INDY Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, October 29, 1998

• 0904

[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): Pursuant to an order of reference of the House dated Tuesday, October 6, 1998, we will continue our consideration of Bill C-53, an act to increase the availability of financing for the establishment, expansion, modernization, and improvement of small businesses.

Yesterday we had another interesting meeting, and originally we had scheduled that we would have the department with us this morning, which we do as witnesses, and then move to clause-by-clause. Yesterday I suggested that we would postpone clause-by-clause today because of some new developments this week and some difficulty in getting some information to committee members. That being said, if there's consensus later, we could move to clause-by-clause, but the plan right now is to hear the department as witnesses and to ask as many questions as you want based on the evidence we've heard and what testimony we've had before the committee.

• 0905

I would propose that the department may have an opening statement based on the evidence the committee has heard.

Mr. Walt Lastewka (St. Catharines, Lib.): Madam Chair, just for clarification, are we going to go through the discussion on the act first, and then regulations? Is the discussion going to be on clarification of the act first?

The Chair: I assume that the department is going to clarify the evidence we've heard before the committee. We've heard both. We've heard evidence on the act and we've heard evidence on the draft regulations. I assume they're prepared to proceed and that they're prepared to give evidence or to clarify things we've heard for both. So I'm leaving it up to them on how they want to do it.

Mr. Walt Lastewka: Okay.

[Translation]

The Chair: Madam Lalonde.

Ms. Francine Lalonde (Mercier, BQ): If I understand correctly, we can ask questions on all of it. When we ended yesterday, you said that it was not within the spirit of the proceedings to change the regulations in such a way as to change the thrust of the legislation. In fact, we need to talk about both because we have heard rather troubling evidence about the effect of the regulations on the thrust of the Act.

[English]

The Chair: We're definitely talking about everything we had before us, both the bill and the draft regulations, the whole purpose being that a number of things were put into the regulations or draft regulations that this committee has been concerned about since the beginning. So we're definitely talking about it all.

I'll turn it over to the department. If they're not prepared to have an opening statement, we can move to questions.

Mr. Lastewka.

Mr. Walt Lastewka: I thought it would have been good that if there were any questions on the act itself we could do those first and then get into the regulations, understanding that all principals receive the regulations at the same time and discussions on the regulations are still ongoing. I think this committee, after what we've heard, is going to make some recommendations for the department. Is there any clarification on the act itself?

The Chair: There have been several witnesses who have commented on the act itself. We have draft changes before us from some witnesses as well.

Mr. Riis.

Mr. Nelson Riis (Kamloops, Thompson and Highland Valleys, NDP): I think, Madam Chair, that once we hear from the members of the department in terms of the areas where there's some concern and/or confusion, probably the area to focus our efforts on will be clear, whether it's in the regulations or whether it's in the changes to legislation. So it would seem to me that your original plan was to listen to the members of the department react to the concerns we've heard around the table, and then it will become clear, presumably, what course of action is required, if any.

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

I will turn it over to the department.

Mr. Robert Dunlop (Director General, Entrepreneurship and Small Business Office, Department of Industry): Madam Chairman, as I understand it, the two issues you raised last night were the proposals by the Canadian Bankers Association and by the restaurant association.

The Chair: Mr. Dunlop, we've had evidence from several witnesses over the past few weeks, and I was not only referring to last night. The department has known they are coming today for several weeks now.

Mr. Robert Dunlop: No, absolutely, we're prepared to answer questions on all the issues raised by the witnesses, and on the act and on the regulations. But what I propose is that if you would like, we could begin with the CBA—

The Chair: Certainly.

Mr. Robert Dunlop: —as they made proposals on specific amendments.

Peter, do you want to take the lead?

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

The proposed amendments that came to us from the CBA deal with a number of issues. If you have their submission in front of you, you will see they raised a number of issues of course with respect to the regulations, but for the time being I think we'll put those to one side and we'll come back to the regulations, as per Mr. Lastewka's suggestion.

With respect to clause 5 of the legislation, Bill C-53, we've reviewed their proposal to delete these words from this clause. In general, I think the feeling is that this is a drafting style and if members feel they want to support this change, that wouldn't be a great problem for us.

• 0910

If there aren't any questions on that, I'll just move on. Of course, I'd be happy to take any questions as we go along.

I will just pass on to subclause 5(3) and to the proposal on the second page of the CBA's submission from yesterday. Subclause 5(3) is a provision that has been in the Small Business Loans Act for many years. It is there primarily to provide the minister with a tool to mitigate our risk in the case of lenders who are abusing the program, and in instances of egregious abuse, giving a lender seven days' notice simply runs up our exposure.

It is not our intention to use this provision frequently, for sure. Indeed, in the past we've never used it. The purpose of it is to mitigate the taxpayers' risk in cases where a lender is egregiously abusing the program. That's the reason we would not support changing the existing provision from 24 hours to seven days. Clearly, the major lenders have no difficulty in informing their branches of interest rate increases, for example. I don't see any reason why they shouldn't be able to inform their branches of a change in CSBFA eligibility within 24 hours.

Are there any questions or comments on that?

