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37th PARLIAMENT, 1st SESSION

Standing Committee on Industry, Science and Technology

EVIDENCE

CONTENTS

Tuesday, April 16, 2002

0905

The Chair (Mr. Walt Lastewka (St. Catharines, Lib.))

0910

Mr. Robert Dunlop (Director General, Small Business Policy Branch, Department of Industry)

0915

0920

The Chair

Mr. James Rajotte (Edmonton Southwest, Canadian Alliance)

Mr. Robert Dunlop

Mr. James Rajotte

Mr. Robert Dunlop

Mr. James Rajotte

0925

Mr. Robert Dunlop

0930

Mr. James Rajotte

Mr. Robert Dunlop

The Chair

Mr. James Rajotte

Mr. Robert Dunlop

Mr. James Rajotte

Mr. Peter Webber (Manager, Small Business Financing Policy, Department of Industry)

Mr. Robert Dunlop

The Chair

Mr. Alan Tonks (York South--Weston, Lib.)

0935

Mr. Robert Dunlop

Mr. Alan Tonks

Mr. Robert Dunlop

Mr. Alan Tonks

Mr. Robert Dunlop

Mr. Alan Tonks

Mr. Robert Dunlop

0940

The Chair

Mr. Brian Fitzpatrick (Prince Albert, Canadian Alliance)

The Chair

Mr. Brian Fitzpatrick

Mr. Robert Dunlop

0945

Mr. Brian Fitzpatrick

Mr. Robert Dunlop

0950

The Chair

Mr. Andy Savoy (Tobique--Mactaquac, Lib.)

Mr. Robert Dunlop

0955

Mr. Andy Savoy

Mr. Robert Dunlop

Mr. Andy Savoy

Mr. Robert Dunlop

1000

Mr. Andy Savoy

Mr. Robert Dunlop

The Chair

Ms. Cheryl Gallant (Renfrew--Nipissing--Pembroke, Canadian Alliance)

Mr. Robert Dunlop

Ms. Cheryl Gallant

Mr. Robert Dunlop

1005

Ms. Cheryl Gallant

Mr. Robert Dunlop

The Chair

Mr. Robert Dunlop

Ms. Cheryl Gallant

Mr. Robert Dunlop

Ms. Cheryl Gallant

Mr. Robert Dunlop

1010

Ms. Cheryl Gallant

The Chair

Mr. Stéphane Bergeron (Verchères--Les-Patriotes, BQ)

Mr. Robert Dunlop

Mr. Stéphane Bergeron

1015

Mr. Robert Dunlop

Mr. Stéphane Bergeron

1020

Mr. Robert Dunlop

The Chair

Mr. Larry Bagnell (Yukon, Lib.)

The Chair

Mr. Larry Bagnell

Mr. Robert Dunlop

Mr. Larry Bagnell

Mr. Robert Dunlop

1025

Mr. Larry Bagnell

Mr. Robert Dunlop

Mr. Larry Bagnell

Mr. Robert Dunlop

Mr. Brian Fitzpatrick

1030

Mr. Robert Dunlop

Mr. Brian Fitzpatrick

Mr. Robert Dunlop

The Chair

Mr. Brian Fitzpatrick

Mr. Robert Dunlop

The Chair

1035

Mr. Brent St. Denis (Algoma--Manitoulin, Lib.)

Mr. Robert Dunlop

Mr. Brent St. Denis

1040

Mr. Robert Dunlop

Mr. Brent St. Denis

Mr. Robert Dunlop

Mr. Brent St. Denis

The Chair

Mrs. Bev Desjarlais (Churchill, NDP)

Mr. Robert Dunlop

Mrs. Bev Desjarlais

Mr. Robert Dunlop

Mrs. Bev Desjarlais

The Chair

Mr. James Rajotte

1045

Mr. Robert Dunlop

Mr. James Rajotte

Mr. Robert Dunlop

The Chair

Mr. Stéphane Bergeron

1050

Mr. Robert Dunlop

Mr. Stéphane Bergeron

Mr. Robert Dunlop

Mr. Stéphane Bergeron

1055

Mr. Robert Dunlop

Mr. Stéphane Bergeron

The Chair

Mrs. Bev Desjarlais

Mr. Robert Dunlop

Mrs. Bev Desjarlais

The Chair

Mr. Brian Fitzpatrick

1100

Mr. Robert Dunlop

1105

The Chair

CANADA

Standing Committee on Industry, Science and Technology

NUMBER 076

1st SESSION

37th PARLIAMENT

EVIDENCE

Tuesday, April 16, 2002

[Recorded by Electronic Apparatus]

¿ (0905)

[English]

The Chair (Mr. Walt Lastewka (St. Catharines, Lib.)): I call to order this committee meeting, pursuant to Standing Order 108(2), for consideration of the Business Development Bank of Canada further to subsection 36(3) of the BDC Act.

Before I begin I have two items I would like to bring forward. We have a proposed motion from Mr. James Rajotte to invite the ethics counsellor to appear before the House Standing Committee on Industry, Science and Technology. The motion is being translated. We'll have it later this morning and we will deal with it on Wednesday afternoon. I want to make sure everyone is given notice of this and we'll go from there.

I want to begin with the other item, concerning the Business Development Bank of Canada. As you know, this is the first of two scheduled meetings on the review of the Business Development Bank of Canada. Before we proceed I will cover a little of the background, because a number of you are new to this committee.

Subsection 36(1) of the Business Development Bank of Canada Act stipulates that five years after this act comes into force, and then every ten years after that, the designated minister must have a review of the provisions and operation of the act undertaken in consultation with the Minister of Finance. At that time we debated whether the first review should be after five years or seven. We settled on five and then every ten years after that.

Subsection 36(2) further stipulates that within one year after the review is undertaken, the designated minister must submit to Parliament a report on the review. Finally, according to subsection 36(3), the report must be reviewed by any committee of the Senate or the House of Commons or any joint committee that may be designated or established for the purpose of reviewing this report.

From time to time we look at other banking institutions, but we always prefer to be the committee that handles issues pertaining to the Business Development Bank. Sometimes the Senate will undertake to handle reviews of banking institutions.

The purpose of the meeting today is to review the report, which you have all received and have questions about. We'll spend time today with the reviewers in the department and then we'll have the president of the Business Development Bank to answer questions tomorrow afternoon. We will start tomorrow's meeting with the item on the motion and go from there.

Today we have Mr. Robert Dunlop and Mr. Peter Webber from the department.

Mr. Dunlop, I understand you're going to begin with some opening remarks, and then we'll open the meeting for questions.

¿ (0910)

Mr. Robert Dunlop (Director General, Small Business Policy Branch, Department of Industry): Thank you very much, Mr. Chairman and members of the committee.

I'm very pleased to present to you the report of the review of the Business Development Bank of Canada Act. This report was tabled in June 2001. It reviews the provisions and operations of the Business Development Bank of Canada Act, and analyses the bank's performance for the five years from 1995 to 2000.

First, I'll summarize the mandate review requirements and the manner in which we undertook the review. Second, I will be outlining the bank's current mandate, before moving to the key findings of the review. Finally, I'll close with a few points on the future challenges of the bank.

In my comments, I'll be trying to summarize the results of a 120-page report and a number of research studies. I'll keep my comments brief, focus on a few highlights, and then look forward to questions from the committee.

Please note that the review dealt only with legislative and mandate issues. We did not look at individual transactions or administrative decisions within the bank.

The review, its related research and consultations, and the development of this report were led by a committee consisting of the people from Industry Canada--my group--the Department of Finance, Treasury Board Secretariat, and officials from the bank itself.

Our objective was to review the current market conditions and compare them with those prevailing in 1995, when the act was passed. We looked at the performance of the BDC during a five-year period, with respect to the mandate it was given in the legislation, and through subsequent directives from the Minister of Industry. We then looked ahead, asking ourselves if the BDC's legislation or mandate needed to be changed to meet market demands and changes that have happened in the marketplace since the act was passed.

The research and consultations focused on trends and developments in the last five years in the financial marketplace for small businesses. The goal was to look at the gaps that were identified in 1995, which were risk, size, flexibility and knowledge, and gauge how relevant they are today in the financial services marketplace.

The review focused on the performance and operations of the bank over the review period, as it migrated from being a lender of last resort to a complementary lender. It looked at how the bank was able to balance its public policy mandate with its mandate to operate in a commercial manner, that is, to earn a rate of return at least equal to the government's cost of funds.

Two independent studies of the SME financing market were undertaken. One examined the market from the perspective of SMEs themselves, and the other examined it from the perspective of financial institutions serving small businesses.

I would also like to note that we included in our work the results of the 1999 special examination that is required under the Financial Administration Act. This special examination was undertaken by the Auditor General and the firm of KPMG. Those results were included and integrated into the work we did, as part of the review.

[Translation]

Before I proceed with the review findings, I would like to provide a brief overview of the Bank's current mandate.

The BDC was created in 1995 by an Act of Parliament that streamlined and modernized the structure and mandate of its predecessor, the Federal Business Development Bank. The mission of the BDC is to support Canadian entrepreneurship by providing financial and management services.

The principal changes in the Act involved transforming the role of the BDC so that the Bank would be a complementary source of SME financing, or complementary lender. The Act gave the Bank the power to provide financial and management services jointly with other institutions.

The Bank's new mandate is to be a pathbreaker, that is to pioneer new services and fill marketplace gaps that prevent SMEs from reaching their full economic potential.

In line with this goal is a focus on increasing activity in smaller loans, higher-risk term lending and venture capital, that is higher-risk financing activities that are not available elsewhere.

