INDY Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, October 21, 1998

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[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): Pursuant to an order of reference of the House dated Tuesday, October 6, 1998, consideration of Bill C-53, an act to increase the availability of financing for the establishment, expansion, modernization and improvement of small businesses, we are very pleased today to have with us representatives from the Canadian Federation of Independent Business: Mr. Garth Whyte, vice-president of national affairs, and Mr. Brien Gray, senior vice-president of policy and provincial affairs.

We'd be very pleased to hear your presentation, and then I'm sure we'll have some questions for you.

Mr. Brien Gray (Senior Vice-president, Policy and Provincial Affairs, Canadian Federation of Independent Business): Thank you, Madam Chair and members. We have prepared 30 briefs in English and 15 in French, which you have in front of you. For purposes of this presentation, we would like to just read into the record the essence of what we want to say and then open it up for questions.

CFIB is pleased to make an appearance before the House of Commons Standing Committee on Industry to comment on the draft legislation, Bill C-53, dealing with the Canada Small Business Financing Act, formerly called the SBLA.

As you know, we appeared before the Senate banking committee in July, and many of the points we are going to make today were made at that time.

We come to this exercise with a unique perspective. CFIB is an organization which represents 90,000 small and medium-sized independently owned and operated firms across Canada.

We have provided input into the development of the SBLA program for over 25 years and, as such, we have become knowledgeable about the program and the perspective of the users, the thousands of entrepreneurs who have used the program over the years.

Historically, our surveys and our independent research have pointed to the SBLA as one of the most effective programs of its kind. According to our members, it's the best known, the best understood and the most used program of its type at either the federal or provincial level.

There are several reasons why the program has been so effective. It has remained relatively constant in its purpose as a program to assist young and small firms in obtaining debt capital because of gaps in equity and capital for this end of the market.

The program is accountable. It has been reviewed regularly to ensure that it operates efficiently, problems are addressed and new and appropriate needs are entertained.

And finally, the program has worked in no small measure because politics have been kept out of an inherently good program. This last point, from our perspective, is extremely important.

In spite of our support for SBLA and its role in the small business community, we are concerned that the program stick to its fundamental principles in order to sustain itself. Efforts to steer it away from those fundamentals have and will put the entire program at risk. We do not believe that is a risk worth taking.

During this past summer, as we examined the consultation paper on the SBLA, we were struck by the range of new applications that were being suggested for the program. In July, CFIB reminded the government to stick to its knitting with respect to the program.

We have long been on record as saying that working capital needs should not come under the SBLA because it could ruin the entire program. Lending for working capital purposes is quite a different game, and if the government is determined to go in this direction, it should test a program on its own merits and see whether it works outside of this program. At the end of the day, we worry about the long term sustainability of the SBLA. We believe it is dangerous to park every conceivable need under this program.

Finally, the government must reject the suggestion that the only way the banks will loan to export firms, KBIs, micro firms or even the voluntary sector is under a credit guarantee scheme. Useful as the SBLA program is, it should in no way be used by the banks as their response to the broad financing problems experienced by the majority of small firms in Canada.

Now, with respect to specific issues, the following are some of the areas that CFIB will comment on specifically. Our objective is to keep the program effective and relevant for the small firm sector and to ensure the sustainability of the program.

With regard to program numbers, CFIB has been concerned for some years about the number of loans being made under the program. Throughout most of the 1980s, the number of loans under the program each year was in the neighbourhood of 16,000 to 17,000. Following the changes to the program in 1993, those numbers quickly rose, to peak at around 68,000 in 1994-95. Since that time the numbers have fallen—due in part to the 1995 changes—to about 30,000.

In 1994, we wrote to Minister Manley to register our concerns with aspects of the SBLA that we felt needed attention. We were particularly concerned that “up to 16% of total small business term lending” was financed under the SBLA since the 1993 reforms. That's a citation from our letter.

CFIB believes that the numbers are still too high and risk going even higher, particularly if some of the present proposals for expansion of the program are accepted and placed under the act.

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With regard to program parameters, CFIB is of the view that the overly generous parameters of the program have resulted in larger than anticipated uptake, column shifting, and the need for the department to go back for further funding allocations over the five-year period.

We have in the past called for the parameters to be tightened. In 1994, CFIB members had a median loan size of about $50,000. In 1997, that figure stood at about $90,000. The average size of loan under the SBLA today is about $65,000. Further, the higher limit may be creating problems related to larger firms trying to beat the system. And for several years, CFIB called for a lowering of the SBLA loan size from $250,000 to $150,000.

In view of the present deliberations, however, we felt that it was important to take the issue to our members for an update on their views about this threshold. It should be noted that members voted 49% not to reduce the $250,000 limit. The narrow margin of the vote does indicate, however, that there should not be any increase beyond that threshold. If increased to $500,000, for example, enormous pressure would be put on the program and government coffers, which could well jeopardize the program. Remember, the average loan size today is still under $100,000.

With respect to the sales volume threshold, we believe it is set too high. In our membership, only 7% of firms are larger than $5 million in sales volume; 18% are larger than $2 million. Statistics Canada numbers indicate much the same thing. Those who argue for the need to keep larger firms and larger loans in the program to subsidize the program are wrong-headed, in our view. The issue is whether these firms need SBLA-type credit guarantees.

Eligible enterprises: another issue that relates to the program, its numbers and sustainability is that of the types of enterprises that qualify for loans under the program. It is difficult to argue the case of need for some who currently qualify under the program. A consultation paper raised the possibility of a myriad of new types of operations that might be placed under the program. It is in these areas that one risks politicizing a program that is clearly targeted and effective in assisting small business.

Should there be needs beyond helping new, young, small firms, those needs should be dealt with outside of this program. It would appear that the needs/objectives of other departments are being parked under the SBLA for lack of any ideas as to how else to handle these political objectives.

Garth.

Mr. Garth Whyte (Vice-president, National Affairs, Canadian Federation of Independent Business): In regard to credit guarantee review agency: some would argue that the reason government wishes to place activities that are not related to small business development under the act is that it has an established credit guarantee review mechanism. We would submit that if the government wishes to test or set up new credit guarantee schemes unrelated to small business financing—and which could skew the performance numbers of small business loans activity under the act—they be separately tested.

Once it has been established that the need is present and the test has worked, there should be separate legislation to deal with the government objective. In order to provide the needed credit guarantee review mechanism, we would suggest that the government have a central credit guarantee review group that could serve to monitor activity under the separate acts.

So, for example, if the test for the voluntary sector proves a need in that sector, set up a voluntary sector financing act on its own, separate from the Small Business Financing Act. And use the credit guarantee review group to oversee activity under that legislation. In this way, the government can monitor and control risks inherent in similar types of sectors or activities and measure the effectiveness of the program.

Now let's move on to pilot programs. Bill C-53 calls for pilot programs to be undertaken under the act in two specific areas: the voluntary sector and capital leasing. CFIB has concerns about placing either of these activities under the Small Business Financing Act for the reasons we've just stated above. Beyond these, we believe it is important to establish the level of need for both these activities.

With respect to capital leasing, we have not heard loud cries from our membership for this form of financing to be available under the Small Business Financing Act. The need has not been clearly established. Where are the specific gaps? Presumably the pilot test will determine whether these gaps exist, and at what size levels and age levels of the enterprise, etc.

With respect to the voluntary sector, CFIB members complain on a regular basis about unfair competition from establishments that do not pay taxes. We have serious concerns that the voluntary sector establishments receiving financing under the act will have a further competitive advantage over traditional taxpaying enterprises that may not be eligible for a loan under the Small Businesses Financing Act.

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CFIB would ask this committee and Industry Canada to monitor these pilot projects very closely, through a range of criteria, before these areas become more permanently eligible for credit guarantees.

With respect to micro loans, we are concerned that some lenders may be treating the majority of their micro loans under the program. In effect, we are concerned that banks may say that if you want a micro loan they can do it, but under a credit-guaranteed program. Statistics should be kept, analysed and released on a regular basis—by institution—to determine whether these numbers are appropriate. For example, no institution should have the majority of its start-up loans under the Small Business Financing Act's books.

That leads us to the next issue: column shifting. CFIB continues to be concerned about the phenomenon of banks shifting lending they should be doing outside the program onto the SBLA program, effectively moving risk off their books. This should not be permitted. Repeatedly, CFIB has raised these concerns with ministers responsible for the program. The numbers in the 1980s versus the numbers in the 1990s are an indicator. The findings in the study by Professor Riding were a second indicator.

The fact that 80% of present lending under the program is done by the banks raises suspicion. The program evaluation criteria must be set up to monitor, on an ongoing basis, the levels of incremental lending under the program, including analysis by institution.

