Mr. Speaker, I am not sure you can hear me from way down here, but the positive of being down here is now we can always look right instead of having to look left.
Today I rise to speak on Bill C-53, an act to increase the availability of financing for the establishment, expansion, modernization and improvement of small business. For the purpose of brevity, this bill seeks to replace the Small Business Loans Act with the new Canada small business financing act. In essence parliament will be attempting to guarantee that the principles of the success story known as the Small Business Loans Act will continue into the next millennium.
Since 1961 the Small Business Loans Act which was implemented by the Progressive Conservative government under John Diefenbaker has helped over a half million Canadian businesses. In the 37 years that have followed, parliament has shown its resolve to assist small business by continuously updating and innovating the act to ensure that it remains responsive to the needs of Canadian small and medium size enterprises.
By and large this duty has been discharged with commitment and diligence. I remind the House of this because the same hand that passes this torch on will be expecting much of us. Since its inception the Small Business Loans Act has experienced a successful repayment rate in excess of 94% of all loans. When we consider that during this period the program has guaranteed loans worth $22 billion, the numbers become all the more impressive.
In 1997-98 the Small Business Loans Act borrowers reported that they would create 74,600 new jobs. This is even more significant when we understand that over 50% of all loans made under the provisions of the act would never have been made under conventional lending practices.
This is easy to believe when we note a 1996 study entitled “Economic Impacts of the Small Business Loans Act”. The study found that approximately 45% of the borrowers in the sample were companies that were less than one year old. In comparison, only 5% of non-SBLA loans went to start up firms.
Much has already been done to facilitate the work of this House as well as the industry committee when it begins its in-depth examination of Bill C-53. To date, a comprehensive review of the financing needs of small business has been completed with special emphasis on the following areas: the economic impact studies; the compliance and default studies; the stakeholder consultations; the cost benefit analysis and future evaluations; and the capital leasing studies. As well, our hon. colleagues in the other place finished the committee report entitled “Review of the Small Business Loans Act”.
In dealing with this bill, I would like to stress both what has been included and what has been excluded. As for what is in this bill, many provisions of the Small Business Loans Act have remained unchanged. The loan loss ratio remains at 85% of the cost of claims for loans in default. This is the same rate that it has been since 1995. Lenders remain responsible for the remainder.
Members of this House will recall that the Liberal government reinstated this ratio in 1995 after the Conservative government had reduced the risk to lenders in 1993. The Conservative government did this to encourage a greater participation by the financial sector in the Small Business Loans Act.
When a government sets up a program like the SBLA which guarantees loans for small businesses, it does so for one very obvious reason. Without such an act, loans would be labelled too high risk by lenders and they simply would not be given. Therefore I have to question the judgment used by the government when it increased the risk to lenders.
At the risk of attributing motives, this appears to be an instance where good politics took precedence over good policy. I say this because since the Liberals did this, we have studies which show that small and medium size enterprise lender dissatisfaction has been steadily increasing. Rather than pointing fingers at lenders or borrowers, this legislation should be focusing on improving the environment for both.
A few other program parameters which have not changed should be noted. The maximum loan size remains at $250,000. When this issue was reviewed it was found there was very little support for increasing this figure. Until recently the Canadian Federation of Independent Businesses was arguing for a reduction of the loan threshold. One notable exception to this is the tourism industry where many have called for a doubling of the $250,000 threshold. This has been due in part to the significant capital investment required for facilities. The percentage of the costs of eligible capital assets accepted for financing remains at 90%. This is a reasonable figure and there is no need to review it.
However, there is a shortcoming with this bill that lies in its failure to come to grips with the issue of the lack of access to the Small Business Loans Act that currently exists for knowledge based industries. The minister raised hopes when he asked for a report that asked for the Small Business Loans Act to be expanded to target knowledge based industries. Unfortunately when the answer comes back that something definitely needs to be done, he chooses to ignore it.
Knowledge based industries are among the most dynamic job producing companies in Canada today. The problem lies in the fact that their major assets are intellectual and thus are not capable of being financed under current criteria. So what are we to do, ignore them? Based on the industry estimates which I read this year, the same estimates which place so much emphasis on the importance of thriving as a knowledge based economy, I am more than a little surprised that we have no firm plan from the minister.
It is not my intention here to cast aspersions but in the past the Minister of Industry has indicated his willingness to encourage the development of our knowledge based economy. My party stands ready to assist with this. Perhaps Bill C-53 is the vehicle we can use.
I turn my attention to the specific changes that will come about if Bill C-53 is implemented. First, there is a mandatory program review provision. If passed, this would mean the end of the current provisions that require an automatic ending of lending authorities if a new bill is not passed as we saw last year with Bill C-21. While we are still a little short on the details that would constitute this review process, in general terms it appears to be a good idea.
I say that for the following reasons. Under the current system, the government is in a situation where it must present a bill to parliament in order to keep the program alive. This bill could potentially contain clauses the government of the day would like to slip through while at the same time keeping the opposition handcuffed by the inherent time constraints. After all, who wants to be the party that takes the blame for the demise of such an historically important and successful act? With this in mind the review process is a better way to deal fairly with any necessary changes.