In 1995, analysts and policy makers were just beginning to see the importance of knowledge-based industries in terms of competitiveness and productivity growth, but the sector posed important SME financing challenges. In light of this fact, the BDC was tasked with designing and implementing services targeted to the needs of this sector.

I would like to turn now to the review report and its findings.

The first part of the report includes the Act's main features, the Bank's operating mandate, its governance, its evolution and an assessment of its performance.

The second part asks whether or not to continue the Bank's mandate in its present form, given current trends in SME financing and consulting.

The third part concludes with an outlook for the future.

The report's main conclusion is that the Bank's mandate remains as relevant today as it was in 1995 and no changes are required to the BDC Act at this time.

Many SMEs continue to face difficulties in getting the kind of financing they need for growth and technology adoption. However, SMEs remain as important as ever to the Canadian economy.

The financing gaps identified in 1995 are still present. As currently structured, the Bank has the mandate and the tools to continue bridging these gaps.

And finally, despite recent moves by domestic banks to target SMEs, early indications seem to show that their efforts will mainly benefit SMEs that are already well served by the traditional institutions.

In short, the review found that there is a sound public-policy rationale for a Crown corporation to continue serving SMEs that are unable to get either sufficient financing from traditional sources or products that meet their specific needs.

From an operational standpoint, the review came to several conclusions.

The Bank has delivered equally well on both its public-policy and commercial mandates and it continues to develop, refine and adjust its policies and initiatives.

The BDC has successfully moved from being a lender of last resort to one that works closely with a broad range of partners to fulfill its new role as a complementary lender. While developing initiatives with traditional financial institutions, it also provides lending, consulting and other services not generally available from those institutions.

¿ (0915)

The Bank continues to support the entire range of SMEs, including traditional sectors such as manufacturing and the wholesale and retail trade industries. At the same time, it has developed a particular expertise in serving knowledge-based and exporting small businesses.

[English]

I'd like to give a few key numbers to highlight their performance in the last number of years. From March 1995 to March 2000 the BDC's loan portfolio grew from $3.2 billion to $5.4 billion, a 69% increase. Since 1997 the bank has paid a total of $54.3 million in dividends to the shareholder, the federal government. Even though it has had a higher risk portfolio than most lenders, the bank's return on equity during this period has ranged from 3.2% to 18.7%, an average of 12.5% over the five-year review period.

As I mentioned earlier, the BDC is a niche player in the range of financial institutions offering their services to Canadian SMEs, with about 3.6% of the term lending market and approximately 2% of the venture capital market. As such it relies on partnerships and strategic alliances to extend its reach.

During the review we observed that the bank also complements the services of commercial financial institutions in a number of ways. These include encouraging more local decision-making and a personal approach; having a greater presence in rural areas; and developing a sensitivity to the needs of developing markets, such as tourism, cultural industries, and businesses run by youth, aboriginal people, and women.

Another area in which the bank has excelled is venture capital investing. The bank's venture capital division has been meeting the needs of knowledge-based industries, or KBIs, since 1983. Since its inception the division has invested close to $400 million in 300 companies, twice as many early-stage companies as the industry average. As a syndicated investor, the bank has achieved an investment ratio of about 5.6. In fiscal year 2000-01, for example, the $114 million invested by the bank in venture funds leveraged another $636 million in investments from other sources.

The bank has been instrumental in creating a new type of venture capital partnership to focus on seed fund investment. In these arrangements the bank and its partners provide capital for independently managed venture funds, focusing on very early-stage investments throughout the country, not just in the major areas.

In closing, Mr. Chairman, I'd like to offer a brief comment on the future challenges for the bank and its clients. Over the past few years private sector providers of financing have introduced a number of initiatives to address the needs of small business. This is a very dynamic market. We're watching trends in this market closely through the finance data initiative, and we will keep the committee informed of the results of that initiative. We look forward to seeing you in the not-too-distant future.

For the moment, though, we find that there is a need for the kinds of services the BDC provides and was mandated to provide in 1995. This does not mean that the bank's mandate should necessarily remain as is until the next official review in 2010. Industry Canada will continue to monitor the evolution of the financial marketplace and through the BDC's annual corporate planning process will ensure that the BDC's activities remain relevant to Canadian SMEs, as no doubt will this committee. If the analysis reveals a need, recommendations will be made to adjust the BDC's mandate.

The BDC has been successful in balancing its public policy mandate with its mandate to operate as a commercial institution and has demonstrated that it can be an innovator and a path-breaker. It has met, and continues to meet, the complex needs of Canadian small and medium-sized businesses and, in our opinion, should continue in this direction.

That concludes my opening statement, and I look forward to comments and questions.

¿ (0920)

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

Mr. Rajotte.

Mr. James Rajotte (Edmonton Southwest, Canadian Alliance): Thank you, Mr. Chairman.

Thank you very much for coming here today and speaking to us about the BDC.

I want to start out with a general question about the review itself. Why was an interdepartmental review chosen instead of a review by an independent task force?

Mr. Robert Dunlop: The recommendations of the Auditor General were issued after most of our work was completed, and in fact the Auditor General recommended that departments should lead in the review. We had a discussion among the various parties in late 1999 about which approach we should take, and we thought this was the best approach as it didn't seem appropriate for the bank to be leading a review of itself on its own. So we chose a department-led approach involving the interested departments and the bank itself.

Mr. James Rajotte: Was there a discussion of getting an independent task force to lead this review, not the bank itself? Was there discussion of that at any point?

Mr. Robert Dunlop: I don't believe we seriously considered contracting the review out to a third party, no. We thought it was most appropriate to do it ourselves.

Mr. James Rajotte: I want to touch on the financing gaps. You state on page 4 that the financing gaps identified in 1995 are still present. Obviously you're arguing that BDC is addressing these financing gaps. Perhaps you could expand on how well BDC is doing in terms of addressing these financing gaps and how they've decreased in the last five years particularly.

¿ (0925)

Mr. Robert Dunlop: Sure. The gaps that were identified were the ones I noted. I'll just go through them and what we've learned about them in the process of the review and how things might have changed and the role the BDC has played in addressing it and hopefully changing the market itself. Ultimately the public policy goal here is for the BDC to change behaviour in the private market so that these needs are addressed by the financial service sector at large.

On the risk side, it's been noted. The MacKay committee report, which I should note was also one of the main elements in our review documentation, noted that one of the big differences between Canada and the United States is the absence in Canada of pricing to risk. The MacKay committee report noted that on average, the spreads of loans to small businesses in Canada are smaller than they are in the United States. On average, loans are made in the range of prime to prime plus 3, with an average spread of about prime plus 1.75 to small businesses. In the United States, on the other hand, the normal spread is from prime to prime plus 8, with an average spread in the range of prime plus 3.75.

The conclusion is that well-heeled and successful small businesses probably pay lower interest rates in Canada than they do in the United States. But the price is access for the higher-risk lender, which may just not fit the profile of a conventional lender in Canada and therefore doesn't have funds available to it.

The role the BDC has been playing since its new mandate is being this price-to-risk lender. The price of a BDC loan is higher, but it provides access to firms that would otherwise not necessarily have access to lending. Therefore, while people aren't happy to pay the higher interest rate, they generally understand they're getting access they wouldn't otherwise get. This hasn't been an issue of major complaint.

Again, this is something we would like to see encouraged in the Canadian marketplace. I think the BDC, by demonstrating that it's able to be profitable and making these higher-risk, higher-cost loans... It's something we would hope the other financial institutions will pick up on.

In terms of flexibility, this was an area primarily linked to the needs of the knowledge-based industries. What you have here is a company, especially at the start-up stage, without the hard assets that traditional businesses have. What they need is financing that is tailored to the needs of a company that might have a longer start-up period, without revenues and without assets, before it takes off. What the BDC has been able to do, primarily through its quasi-equity product, is to develop financing solutions that see repayments tailored more to the kinds of cashflows that a knowledge-based business would see. I think the success of the BDC is something that we hope will encourage other financial institutions to repeat.

I know the issue of a size gap has been raised very frequently before this committee. It's getting increasingly difficult for a small business to get especially a first loan that's relatively small in size. If you're looking for $500,000 to $5 million, there's a well-established market for that. But making the smaller loans—usually that means the very beginning of a company's development—is increasingly difficult. About 55% of the BDC's loans are for less than $100,000. So it continues to deal with smaller companies. We hope that by demonstrating that you can be profitable in making these kinds of loans, we will encourage other institutions to develop this cadre of small business.

Finally, the knowledge gap is something I think the other banks have picked up on a great deal. They want to learn about this new element of the economy, the knowledge-based sectors, to understand their needs better. Clearly these are very successful economically, but they don't behave the same in terms of traditional banking, the bricks-and-mortar lending based on collateral and those kinds of elements.

¿ (0930)

I think in the last five years all financial institutions have recognized the profit potential in this sector and have been trying to adapt to those needs. Again, I think the BDC's been at the forefront of that.

Mr. James Rajotte: I just want to pick up on something you said at the beginning of your answer, when you said that the needs currently being fulfilled by the BDC are needs that you think should be addressed by the financial sector. I'm assuming you see the BDC actually fulfilling the needs now and then pulling back as the other financial institutions begin to address those needs. I guess that sort of fits in with the BDC's role of being a complementary lender.

But do you see the opposite happening, and how do you prevent the opposite from happening in the sense of the BDC fulfilling these needs and the other financial institutions backing off, saying, “Well, the BDC is covering this area and these high-risk loans, and therefore we don't have to”? I wonder if you could address how you prevent that from happening.