Let's move to the issue of transparency. CFIB believes that those who receive funds under the Small Business Loans Act must be made aware of the fact. Several sources have indicated that many loan applicants do not know they are receiving money under a government-guaranteed program for which they pay a premium. As a result, they may not be making an informed business decision, either to go into the program or to remain in it.

The SBLA application form must be fully transparent and loans officers must be required to fully explain the opportunities and costs of this form of financing. The government should get some credit for this program. The attached application form at the end of our brief illustrates the point: many small business operators receiving financing under the Canada Small Business Financing Act and filling out this form would be unaware that it is more costly and subsidized by the government.

The next point is data collection and monitoring. The methods of assessing the program are critical. In the past, this has been a weakness in the Small Business Loans Act program. Tighter monitoring and program evaluation is a must. For example, to what extent today do we know which elements of the 1993 and 1995 changes bore fruit? What about the proposed changes for 1999? To what extent can we measure those effects?

On another note, judging the Small Business Loans Act by jobs produced is, in our estimation, more a political measure than a true measure of this program's success. Instead, measure firms that graduate from the Small Business Loans Act program or programs under this type of act by their financing needs, growth rates, etc.

Finally, we suggest that Industry Canada monitor, by institution, the number of repeater businesses that are financed under the program.

In regard to regulatory flexibility, CFIB understands the need for government to be able to move quickly when there are problems that need correction under the program. An example would be where the abuses of related companies occurred. In such cases, a regulatory approach makes sense. However, those issues that are fundamental to the program, for example, structural changes to the program such as lenders permitted, loan thresholds, qualifying loan recipients, etc., should be dealt with under legislation, not regulation, in order to assure accountability and transparency under the program.

Now, we understand this is not part of the act, but there was another issue on other fees. As we understand it, some lenders have asked to be allowed to charge in addition to the 2% registration fee and the 1.25% annual administration fee charged to lenders, which may be passed on to the borrower. They've asked for loan application, renewal or other fees. Now, the rationale for this proposal is that such a policy would be more in keeping with normal banking practices, thus simplifying matters.

CFIB rejects the notion of adding these additional fees to the Small Business Loans Act. CFIB members have consistently complained about service charges, the arbitrariness of their application and levels, and the lack of correlation between the service charge and the value of that service. We have always found it contradictory that if financial institutions are open for business they would charge people to apply to do that business. We do not think it appropriate that a federal government program would add these types of additional charges to the program.

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Finally, as we pointed out in the section under transparency, we feel it is important to differentiate loans under the Small Business Loans Act from so-called normal bank loans.

Brien.

Mr. Brien Gray: One cannot discuss the issues of debt capital, including that provided under this program, without also discussing the issue of adequate access to equity capital.

There has, in the last 20 years, been far too little attention paid in Canada to the equity issue as it affects small firms. And the hangover effect of the recession on small business equity levels continues. In the face of weakening market conditions and often massive cutbacks to small business lending, many firms were forced to draw from their equity bases to survive.

As the economy has strengthened, a different tax mix from that of the early 1980s has made it difficult for many small firms to re-establish their equity base. Reduced equity levels make it difficult for many small firms to lever more credit financing. The consequent effect is suboptimal job creation.

The present range of tools to address this issue is seriously inefficient. A survey of CFIB members in 1997 identified personal savings—56%—and reduced taxes and higher retention of earnings—45%—as the most appropriate sources of equity financing for small firms. In contrast, there was very low support for passive investor angels—5.2%—venture capital—4.1%—and labour-sponsored venture capital corporations—1.1%—as appropriate sources of equity. Clearly, programmatic solutions and LSVCCs are not a solution for the small firm sector's need for equity.

This issue was identified strongly in the small business working group's report Breaking Through Barriers, which I was privileged to co-chair in 1994. The group, appointed by the Ministers of Finance and Industry, urged the government to use instruments of fiscal policy to resolve the equity gaps for small firms.

Solutions practical to small firms must be pursued with more vigour. Better solutions to the equity issue for small firms will do much to build not only the financial health of the firm but its ability to grow and contribute to the economy in terms of jobs and wealth creation. Another outcome would be less reliance on the government's subsidized credit guarantee programs such as the SBLA.

It would be difficult to review a financing program delivered to small business in large part by Canada's major chartered banks without some consideration of the implications of the proposed bank mergers.

CFIB has taken a look at some recent SBLA numbers and has observed that in Ontario, for example, if the four banks were reduced to two, those two banks would account for more than 75% of the number of SBLA loans in the province and more than 75% of the dollar value. And certainly, these figures will be higher in some communities.

Inasmuch as this program and the loans under it are aimed at young and small firms, and given that small, young firms are providing the majority of the net new jobs in the economy, we find it very troubling that the vast majority of these SBLA loans would be monopolized by only two mega-institutions. As part of your review exercise, we believe that it is critical to gather data from the banks to assess the impacts of possible bank mergers on the SBLA program.

In conclusion, CFIB has outlined some of its views and concerns about the SBLA program—now the CSBFA—and the proposals under C-53. As well, we've reiterated several, and we encourage you to read our previous letters to the ministers, which are contained in this brief. We believe many of the concerns expressed in those letters are still valid today.

Finally, we believe that the CSBFA, tightly defined and administered, will continue to play an important role in the development and growth of the small firm sector in Canada. We recommend, however, that you proceed with extreme caution in terms of major structural changes to the way the program operates. In effect, if it works, don't fix it.

Thank you very much.

The Chair: Thank you very much, Mr. Gray and Mr. Whyte, for reading your presentation into the record.

I'll now turn to questions, beginning with Mr. Pankiw.

Mr. Jim Pankiw (Saskatoon—Humboldt, Ref.): With regard to your second-last point before the conclusion, yesterday we had two gentlemen from the Fraser Institute before the industry committee. Their view is that programs like the SBLA distort markets and that although they may benefit a very few businesses substantially, they harm a great many businesses a little. They said that the net effect—or as they called it, “a full cost-benefit analysis”—is that there's a net detriment to job creation.

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That seems to be borne out in that second-last point, “provision of equity capital”. In effect, I'm saying that the real barriers to access to financing by businesses are excessive tax rates, capital gains taxes and marginal tax rates, as well as other government regulations that are a burden on business. What I'm saying is that the point you make is consistent with what the Fraser Institute said yesterday, but inconsistent with the rest of your report.

Mr. Brien Gray: Not having read the Fraser Institute's report or being here to have heard it, I can only guess at what the elements of their argumentation are. I can tell you this: our positions on these things are based on ongoing surveys of our membership of 90,000 small and medium-sized enterprises. I don't know what the basis is for the Fraser Institute's position, but we feel pretty confident that when we talk about our members knowing....

First of all, let me explain. Small business isn't out there shrieking for more programs. But where a program is there, established and working.... This program was set up specifically because there were some market gaps. Small firms do have inherent disadvantages in the economy. Like it or not, smallness has its disadvantages. One of those is that small firms have less ability to get capital, be it debt or equity capital. There are problems on both sides of the ledger, so it's not inconsistent for us to say there is a need on both sides.

This particular program is aimed at a very definite niche in the marketplace: small, young, early-level firms that have difficulty collecting from the get-go because they are insufficiently capitalized. Even if you changed all the tax laws tomorrow, you may not change that for the early stages right away. You might change it a bit with better capital gains tax laws and better investment credits and the like, but what we're saying is that within the realm of what is there and available today this is a program that for 25 years has served the small business community relatively well. They don't like most programs—I would agree with you about that—but this one has served its purpose for that element of the market.

With regard to tax relief, tax legislation and that kind of thing, what we said is very consistent. Fewer taxes, fewer regulations: all of that would have very much a stimulant effect on the economy, but what we are talking about today is the SBLA program, and from our perspective, our members would not support abandoning the program.

The Chair: Mr. Whyte wishes to add to that.

Mr. Garth Whyte: Thank you, Madam Chair. I just want to reply to that. I think we're consistent throughout the report, and we've been consistent for at least the 15 years Brien's been working on this and the 12 I've been working on it. We've always said that this works at the margins. This shouldn't be a panacea for all small business financing issues; it's there to help those new firms that need a little extra help from a loan-guaranteed program to get access to a loan.

The distortions start happening when you start ballooning the program and raising the level to firms with $5 million in sales with $250,000 loans, and that's why we disagreed with it. When you start getting into the voluntary sector and all these other things, you go beyond the scope of this type of loan.

