moved that Bill C-21, an act to amend the Small Business Loans Act, be read the second time and referred to a committee.
Madam Speaker, I am very pleased to have the opportunity to introduce Bill C-21, an act to amend the Small Business Loans Act, in the House of Commons. This is an important bill because its purpose is twofold: to maintain an element of government framework in order to support small businesses in Canada and help them prosper, and to ensure improved operation of this element.
Small businesses play a vital role in Canada's economy. They number more than 2.5 million, including the people they employ. Half of all private sector jobs are in businesses with fewer than 100 employees, and 43% of this sector's productivity comes from such businesses. In 1996-97, small businesses created 81% of all new jobs. It is clear that Canadians see small businesses as one of the great engines of economic growth and that their importance is continuing to grow.
The business community has often said, however, that the absence of reasonable financing is a significant obstacle to the growth of small businesses. It is for this very reason that the small business loans program exists.
The objective of the Small Business Loans Act is to increase the availability of loans for the establishment, expansion, modernization and improvement of small business enterprises by encouraging lending institutions to make loans at reasonable terms and conditions. These fixed asset loans are available for such things as the purchase of land or equipment or for making improvements to a leasehold. They are not available for the purpose of financing the purchase of shares, working capital or existing debt. They are not based upon goodwill or other intangibles.
Virtually all small businesses are eligible to borrow under this program. Eligible borrowers include almost all enterprises in Canada that operate for gain or profit provided the annual gross revenue of the business does not exceed $5 million. Farming operations and religious and not for profit organizations are excluded from this program.
The small business loans program was established back in 1961 and its overall record is one of great success. Preliminary information indicates that in fiscal 1996-97 alone some 30,000 small and medium size businesses used the SBLA to access about $2 billion of financing. Clearly the small business loans program provides significant and obvious benefits to Canadians and their economy.
The program is subject to a cut-off clause and has been extended many times since 1962 for fixed periods. Unless Parliament decides otherwise, however, no new loans may be approved under the program after March 31, 1998.
The bill we are introducing today would enable us to continue to meet the needs of small businesses in Canada where long term loans are concerned. It would extend the SBLA by one year, and would increase the total loan envelope.
More specifically, Bill C-21 amends the Small Business Loan Act by extending its application to March 31, 1999 and by increasing the total envelope by $1 billion, thus raising it from $14 billion to $15 billion.
Passage of this bill will allow the SBLA program to continue beyond March 31, 1998. The extension of the program for another fiscal year is important to continue to meet the expanding needs of small business during this period of strong economic growth.
At present, lending under the program has reached $12.7 billion and has a ceiling of $14 billion. The $1 billion figure contained in Bill C-21 was arrived at because this is the amount that current economic forecasts have determined to be necessary to allow lending to continue for one year.
As I have stated, the SBLA program has served Canadians well since its adoption in 1961. The program is supported by the small business working committee which includes representatives of the Canadian Federation of Independent Business, the Chamber of Commerce and other Canadian business leaders. It was also supported by the Standing Committee on Industry in its report “Taking Care of Small Business”.
But those who support the program have also encouraged us to continue improve it, to increase its effectiveness and to lower costs for the taxpayer. Indeed the SBLA program is at present undergoing a comprehensive review with input from both private and public sector stakeholders.
Moreover Canada's auditor general audited the SBLA program and released his report in December 1997. I am pleased that the auditor general noted that we have made considerable progress toward increasing productivity and reducing the overall costs of the program. The auditor general's report will be a very useful tool as we review the SBLA and design ways to make the Small Business Loans Act even better in the future.
A one year extension of the act will provide the time needed to complete the review of the program. The extension will also allow both private and public sector stakeholders to consider the auditor general's recommendations and thus become better prepared to participate in the ongoing comprehensive program and policy review.
In 1993, the previous government made in-depth changes to the program, resulting in a heavy increase in the number of loans made. When we came into power, we saw that the program's sustainability was in jeopardy. As a result, the government made major changes in 1995 in order to move in the direction of a cost recovery program, for the first time.
We imposed annual administration fees, the purpose of which was to compensate for claims for losses on loans extended after March 31, 1995. As the auditor general pointed out, however, we inherited a heavy burden, which will weigh upon us for some years yet.
