Special Committee on Cooperatives Committee on July 26th, 2012

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Thanks, Mr. Chair.

Thank you for being here today.

I would just like to follow on with the financial-type questions, because I think we're fortunate to have two financial institutions here that are involved in lending.

One of the repeated comments we've heard from a number of different witnesses concerns access to capital financing for co-ops. There's been sort of a general impression that co-ops are disadvantaged over perhaps small businesses when they go to seek loans. It seems to be, in a general sense, because there's a misunderstanding of what co-ops are. There's a misunderstanding of how they're organized, what their structure is, etc. My feeling is that it's probably a bit more than just a misunderstanding. My guess is that there might be some legalities involved here in terms of access to capital.

My question kind of follows up on a question I asked yesterday. If you have a small business, you don't have a lot of capital either. It's a high-risk endeavour for a bank, perhaps, or a lending institution to finance a small business. What I want to get a sense of, from each of your respective institutions, is whether you see co-ops as being disadvantaged in some way because they are co-ops. Or is it more that we assess risk based on a number of different factors, and those factors are applied equally as much as possible, whether it's a small business or a co-op? In other words, there's no sort of built-in institutional bias against co-ops just because they're co-ops. It's not that they don't understand co-ops, so are not lending to them.

Mr. Malli, I'll start with you, because as a co-op, you would understand co-ops. You would understand their structures. We've had some people say that yes, co-ops do help co-ops. But I'm assuming, as well, that there's very much a business decision made in terms of risk analysis, capital you have access to should something not work out well, etc. Perhaps you could comment on that.

[Rob Malli]

Yes. An example is the Kettle Friendship Society. We had to use a creative means of trying to help them get established, both through supporting a debt and by sometimes using granting as well as lending. That's a combination of different forms to make sure that they're capitalized, etc., moving forward. That's something a bank can't do today for their members or clients in that way. We do that because of our structure.

Also, at the macro level, as a cooperative, how do we need to kind of move forward? Our only means, typically, because of the cooperative structure, is retained earnings, or growth, as a means to develop capital. There are some constraints right now. The capital markets aren't so friendly. So we have to have a means of working together, cooperatives working with cooperatives. Right now there's not a lot of latitude there to allow us to support another cooperative outside of our region, perhaps, or even in B.C., and help them with capital needs.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Is that where federal regulations might come in handy?

[Rob Malli]

They still don't address that, because it's an absolute. It's not a structural thing. I think it needs to be looked at further. I think that's where it's not set up in a way to support what they need. There are some disadvantages, more probably at the macro level. Whether they're intentional or not, I agree, is another issue.

Otherwise, as a business, as a cooperative, the way we run Vancity is that we create a sustainable growth model to ensure that our accumulation of equity is enough to keep pace with our ambition for growth. It has to be through retained earnings as the primary source. In addition, it's how we distribute retained earnings—we give 30% of our after-tax profits back to our members and communities every year—and still maintain enough equity.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Do co-ops just inherently, then, have a challenge with retained earnings, because they want to return as much as possible back to their members, and therefore it is part of the co-op structure that their retained earnings may not be as high as...?

[Rob Malli]

Right. Well, retained earnings for what purpose? For us, as a cooperative structure, retaining earnings serves the purpose of supporting our future growth and investment. Otherwise, they are distributed back to our communities. That's the only purpose they have. We don't have single shareholders who have a mandate to get 20% returns, right? We're not profit-driven; we're mission-driven. That's a very different structure. Cooperatives are structured that way.

If you think about the long-term investment and equity needed to build, the time to get into trouble is when there is some type of downturn or crisis or a reduction of money coming in. Or it is when you're trying to grow. When you're trying to grow, you start with capital to be able to grow your position. It's difficult otherwise.

Those are the times when we need to make sure that the right legislation is in place to allow them to get access to that, not just through open capital markets but perhaps even through other cooperatives or other structures that could allow them to have that as permanent capital or as capital that is consistent with their mission. Then they would build that back.

I think it's very important that any business have a sustainable growth plan. You don't grow from unsustainable means of capital, wherever it comes from.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

I think I'm out of time for Mr. Carlson.

[The Chair, Conservative, Blake Richards]

Unfortunately, you are.

We'll move now to Mr. Allen. You have five minutes.

[Malcolm Allen, NDP, Welland, ON]

Thank you very much, Chair.

Mr. Mali, we've been listening to some folks from different credit unions. Mr. Lahey was here yesterday, from Alterna, talking about how in this particular province roughly 6% of financial institutions are actually credit unions.

It's interesting to look across the country...and this is a broad-brush approach to how they have developed, if you will. We have Vancity, in the lower mainland, Vancouver area, which is a heavily urban-based area these days in its growth. As you go across the prairies, you see credit unions being more rural-based in their initiation, if you will.

You come to Ontario, and it tends to be an employer base, through the employees. In other words, the credit unions are attached to a particular employment place, whether it be, in my case, with the auto workers, or civic credit union, for civic employees who work for the City of St. Catharines. There was another one in Welland and another one elsewhere, and they were very small.