We have studied these programs around the world, and this is the one successful program around the world—because it's a loan-guaranteed program. We also said, and our history points it out—read the letters—that this is not a handout. The firms getting this have to pay a higher premium and an administration fee. And we didn't ask for those fees to go down; we were the ones who argued they should be higher. These firms are prepared to pay a higher price to get these loans because they can't get access elsewhere.

Mr. Jim Pankiw: Well, to my mind, access would be readily available if capital gains taxes were cut, but nonetheless, you said that this has served the business community well for 25 years. I, myself, took a loan under the SBLA, and like on your page 5, I was in business at the time, an entrepreneur, caught up in my business, and the bank said, “do this”, and that was it, I just did it.

It was only after I actually got into politics that I started finding out what this program was all about. When I look back and I think of that banker I know that I didn't have to borrow under that program. I had a lot of equity and stuff like that. There was no question that I was a risk, but he did it just to back their loan.

Mr. Brien Gray: We do address that specifically, in transparency issues.

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Mr. Jim Pankiw: Okay, but you're admitting there that even your own people who are filling out your forms are unknowingly going through that program. How confident are you that your businesses answering these questionnaires you're sending to them are really understanding the issues? Because, as a guy that was forced to go under the SBLA, I didn't understand it!

Mr. Brien Gray: It's very interesting that you ask that, because one of the problems, when we talk about data monitoring and data gathering.... The last time the review took place, we were asked, as an organization, to help Industry Canada collect data on experiences under the SBLA because the government itself didn't have the ability to collect that data itself directly. So we went with specific survey materials on the Small Business Loans Act and questions related to it to help them attempt to measure the effectiveness of the program. We were very precise in terms of what we were talking about: the program, its effects, and whether or not somebody had been helped under it.

I accept your point. And that's one of the reasons we raised it here. Also, Allan Riding identified that many firms may not know they're under the program, hence our recommendation that it be made crystal clear to all users of this program that they're under it so they can make an informed business decision—which you apparently weren't able to do—that they're under a specific guaranteed program that's going to cost them more money. And even though they might take that on to begin their loan, do they want to carry on indefinitely under that premium cost? They want to make an informed decision. If they know they're under a government program, they'll know that.

Mr. Garth Whyte: I must say that this is the type of discussion we were hoping to avoid, because the more you balloon this program the more it gets into politics.

And you're right. You probably could have gotten the loan. We don't see this as a way of offsetting banks' lending. They should have given it to you on your own merits.

That's our concern. The more expansive this program gets, the larger the tendency, we think, for people to lean on this program and displace other regular lending practices.

I don't see us talking at cross purposes here. If you look at our brief, we're agreeing with a lot of things you're saying, but still, historically, the program hit a niche; it hit a certain segment that needed some financing. And now we're afraid it might be eroded if it's expanded too much.

Mr. Jim Pankiw: But I think that's where we break down. We agree up to that point. My point is, you're still saying there's a niche there according to your people, but by your own admission, many of your people don't even know they're in the program. Yet you're relying on their responses to your surveys to justify your support of the program for that niche.

Mr. Garth Whyte: Can I turn it around? We feel many of our people wouldn't have gotten a loan. You may not have gotten a loan if this program weren't in existence. That's the argument. Part of our argument is with the banking community. They shouldn't need to have this program to do micro lending; they should do it on their own merits. But you may not have gotten the loan if the program weren't there. They just didn't happen to tell you, so you couldn't take your own banker to task.

This example has proven true in countries around the world. When they do studies of the types of programs that are most effective it's the small-business-loans-act types, which hit about a margin of 10% or 15% of businesses. We can give you those studies.

Mr. Jim Pankiw: Well, but—

The Chair: Mr. Pankiw, Mr. Gray wishes to respond.

Mr. Brien Gray: Yes, one last point, Madam Chair: from time to time with this program, we have found ourselves in that position where we're the keeper of the purse, if you will, where we're the ones who are trying to keep this program contained so that it doesn't get right out of whack and do all kinds of things that are well beyond the original intent of the program—and that will cost the taxpayer a lot of money.

But do you know something interesting? We don't very often, if ever, get our research attacked in terms of the methodology. We are very confident that our members are knowledgeable about a need in the marketplace for young, small firms. If they don't have that credit guarantee, I can guarantee you that an awful lot of small business job creation currently going on might not be.

For that reason, we're supportive of the program. We are very strong on tax relief, as we've pointed out in this brief. It's not normal to do necessarily a whole section of this brief on equity provision for small firms. It is a serious problem in Canada, but the two issues have to be addressed.

Mr. Jim Pankiw: I just have one other comment—

The Chair: No, Mr. Pankiw, we will come back to you. Thank you.

Mr. Lastewka, please.

Mr. Walt Lastewka (St. Catharines, Lib.): Thank you, Madam Chair.

Do you have any firm evidence that banks are using the SBLA to move risk off their books?

Mr. Brien Gray: We don't have firm evidence of that, but we're asking the government people to analyse it and to be sure to satisfy themselves that it's not happening.

Mr. Walt Lastewka: But you, as an organization, don't have any firm evidence?

Mr. Brien Gray: No.

Mr. Garth Whyte: Well, just look at the program numbers. We had suspicions and so did the minister at the time. In the early 1980s, the number of people under the program was consistently in the 16,000 to 17,000 range. It ballooned to 68,000 once certain eligibility criteria increased. Now it's consistently around 30,000.

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Our question is, can we do some evaluation to find out what's happening and what's happening on loans of this size? We think the numbers point to something.

We were concerned. And by the way, that was when we started making presentations to this committee, asking to get banks to sit down and give us some numbers on their lending overall. We didn't even have an analysis of their lending practices.

Mr. Walt Lastewka: You say businesses should have a clear understanding that they're falling under the SBLA program. I suppose the only way of doing that is to put it in large print and have someone sign off.

Mr. Brien Gray: No. I'll give you an example. And by the way, the small business working committee was quite strong on this issue as well. If you're going to have a program that the government is helping to subsidize and promote, the informed consumer ought to know that in order to make an informed decision about whether or not he or she ought to do it.

Allan Riding, an independent researcher hired by Industry Canada to look at the program, found that the majority of the people under the program didn't know that under a federal government guarantee program they were paying this premium to be in it.

Now, if you turn to the end of our submission, there is an application form which is headed “Small Business Loan Registration”. Sure, the Government of Canada logo is there, but I don't see anything there that says explicitly, “This is a federal government guarantee plan that's dedicated to help small, young firms in their initial stages of financing, and please be advised that this program and its costs may be greater than you might otherwise have to pay outside of the program.” We're saying that at the very least that ought to be up there, at the top, and in our estimation, it should be very clear.

Mr. Walt Lastewka: I noticed the items at the bottom where the borrower acknowledges certain things and the lender acknowledges certain things. Although it says “Small Business Loan Act”, what I'm hearing from you is that there should be a spot on the form at the top very clearly spelling out what it is.

Mr. Brien Gray: That's right. The Government of Canada—

Mr. Walt Lastewka: And both the borrower and the lender should sign off that it has been made clear.

Mr. Brien Gray: That's right.

We have some concerns—it's very difficult to prove this and we made reference to this especially in terms of new loans to start-up firms—that a lot of loans that may not have had to be parked under this program were, just as a matter of course. So we think it's inherent upon effective measurement of any program like this that these kinds of things be monitored.

Mr. Walt Lastewka: I want to go further than my colleague from the opposition, who made it clear that his party doesn't support this program at all and didn't support the extension in the spring. I guess I need to hear and see more proof that this program is really required. You've mentioned that for young and new firms there's a missing portion. You've mentioned that somehow we have to make sure the banks that would have made the loan aren't using this program. I need to hear more evidence that this program is a good program for the small business community.

Mr. Garth Whyte: Sure. I think there would be a couple of proxy measurements. We don't have all the other stuff here, but the first would be on take-up and the other would be on recognizability, that people know this loan, that it's been around for a while, that when we ask our members about what loans they're familiar with, people know this loan.

There are others. There are studies and I suggest the committee get them. And don't look only at Canada's example; look at international examples. Look at the cost per this type of program versus the cost of, let's say, the Western Diversification office or things like that, which we don't advocate. The cost, the bang for leveraging, for financing, an economic activity is much higher under this type of program because it's a loan guarantee program, it's paid back and there's a low default rate to it. It's much higher than it would be with other types of hand-out programs.

Mr. Brien Gray: I will get you some information on that. We do very detailed bank surveys every three years because we think it takes about three years for big institutions to effect meaningful changes in the marketplace.

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We've asked our members about access to financing and issues like that, and when you go into the very small firm or the young firm, you see access numbers go down in terms of being able to get the money and rejection rates go up. I'd be glad to share that with you. I think that's a direct correlation and shows a gap in the market at that level. Once you get into the levels that are a little higher, it's much better, but in the early stages of development, there is a problem.

