INDY Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, October 7, 1998

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[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): I call this meeting to order pursuant to an order of reference of the House dated Tuesday, October 6, 1998: consideration on Bill C-53, an act to increase the availability of finances for the establishment, expansion, modernization, and improvement of small businesses.

We are pleased to have with us today several witnesses who are here on behalf of Industry Canada. We have Mr. Robert Dunlop, director general of the Entrepreneurship and Small Business Office; Mr. Peter Webber, team leader of small business financing in the Entrepreneurship and Small Business Office; Mr. Serge Croteau, director general of the Programs and Service Branch; and Ms. Lenore Scanlon, legal counsel.

I propose that witnesses will provide their opening comments or statements. From there, we'll go to questions.

I will turn it over to Mr. Dunlop.

Mr. Robert Dunlop (Director General, Entrepreneurship and Small Business Office, Department of Industry): Thank you, Madam Chair and members of the committee, very much for your invitation to us to provide an overview of Bill C-53, the Canada Small Business Financing Act.

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For this technical briefing, we're providing you with a briefing book that contains a number of items we hope will be of aid to you in your deliberations, including the clause-by-clause analysis of the bill.

Our goal today is to provide the committee with an explanation of the new components and to answer any questions you may have on the elements of that bill.

We thought, before beginning, that some context would be useful. As many committee members are aware, the Small Business Loans Act, the predecessor to this proposal, was in Parliament only this year. Bill C-21 extended the life of the program by one year and was given royal assent on March 31, 1998.

In the seven months since then, the challenge has been for us to finish the comprehensive review of the program, which is involving extensive consultations with both borrowers and lenders. During this review, a number of studies were done to provide information for decision-makers.

Based on the results of this work, the next task was to develop a proposal that would respond to the needs of the market, as well as the recommendations made by the Auditor General in his December 1997 report and the recommendations made by the public accounts committee.

After that, policy decisions were made. Then the intent had to be translated into legal language, first in the bill and then in the regulations.

First, the Auditor General, in his December 1997 report on the audit of the Small Business Loans Act, raised concerns relating to qualifying program objectives and the need for comprehensive program evaluation, cost recovery, monitoring, and forecasting. Although he said to this committee that the program was generally well run and had a minimum of costs, he also indicated that there was a need for more precision in program objectives. A balance had to be found between the sometimes competing objectives of increasing financing for small and medium-sized businesses and meeting cost recovery.

In its recommendations, the public accounts committee touched on many of the same issues. It called for a more clearly defined statement of performance and objectives, the development of performance indicators, clearer targets of incrementality, and closer monitoring of the program to assess its performance, the impact of jobs, and the progress toward cost recovery.

The committee also called for the establishment of mechanisms that would allow for early corrective action when it was necessary. It also called for closer scrutiny of bad loans in compliance with the SBLA by lenders and financial institutions.

I understand that the minister will be tabling the government's response to this report today. As soon as we are made aware that this has been tabled, copies will be available for the committee.

The comprehensive review that Minister Manley announced on November 20, 1997, indicated that there would be three objectives. He said at the time that the program, if continued, would need to be made relevant to the needs of small business, be financially self-sustaining, and have an adequate accountability framework.

The comprehensive review promised by the minister has now been completed. The results of that review and consultations with borrowers and lenders are reflected in the bill before you. Let me briefly characterize the comprehensive review, summarized in the three documents assessing the needs, which is contained in the briefing book that has been provided to members of the committee.

Among its independently commissioned studies, it included studies on economic impact and non-compliance and defaults within the program, stakeholder consultations, a cost-benefit analysis and future evaluations, and the possibility of sending the program to capital leases.

On economic impacts, these studies predicted the economic impact of the SBLA program and the loans it guarantees primarily in terms of understanding the impact these loans have on the firms that took them and what employment benefits resulted from that activity. These studies also examined the question of what gap the program is filling in the financial market.

On non-compliance and default, these studies examined the extent to which lenders and borrowers were not complying with the provisions of the SBLA.

As for the cost-benefit analysis and future evaluations, the studies attempted to ascertain whether the SBLA program was effective and efficient, whether it was bringing the most benefit to small borrowers at the least cost to taxpayers, and how changes might be implemented to improve that performance.

Certain studies made specific suggestions on how data could be collected on the program in the future and how to facilitate that collection to provide a thorough evaluation.

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On capital leasing, the question was whether the Small Business Loans Act could or should be extended to this area of financing, which is not covered under the Small Business Loans Act per se.

The essential challenge facing this program is to come up with the means to move efficiently toward cost recovery, while ensuring it does not lose sight of its raison d'être, which is the facilitating of debt financing to small young businesses that would otherwise not likely have debt financing made available to them.

The program must continue to contribute to the competition among lenders as a means of providing choice for financing for small businesses. The program encourages small owners in particular to participate in the program by providing them with a higher rate of guarantee based on their total loan portfolio size.

This is not a program used exclusively by the big banks. In fact there are over 1,500 accredited lenders and 13,000 points of service across the country. At a time when economic conditions for entire nations can change overnight, it is important that the management of the program have adequate flexibility for taking fast action. The bill provides the means for this to protect for any overexposure of taxpayers if, for instance, defaults suddenly rise and losses accrue at a rate that was not forecast.

With these considerations in mind, Bill C-53 is meant to respond to the three long-term needs of stability, accountability, and innovation.

On stability, the major provisions of existing legislation are maintained in this bill. The CSBFA contributes to stability. In the bill before you, you will see that the basic parameters are maintained. Loans may be made by approved lenders for terms up to 10 years. That remains unchanged. The maximum loan size is $250,000 per borrower.

Businesses will be able to borrow to acquire real property and equipment or make leasehold improvements. The three categories of loans are unchanged. Eligible businesses must have $5 million or less in annual sales and be for-profit enterprises not operating in the areas of charitable or religious purposes or in the business of farming. That is unchanged. Borrowers must pay a one-time upfront 2% registration fee, which can then be financed through the loan. Lenders must pay an annual administration fee of 1.25%, which can be passed on to borrowers. The interest rate is capped at prime plus 3% and the loan sharing ratio.

Since 1995 the government showed losses as 85% of the cost of claims for loans and default after recoveries on security. Lenders are responsible for the remainder. Again that is unchanged.

On the cap on claims, each lender has a separate account of SBLA-guaranteed loans. The government will pay 90% of the first $250,000, 50% of the next $250,000, and 10% of remaining loans. This was the feature I mentioned earlier that encourages the smaller lenders. The effective guarantee rate for a major lender such as the Royal Bank would be in the range of 10.6%, while for a small institution that might have a total portfolio of under $250,000 it is 90%. Financing continues to be limited to 90% of the value of the project being financed.

It's proposed that these existing parameters be maintained because they've proven effective in reaching the program's objectives and are largely understood by both lenders and borrowers who use this program.

A number of changes are being introduced, as you're aware. For example, stability will be further provided by proposed elimination of the sunset clause. The new bill provides for an evaluation framework that would be used, with a mandatory program review by Parliament every five years. This would replace the existing provision in the SBLA that calls for lending authority of the program to be terminated after every five-year period.