Mr. Robert Dunlop: I think part of the answer to that question is just the size of the BDC. It's such a small part of the overall financial market that it wouldn't be able to fulfil the entire need.

The other element is the mandate and the way the BDC has acted in partnership with other institutions, so it doesn't attempt to dominate a market. It attempts to work with other institutions and bring them into the market. Once those institutions, driven by the profit motive, decide there's a business there, which we hope to demonstrate, they will grow. The BDC is governed by a complex mandate of both public policy and return on equity, whereas the other institutions are governed purely by the pursuit of profit, and we assume that when they see those opportunities, they will grow into those markets.

But you are right in the sense that this is something that, as those looking at the shareholders' interest in this respect, we always have to keep in mind when we look at the BDC.

The Chair: Mr. Rajotte, one more question.

Mr. James Rajotte: This is something I don't know, but on the issue of knowledge-based industry--and this fits within venture capital--in terms of support for research, does the BDC work with agencies like the CFI, the Canada Foundation for Innovation, and other agencies like that in terms of funding research at the very basic level, or even at the development stage? Is that something that BDC under its venture capital umbrella would seek to invest in?

Mr. Robert Dunlop: The BDC doesn't invest in research per se, but especially through the seed funds that I mentioned, they've been looking at very early-stage investments in commercial spinoffs from research. I don't believe they've worked with the CFI per se, but they have worked with IRAP in trying to identify research projects that are leading to interesting commercial possibilities and then providing early-stage commercial funding for the results of that research work.

Mr. James Rajotte: Do you have any other examples you can point to that highlight that role of the BDC?

Mr. Robert Dunlop: I can't think of one.

Peter?

Mr. Peter Webber (Manager, Small Business Financing Policy, Department of Industry): Well, the BDC has also partnered with the NRC to provide direct financing for the commercialization of projects developed by NRC scientists. They've done this as a pilot project, and I'm sure the bank would be in a position to speak to that in more detail tomorrow.

Mr. Robert Dunlop: I've thought of another one. The BDC has also worked with some universities--the ones I'm thinking of are McGill and Sherbrooke--in terms of early-stage investment of research coming out of universities. They're focused very much on that very early stage of venture capital as opposed to the $4 million deal that is the average in the industry.

The Chair: Thank you very much.

Mr. Tonks.

Mr. Alan Tonks (York South--Weston, Lib.): Thank you, Mr. Chairman, and thank you for your deputation.

On assigning risk and return on equity, I'd be interested to know how this works. If a traditional financial institution joins with BDC, how are these elements balanced in terms of the assumption of risk? Are they both equal partners in the risk in venturing the company, or is there some formula that's used?

¿ (0935)

Mr. Robert Dunlop: That might be a better question for the bank president, because we don't get involved in individual arrangements. I think, though, the partnering is often based on the kinds of products the BDC is able to provide, because it's not a full-service bank.

The kind of arrangement a bank may have is...for example, the Toronto-Dominion bank might be providing a short-term credit line, and the BDC might be providing a medium- or long-term loan. But the BDC would evaluate the risk of that arrangement based on the value of the collateral and its assessment of the company as it would with any other investment. It has to decide whether it fits its risk profile. Oftentimes the BDC can make the deal, because they'll be charging more than prime plus three, which the traditional banks see as something that's outside of their market.

Mr. Alan Tonks: I appreciate that the BDC is not a banking institution in the traditional sense, and this concept of last resort, but are there any statistics...? I assume that there are still situations where, rather than co-joining with a traditional financial institution, the BDC thinks as a policy matter that this is a good area, that there's a risk that can be quantified or qualified.

Do you have any transaction percentages or total portfolio percentages, ones that fit into that category?

Mr. Robert Dunlop: The areas where the minister has in fact given the BDC a target is with respect to knowledge-based industries and exporters. The minister's instructions in 1997, and it's been followed up a few times since, were that the BDC's lending should be at least 50% to knowledge-based industries and exporters by next year. And the BDC is on target for that.

Now, knowledge-based industries are about 5% to 6% of the Canadian economy in terms of businesses. The BDC's lending is now about 10% to knowledge-based industries. So they're higher weighted in that sector than the economy is as a whole. Exporters, it's about 40%, and again, in terms of looking at the small business population, which is their market area, they're higher weighted in companies that export than the market is as a whole.

Mr. Alan Tonks: Pursuant to that, Mr. Chairman, with respect to trends in particular sectors, even if it doesn't require a policy change with respect to the BDC and its operative legislation, are there continuous indicators that are developed as to what parts of, let's say, the manufacturing for export sector would be more of...that the lending would be a policy instrument to accelerate that particular sector, as of need?

Mr. Robert Dunlop: The instructions given to the bank haven't been that precise. In this area of the instructions to the minister, and there's a copy included in the mandate report, it's been knowledge-based industries and exporters, and within that category, to allow the BDC to determine the credit decisions on which is the most promising and where the returns justify its investment.

So the attempt has been made to give the board of directors and bank management latitude, within general policy parameters, to achieve.

Mr. Alan Tonks: This question is perhaps for the banks, but maybe you can give us a preliminary indicator. Because you are suggesting that no change in the mandate should be recommended at this point, I assume that there still is a need for government financing of this nature. Is this because traditional financial institutions...? I think you edged on this with my colleague's questions, but do you see any trends in terms of the availability of traditional capital sources being at the table? I'm trying to get a feel as to whether the private sector institutions are doing their job in terms of taking reasonable risk.

Mr. Robert Dunlop: This is a subject that we'll be presenting to you in the next month or so with the results of the finance data initiative that we've been mandated to do, but I'll give you a sense of what we're discovering. This is a really dynamic market and it's fascinating in terms of the way it's evolving. We're getting very mixed signals about what's working and what's not.

I refer you to the survey that the CFIB did of its members, which found that on average their membership is increasingly positive and satisfied with the services it's receiving from the financial services industry. However, there are subsets of their membership that have expressed a concern--in particular, early-stage companies and companies with high growth potential in the knowledge-based sectors, which is what the BDC aims to focus on.

So within a general context of more than two million Canadian small businesses seeing that financial services are evolving in a way that's generally positive, there are some areas, that we think from a public policy point of view are very important, that are expressing increasing concern that development such as greater use of credit scoring and centralization of decisions aren't necessarily working in their interest, or the migration--and this is something we noted in the review--of commercial lending from the commercial side of the banking business to the retail side for smaller businesses.

Again, we get mixed views on that, too, because there's less account manager turnover, but the account manager may not have as good an understanding of business as somebody who's focusing on commercial.

So we're trying to follow all of these trends and determine which are positive and which are negative, and the reality is, in most cases, they're both.

¿ (0940)

The Chair: Thank you, Mr. Tonks.

Mrs. Desjarlais, did you want to ask some questions now or wait until the next turn? Okay.

Mr. Fitzpatrick.

Mr. Brian Fitzpatrick (Prince Albert, Canadian Alliance): Thank you, Mr. Dunlop and Mr. Webber, for your presentation. The gist of what I'm going to address concerns the mandate of the Federal Business Development Bank. I have some comments to make and then some questions.

The question that crops up in my mind is, what is wrong with our economic environment that the government has to create an agency to fill the gaps and “lead the way with knowledge and innovation”? We have a country to the south of us that has 5% of the world's population and produces something in the region of 40% of the world's GDP, and we have a province here that's largely dependent on that market for its very existence.

There was a huge economic expansion in the 1990s, largely based on the growth of the knowledge economy and the information technology sector. One thing that is fairly clear to me, when you look back at that decade, is that the government had very little to do with it; it was almost entirely something that came out of the private sector.

If I could just use one example, I remember two young gentlemen in the Seattle area in the late 1970s who dropped out of university and started a software company in their garage as a small business and grew it in my lifetime into, at one time, the largest company in the world in stock capitalization. And my understanding is that very little to do with government lenders or agents led to the growth of this company.

My own view is that the private financial and capital markets are far more responsive to all sectors of the business than the government.

In a lot of ways, I spent 25 years working for small business people. One comment I would make is, for entry into that business and initial success in it, one of the biggest obstacles is government itself—just the mountain of paperwork and requirements imposed on small business; the tax collections—

The Chair: I want you to get to your question.

Mr. Brian Fitzpatrick: Well, one question I'd like to throw at the witnesses is this. I really question how the government can be the leader in innovation and consulting. I just think the government is so far removed from the realities of small business people and their realities from day to day that about the last place, I would think, you would find some real leading information on innovation and consultation would be Ottawa. I just think Ottawa would seem to be a very poor place to get really good advice in that area if you were running a small business.

Maybe you could expand on that and explain to me how the government, through your agency, can possibly lead a private enterprise economy in innovation and consulting private sector businesses.

Mr. Robert Dunlop: Okay. I'll do my best to answer those questions.

The first issue is that the private sector's more responsive to government agencies in responding to needs of the market. Fundamentally, I don't have a problem with that approach. I think, though, when we look at the United States there are regions that have been tremendously successful, and the private sector has met needs, but not all regions necessarily are the same. You have Silicon Valley and you have New York, but companies looking for venture capital and innovative products in Kansas City might have a different view about how well the market is serving them.

Again, I think the key element here in the BDC's mandate is to be a complementary provider of services, not to try to replace the private sector. It's trying to lead in a couple of areas that we've defined quite specifically and not trying to be a government bank replacing the activities of the private sector. That's fundamental to the BDC's mandate and it was discussed in great detail when the mandate was accepted in 1995.