Mr. Walt Lastewka: Thank you, Madam Chair.

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

[Translation]

Ms. Lalonde, please

Ms. Francine Lalonde (Mercier, BQ): Your presentation is most interesting. I brought the text of the press conference given by your president in January. She said that in 1997, 29% of company owners said that credit availability was one of their chief concerns.

I also note that right from the start you have eliminated working capital. I know that there are problems with working capital. However, I would have expected you to suggest that working capital be guaranteed with management counselling for companies.

I'm telling you this because I know that company owners, as they start out, often spend their own money before turning to money lenders. They get a guaranteed loan for the premises, but when the time to pay the operating costs of the first three months comes around, before any money comes in, they completely exhaust their funds and gradually go bankrupt, simply because they did not get sufficient credit. Companies have not obtained sufficient credit to reach the viability threshold.

This is one of my concerns. I'm certain that with good management counselling and sufficient credit, there will be a smaller mortality rate. Do you agree with that? Why wouldn't you propose a pilot project on this?

Mr. Brien Gray: Our experience is largely based on concrete experience in other countries.

Ms. Francine Lalonde: I see.

Mr. Brien Gray: When they launched these programs, they exploded. This is a very risky form of funding, and any banker will tell you that. This type of financing is very different from long term debt. In England, for instance, things really exploded. They were unable to assume the costs of the program.

Basically, the reason why we do not necessarily support operating capital here, is that the program is currently working extremely well and we do not want to upset anything. We think that the best way to help SMEs, those that are starting out and others, with their working capital problems would be to give them better access to equity funds so that they have sufficient capital to carry on business.

Ms. Francine Lalonde: Give them more access to funds.

Mr. Brien Gray: To equity funds. Up to now, most of the measures taken by governments... For instance, recently, the minister responsible for financial institutions here in Ottawa, announced that another sum would be injected for working capital. This has nothing to do at all with SMEs. This means 1% of all SME applications. We think, as Mr. Pankiw said earlier, that if we had a rate slightly lower than the current rate for SMEs, if they could invest their profits back into their company without paying heavy taxes, they would have less working capital problems. They would be able to assume the costs.

• 1610

Ms. Francine Lalonde: This might perhaps be good for already established companies, but for those that are starting out, the problem—

Mr. Brien Gray: This has always been a problem all over the world. I am not aware of many programs that have succeeded in doing this in the industrialized world.

Ms. Francine Lalonde: I'm coming back to my question on the pilot project. A pilot project would avert the explosion. I will look into what you said, but I believe that we also need management counselling and that we can't work haphazardly.

Do you agree with the new formula in the bill? Rather than set a total sum, we're talking about indirect liability as an instrument for determining available sums. Indirect liability does not really show whether the totality of these credits that could be obtained is really available.

Mr. Brien Gray: I don't have a good answer to give you, but I will think it over and write to you about it.

Ms. Francine Lalonde: Fine. Another issue of great concern to me is the excessive facility with which banks fund the bad loans that they make. What can we do to stop this from happening? I know that it has been often times deplored that SME access to loans is not as great as it should be, whereas other companies take advantage of these loans even though they should not.

Mr. Brien Gray: I think there are several ways of going about it. We have tried out one or two.

For instance, if the program costs are somewhat higher and the businessman is aware of the fact that he is working within the framework of government subsidies, he will not pay the necessary premium to obtain the funds. This happens especially with companies that should not necessarily benefit from that program.

Ms. Francine Lalonde: It should be compulsory for the business man or woman to know this clearly. It shouldn't merely be in a small print on a form.

Mr. Brien Gray: Basically, the bank will decide that its most viable option is to do it outside the SBLA program rather than within its framework, because it will get the money back itself.

As to how the monitoring of all figures related to the program should be done, professor Riding made a study to see to what extent loans granted under this program were what are called incremental lending. If these analyses are regularly carried out, banks will find themselves obliged, to a certain extent, to do that in the future.

The Chair: One final question, please, Madam.

Ms. Francine Lalonde: You said that if there were needs that went beyond the help given to new small businesses, these needs should be met outside the program. Once again, how are we to go about concentrating on help for new small businesses? Basically, that is where the difficulty lies. You said that when speaking of eligible companies.

Mr. Brien Gray: It is not by saying—

Ms. Francine Lalonde: I'm not talking about the others, but this is my question to you: How to go about ensuring that help is given to small new businesses?

Mr. Brien Gray: When people ask for loans from the SBLA, they could be asked how many years they have been in business. This could go into the database on that company. This can be compared with figures provided by the bank even outside this program. In this way, we can see to what extent banks are financing new SMEs. We can see whether a bank is doing it entirely within the program, partly within the program or not at all within the program.

• 1615

Ms. Francine Lalonde: They're already being asked how many years they have been in existence.

Mr. Brien Gray: Indeed they are, but I am not convinced that these figures are used in an analytical way. Often we do not have the necessary figures to evaluate the program by that method. This is the reason why we asked that it be done regularly. There are also companies that apply several times under the program. Are they getting their funds within the program from beginning to end? If that is so, is the government aware of this and is this a way of measuring it? If they do not need this program, they should not resort to it.

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

[English]

Mr. Shepherd, please.

Mr. Alex Shepherd (Durham, Lib.): You mention under “Other Fees” that banks are essentially imposing these over and above the registration fee—loan application fees, renewal fees and so forth. Is that happening now?

Mr. Brien Gray: No. There was a suggestion in the consultation paper that we thought we should reinforce here because, to our knowledge, it isn't picked up in the proposed legislation. In that consultation paper there was a suggestion that beyond the fees you currently have under the act banks be permitted to add some of their traditional loan application fees and credit review fees. From our perspective, we didn't think that was on, particularly not with a credit guarantee system subsidized by the federal government.

Mr. Alex Shepherd: So is it your opinion that the legislation as written is unclear?

Mr. Brien Gray: No. I'm not saying that. This is effectively a form of reinforcement: don't think about that now or in the future. That's the reason—

Mr. Garth Whyte: Don't sneak it in.

Mr. Brien Gray: Don't sneak it into the regulations. Don't do anything down the road that may introduce that element into the program.

Mr. Alex Shepherd: But are you suggesting an amendment which would say something to the effect that it is understood that the only fees eligible under this section or whatever are in fact the—

Mr. Brien Gray: My reading of the legislation is that unless it's specifically permitted, it isn't permitted under the act.

Mr. Alex Shepherd: I see. So you think it is.

Mr. Brien Gray: My reading of the legislation is that currently there is the registration fee and the application fee and that's it.

If you want more, I would expect that would have to be made clear, either through the legislation or the regs. I haven't seen the regs so I don't know whether it's there.

Mr. Alex Shepherd: Should it be the other way around? Should it be that it would contravene the act to impose a fee?

Mr. Brien Gray: You could.

Mr. Alex Shepherd: Yes.

Another question is the possibility of limiting personal guarantees. This is something that's come up time and time again. And of course, I would imagine that most of the personal guarantees that go with these loans among your members would be unconditional as opposed to being limited in dollar value.

And getting back to the idea of getting the banks to be more responsible for these loans and in a sense trying to wean them off this government guarantee, do you see some kind of window where you can actually start saying, “okay, based on certain parameters the guarantee would be limited”?

Mr. Garth Whyte: I'd like to address everybody on this. This is sort of our concern. Initially, the banks were not the bad guys on this program. As a matter of fact, we were the ones who worked with the banking community to come up with this program.

Historically, we found a gap. We said, “How do we solve that gap? Let's work out a loan guarantee program.” It goes way back to John Bulloch. We were the ones who said we should pay higher fees because that way you would ensure that only people who really need the loan would get it. And we were the ones who were concerned when it was only a $4 billion program. No one else was concerned about it, no opposition party, not the NDP—and the Reform Party wasn't there then. No party was concerned about this program. It was a non-partisan program.

• 1620

But we were concerned. When it is exploding to $12 billion we say, please monitor the program and make sure of where the money is being loaned. Don't raise the loan level to $250,000. Don't call a firm with $5 million in sales “a small business”, because you're going to wreck the program. This is supposed to be for the very new, very small firms that can't get financing under any circumstances and are prepared to pay a higher premium to get a loan.

Now we see an act that keeps expanding, and if it gets too prescriptive, too complex, the banking community will not use it. They will not sell it. And that's another side of the downside of this program. Ideally, this is supposed to work. They're supposed to say, “Look, we're not prepared to give you the loan”—and we think that's another issue—“but there's a loan guarantee program, and if you pay a higher premium you'll get in on this.”