Under the proposed process the review would see data collected over a five year period prior to the review used to give parliamentarians and policy makers the tools needed to evaluate where changes need to be considered. At the end of the five year period, currently designated as March 31, 2004, the minister would have 12 months in which to cause a comprehensive review. At this point we are not prepared to comment on the reasonableness of these time constraints as we look forward to reviewing them at the committee stage.
Bill C-53 proposes a new component to the act, the idea of pilot projects both for capital leasing and for the voluntary sector. Capital leasing has been an ever growing and popular financing option for small and medium size enterprises. This particular type of lease ensures that the lessee will own the equipment at the end of the lease. A provision of this nature serves to protect the interests of taxpayers as the equipment will become an asset of the company at the end of this lease. Or so one would believe if one were to read the memorandum that was distributed by the minister to all parliamentarians. However, Industry Canada's report “Access to Financing for Small Business: Meeting the Changing Needs” is not so definitive in its treatment of capital leases. I refer to page 17: “Capital leasing is the leasing of equipment for the major part of its useful life, with the expectation that the lessee will obtain ownership of the equipment”. If the intent of the bill is to guarantee that all capital leases under the program will be lease to own agreements the wording should be carefully considered.
At present the leasing industry does not approve leasing for firms under two years old seeking less than $100,000. This typically excludes the majority of present Small Business Loans Act borrowers. Parliamentary committees will be consulted for the implementation of such a pilot project. In doing so, I trust we will come up with a program which is responsive to the stated needs that exist.
The other proposed pilot project deals with the voluntary sector. The document “Securing Our Future Together” makes a commitment to reviewing federal small business programs with a view to extending their mandate to the voluntary sector. This program raises many questions. In recent hearings conducted into this issues witnesses generally were opposed to extending provisions of the Small Business Loans Act to the voluntary sector.
Some of the reasons cited included costs as well as instability of revenues. These are legitimate concerns and I also would be concerned if we were to put in place a program which would allow non-profit or voluntary organizations to unfairly compete with other business interests. This is something that needs to be more thoroughly explored at the committee stage.
Contingent liabilities are a new addition to the act. The claim being made is this is somehow necessary to shield the taxpayers against incurring more than $1.5 billion liability should all loans default. Based on the fact that the program as it stands is only experiencing a 5.6% default rate coupled with the fact that the program would have to be five times larger for such a large payout to be made, I am suspicious of this clause.
A cynic might suggest that this is merely window dressing and marketing to make the government appear fiscally responsible. The reality is the threshold is set so high it will never come close to being tested but it does sound nice.
Cost recovery is a worthy goal of the program. Toward that achievement, Bill C-53 seeks to allow the government the ability to restrict access to program loans or guarantees. Too little has been released on this clause to discuss it with any depth and I would caution that any legislation covering this area must be generous in scope with allowance for various contingencies. We have a heavily regulated financial services sector already. If any abuse of process is suspected other avenues may exist to achieve compliance.
The next area I wish to address is that of the proposed accountability framework. This proposal by Price Waterhouse will access the Canadian small business financing act over the next five years. Several criteria will be used, including the visibility of the program to potential borrowers, its impact on creating and maintaining jobs and the performance of the borrowers. The auditor general in his report on management of the small business loans program points out that claims audit procedures need to be strengthened. This is an area that will have to be dealt with with great sensitivity to the viability of the program as a whole.
I remind the House that the reason this act exists is due to the undeniable fact that a problem exists. The problem was the unwillingness of banks to lend to small and medium size enterprises. Any attempt to change the program so as to put greater compliance demands on lending institutions will only result in fewer small businesses getting the financing they desperately need. While I am not opposing the provisions at this time I am suggesting that we tread carefully.
Finally, I would like to address a clause in the Industry Canada review of the Small Business Loans Act. Specifically in the booklet “Meeting the Changing Needs” on page 17 there is a reference to asset transfers.
Included in this is a reference to non-arm's length transfers of assets of going concerns.
The issue I raise is that specifically itemized as being excluded from the CSBFA act guaranteed loans would be the sale of a business from a parent to a child. This needs to be reviewed and for very good reasons. We no longer live in a time where the purchase of family businesses is financed by long apprenticeships, that is to say children working at below market value with the understanding that some day the businesses will be theirs.
Rather, the inherent value of small businesses represent the equivalent of an RRSP to many business owners. This provision would result in children being unable to secure the proper financing. What would happen then? I suggest that parents who are facing the insecurity of retirement would be forced to look at selling their business to a non-relative who would not know the ins and outs of the particular company and would have access to the Canadian small business financing act loan guarantees.
Is this fair? I think not. At a time when high taxes and a lack of opportunity are leading to brain drain and breaking down the family unit, we do not need to make the situation worse with punitive anti-family legislation.
Once again I look forward to working at the committee level to see if we can change this.