The Chair: Mr. Webber, I had hoped that you would take us through the different things we've heard, and then we would move on to questions. Otherwise, it could get extremely lengthy, unless committee members want to do it item by item.

Mr. Peter Webber: Okay, fair enough.

With regard to subclause 7(1), the purpose of the provisions they're proposing to eliminate is to ensure that lenders take their responsibility in respect of loans they have made to the same borrower. We are not asking them to know about every loan that has been made to this borrower by every lender. We're only asking them to make sure that if they know about a loan because they've given that loan to a borrower, they will ensure that the new loan that is being made falls in aggregate beneath the $250,000 limit. This is a provision that specifically responds to the Auditor General's concern about project splitting. It's a consequence of that. It is a new provision. But we're not asking them to know about all loans that have ever been made to this borrower, only about those loans they made themselves.

With regard to subclause 9(2), this is an interesting debate we're having with lenders. As the law is currently structured, it is conceivable that a lender could only submit their annual administration fee in respect of a loan on which they want the government to pay a claim. In our review of the existing act we determined that although there haven't been instances of that happening in the past, the law is structured in such a way as to make it possible. This was clearly not Parliament's intention in respect of putting the annual administration fee in place. It was to ensure that the revenues resulting from the program cover the cost of claims. But we can't protect the revenue base without ensuring that all loans that are made under the program are subject to the annual administration fee. So that's the reason this sanction is there. If you don't pay your annual administration fee with respect to one loan, we're not going to be liable with respect to the rest of your portfolio.

• 0915

That is the reason the sanction is there. It certainly has caught the attention of lenders, and I suppose that's the purpose of it.

With respect to subclause 13(1), pilot projects, we were puzzled by this because the Small Business Loans Act, as it is now, and the Canada Small Business Financing Act, as it is proposed to be, is a voluntary participation program. There is no requirement for any lender to participate in this program; they do so of their own choice. So it seems to us that this is a redundant proposal.

With respect to subclause 15(1), the proposal to include a 21-day notice period appears to us to be reasonable. Given the circumstances described to the committee yesterday by the Canadian Bankers Association, it seems to be a reasonable proposal, and we're suggesting that perhaps 21 days is a more reasonable period of time for them to pull this together.

With respect to the second proposal concerning that section, drafters suggested that we put these words in for greater certainty. It is a drafting style; however, we're satisfied that the rest of the section achieves what we're looking for, and if the committee wanted to delete these words, that would not be a problem.

With respect to subclause 15(2), this is something we're going to have to discuss with the CBA in more detail to find out exactly what they're trying to do here. We think we've captured that sense in subclause 15(1), because it refers to the act and regulations being complied with in respect of a loan. So we're not sure. It seems to us that they're deleting in one place and now adding another provision in another place—in one instance, to reduce redundancy, and in another case it seems to increase redundancy. We're meeting with them next week, and we'll hopefully have an opportunity to clarify that with them. So we're neither in favour of nor opposed to, at this point, because we just don't understand what it is they're trying to accomplish.

With respect to subclause 15(3), their proposal that the audit and examination take place on site is acceptable—no problem there. The provision of a report to lenders after the audit is completed, again, is acceptable.

Subclause 15(4) is more problematic, because with respect to subclause 15(4), if a lender fails to comply with any of the requirements of this section—that is, providing documents and cooperating in the audit—then we have to have some sanction. The auditors must have some sort of a lever to ensure cooperation, even in circumstances where it's not favourable to the lender. This is the reason why these words are in here, and we're prepared to discuss with them how we can ensure that the sanction is real. If they don't understand what we're trying to get across with these words, perhaps we can discuss it with them. But certainly our intention is to make sure the audits happen when they're needed and that there is a real sanction if they fail to comply.

• 0920

With respect to the general section, and those two items, we don't feel it is appropriate to put them in the act. Currently, we are providing lenders, and everyone else, with information about their positions in respect of the lending ceiling. Yesterday, Mr. Powell indicated to the committee that he has no problem getting the information he requires.

We're not sure it's necessary to put it in the act. Certainly, there is a requirement in the act, or at least in the bill, for annual reports to Parliament. We will provide as much information as necessary there. We just don't feel these proposals are necessary.

With respect to the provision for 90-day notice, this too is problematic. Clearly, that's the purpose of the legislative process. Everyone is given notice when a bill is introduced. The legislative process takes time and everyone has an opportunity to participate in it.

As far as regulations are concerned, there's an established process for dealing with regulations. We go through this process every time, and we seek input and consultation on all of the regulations we put in place.

A 90-day notice period would make it difficult for us to use the regulations to cut off an abuse of a program when we become aware of it, increasing costs to the taxpayer. Similarly, it seems as though it substitutes a new standard for this bill that doesn't exist in other legislation and other regulations. So we would not be supportive of that.

With respect to the question of the Canadian Restaurant and Food Services Association, certainly you've heard over the last couple of days that there are some concerns about the proposed bill and related regulations. In particular, there is a concern that they would exclude franchises from using loans under the program. It's clear the exclusion of any class of loans from the loan guarantee program would require a government policy decision. Those policy decisions taken by the government are clearly outlined in the proposed Canada Small Business Financing Act before you today.

