moved that Bill C-53, an act to increase the availability of financing for the establishment, expansion, modernization and improvement of small businesses, be read the second time and referred to a committee.
Mr. Speaker, eleven months ago I came before the House to seek its approval to extend for one year the lending authority under the Small Business Loans Act.
I said at the time that this extension would allow us to complete a comprehensive program and policy review that was under way at that time. It would allow for thorough consultation with both private and public sector stakeholders. And that it would allow us to consider the auditor general's recommendations.
The extension also gave us the opportunity to take into account the recommendations of the Standing Committee on Public Accounts.
Today I am pleased to inform the House that the analytical phase of the review of the SBLA, the Small Business Loans Act, has been completed. The results of this review can be seen in Bill C-53, the Canada small business financing act.
As hon. members will see, the bill as well as a program evaluation framework and performance measures designed for it address the concerns raised by the auditor general and the public accounts committee. I am confident that Bill C-53 responds fully to those who support the program and encouraged us to continue to improve it to increase its effectiveness and to reduce its cost to the taxpayer.
As I told the House just a few months ago, our objective is an improved program which responds to the needs of small and medium size business.
Bill C-53 contains no changes to the major program parameters. The new provisions it does contain are aimed at ensuring the long term life, financial viability, cost effectiveness, usefulness and accountability of this program. In so doing it will continue to meet the needs of small and medium size businesses and to help them grow in the years ahead.
Why have we not proposed changes to the program's parameters? First, our analysis found that the program is fundamentally sound. It has proven itself for 37 years. Our consultations with public and private sector stakeholders showed that small business believes this program works. Our research supports the soundness of the program's current structure. Our analysis indicates we are on course toward the cost recovery goal.
Second, this is not an appropriate time for grand experiments. The recent and quite unexpected volatility in currency and trading markets that we have all witnessed, confirms, again, the importance of sound, consistent public policy.
Small business, which is especially vulnerable to the vagaries of economic gyrations, needs stability. It needs this even more so at a time when the country is about to enter into a vigorous debate on the role and structure of its financial services industries.
The House can go a long way to help establish a climate of stability for small business by giving its approval to Bill C-53, the Canada Small Business Financing Act.
Decisions related to the recommendations of the Mackay Task Force and the proposed bank mergers will have a direct bearing on the well-being of small business, which is the source of economic and job growth in every region of the country.
Like all others, the financial services sector is under pressure to adapt itself to the impact of electronic banking, E-commerce, the Internet and other new technologies that are reshaping the way business is conducted.
Small businesses continue to identify the lack of access to appropriate credit as an impediment to their growth. I think hon. members will agree that it is essential for us to ensure a measure of stability by continuing the one program which is available to all legitimate for-profit small businesses wherever they are located in Canada. Small and medium size businesses are an anchor for our national economy. In fact they make a crucial contribution to our collective economic well-being. This is one reason support for the bill before us is important.
There are more than 2.5 million small businesses, including self-employed individuals across Canada. These account for 99% of all Canadian businesses. Together they have generated 70% to 80% of all new jobs in Canada over the last three years. Businesses with 100 employees or less account for 50% of all private sector employment and 43% of gross domestic product. It is a sector of the economy that continues to grow. Growth in the small business debt financing market outpaced that of the total business market, increasing by 20% between 1994 and 1996.
Despite the increase in available capital and the increase in lending, access to credit continues to be identified by entrepreneurs as a significant barrier to the growth of small businesses. This is precisely why we are asking the House to approve the Canada small business financing act.
The objective of the small business financing program is to facilitate the availability of loans for the establishment, expansion, modernization and improvement of small business enterprises.
Loans may be made by approved lenders for terms of up to 10 years. Business will be able to borrow up to $250,000. Lenders must pay a one-time up-front 2% registration fee which can be charged to borrowers. In addition, lenders must pay an annual administration fee of 1.25%.
These asset-based loans are available for the purchase of land or equipment, or for making leasehold improvements. They are not available for financing the purchase of shares, working capital, or existing debt. These loans cannot be made to finance the purchase of goodwill or other intangibles.
Virtually all non-farm small businesses are now and will be eligible to borrow under the new program if it is approved by parliament. Eligible borrowers include enterprises in Canada that operate for gain or for profit, provided the annual gross revenue of the business does not exceed $5 million.
