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37th PARLIAMENT, 1st SESSION

Standing Committee on Industry, Science and Technology

EVIDENCE

CONTENTS

Wednesday, April 17, 2002

1530

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

Mr. James Rajotte (Edmonton Southwest, Canadian Alliance)

The Chair

1535

The Chair

Mr. Cedric Ritchie (Chairman of the Board, Business Development Bank of Canada)

Mr. Michel Vennat (President and Chief Executive Officer, Business Development Bank of Canada)

1540

1545

The Chair

Mr. James Rajotte

Mr. Michel Vennat

1550

Mr. James Rajotte

Mr. Michel Vennat

Mr. James Rajotte

Mr. Michel Vennat

1555

Mr. James Rajotte

Mr. Michel Vennat

The Chair

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

1600

Mr. Michel Vennat

Mr. Brent St. Denis

Mr. Michel Vennat

Mr. Brent St. Denis

Mr. Michel Vennat

Mr. Brent St. Denis

The Chair

Mr. Brent St. Denis

Mr. Michel Vennat

1605

The Chair

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

Mr. Michel Vennat

Mr. Stéphane Bergeron

1610

Mr. Michel Vennat

Mr. Stéphane Bergeron

Mr. Michel Vennat

Mr. Stéphane Bergeron

Mr. Michel Vennat

Mr. Stéphane Bergeron

1615

The Chair

Mr. Larry Bagnell (Yukon, Lib.)

Mr. Michel Vennat

Mr. Larry Bagnell

Mr. Michel Vennat

Mr. Larry Bagnell

Mr. Michel Vennat

The Chair

Mr. Larry Bagnell

Mr. Michel Vennat

Mr. Larry Bagnell

Mr. Michel Vennat

1620

Mr. Larry Bagnell

Mr. Michel Vennat

Mr. Larry Bagnell

The Chair

Mr. Brian Fitzpatrick (Prince Albert, Canadian Alliance)

1625

Mr. Michel Vennat

Mr. Brian Fitzpatrick

Mr. Michel Vennat

1630

The Chair

Mr. Binet

Mr. Michel Vennat

Mr. Gérard Binet

Mr. Michel Vennat

Mr. Gérard Binet

The Chair

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

Mr. Michel Vennat

Ms. Cheryl Gallant

1635

Mr. Michel Vennat

Ms. Cheryl Gallant

Mr. Michel Vennat

Ms. Cheryl Gallant

Mr. Michel Vennat

Ms. Cheryl Gallant

Mr. Michel Vennat

The Chair

Mr. Serge Marcil (Beauharnois--Salaberry, Lib.)

Mr. Michel Vennat

Mr. Serge Marcil

1640

Mr. Michel Vennat

Mr. Serge Marcil

Mr. Michel Vennat

Mr. Serge Marcil

Mr. Michel Vennat

Mr. Serge Marcil

Mr. Michel Vennat

The Chair

Mr. Michel Vennat

Mr. James Rajotte

The Chair

1645

Mr. James Rajotte

Mr. Michel Vennat

Mr. James Rajotte

Mr. Michel Vennat

Mr. James Rajotte

Mr. Michel Vennat

Mr. James Rajotte

Mr. Michel Vennat

Mr. James Rajotte

Mr. Michel Vennat

The Chair

Mr. Michel Vennat

1650

Mr. James Rajotte

Mr. Michel Vennat

Mr. James Rajotte

Mr. Michel Vennat

Mr. James Rajotte

Mr. Michel Vennat

Mr. James Rajotte

Mr. Michel Vennat

Mr. James Rajotte

Mr. Michel Vennat

The Chair

Mr. Larry McCormick (Hastings--Frontenac--Lennox and Addington, Lib.)

1655

Mr. Michel Vennat

Mr. Larry McCormick

Mr. Michel Vennat

Mr. Larry McCormick

Mr. Michel Vennat

Mr. Larry McCormick

Mr. Michel Vennat

Mr. Larry McCormick

Mr. Michel Vennat

Mr. Larry McCormick

Mr. Michel Vennat

1700

Mr. Larry McCormick

The Chair

Mr. James Rajotte

Mr. Michel Vennat

Mr. James Rajotte

Mr. Michel Vennat

Mr. James Rajotte

Mr. Michel Vennat

1705

Mr. James Rajotte

Mr. Michel Vennat

Mr. James Rajotte

Mr. Michel Vennat

Mr. James Rajotte

Mr. Michel Vennat

The Chair

Mr. Dan McTeague (Pickering--Ajax--Uxbridge, Lib.)

Mr. Michel Vennat

1710

Mr. Dan McTeague

Mr. Michel Vennat

Mr. Dan McTeague

Mr. Michel Vennat

Mr. Dan McTeague

Mr. Michel Vennat

Mr. Dan McTeague

Mr. Michel Vennat

Mr. Dan McTeague

Mr. Michel Vennat

Mr. Dan McTeague

The Chair

1715

Mr. Michel Vennat

The Chair

CANADA

Standing Committee on Industry, Science and Technology

NUMBER 077

1st SESSION

37th PARLIAMENT

EVIDENCE

Wednesday, April 17, 2002

[Recorded by Electronic Apparatus]

¹ (1530)

[English]

The Chair (Mr. Walt Lastewka (St. Catharines, Lib.)): I call this meeting to order.

The order of the day, pursuant to Standing Order 108(2), is consideration of the Business Development Bank of Canada further to subsection 36(3) of the BDC Act.

A matter of information, we do have an item of business. As soon as we have nine members in the room, we'll then go through with the motion on the record.

I apologize to the witnesses. We have one item of business to clear up. There was a motion circulated on Monday. We dealt with it partially yesterday at the meeting in terms of serving notice. We agreed we would move this motion today. It's been revised slightly. Everybody has the revised copy. It's written on the order agenda.

Basically the message is very clear. Once there are guidelines for ministers involved in organizing leadership campaigns as well as any other matters concerning his mandate, the ethics counsellor will be called to the committee.

My objective would be to send a letter to the ethics counsellor in advance to make sure this happens immediately when the guidelines are issued.

Are there any questions?

Mr. Rajotte, did you want to make any further comment?

Mr. James Rajotte (Edmonton Southwest, Canadian Alliance): Mr. Chairman, I thank you for your efforts in working with me on this motion.

It's my understanding the guidelines have been developed already. I would certainly support this motion as written, but I would hope that we could send a letter asking the counsellor to appear at his earliest convenience, assuming the guidelines are already prepared.

The Chair: That is exactly what I will be directing the clerk to do, to send that letter.

Mr. James Rajotte: Thank you.

The Chair: There being no further questions on the motion, we'll vote on it.

(Motion agreed to [See Minutes of Proceedings])

¹ (1535)

The Chair: Thank you very much.

We'll now continue with our second of two scheduled meetings concerning the Business Development Bank of Canada Act. As I mentioned yesterday, part of the act stipulates that a five-year review be made. We had the department and the people who reviewed the BDC here yesterday, with numerous questions. A number of questions were moved from yesterday to today.

I will begin by asking Mr. Ritchie to make some comments. Then, Mr. Vennat, you are going to do a presentation, I think.

Mr. Ritchie, please.

Mr. Cedric Ritchie (Chairman of the Board, Business Development Bank of Canada): Thank you, Mr. Chairman.

As chairman of the BDC board, it's my pleasure to be here today to convey the full support of BDC directors for the recommendations contained in the report presently being examined. Based on my banking experience, I can affirm that despite its small size in the Canadian financial landscape, BDC is extremely effective at fulfilling its mandate of serving Canadian small and medium-sized businesses whose financial needs are not necessarily met by traditional financial institutions.

In directing and managing the business and affairs of the bank, the board approves the strategic direction of the bank, safeguards the resources of the bank, monitors corporate performance and compensation policies, and ensures proper financial reporting to the shareholder.

Since receiving its new mandate in 1995, the board has constantly refined its governance framework based on the input of its governance committee. These refinements have improved the quality of the board's role and enhanced its effectiveness, in compliance with the Financial Administration Act and relevant Treasury Board directives.