Stability would be provided with this new mechanism by ending the cyclical uncertainty for both lenders and borrowers about the continuation of the program, and would provide parliamentarians with a thorough evaluation framework, with improved and more detailed information on the performance of the program.

The second item I mentioned was accountability. Accountability of the program would be improved through the adoption of a variety of initiatives, including implementation of the evaluation framework.

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A number of performance indicators have been developed to evaluate the effectiveness of the program, and these will include the extent to which the program meets small-business financing needs, the impact on jobs, cost recovery, and the average price of loans made under the program relative to loans made outside of the program's parameters.

Contingent liability is another area of change. Bill C-53 proposes to eliminate the current aggregate lending ceiling and replace it with a cap on the government's total contingent liability of $1.5 billion over each five-year period. 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.

This pay-out would only happen if all loans were to default, which is a very unlikely event. Over the life of the program the default rate has been 5.6%. This means that somewhat over 94% of loans made under the program have been repaid over the 37-year history of the program. The program is designed so that revenues offset the cost of claims resulting from defaults on loans made since 1995. In other words, since 1995 the objective has been to have the program run on a cost-recovery basis.

This contingent liability would be automatically renewed every five years under the proposed bill. This would support in the range of $2 billion a year in guarantees, which is roughly equivalent to the activity under the program over the last several years.

On restricting access to the program, under the bill before you for consideration the government could regulate the eligibility criteria that are set out in the bill, but only to restrict access to the program should it become evident that the goal of cost recovery was not being met.

Another change is in the area of interim claims payment. The bill provides authority to establish a mechanism for interim claims payments. Currently, lenders have to realize on all security before submitting a claim, which often takes a considerable amount of time. The Auditor General expressed a concern about the interest costs borne by the department as a result of this system.

Under the proposed new approach, lenders would be allowed to submit a claim for loss after realizing on hard security. Industry Canada, after audit, would then pay the claim less the amount of any personal guarantee provided. This means lenders would get their money more quickly, and Industry Canada's interest costs would be reduced.

In addition, the bill proposes that there be authority for a compliance audit. In the past this was not an element of the bill. The Auditor General found that he had no authority to audit the program, and when he did he found a few problems with non-compliance. This bill responds to these concerns by giving the authority to the department to undertake an audit, and in cases where compliance appears to be a problem, audits would be limited to the loans made under the act and would only be used in extraordinary circumstances, not as a routine measure.

The goal of achieving cost recovery over the ten-year life of the loans was established in 1995. Private sector studies were commissioned by the department to determine whether the program as currently structured could meet this target, given the historic default rate of 5.6%. Preliminary indications based on the results to date, in the three-year period under the new regime, suggest that the program is moving toward cost recovery. These are ten-year loans, so it takes more time to develop a database and experience, but over the three years of experience to date, the consultants suggest this goal is being achieved.

Incrementality is another important issue. The Auditor General expressed concerns about the degree of the program's incrementality—that is, the proportion of the loans that would be made in absence of the program. An independent study commissioned by the department found that 54% of the loans made under the program would not have been made otherwise. An additional 42% of SBLA applicants would have received a conventional loan, but with less favourable conditions.

This bill also contains some elements of innovation. Members of the committee are aware that financial service is in a state of rapid evolution in this country and elsewhere. In this changing environment it is important for the program, while remaining true to its principal objectives, to meet the emerging new needs. For this reason, the proposed bill contains two innovative provisions.

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The two provisions are the creation of pilot projects in the area of capital leasing and for the voluntary sector. The details of these pilots are to be worked out in consultation with parliamentarians and other stakeholders should the bill be passed into law, but they will have separate program criteria described in separate regulations and a separate contingent liability ceiling. In other words, these would not be used to cross-subsidize or to receive cross-subsidies from the loan element of the program, as currently run by the SBLA. If it is approved, we anticipate it would take at least a year to commence to any financing activity under these pilots.

Capital leasing is one of the areas mentioned. This is the leasing of capital equipment with the expectation that the lessee will obtain ownership of the equipment by the end of the lease term. This is a rapidly growing form of financing for small and medium-sized businesses. However, consultations have indicated that the leasing industry generally does not approve leasing for smaller firms with less than two years in operation seeking financing in amounts of less than $100,000. This is similar to the kind of gap filled by the Small Business Loans Act for conventional loans, so it is an obvious area of interest in the consultations we undertook.

The voluntary sector pilots are a bit different. The government has committed to review federal small-business programs with a view to expanding their mandate to the voluntary sector, in recognition that these organizations are often an integral part of the economy and labour market. Although stakeholders' views were divided, consultations revealed that some voluntary groups would find a loan guarantee program useful and believe their operations would permit repayment of government-guaranteed loans.

The ministry has indicated these pilot projects would most likely be considered successful if they demonstrated that they could be delivered on a cost-recovery basis—both the voluntary and the capital lease—and if they demonstrated that they filled a gap in the financing market.

In conclusion, Madam Chair and members of the committee, I would note that this program is relatively simple in concept and delivery but somewhat complex in the behind-the-scenes details. We've tried to provide the committee with the information that will make even the behind-the-scenes details relatively clear, including the clause-by-clause analysis in the briefing book.

In addition, our annual report was tabled in the House last week, and we've provided three additional documents for your information. Entitled Access to Financing for Small Business, this series traces the origins and the history of the act from its inception in 1961. It summarizes the consultations undertaken and provides an overview of the proposed changes in what we hope is layman's terms.

I hope these publications and remarks will provide the committee with useful information. We are now happy to respond to any questions the committee would find useful.

The Chair: Thank you very much, Mr. Dunlop.

We're going to begin with you, Mr. Pankiw. Do you have any questions?

Mr. Jim Pankiw (Saskatoon—Humboldt, Ref.): Thank you.

First of all, could you clarify something for me? Is this the time to go through the bill and ask for clarification and explanations of clauses?

The Chair: Yes.

Mr. Jim Pankiw: Okay, then we can start with something that was mentioned. It's on page 4. Can you explain again paragraphs 2(a), (b), and (c), and this 90%, 50%, and 10%?

Mr. Robert Dunlop: It's one of the areas that's simple in content and more difficult in application. I'll ask Peter Webber to answer that question. He had the lead on the policy development for this.

Mr. Peter Webber (Team Leader, Small Business Financing, Entrepreneurship and Small Business Office, Department of Industry): Thank you.

I presume you're referring here to subclause 6(2), on page 4 of the bill, Mr. Pankiw.

Mr. Jim Pankiw: Yes.

Mr. Peter Webber: Well, it limits the liability of the minister in relation to the overall portfolio of an individual lender's loans under the program. This is a pre-existing provision. It's been in the act for quite a number of years, and it is based on the 90%-50%-10% rule that the calculation of the contingent liability cap works.