So the answer I would have to your question, sir, is in the nature of the complementarity. As I said, if the private sector demonstrates that it's ready to replace the BDC, the decision at that point would have to be taken, under a complementary nature of the bank's mandate, to withdraw from those services, because they are provided successfully elsewhere. And certainly the BDC is not a full-service bank. The reason it isn't is that a number of these services are provided competitively throughout the country and there's no need for a government institution to provide that service as well.

In terms of consulting, we have done some research with small business, based on the information services we provide. Certainly the view that you reflect is one from small business. They would not look to government per se for advice on how to run a business. As a matter of fact, in a survey that we did, government came second-to-last; the last was consultants. Smaller businesses, especially, don't have a very high regard for consultants, who they tend to see as being more designed to serve the interests of larger institutions.

As part of its mandate, over the last 30 years the BDC has provided consulting services. And I think what makes them different is precisely their primary focus on smaller businesses. They're not looking for the larger contract with a major corporation. They're attempting to tailor their services to smaller institutions, which isn't necessarily the case for the large consulting firms.

This focus on consulting also comes out of an awful lot of research that's been done that suggests that the major reason for small business failure is weakness in management. Again, the BDC is not a government institution per se; it's not based in Ottawa. They run their consulting services on a cost-recovery mandate and they have to change their approach, based on the signals they get from the market in terms of their ability to sell their services and to be successful with the small business clients.

I hope that answers your question, sir.

¿ (0945)

Mr. Brian Fitzpatrick: Management would be one area for sure where I would really question whether a government is in a position to help a small business person out. The one thing a small business cannot do is have layers of bureaucracy and administration and so on. They just can't afford it. Their lenders won't permit them; they have a bottom line to deal with. So I question that.

This raises another observation, too. I've been involved in the small business sector for 25 years, and it still seems to me that you folks can be a lender of first resort. I've seen cases where I would classify you as a lender of first resort, and I would question being a lender of last resort, too. If everybody else has turned you down, in a lot of cases I would suggest there might be good reasons why better people have been turned down. A lender of last resort by the government that really isn't exposed to risk and so on perhaps is the risk that other lenders are... It's open to question.

Mr. Robert Dunlop: Sure. Those are good points. I note, with respect to the affinity of the BDC for small business and its ability to provide consulting services, that the overwhelming majority of the consultants used by the BDC are private sector consultants who are part of its network. They're not employees of the bank per se. They are people who deal with small business all the time and understand the reality of small business. They're in the bank's network, but not all of them are employees of the bank per se.

The second point you raised concerned being the lender of last resort. In fact, this was an element of the BDC's mandate that was explicitly dropped in the new mandate given in 1995. The BDC is no longer a lender of last resort. Its mandate is to be a complementary lender.

The requirement that banks have to turn down an institution two or three times before the BDC, or in those days the FBDB, could deal with them was dropped in 1995. The new mandate is to provide services that don't compete, but complement what is offered in the private sector.

¿ (0950)

The Chair: Thank you very much.

I should remind the committee that this committee does review the major banks in Canada, at least twice a year. For the last nine years, we've been pushing and pushing for the banks to do more small business lending. They almost were right out of it in the early 1990s. They still have a long way to go.

We'll have the opportunity soon. On Thursday, we'll have some discussion with credit unions. We will have all the banks and the CBA here to ask specific questions on why they aren't giving more loans to small business.

Mr. Savoy.

Mr. Andy Savoy (Tobique--Mactaquac, Lib.): Thank you, Mr. Chair.

Thank you for the presentation.

I'd like to speak on something Mr. Rajotte touched on concerning venture capital. The BCNI and numerous other organizations, with the review, have identified a serious deficiency in venture capital in Canada. In fact, they're saying we're tenth amongst selected advanced countries.

There are a number of reasons for it. You have identified four gaps in the review. The institutional gap is particularly disturbing in that we invest about one-sixth of our pension funds into venture capital, as compared with the United States.

I know it's not your realm of responsibility, but do you have any explanations for such a discrepancy between Canada and the U.S. as far as institutional investors go?

Mr. Robert Dunlop: As you say, sir, there are better experts on this than me. Based on my reading, there are a couple of factors I've come across.

When pension funds were very interested in venture capital investing 10 or 15 years ago, they were quite burned when there was a sudden downturn in the market, as there tends to be in a high-risk type of investment. Unlike the United States, they weren't prepared for the risks that were realized. They now are approaching this market with a tentativeness that is frustrating a number of people who are interested in seeing the investments being made. It's certainly one of the elements.

I think we're all interested in seeing pension fund managers learning about how to use investments in venture capital as a rational and useful part of the overall portfolio. They're not recoiling, seeing this as something high risk that hadn't done well in the past, and therefore something they shouldn't do.

Again, I think the experience of the BDC is a good one in this respect. They've been running a venture capital portfolio since 1983. They had an internal rate of return of 26% in the last year. It's going to vary with the market, but there are profit potentials here. We believe venture capital should be a part of a diversified portfolio by portfolio fund managers.

Certainly the BDC has been active in the area of encouraging pension funds to become active in this area through such initiatives as seed capital funds and other larger funds, where the BDC and pension funds can be co-investors in venture capital. Therefore, they demonstrate this is something they should be involved in to serve pension-holders, ultimately, because the returns are high. With the proper risk management, you should be able to benefit the portfolio overall by taking on some higher-risk assets, as long as they are managed properly.

¿ (0955)

Mr. Andy Savoy: On venture capital, one of the real strengths of the U.S. market for venture capital is angel investors, of course. What they bring to the table in monetary terms is of course very valuable, but in experience terms it's extremely valuable, because they've been through the process on numerous occasions. We don't have as strong a community of angel investors in Canada, as we know. But I understand the BDC is in that venture capital capacity and in essence would be termed an angel investor, because they're early stage as well.

As I said, angel investors bring much more to the table than strictly monetary resources. They bring experience to the table. I'm not talking technical experience and doctorates and academics, the sciences. I'm talking about the entrepreneurial experience that angel investors bring to the table. How do you achieve that at BDC?

Mr. Robert Dunlop: I'm sure the president of the BDC will be able to answer this in much more detail than I can, but I certainly know the BDC operates its venture capital through six offices across the country, from Halifax to Vancouver. The kinds of people they have working for them are people with a hard background usually in the sciences--all their investments are in knowledge-based industries--but also people who have had experience in successful investing in companies. As with any early-stage investor, they bring some advice and experience to the entrepreneur, as well as the funds.

I wouldn't say they fulfil the role of an angel investor per se. For example, the BDC venture capital division doesn't take positions on boards of directors, unlike a lot of other venture capitals. BDC also tends to invest in consortiums, so they're bringing other knowledgeable investors into the company as well. So I think they fulfil a slightly different role from angel investors per se. Certainly in wearing another hat, I'm very interested in the development of angel investing in Canada. This will be one of the elements we will report on to you in the next month or so, the work we've done in trying to understand angel investing in Canada.

The BDC's mandate is a bit different. Their seed fund, which is a bit higher-level, is maybe not so much hands-on, but the people running the investments in the BDC do have the experience and the background to be able to provide some value-added to the companies in which they invest.

Mr. Andy Savoy: Traditionally in Canada our industrial structure has been one of resources and large companies. We know that many of our players are large multinational companies, of course. With regard to venture capital, maybe the necessity for venture capital isn't there because of this reality. Do you think that hurts the Canadian economy in the long term, specifically the venture capital markets?

Mr. Robert Dunlop: This is an area that's evolving so quickly. It wasn't long ago when it was commonly believed that venture capital only invested very close to where it was located. In the last fiscal year, about one-third of the investment in Canada has come from abroad, which kind of broke the rule of thumb that existed in the past.

We've had some experience in Industry Canada with a program called the Canada Community Investment Plan, where we have tried to encourage the development of angel investment and venture capital investment in areas where it hadn't happened spontaneously. We didn't do this by subsidizing investment; we did it by helping local groups develop the interest of angel investors or get entrepreneurs to be ready for that kind of investment. We've had some noticeable successes in areas where venture capital wasn't very active. For example, in the Niagara region, which the chairman certainly knows well, venture capital is now active in an area where it wasn't before.

I think it is a disadvantage when you don't have a base of those kinds of industries that we normally associate with venture capital. If you speak to Denzil Doyle, who as you probably know is kind of the historian of the Ottawa technology cluster, he would point out that the earliest investments in Ottawa were made by people who made their fortunes in businesses such as lumber. They didn't understand very much about the early computer business, but they did know business. They had money and they had business experience, and they worked at very early stages with the scientists from the national defence department...and developing of CDC. The early fortunes in Ottawa were made by lumber barons.

This is a model that gives us hope in other areas of Canada that you can put business savvy together with high-tech potential in areas outside of the major centres of technology like Montreal, Toronto, and Vancouver. We are seeing some of that develop in other regions of the country. It's a model that's of interest to all of us, because we want to see this kind of development take place in not just a few centres.

À (1000)

Mr. Andy Savoy: Do I have time for one more, Mr. Chair?

The Chair: For a short question.

Mr. Andy Savoy: It looks as though the optimal venture capital market might be a pipe dream. Where do you think the BDC fits in optimal venture capital? If you had an optimal situation in Canada, where would BDC fit into it? It may be a hypothetical question, but do you see yourself doing more? How are you doing to date in addressing venture capital needs? What opportunities do you see for further investment in your venture capital?

Mr. Robert Dunlop: I think what we want to see in venture capital in the BDC is continuing investments in areas that aren't necessarily venture capital hotbeds at the moment, perhaps leading other venture capitalists into those areas. I think the BDC has done a great deal of that. They have an office in Halifax; Calgary is now taking off, and the BDC has been there for awhile.