The results of our comprehensive review did not suggest the exclusion of loans made to franchises from the loan guarantee program, nor is it the policy intent of the government. If the effect of the draft regulations would result in the exclusion of franchises from the program, this wording will have to be amended.

• 0925

The fundamental purpose of releasing the draft regulations at this time is to facilitate discussions with stakeholders. As Mr. Lastewka said at the outset, this is the first draft of the regulations, and what you've heard from stakeholders is evidence that they received these regulations at the same time as the committee did. If there are problems with them, that's because we haven't had a chance yet to have detailed discussions with them to determine what ways are best to reflect our attempt to draft a policy and put it into the regulations.

So with respect to that, I'd pass on to the two principal issues raised by the CRFA the day before yesterday before the committee.

First is the question of existing leasehold improvements. This has been a problem for the SBLA and we expected that there would be continuing problems with the CSBFA. The problem we've encountered, at least the anecdotal evidence we have received, from audits of claims of loans under the program suggests that existing leasehold improvements add no economic value, are not incremental, which of course is one of the issues raised by the Auditor General in his remarks before the committee earlier this week. Incrementality is an issue.

Second, financing of existing leasehold improvements seems unnecessary to us inasmuch as there should be a way of negotiating the rent to include the added value of those existing leasehold improvements. After all, the landlord gets a benefit when a franchise operation or anyone else who's made a leasehold improvement decides to go out of business. The existing leasehold improvements, such as carpets, tiles, the paint and wallpaper, and the lighting and what not, remain in the location, and the landlord gets the benefit of those improvements. Usually he or she gets them at no cost to themselves, particularly in the case of a wind-up situation. If we've already financed them under the Small Business Loans Act or the proposed Canada Small Business Financing Act, to finance them again adds more potential cost, adds greater risk, and with no realization value.

With respect to the question of the 50% buy-back rule that's proposed in the regulations, this issue is particular to franchisers and certain arrangements between manufacturers and their distributors. It's often the case that you have proprietary equipment that cannot be used except by a franchisee of the franchisor. To use an example from the Canadian Restaurant Association's membership, there are, as they call them, quick service restaurants that have french fry fryers that are proprietary to the franchisor. When a franchisee goes out of business, the liquidator tries to find a market for these fryers and determines that there is no market for them except the franchisor, who can set whatever price he or she wants to buy them back and can then sell them back to a new franchisee at their full value, using again the Canada Small Business Financing Act to finance them.

• 0930

This to us seems to be an abuse of the program and is something that adds cost. That's the reason we feel we need to address this issue.

Now, having said that, and as I said at the beginning of this section, the fact of the matter is that we are not lenders and we need to discuss with the lenders and with other stakeholders how best to solve this problem. If this is not the way, then we have to find another way.

I'd propose to stop there, unless you would like me to go on and address some of the issues that the Auditor General raised with you a couple of days ago. I'm in your hands.

The Chair: Mr. Webber, I appreciate your comments.

Just for a bit of clarity, in the Minutes of Proceedings from Wednesday, October 7, when you first appeared before the committee, I don't recall—and I reviewed it again briefly this morning—anything that talked about existing leaseholds being excluded. There was a lot of talk about how things would continue the same. So I'm a bit concerned that we haven't had any evidence, or had the opportunity to hear from any witnesses, about how that would affect their loan. Aside from the franchisor, I think it's a policy change; it's not so much a regulation change. I'm a little dismayed that we were led to believe on October 7 that there were no substantial changes in the legislation. So now we've had no witnesses, and as chair, I find myself in a real quandary here because we've had witnesses who talked about their success stories that dealt specifically with existing leaseholds.

Maybe you could clarify for us where this comes from in the draft regulations.

Mr. Peter Webber: Well, with respect to the existing leasehold improvements, it was included in the documentation that we gave to the committee and published at the time of the introduction of the legislation. I think what we said in our presentation on October 7 was that all the major program parameters remained in place.

The Chair: And one of those guidelines for the SBLA specifically said that existing leaseholds were allowed to be financed. We've had that testimony from other witnesses, not just from the bank. So you're changing one of the major guidelines, yet that wasn't pointed out to the committee on October 7.

So I'm just a little dismayed that I may not have called the right witnesses before the committee to give a proper airing of this bill and the draft regulations, because that wasn't pointed out to us. I'm just concerned that buried in one of the five volumes that were given to the committee members, and it was not pointed out in your brief by any means, was this major change.

Mr. Riis.

Mr. Nelson Riis: Perhaps it would be helpful regarding the point you're making, Madam Chair, to have Mr. Webber describe the extent to which this is a problem. The implication is that this is a significant problem to require a significant change. Could he help us understand how significant this problem is?

The Chair: Yesterday I suggested you might want to provide evidence of loss ratio this morning.

Mr. Serge Croteau (Director General, Programs and Services Branch, Department of Industry): We do not have, at this time, statistical data that are reliable on the operations with franchises. We started to collect these data in 1995, and as you know, it takes two to three years on average before we start to see the real default rate developing on these loans. So it will take still a few more years before we have reliable data.