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For a small lender who makes less than $250,000 worth of loans during a five-year period, we will pay up to 90% of their overall aggregate portfolio in claims. Obviously that presupposes that they've maximized the realization of security on each one of the claims made. They will send us a claim after having realized insecurity. We will then pay them 90% of the aggregate principal amount of the loans, and that's for their first $250,000 tranche. The second—

Mr. Jim Pankiw: Maybe we can simplify this. I thought there was a $250,000 maximum.

Mr. Peter Webber: Sorry, that's on loans to individual borrowers. There's no maximum on a lender's portfolio. This is the sum of all the loans they've made during a five-year period to all borrowers, no matter how big or small the size of the loan.

Mr. Jim Pankiw: Well, what I'm thinking here is that it doesn't make sense. For a lender, the total value of loans to all the businesses under it through the SBLA could total millions of dollars.

Mr. Peter Webber: That's absolutely true.

Mr. Jim Pankiw: But to that lender—

Mr. Peter Webber: For the first tranche of $250,000, we will pay to that lender 90% of eligible losses.

Mr. Jim Pankiw: What do you mean by “lender”? Would the CIBC and every branch of that bank in Canada be a lender?

Mr. Peter Webber: Let me put it in these terms: Each lender has an account with us, and that account is built up over the course of a five-year period of time. Every time a lender makes a loan, we add a certain proportion to their reserve account, if you will. When they send us a claim, we subtract from that account. At the end of the five-year period, once the books are all closed on all the loans made during that period, the maximum we will pay on the first $250,000 tranche is 90%. For the example of the CIBC that we used before, our maximum exposure to the CIBC is roughly 10.6% because their lending for a five-year period exceeds $500,000. The maximum we would ever pay to them on losses is 10.6% overall.

Mr. Stan Keyes (Hamilton West, Lib.): Overall or branch by branch?

Mr. Peter Webber: Overall.

Of course the situation is different for the credit unions and the caisses populaires, which are sometimes individual lenders on a branch-by-branch basis. But for the major lenders, they are caught by the 10% rule.

Mr. Jim Pankiw: So you're not guaranteeing to the banks 85% of every loan they make under the SBLA.

Mr. Peter Webber: We guarantee 85% on individual loans. We will pay up to 85% of eligible losses on individual loans.

Mr. Jim Pankiw: But if every single one of those loans goes into default, then you're actually not liable for all that.

Mr. Peter Webber: That's right, precisely.

Mr. Jim Pankiw: All right, that explains that.

Could you explain to me the purpose of subclause 3(2), on page 2?

Mr. Peter Webber: This subclause provides for the payment of administration fees. We are proposing to change the regime of payment of the administration fee. Currently, it's paid annually. We're hoping to increase the frequency of remittances.

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There's a period from April 1, 1995, to March 31, 1999, during which the annual administration fee would otherwise be paid on an annual basis. The complexities of keeping two sets of books for some lenders may well prove to be administratively inconvenient and not worth their while, in which case they would be able to pay their remittances quarterly. Some may determine it is worth their while to continue paying on an annual basis.

That having been said, of course this is designed to avoid a retroactive impact on the lenders, which ultimately reflects on their willingness to use the program to enhance access to financing for small businesses.

The Chair: Do you have a last question, or are you okay for now?

Mr. Jim Pankiw: I'll ask one more.

Subclause 3(3) refers to the Fisheries Improvements Loans Act. That's again referred to in subclause 4(3). There's one other place where it was referred to as well. What's the significance of the Fisheries Improvements Loans Act? What onus does that have?

Mr. Peter Webber: This is a residual provision. The Fisheries Improvements Loans Act per se no longer exists, but loans under that act remain outstanding. In 1987 the act was repealed and fishermen—or fishers, as some people prefer to call them—were made eligible under the Small Businesses Loans Act. In effect, this ensures the regime in place to administer loans can continue to be in place for those that remain outstanding under the existing acts.

In the case of interim claims payments, we're proposing to provide in fact for changing the claims payment process to an interim claims payment process. Because of the way it's designed, it's a win-win situation for the taxpayer and the government in terms of reducing our interest costs for respective claims. It's a win for the lender because they get their claims paid sooner. So we wanted to extend that advantage to both of us. Because there's no cost involved, it would have in effect a retroactive impact, but it would be a positive impact for both.

In the case of subclause 3(3), in terms of interim claims, it's up to the lender to choose to use that mechanism. As I say, it's a result of a residual lending program that continues to be in force. I think I heard there are about 85 loans still outstanding under that act, and I suspect in a few years' time they will have been either repaid or discharged.

The Chair: Thank you very much, Mr. Pankiw.

Ms. Jennings, do you have a question?

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): No, I'm fine.

The Chair: Okay. Mr. Peric.

Mr. Janko Peric (Cambridge, Lib.): I would like some explanation. How did you get the figure of prime plus 3%, and what is this 2% registration fee?

Mr. Peter Webber: The 2% registration fee is an upfront fee paid by the borrower. This fee and the 1.25% annual administration fee are intended to defray the costs of claims under the program.

With regard to the prime plus 3%, that was calculated on the basis of the pre-existing level that existed at the time of prime plus 1.75%, when we brought in the annual administration fee, which can then be transferred through the interest rate to the borrower. So we increased that from 1.75% to 3% to reflect the increase accounted for by that 1.25% annual administration fee. This is a provision that remains unchanged from the existing SBLA and is essential for maintaining cost recovery.

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Mr. Janko Peric: If this bill is passed tomorrow and it's the law, how much would it cost me if I borrow money today? Is it prime plus 3%?

Mr. Peter Webber: No. A study we undertook in 1996 indicated that there is competition among lenders and the average interest rate actually being charged was prime plus 2.6%. So it's less. It's not always prime plus 3% in every case.

Mr. Janko Peric: So prime plus 3% is the maximum.

Mr. Peter Webber: That's the maximum. They can't go above that, but they are charging less than that in certain circumstances.

The Chair: Ms. Jennings.

Ms. Marlene Jennings: I was so distracted by the interest, I have to say that I forgot I do have a question. It concerns the regulations.

The legislation refers a lot over to the regulations that we used to find in the legislation itself. Do you have any time line on when those regulations are going to be ready?

Mr. Robert Dunlop: Obviously the first task was drafting the bill. We've been working with our colleagues in the Department of Justice on the drafting of the regulations. After spending considerable time with them over the last several days, we hope to be able to release the preliminary draft regulations to the committee and to stakeholders certainly before the end of this month and hopefully well before.

Ms. Marlene Jennings: That's very good news. Thank you.

The Chair: Thank you very much, Ms. Jennings.

[Translation]

Ms. Lalonde, please.

Ms. Francine Lalonde (Mercier, BQ): Mr. Dunlop, in your introduction, you said that the reform was based on market studies, the recommendations of the Auditor General and the work of the Standing Committee on Public Accounts. However, I did not hear any reference to the needs of small and medium-size businesses. That will be the focus of my first question.

The reform was made necessary by the Auditor General's comments, which were studied by the Public Accounts Committee. However, the primary objective of this program is economic in nature. It seems to me we should have made sure we had a macro- economic analysis of the impact of the loans in order to balance the need for taxpayers to recover all the money and the necessary injection of capital in the economy through new SMEs. Unfortunately, these SMEs do not have enough credit or enough management assistance, and often have to declare bankruptcy. We have no macro-economic studies that would allow us to determine what type of assistance the federal government should be providing. That is my first comment, and I would like you to respond to it, because I personally am dissatisfied.