The average period before a loan defaults is about three to five years, but the major program changes were approved by Parliament effective January 1, 1996. Thus we are now living with the costs associated with the massive build-up of lending under the 1993-95 SBLA rules. We did not wait for the auditor general's report to act responsibly to address this problem. As I said before, we took necessary action in 1995 to move the SBLA program toward cost recovery.
Consider the facts. The SBLA at present guarantees to the SME community loans worth approximately $2 billion per year. Are we to scrap this worthwhile program because of losses that were incurred as a result of 1993 program changes as some critics have proposed? That would be throwing out the baby with the bath water.
The sensible and responsible course of action is to pass Bill C-21 and to continue the SBLA program for another year, using that time to complete our comprehensive review so that the SBLA can be made into an even better instrument for responding to the needs of small and medium size businesses.
Certainly there is room for additional improvements. That is what the review process is all about. For example an improved monitoring process could provide for a better means of tracking performance and verifying cost recovery. Likewise a better forecasting system could make the program more flexible and better able to respond to economic conditions and the changing needs of small business.
While the SBLA lays out clear objectives for the program, we do need a more detailed and updated evaluation framework. This framework will be developed as part of the comprehensive review being undertaken this year.
Those are the sort of questions being asked in the review that is under way. To date, the studies and consultations have addressed the following points: general advantages of the program; possible extension of the program; specific consequences relating to inclusion of capitalized leases among the activities eligible for financing.
Other studies are either under way or in preparation on: program costs; the possible inclusion of operating costs in the expenses eligible for loans; the consequences of improved start-up loans; possible changes to program parameters; possible changes to the regulations, and the auditor general's recommendations.
We want to make sure that the SBLA program remains relevant to the needs of the small and medium size enterprise community. The auditor general's report will help the government ensure the effectiveness of this valuable program.
The types of questions that are being asked and answered by this comprehensive review illustrate why it is both relevant and necessary to constantly consider both the costs and the benefits of the program. The government therefore is encouraging interested parties to come forward and participate in the review process over the coming year.
The private sector financial market is at present in a period of rapid change with new financial products and services being added on an almost weekly basis. The impact of these changes on the SME access to financing is as yet unclear. Therefore it is important that we keep some stability in the system by keeping the SBLA program in place. It is also important that we take this evolution of the SME financing environment into account as part of the comprehensive review process to ensure that the program remains both relevant and sustainable.
It is true that there is a wide diversity of private and public sector programs which provide financing to SMEs. However the SBLA is unique. Under it the government does not provide money directly to small businesses. The program provides private sector lenders with a government guarantee for those lenders who sustain loan losses. The lenders are the sole decision makers as to whether or not a loan is made.
Thus it enables the vast majority of SMEs to have access to fixed asset financing. It is accessible through more than 1,500 different lenders: banks, caisses populaires, credit unions, Alberta treasury branches, loan and trust companies, and other institutions.
Far from duplicating the services of other programs, the presence of the SBLA program has allowed federal and provincial programs to focus on other usually more narrowly defined gaps in SME financing.
That program bears no resemblance to a small business subsidy program. The loans that are now being guaranteed under the terms of the program are made in keeping with the principle of cost recovery.
Thanks to the SBLA, the government, the financial institutions and the small business borrowers share the risks inherent in capital loans. By pooling the risk, the SBLA is supporting one of the most dynamic growth sectors of the Canadian economy.
The Small Business Loans Program meets a need that would not be met otherwise. The average amount loaned under the program is extremely modest: in the vicinity of $65,000.
Moreover the success rate of the program is quite high. In the history of the program some 94% of SBLA loans have been repaid. This suggests that the lenders are exercising good judgment when they decide who gets an SBLA loan, since it is the private sector lenders who decide who receives a loan under the program and not the government.
The small business loans program is an integral part of our programs and services to promote growth and job creation in Canada's small business sector. By passing the act before the House we will allow the SBLA to continue to back loans to SMEs for another year, a year during which we can complete the comprehensive review of the SBLA that is under way. The debate on that review will help determine the longer term future of the Small Business Loans Act.
Madam Speaker, I thank you and I ask hon. members for their co-operation in the swift passage of this legislation.