What we have at this time is the experience of a number of cases where it was noted by our claim officers that there might be a way of abusing the program in this respect. So what is being attempted here is just to close the door to a possible loophole.

• 0935

The Chair: Okay. I should probably proceed to questions from committee members now.

For the committee members who arrived after the presentation began and who were not here at the end of yesterday's meeting, due to the fact that we received several pieces of information yesterday and some comments on the draft regulations, I proposed yesterday we would delay clause-by-clause to the beginning of next week.

I will be in the hands of the committee after the end of the questions if you have consensus to proceed with clause-by-clause. If there isn't consent, we will delay it until the beginning of next week.

Madame Lalonde.

[Translation]

Ms. Francine Lalonde: I'm sorry, Madam Chair, but the officials have not had an opportunity to comment on what the bankers have said about the regulations. Among other things, the second comment by the bankers dealt with guarantee requirements. They pointed out that that was a new requirement and would mean that guarantees for loans given under the program have to be the same as those for other loans not covered by the program. It was the first time they had heard about this and they said that the result would be diminished access to credit for non-SBLA programs, which seems to go completely against the spirit of the SBLA. I was very surprised to hear their comments. Before asking any questions, I would like to hear your views on this.

[English]

The Chair: That's right.

[Translation]

Mr. Serge Croteau: In my opinion, we are not asking lenders to take any measures beyond those that they already take for their conventional loans. The various provisions in the regulations, I am told, are in accordance with standard banking practices. I would point out once again that we have not had an opportunity at this point to hold discussions with the various lenders. We have published draft regulations which we submitted simultaneously to the members of the committee and the various lenders. We will need to sit down with them, look at the interpretation problems they have identified and amend the regulations as necessary.

[English]

The Chair: Mr. Croteau, just to clarify then, from your knowledge of lending, and I'm assuming there's some expertise in the department, do the banks not have criteria in place that have a risk factor that would be different from the risk factor under the former SBLA and the new CSBFA?

Mr. Serge Croteau: That is possible. We do not have access right now to the procedures banks are using for their conventional loans. This is one of the changes we are going to implement with this bill.

When we ask the lenders to apply the same due diligence for SBLA loans as they apply for their conventional loans, it means they will have to let us have access to their existing procedures, which I'm sure will vary from one lender to another. But at present, the various lenders do not give the department access to their procedures in conventional lending.

The Chair: But could you clarify for the committee, before I turn it over for questions, the purpose of the CSBFA and why it exists?

Mr. Serge Croteau: The purpose of this act is to allow lenders to enter into a risk sharing arrangement with the government so they can go into riskier loans they would not otherwise entertain without the program. That's why one of the criteria under the program looks at incrementality—how many of these loans are really incremental and how many would be of a riskier nature.

In general, lenders do not entertain very small loans. As you know, the average loan under this program in the past has been around $67,000 to $68,000. This is not the category of loans the normal lenders would entertain without a loan insurance-type program.

• 0940

The Chair: Perhaps the CBA has misinterpreted what you wanted out of the regulations by the fact that they're suggesting part of their due diligence criteria is a risk factor. You've just clarified this will obviously be a higher-risk arrangement they would enter into. So you're not asking them to apply the same criteria for risk as for these loans.

Mr. Serge Croteau: It wouldn't necessarily be the same criteria for risk, but it would be the same procedures to assess the risk factor of a project.

In other words, if they use a business plan for a certain size of loan, we would like them to use the same methodology for a loan that is authorized under the program. Obviously, when the level of risk is assessed, the lender will decide if they will go with a conventional loan without the program, knowing the risk of the loan, or if they want to use the program for that particular loan because of the level of the risk. Even with the program, the project may be so risky they may not entertain the application for the loan.

The Chair: Okay. Thank you.

I will now turn to questions.

Mr. Pankiw, do you have any questions?

Mr. Jim Pankiw (Saskatoon—Humboldt, Ref.): Mr. Webber, with respect to the existing leaseholds concern, I think you're missing something, or you're not looking at this the right way.

In the case of a restaurant going out of business and the landlord inheriting the leasehold improvements, I don't really see how a new entrepreneur opening that space up would be in a position to purchase those leaseholds from him. It would, of course, be written into the lease agreement with the landlord.

I can't speak for the CRFA, but I believe they're talking about the case of an existing restaurant that's in business. That guy sells his business to another person and there are existing leaseholds, which have a value. In that case, the guy purchasing the new business has to finance the leaseholds, and the new regulation would exclude him from financing them.

Mr. Peter Webber: In most instances, my recollection is we have asked our claims officers to look at the degree to which, in their experience, existing leaseholds form a significant portion of claims. They have indicated to us that around 20% of claims have existing leasehold improvements as one of their factors. This is a very significant portion of claims.

It is possible that situations such as the one you described, which may well be legitimate, are not being captured. But the fact of the matter is, as other witnesses before the committee have indicated, the CSBFA is not intended to fill all financing gaps for small and medium-sized enterprises. It is intended for asset-based term financing.