And we then try to drive down the personal guarantee, because we were concerned that if you had to use up all of your personal guarantee then you couldn't get loans elsewhere—and that's your working capital question. We don't want to see it loaned to working capital; we like people to use their personal guarantee for their working capital and use assets for this loan. That's how we worked with the banking community to try to come up with what we thought was a program that worked really well.

Mr. Brien Gray: So the saw-off on that was the 25% personal guarantee—

Mr. Garth Whyte: That's where we got it—

Mr. Brien Gray: —where the administrators of the program, the government as well as the bankers, wanted some notion that the entrepreneur had a vested interest in this loan and wasn't able to just walk away from it.

One of the things that happened early on—and it has been corrected—was that if you had four partners in a firm you might have had 25% from each to add up to 100%. That was a bit of a distortion and we got rid of that. The point being that we did reduce from the 100%; at one time, the bank could have asked for a 100% personal guarantee. Now it's limited to 25%, which we think is much improved.

Mr. Alex Shepherd: So that's the end of the story; it's at 25% and you're happy with that.

Mr. Garth Whyte: Well, we tried to drive it down, but now we're concerned that this $4 billion program is up to $16 billion and moving. Plus, we're looking at the voluntary sector and other pilot projects. We're concerned about this whole thing ballooning, about when it does become a deficit issue on the books and it does become an issue beyond financing for a niche, for a small bunch of people.

Mr. Brien Gray: And although some of the fee activity has generated more money for the program, which has helped to offset some of the costs, there is a lag in terms of when the loan is put on the books and when it starts to default. I think a lot of the loans made in the worst of recession are now getting to that maturity where they may start to default, and for those kinds of reasons, you have to maintain a certain prudence with regard to the way you're administering this program.

Mr. Garth Whyte: Again, we're still concerned this program isn't fully monitored. And it's hard to compare the experiences of 1993 and 1995 because the rules have changed. This was supposed to be a cost-effective program that paid for itself, but we're also concerned now that people who don't really need the loan guarantee program are accessing it.

Mr. Alex Shepherd: So the argument would be to drop the ceiling down, because the people you want to hit are the average component of a loan—

Mr. Garth Whyte: Yes, we're in the same trap that all politicians are in. Once it was raised and we fought that, we surveyed our members, and now we have a slight majority saying not to drop it. It's like putting up a sign saying, “Free Candy”.

Mr. Alex Shepherd: But the argument is that there's no analysis, say, from $100,000 to $250,000, that those people getting loans in that group couldn't get them without the guarantee.

Mr. Garth Whyte: We believe that's correct.

Mr. Alex Shepherd: You believe they can get them?

Mr. Garth Whyte: No. We believe what you said. The statement's correct. There is no—

Mr. Alex Shepherd: —analysis.

Mr. Brien Gray: Allan Riding has done work on the incrementality of the program. It's been too long since I've looked at it in that kind of detail in terms of size of loans, categories and the incrementality numbers there, but that is available through Industry Canada. If you want it, you should ask for it.

Mr. Alex Shepherd: Thank you.

The Chair: Thank you, Mr. Shepherd.

Before we go to the second round of questions, I just want to get some clarification here.

Mr. Whyte and Mr. Gray, you've continuously said that you were opposed to raising it to $5 million. What did you think was reasonable in terms of sales?

Mr. Brien Gray: At the time, it was $2 million, if memory serves me—

Mr. Garth Whyte: Yes.

Mr. Brien Gray: —and we were fine about keeping it where it was, for the reasons outlined in the brief. The vast majority of small firms in this country are well beneath the $2 million sales level. And if you're talking about a program that's largely aimed at new, young firms, they don't jump from the get-go into $2 million and $5 million worth of sales.

• 1625

The Chair: My own previous experience tells me that I would disagree with you in regard to certain types of industries that would require new firms.

I'll use an example from when I was practising law. In regard to donut chains or the donut industry, to compete with the big ones out there, you need to have a certain size or a certain visibility or you're never ever going to enter the market or you're never going to go from small to large. And to make things work, if I correctly recall some of the surveys and things I saw, you needed to have three stores, probably five stores, to be visible and to make it as a small operator.

Now I would consider that small compared to what we know about the size of the chains today. Yet when you look at the average sales you have on a daily basis, you very quickly get over the $2 million range, just in revenues, in that type of operation.

So I'm just not sure how you define the SME sector.

Mr. Brien Gray: You raise a very good point. The whole problem of a definition for small business is one that's very problematic. Every country faces this dilemma. For example, the United States' definition of smallness meant that at one point the American Motors Company was considered a small firm because, within that industry, it was small, even though it had access to public markets and equity sources that most small firms—that we traditionally understand as being small—didn't. American Motors largely doesn't have the kinds of problems that we think about when we think of small businesses.

And yes, we can always raise the exception to the rule. But in general terms—and we're talking about a program here that has general applicability across the board— if you look at the demographics of the small business constituency in Canada, you've captured most of them under $2 million.

The Chair: Mr. Gray, with all due respect, I know which businesses in my riding belong to the CFIB, and I'm a bit confused, then, because I know what they do and what their sales revenues are, so I have to say that there seems to be some difference between those that continuously participate in your surveys in my own riding versus what you're saying their sales levels would be. So I'm a bit concerned here that—

Mr. Garth Whyte: I have to address that.

The Chair: —in my riding I'm getting a distorted image of the members that should belong. I'm a bit concerned.

Mr. Whyte.

Mr. Garth Whyte: We have membership from all sizes of firms, but again, the whole idea—and I think our larger member firms would agree—of the criterion for our membership is that you have to be an “independent business owner”. You could argue that Eaton's could become a member because it's not traded on the Toronto Stock Exchange. So we have different sizes of members.

When we survey our very small members—and we have quite a few, quite a few thousand, and the numbers are growing.... This is the group this program was intended to target.

The Chair: Okay.

Mr. Garth Whyte: This wasn't supposed to be a program for all businesses and it's not supposed to be a program to help a firm with $5 million in sales access loans. That's why, when we give a presentation on financing—and we have given it to this committee many times—one aspect is the Small Business Loans Act. The Small Business Loans Act wasn't supposed to be a panacea to handle all the financing difficulties of all firms in Canada. It is supposed to deal with a particular segment, as an option. There are many other options we have looked at on the financing needs, and we've looked at one on the equity side as well.

So to say the Small Business Loans Act should handle everything...? This is why we're a little concerned. We're starting into a discussion of moving it to the voluntary sector and to larger firms, which is almost moving to the political side. Then we get into the idea that it's a handout. This is what we've been concerned about, and we're worried that this program may be sacrificed because it's getting too ambitious.

The Chair: Okay. The other question I wanted to clarify is this one: in the application, if I recall correctly, there is an SBLA fee that is set out. There seems to be some suggestion that your members or people who are getting these loans are not aware that they're getting this type of loan. Yet, very clearly, there's a line for the SBLA fee, if applicable.

As well, if I recall correctly from the SBLA financing that I did, your bank will send you outside to get independent advice or get advice so that you know what you are signing. That's part of the standard financing package with a bank.

Is there not some responsibility for those who are signing or witnessing to see that this loan is explained?

Mr. Brien Gray: Certainly, and—

The Chair: Are you suggesting that your members don't follow this?

Mr. Brien Gray: I don't want to get into sort of a confrontation here, but—

The Chair: No. I just want to get some clarification here on how financing is done.

Mr. Brien Gray: Yes. Listen, you don't need to take our word for this. This is the finding of Allan Riding in his very detailed—

The Chair: He's going to be here.

Mr. Brien Gray: Yes? Then you can ask him when he gets here. He found that many people under the program weren't aware that they were under the program—

The Chair: Okay.

Mr. Brien Gray: —and from our perspective, if he's found that out as an independent researcher working for Industry Canada, it should be listened to.

• 1630

The Chair: Fine. Mr. Gray, I'm not disputing that. I'm just concerned that you're representing 70,000 members, if I—

Mr. Garth Whyte: Ninety thousand.

The Chair: Ninety thousand businesses.

I'm concerned that people are not getting information they should be getting. As a lawyer, I'm concerned about the forms, applications and requirements for financing that need to be filled out so that everything is done properly. And I will pose the same question to Mr. Riding, because I want to ensure this very clearly for the record: there seems to be something that we need to follow through on here—

Mr. Brien Gray: Absolutely.

The Chair: —so that people know what they're doing. But at the same time, I have difficulty when I look at a form and see a line for a fee and people tell me they're not aware they've been charged a fee. That's my concern.