The proposal is better than nothing. I have some other criticisms, but that is the main one. There must be some tension between the desire of taxpayers to recover all the money and the economic impact that is produced.

Mr. Robert Dunlop: That is a very important observation, Ms. Lalonde. During the period in which the studies were done, the questions and pressure had to do with costs.

The program began in 1993. At the time, it was a little program, with a budget of approximately $500 million a year. With the changes, it has become a program with a budget of $5.5 billion. So everyone wanted to know whether the costs were justified, the costs of the government, rather than the benefits of the private sector.

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We may have taken for granted the importance of these programs for SMEs, and our response may have been based more on comments made by others. At the moment, the program provides approximately $2 billion in loans to SMEs every year. Our studies show that about 54% of these loans have spin-off effects. In our view, the benefits for the sector were clear and the questions being asked were mainly about costs. I hope that answers your question.

Ms. Francine Lalonde: I understand what you're saying, but it does not answer my basic question. You explained the historic context in which the reform was carried out, but the economic context changes quickly. At the moment, we seem to be heading toward a period of economic downturn, for who knows how many years.

Since we have no macro-economic instruments, we do not know how the program should be used. There is no provision in the bill that the program should be fully self-funded. I do not find the answer satisfactory. I have other questions, but these turns always go by extremely quickly.

I would like you to give me an example of what is meant by "he is not required to compensate the lender". How would this be applied in concrete terms? I would like to know what the impact of the 90-50-10 is on the lender.

Mr. Serge Croteau (Director General, Programs and Services Branch, Department of Industry): We will repeat the explanation about the 90-50-10.

Ms. Francine Lalonde: I would like to have an example.

Mr. Serge Croteau: Fine.

Ms. Francine Lalonde: I would like you to give me an example of a hypothetical lender, so that I can better understand what the impact of that would be.

Mr. Serge Croteau: Let us start with a caisse populaire. There would be—

Ms. Francine Lalonde: I don't want this explained. I want to see it.

Mr. Serge Croteau: Would you like us to send a written example later on?

Ms. Francine Lalonde: Yes, that is what I want.

Mr. Serge Croteau: We can do that.

Ms. Francine Lalonde: Thank you. Is this my last question?

[English]

The Chair: I think he was going to give an example—or did I misunderstand?

[Translation]

Ms. Francine Lalonde: No, I don't want him to go over that again. I have heard it three times. I want to see the example.

[English]

Ms. Marlene Jennings: She wants it in writing, so he's agreed to make up an example and send it to her.

The Chair: Okay.

Ms. Marlene Jennings: In this case he'll send it to everybody.

The Chair: All right.

[Translation]

Ms. Francine Lalonde: It may be more useful to others than to me.

Some honourable members: Perhaps, on ne sait jamais.

Ms. Francine Lalonde: I've another question, which I feel is important. It also involves figures. By changing the formula, by putting the possible liability in the place of the maximum amount, are we not putting ourselves in a position that will...

[Editor's Note: Inaudible]... access to credit, whereas, theoretically, the possible liability will never be reached? You explained in my office that the program could have losses of 6.4% of the total, before it costs anything at all. Given that, with the possible liability, is this not overkill?

Mr. Serge Croteau: As far as restricting the program goes, moving from a formula that limits the program to a loan maximum, to one based on a possible liability has no effect.

Ms. Francine Lalonde: No effect.

Mr. Serge Croteau: No effect, because we have calculated that the $1.5 billion in possible liabilities will enable us to continue at the current rate, that is, $10 billion in loans annually. In other words, over a 5-year period, it could be $10 billion in loans with a maximum possible liability of $1.5 billion.

We are suggesting this change because it is clearer for taxpayers. They understand that it is a possible liability that the government agrees to assume, rather than the government itself lending $10 billion.

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The program is delivered by the financial institutions. That is the real reason behind the change in the formula. People looking at the program did not understand the ceiling put on the loans. So we have chosen rather to talk about a possible liability.

Just as in the past we could increase the total loan ceiling through other means, such as an appropriation, the same can be done with the $1.5 billion.

If, for example, the economic activity was very intense and we were close to reaching the ceiling in the third year, Parliament could decide whether the program should be ended or the ceiling increased. So we have the same flexibility now.

[English]

The Chair: Thank you, Madam Lalonde.

[Translation]

Ms. Francine Lalonde: I will come back to this.

[English]

The Chair: Mr. Shepherd.

Mr. Alex Shepherd (Durham, Lib.): Yes. Thank you.

One of the criticisms the Auditor General made of this program some years ago was about the way the banks were claiming on defaults and the fact that there was a one-year moratorium after a default occurred that they were getting the stated interest rate. I think he found that on average it was taking the bank something like nine months to make a claim, so that during this period of nine months, of course, the banks could have a fully guaranteed loan. Have we done something to address that factor?

Mr. Peter Webber: Yes, Mr. Shepherd. We are going to be proposing in terms of interim claims, which was already dealt with in this legislation, a mechanism to speed up the portion of our payment of the claim to lenders. I would point out that the question of why there is a delay is an issue the committee has to understand. The lender is under an obligation to realize on security before they send us a claim, and if we push them too hard to get the claims in quickly then they will take fire sale prices on the security, so we sort of cut off our nose to spite our face.

Mr. Alex Shepherd: Is that going to appear in the regulations? Is that what you're saying?

Mr. Peter Webber: There will be more details seen in the regulations.

Mr. Alex Shepherd: This was specifically dealt with in this legislation?

Mr. Peter Webber: Interim claims is dealt with in subclause 3(2), but as I say, there will be more detail in the regulations.

I would also say that the regulations also deal with a reduction in the period during which we will pay interest. Currently it's up to 36 months. We are recommending that it be reduced to 24 months, but that the second 12 months of that period would be at half of the interest rate.

Mr. Alex Shepherd: As we move towards lowering our guarantee, aren't we in a sense forcing the banks to look at more secured borrowers, and isn't that somewhat defeating the whole cause of the plan? You talk glowingly of the 54% of those people who weren't going to get financing anyway. As we reduce that guarantee, aren't we in fact going to...? What concerns me about this in the background is that what we're doing is subsidizing the banks. These are things the banks should be doing anyway, and the government is giving them a guarantee to do their normal business.

Mr. Peter Webber: Firstly, I would point out that we are not reducing our guarantee. I would just be clear on that. The guarantee that is in the existing act is 85% on individual loan losses, and under clause 8 that remains unchanged.

Mr. Alex Shepherd: I guess I'm going from the history; it was 90%, I guess.

Mr. Peter Webber: It was 90%.

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Mr. Alex Shepherd: Aren't we just encouraging the banks to make sure those borrowers are more secure?

Mr. Peter Webber: This is a balance. This program is filled with a lot of balancing of interests, and this is one of those balancing acts.