With the kind of existing leasehold improvements you're talking about, there should be no reason why they can't finance them outside the CSBFA if they're a good credit risk. If they don't need to use the CSBFA for financing the existing leasehold improvements, if they can't use them, there should be no reason why they can't negotiate a new rental agreement with the landlord.

In many cases we've already financed these existing leasehold improvements once, and we are not adding any economic value. By lending to them again, the loan itself is not incremental. That's the rationale. If, however, the proposed provision has an unintended effect—and this is something we'll have to discuss with the lenders and the CRFA—obviously we'll have to review that.

• 0945

These are draft regulations. It's a consultations draft. These are not tablets from Mount Sinai, so they can be changed.

Mr. Jim Pankiw: I'll just finish this off then. You say arrangements could be made with the landlord, but I'm saying no, they couldn't. If I own a restaurant and I'm going to sell it to a new person who needs to use the CSBFA, then it's got nothing to do with the landlord. I own those leaseholds. I put them into that space. I'm selling them to him. He has to gain access to financing for that. You said to get it somewhere else, but look at the whole point of SBLA. It's not that I agree with it, but nonetheless, in this case, the whole point is that if he can't get it somewhere else, that's why he's using the SBLA.

You also say they've already been financed once—maybe. I don't really see that as meaningful or significant. I suppose there could be cases when a business might be purchased by somebody who used the SBLA to purchase it. He may own that business for a few years and end up selling it to somebody else who uses the SBLA to purchase it. Why can't things be financed numerous times through different owners for the same thing?

You also said that 20% of the claims are for existing leaseholds. But again, I don't think we should sit here and say that's too high. Leaseholds are part of many business purchases that factor in, so you might say that seems about right. If you purchase a business, there's goodwill, leasehold improvements, and equipment. It's just part of a business. So you would expect it to form a certain percentage of the claims on the SBLA.

Mr. Peter Webber: Yes, that's true, but as I say, they provide no value. There's no realization value. Second, leasehold improvements, in essence, in that situation, are very much like goodwill, and we don't finance goodwill either, because the price of existing leasehold improvements is a negotiated price between the two parties and there's no market test for it.

Mr. Jim Pankiw: Finally, I have only one other thing I have to ask of you. You say these are just draft regulations, but I still haven't really heard a sufficient answer to the question posed by the chair of this committee about why major policy changes are coming forth in the form of regulations.

Mr. Peter Webber: I guess this is a question of interpretation. We did not regard this as a major policy change, but clearly the committee does. That's a difference in perspective. Certainly, it was not our intention to eliminate a class of borrower or try to hide this. Indeed, it was referred to in a document that was published at the time the legislation was introduced called Access to Financing for Small Business: Meeting the Changing Needs. It's partly as a result of that document being published and the draft regulations being published that people are becoming aware of this.

I guess I can't say anything more.

The Chair: Thank you.

With all due respect, Mr. Webber, I pointed out yesterday that it was buried on page 21. I reviewed your testimony on October 7 because I would have thought something like that would have been pointed out specifically to the committee at the time of your testimony, in the briefing opportunity, when you handed us a binder that was four inches thick.

We only have the evidence now of what we've heard based on the witnesses we called before the committee and based on what we thought was in the draft regulations of the bill.

• 0950

We had the CRFA before us. They told us it will basically exclude them. Yesterday we heard that 17% of the financing is restaurants, and the CRFA is a large part of that.

So if that's not a policy change, I'm sorry if we're misinterpreting it as a committee. However, I'm a little distraught that the briefing session did not point out what would be coming down the road, and when we asked for clarification on many issues— I have the minutes in front of me, and maybe I'm missing in the minutes something that was said.

There's a responsibility on all parties to read. However, I don't expect committee members to find one line on page 21 out of about 500 or 600 pages that have been submitted to us to read.

Now I'm going to go to more questions.

Madame Jennings.

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): You may have already covered this in your presentation. I apologize for not being here for that presentation. I was at another committee meeting.

You state that you feel there's a loophole in the existing act, which allows existing leaseholds to be refinanced under SBLA, and there is no value added, no incrementality, and you thought the best way to close this was through the regulations. You also state that in your document, Meeting the Changing Needs, the issue of closing up this loophole is in fact mentioned in there.

I have to say

[Translation]

that this did not exactly jump out at me, even though I read the document as soon as I got it. I would like you to give us the date when you decided to address this problem and to do so by amending the regulations rather than the legislation itself.

[English]

Mr. Serge Croteau: These discussions occurred as we were drafting both the act and regulations; at what point exactly, I could not answer that.

We have been aware for some time that there was the possibility of an abuse there, when the leasehold improvements are resold again and again and again. Some of our claims officers indicated to us that they were receiving claims on the same leasehold improvements several times.

We were aware of that problem, so probably when we were drafting the regulations, when we dealt with specific aspects of claims, we thought the appropriate way was to handle it through a change in the regulations.

Again, the wording we have now may not be the wording to do it without causing prejudice to other situations, and we are certainly prepared to discuss that with stakeholders and come to an agreement on what would be a provision that would close the loophole but would not prevent legitimate access to the programs.