Now let me go to the main recommendations contained in the report: that the BDC's current mandate be reconfirmed; and that the BDC Act be maintained as is. The board agrees there continues to be a public policy rationale to maintain an institution such as BDC. As demonstrated by the bank's results since 1995, there continues to be a strong demand for BDC services. The results achieved in supporting Canadian SMEs allow the board to confirm to members of this committee that the bank was managed in the best interests of all Canadians.

As members of this committee know quite well, the Canadian economy is highly dependent on the ability of Canadian entrepreneurs to realize their dreams and create employment for all Canadians. But access to adequate financing remains a barrier to the development of many Canadian small businesses, making it important that the federal government continue to support SMEs through vehicles such as the BDC.

I now, Mr. Chairman, will turn the floor over to Mr. Vennat.

Mr. Michel Vennat (President and Chief Executive Officer, Business Development Bank of Canada): Thank you very much, Mr. Chairman. Thank you for inviting me to take part in this review.

[Translation]

I am proud to be here today before this committee and proud of the Bank's many accomplishments since 1995. Because of these accomplishments, I believe that the Bank's mandate is even more relevant today than it was in 1995.

¹ (1540)

[English]

Since 1995 we have transformed the bank from a lender of last resort to a niche lender, focused on the growth and development of small and medium-sized businesses in Canada. During the five years covered by the report, we have provided financing and consulting to well over 30,000 Canadian small businesses. Our loan portfolio now exceeds $6.2 billion, and our venture capital portfolio exceeds $350 million. Simply put, the BDC exists because adequate access to financing remains an issue for many Canadian SMEs. As a complementary institution, BDC fills gaps for small businesses whose needs are not addressed by traditional financial institutions.

In concrete terms, this means we take more risks, are more flexible, serve the small loans market, and are eager to finance the new economy.

Let me give you some examples. As you'll see on the screen, the risk profile of our portfolio is greater than that of traditional financial institutions. Three-quarters of the bank's lending transactions are for sums of $250,000 and less, and more than half for $100,000 or less. BDC also focuses on the financing needs of knowledge-based industries, with the bank's share of lending to KBIs and exporting quadrupling since 1995.

[Translation]

We are proud to work with other financial institutions with whom we have negotiated a number of alliances. In fact, referrals from other financial institutions now account for 30% of annual authorizations and many of our transactions are done in direct partnership with these institutions.

I was pleased to hear that a representative from a Canadian chartered bank stated before this committee last December that BDC was not in competition with the chartered banks and that it would be detrimental to SMEs if BDC disappeared.

[English]

Another example of our flexibility is our reaction to the tragic events of September 11. Less than two weeks after the events, we offered all our regular customers the option of postponing principal payments for four months, giving entrepreneurs a chance to get back on their feet and plan for the future. Indeed, more than 37% of our customers availed themselves of this option.

BDC has also implemented strategies that favour local decision-making. Close to 95% of our credit decisions are made at the regional level and are based on local economic realities. In fact, 44% of our lending portfolio is in rural Canada.

The bank's success is defined largely by the strong relationships we build with small businesses across the country, and through our innovative approaches. For example, our entrepreneurship centres have improved our efficiency in managing loans of less than $250,000. Our virtual branch, BDC Connex, enables entrepreneurs from all over the country to apply for financing online at any time, from anywhere.

Our success in focusing on our customers is reflected in the 91% level of customer satisfaction we received last year compared with an industry average of 69%.

[Translation]

In fact, the Groupement des chefs d'entreprise du Québec recently confirmed that BDC positioned itself an easy first in customer satisfaction with a 92% rating. We are also gratified to have dedicated employees who have taken their customer relations to heart. In fact, the dedication of our workforce was recently confirmed when a survey reported a 75% commitment rating to the bank.

¹ (1545)

[English]

Our loan programs range from those targeted to micro-businesses to those aimed at helping entrepreneurs improve their productivity by acquiring equipment or new technologies. We also offer subordinate financing, which is an innovative financing approach.

Our venture capital activities are also becoming increasingly important to Canadian SMEs. Our portfolio has increased from $44 million in 1995 to over $370 million this March. These investments were made in high-technology companies at early stages. We now have direct investments in 145 companies, plus another 85 investments through our participation in other specialized funds.

These investments have also produced a 10-year internal rate of return of 25%, which is outstanding in this field.

[Translation]

BDC Consulting Group, with nearly 30 years' experience and a national network of some 500 independent consultants, completes more than 5,000 project annually.

Another important BDC feature is its ability to work with aboriginal entrepreneurs, women entrepreneurs and young entrepreneurs.

[English]

Finally, Mr. Chairman, while we have been successful in meeting our public policy mandate, we have also achieved financial success. We have had a positive net income in each year of the review period, with total profits exceeding $200 million. For fiscal 2001, we posted a net income of over $88 million, the second highest ever. This year we will again achieve solid profitability despite a very difficult venture capital market.

These results are in compliance with Treasury Board objectives that we earn a return on equity at least equal to the government's long-term cost of funds.

I'm also proud of our efforts to improve the efficiency of our operations. Over the review period, our productivity ratio—which measures the efficiency with which expenses are deployed to generate revenues—has improved from 60% in 1995 to 48% in 2002. That's the one ratio you want to see go down because the lower it is, the more productive you are.

[Translation]

During the review period, the Bank paid more than $24 million in dividends to the federal government. In fiscal 2001, we declared a dividend of $14 million, and our board has recently approved a dividend payment of $16,7 million for fiscal year 2002. Our Financial assets are extremely solid.

The Bank has prudently increased the allowance for losses in anticipation of an eventual economic downturn, which I must say, has not yet materialized in our books. We have, over the last three years, deliberately increased our reserves to almost 7% of our portfolio to reflect its high level of risk. In so doing, the Bank will be able to withstand unfavourable economic circumstances without requiring additional government funding, and while allowing us to maintain our current level of activity.

[English]

Mr. Chairman, now let me turn to the future.

BDC doesn't pretend to be all things to all people. We operate under a clearly defined mandate from Parliament. What we do, we do well.

[Translation]

BDC's mandate remains relevant as SMEs continue to experience difficulties in accessing the financing they need to grow their business. Structural shifts in our economy demand innovative and flexible approaches to financing. And with newly developing markets, SMEs need a complement of financing, consulting, mentoring and community involvement.

[English]

In this vein, the bank will focus on the following priorities over the coming years. We will continue to innovate to meet the evolving financial and consulting needs of Canadian SMEs. We will increase our loans portfolio to more than $10 billion in the next five years. We will continue to offer first-class customer service with a very dedicated workforce. We will further improve our operating efficiency by reducing our productivity ratio to 44% in 2007. We will continue to operate the bank with a view to constantly balancing our obligation to fulfil our policy mandate in a commercially responsible manner by delivering good profitability and constant dividends to our shareholders.

[Translation]

Mr. Chairman, members of the committee, I believe that the operational picture I have just sketched is consistent with the observations and recommendations of the report you are reviewing.

With the support of our Board of Directors and our exceptional staff, I am proud to head this remarkable Crown corporation.

Thank you.

[English]

The Chair: Thank you, Mr. Vennat. I'll now begin with questioning.

Mr. Rajotte.

Mr. James Rajotte: Thank you, Mr. Chairman, and thank you, gentlemen, for coming in today and presenting to us.

The question I want to start off with is a fairly broad one that we did discuss yesterday in terms of the mandate of the BDC itself. It was described yesterday by the Department of Industry officials as a two-pronged mandate. One is obviously to maximize profits and to provide a service to businesses that is not currently provided by other financial institutions. The other is really what's called more of a public policy or social policy mandate, particularly in terms of providing economic opportunities, as it says in here, to youth, to aboriginal businesses and the like.

In reading through the letters from former Department of Industry Minister Manley, I tend to notice a shift from perhaps the former to the latter in terms of the focus of the mandate. I'm wondering if you wanted to comment on that.

Mr. Michel Vennat: Ours is a public policy mandate; we are a crown corporation. Our objective is not to maximize profits. Our objective is to promote the development and growth of small businesses in such a way that we can make enough profits to: (a), ensure that the capital of the bank is preserved; and (b), ensure that there's enough growth in our capital base so that we can do more.