In Quebec, obviously there are the caisses populaires, with the Desjardins Group. It's a totally different piece altogether. It's a huge chunk of the market.

How do we help folks understand that credit unions are a viable alternative for them, in places like Ontario, where it's only 6%? Is a federal model, where it allows you...? Because I absolutely agree with you about keeping that vision of community first. By your simply having another branch like TD, you just become another TD with a different name.

Is there a way for us to structure federal legislation that allows you an opportunity to look at Ontario—not to simply have another branch, but to actually help grow the credit union movement, rather than a credit union branch?

[Rob Malli]

Absolutely.

To make sure we have the right facts, Vancity is only one representative of a credit union in British Columbia. British Columbia has numerous credit unions, which are in urban and rural areas. They're employment-based. They're sometimes religious-based. They're across the gamut. There are 40% of British Columbians who belong to a credit union, in one way or another. I believe it's about a 25% market share in terms of banking, somewhere around that range.

We believe that the way to strengthen the credit union system nationally is what the legislation should be focused on, not for an individual institution to be able to exercise its focus on just geographic reach. In order to do that, we believe it should enable us to work together, as a cooperative system, in a stronger way.

We could look at the Ontario credit unions, for example, from the B.C. perspective, and how do we help them learn from and extend our business models in a way that's relevant for their communities, make sure they have the capital means that they need, and the infrastructure means?

You hear credit unions talking about regulations around infrastructure, banking systems, regulatory burdens, etc., that are becoming too costly. Well, there are different ways we could structure ourselves. Again, I point to Desjardins as another model, using a federated model that has accomplished that. The caisses populaires could be effective in their own right, while still allowing a structure where they could deal with the burden of scale, etc.

I think we need to look at structures and regulations that support that type of model, or do more research. There's definitely research that needs to be done. I wish I could take you all to Italy, on our program to Bologna, so you could see first-hand...or even come to Vancouver to see how we've done it with Vancity. Vancity really is a collection of 59 different branches that are communities. I think that is what needs to be considered, not approaching the same regulations that are relevant and applicable and necessary for banks, which operate differently, and say we can basically transport that over with some minor tweaks. I think it needs to be a fundamental look at what it would take to support that structure.

The question in Ontario is that it's also the home place for the major banks. If you look at the statistics, that's the place that has the least amount of penetration in the credit union system, versus the rest of the country, which is very different. Are people satisfied? When I come to Ontario and talk to people, they are not necessarily satisfied. If you look at the data on bank satisfaction with consumers, it's telling as well.

There are ways, but you're on the right track, in that you have to be able to see how we could organize ourselves and solve our own problems and meet the needs of our consumers in a way that doesn't limit us to geographic reach. It doesn't mean applying a model that means we can go national just for the sake of going national.

[The Chair, Conservative, Blake Richards]

Thank you very much.

We'll be moving now to Mr. Butt. You have five minutes.

[Brad Butt, Conservative, Mississauga—Streetsville, ON]

Thank you very much, Mr. Chair.

Good morning, gentlemen. Thank you very much for being here.

I'm assuming both of your organizations work with no government money, you're not funded by any level of government, and you're self-sustaining. Has that always been the case? With FCC, when it was first started, I'm assuming the federal government of the day recognized a problem, a challenge, etc., and decided to create the organization. How long have you been self-sustaining? I'm assuming that model is working, because it sounds like both your organizations are very successful. So maybe you can explain a little bit about some of that history for someone like me, who doesn't know a lot about FCC. I come from an urban riding outside of Toronto, and it's not really an area I have explored. Maybe go through that a little bit, the history of that, and how you're operating now, how you're in a self-sustaining financing model.

[Lyndon Carlson]

In 1959 and into the early 1970s we would have received an appropriation annually. In fact, as we started out, banks didn't offer farm mortgages, so we were the show in town to do farm mortgages. We never turned a profit, though, for that whole period of time. We were kind of living from hand to mouth, so to speak, as an agent of the government. There's no doubt about that.

Later on, as we got through the 1970s and into the 1980s, we became what was a complementary lender, really taking more risk than other lenders.

Then we hit the days of the mid-1980s, when interest rates became.... I started 30 years ago, and we were lending money at 16.5%. You can just imagine the interest expense. Of course there was a price to pay with that combination based in the agricultural community, and then failure.

We went through some really tough times in the late 1980s and the early 1990s. At the end of that period the government realized that we needed to operate like a commercial crown with a business structure that was sustainable. If we were going to serve the industry, we had to be around.

In 1993 we received new legislation and we were directed to enter the marketplace as a self-sustaining business. We have not received any more money from the federal government since that period, which is now about 20 years ago.

Today we operate as a self-sustaining crown, we pay a dividend back to the federal government annually, and we take on business of all shapes and sizes, all sectors, all enterprises, across the country. Now we actually have a good balance sheet and we're here to serve.