We've seen in the United States and we're seeing in Canada that the average deal size is getting larger and larger. The Americans have what they call the 10-10 rule; they don't like to invest less than $10 million, and a venture capitalist doesn't want more than 10% of the deal. All of a sudden you're looking at a market where $100-million investments are the norm. This is creating a gap in the American market, where a lot of companies need a lot less than $100 million, and the market may not be serving them well.

We want to see the BDC focusing on the smaller end of the venture capital continuum to demonstrate that, by taking a position earlier in the company, where perhaps it needs a bit more hands on, you can still do it on an economic basis and be profitable.

Those are the two areas primarily where we'd like to see the BDC continue to develop, plus, as you mentioned earlier, bringing in the pension fund investors and having a greater diversity of expertise in specialized areas. In Calgary, for example, where they have a wireless technology, you have some venture capitalists who are very knowledgeable about the wireless business and whose value-added is more important. The BDC sees itself as investing in venture capitalists like that, so they reach critical mass in areas like Calgary.

I'd say those would be three areas we'd like to see the BDC develop further.

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

Ms. Gallant.

Ms. Cheryl Gallant (Renfrew--Nipissing--Pembroke, Canadian Alliance): Thank you, Mr. Chairman, and through you to the witnesses, thank you for the answers to the questions thus far.

My first question is whether or not the BDC works with the funding of patent acquisition and/or development thereof.

Mr. Robert Dunlop: If I may, I'll leave that question for the president. I know they've been interested in looking at models of the value of patents for collateral and for banking generally. But I haven't been directly involved in that work, so if I may, I'd like to defer that question to the president.

Ms. Cheryl Gallant: Okay.

Would you please explain what steps the BDC is taking to have a greater presence in rural areas?

Mr. Robert Dunlop: This is certainly an area of focus of the BDC. The analysis we've done shows, especially in rural areas of the economy, small business is particularly important. The figures that I have show the majority of businesses are small, and 65% of the businesses active in rural areas have fewer than five employees. This is a key market for the BDC, and I think it's reflected in their activities.

If we look at Canada as a whole, approximately 35% of small businesses are located in rural areas and 65% in urban areas. In terms of population, it's 38% in rural areas and 62% in metro areas. In terms of the BDC's branches, 40% are in rural areas and 60% are in urban areas. In terms of clients, 44% are in rural areas and 56% are in urban areas.

So the BDC, traditionally and through its new mandate, has been disproportionately active in rural areas of the economy. This has not been affected by their mandate to be more involved in knowledge-based industries and the like. Certainly the pressure they feel to develop knowledge-based and exporting businesses in rural areas is particularly acute, because those rural areas are where their main business is and they have a mandate to develop those kinds of businesses.

À (1005)

Ms. Cheryl Gallant: Are there any new initiatives being taken to expand further in the rural areas or to reach the people who are looking for start-up capital or expansion capital?

Mr. Robert Dunlop: Yes. They are doing more work on the Internet through BDC Connex. BDC Connex was actually the first online source of capital where decisions could be made online. Part of the reason for that was to assist people in rural Canada who weren't necessarily close to a branch per se. Additional offices have been opened in rural areas as well to develop that business.

The Chair: Mr. Dunlop, you mentioned earlier the Canada Community Investment Plan. The 22 pilots done by the policy branch of Industry Canada were all in communities outside of financial districts. That's what Ms. Gallant is getting at. How are we servicing outside of these areas, into the rural areas, as much as possible?

Mr. Robert Dunlop: Exactly. With CCIP, we had 22 sites across the country, and part of the requirement was that they weren't in major urban centres. From Mount Pearl, Newfoundland, to Swift Current, Saskatchewan, and Victoria, B.C., as well as...

The idea here was that not all financial needs can be met by a lending institution. Especially at early stages, what's often required is equity investment, which still tends to be sourced locally. There's no reason that successful business people in rural Canada shouldn't be investing in promising businesses in their areas, as has happened spontaneously in places like Ottawa, Toronto, and Montreal. Through this program, by the time the program ended with an expenditure of $12 million on support for these institutions, we'd recorded over $235 million in investment in businesses.

Now, that's separate from the BDC. The BDC as well, through its branch structure and increasing use of the Internet, is attempting to meet the needs of rural Canada.

Ms. Cheryl Gallant: Thank you.

Mr. Dunlop, you mentioned their reaching out to small businesses in rural Canada through the use of the Internet. Has there been an initiative to help get the Internet and the fibre optic backbone, the wires, to these rural communities? Is BDC involved in lending money to the different syndicates that are trying to get the infrastructure to the outlying areas?

Mr. Robert Dunlop: They may be. Again, that's one I can't answer, because we don't get involved in individual credit decisions and we don't keep a record of what kinds of companies are being invested in.

Ms. Cheryl Gallant: Okay, so that's not a focus.

Canadians have the perception that Canada, through the BDC, is funding purchases for foreign countries. Aside from the general reporting of loan repayments, has there been consideration given to providing greater transparency in terms of reporting the repayment of loans by industry sector?

Mr. Robert Dunlop: I believe that information is included in the annual report. I'd have to confirm that, but frankly, I'd not heard that before as an issue for the BDC. The BDC, by law, can only lend money or make investments in a company resident in Canada. It cannot invest in companies abroad. So this hasn't been an issue I've come across before.

À (1010)

Ms. Cheryl Gallant: Thank you.

The Chair: Thank you very much.

Are there any other people for questions?

Mr. Bergeron. Bonjour.

[Translation]

Mr. Stéphane Bergeron (Verchères--Les-Patriotes, BQ): Thank you, Mr. Chairman.

Further to your presentation, I have a number of questions. You stated that according to the report's main conclusion, “the Bank's mandate remains as relevant today as it was in 1995 and no changes are required to the BDC Act at this time”. However, you go on to say this: “Many SMEs continue to face difficulties in getting the kind of financing they need for growth and technology adoption, but”—in the same breath, you note the following—“SMEs remain as important as ever to the Canadian economy.”

If we acknowledge at the outset that SMEs remain as important as ever to the Canadian economy, how as it that we can conclude that everything is humming along smoothly and admit in the same breath that many SMEs are still facing some difficulties in getting the kind of financing they need for growth and technology adoption. You go on to say—and you view this as a positive development—that since 1997, the Bank has paid a total of $54.3 million in dividends to the government.

If the money is there, why are SMEs still having problems getting the financing they need, particularly from the BDC?

I may have another comment regarding something you said earlier.

Mr. Robert Dunlop: These are excellent questions. Let me start by saying the shortcomings observed in the market in 1995 remain. It has never been part of the BDC's mandate to rectify these shortcomings. As a complementary lender, the Bank has a mandate to show that it is possible to overcome these obstacles and to encourage private sector lenders to invest in this market.

We believe the BDC has taken on this role because it is to the Bank's advantage to do so. We've observed how the private sector is interested in investing in this market. Are there still obstacles? The answer is yes, and most likely because that sector of the economy experiencing profound growth is knowledge based. This represents a challenge for all providers of financing, because the rules are not the same in knowledge-based industries as they are in other more conventional industry sectors. According to our analysis, the BDC has performed well, but the challenges it faces are also mounting.

As far as dividends are concerned, as the party responsible for assigning this mandate to the Bank, we believe it is vitally important for the BDC to be an institution with a culture similar to that of the private sector and to invest with a private sector mind set. Normally, there is a cost associated with capital and the Bank, as a private sector company, must acknowledge this reality. There is a cost associated with the capital that we have turned over to the Bank since 1995, and that cost is the dividends paid by the Bank to the federal government. The latter has invested in excess of $295 million in the Bank to help it expand its services. Yes, the Bank pays out dividends, but we mustn't lose sight of the additional investments that have been made.

Mr. Stéphane Bergeron: I'm sorry, Mr. Dunlop, but I sense a paradox when people say that an institution is cost-effective, but still has some shortcomings. I have difficulty understanding how one can find such a situation acceptable.This is equally true of financial institutions in the private sector, and for the BDC as well. While all of these institutions are profitable undertakings, SMEs nevertheless continue to have problems securing financing and this seems to be an acceptable state of affairs. For the life of me, I don't understand how anyone can find this acceptable.

As you so aptly put it, part of the BDC's mission is to set an example for the financial services industry by proposing innovative solutions to address the needs of SMEs. Yet, you indicated in your submission that SMEs continue to face difficulties in getting financing. Later on, you state, again somewhat paradoxically, that SMEs are well served by traditional institutions. These are the kinds of paradoxes to which I was referring earlier.

Getting back to the BDC setting an example, oddly enough, your report is silent on this component of the BDC's mandate. You don't say how the Bank should go about setting an example, even though you maintain this is an important aspect of the Bank's mission.

À (1015)

Mr. Robert Dunlop: I will start at the beginning. You mentioned that the situation was paradoxical and I would have to agree with you. Early on in my presentation, I mentioned a report produced by the Canadian Federation of Independent Business. The Federation had surveyed its members about their dealings with financial services and found that generally speaking, most SMEs are more satisfied today with the services provided by traditional institutions than they were in the past, but that in certain markets, among the vast array of SMEs, there are signs that services are not as good and that problems persist. This is especially true for small start-up companies and knowledge-based industry businesses.

Generally speaking then, the problems are not that great, although they may be worse in some sectors. Therein lies the paradox. In essence, the BDC's mission is to meet the needs of market components that are not well served. Overall, the situation is improving, but a number of sub-markets are experiencing major problems and these, the BDC is trying to address.