It's a juggling act, but it's an act that we have been able to successfully achieve over the last years. So we are always mindful that we are there to fill gaps and that we are there to be there in complementarity, that is, in partnership with other financial institutions.

As a result, we have a very focused approach. We don't try to be too broad, because if we try to, as a relatively small financial institution, we have no impact. We try to be useful, where there are gaps in the financial marketplace.

Now, these gaps evolve over years, but we believe those gaps that were identified four or five years ago, that's the size.... We all know it's relatively more difficult to borrow for small borrowers than for big ones.

On the gap of flexibility, although we're in small loans we try to remain flexible as opposed to be formally driven lenders. On the gap of risk, we believe, and we're old-fashioned in that way, that it is our role to take risks. Indeed, in the last year our business went up by 13.5% in the period that saw a mild economic slowdown. The reason for that is we did not change our posture of financing the projects with small business.

So we do not put profitability at the top of the list. Our mandate is to have just enough to remain prudently well capitalized so that we can remain constant in our support to small business.

¹ (1550)

Mr. James Rajotte: Some of the initiatives mentioned in here are couched in terms of aboriginal businesses, or in terms of youth. In terms of the public policy mandate, how do you decide priorities between different groups that do, in your opinion, need some extra attention?

Mr. Michel Vennat: We do that by studying the marketplace. Indeed, in this review you saw that there were two studies made to review whether our mandate was still relevant: one about the offerings of other financial institutions and one about the view of small business about what was required. We try to focus on those areas where the need is more evident. We therefore intend to remain in the small loan business, because that has been identified as something that remains relevant.

We'll continue to be focused not only on the bigger centres in Canada, but to retain the 44% share of our loans in the smaller communities, because that's where we find there still is a lot of need.

Indeed, you'll be glad perhaps to understand that we've reviewed our processes in the last six months and have decentralized further the credit-decision empowerment of our regions. This is very much in line with our finding of a need for more flexibility at the regional level and the findings of the MacKay report, which recommended that there be more decentralization of the credit functions.

We've done it; 95% of our credit decisions are now made at the regional level. We have 18 underwriting centres throughout the country and may add more as our business grows. But today the people who are in charge of our lending decisions have more power than they had a few years back.

Mr. James Rajotte: I have one more question on the BDC's mandate. I was left with the impression yesterday in discussions with the industry officials that the bank is moving towards a more complementary role with other financial institutions and, as you say, filling the gaps. My impression from yesterday was that they see the BDC over time as almost moving out of the gaps it is filling now and allowing the other financial institutions to take those over. Was that an accurate impression of your vision of the BDC mandate?

Mr. Michel Vennat: I think the way I would respond is that we are constantly looking for those gaps, and they evolve over time. Since we have limited resources, we're not going to spend them doing things other financial institutions do well or better than us. So, yes, in fact with time this changes.

Let me give you an example with venture capital. There is a growing base of venture capital in Canada, although it's too small for our needs as a country. Within that base of venture capital there's a broad scope. We have limited our operations at the moment to early-stage financing. We are now finding that within the early stage of new ventures, seed capital is probably where the risk and the need for financial support are greater.

We are in the process of organizing ourselves to be even more active at the seed level and at the level of commercialization of research coming out of educational institutions, or hospitals, or other things like that.

We are not static, and although $7 billion in assets may sound big to me as an individual, I know it's awfully small on the financial landscape. Unless you have a very focused approach, you risk not having an impact.

¹ (1555)

Mr. James Rajotte: In terms of the commercialization of research, how proactive is the bank in seeking out opportunities? I was at the University of Saskatchewan last week to see the synchrotron. They have a place--it's called Innovation Place--right on campus in which researchers work, but they allow companies there. Basically they snoop around and observe all sorts of research going on. If they think something is worth investing in, they are very much hands on in that they can get involved at the early stages.

Would BDC be involved at that early a stage?

Mr. Michel Vennat: We have, in venture capital, six offices across the country. We have one in Vancouver, one in Calgary, and Toronto, Ottawa, Montreal, and Halifax. We have just under 40 professionals in our group, which is a substantial group for Canada, but we cannot be everywhere.

Therefore, we signed a few months ago a partnership with the NRC-- the National Research Council--which in turn has a few hundred professionals on most campuses, including the University of Saskatchewan in Saskatoon. They've gone through our training and we've gone through their training. We use them and are in partnership with them; when they identify things, they bring them to us. That way we can increasingly make sure we don't only look at financing proposals that arise out of the big centres, but that the increasing amount of research and development done throughout the country in a very decentralized fashion is brought to our attention.

The Chair: Thank you very much.

Thank you, Mr. Rajotte.

Mr. St. Denis.

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

Thank you, gentlemen, for being here with your officials.

I was impressed by the fact that you mentioned, Mr. Vennat, that 44% of the lending portfolio was in rural Canada. I represent a large rural riding in northern Ontario.

I would take from one of the charts here, this fourth chart, that over 50% of your lending is $100,000 or less, if I got my colour codes right. Over half of your lending is of a smaller size, but that would typically be in the rural areas. If you were to take that chart and, say, apply it to the rural areas, would the lending there be typically smaller than you might see in non-rural areas?

º (1600)

Mr. Michel Vennat: It is a fact that small businesses in rural areas usually have fewer employees as a whole and so that would be the result. There are many of our clients who are what we call mid-market in regional places, so we don't only try.... We are supportive and we are present. As you know, two branches of the BDC out of five are in those areas. We also use our Internet bank to keep in touch with smaller communities.

But the lower amounts of loans that we make in regions would more reflect the basis of small businesses there, as opposed to being a policy of ours. Our policy, though, is to be present and to try to support, because we're quite mindful that a lot of....

I travel this country extensively. I've been to northern Ontario in January, and I enjoy it there even when it's cold. But everyone I speak to, all entrepreneurs, whether it be in Alberta, in the Maritimes, in Cape Breton, or in northern Ontario, tell us that they would like to have people within their regions who understand the particularities of their market, so that they can get the feeling that the credit decisions are made with more knowledge of their needs. That's what we've done to organize ourselves to do in the last few months. We're very mindful of that.

I think that is a significant difference perhaps between us and other larger financial institutions, although as you know, in the regions, there are also credit movements and things like that, with whom we have cooperation.

Mr. Brent St. Denis: The rural members on both sides of the House of course are mindful of the trend of depopulation. Our folks, for one reason or another, are moving to the cities and not reproducing themselves in sufficient numbers, and so it's very important that the BDC maintain its very strong presence in rural areas. We appreciate that.

I will say by way of comment, that if I compare the BDC to what we saw in the old days, when it was the Federal Business Development Bank, frankly I feel we are getting better service now than we did many years ago. I mean no disrespect to the past, it was a different approach then.

I know I can call up the local office, say in Sudbury, and get virtually immediate response to an inquiry that I might get from a constituent. I wanted to mention this in passing, that I do think you are moving in the right direction when it comes to serving our rural areas. I would of course look for as much as you can do.

I wonder if I could ask more about the issues in the venture capital area. I know, as you said, and I agree with you, that there isn't enough venture capital in Canada. I see the chart shows it's going up exponentially, it would seem, over time. Do you know within the rural areas if you're getting that kind of uptake as well, or is that more of an urban phenomenon?

Mr. Michel Vennat: First of all, I don't think I quite said that there's enough. There's not enough venture capital in Canada.

Mr. Brent St. Denis: No, I said you said there wasn't enough yet.

Mr. Michel Vennat: I'm sorry; there certainly isn't enough.

Again, what we've tried to do in our.... As you can see, when it comes to geographic location, for instance, B.C. would have 20% of our investments, and the Prairies 7%, and Ontario and Atlantic Canada.... So we have deliberately opened offices across the country in order to make sure that we can look at most things that happen.

That's not enough. That's why we use the NRC as one of our partners, because they have representatives on every campus.

One of the things that impresses me most about the investments this country has made in education in the last 10 to 15 years is its decentralized nature. There are now university campuses in Lethbridge and in a number of communities in Newfoundland and northern Ontario, etc.