Farming operations and charitable and religious organizations are excluded from the current program. Parliament has established a sister program entitled the Farm Improvement and Marketing Co-operatives Loans Act to facilitate farmers' access to credit. I note also that the bill proposes the design and implementation of a pilot program for lending to the voluntary sector.
The bill before us today provides a step forward in streamlining the Small Business Loans Act. We expect that this will make it easier for the loans officers in the 13,000 points of service to understand it.
While all the key provisions of the act are contained in the bill, most of the detailed administrative provisions will be in the regulations. This means that all major control levers remain in the act while the regulatory regime provides a more complete guide to program implementation.
I will now outline for the House the key provisions contained in the bill.
The bill would provide authority for the Department of Industry to conduct audits to ensure compliance with the act and regulations. It would provide authority to create a limited pilot program on a cost recovery basis for capital leasing. It would also provide authority to create a limited pilot program on a cost recovery basis extending lending to the voluntary sector.
I am also proposing to replace the current sunset clause. Every five years Industry Canada will conduct a comprehensive review of the program using an evaluation framework and performance measurements. The resulting report on the program's performance, effectiveness, financial viability and progress toward cost recovery would be tabled in parliament and referred to committee for consideration.
As a means of maintaining and ensuring cost recovery, the governor in council through regulation would have the power to restrict eligibility criteria for access to program loans.
The crown's contingent liability under the program would be capped at $1.5 billion over five years. This means that regardless of the dollar value of the loans made under the act, taxpayers would never have to cover more than $1.5 billion on loans made in that period. That $1.5 billion payout would only happen if all loans were to default, all of them, which is a rather unlikely prospect.
Historically the rate of loan losses has been 5.8% meaning that over 94% of all loans have been repaid without incident. This contingent liability would automatically be renewed every five years. This will permit lending to continue while parliament considers the comprehensive review. I will explain briefly the rationale and thinking behind these provisions.
The bill proposes the creation of two pilot projects designed to be financially self-sufficient. Hon. members should know that I intend to call upon their advice, through the Standing Committee on Industry, when the regulations and the parameters of the pilot projects are being drafted.
The only kind of financing which currently enjoys the government's risk sharing is asset-based lending.
Capital leasing is a rapidly growing form of small and medium sized business financing. Some hon. members and the leasing industry have pressed for its inclusion under the program.
The leasing industry says it generally does not provide financing to firms less than two years old or those seeking amounts less $100,000. A major portion of current SBLA clients fall into these categories.
That is why authority to design a capital leasing pilot program is included in the bill. It would test the need to fill an apparent but, as yet, unproven gap. As I have indicated before, it would have to be independently self-sufficient in terms of meeting its cost of claims.
The voluntary sector plays an increasingly important role in Canada. Consistent with our previous commitments, Industry Canada consulted members of the voluntary sector to determine whether the CSBFA program should be extended to this sector. Some indicated that extending the program would make a real difference to a voluntary group's ability to serve its community. A proposed pilot would test this view and it would also be designed to be self-sufficient.
An item that we had to reject was the suggestion that the program be used to provide access to working capital. The program already indirectly facilitates access to working capital through a 90% financing rate on fixed assets. This is higher than conventional lending. This provision leaves a greater portion of small business equity available to finance working capital. During our consultations stakeholders said that they did not see the program as an appropriate way to meet their working capital needs.
The sunset clause that called for the program to come to an end after specific periods of time created undue and really quite unnecessary anxiety for both lenders and borrowers. It has also led to situations where the House has been asked to provide legislative authority while facing a tight deadline. This has constrained parliamentary consideration. Further, it is not a businesslike way to manage a program which is badly needed by small business.
Under the new provisions parliament will have the opportunity to review the program's effectiveness every five years. Currently all major control elements of the program are found in the act. The proposals contained in the bill, if approved by parliament, would change this authority so that the governor in council would have authority to make regulations to restrict access to the program to ensure that it remains on a cost recovery track.
This power is restrictive only. Should a future administration wish to make changes similar to those made in 1993, for example, it would need to seek parliamentary approval for them. This protects the control of the House over appropriations while ensuring that action can be taken in a timely fashion to mitigate taxpayers' risks under the small business financing act.
The bill also proposes a number of measures which may reduce the level of program losses, thereby lowering default and claims on the program.