As you'll see in the first document that we gave you, on the history of the program, at one time we had a 100% guarantee, but we found that was too expensive, and over time that's been reduced to 85%. Yet still we have a very considerable amount of activity under the program. Right now the private sector forecasts and studies indicate that it's operating on a cost-recovery basis. So in that sense we think we may now have the balance right. Of course economic conditions will change, and we'll have to keep monitoring it.

Factually, the answer to your question is we're not changing the guarantee rate.

Mr. Alex Shepherd: Just one last question. I know you're saying you're going to bring forward more discussion on the issue of capital leasing. In my mind, it would appear that Canada is almost awash with companies involved in capital leasing—GE Capital, Newcourt Credit, and so forth. In addition to that, it's such a hybrid method of lending in the sense that the government is going to end up owning fixed assets—bulldozers, and I don't know what you're talking about doing. Is it an appropriate thing for government to do?

Mr. Peter Webber: I would say that we haven't defined how the pilot will work, but I would be surprised if we ended up owning bulldozers and computers and such through such a guarantee program.

It is not our intention—at least I've never heard that it was our intention—to actually be in the capital leasing business ourselves. The objective, I think, would be to provide some form of guarantee for stimulating more capital leases for that relatively small niche of the market that currently the capital leasing industry says they are not serving; i.e., those firms with less than two years of experience, which is a very major slice of the niche that—

Mr. Alex Shepherd: So loans to capital leasing companies, not capital leasing.

Mr. Peter Webber: This would be guaranteed leases by capital leasing companies, in the same way as we guarantee loans by banks and by caisses populaires. We're not guaranteeing them directly to the borrower. We wouldn't be guaranteeing them directly to the business who was—

Mr. Alex Shepherd: Insurance. You're talking about insurance, rather than a—

Mr. Peter Webber: That's a very close analogy to what it is this program does.

The Chair: Thank you very much, Mr. Shepherd.

Mr. Jones, please.

Mr. Jim Jones (Markham, PC): Thank you, Madam Chairman.

The SBLA Act appears to favour fixed assets, whether they're capital equipment or expansions of facilities. Through your consultations on that, did you get feedback? Why are you not considering what's happening now in the real world, in the information age we're in, and that maybe 5% of the portfolio should have been geared towards the information, like software development and that, which might not necessarily be capital equipment or expansion equipment or facilities orientated?

Mr. Robert Dunlop: Mr. Jones, this was one of the questions that came up in the course of consultations, and it was one of the questions we put to people.

The response that we got, I'd say fairly overwhelmingly, was that this might not be the appropriate tool to deal with that need in the market, based as it is on fixed-asset lending with the possibility of solid recoveries. The programs developed a history and a competence in making that kind of loan. We didn't have experience with the kinds of losses we would be faced with if we had extended it to something we called working capital.

What the people we consulted with told us is that in some respects this program does contribute to their needs, in that unlike conventional lending, this program will finance up to 90% of the value of an asset. Normally it would be 50%. That frees working capital that wouldn't otherwise be available.

• 1625

Similarly, there's a limit on the size of the personal guarantee that a lending institution can be asked to make for an SBLA loan. Again, because that's smaller than what the bank or other lending institution would normally request, that frees up more capital for the small business to make investments in these areas.

So it was a question of the balancing. If this program were to remain on cost recovery and it were to then expand into an area where the losses would be much higher and the fees and other elements would have to be restricted, would that balance serve the small-business community, or should we look to other mechanisms to try to deal with the question or knowledge-based lending and the gaps that exist in the market there?

Mr. Jim Jones: I think in the future we should be looking at making sure that a certain percentage of the portfolio should be given to knowledge-based lending, because that is the future of this country. If we don't invest in that, then they can easily get it across in the U.S.

Was one of the original attempts of the SBLA to drop the personal guarantee provision from the Small Business Loans Act? If it was, why wasn't this done?

Mr. Peter Webber: Certainly that question was considered extensively during the consultations. The answer we got back from both lenders and borrowers was that there was a strong feeling that the personal guarantee was a necessary surety that the loans would be repaid. Everyone we talked to, with almost no exception, felt there was no justification for removing the personal guarantee entirely from the kinds of security that can be offered under this program. Certainly the limited 25% remains in place, and will continue to be in place under this bill.

Mr. Jim Jones: Thank you.

The Chair: Thank you very much, Mr. Jones.

[Translation]

Mr. Bellemare, please.

Mr. Eugène Bellemare (Carleton—Gloucester, Lib.): Thank you.

[English]

For clarification, this program is now thought to be based on a full recovery. Why is this not put into the bill, for example in the summary section?

Mr. Peter Webber: It's a very good question.

With respect to the objective of meeting cost recovery, since the act is going to be in place in good economic times and bad, we felt that while this is an objective we certainly want to pursue, and we will continue to try to ensure the program meets it, from time to time there will be periods during which it may not be entirely on cost recovery—periods such as those preceding a recommendation to tighten up or restrict the access to the program. That's why the bill before you provides for that restriction. If we said that it has to be on cost recovery in the act, we'd never be able to make those, because we would be illegal. It becomes sort of a snake chasing its tail because of that. So that's really the reason we haven't put it in, but certainly it's a clear objective of the program administration.

Mr. Eugène Bellemare: The small-business persons who are a bit frustrated with the banks I think are large in number. Isn't this bill going to look as if we're really subsidizing the banks for their risks? Should we not, as an example, instead of paying 85%, pay 80%, but we give them a point system whereby those that are greater risks would increase if they do take on greater risks? Then there's an added five points: we would guarantee 85%, and cut back.

• 1630

It appears to the person on the street, those who come to my office, that we're guaranteeing loans but the banks are making darned sure that a business person has signed off his older child and his house and his wife and everything as guarantee. That's what they tell me: “We've signed everything, everything we own”. And even at that, the banks are not willing to take a risk.

I'll stop on that one.

Mr. Peter Webber: As far as that notion, it's certainly an interesting suggestion. I'm sure the committee would want to consider that.

Mr. Eugène Bellemare:

[Inaudible—Editor].

Mr. Peter Webber: No, we haven't examined that issue. However, we did examine the question of possibly reducing the guarantee rate as a mechanism for ensuring that the program remained on cost recovery. And it certainly is a very powerful tool, given the five points that you suggest. However, in those areas it is a classic double-edged sword, because it may in fact have the opposite or reverse effect over what you're really wanting to achieve. It seems as though while it's a powerful tool to keep it on cost recovery, it also is likely to provide an increased incentive to lenders to reduce access even further. That is kind of counterproductive.

So while we certainly examined the question during our analytical phase of this review, the consensus seemed to be that we didn't need to use that kind of a tool right now.

[Translation]

Mr. Eugène Bellemare: Mr. Croteau, when a department drafts a bill, it often consults the people involved, the people who will be affected by it, and so on. Have you invited representatives from the banks to discuss the bill?

Mr. Serge Croteau: Of course.

Mr. Eugène Bellemare: Did you also talk to potential borrowers, such as organizations and businesses?

Mr. Serge Croteau: Yes.