We wouldn't have the resources to cover all of these things, but with our partnership with NRC we feel confident that we will get a chance to look at the new opportunities that will come out of those investments in education. That's why we made this partnership with NRC and we're very thrilled about it.

Mr. Brent St. Denis: Do I have time for a last question, Mr. Chair?

The Chair: A short question.

Mr. Brent St. Denis: Yes.

With the focus on knowledge-based industries, of course a focus we can all agree is an important one, just the same in our rural areas there's still quite a dependence on the resource sector. While forestry and mining are in and of themselves in their own way advancing their technological capacity, there still is need for lending in the more traditional areas. I know some of the banks are tending to look away from the resource sector and more to knowledge-based industries.

I'm wondering whether within your bank, or our bank, BDC, you are still open-minded when it comes to lending and investing, looking at the potential modest return as opposed to whether it's knowledge-based, or resource sector, or tourism. We need some of the more traditional areas to receive those investments.

Mr. Michel Vennat: Yes, that's a very good question. Let me reassure you on that score.

Although we have specialized in knowledge-based industries, we really deal with industry as a whole. What we try to encourage is for all types of entrepreneurs to invest in their systems, in their technologies, so that they become more productive. The bulk of that of course is in non-knowledge-based industries, as I said. The tar sands are a perfect example. There's nothing more basic than tar sands, but the application of new technologies has led to a huge investment in the tar sands. So technology in traditional industry is very important, and that's precisely what we call our “sweet spot”.

We have programs. For example, we have productivity-plus loans, where we will provide financing for up to 125% of the cost of a project, including from a traditional industry, to implement new systems, or to bring new technology to improve their productivity. Why 125%? Because we know that it's not enough to finance the technology. You need training, and it takes time in order to get the full benefit of these investments.

So that's an example of the things we do. We're growing these products quite fast. They apply to all sectors of the economy.

º (1605)

The Chair: Thank you, Mr. St. Denis.

Monsieur Bergeron.

[Translation]

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

First of all, thank you for accepting our invitation and for bringing a team of people along with you. I'm confident they will help you supply the best possible answers to our questions. Thank you as well for taking the time to meet, if not all, at least a great many of the members of this committee prior to the meeting. We appreciate your concern for providing quality service. However, I have no illusions. I realize full well that you wanted to meet to get some idea of where we were coming from and what kind of questions we were likely to ask you.

Having said this, it was an extremely interesting meeting and I'm fully certain my colleagues share this sentiment.

I'm sorry to be hidden behind all of this technological equipment. Our set-up today is somewhat outdated, to say the least. Of course, I'm not complaining, as I am seated next to a charming lady.

I do have a number of questions for you concerning ethical concerns and conflicts of interest.

The fact is BDC operates according to a number of guidelines primarily designed to ensure that the Bank's operations are completely transparent. It's also true that these guidelines were first drawn up in the early 1960s and were examined by the Board of Directors in 1987 and again in 2001. I do have a question, however. To ensure real objectivity and impartiality, would it not be preferable to have these guidelines reviewed by an independent committee rather than by the Bank's Board of Directors?

Mr. Michel Vennat: First of all, as far as the guidelines are concerned, it's the responsibility of the Board of Directors to ensure that the rules of internal management are appropriate. For this reason, I've taken it upon myself to propose new rules to our Board of Directors. We are very proud of these rules and we have no problem with the committee reviewing them thoroughly. As prudent, proactive administrators, it was our duty to take this initiative. These rules are public knowledge and have been distributed to all MPs. We have assumed our responsibilities and if the committee wishes to examine this matter further, we welcome this action.

Mr. Stéphane Bergeron: Fine then!

I believe all Bank employees are required to pledge in writing that they will adhere to the Bank's code of conduct, meaning that they pledge to behave with honesty, transparency and integrity at all times. In your opinion, is this undertaking on their part sufficient in itself to ensure the objectivity and impartiality of the Bank's personnel? I have to tell you that we were burned by what happened recently in the case of the Auberge Grand-Mère. Do you feel that adequate measures are now in place to prevent a recurrence of this type of incident?

º (1610)

Mr. Michel Vennat: To ensure an ethical business climate, the first thing we need to have are clear rules. That's what we have done. What's more, we have also developed a training program for employees in charge of internal auditing procedures. The Bank conducts training seminars on a regular basis. These give staff an opportunity to discuss different files. Moreover, we are always mindful of such issues. Therefore, to sum up, I think we are now in a better position than ever before. Like anything else, it takes work.

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

Most likely you heard that yesterday—I put a series of questions to departmental officials who appeared before the committee on the rate of satisfaction of businesses who have had dealings with the ombudsperson. According to the report, 33% of persons who turned to the ombudsperson for assistance were ultimately dissatisfied with the responses provided. Admittedly, 84 complaints over a period of one year is not a high number. As I mentioned earlier, the Bank is also praised for the quality of the services it provides. However, wouldn't you agree that in terms of the number of people who turn to the ombudsperson for help and who are ultimately dissatisfied with the responses, 33% is a relatively high percentage? That's the question I asked yesterday. I realize that you can't exactly answer on behalf of the ombudsperson.

Mr. Michel Vennat: No, I can't speak for the ombudsperson, but as far as we're concerned, we've taken steps so that the ombudsperson reports directly to the Chief Executive Office. I wouldn't say that 20 to 30 dissatisfied clients out of a total of over 20,000 clients constitutes a problem.

Every financial institution must contend with problems of this nature. In most of these case, the persons wanted a loan but in our opinion, the risk was too high. For any financial institution, this comes with the territory. Our mandate is to provide promotion and development assistance. However, occasionally, we also have to turn people down. Consequently, I'm not worried by these statistics. On the contrary, I think we have an excellent ombudsman service. The Bank's current ombudsperson has held several high-ranking positions at BDC on the loans as well as on the operations side of the business. I believe the ombudsperson has the tools to do the job, but it's impossible to please everyone.

Mr. Stéphane Bergeron: I agree with you on that score. Who better than a politician to know that's true.

Mr. Chairman, I'd like to conclude by asking another question that I also raised yesterday.

I was happy to read about the ombudsperson's performance in the report because as recently as last December, a reporter told me that she was extremely upset over not being able to pry this information from either the Bank or the ombudsperson.

Does this kind of thing happen often? Do people often try and get information about the number of complaints lodged, or about how these complaints are processes, or about the number of clients satisfied, or dissatisfied, with the answers received? I have to say that I was somewhat surprised by what this reported told me.

Mr. Michel Vennat: I don't know the reported and I don't know the circumstances either. However, as you yourself pointed out, our operations are very transparent. We publish these kinds of statistics on a regular basis. I've hired someone who is extremely qualified to beef up our information services, if need be. I'm confident Mr. Moscovitz will be very attuned to these issues and that in future, reporters will be more satisfied with the services they receive from the Bank's information services.

Mr. Stéphane Bergeron: I'm sure she'll be very happy to hear you say that, Mr. Vennat.

º (1615)

[English]

The Chair: Thank you, Mr. Bergeron.

Mr. Bagnell.

Mr. Larry Bagnell (Yukon, Lib.): Merci, monsieur le président.

For two days we have been doing this and I haven't really heard any major complaints, so I'm not going to have any hard questions.

My riding is the Yukon. That's my major interest. Is it possible to get a report of, say, the last ten years or so of the loans and/or venture capital given out, especially as you said there are different purposes now? Does your computer system have any allocation, by purposes, of those loans?

Mr. Michel Vennat: We do give a regional breakdown, even in the report. I can give it to you right now, if you want.

Indeed, I was in the Yukon a few months ago.

Mr. Larry Bagnell: I'll get that later, so I don't use up my time.

Mr. Michel Vennat: Our portfolio in the Yukon was $26 million, 119 customers in 2001. I don't have them all; we just completed our fiscal year. I would be glad to send it to you for this fiscal year.

Mr. Larry Bagnell: Certainly, and for the last 10 years...basically, what I want to see are the changes over the years.

Mr. Michel Vennat: I'd be glad to table this.

Mr. Larry Bagnell: That would be great.