[Translation]

Ms. Marlene Jennings: You say yourselves that there are no reliable data—

Mr. Serge Croteau: No, there are no scientific data.

Ms. Marlene Jennings: —that there is in fact a loophole that goes against the objectives of the legislation and that there is abuse. I wonder if certain proposed amendments to the legislation are aimed at setting up a data collection system that will help us to ensure that the objectives are indeed met, that problems are identified and that provisions of the Act and the program are revised as needed. I wonder if the fact that you have no reliable data is actually a premise based on anecdotal evidence.

Why have you decided to move immediately to change the policy, rather than setting up the data collection process so that, two or three years down the road, it will actually be possible to determine whether the loophole still exists and if there is abuse? We would then be in a better position to suggest amendments to the legislation.

• 0955

Mr. Serge Croteau: I will answer by saying that we now know that there is a loophole. We do not have the statistics we need to assess the impact of one case on all claims under the program. If we waited until we had those statistics, we would leave the door open for abuse to continue during the period that the data would be collected, and we would be able to demonstrate only afterward that there really was a major problem, not that we are suggesting today that this is the case. We know there is a loophole and we feel that it should be closed now, if this can be done without penalizing anyone using the program legitimately.

Ms. Marlene Jennings: Have you discussed this with restaurant owners?

Mr. Serge Croteau: No, we have not yet discussed it. We have sent out the draft regulations to the other stakeholders at the same time as we sent them to you. No one has had time as of yet to organize meetings to discuss points that may be controversial.

As we were saying, we will meet with the bankers next Monday and we plan to hold other meetings with the other program users, including the members of the restaurant owners association. We should then be able to present proposals that will meet the needs of those using the program in a legitimate way.

Ms. Marlene Jennings: Thank you.

[English]

The Chair: Thank you, Ms. Jennings.

[Translation]

Ms. Francine Lalonde: I will start with a comment. It seems to me that we are in a strange situation, since we are being asked to give our views on legislation whose impact is unknown.

I would like to know if changing the structure of the Act and withdrawing its regulations is not linked to your discovery that you could amend the regulations without amending the Act. That is the conclusion that I have come to after listening to you.

Mr. Serge Croteau: I do not believe that that is why we have proposed the present structure. As we explained in the various meetings, including the one you attended, the basic reason is that, given the cost recovery objectives for the program, it would be useful to have tools that enable us to adjust certain aspects of the program quickly if the program is no longer meeting the cost recovery objective. That is why we have presented this recommendation aimed at withdrawing certain provisions that used to be in the Act and putting them in the regulations.

Ms. Francine Lalonde: It is understandable that bankers would be a bit nervous about the regulations and that they are asking for 90 days' notice. You were saying that you felt that this was a little bit excessive, but given what we have just heard, we can understand that they are asking for some time. Do you agree with me on that?

Mr. Serge Croteau: We have never discussed the 90-day period as such, but this is an objective that we are trying to meet. We are concerned that if this is put in the Act, there will be problems. However, it is something that we have committed ourselves to doing with the various lenders. We are very much aware that lenders will have to prepare their branch to adapt to the amendments that may be brought in. They may have to give training to their employees. They need to be given a reasonable amount of time, and that is what we are doing at present.

For example, if the bill were passed in December, and the regulations were passed only in mid-February, and if the Act called for a 90-day notification, before the provisions came into force, the program would end only on March 31st and there would be no program in place for the one or two months following that. We might then face situations that may not be desirable.

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Ms. Francine Lalonde: In any case, the way I understand it, what is being proposed changes the spirit and the application of the Act considerably.

I would like you to come back to the second concern expressed yesterday by the Canadian Bankers Association regarding the guarantee requirements. You seem to be saying that their fears are unfounded. Section 12 of the regulations stipulates very clearly that the guarantees required for a loan under the present part must be the same as those required for other loans. The bankers were telling us that this would reduce the borrowing capacity of small business owners and business executives.

Mr. Serge Croteau: I am not sure if I understand that point of view. We already asked them to have the same loan guarantees under the program as for conventional loans. Perhaps they're suggesting that we go beyond their current procedure, which is something that we could discuss with them. I know that we set out a condition that may seem to go beyond what they do at present, but I am told that, in situations similar to those that we address, they have the means to reduce their risks. Once again, these are questions that we would like to discuss with them next week. We are interested in knowing what wording they would suggest. As I said, these draft regulations have just been published.

Ms. Francine Lalonde: Madam Chair, it would be interesting to hear the discussion between the Canadian bankers and the departmental officials. It seems to me that this all extremely vague.

Subsection 12(8) of the regulations reads as follows:

(8) If the borrower is a tenant, the lender must obtain a waiver from the landlord relinquishing the landlord's right to seize assets—

The bankers told us that this was almost impossible to do. This is in addition to the other provisions on leasehold improvements.

Mr. Serge Croteau: Our files show that a number of lenders do this at present, while others do not. We will no doubt discuss this issue with lenders, who do not necessarily all take the same approach. They may do the same thing for their conventional loans, but there again, I am sure that we will discuss this next week.