Mr. Eugène Bellemare: Yes?

Mr. Serge Croteau: We heard from both the borrowers and the financial institutions. We consulted both sides.

Mr. Eugène Bellemare: Were the objectives of the two groups similar, or did the banks have priority in the discussion?

Mr. Serge Croteau: In many cases, it can be said that there was no conflict between the objectives of the lenders and those of the borrowers. For example, both acknowledged that if we take a personal guarantee of 25%, this will have a beneficial impact on the soundness of the business, because in that case, the person makes a real commitment. When there is a government guarantee covering everything and the person risks no money in the business, that business is often somewhat less serious.

[English]

Mr. Eugène Bellemare: Okay. If this program is truly cost-recovered with no loss liability for the federal government, why does the federal government require its size to be limited?

Mr. Robert Dunlop: I think this is a concern that comes out of the experience between 1993 and 1995, when the program went from $500 million a year to $4.5 billion. It's important that Parliament have a control over the size of the program. As was mentioned, activity under the program responds to changes in the economy. Changing none of the parameters of the program, it becomes more or less attractive both to the banks and the small-business borrowers, based on what's happening in the economy. Given that, it's important that Parliament have the ability to take a look at the program, should it grow very quickly. That's why having a cap is an important element of control.

What we've done, really, is just change the nature of that cap. It doesn't affect the individual borrower or lender, or even the activity under the program. We've just chosen to use a different parameter to follow as the measure of that cap.

Mr. Eugène Bellemare: Why was it considered necessary to make the provisions concerning offences and punishments more severe? In practice, are these provisions often put into effect?

• 1635

Mr. Peter Webber: In answer to your second question, no, they aren't often put into effect, partly because of the difficulty of using them previously, and that's part of the reason why we're proposing these changes.

Secondly, representations from third parties, including the Auditor General, indicated that there was a concern that, on the basis of anecdotal evidence, there may have been some cases of fraud perpetrated against the program. Certainly lenders suffer from fraud from time to time as well.

We felt it was important to make improvements in the offences and punishment section so as to provide, first, a deterrent effect, and second, to perhaps increase the possibility of them being used in instances where they need to be used should that occur in the future.

Mr. Eugene Bellemare: Thank you.

The Chair: Thank you very much, Mr. Bellemare.

Mr. Pankiw.

Mr. Jim Pankiw: On page 3, paragraph 4(2)(b) reads “or any prescribed lesser amount”. Why is it necessary to say that?

Mr. Robert Dunlop: The general approach that has been taken is that the primary parameters of the bill are the same as under the current act, but what the act introduces is the ability of the minister to use regulation to reduce access to the program. For example, in a hypothetical state where actions occur that would indicate that the program is off cost recovery, the government could prescribe through regulation a reduction in the maximum loan size. That's what this allows to be done.

Mr. Jim Pankiw: Just below that it says, “The outstanding loan amount referred to in paragraph (2)(b)”. That's paragraph (2)(b) right above it.

A voice: Yes, that's right.

Mr. Jim Pankiw: Okay. I didn't know what that was referring to.

On the next page, clause 6, if I read that correctly, what protection is there for a lender that the minister's aggregate contingent liability does not unknowingly exceed $1.5 billion, thereby—

Mr. Serge Croteau: That's in part my responsibility, to keep track of the ceiling right now in the outstanding amount of loans, to make sure that when we are registering loans there is room for those loans to go under the act, with the protection of the act.

If we were in a situation where we were getting very close to the ceiling, actually a loan ceiling or, under the bill, a liability ceiling, I would have to inform the lenders that we were reaching the limit under the program and ask them to possibly pre-register loans in order for them to get the assurance that they are fully covered by the provisions of the act.

Of course, this would take place only if the government had not decided to extend this limit through an appropriation act, which they can do.

Mr. Jim Pankiw: Your answer then is that there's no legislative protection for that. What if you neglected to do your job properly?

Mr. Serge Croteau: I guess I'd have to find another job.

Mr. Jim Pankiw: There'd be no protection for the bank.

Mr. Serge Croteau: I would hate to debate the legal aspects of an error like that, but I think it would put some lenders in a pretty good position to suggest that they have a case against the government for losses that they have incurred. For instance, we are at $13.8 billion in outstanding loans, with a ceiling of $50 billion. It's just to give you an idea that this is a figure we monitor on a weekly basis.

• 1640

Mr. Jim Pankiw: At the end of subclause 6(1), it refers to what you're talking about: “or any other amount that is provided by an appropriation Act or another Act of Parliament”. Doesn't that go without saying? Are those words really necessary there? That can be set at any amount that is referred to in any section of any bill, couldn't it?

Mr. Peter Webber: Yes, that's true, except that what this provides for is making the change in the ceiling through an appropriations act specifically. Certainly under any other act of Parliament, yes, but rather than saying it can all be done through an appropriations act, we're saying it can be done through an appropriations act or any other act.

Mr. Jim Pankiw: At the bottom of page 6, subclause 13(4), and at the top of page 7, paragraphs 13(4)(a) and (b)—I don't understand (a) and (b).

Mr. Peter Webber: This is on page 6 under lending to pilot projects, subclause 13(4), and at the top of page 7.

Mr. Jim Pankiw: I understand what subclause (4) says, but I don't understand the term referred to in paragraphs (a) and (b).

Mr. Peter Webber: If the minister has indicated that he is going ahead with one or more of these things on a permanent basis, he then has a period of one year during which the existing regulations, that is to say the regulations that will be put in place relating to these pilot projects...to put legislative measures in place. Once those legislative and regulatory measures are put in place, then the existing regulatory regime ceases to have effect. So it provides a transition from the pilot project to whether the minister wants to continue this. It's primarily, I guess, because we've discovered that over time you need a certain period of time to have the data to determine whether it's operating on a cost-recovery basis or not. That's part of the reason why.

The Chair: Last question, Mr. Pankiw, please.

Mr. Jim Pankiw: Paragraph 14(1)(a) says “authorizing the Minister to designate organizations as lenders”. Aren't the parameters clearly set?

Mr. Peter Webber: Lender is defined in clause 2. In fact, it's the first definition in English.

Mr. Jim Pankiw: So when would it be necessary—

Mr. Peter Webber: If you look at the definition of lender, paragraph 2(a) deals with the Canadian Payments Association members, paragraph 2(b) deals with members of organizations associated with Canadian Payments Association members, but paragraph 2(c) says “any other organization designated by the Minister as a lender for the purposes of this Act”. That's the reason why we need the regulation-making authority, because he has the....

Mr. Jim Pankiw: So do you envision a lender that doesn't meet paragraphs (a) and (b)?

Mr. Peter Webber: There are some now. I think 14 or 15 have been designated.

The Chair: Mr. Lastewka, please.

Mr. Walt Lastewka (St. Catharines, Lib.): Thank you. I have three quick questions, a couple of them for clarification.

Could you give us an example in the voluntary sector of what type of group or project could be involved in your pilot programs?