The Chair: Do you want to go on to your next question and then deal with that after?

Mr. Larry Bagnell: Yes.

I'm assuming that a lot of parliamentarians would like the private sector banking system to carry a lot of the load, which they do. Does the fact that you're increasing your business, services, loans, and venture capital, which is great, mean that we're failing in banking policy in having the traditional financial institutions actually provide service to more and more people? Because I think they are trying to fill those gaps. If you're doing more, perhaps they're not being successful in filling those gaps.

Mr. Michel Vennat: We're doing more, but let's not forget two things. One is that the bulk of the financing to small business is provided by other financial institutions. I have enough on my plate to run my own company, rather than try to figure out their strategy.

Unfortunately, yes, there are still some gaps. I don't think our success should be an encouragement to other financial institutions to do less in small business. On the contrary, it should be an inducement. To the extent that we can do it and do it successfully, I think it should show that you can be engaged in small-business financing and be successful, and that you can take risks.

But don't forget, in our case, the reason we can make some return on investment--because it's not our main focus--and still take the high risk we take is due to the fact that we don't compete with other financial institutions on the basis of pricing. Indeed, in the United States, the cost of financing to small business is higher than in Canada. I believe, as a result, there are more sources of financing. The challenge of financing for small business is not so much one of pricing as it is flexibility and availability.

We exist, and the fact that we can do the things we do I think should be seen by other financial institutions as encouragement to do more.

Mr. Larry Bagnell: Lastly, barring, as I said, hearing any complaints in the last couple of days or in your reports, could you tell us what complaint you receive most often from the public?

Mr. Michel Vennat: I think the complaint I receive most from small business is the one about flexibility and centralized decision-making that prevents enough flexibility. This was identified by the MacKay report.

I am a former businessman, as you may or may not know. When I ran Westburne, there was one thing we never centralized, and that was credit, because I firmly believe better credit decisions are made at the regional level. That's why it was easy for me to recommend to our board, and our board agreed, that we should devote more of our credit resources at the regional level.

That doesn't mean we take more risk. I think we take more intelligent risk by understanding the local markets better.

º (1620)

Mr. Larry Bagnell: This report says 95% of all credit decisions occur at the regional level. So why would people then be complaining to you that there isn't local decision-making?

Mr. Michel Vennat: I don't think I hear a lot of criticism about us. I thought your question was more generic, about availability of small....

Quite frankly, I have been travelling around the country, and I can't tell you that I hear a lot of criticism about us. Quite the contrary; I think our image in the small business community has improved. Our mandate has been seen to be well positioned, and our relations with other financial institutions, chambers of commerce, and the business federation have been improving.

That said, we have a lot to improve. We can do a lot more, and we should do a lot more.

Mr. Larry Bagnell: Thank you.

The Chair: Thank you, Mr. Bagnell.

Mr. Fitzpatrick.

Mr. Brian Fitzpatrick (Prince Albert, Canadian Alliance): Thank you, gentlemen.

I want to address this gap question. It seems to me that risk and investment and return on investment are really at the heart of the market system and the free enterprise system. I'm not going to apologize for using American examples, because they're the heartland of the free enterprise and market system. They control a lot of the world's GDP and they've been a success story in creating wealth. So I think we have to look at models that work.

I can think of four companies that come to mind that 20 or so years ago might not even have existed, and they're right near the top right now--companies like Applied Material Technologies, Inc., Cisco Systems, Inc., Home Depot, and Microsoft Corporation.

I'm quite sure if I followed the history of these companies, their growth, they weren't looking to government or a government agency to fill the gap. The financial markets more than satisfied their needs in that economy.

In this country we seem to be talking about a private enterprise, a small business sector and how we fill the gaps and so on. It seems to me there's something strange about the government filling the risk gap in this area and doing that sort of thing. It seems odd that we've gotten ourselves in that kind of a bind in this country that we look to government agencies to fill those gaps, whereas in other places that's not the case. I guess as time goes on I'm going to try to figure out why in this country we've gotten ourselves in that position.

The other question I'd like to raise draws on my experience working at a provincial level in the practice of law for many years and dealing with banks and financial institutions and so on. The provinces have a lot of legislation that limits the rights of creditors and secured creditors and tries to balance things off with small-business people and debtors, to use that term, and to provide some measure of protection.

I recall back in the eighties that when the farm economy was in a lot of difficulty, Farm Credit Corporation actually took the position that they were a crown agency and that these laws did not apply to the crown. I think there were actually court decisions that protected them on that point.

I always thought that was strange. I thought if the government was going to move into lending, they should abide by the same rules they had created for everybody else. But that was a position they'd taken. You're an organization that's quasi-similar to the Farm Credit Corporation, as you're a creature of the federal crown.

Another concern I have is with the chartered banks. They do their utmost to avoid the provincial regimes that are in place, the personal property registration systems, and all of the provincial laws that provincially created lenders have to abide by--credit unions and so on.

In my province the credit unions are a lot more responsive, generally, to the needs of the rural small business community than the federal banks are.

I'm curious about what your bank's position is on lending practice in the provinces. Do you abide by the rules and the laws that exist in those provinces? Or do you take the same position that you're a crown agency and that these laws do not apply to you? Furthermore, if you have a choice, do you try to take your security under Bank Act security rather than provincial security regimes so you can avoid provincial exemptions and limitations on your rights as creditors?

º (1625)

Mr. Michel Vennat: First of all, on the last point, we abide by the same rules and regulations as any other financial institution. I'm not aware of the situation you're alluding to with the Farm Credit Corporation, but I can assure you we don't claim any special status, from that point of view.

You were talking about general assistance to free enterprise. I'm a free enterpriser and an entrepreneur. I still own some businesses that I've put in a trust, because I can do that. I've run private enterprises. But I do know that in the U.S., assistance to small business is also quite prevalent. Indeed, in some instances it's more prevalent than here.

One of the companies you mentioned was Microsoft. I know that when it started, it got a loan from the Small Business Administration for financial assistance. When I was appointed, I got a letter from the former chairman--but still principal shareholder--of CAE congratulating me and asking me if I knew that CAE got its start with a loan from the IDB, which was one of the predecessors.

Another company we helped in early stages was Rogers, which is a major player now. Ted Rogers told me the other day he once owed $50,000 to the IDB, or something like that. So there's no doubt this country's growth depends on private enterprise. That is why I see our role as being quite limited.

If Parliament or the business community ever tells us that these gaps do not exist any more, I would be the first one to come and recommend to you we be sold or privatized. But I don't think we're there yet, and unfortunately, as the results of the study show, there are still some gaps there.

Finally, when it comes to financial institutions, I agree with you that the credit unions are much closer to the rural marketplace, and that is why we cooperate with them. I had a meeting with the Credit Union Central of Alberta a few months ago, and we are starting to cooperate on.... With those institutions, like Desjardins, there are certain things we specialize in and do in partnership with them and their clients--as we do with the Bank of Montreal or other financial institutions.

So I applaud everything the credit unions and the co-op movement can and should do. Hopefully, as a result of the new legislation, there will be more regional banks created in Canada. That is one of the purposes of this legislation, but up to now they haven't existed.

Mr. Brian Fitzpatrick: The venture capital investments open up a whole can of worms, from a bookkeeping and accounting standpoint. But the ability to properly assess that kind of risk, from a bookkeeping or accounting standpoint, and have it accurately reported on a financial statement presents some unique challenges. I think everybody has referred to some of the problems that have happened in the U.S. lately, and so on, when dealing with things that are not normal, or kinds of securities that are different from what is normal.

I haven't had a chance to really go through your financial statement, and I'm certainly not an expert on this area. But once a person makes an investment in a small business, from a venture capital standpoint, and it's heading into a default situation, where there's going to be a loss eventually, how do you assess and report that?

I'd like to be assured that you report it at a very early stage and don't wait until companies actually file for bankruptcy or liquidate, that you identify it at an earlier stage and it shows up in your financial statements at an early stage, not at a late stage.