It should be noted that the BDC's mission is to show that, even by targeting markets that financial providers view as higher-risk, the Bank can be a profitable operation. Start-up companies have anywhere from $500,000 to $3 million in risk capital to invest, whereas the average investment industry-wide is $4.4 million. Moreover, the Bank now has established formal partnerships with 40 private sector institutions in which it serves as co-investor. We hope this experience working with the private sector will show that opportunities to realize a profit do exist. From a public policy standpoint, when the big banks step in to fill the BDC's shoes, the Canadian economy genuinely benefits. That is the primary objective associated with the BDC's mandate.

Mr. Stéphane Bergeron: Thank you, Mr. Chairman

You say that the act doesn't need any major amendments and you go on to say that the next review of the BDC is slated for 2011. I'm sure you'll agree with me that the economy has changed considerably since 1995, that is in a mere 5 years. The economic structure has been greatly transformed and our businesses face new challenges as a result of globalization.

Under the circumstances, do you really think it's wise to wait 10 years before the next review? Given that the economy is subject to rapid changes, shouldn't we be looking at another review before then?

À (1020)

Mr. Robert Dunlop: I agree with you that the economy is undergoing some profound changes. I believe legislation calls for a regular review of the activities of only two Crown corporations, the BDC being one of them. Is 10 years too long a time frame? As a public servant, it's difficult for me to answer that question because this was decided by Parliament in 1995. As I've hopefully made it clear to you today, the BDC's mandate is set out in the legislation and is reflected in the decisions of the Board of Directors and the Minister. This mandate allows for considerable flexibility to meet needs.

As members of the committee entrusted with the task of reviewing the act, the issue to consider was whether it was necessary to amend the legislation at this point in time to enable the BDC to respond to market requirements. We concluded that the BDC was not encumbered by the act and did not encounter any obstacles in its path, although the situation could change down the road. No doubt it's important for us to be open to changes that will occur between scheduled reviews. There's no question about that.

[English]

The Chair: Thank you, Mr. Bergeron.

Mr. Bagnell.

Mr. Larry Bagnell (Yukon, Lib.): Thank you, Monsieur le président.

I'd like to thank Ms. Gallant for asking questions on the rural area, because that's where my greatest interest is as well. But I was amused at her question on the Internet--whether you're involved in the Internet to rural Canada--considering the previous Alliance member on the committee ranted and railed about how disastrous it was for the federal government to think about getting involved in extending Internet to rural Canada.

The Chair: Keep that down.

Mr. Larry Bagnell: I want to ask a question related to Mr. Fitzpatrick's intervention, which would seem to suggest the private sector should better be providing loans; the government shouldn't be involved or qualified. I would like to know, therefore, to what you attribute your success, or what would happen to the thousands of small businesses you provide loans to--and the thousands of employees that are therefore employed by the loans you provide--when the private sector wouldn't provide financing to those cases.

Mr. Robert Dunlop: Clearly, in the results of our mandate review, we found there is a need for the BDC, that it does fill a useful role; that if it didn't exist there would be problems; and that viable financing that now takes place wouldn't take place. I noted that when the representatives of the Bank of Nova Scotia were before this committee, one of the questions was on what would happen if the BDC were eliminated. That was essentially the answer from the representative from the Bank of Nova Scotia as well, that they see it filling a role in the marketplace at the moment that isn't being filled by others--that is, meeting its mandate as a complementary lender, not competing directly with the banks but providing a service that isn't provided elsewhere in the market.

Mr. Larry Bagnell: In relation to rural Canada, I think the other members of the committee would agree that the charter banks, at least 20 years ago, were fairly weak. Once you got outside the major centres it was hard to get loans. And you provided a role there. Do you see any change, as Industry Canada, in the charter banks--the traditional lenders--doing better in that area?

Mr. Robert Dunlop: Again, this is a very difficult area, because you see different trends. On the one hand, the number of branches is being reduced, and this appears to be affecting rural areas disproportionately. But on the other hand, new forms of service delivery are also being introduced.

I think the real question--and I don't think I'm in a position to answer yet, but we hope to be in a position to answer it as we study this more--is whether the balance is turning out to be to the benefit or to the detriment of rural Canada. At the moment, we have the two tendencies, but I don't think anybody has been able to put them together and come to a conclusion about what the net impact is.

À (1025)

Mr. Larry Bagnell: Again in regard to rural Canada, as you know, Industry Canada, like all federal departments, has to work with the rural secretariat to ensure any new programs or services are looked at from a rural viewpoint, through the rural lens. Have you had much interaction in that respect, related to the bank and rural Canada, and any coordination with the rural secretariat, any pilot projects they might be doing or anything in that respect?

Mr. Robert Dunlop: Certainly in my general job we've had lots of interaction with the rural secretariat, and they've been involved in a number of the projects that we've put together. They haven't been involved formally that I can think of with respect to the BDC, although that's certainly something that we should do when we go back to our offices. I don't believe they've been involved formally since we did the new legislation in 1995. I believe they were involved then. Especially given the importance that the bank plays in rural Canada, I think that's a good item for us to follow up on.

Mr. Larry Bagnell: In the last decade or so, has there been any change in the locus of decision-making, where decisions could be made more in the smaller branches in the rural areas, where at one time they'd be a bit more centralized and people wouldn't understand the difficulties in rural areas?

Mr. Robert Dunlop: Actually, this is one of the initiatives that the BDC has undertaken since 1995. A conscious decision has been made to push down to the branch level where credit decisions are made, and not centralize them in a computer at the head office the way many other financial institutions are going.

My understanding now is that some 90% of the credit decisions are made in the office where the application is made and that this is quite a bit higher than it is for other financial institutions. The bank is looking actively for ways to increase that so that the person you sit across the table from, who has your application, is in fact the person who decides whether to grant credit or not.

As I said, the BDC's current ratio is that 90% of those decisions are made at the local level.

Mr. Larry Bagnell: Thank you.

The Chair: Mr. Fitzpatrick, you had some questions?

Mr. Brian Fitzpatrick: I don't think I want to get into how we deal with the problems of rural Canada today, but I have had some experience in dealing with banks in rural U.S.A. that are independently owned and work with small businesses right from their inception through, and the family, and so on, and provide all sorts of services that are hard to find in this country with big institutions. We do have credit unions out there in the rural areas, and they certainly provide a lot of services where I come from, and so on, but I think we get in a real debate about the gaps that we have in this country and why we have them, and what government should be doing to eliminate those gaps.

I'm interested in the venture capital area. I note that there was $400-million worth of loans to 300 companies, so that would work out to about $1.3 million on average.

I did have the pleasure of having an investment labour venture fund at one time. There are quite a few of them around. It was my observation that they had lots of money, but they weren't investing it, or a lot of it was not invested. They were holding it in treasury bills and things along that line, rather than investing, but a lot of their investments would be about the size you're talking about, $1.3 million. So they are out there.

I'm just curious; when you take a venture capital position in a small business, I assume your equity position is as a minority shareholder. In this country, I don't really think there's a market to trade those securities.

A lot of small businesses can become viable businesses. They won't become mid-sized businesses or large businesses, but they are viable businesses and successful businesses in their own right, but they're not going to grow beyond that stage. There is no market to trade these securities, and in a lot of provinces and jurisdictions it's illegal to try to trade these securities.

How does the Federal Business Development Bank exit those companies? Once they've fulfilled their purpose and the business is viable, there's no need for you people any more, and your capital should be coming out of those businesses, and so on. Maybe you could enlighten me as to how you deal with that. How do you value these securities, and how do you exit them? How does this work?

À (1030)

Mr. Robert Dunlop: Again, I think some of these questions will be good for the president, who can provide much greater detail than I can, but I would note that the points you raise are correct. The BDC always takes a position as a minority shareholder. It doesn't take majority ownership of the companies it invests in, and like every venture capitalist, it has the issue of exit.

The initial public offering is the favoured form of exit, and certainly the BDC has been involved in a number of investments that have resulted in very favourable initial public offerings and capital gains for the portfolio. As I noted before, the venture capital portfolio has as of last year an internal rate of return of 26%.

Some other work we've done in our branch suggests that the majority form of exit in venture capital is not the IPO but other forms, such as buyback by the original owners or private sale. So there are other forms of exit than an IPO; it's the high-profile one, but not the only one. The weakness in the IPO market isn't necessarily a reason for a weakness in the venture capital activity.

Purchase by other firms is another common exit from a venture capital investment.

Mr. Brian Fitzpatrick: I take it when you enter these venture capital investments with small business people, they would have a buy-sell agreement on these investments where the entrepreneur would have the option to trigger a mechanism to purchase these securities back at some agreed formula for valuing them.

Mr. Robert Dunlop: My understanding is that when the BDC makes a venture capital investment it always has an exit strategy from the beginning, and that may well be a buyback from the owner, or other elements.

Again, I think that's a better question for the president, who can get into the details of their--

The Chair: I just want to remind you--just one moment, I'll give you another chance for another question--that Mr. Dunlop is the director general of the policy branch for Industry Canada, which is responsible for setting the policy for the BDC. The specifics and the how-tos will be a very good area for questions tomorrow.

Mr. Fitzpatrick, I'll allow you another question on any policy or any items like that.

Mr. Brian Fitzpatrick: Well, I had one more question. Maybe this is another question that should be reserved for the president, but you can help me anyway.

When you take a venture capital position in a small business, do you assume all the risk in your equity investment, or do you take some collateral security to go along with the investment in case the company fails? Do you take mortgage security, or personal property security interests and personal assets, and so on, or do you totally go with the risk of investing in the company?

Mr. Robert Dunlop: I think that is a better question for the president. My understanding, though, is that when they take an equity investment, it's on equity terms; there wouldn't be collateral provided along with venture capital investment, because that's outside the norms of the industry.