Mr. Brien Gray: People get charged fees at the banks all the time. My question to you is, does each entrepreneur who comes under this program understand that the fee they're being charged on this form is different from the ones they'd normally get charged by the bank? I think that's where the rubber hits the road. I don't know if many consumers out there really understand that one fee is a bank fee, the next one's a government fee, the next and the next and the next.... I think it gets into the whole business of “buyer beware”, “informed consumer”, “better know what you're signing”, and all that kind of stuff. But with respect, not everyone who signs these things has professionals there to help them go over the form.

The Chair: Thank you.

Mr. Pankiw.

Mr. Jim Pankiw: Mr. Gray, Mr. Lastewka asked you what evidence you had that the program is actually needed, and I kind of missed your response. Could you repeat what you said?

Mr. Brien Gray: I think his question was, “Where is the gap in the market?” I said that our surveys, which we do on a regular basis—we did the last one last summer—indicate very clearly that for young firms and for small firms, there is an access-to-capital problem in terms of debt capital. And there's also a rejection rate for bank loan applications that's higher than it is for most other firms in the economy.

So, by proxy, that's the best I can give you in terms of the kind of response I think you're seeking.

Mr. Jim Pankiw: Okay. Mr. Whyte also said that historically you've found a gap, and I guess that's how you're saying you found it.

The problem I have, I guess, is that if we have the problems of taxation that you acknowledge we do have, doesn't it seem to you that they should be addressed first and that then we should try to examine whether there's a gap?

Mr. Garth Whyte: Why not? Not only that, we're on record as saying that the employment insurance premiums should be in balance. We're on record as saying that we should deal with personal income taxes.

Of course that should be addressed, but the point is that there are some small firms starting up that are paying no taxes and are looking for financing, and they can't get financing because they have no access.

Mr. Jim Pankiw: Yes.

Mr. Garth Whyte: That's what the point is.

Mr. Jim Pankiw: But if we had no capital gains taxes, you don't know for sure that there wouldn't be a glut of venture capital available, right?

Mr. Garth Whyte: But you know when you get into venture.... Look, this is true, but when you look at venture capital, at investing in venture capital, and you ask venture capital, like we have, what the minimum requirement is that you need to invest, it's a million dollars. We're talking about loans of the size of $30,000. We're not talking about a firm trying to get venture capital of a million dollars.

Mr. Jim Pankiw: Yes, but how much more money would be left in the hands of ordinary entrepreneurs? And how much—

Mr. Garth Whyte: Sure. You have a point.

Mr. Jim Pankiw: —more activity would be going on?

Mr. Garth Whyte: But you're starting up. If you look at the OECD job studies, if you look at the CFIB study, if you look at the Breaking Through Barriers study, if you look at government studies, there is a need for some start-up capital for firms that have no equity, no things. And this is a good program—that at least has been recognized around the world—to do that.

Mr. Jim Pankiw: Well, okay. I suggest that the start-up capital would be available through a variety of means.

Mr. Garth Whyte: Yes. Love-money, angels, banks, the tax system, savings.... At the back of our brief, we identify the criteria. Again, we're not looking to the Small Business Loans Act to solve all the financing needs. We're just saying that it's one program that has a good track record and that serves a purpose.

Mr. Jim Pankiw: What about this effect of distortion of markets and stuff? Do you make any inquiries of your members?

• 1635

Let's say that one of your members opens a widget factory and is off and running in a couple of years and all of a sudden someone else comes along. And because there's that other widget factory down the street, the bank says no and tells your member that he doesn't have much equity or a lot of money to put up so it's not going to fund him but will let the taxpayers subsidize it—and one of those taxpayers is the guy who opened that widget factory two years ago.

Mr. Garth Whyte: We hear our own lines coming back at us. You're talking about grants to business. Our members are against grants to business.

Mr. Jim Pankiw: Well—

Mr. Garth Whyte: We're worried about unfair competition from non-profit organizations, which this could result in.

Mr. Jim Pankiw: But you're not worried about businesses—

Mr. Garth Whyte: It's a loan—

Mr. Jim Pankiw: —subsidizing loans to other businesses through—

Mr. Garth Whyte: No. Look, of course I'm worried—

Mr. Brien Gray: It's a repayable loan that they're paying a premium for.

Mr. Garth Whyte: —about it. This is a repayable loan at a higher premium.

Mr. Jim Pankiw: Yes, but it's still a taxpayer guarantee.

Mr. Garth Whyte: Sure it is, but in certain communities, including the community where your business started up, you get a small business loan. You may not have got a loan elsewhere. We're trying to find ways to get access to capital for smaller firms.

Of course we do not advocate using taxpayers' money to fund competitors, but we don't see this. What we see is someone is prepared to pay a higher premium for a loan guarantee linked to an asset that they're buying. That's why, by the way, we're not advocating this program for working capital; that's where it could be seen as a grant or a hand-out, because then you'd have a big default. But you don't have a big default record on this program. The majority of it is paid back.

Mr. Jim Pankiw: Then what about that premium? It was your suggestion that it be there so that only those who need it will actually want to access it. Here you have an enterprise where, on the surface of it, no current lender would lend to it because the risk is thought to be too high. And part of determining whether this is a viable operation is the current rate of interest. Now you're going to take that business that's probably questionable in the first place, put a surcharge on it, and then a premium and a higher interest rate; and it's the government implementing that and putting it onto that business....

Mr. Brien Gray: One of the problems in the Canadian economy—it's changing a bit now but it's been the case for some years—is that inherently the banks don't price for risk. One could say that for start-up firms in a perfect market the bank would say, “Okay, you're a start-up, and instead of charging you prime plus 2% or 3%, I'm going to charge you prime plus 4%, but you can have the money.”

Now, in the absence of the banks really doing much price-for-risk lending in this country—and very little of it has been done until recently—in the absence of the banks setting up their own risk profile or their own risk adjustment, you had to find a mechanism that would somehow encourage the money to get out there to small firms. So if you will, this program, in a way, gets the money out there because it takes care of the risk those banks are worrying about. They have a guarantee. They're not pricing it for risk. They're getting a government guarantee that covers their concern about risk.

Mr. Jim Pankiw: But they can't price for risk because of government regulations. Isn't that so?

Mr. Brien Gray: Not true.

Mr. Jim Pankiw: Nothing prevents a bank from having...?

Mr. Brien Gray: Nothing.

Mr. Garth Whyte: And we're concerned that there is a bias against small sectors, especially the very small micro firms. That's why, in our presentation, we're also saying that this shouldn't replace that. It should just supplement it.

Again, the whole essence of this program is that you need very good evaluation and very good monitoring to see what's working. And we don't think people should be on the Small Business Loans Act into perpetuity. It's a start-up thing and they should be able to wean themselves off it. That's why we're concerned about the $5 million and the $250,000. If we monitor this and the research shows it's being rolled over year after year, then we have some concerns.

Mr. Brien Gray: Please let me be clear in terms of pricing for risk. I think it's appropriate that a bank prices for risk where the risk truly is there, but please don't misinterpret that as a general permission for the banks to go out and add risk points to a lot of loans that really don't have risk attached. In other words, don't interpret that as a general permission for banks to go out and gouge the market. Where there truly is risk, maybe there should be a little bit of that market activity going on out there.

• 1640

The Chair: Thank you very much. Madam Jennings, please.

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): Merci.

I wasn't able to attend the first part of the meeting today and if you have been asked this question, I would ask you to bear with me and answer it. I'm concerned about the point you raised that up to 16% of the total small business term lending has been financed under SBLA since April 1993. You mentioned that in a 1994 letter to Minister Manley.

First, do your statistics show that it's still in a similar range?

Mr. Brien Gray: No. It's not at the same levels. It's come down since then, largely because of some of the changes that brought the act more under control.

Ms. Marlene Jennings: And it's come down to what point?

Mr. Brien Gray: I don't have the number off the top of my head, but where the peak was about 68,000 loans, I believe I'm right when I say it's now 30,000 to 40,000.

Mr. Garth Whyte: Thirty thousand.

Mr. Brien Gray: Thank you.

Ms. Marlene Jennings: But these loans are being made under SBLA would constitute what percentage of this total?

Mr. Brien Gray: I don't have a number for you, but I'm sure—

Ms. Marlene Jennings: So you don't know if it's still 16%.

Mr. Brien Gray: I know it's not 16%.

Ms. Marlene Jennings: Okay.

Mr. Garth Whyte: It peaked then.

Ms. Marlene Jennings: So that's still more than the international average.

Mr. Brien Gray: Yes, the international average—

Ms. Marlene Jennings: —is about 5%.