Mr. Michel Vennat: Absolutely, that's very important. In venture capital, in lending, as you know, most financial institutions lend more than their capital base. In our case, although our act permits us to go to 12 times lending for our capital base, we have limited ourselves to 10 times. But when it comes to venture capital, we treat every investment as capital. There's no leverage in our venture capital. By this I mean that for the $370 million we've invested, for all of that, we have $370 million of capital.

Every year we review these investments, one by one, to see whether they're still good or whether they should be written down. We write down everything every year that we feel does not have a prospect for profitability. Our method of accounting for our returns is the most conservative you can get under accounting practice. That is, we only calculate our profits when they're realized. So there's no element in our financial statements of valuation when it comes to our investments. But we take all our losses as soon as we think there's been impairment.

So although we feel that there are substantial upsides in our venture capital portfolio, none of that is reflected in our financial statements.

º (1630)

The Chair: Thank you, Mr. Fitzpatrick.

Monsieur Binet.

[Translation]

Mr. Gérard Binet (Frontenac--Mégantic, Lib.): It's a pleasure for me to be here today.

I represent the Chaudière-Appalaches region which is home to a large number of SMEs. Specifically, I'm the Member of Parliament for the riding of Frontenac--Mégantic which takes in the Thetford Mines and Mégantic regions. The Thetford Mines region is hoping for a economic rebirth. In the past, the economy was driven by the asbestos mines, but today, the focus has shifted to SMEs. The situation is looking very good right now.

A group of businessmen approached me to discuss a problem. I'm a businessman as well. I once ran three retail businesses and I now own a small processing plant. Therefore, I'm somewhat familiar with financing. Does BDC finance start-up projects?

Mr. Michel Vennat: Yes, we do.

Mr. Gérard Binet: Really? There is one start-up project in my region. I was told that BDC didn't finance this kind of venture and that's why I asked the question.

Do you grant short-term loans?

Mr. Michel Vennat: No.

Mr. Gérard Binet: Why not?

Mr. Michel Vennat: May I answer your questions as we go along?

Mr. Gérard Binet:Certainly.

Mr. Michel Vennat: Fine then.

The Bank mainly issues term loans with a view to financing projects or start-up ventures. However, we do not finance receivables or inventories, except in very specific cases. This financing area is very well taken care of by traditional institutions.

Mr. Gérard Binet: I see. Thank you.

[English]

The Chair: Thank you very much.

Ms. Gallant.

Ms. Cheryl Gallant (Renfrew--Nipissing--Pembroke, Canadian Alliance): Does the BDC provide loans for patent acquisition and development?

Mr. Michel Vennat: As part of our financing of knowledge-based industries, quite often part of the assets will be patents and development of patents. Of course, in venture capital, all of our venture capital is in new technologies and those moneys are used, amongst other things, for research and development and to acquire patents and develop them.

Ms. Cheryl Gallant: So the product actually has to be developed before you would back a new patent?

º (1635)

Mr. Michel Vennat: No. For instance, in venture capital we invest at a very early stage. Very often, then, all of the technology has not yet been patented.

Ms. Cheryl Gallant: Okay, thank you.

A major obstacle to small business start-ups and the expansions, with the traditional banks, is the requirement for borrowers to hold up as collateral assets that far exceed what the loan is worth. Are the same practices in place with the BDC?

Mr. Michel Vennat: It depends at what level. At the lower level, the smaller amounts, we take greater risk and less security, and sometimes no security. For instance, we have innovation loans of $50,000 or less that are really designed for people who don't have the risk.

Then, as the loans grow larger, we do take security, but a lot of our newer products, like our productivity loans or our innovation loans, have a much lower component of security than traditional financing. That's why we say we take more risk.

Ms. Cheryl Gallant: I really enjoyed the pie graph you had up there, showing the different provinces and the proportions of lending. Would you have a riding-by-riding breakdown of the percentages that you lend out?

Mr. Michel Vennat: No, we don't keep that type of breakdown. We do it on a regional basis.

Ms. Cheryl Gallant: Okay.

So that the private sector can put in place the infrastructure necessary for high-speed Internet, fibre optics, is that the type of lending, in the millions of dollars, that you would provide to a syndicate within a municipality?

Mr. Michel Vennat: No. Most of the infrastructure would be put in place by major corporations such as cable companies. What we would finance, though, are people who would be installers between the infrastructure in the office buildings or the servers, the service industry, things like that.

Ms. Cheryl Gallant: Thank you very much.

The Chair: Thank you.

Monsieur Marcil.

[Translation]

Mr. Serge Marcil (Beauharnois--Salaberry, Lib.): Thank you very much.

Mr. Vennat, according to the report and to our observations, the situation at BDC is evolving. Where do you see the Bank in three or five years' time? What types of services is the Bank currently focussing on in an effort to meet the needs of your clients, namely SMEs?

Mr. Michel Vennat: At BDC, we see the main challenge facing SMEs and Canadian entrepreneurs as being the quest to improve productivity and to be more innovative. Consequently, we are working hard to convince our clients to invest in equipment, systems and skills. With this aim in mind, we have set up advisory programs. As you know, the number one reason why SMEs fail or declare bankruptcy is not their inability to secure financing, but problems encountered with human resources and management skills. That's why we have consulting programs to help businesses with self-review, with assessing their strengths and weaknesses and with drawing up plans to finance productivity enhancements. Increasingly, we want to help businesses enhance their productivity and growth. That's the challenge facing Canadian SMEs. Often, they are too small.

The North American market in which we operate is becoming increasingly global. The United States, the world leader in productivity, are the main market for SMEs and larger businesses alike. In addition, they represent our main competitor. BDC's challenge is to help our clients and Canadian SMEs pick up the pace and become more productive. We will be focussing on programs designed to do just that.

With respect to venture capital, increasingly we will be focussing on seed financing, that is start-up funding, as well as on financing of research marketing conducted across the country.

Mr. Serge Marcil: On the venture capital side, I'm greatly interested in one sector in particular. The question is how to increase the level of participation of pension funds. As an active venture capital investor, what would BDC suggest be done to increase the participation of pension funds of Canadian institutional investors in the venture capital market?

º (1640)

Mr. Michel Vennat: It's no secret that in North America, including in Canada, venture capital has performed better than shares or securities. The problem is convincing pension funds to invest more. This is a relatively recent phenomenon and given the rates and the variability factor, some pension funds managers are somewhat “chicken”, if I can use that expression.

Our experience over the past 10 years is beginning to show that it would be a good idea and a wise move for pension funds and insurance companies to invest in venture capital.

Moreover, we have launched a project to set up a fund in which we would invest our own money and for which we would provide the expertise of our team, which has an excellent record. As mentioned earlier, our rate of return over the past 10 years has been 25%, which is truly remarkable. We will extend this service to pension funds and other financial institutions to encourage them to come on board as well.

We need to convince them to invest in this area and to realize that the risk involved is not unreasonable, but rather, that it is in the interest of the retirees they represent to invest some of the pension fund assets in the venture capital market.

Mr. Serge Marcil: I have one last question. We always hear about loans to small businesses. BDC's focus is more on SMEs, which is an entirely appropriate approach for the Bank to take. We also hear about small loans. Is there a ceiling on loan amounts? Often, the figure quoted is $250,000 or less, but...

Mr. Michel Vennat: We have set an internal limit. The Board of Directors has decreed that no more than 75% of 1%, or ¾% of 1% could be invested in any one loan. Today, ¾% of 1% would translate into $40 or $45 million.

Mr. Serge Marcil: Theoretically then, you would go as high as $40 million.

Mr. Michel Vennat: In fact, we award different kinds of loans... The definition of SME is changing.

Mr. Serge Marcil: I see.

Mr. Michel Vennat: Several years ago, I was attending an evening function in New York. In answer to my question about their line of work, my dinner companions said they ran a small business. Their sales figures totalled $500 million. It all depends on the perception of the person doing the talking. The definition of “small” and “medium” is changing in Canada, and we're changing as well with the times. We grant a number of loans in the $25 million, $30 million and $35 million range, but this isn't true for the majority of our loans. We loan money to our clients to help them expand their business. This helps us to acquire a more balanced portfolio and ensure a rate of return which in turn, guarantees continued growth.