Earlier this year, Parliament set the program's total lending ceiling at $15 billion for the period April 1, 1998 to March 31, 1999. Traditionally, the lending ceiling has been used to control the size of the program. This has led to confusion. It has led to the mistaken belief that taxpayers are lending the entire $15 billion. This is simply not the case. Lenders are lending money they raise themselves.
Taxpayer liability has always been much less than the aggregate lending ceiling. This is because of the formula which is used to cap the limit on claims that the government must pay in the event of default. The new bill maintains this formula, but eliminates the artificial and confusing aggregate lending ceiling.
To make the government's and the taxpayers' liability absolutely clear, we are capping the contingent liability at $1.5 billion for each five year period.
Hon. members should understand that program costs have never come close to this contingent liability and that these costs are now offset by revenues on loans that have been made under the program since 1995. I would also like to point out that this contingent liability allows the program to continue guaranteeing lending of approximately $2 billion a year, which is the current yearly average.
In 1995 the government set the program on a cost recovery track. A private sector analysis of the program indicates that on loans made since 1995 the program is in fact on track. However this analysis has also shown that the program is extraordinarily sensitive to changing program parameters and may be affected by other economic conditions.
There are many factors that affect the performance of the program. Industry Canada will therefore continue to monitor the program very closely.
To conclude, Mr. Speaker, allow me to remind the House, once again, how critically important the proposed CSBFA is. Created in 1961, its overall record is one of great success. Its results demonstrate the need to make it a stable, long-term instrument of our economic policy.
Last year, it provided access to nearly $2 billion in financing. This means that close to 30,000 firms across the country, in all regions, got necessary financing that they might not have had access to otherwise. Some 9,000 of these firms were in rural communities. The majority of loans, averaging nearly $68,000, went to firms less than three years old.
The success rate of the program is quite high. Defaults have fluctuated periodically and we anticipate a rise for a period. The fact is that the loss rate on loans have been on average 5.6% over the 37 year life of the SBLA program. Private sector forecasts suggest the current fee structure is expected to offset the claims costs of the program on loans made since 1995.
The program which parliament is being asked to approve does not represent a subsidy to small business therefore, or to the banks or other lenders. As currently structured the program shares the risk of lending among lenders, borrowers and taxpayers. Loan losses now guaranteed under the program are expected to be fully cost recovered.
The CSBFA will continue to offer a way for the government, financial institutions and small business borrowers to share the risks of fixed asset based lending to smaller, younger firms.
In providing this risk pooling the Canada Small Business Financing Act will support one of the most dynamic growth sectors in the Canadian economy.
As I mentioned earlier, an important contribution that we can make at this time for this sector is to provide it with stability.
This stability is provided through the bill, which will continue to provide the small business community access to financing, even as the finance services industry continues to restructure. Maintaining the major program elements provides a stable base of financing for small business, while institutions and their product lines are under review.
Measures are contained in the bill which will maintain the program on a cost recovery track. This contributes to its stability, ensuring taxpayers long term support for this important risk sharing program.
Eliminating the aggregate lending ceiling will also enhance the stability of the program. It will reduce the periodic uncertainty which has plagued the program in the past.
Each time we have approached this artificial ceiling we have been required to return to parliament for an increase. The proposed cap on the contingent liability provides a real cap on our liability but does so in such a way that will not unnecessarily take up the time of the House of Commons.
By eliminating this periodic uncertainty we will enhance borrowers' confidence that the program will be there in the future to facilitate financing for at least a period of five years. Stability will be enhanced by eliminating the sunset clause and replacing it with a regular review during which lending will continue.
In the past this provision has created uncertainty about the future of the program. It has also constrained parliamentary consideration of the program in the past. This proposal will eliminate these features while still allowing for appropriate parliamentary reviews.
As provided in Bill C-21, authority to register loans under the Small Business Loans act expires on March 31, 1999. The authority under the current bill would commence April 1, 1999.
One of the many strengths of this program is that it is delivered by lending professionals, not bureaucrats. This, however, means that the more than 1,500 financial institutions must have the time they need to train their staff on the new legislation and regulations. With over 13,000 points of service, this is no small task. This is why lenders have asked for 90 days to prepare themselves to implement the legislation. While this may reduce the time for parliamentary consideration, I believe that effective implementation to serve Canada's small business community is important.
For this reason I urge all hon. members to support the passage of bill as soon as possible.