The BDC also provides, through its venture capital branch, subordinated debt financing--quasi-equity, as it is sometimes called--and is a leader in the market for that kind of investment in smaller amounts. I think that addresses the question I think you were getting at: are there options for the entrepreneur who doesn't want to give up ownership and isn't willing to take in outside equity investors? Certainly the BDC has been one of the path-breakers in developing the subordinated debt market in Canada, which is very important for entrepreneurs at that stage in their development.

The Chair: Thank you very much.

Mr. St. Denis.

À (1035)

Mr. Brent St. Denis (Algoma--Manitoulin, Lib.): Thank you, Mr. Chairman.

I apologize for being late. I hope my questions and comments aren't repetitious.

I represent a northern Ontario riding that has been served by BDC offices in the Sault and Sudbury for a long time. I have found that the approach to the BDC's client group has improved substantially as compared with 10 years ago or so. There seems to be a lot more flexibility and more willingness to talk to the elected representatives about issues of concern to, typically in my case, the small business community. We don't have a lot of medium-sized and large businesses in my riding, except for a couple of major mining and forest companies.

Considering rural depopulation trends, and with that, of course, pressure on small businesses, when you're having policy discussions, is there is some long-term thinking that rather than just react to business needs, we need to be more proactive? For example, are you engaged with FedNor in encouraging businesses to move from the highly populated areas where taxes, costs for workers, and pollution are higher? Is a proactive effort being made in cooperation with other agencies, provincial or federal, to attract businesses to the rural areas?

We know that the trend we're seeing is a long-term one, and to the extent that we can deal with that tide, it's going to improve the quality of life in rural areas such as we want it to improve in the urban areas. I'm just wondering if there is any long-term thinking in terms of helping businesses move to rural areas.

Mr. Robert Dunlop: That's a very good question. It's something the bank has looked at, though perhaps not in terms of attracting businesses from one part of the country to another.

They work in partnership with FedNor. By doing that, you have the ability to finance unconventional businesses for northern Ontario or other areas in those regions as part of a national network that understands knowledge-based business. In working with FedNor and the other regional development agencies, part of the goal is to share the knowledge BDC has as a national institution with particular experience in knowledge-based and exporting businesses, and to make sure that expertise and financing is available in other regions so it's not an impediment and they won't say, “I don't want to start that kind of business here because the local finance provider won't understand it.” We're trying to reduce the impediments to developing unconventional businesses in other areas. We were talking about that before as something where it's very important that both the department and BDC are active.

Mr. Brent St. Denis: I know that in my area, which tends to be mainly forestry, mining, and tourism, if a business goes in with a proposal that is outside of those three, it's a much tougher sell. They're already starting several steps behind the client who goes into a bank where the economy is at a much higher level and is more diversified.

Does Industry Canada and/or BDC somehow engage itself with immigration officials? I think it's fairly obvious that immigration has been important to this country in the past, as it is at present; arguably, it will be even more important in the future. I would say that since the census report, in rural areas there has been an opening of minds to the possibility that we're going to have to be more aggressive in terms of attracting immigrants from all around the world to participate in and contribute to our rural economies, in my case the economy of northern Ontario.

When it comes to business/immigration programs, are there any discussions, policy thinking, going on in terms of let's do less to stimulate the immigration to the large urban areas and more to stimulate that immigration to the rural and less-populated areas?

À (1040)

Mr. Robert Dunlop: I'm afraid you're a little bit outside of the mandate or the area for which I have direct responsibility or knowledge.

Mr. Brent St. Denis: In general terms, is it something that would make sense for the BDC and Industry Canada? I know we have the innovation agenda of HRDC and Industry Canada. I'm just wondering if, apart from elected people saying we should do this, those discussions are starting to take place generally, or else are taking place at the level of the public service.

Whenever there's a need to save some money in a federal department, we tend to believe we should move the people from Sudbury to Toronto, even though it's harder on the workers. They don't get a pay increase to spend more on apartments and housing, and they don't get a pay increase to spend more on taxes. There tends to be a mindset that an easy way to save some money is to close an office. This is something that's been happening for a long time. It's sort of a general attitude among middle and senior management, without pointing any fingers.

I just wonder if there's any thinking, just in general terms, about how we approach getting people back into the rural areas. With modern technology, distance doesn't matter as much any more.

Mr. Robert Dunlop: Certainly all the research I've seen supports the idea that immigration is a very important source of dynamism for all kinds of reasons, economic ones included. Canada has benefited mightily from the immigrants we've had. As you well know, they tend to go to three major centres in this country.

I'm not aware of any specific initiatives that the Department of Immigration—and it would likely be more of interest in the regional development agencies—has taken beyond the Immigrant Investor Program. I'm not very aware of the details around how that works. Certainly, in terms of an avenue of pursuit, given the importance of immigration to economic development, I think it's something that's useful for members for rural ridings to look at.

Mr. Brent St. Denis: Thank you. We'll raise that with the president. I believe he'll be coming at some point.

The Chair: Thank you.

I'm going to go to Mrs. Desjarlais and then to Mr. Rajotte, who has to leave early.

Mrs. Bev Desjarlais (Churchill, NDP): I have just a quick question. You mentioned that the mandate is to complement private sources that may be there for businesses. Is there also a complementary aspect to other regional government departments, as you mentioned, that may have some financing involved? I know you didn't say this, but could Western Economic Diversification or ACOA be the complementary lender as well?

Mr. Robert Dunlop: Yes, they can. The BDC has partnerships with regional development agencies. Obviously they have a different mandate and provide funds on a different basis, but the BDC works closely with them, yes.

Mrs. Bev Desjarlais: Would they be involved in a number of the endeavours that take place? Would the different regional agencies be partners in a number of loans that go out?

Mr. Robert Dunlop: I can't say, in terms of the total activity of the bank. We can signal that as a question to be answered tomorrow, if that's all right.

Mrs. Bev Desjarlais: Sure, that's fine. Thank you.

The Chair: Mr. Rajotte.

Mr. James Rajotte: I want to return to the mandate of the BDC, and you mentioned that in an answer to me. It has two, basically. One is public policy and the other is a return on equity. Traditional financial institutions do not have to worry about the public policy. They focus on the return on equity. How do you fit the two together? It must be difficult at times, because the marketplace and public policy are not always congruent. How do you do so when they aren't?

Just reading through former Minister Manley's letters at the back of the review here, it's interesting that in his first letter he focuses very much on technology industries and on venture capital. Then on his last page he talks about businesses with special needs. If you go to his next two letters, he begins with businesses with special needs. Has there been a shift in focus from the return on equity aspect to the public policy aspect, starting with Minister Manley and continuing? How do you fit it together when the two of them are perhaps not congruent?

There's a lot of talk in here about funding youth businesses. Minister Manley talks about that. Do you approach that more from a public policy perspective than from a social policy perspective? How do you balance the two when you look at a case like that?

À (1045)

Mr. Robert Dunlop: You've put your finger on an absolutely fascinating area in terms of crown corporation governance. You'll have the advantage tomorrow of the chairman of the board, who comes from a career in the Bank of Nova Scotia and now deals in this more complex environment of doing exactly the balance that you've described, which doesn't come with an easy “therefore you do this in this circumstance” kind of model.

I would begin, though, by noting that even the commercial financial institutions don't operate in a world where profit maximization is their only objective. I've participated as a witness on this committee and witnessed as you talked to the commercial banks about their other obligations in dealing with small business. I think it's just a question of degree that the BDC is obviously more sensitive to meeting those other needs and has a mandate directly from its shareholders to do so.

In terms of whether there has been a change, I think, in a way, you might have picked up a change over those three letters, in that at the beginning the BDC was first given its mandate to earn a return on equity as opposed to covering its losses. So at the beginning, the focus was to have management learn how to run a profitable business and to become experienced in that area, and as they've demonstrated over the five years, in each of those years they've made a positive return. They've averaged a 12.5% return on equity. That's significantly lower than the commercial banks have in that period; however, the BDC has also dealt specifically with markets that the banks see as very high-risk and difficult.

So as the BDC demonstrates its ability to be profitable in those areas, it's natural that the interest in serving the particular markets that need that complementary role is one that the shareholder will be more interested in.

Mr. James Rajotte: I assume I know the answer you're going to give me, but is the mandate too broad? You're asked to do the knowledge-based industries, the venture capital, small business financing, and then address businesses with special needs. It seems to me a very broad mandate. Is it beyond the scope of one agency or one crown corporation? Should it be split between two, or should it be dispersed to other agencies? Is the BDC able to meet all the needs of its mandate?

Mr. Robert Dunlop: I think if the question were that the BDC were uniquely tasked as the only institution of government to meet the needs of the various types of business and demographics of ownership of business, you'd be correct. The BDC has to be seen as one of the elements that the federal government and other levels of government bring to answering those questions. The issue is, in terms of mandate, whether it's addressing the kinds of needs that are amenable to a solution by a profit-seeking institution.

Our conclusion in the mandate review isn't written down per se, but if you're dealing with a commercial entity like a small business, which also has a goal of making a profit, there is a certain symmetry and understanding when you deal with a profit-seeking bank. The two parties sitting across the table understand each other, that the BDC is not there to provide a subsidy to the small business person but to provide financing on commercial terms, and the two parties can understand each other.

So I wouldn't say the BDC is the answer to all the issues in these areas, but I think in those areas where you're dealing with a profit-making institution, there's a certain benefit in dealing with an institution like the BDC as opposed to perhaps another kind of government intervention.

Mr. James Rajotte: Thank you.