[Brad Butt, Conservative, Mississauga—Streetsville, ON]

Mr. Malli, you can continue with Vancity. Obviously, from what you've told us today, you're a wildly successful organization in British Columbia. I'm assuming that you're operating with no subsidy from government, it's funded within your internal operations, you make money off your investments, your mortgages, and other things you're doing, and you're reinvesting that back into the community. So you're a true co-op that's operating and being extremely successful without government money.

[Rob Malli]

That's correct.

From our beginnings, people came around a kitchen table to create Vancity in 1946, to pool their money together because at that time the banks weren't lending east of Main Street. They just pooled their money together to lend to one person and created it. Ever since then, that's how Vancity has operated.

The one thing we do work on with governments is to help them execute on their mandates. We've worked in the past with Western Economic Diversification Canada to be able to exercise their mandate to be effective because it aligns to our mission. So we could work in partnership and say if you were trying to get access to put this money out and provide it as a safeguard to make loans that otherwise wouldn't be made in places, we could help you do that and execute that. In fact, anytime we've done that in partnership we've shown a return. They haven't had to spend those pools of money that they've put aside because we have such trust in the community in the way we do it and we are able to do it at a much lower cost. So it saves government money, at the end of the day, by doing it, and a lot of it we just adopt as our normal practice.

We've partnered where appropriate, but we don't get it directly. It's our members or the community at large that would get the benefit of those types of things.

We've done other things on partnership around social housing issues, etc., but we work with agencies, not getting money for ourselves.

So absolutely, we're a product of self-funded.

I think that's the issue I wanted to raise as well with social enterprises—the way to transition. There's a transition period we have to consider here. What we're granting now is provided to a lot these entities or social services. They were given by government. There's a way to wean them off that, but you have to have the right structure in place. This is where we believe that social enterprise, the social cooperatives, can play a big role. There's probably a transition period when they take great pride in being self-sufficient and viable.

Atira Women's Resource Society in Vancouver is a great example of this. We've worked with them from the beginning, originally granting, etc., and now they run their own enterprises to self-fund their operations. They have hired women who used to be clients or participants, who would otherwise be in their shelters, and now have them working for them.

These are the types of innovations that get created in social cooperatives that help fuel them in the future without government money.

[The Chair, Conservative, Blake Richards]

Thank you very much.

We'll now move to Mr. Payne. You have five minutes, as well.

[LaVar Payne, Conservative, Medicine Hat, AB]

Thank you, Mr. Chair.

I also want to thank the panel members for coming today. It's important that we hear their testimony.

I've met with some FCC folks, on a number of occasions, to fill me in. I'm from Alberta, and I've met with the folks from Lethbridge.

You talked earlier about helping young farmers. Do you have a designated dollar amount, or the number of young farmers you try to help out on an annual basis?

[Lyndon Carlson]

We don't.

We set a target annually with regard to our lending, to ensure that our front-line force remember to always focus on young farmers, as well as all farmers. For example, last year we set a target of $1.5 billion for young farmers, and we exceeded that target by lending $1.9 billion. We keep that as a kind of steady focal point for our active lending.

This year we also launched a new program, which we simply call the young farmer loan program. We have allocated $500 million of funds specifically targeted at young farmers. They can not only get a loan from us, but they can do so at a price that's below what they might otherwise pay—that price being prime plus a half.

As a young person without a proven track record, typically we would have to mitigate some of that risk through a higher interest rate. But we want to make sure we give these farmers a good start. We launched that program in April, at prime plus a half, and no loan fees at all. They don't have to pay for their appraisal and their security and that sort of thing.

With this many weeks into it, which is a short period of time, we already have over $100 million approved for young farmers.

So yes, we certainly focus on young farmers.

[LaVar Payne, Conservative, Medicine Hat, AB]

Is that right across Canada?

[Lyndon Carlson]

That's right across Canada.

[LaVar Payne, Conservative, Medicine Hat, AB]

What kind of a breakdown would you have for western Canada versus, say, Ontario.

[Lyndon Carlson]

Western Canada has come out of the gate really fast. Atlantic Canada would be the lowest amount because there are fewer farmers in the Atlantic. But from Quebec going west, the numbers are strong in every province.

[LaVar Payne, Conservative, Medicine Hat, AB]

Okay.

I've talked to other bankers. They think you folks have an advantage in terms of being able to lend to farmers. What would your comments be in regard to having an advantage over traditional bankers?

[Lyndon Carlson]

We are committed to giving our customers the best products and services that we can. Whenever we are aware that another financial institution is vying for that business, we are very diligent to never undercut the competition on price.

We borrow money through the consolidated revenue fund, and that's at a good price, for sure. But banks have a double-A rating, and they're able to access funds at an attractive price as well. Plus, they have millions of dollars of deposits on hand. They pay very little interest, and they can use that to reinvest in their lending program.

All that being said, every time we're making a price adjustment, where there's a competitor involved, we do not undercut the competition on price. We believe that by winning the business based on service and knowledge, we compete very fairly in the marketplace.

[LaVar Payne, Conservative, Medicine Hat, AB]

You also spoke in your opening comments about Foothills Cattle Co-op, Agropur, and UFA lending. What do you use for collateral for these types of organizations? Is there any special method you use versus your regular lending?