Ms. Francine Lalonde: It is interesting to note that Mr. Riding, who did a study for the Auditor General, pointed out that it's important to identify priorities because, among other things, there has been no macroeconomic longitudinal study done to show the macroeconomic impact of this program.

Moreover, constraints have been proposed, with good reason, by the Auditor General, who is concerned about the management of public goods. The fact that this program is useful on the macroeconomic level may be more important for Canada and Canadians than a temporary increase in loan defaults. Have you given any thought to that aspect and would you have any suggestions for the members of the committee? I feel that the aim of this program should be to contribute to the Canadian economy and not the reverse.

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Mr. Serge Croteau: It is certainly important to do an in depth study of the cost and cost recovery aspects of the program, which we have not been able to do up to this point, as you just mentioned. A more detailed economic study will be necessary to identify the indirect impact of the program. For example, when jobs are created, employment insurance payments go down, employees begin to pay taxes again, etc. We intend to do a study of that sort, which will enable us to assess the benefits of the program.

Ms. Francine Lalonde: Priority is thus being placed on cost recovery.

Mr. Serge Croteau: I must admit that that is what we have focussed on recently. In the future, we will be able to look at the benefits of the program. But we have to develop data banks and do more in-depth studies.

Ms. Francine Lalonde: But in the meantime, the Act and regulations are drafted in such a way that the priority is given to cost recovery.

[English]

Mr. Serge Croteau: They're just mentioning that this is also part of the evaluation framework,

[Translation]

of the program evaluation framework that has been presented and that confirm that we want to head in this direction because we do not have any studies of that type at present.

The Chair: Thank you, Madam Lalonde.

[English]

Mr. Keyes.

Mr. Stan Keyes (Hamilton West, Lib.): I have a point of order, Madam Chair.

The Chair: Mr. Keyes, you don't need a point of order to have the floor.

Mr. Stan Keyes: I have a point of order just to begin. I'll move toward the point I'd like to make, and maybe members would agree with this.

I think we're agreed that the spirit of the legislation is being breached by suggested regulatory changes, changes that we committee members are not aware of and are certainly not comfortable with. It seems to me that there are many assumptions being made by the department, causing us of course to ask questions in a void. It's certain that we need to hear from more witnesses who might be directly affected by these changes to the regulations. I think we need to do more work, to hear more witnesses. So with the indulgence of the committee, and if it so agrees, and to ensure that the motion can be debatable, if you care to cause debate, I'd move that this committee send the department back to the drawing board and that we now adjourn.

Mr. Nelson Riis: I'm sure there are many other questions that need to be examined as well. I'm thinking of the voluntary pilot study and so on. I think Mr. Keyes is correct. This legislation, we've been told, is exemplary government legislation, that it has made a difference for a lot of people. I realize not everyone around the table is an enthusiastic supporter, but I suspect most are, and the kind of feedback we got from our constituents was exciting feedback at the chance of not only maintaining this legislation but expanding it to include some other possible opportunities.

The fact that the witness two days ago indicated this would exclude their sector I think is something that we obviously have to pay more attention to.

So I want to support the suggestion that we come back to the table with perhaps additional witnesses. It seems to me that we're onto something so valuable here in terms of assisting this small and medium-sized business sector of our economy that to put together a piece of legislation that is even marginally flawed at this point would be inappropriate.

I want to say, as someone who has sat on a lot of committees, that this is the way a committee should operate. It should not feel some obligation to plough through just for the sake of getting a piece of legislation through, but be dedicated to see it get through in as positive a way as possible.

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So I think the committee should follow the advice of Mr. Keyes. We should adjourn now, then come back and maintain the quality of discussion I've heard around this table. As a long-standing member, I've been very impressed.

The Chair: Thank you, Mr. Riis.

Mr. Lastewka.

Mr. Walt Lastewka: I understand the frustration. I think the important thing is that there are some items to be discussed regarding the regulations, at least with the restaurant association and the bankers.

I was waiting to get on the list to speak. My question was this. The bankers understand there is a problem. They said this yesterday when I asked them the question, and they said they had a resolution to the problem. I think it is important to hear the bankers on their resolution of the problem, which they understand. This might help us to better understand the leasehold problems.

My understanding is not that we want to stop leasehold improvements; it is that there is a problem of passing down, passing down, passing down, and with all the manipulations that go on between the landlord and the tenant, and the future tenants. The bankers are aware of this. So let them come forward with their resolution.

Hopefully the restaurant association understands this, and they too agree on that resolution. Then we could proceed with the bill.

This is the main item of disagreement. Am I right? Are there other areas requiring significant discussion? Then I think we should hear from the group.

The Chair: Mr. Lastewka, we already have a motion on the floor, and we are discussing it. So we will try to stick to the original commentary and include yours in that.

Madam Lalonde.

[Translation]

Ms. Francine Lalonde: Madam Chair, at this point, I am pleased with the motion. I was saying a little earlier that we are being asked to pass something whose impact we do not understand. A lot of people say that the present legislation is flawed, but at least it produces good results. Before amending it, we must make sure that the changes are improvements. We are not sure of that now, and that is why I agree with Mr. Keyes. I understand Mr. Lastewka's point of view, but I have to ask myself, Madam Chair, and I hope you can answer this: were the regulations considered by the Canadian Federation of Independent Business and did that organization have an opportunity to present its views?