The Chair: Thank you.

Are there any more questions? I need to go around the room.

Mr. Bergeron.

[Translation]

Mr. Stéphane Bergeron: Thank you, Mr. Chairman.

I'd like to touch briefly on customer service. As we know, the BDC takes great pride in its customer service.You examine this area on pages 25 and 26 of your report, with particular emphasis on the role of the ombudsperson. In fact, you quote some figures on page 25 and state the following:

An average of 84 complaints per year have been handled since the appointment of the ombudsman in August 1995. Of the complainants, 40% were satisfied with the resolution of their complaint, 27% acknowledged the Bank's position and 33% remained dissatisfied with the ombudsman's response.

First of all, I'm pleased that you included these figures in your report. As I recall, I was contacted by a reporter in December who told me she was completely dissatisfied with the responses she had received from the BDC and from BDC's ombudsperson. She was looking for this very information, namely the number of complaints handled per year and the level of satisfaction of businesses that turn to the ombudsperson, but didn't get anywhere. I'm pleased to see that this information has been made public in your report.

What possible reason could there be for the ombudsperson and for the BDC to be so reluctant to release these figures which, to my mind, are relatively trivial, if not insignificant?

As for my second question, when you say in your report that 33% of complainants remained dissatisfied with the ombudsperson's response, you're referring to those businesses that look to the ombudsperson for an answer. Don't you find this figure somewhat high? Why do you think so many of the businesses that turn to the ombudsperson remain dissatisfied after their complaint has been reviewed? Could it be the ombudsperson lacks the independence required to produce results that businesses would find satisfactory?

À (1050)

Mr. Robert Dunlop: Why weren't these figures available earlier? I can't answer that question. It's standard practice for the private sector ombudsperson and for his counterpart at the BDC is to publish these statistics annually. I can't answer this question because this matter wasn't discussed, but I do believe it's standard procedure for the BDC to release these figures.

As for the ombudsperson's performance, I can tell you that the BDC has approximately 20,000 clients, 84 of whom sent a complaint to his office. If one third of these clients were unhappy, this is still only a small minority of the Bank's overall clients who expressed some dissatisfaction with the ombudsperson's response.

I don't have the figures here with me, but I do know that the private sector ombudsperson publishes the same kind of data. Perhaps we could get that information from the private sector and this would give us some basis for comparing the performance of the Bank's ombudsperson with that of his private sector counterpart.

Mr. Stéphane Bergeron: Would it be possible to get that information to us at a later date?

Mr. Robert Dunlop: Certainly. The figures are published in the annual report of the private sector ombudsperson.

Mr. Stéphane Bergeron: Now then, Mr. Dunlop, I want to make myself very clear. I'm not talking about the level of dissatisfaction of the BDC's clients in general, because as you rightly pointed out, and as I mentioned as well at the outset, the Bank is trying to focus on customer service and customer satisfaction, and I would have to say that in most cases, its efforts are proving successful.

My concern is that one third of the 84 customers who complain each year to the ombudsperson remain dissatisfied with the response provided. How is it that these clients, who see the ombudsperson as a last resort and someone who will act independently, are still dissatisfied? Again, I'd like to see how similar institutions in the private sector compare, from a percentage standpoint. Perhaps we'll discover that the percentage of dissatisfied customers is higher in the private sector. Or maybe it will be the same, or even lower. Then we can draw some conclusions. However, I maintain that when one third of customers are dissatisfied with the ombudsperson's responses, that's unacceptable.

À (1055)

Mr. Robert Dunlop: That would be a good question to put to the President tomorrow. From a policy standpoint, we have worked with the Bank to try and find out why customers are dissatisfied. We wanted an ombudsperson to be on the job and we wanted a system in place whereby a client who was experiencing problems could work with the Bank. We have looked at the results and any discrepancies in the Bank's performance may be attributable to policy matters.

I think either Mr. Vennat or Mr. Ritchie will be in a better position than I am to answer that question.

Mr. Stéphane Bergeron: Thank you.

[English]

The Chair: Thank you, Mr. Bergeron.

Mrs. Desjarlais.

Mrs. Bev Desjarlais: If we look at pages 115 and 116 of the report, these highlight the different groups that, I take it, support the need for targeted government programs to assist them in getting financing.

The one I want to make note of specifically is the paragraph from women entrepreneurs, who indicate that they have great difficulty getting financing from the banks. I notice it talks about a focus group. I'm wondering whether there was any liaison with, say, the Canadian Federation of Business and Professional Women's Clubs, and whether or not they had comments in this area as well.

I guess I'm questioning it because the first part of the paragraph indicates the problems they have getting loans from the banks, and the last sentence says the banks have done a study, and they don't see this as generically discriminatory, within a study that was paid for by the banks.

It just seemed a little bit wishy-washy there...rather than use a different choice of terms.

Mr. Robert Dunlop: Certainly this is an area of ongoing study. The Thompson Lightstone findings were that there wasn't evidence of discrimination. One of the reasons why in fact we were given a mandate to replace the research and statistics published by the banks was so that there would be a Government of Canada, Statistics Canada, source of information so that these issues could be addressed on a more systematic basis and there wouldn't always be questions about who was funding the research and whether it was biased or not.

The BDC has worked with Mount Saint Vincent University to produce a study on the financing of women-owned enterprises in the country, reviewing the academic research and other research on this issue and other issues around it to help them build a better relationship with their women-owned businesses. Certainly at the BDC their portfolio is growing amongst women-owned businesses twice as fast as the overall portfolio. So they're taking those lessons to heart and applying them in their lending practices.

But the question you raise is one that we hope to be able to answer with solid, non-partisan statistics. That's one of the things we'll be reporting to you on in the next years as we collect data under the finance data initiative.

Mrs. Bev Desjarlais: Okay, thank you.

That's it.

The Chair: Are there any more questions?

Mr. Fitzpatrick.

Mr. Brian Fitzpatrick: It just occurred to me, sir, that based on my experience with small businesses in rural Canada--to get back to that topic--there may be some overlapping jurisdiction with the federal government. I'm not putting you on the spot for that, because I think that goes with the territory. The left hand quite often doesn't know what the right hand is doing in this town.

Farm Credit Corporation now has the legislative power to move into venture capital, investing in rural Canada, and also to make loans to agriculture-related businesses--which, in rural Canada, gives them a pretty wide mandate, because most of the businesses in rural Saskatchewan are geared to providing services to the farming community.

Then you have the small business loan guarantee programs, which, to me, seem to be filling in a gap, to use your terminology, or the banks glady take government guarantees to provide funding to special-need cases out there. I've never seen banks really turn their noses up at these programs. They seem to love them. But there's a host of these things around.

There are also farm improvement loans in existence. Then in Saskatchewan there are these--I hope I have the right terminology--rural development corporations that were initiatives of this federal government. Again, my experience with these organizations is that they're filling in gaps. They provide guarantees that provide some interim financing, bridge financing, all sorts of things that supposedly the regular financial system doesn't provide.

So looking at those sorts of things, I'm just wondering whether your bank isn't running at cross-purposes with a whole lot of other government initiatives.

Á (1100)

Mr. Robert Dunlop: Sir, that's an excellent question, and something we have to be aware of all the time, because there are a number of other government initiatives out there. Certainly the work of parliamentary committees and the Senate committee pointed to the danger of the financial crowns competing against each other. In the world of financial institutions, the four federal financial crowns are tiny, so it makes no sense for them to be competing, one against another.

We've designed a structure to try to avoid this. There's an organization called the Council of Crown Financial Institutions that consists of the presidents and the chair of the Business Development Bank, the Farm Credit Corporation, the Export Development Corporation, and the Canadian Commercial Corporation, which is the smallest. They meet regularly to coordinate their activities to ensure they're not overlapping. There's also cross-training of staff in these institutions, so they understand the products and services offered by the others.

There are two key relationships. One is between the BDC and the Farm Credit Corporation, exactly for the reason you've stated, which is that the Farm Credit Corporation has been given a mandate to move beyond the farm gate. The BDC and the FCC have been working on determining which of the financial crowns supports businesses in those areas, which has minimized the potential overlap between them.

The other relationship, of course, is between the EDC and the BDC. The EDC provides guarantees for export sales; it doesn't provide investments per se. They're now doing some venture capital related to exports, but again we don't see a major overlap between the mandates.

On the other programs you've mentioned, perhaps the largest intervention of the federal government outside the BDC is the Canada Small Business Financing Act. It provides a partial loan loss guarantee to private sector lenders that make loans to small businesses. The overwhelming proportion of this, two-thirds, is to firms that have been in business for less than two years, and most haven't been in business at all. The real benefit of the program is that it establishes a first loan and a relationship with a commercial lender.

Again, the BDC is not a full-service bank. It doesn't offer current accounts or chequing. Every BDC client is also a client of a commercial bank. More than anything else, the CSBFA establishes that first relationship with a commercial lender. I note as well that this is a program we are mandated to run on a cost-recovered basis. So the small business pays fees to cover the losses that are experienced under the partial loan loss guarantee.

Again, we don't see that as an overlap with the mandate of the BDC, which provides niche products that commercial banks aren't providing. Clients of the BDC still need to be clients of commercial banks, and the Canada Small Business Financing Act encourages the creation of that relationship at very early stages.

Á (1105)

The Chair: Are there any further questions?

I'd like to thank you, Mr. Dunlop and Mr. Webber, for being with us on the review portion. Tomorrow we'll refer to some of the questions that have been deferred. I'm sure they'll be answered in detail, since we had a dry run with them today.

Thank you very much. The meeting is adjourned until tomorrow afternoon.