Mr. Peter Webber: Of course, as I think we indicated earlier, that has not been defined at this point. By way of example, one could think of a not-for-profit day care centre that wants to expand its operation by adding a kitchen to provide hot lunches for its clients' children. They could then use the program to finance the acquisition of the equipment and/or addition to their facility and use the additional revenues to finance the cost of that. That is one example. There may be many others.

• 1645

Mr. Walt Lastewka: Business splitting came up in the discussion a few times when we were discussing the last bill. What areas of the bill strengthen your position to make sure we don't have business splitting?

Mr. Peter Webber: If you refer to paragraph 4(2)(b) and subclause 4(3), dealing specifically with the question of borrowers and all those related to that borrower—I'm on page 3 of the bill, if you're following along—subclause 4(3) of the bill provides that a borrower and anyone who is related to the borrower within the meaning of the regulations will be captured by the $250,000 limit. So this will reduce the chances of multiple loans going to businesses that are substantially the same.

Mr. Walt Lastewka: Madam Chair, during our discussion with stakeholders and knowing that the average loan under the SBLA was around $68,000, what pressures did you get to lower it or to increase the amount from $250,000?

Mr. Peter Webber: We have some stakeholders who feel that the program needed to be focused more on smaller businesses. We also heard from others who indicated that $250,000 was the absolute minimum that they felt was required to ensure that they have access to the financing they need.

Lenders, generally speaking, felt it was at the appropriate level, and the research indicated that loans between $200,000 and $250,000...while the evidence suggested that they might be defaulting sooner, there was a very small number of them; therefore, it really wasn't statistically valid to base any decision to reduce it on that basis. Given all that evidence, we came to the conclusion that leaving it where it was seemed to be the most appropriate decision.

Mr. Walt Lastewka: Thank you, Madam Chair.

The Chair: Thank you very much, Mr. Lastewka.

[Translation]

Mr. Dubé.

Mr. Antoine Dubé (Lévis-et-Chutes-de-la-Chaudière, BQ): One of the considerations deals with extending the loan program to include the working capital.

Unless I am mistaken, I don't think this appears in the new proposal. When we talk to business people, the question they ask us the most often is: "Why don't we have access to working capital?" In any case I heard that again this morning, and Ms. Lalonde hears it as well.

Mr. Serge Croteau: I think I answered this question earlier. The reason why the program was not extended to include working capital is that the risk is completely different from that assumed for fixed-asset loans.

The people who advised us on this said that rather than extending the program to include working capital, it would be preferable to divide a completely separate program to avoid having one part of the program subsidize the other. The point was also made that, under the Act, even though this program is for fixed assets, it does allow the lender to provide 90% of all assets, because the program normally provides for a maximum of 50%. Thus, moving from 50% to 90%, extra money is made available that the borrower can use as working capital.

• 1650

In addition, by limiting personal guarantees to 25%, contrary to what is done in the case of a conventional loan, the borrower could use these funds as working capital. Consequently, the program does not apply directly to working capital, but it does apply to it indirectly. If we were to introduce the concept of working capital, this could result in a significant imbalance in the program. That is why some say that if we want to provide loans for working capital, this should be done under a separate program.

Mr. Antoine Dubé: I know you have looked into the matter. Apparently the analysis of working capital was done on the basis of businesses that had gone bankrupt. The analysis did not look at businesses that are successful and developing. Don't you think that is a shortcoming in the analysis?

Mr. Serge Croteau: I was not aware that all the businesses analyzed had gone bankrupt. I thought we had looked at as many businesses that had succeeded as had gone bankrupt. We could look into that.

Mr. Antoine Dubé: I would be very interested to hear what you find.

Point 16 deals with an analysis of gaps and overlaps between the government and private sector, but it was also stated that in the end the provincial programs would be kept. I have met with an industrial commissioner who told me that there are many programs. My memory may be somewhat inaccurate, but I was told there are over 100 loan programs of all types. The commissioner I spoke to acknowledges the virtues of this program, because it is a basic program. There are other specific programs, but I come back to the issue of a full review of all provincial and private sector programs—that is all the loan programs available to businesses. Sometimes having too much information is as bad as not having enough. People often deplore the fact that it takes so long to sort out all the different programs.

Mr. Serge Croteau: As we said, this is a basic program, one that has been around since 1961. A number of other programs have been added, but there's not necessarily any overlap between these programs and the one we are discussing here. We are not saying there is no overlap, but we have not found a great deal of overlap between the provincial programs and this one. When the provinces introduced their programs, they knew that this program existed. So they tried to complement it, for example by offering working capital or other types of programs.

Mr. Peter Webber: And the specified sectors.

Mr. Serge Croteau: The sectors that are not eligible for the program.

Mr. Antoine Dubé: You say that you carried out an analysis. We have tons of information, but I don't have the impression that we have all the information in what we have received to date. If that is not the case, could it be made available?

Mr. Serge Croteau: It is supposed to be.

Mr. Antoine Dubé: We don't have it.

Mr. Serge Croteau: No. They are summaries.

Mr. Antoine Dubé: I am asking, if possible, for all members of the committee. It is very interesting.

Ms. Francine Lalonde: So that we can see the gaps.

Mr. Antoine Dubé: Do I have anymore time?

The Chair: No, not now.

Mr. Antoine Dubé: That's fine, since I have no other questions.

Ms. Francine Lalonde: I have some others.

[English]

The Chair: Ms. Barnes, please.

Mrs. Sue Barnes (London West, Lib.): Thank you, and welcome. I think I saw you last at the public accounts committee. I know your report has been tabled in the House now, and I'd be interested to see that report, from our examination earlier, and maybe you can incorporate some of the answers in that report into my questions.

First of all, I want to go back to what Mr. Lastewka raised on the voluntary sector and the pilot projects. The example you gave was of a not-for-profit, maybe a day care centre that wants to do a capital expansion of their operation. I see that in the bill it talks about the five-year period of pilot projects. Unless I'm misreading this section and the application of it, how would you ever do an expansion of that nature, especially something that's not for profit, within a...? What would happen to them at the end of the five years? What are you talking about here?

• 1655

Mr. Peter Webber: The pilot project would last for five years. As with our current lending under the program, though, the maximum period of a loan is ten years, even though each lending period itself is five. The loan would continue until the end of its usual term, even though that pilot project ceased to have effect.

Mr. Robert Dunlop: New loans under the pilot could end up being for five years, but that would not limit the lending under the pilot to a five-year term.

Mrs. Sue Barnes: All right, thank you.

I'd like to go into the auditing, in which you're looking at a situation where you have some concerns over say a sector portfolio. How is your audit done? Do you have sufficient auditing staff? And how detailed does that audit get?

Mr. Peter Webber: Firstly, I would reiterate that we don't currently do portfolio audits. We do a desk audit of the individual loan files, and that's because the existing act did not provide audit authority.

Mrs. Sue Barnes: But there were concerns raised.

Mr. Peter Webber: That's right.

Mrs. Sue Barnes: Then I'd like the answer now. What potentially would change, if anything?