[English]

The Chair: In fact, Madam Lalonde, CFIB appeared before the committee before the draft regulations were available. So we haven't had a response from them yet on the draft regulations. One of the concerns of the committee was that the draft regulations would come sometime during our hearings. I have not contacted them since they were received.

Madam Jennings.

[Translation]

Ms. Marlene Jennings: I would like to emphasize how pleased I am that the committee chair insisted that we receive the draft regulations. If we had not received them during consideration of the bill, we would be in the situation described by Madam Lalonde and Mr. Riis. Almost everyone around this table thinks that the program is generally working well and that the amendments proposed in the bill are good. But we would not have learned that there was a subsequent change in policy. I feel that the Act expresses the program's objectives very well. The regulations, as you have drafted them, represent a basic change in the thrust of the legislation. For that reason, I think that this is much more than a simple question of different perceptions; we are looking at a basic change in government policy expressed through this legislation. In my opinion, you are trying to bring in through the back door what you could not bring in through the front.

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Secondly, I do not at all like the fact that this policy amendment you are proposing has never been clearly flagged to the members of the committee and to the other stakeholders. As the chair has just mentioned, the Canadian Federation of Independent Business has not even had an opportunity to comment on the change. The representative of the Canadian Restaurant Association, who appeared before the committee, saw the draft regulations for the first time the very day he took the plane to come and testify before the committee. I congratulate him on being able to bring to our attention, despite such short notice, the difficulties that the draft regulations would create for his members. He had not had time to examine the regulations in detail, but he managed to prepare a written presentation and everything. I must congratulate him for that. My congratulations will appear in the records of this meeting.

I support Mr. Keyes' proposal. We should suspend our work and call more witnesses to give us their views on the proposed changes to the policy and on whether these changes should be enshrined in the legislation or in the regulations. It seems to me that such an amendment belongs in the legislation because it is aimed at the same objectives, but I will let the other witnesses and committee members come to a consensus on that point. Thank you.

[English]

The Chair: Thank you, Madam Jennings.

Mr. Riis, do you have another point?

Mr. Nelson Riis: Briefly. To elaborate on Madam Jennings' point, when the representative of the restaurant association appeared, it's my recollection that he came in rather breathless and with no brief. He said he'd written some stuff on the plane when he was arriving, and then he followed up later with some more detailed work. This is a reflection of part of the problem, that a lot of people are going to be adversely affected by this in coming late into the decision.

The Chair: I'll clarify, Mr. Riis. We had asked if they wanted to appear originally on the legislation, and the CRFA said they didn't have any problems with the legislation. When reviewing the draft regulations on Monday, and talking to the different franchisors, Mr. Ferrabee realized that there were grave concerns and contacted the clerk and asked to appear Monday afternoon. On Tuesday we were able to confirm a time with him, and he arrived by plane for the Tuesday afternoon meeting.

Mr. Nelson Riis: Thank you for that clarification.

The Chair: He actually came up to Ottawa on Tuesday without knowing that we were going to hear from him, just hoping we would do so.

Mr. Nelson Riis: But I do think it does reveal some of the issues we're debating.

Because of my spotty attendance, I'll just raise this before we vote on this motion, but thanks to Mr. Keyes we've identified a course of action to deal with what has become a bit of a problem.

Does the issue of the volunteer pilot study require any more consideration? It seems to me, as I say, from my spotty attendance, that we could use more work on that, but I'll leave it up to the chair or the committee to determine.

If we're going to continue hearing a few more witnesses—

The Chair: Mr. Riis, we have heard from two or maybe three witnesses now from different aspects of the volunteer—

Mr. Nelson Riis: If the committee feels that—

The Chair: We've had some difficulty in finding people who actually speak to pilot projects, because they're not sure. We're open to more witnesses if we decide to go ahead with more witnesses, if you have any suggestions, but to date we've been looking and we've brought what we could to the table.

You had a comment as well, Mr. Pankiw?

Mr. Jim Pankiw: Yes, a brief comment.

As Madam Jennings pointed out, not everybody is in agreement with this legislation, and that's really only me because I don't think it's the right way to address the problem of access to financing. It's the wrong approach, but that's not the issue.

I have a letter here from the Minister of Industry. It's a form letter he sent out to stakeholders that contains five major points. The first one is that all major program parameters will remain in place. So in light of that, I am favourable to Mr. Keyes' motion.

The Chair: I'll call the question.

All those in favour of Mr. Keyes' motion that we hear further witnesses and that we adjourn? All those opposed?

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Mr. Keyes, you didn't say we should hear further witnesses?

Mr. Stan Keyes:

[Editor's Note: Inaudible]

The Chair: I'm sorry, but before we adjourn, could someone move a happy amendment that we'll call further witnesses?

Mr. Jones. And Madam Lalonde seconded that.

(Motion as amended agreed to)

The Chair: The meeting is now adjourned.