I said the limit was $40 million. In fact, it's more in the neighbourhood of $75 million, but we haven't made any loans of...

[English]

The Chair: That small business figure was in U.S. dollars, too, was it?

Mr. Michel Vennat: It was in U.S. dollars.

Mr. James Rajotte: Is there a difference?

The Chair: Mr. Rajotte.

º (1645)

Mr. James Rajotte: Thank you, Mr. Chairman.

I want to return to the topic that Mr. Bergeron raised in terms of conflict of interest in terms of the BDC.

I asked this actually in a previous meeting with you, and you kindly sent me the guidelines in terms of any relationship between any member of Parliament and the BDC.

I want to clarify when these guidelines were instituted.

Mr. Michel Vennat: There have always been guidelines. The new set of guidelines was presented and adopted by our board in November or December 1999, I think, shortly after I became president. They're set to upgrade them.

Governance is a continuing thing, and the rules of governance for corporations in the private and public sector have been evolving over the last few years.

Mr. James Rajotte: Apparently the ethics counsellor will be doing guidelines relating to the BDC as well. Am I correct in that information, that these guidelines will be changed?

Mr. Michel Vennat: I said 1999, but I think it's January 2001.

Mr. James Rajotte: Will the guidelines the ethics counsellor will be bringing in affect these guidelines in any way?

Mr. Michel Vennat: They may, but certainly I've sent them our guidelines, and I've given him the benefit of whatever experience we have in these matters. If they are different, if they are tighter, we'll make ours tighter, and if they are more liberal, we'll see if.... I think you'll find that our guidelines are as good as any other crown corporation's.

Mr. James Rajotte: Were these updated as a result of the situation surrounding the Auberge Grand-Mère?

Mr. Michel Vennat: Whenever you get a new CEO, you look at matters and you try to improve things.

Mr. James Rajotte: In the guidelines themselves, it states specifically that if a member of Parliament or a senator or a BDC director contacts a representative of the bank, then a copy of a form is furnished to the bank's government relations office and the bank's corporate secretary. I think it's good to have a paper trail set up. I certainly applaud you for that. Are these forms open to the public and other members of Parliament to view, to see exactly--

Mr. Michel Vennat: I forget the section of the act, but as you know we have a duty of confidentiality about the names of our clients. I believe our clients are entitled to the same confidentiality as if they were dealing with the Royal Bank or the Nova Scotia. But we have reports given on a regular basis to our board.

Mr. James Rajotte: But then, what's the purpose of having them? Suppose I, as a member of Parliament for Edmonton Southwest, write to you and the letter goes in a file. What's the purpose of having the letter, then?

Mr. Michel Vennat: I think the real purpose is to make sure everyone is on the level. If you called me about a loan and I wrote you a letter, writings exist; that avoids any doubt as to how we are going to deal with the matter.

Mr. James Rajotte: But if someone else cannot access it, what's the point of having it in writing?

Mr. Michel Vennat: If you write to me about a particular company, I'm sure that company would not necessarily like it that we make public the fact that they are looking for financial assistance from us or any other financial institution. That's why our act is quite specific in providing that we have a duty, an obligation, to preserve the confidentiality of our clients.

The Chair: Not all members have that section, but you might want to explain, if Mr. Rajotte acted on behalf of a company, what the procedure is that follows.

Mr. Michel Vennat: If Mr. Rajotte phoned me or wrote to me or referred something to me, which we would welcome.... We think members of Parliament have a real role to play in this country, and they are elected to do that. The purpose of our guidelines, by the way, is to ensure that there is continuing communication between members of Parliament and the bank.

What we would do is simply write to Mr. Rajotte thanking him for the referral--basically, it says that--and saying we would be dealing with the file in due course.

What the guidelines also stipulate is that at that point, neither the member of Parliament nor his staff could or should attend any meetings between the client and the bank.

That's basically all they do. It's quite simple, but it has worked.

º (1650)

Mr. James Rajotte: You want two things: you want to ensure that the member--myself, if I am writing--acts appropriately, and you want to ensure that the bank acts appropriately. Who then, aside from the parties who are very much involved in the decision, ensures that those two groups are acting appropriately?

Mr. Michel Vennat: I think it's the responsibility of our board. That's why we advise the board and report to them regularly on these matters.

Mr. James Rajotte: I guess my problem is that it seems very much an in-house solution to a problem. Regardless of one's feelings on the Auberge Grand-Mère, whether you think something was done wrong or not I think it would have been much better resolved if there were an independent authority that could have said, this is the information on the table. I certainly applaud you for wanting to have a paper trail, but someone could have judged the paper trail and ensured that either there was something done wrong or not.

My problem, on first reading the rules, is that it seems my letter would go into a file, and it would be in files at the BDC, but--

Mr. Michel Vennat: It's more than that. There's another part of the guidelines that stipulates, if someone approaches me, I will not participate in a decision on that level.

Mr. James Rajotte: But who ensures that you will not participate?

Mr. Michel Vennat: Once I do that, I report to our board. Personally, I would ensure that I don't. The rules are quite clear, and everyone within the bank knows them too.

Mr. James Rajotte: But you not only need a system of accountability, you need some sort of independent authority to ensure that those rules are being followed.

Mr. Michel Vennat: We have auditors who review our loan files every year, internal auditors and external auditors. When they give an opinion to the board, to the shareholders, and to Parliament, they state whether, in their opinion, we have complied with all not only legislative rules, but including the practices of the bank.

As you know, we have two auditors, joint auditors, the Auditor General of Canada and, for the time being, KPMG.

Mr. James Rajotte: The Auditor General has access to the letters in the various files?

Mr. Michel Vennat: They have access to everything, including everything that goes to our board.

Mr. James Rajotte: Thank you.

The Chair: Thank you, Mr. Rajotte.

Mr. McCormick.

Mr. Larry McCormick (Hastings--Frontenac--Lennox and Addington, Lib.): Thank you, Mr. Chair, and thank you, gentlemen.

I'll just ask the gentlemen here to excuse me for a moment. Since I'm not a regular on this committee, I want to congratulate our chair, because I know his work in the past and passion for small and medium-sized enterprises has been great.

Like many people, I've only been here since 1993. You look around at what you might specialize in or what you're going to concentrate on, and after a couple of years, you kind of look at home--that's rural and small-town Canada.

In two and a half years with the government, the national rural caucus, of course, one of the top things we've heard always--we've told this to all the chartered banks, and I wouldn't want to not give you the same opportunity--is that the greatest challenge in rural Canada as the lights are going out across the prairies, or in Ontario, or whatever, is the access to capital.

I am glad to hear you use the word “entrepreneurs” in both your opening speeches. Twenty years ago we probably would have had to go to California to hear the word. So we've come a long way, and certainly the BDC has come a long way in just the last few years. I give you credit. We have a lot of great people working in the BDCs across the country.

But, for example, when a loan is for a little larger amount than what it might be in some small rural areas, not the large loans, it gets passed on to somebody in, say, that little town of Toronto. It doesn't seem to be that many people in the Toronto office would have much knowledge as to what goes on in the Wasaga-Muskoka area.

That's not the area I'm referring to. I'm sure they'd know Muskoka better than they would my riding. I represent a riding with the most kilometres of road of any riding of all of Canada.

The biggest challenge our people have in rural Canada is access to capital.

Another criticism, of course, is of us, the federal government, of what we call a small business. We're always talking about small business as being 50, 150, or 250 people. But I've just come back with our agriculture and agri-food committee from ten provinces, and I worked in another, going back to the provinces several times, and in many rural ridings, small business is not always a large business, in those people's eyes.

I'd like to give you an opportunity to make some comment. When you say 41% of your loans are in rural Canada--and I'm glad to see you doing a better job there--I wonder what your description is. What is rural Canada? As well, what is small business in this country?

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Mr. Michel Vennat: When it comes to rural Canada, it's towns and cities with populations of 10,000 and less. It's a fairly standard thing.

When it comes to small business, we don't have an open and shut.... First of all, we don't only deal in small business. We're in small and medium-sized businesses. A lot of our clients don't like to consider themselves small businesses. It's all in the RSO. We're hoping to help them grow, and that's why we're putting the emphasis on that.

