behaviour so that people follow the rules, are focused on following the right procedures and making sure that all those pesky little boxes are actually ticked, that there's a reason for them.

I'm going to go to an area that's a bit problematic, but it won't be my usual style because it's not deserved. I want to compliment all of you on what I would say is a relatively good audit. I would hold you up as an example to the rest of the government on a lot of key areas, in terms of the things that you got right.

Today's one of those days, Chair, where man bites dog and I'm complimenting the former Conservative government—and I give the Conservatives their due—that this was not a bad audit, given some of the nightmares we've seen come across our table. So thank you very much for the job that you did. These kinds of compliments don't come very often from me, so if that's worth anything at all to you, hold it close because it's sincere and heartfelt. It's a good audit, not a bad audit, and I wish we could see more of these.

Having said that, I don't have too much time. In fact, how much time do I have left, Chair?

[The Chair, Conservative, Kevin Sorenson]

You have a couple of minutes left. I was just going to say, on behalf of the former government, that I'm starting to worry when we have you onside.

[Voices]

Oh, oh!

[David Christopherson, NDP, Hamilton Centre, ON]

Don't extrapolate too much from it.

[The Chair, Conservative, Kevin Sorenson]

Go ahead.

[David Christopherson, NDP, Hamilton Centre, ON]

On this committee, you have to take the blame when you've done wrong, but give credit where credit is due. I want to make sure that we do that. Otherwise, we're talking hot air when we talk about our lofty goals of being non-partisan and holding whatever government to account regardless of their partisanship.

The only reason I had to put a disclaimer in my comments was that, in the one area, whenever I see the Auditor General use words like “significant shortcomings”, that's an alarm bell. The Auditor General is careful about the language he uses. When that office says “significant shortcomings”, that needs to be paid attention to. That was the one thing that stopped you from getting an even more glowing report.

I still have three minutes later, but I have one more question.

On this one, the thing that troubles me is that you reserve the right.... It's stated on page 13 of the Auditor General's report, “it indicated that it reserved the right to make changes to the selection process and to select any firm that it preferred.” Then I hear that you had some trouble in the beginning getting people to sign in.

Things like that would certainly jump out to me. May I just ask, what was the rationale for you determining that was fair?