Mr. Brien Gray: Yes, about 5%, and anything beyond that, I think, you have to keep monitoring. You have to understand what's behind it.

Ms. Marlene Jennings: Okay.

The other question that I have is, do you or does anyone, whether it's the government or anyone else, in fact do monitoring to determine whether or not those loans made under SBLA could and should have been made outside of the program? This is the point about column shifting, because I also have a concern about that. If there's a possibility that the banks, which are in the business of lending, are taking advantage of a government program which reduces their risk and shifting that risk over to the government, that means they're shifting it to the average Canadian taxpayer. Has there been any study done on that particular aspect of the lending under the act?

Mr. Brien Gray: I was mentioning to Madame Lalonde recently that I think there are a number of things that have been put in place which will help this. One is that the cost of the programs are higher now so there's less business. In terms of making an informed business decision, if you know you're under the program—and that gets to the transparency issue—you see the differential in cost, and you think you can finance it outside of the program, you'll choose not to be inside it. But that requires you to know that you're in fact in it and that gets to the chair's comment about uninformed consumers making sure that they know their legal rights and obligations.

There's another way. It becomes a little problematic and I think it's incumbent upon the department to try to monitor it, because the program is predicated on the business or loans officer making a loan through normal banking means. But where they've judged that the risk is such that there ought not to be a loan, I don't have an easy answer for you.

I do know that Riding got at a methodology that tried to understand and determine incrementality under the program. If he took strict measures of incrementality, he was talking about, if I recall correctly, something around 54% incrementality under the program. Then he made a few other assumptions that were relatively generous, which took it up to 80%, I believe, but those were pretty generous assumptions on incrementality.

Let's take it halfway between 50% and 80%; that's still, in my estimation, too many loans outside of the program. I think it's important to enforce the rules under the act. But that's part of Industry Canada's function.

Mr. Garth Whyte: Industry Canada should be monitoring this. We strongly urge you to. And if you're going to set up pilot projects, set the criteria right away. Set it up so you can monitor whether or not it's a successful pilot project. Don't look at take-up or number of firms with loans or the size of the total program. Look at how many firms it's helped and whether they are moving off and continuing on. That's what we have to do.

And that's our concern. Really, it means watching the results of the loans. I guess Industry Canada is waiting; there's been a lag and they are waiting a year or two to look at it.

But that's why we're concerned. Again, if you keep adding to the program without truly evaluating if it's working and if it's being abused.... That's our concern. We agree with a lot of the things you're saying.

Ms. Marlene Jennings: I have one last comment, and I hope you'll take it with n a generous spirit, because it is said with a generous spirit.

• 1645

I appreciate the documentation and the ballot forms you sent me. There's just one problem. I was elected back in June, in the last general election. Every time you have sent me the ballot forms that supposedly come from my riding, at least half of them are from outside of my riding. I'm concerned about that—

Mr. Garth Whyte: Sure.

Ms. Marlene Jennings: —because if there's such a discrepancy in terms of your mailing, then—

Mr. Garth Whyte: Could I answer that?

Ms. Marlene Jennings: Yes.

Mr. Garth Whyte: I'm the one sending all of you these letters all the time. And by the way, if you write back to me, we use it and we distribute it and many of you know that.

We get this question all the time. These members live in your riding. Their businesses are not in your riding, but they live in your riding. And please, I encourage all MPs to understand that. At the top of the letter, every time, we say that they live in your riding. Please understand that. They vote in your riding. We'd rather send it there than have people who are non-voters working outside your riding—

Ms. Marlene Jennings: Boy, am I glad I asked. I said it so gently.

Mr. Brien Gray: I know. We've heard it many times.

Some hon. members: Oh, oh.

The Chair: Thank you very much, Madam Jennings.

[Translation]

Ms. Lalonde, have you another question?

Ms. Francine Lalonde: I have more than one. I will try to be concise to get answers to them all.

I said I was concerned about looking at loan guarantees in strict accounting terms as opposed to examining the issue from a more macro-economic perspective. Setting up and maintaining small and medium-sized businesses has both an accounting and an economic impact. If we view the issue sole from the accounting perspective, we may make a mistake. I would like to hear what you have to say on the issue.

Secondly, you talked about the impact of bank mergers on loan accessibility. I'd like to hear what you have to say about Quebec, because one may think that Quebec is not as affected. However, I have already heard some things to the contrary.

There's one thing that you did not talk about but which you mentioned in the survey, and that is the stiffer personal guarantee requirements for loans. Although the limit is set at 25%, the requirements for these guarantees may become stiffer.

Finally, do you think that the pilot project on social economy could be replaced by banks reinvesting in the community?

Mr. Brien Gray: I don't know where to begin.

First of all, as far as the bank mergers are concerned, it is clear that many people feel that this problem exists more outside of Quebec than within the province, because there you have two enormous financial institutions, the Mouvement des caisses Desjardins and the National Bank, which, in reality, is a regional bank.

Interestingly enough, we have observed, over the years, that in Quebec, there were more participants in the market, greater competition and a higher level of satisfaction amongst our members. This is obvious: more players, greater competition and a higher level of satisfaction. But there is another aspect that concerns us. The caisses populaires are very effective for small businesses with a staff ranging from zero to five or ten employees. However, when you get beyond a certain size, you're no longer talking about personal loans or personal mortgages for the business; the financial transactions become a little bit more complicated. This is why we have certain concerns. When a business grows, it has to depend more on the chartered banks. If the banks merge, the problem will become more significant than we have initially perceived, both in Quebec or elsewhere.

In Ontario, we have other concerns related to the fact that, after the chartered banks, there is no second level. If we eliminate two chartered banks in Ontario, we will have a choice between only three banks. We have some trust companies and a few caisses populaires, but they are not as well-established in Ontario as they are in Quebec or even in the Canadian West.

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The four chartered banks, in Ontario, have nearly 75% of the market. If two were to be eliminated, we would have very significant concentration.

I can't remember the other questions.

Ms. Francine Lalonde: The stiffer requirements for personal loans.

Mr. Brien Gray: Under this program?

Ms. Francine Lalonde: Yes.

Mr. Brien Gray: I think you had better explain this to me in greater detail.

Ms. Francine Lalonde: This was one of the findings of your survey. Given that 25% guarantees may be required under the program, I was asking you whether or not you had any suggestions to make with respect to this matter.

Mr. Brien Gray: I think that the current guarantees required by the program are good. Even if we wanted to eliminate this type of collateral, the government and even the banks would be much more comfortable if there was at least some type of ownership on the part of the entrepreneur.

[English]

Mr. Garth Whyte: If I may, let me add that there's a delicate balance of accountability among government and the banks and the individual and between the banks and the individual. Again, this can't be seen as handout; the individual has to have something on the line.

Also, we like to say that banks should do everything, but there has to be accountability from everybody, not just the banks. That's why there has to be some form of personal guarantee.

Part of the challenge we had when we first tried to form or adapt this program was to ensure that there still would be some personal guarantee left in order to be able to access working capital loans or other loans that you could use—and use the SBLA as a means to get the guarantee to get assets. That was the beauty of the program and, really, in building the program in 1993, we worked very closely with the banking community to come up with this fine balance and I think that part is working fairly well.

[Translation]

Ms. Francine Lalonde: Let's talk about the macro-economic as opposed to the accounting vision of the legislation. I agree with the accounting vision, but we also have to have a macro-economic vision. We are perhaps heading toward an economic slowdown.

Mr. Brien Gray: We shouldn't view this program as a solution to all of the problems that exist on the market. If I decide to get into business, I'm going to have to deal with certain risks. We have all kinds of other ways to improve the situation of the small and medium-sized businesses, particularly ways to improve the actual climate of the market. We're concerned with the debt, the deficit, and the impact that they may have on the future if we do not continue to wage our battle.

Regarding taxes, they are still too high according to our members, especially regressive taxes, namely taxes payroll and municipal taxes, which have to be paid even if you are not profitable.

Finally, we may have some differences of opinion regarding the SBLA, but not regarding the fact that we should create incentives so that Canadians like you and I invest in an SME rather than in IBM, as they don't need my money. It would be better to invest in small local businesses. I place great trust in small local entrepreneurs, I know them well enough and I can monitor them better on a daily basis than I could monitor IBM. With RRSPs, I can invest in IBM, but not in local businesses.

Thus, there are all kinds of macro-economic aspects that could be created outside this program, which is chiefly aimed at businesses that are starting up.

[English]

Mr. Garth Whyte: If I may, I'll also answer briefly relative to this program. We have a study called Diamonds in the rough: why firms born in recessions are better survival prospects, an old, dated study, and in it we found that those firms formed during a recession had a higher survivability rate than those firms formed during good times. I guess they were careful about what they were moving into. But we also found that the banking community seems to tighten down on lending during a recession.