Mr. Serge Croteau: The bill will provide us with the authority to conduct audits. We have not yet defined how we would do those audits. The idea is certainly not to go in with a large team of auditors and review all the files. What we would likely do is follow either the pattern of losses from various lenders or the level of adjustments, because we do a desk audit when we receive claims. We review invoices, the way they calculated their claims, and the way the loan was made. We can identify a number of variances or errors. If, for instance, a lender in particular—or a category of lenders—was experiencing much a higher variance rate than others, we would target those variances.

Mrs. Sue Barnes: I understand how they'd get there. What I'm asking is who you are going to do the targeting with. Are you going to create a body of auditors within your organization, within Industry Canada, or are you going to look at retaining external auditors? Are you just putting forth questions to be answered by them? How is the audit going—

Mr. Serge Croteau: At the moment, we would be talking about two or three people within my organization. Those two or three people would be responsible for this audit.

Mrs. Sue Barnes: Okay, thank you.

Let's go back to the minister not making payment on a lost claim. There are two sections. I'm not really concerned about the ones who don't pay their fees, but I am concerned about where the statute talks about other requirements under the regulations and acts. I think that's in paragraph 9(1)(b). I'd like for you to tell the committee where you've historically seen these problems. Because of the concerns raised in the past, especially with the large number of situations that preceded this review, where do you see these problems occurring?

Mr. Serge Croteau: We have various situations in which we reject claims. For instance, one would be when they have exceeded the $250,000 limit that the minister has no authority to adjust.

We have other situations in which other fees were charged and those fees were not eligible under the program. Again, the claim could be rejected under those instances.

Mrs. Sue Barnes: What about putting claims or applications for loans together—me and my personal capacity, me in my business capacity, me at another branch for a similar project? Is that loophole cleaned up?

Mr. Serge Croteau: Are you talking about loan splitting?

Mrs. Sue Barnes: Yes.

Mr. Peter Webber: If you're referring to loan splitting, I indicated earlier that subclause 4(3) and the regulations related to it deal specifically with the question of who are related borrowers. That subclause also places an aggregate limit of $250,000 on those related borrowers. It gets there from that.

Mrs. Sue Barnes: Have we defined “related borrowers”?

Mr. Peter Webber: Yes, the regulations will, and you'll see those in camera.

Mrs. Sue Barnes: So we don't have them here right now?

Mr. Peter Webber: Not yet.

Mr. Robert Dunlop: No, we'll deal with them shortly.

• 1700

Mrs. Sue Barnes: Madam Chair, I would appreciate it if those definitions could be circulated among the group. I'd particularly like to look at them myself.

The Chair: Thank you very much, Mrs. Barnes.

[Translation]

Ms. Lalonde.

Ms. Francine Lalonde: I would like to know what motivated you to include penalties that are much more severe than those in the current Act. I am looking at this and I see that they are very different. The present Act says:

9. (1) Is guilty of an offence under this Act and liable on summary conviction to a fine not exceeding $1,000;

The new Act says:

(2) Every person who commits an offence under subsection (1)(a) is guilty of an enditable offence and liable to a fine not exceeding $500,000 or to imprisonment for a term not exceeding five years...

Mr. Serge Croteau: First, the current provisions of the Act are not applied. One of the reasons was that the fine of $1,000 did not at all correspond to the loans of $250,000 and with the loss that the government might assume on these loans. We compared this with other similar legislation dealing with losses that the government might assume and adjusted the penalties accordingly, taking into account the fact that the Auditor General had observed that something would have to be done to prevent abuse of the program.

Ms. Francine Lalonde: Could we know what similar legislation you used in adjusting these amounts? You have also added a subsection b):

b) the borrower, without being a borrower,... disposes of any assets taken as security for the loan where the disposition is not permitted by the regulations—

Mr. Serge Croteau: If someone had provided assets as security for a loan and then, knowing that the company would go bankrupt, quickly sold all the assets and pocketed the money and thereby created losses for the government, this would also be an offence because it would be done willfully and with fraudulent intent.

Ms. Francine Lalonde: Will you provide me with comparative legislation?

Mr. Serge Croteau: Yes, we will pull out some examples for you.

The Chair: Thank you very much, Ms. Lalonde.

[English]

Monsieur Dubé, I apologize, but we have to go in camera to another issue. However, the department will be back with us at another time, maybe before clause-by-clause. If not, we'll get your questions in at clause-by-clause.

That being said, I want to thank the representatives from the department for being here today on such short notice and for preparing for us a very detailed book that we can all read with detailed interest in the next ten days, before our next meeting on the subject. I also want to thank you for being able to bring the draft regulations to the committee. We do have several witnesses who do not want to appear until they have an opportunity to see them. Our work will be slowed down until they get them, so I appreciate having them. As we know, there's a timeline with regard to getting the banks and everybody onside with the legislation, if the legislation does pass through the House and the Senate.

I wasn't asking you a question, Monsieur Dubé.

[Translation]

Mr. Antoine Dubé: I would like to put these questions to you.

[English]

The Chair: You have a question for me? We are going in camera as a committee.

[Translation]

Mr. Antoine Dubé: I would like to quickly refer to point 14. It would be useful for the officials to provide the committee with studies on job displacement. I think we simply don't have them.

• 1705

[English]

An hon. member: Do they understand what's being asked?

The Chair: The number of jobs displaced? I don't know what you're referring to, Mr. Dubé.

[Translation]

Mr. Antoine Dubé: The material produced by the Library mentions job displacement effects: it wasn't the Auditor who suggested that this be examined, but people have surely looked into the matter. I would simply like to know the results of the studies on this point.

[English]

The Chair: Oh, okay, I understand. In translation it's coming across as “jobs displaced”. I'm assuming that's not what number 14 is referring to. It may be, however.

Is jobs displaced what it's referring to, Mr. Dunlop?

Mr. Robert Dunlop: If that's in the report that was done by Parliament, we haven't seen that.

The Chair: No, it's a summary of the red book that you have, Meeting the Changing Needs. It's under the analysis of gaps and overlaps between the government and private sector and the role of the program. Is that correct? No? It's number 14, and it comes from the red briefing book that you reported.

[Translation]

Mr. Robert Dunlop: This is an extremely difficult question that was raised during the analysis. We talk about jobs created by a program. When someone receives a loan, perhaps because of competition or changing productivity in his own institution, jobs are lost. All the economists that we consulted said that this was very difficult to assess.

Mr. Antoine Dubé: We have no results on that.

Mr. Robert Dunlop: No.

Mr. Antoine Dubé: Thank you.

Mr. Serge Croteau: In the program evaluation, we will assemble information on the subject and report on it later.

Mr. Antoine Dubé: For the future.

Ms. Francine Lalonde: With the macroeconomic effects.

Mr. Peter Webber: Precisely.

[English]

The Chair: Okay, Monsieur Dubé, you've now had the final question.

I want to again thank the witnesses for being here today. We appreciate it. I'm assuming we'll be seeing you again at some point in this process, and we may have some questions from time to time as other witnesses come before us.

I'm suspending for thirty seconds to allow everyone who is not a member to clear the room. I need every member to stay, because we are going in camera to discuss something.

[Proceedings continue in camera]