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You're ruining those “diamonds in the rough” if you do not have this type of program to help leverage more financing for those firms that have really thought it through but have a hard time in certain communities. Being in Regina and Winnipeg during the drought in the 1980s and knowing how tough it was to get financing, I know that this type of program can help a certain segment.

The other thing that's really important, linked to job creation, is that in any given five-year period 50% of the net new jobs come from firms that were not in existence before that; the very new firms are the ones creating a lot of the net new jobs. And this program helps facilitate that, especially during a recession.

[Translation]

Ms. Francine Lalonde: Diamonds in the Rough. Could you send me a copy?

Mr. Brien Gray: Yes, yes.

Ms. Francine Lalonde: Basically, this is reinvesting in the community for the greater good; it's social economics.

[English]

Mr. Garth Whyte: Do you want to answer?

Mr. Brien Gray: You do it.

Some hon. members: Oh, oh.

Mr. Garth Whyte: We like the idea of knowing where the investment is and how much is going back to the community, but again, it can be very onerous if it gets too detailed. An individual may not want that to appear. In Elbow, Saskatchewan—I know Elbow—there are maybe not too many entrepreneurs there and you may not want them to know how much money you are borrowing or whatever. However, we have been an advocate of knowing the extent of loans by province and by region. It would be useful to know that. We have surveyed our members on this and it's a concept they're—

Mr. Brien Gray: We have asked them the question. I'm sorry, but I don't have the details with me. I will send the committee a copy of that result for the community reinvestment program.

The Chair: Thank you very much.

Merci beaucoup, Madame Lalonde.

Mr. Lastewka, you had some questions.

Mr. Walt Lastewka: Mr. Gray and Mr. Whyte have answered a couple of them I was concerned with in regard to Mr. Pankiw's earlier question.

Over all the years from the beginning of this program, over 37 years, 94% of the loans have been repaid. And in the past 5 to 10 years, that number is even higher.

My understanding from the data I have is that 40% of the SBLA loans, from 1987 to the latest data, are going to start-ups. I think you made a real good point when you talked earlier about making sure that firms know—let's forget about why they don't know, because there are thousands of reasons—they have to sign off. I thought you made that point well.

I want to go back to Madame Lalonde's area. We were talking about loans that were given to firms because they probably couldn't get them anyplace else. And then there are the risk firms—depending on how wide we want to have that band—where the banks or lending institutions could have given the loan without using the SBLA. I think we're all trying to narrow that band somewhat, knowing that there's going to be overlap, because you always get into that final grey area of “could it go to one or the other area?”

Could you share with us any information on how that could be done better, on how we could narrow that band such that we could get more firms who really could not have got it elsewhere using SBLA for its purpose, which you said earlier was to kick-start them?

Mr. Garth Whyte: Again, we don't have all the answers—and I'm sure Brien is going to kick in here—but I would think that the first suggestion is this one: don't expand it. Don't keep expanding the program.

And at least, with the current program, let's get the real numbers. And just by doing some analysis of the Small Business Loans Act books you get some questions. For example, on leasing, when we do our pilot project, let's really evaluate it and see where it's going, because that will expand the program. When we look at the voluntary sector, let's look at it and keep it separate, because the more we put into it the tougher it's going to be to segment out the areas we want to look at on the band size.

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The two areas we were most concerned about were the size of firm and the size of loan. That's why we were concerned about the maximum loan size being $250,000. Once that's done it's pretty hard to retreat. The average size at the time was $30,000; now, of course, the average loan size is up to $60,000 or $70,000.

So first, don't expand it, and second, measure what we have now.

Mr. Walt Lastewka: Excuse me for a minute. Let me just interrupt you there. Let's see if we can stick to one item—

Mr. Garth Whyte: Sorry.

Mr. Walt Lastewka: —because I really appreciate the dialogue.

The program was changed from $2 million in revenue in the 1980s to $5 million in revenue in 1993 and from $100,000 to $250,000. Right?

Mr. Garth Whyte: I think so.

Mr. Walt Lastewka: Six years since its introduction.

Over time, that $5 million or that $250,000 isn't really the same dollars. What you're saying is “don't change that”, and I understand that and I understand your reasoning.

But take me back, knowing where we are today, to how we could narrow that grey area of risk and really use the SBLA program to improve the program, so that it's being used for the right thing, let's say. Let's put it that way.

Mr. Garth Whyte: I'm going to let Brien talk to this in a moment, but one way is to bring all the players to the table. Talk to the banking community directly, to those people who are on the ground floor, and ask them what their experience is. Also, maybe we could do the same and talk to entrepreneurs who have used the program. We could do that type of study again. We could revisit the study and see what the issues are. Off the top of my head, I don't have the answer.

Mr. Brien Gray: I think there are forces in the market that are actually starting to come into play.

In the last couple of years, the banks have screamed and yelled about Wells Fargo coming into Canada. Let's look at that. That's pre-selected; you can't go to Wells Fargo unless you get the letter. And they want to have certain numbers on your firm: so many years of existence, so many years of profitability. You can have a loan, if I recall correctly, of up to $75,000, and you're probably going to be paying prime plus 8% or 9%.

An hon. member: Eight or nine per cent?

Mr. Brien Gray: Yes.

Now, there's a big gap between the general risk aversion that the banks traditionally have shown at about prime plus 2% and prime plus 8% or 9%, so when I talk to Charlie Coffey or I talk to people from other banks and they complain about the advent of Wells Fargo.... First of all, Wells Fargo got them into the business of lending some of this kind of money, which they wouldn't have done otherwise, but if they're going to lose that business they kind of deserve to lose it at that price. They really do.

If you have a firm that's profitable and has been that many years in business and you're going to charge that rate, if you lose the business you deserve to lose that business.

Now, if you start to have a banking industry predicated on competitiveness and competition, then presumably you'll start to see a little more movement towards pricing for risk where it really truly exists.

For example, a lot of the stuff that comes under the SBLA would be things like restaurants, where leaseholds are costly and there are things like that. And there's a higher risk with those restaurants. So the banking industry is saying, “Anything over prime plus 2%, we really don't want to entertain you. We sort of close the book on anything past prime plus 2%.”

But you could have a banker who is a little more entrepreneurial and says, “You are more risky. There's a track record of this industry being a lot more risky, and based on real risk criteria, we're going to charge you prime plus 4% or 5%.” I would guess that the entrepreneur would say, “Yes, I'll pay that, because I want to be in business and I have confidence in my projections and my ability to compete.”

It's starting to change a bit now, but historically, past prime plus 2% or 2.5%, there's been a risk aversion on the part of the major chartered banks in Canada. So I think this is part of the answer to your question: if we get the kind of competition that gets into some of that pricing for risk, being a little bit what I call...in traditional business terms, you talk about sensitivity analysis, and this is what you're talking about.

So you bring it to the application of this. Then if you get that appropriate pricing outside of the program, the program will truly be defined for those in true need who can't get loans outside of the program.

Mr. Garth Whyte: I just thought of something else too. We could survey the users and ask them if they could have gotten a loan. Or did they need the SBLA loan? We could survey the actual users—and we have done that in the past—just to find out their track record.

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Mr. Brien Gray: I just might reinforce this again, because I see too much of it going on in terms of behaviour in the marketplace when you have dominant players: our members would say there should be more pricing for risk, but let's not have it as a general permission to go out there and hike rates where they need not be hiked.

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

Mr. Gray and Mr. Whyte, in your brief you talk about how $150,000, if I recall correctly, should be the maximum loan; at one time, you were opposed to it going to the $250,000. When we talk about the guarantee rate of 25%—and because you see the $150,000 and beyond as not a start-up kind of loan any more but as appealing to larger versus your ideas of small—would a solution be to raise the guarantee beyond the $150,000 or does that get back into the issue of working capital as something that you would like to avoid?

Mr. Brien Gray: My response is twofold. The most direction from the membership is $250,000, not $150,000, so although we traditionally took that position, the most recent direction from the membership is $250,000.

And you're quite right. The 25% does free up capacity so that if they are able to get a working capital loan at least they have some collateral to pledge for that purpose. If they take it all up on, say, the thing for the leasehold, then they wouldn't be able to do that.

The Chair: On behalf of the members of the committee, I want to thank you very much for being here today. It's been a very enlightening discussion. I know we've all appreciated the opportunity to ask questions and be part of it, and we appreciate your very thoughtful brief.

We'll adjourn now, until tomorrow, and I remind members that tomorrow we're going to be doing credit statistics with the banks and not the SBLA.