But once you get past a few hundred million dollars in sales and maybe 500 employees, it's a natural evolution. The bigger you get, if you are successful, the more you'll attract the attention of other players in the financial market who are quite prepared and quite capable of giving great service. It's a normal evolution that happens. We help them, and then there comes a point where they have the contacts in the other financial institutions and we become less relevant.

Mr. Larry McCormick: No, I realize that. I have actually talked about the successful partnerships you have had and do have continually across this country, including those with the chartered banks, and now with Farm Credit Canada, which has a new jurisdiction. It can take loans past the farm gate and make them to people who are not registered as agriculture producers.

On your entrepreneur centres, are these same programs available all across the country? Or do you have to run pilot programs before you can go ahead with them?

Mr. Michel Vennat: No, they're across the country. Not every branch has one, but every region does. That's how we can manage to be efficient and still be in the small loan business. There are people who have really become experts, specialized in helping at the very small end of things.

The rules for these loans are more supple and there's less paperwork. The reaction is almost instant. That's why they manage to grow.

Mr. Larry McCormick: That's fine; you can't be expected to have them everywhere. If a person went into a branch without an entrepreneur centre, could he or she get the same information and be steered in the right direction?

Mr. Michel Vennat: Yes, the same information would be provided. We're well equipped in terms of communications to ensure that good service is provided no matter where a person is.

Mr. Larry McCormick: I have one other comment. You mentioned loans targeted to micro-businesses. Is this one and the same as the entrepreneurship centres?

Mr. Michel Vennat: We think that entrepreneurship is the way of the future.

Mr. Larry McCormick: I'm glad to hear that.

Mr. Michel Vennat: We don't use the expression lightly.

I want to come back to something you said earlier, but, yes, they are. I mean, micro-entrepreneurships...are really designed mainly for younger people or for very small enterprises. We have a lot more flexibility in those loans.

Of course the risk here is much greater. I can't tell you we make money on this; we don't. That's why we have a balanced portfolio. In a way we cross-subsidize these things, but we do it because it's important and it's a part of our mandate. If we were only looking for a return on our equity we probably wouldn't do as much.

Mr. Larry McCormick: And that's why we're really glad we have you. I do believe in entrepreneurs and they will continue to build this country.

Mr. Michel Vennat: Mr. McCormick, I was in Cape Breton in January. I know it's not your region, but you talk about the importance of entrepreneurship, and I was struck by the fact that although last year, with the big mine and the steel companies and so on...there were 3,000 more jobs at the end of 2001 than at the beginning. And those are all as a result of entrepreneurs doing things, and doing new things in combination with the fact that we have much better-educated manpower.

For instance, you have call centres in Cape Breton. There are universities and colleges there to educate people. They have the skills and the manpower, and they can find jobs at home as opposed to having to depart.

You've described the regions as having great challenges, but I'd rather see them as having great opportunities. The greatest opportunity for the Canadian economy in the next 10 to 15 years is the fact that the younger people in the regions are better-educated, and have access to better education. They are going to create new opportunities and are really going to be carrying us.

Indeed, as s you know, our economy has performed better than the U.S. economy during the slowdown of the last 12 to 15 months. That is due to the small business sector. Our big corporations, as you know, have had their share of trouble, but the strength of entrepreneurs in Canada has carried us to a great extent in the last 18 months.

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Mr. Larry McCormick: Mr. Chair, I'm glad I was able to come here today. I've heard people say that our government does not have a climate that really encourages entrepreneurs. But with people like this, with the Crown and the BDC, I'm sure we can share some of their words of wisdom and their words of concern; they're trying to invest in entrepreneurs.

Thank you very much, Mr. Chair.

The Chair: Thank you, Mr. McCormick.

Mr. Rajotte.

Mr. James Rajotte: Thank you, Mr. Chair.

I want to clarify two or three issues here. First of all, in terms of a venture capital fund, when you fund projects through this, do you fund all the time in terms of being part of a group or part of a consortium of other people, or does the BDC ever fund projects on their own?

Mr. Michel Vennat: I'd say 90% or 95% of our investments are in co-ventures with others. That's the way venture capital works and that's how you can multiply with limited resources the number of investments. But our presence is always quite important because of our track record, the nature of our team. And the fact that we're there very often means that other players will come in.

That's why we do it in cooperation with other venture capitalists. That's why we've invested in new, specialized funds; we're hoping through that method to encourage other players to come in the venture capital field.

Mr. James Rajotte: I think you mentioned five or six centres across Canada in terms of venture capital. In terms of determining whether something is more risk or less risk for an investment, would they have a fair amount of leeway in determining projects in their office or would they have national criteria established?

Mr. Michel Vennat: We do have six offices across the country but our teams are organized on the basis of specialization. For instance, we have a life sciences group that is headed by one of our senior partners, and there are five or six people throughout the country in life sciences. But if you come into our Halifax office, for instance, in life sciences, even though you may not have the expert there, that way with this matrix organization, we can ensure that we bring the best expertise to bear on every project. So it doesn't matter where you come in. You get the best expertise of people.

I may not have mentioned this to you earlier on, but our team in venture capital is about two-thirds composed of people with a scientific background as opposed to a financial background. Some have PhDs, some have Masters. The key to venture capital in the high-tech industry is to understand whether the new technology that is being proposed by this gung-ho entrepreneur has real potential, whether it's a breakthrough or not, and whether it has a market should the technology be good.

So we have this mixture of scientific and financial backgrounds, and I think it's proven to be quite an asset.

Mr. James Rajotte: Do we rely largely on their judgment for assigning level of risk or are there criteria for guidance?

Mr. Michel Vennat: Oh, yes, we have a very sophisticated due diligence process, and we rely mainly on their judgment. But with their contacts, they go.... For instance, when we assess technologies, very often we'll use outside experts in those technologies to give us an assessment. It's a very systematic approach, which is on par with the most sophisticated of venture capitalists in North America.

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Mr. James Rajotte: Is it fair to characterize it as at least a variation of a peer review process, then, in terms of determining the suitability for a project for funding?

Mr. Michel Vennat: I wouldn't call it a peer review. The biggest risk in venture capital is that whoever proposes it falls in love with his own project. So we have a system of checks and balances. No one makes any individual decisions. There are internal committees, and depending on the size it comes to a very senior level of management, and if it's over $3 million it goes to the board. There are some checks and balances there.

Mr. James Rajotte: Lastly, in terms of the consulting services division, obviously you've identified the need for financing and filling the gaps with playing a complementary role to the other financial instructions, but in terms of the consulting services, could you explain why it is that BDC has a consulting services division and why the private sector itself is not filling the market for this?

Mr. Michel Vennat: The reason for the “why” is that, as I said earlier, one of the biggest challenges of entrepreneurs is to improve their competencies at the same time as they improve their balance sheets, as well as the management skills that are required to grow and grow fast. So there's a real need there.

In the marketplace there are a number of consultants, but our average size of mandate is $11,000, and very few consultants are interested in that size of mandate. In addition, we don't perform the consulting services ourselves. In fact, our consulting group is a clearinghouse where we identify a need, and the services are provided by independent consultants. We have a network of some 500 independent consultants.

We've done that deliberately so that we wouldn't be taking the jobs from private consultants. In fact, we provide work to them.

Mr. James Rajotte: So the BDC contracts with them to provide a consultant.

Mr. Michel Vennat: We give contracts and we provide quality assurance and things like that, but the consulting work itself is done mainly by independent consultants.

The Chair: Thank you.

Mr. McTeague.

Mr. Dan McTeague (Pickering--Ajax--Uxbridge, Lib.): Thank you, Mr. Chairman.

Thank you both for being here today. It's very helpful and very useful for members, especially as your organization continues to play a rather prominent role. Certainly, we hear from constituents their concerns that there is need for more flexible alternatives in terms of financing many of the needs in our various communities.

I have a question I was waiting to hear other members ask, but I'm pleased to see that they have not. You have a public mandate and from time to time a private interest as well. You don't want to keep yourself in a position where you're at variance with other lending institutions. I'm wondering if you could give an illustration, a concrete example, for this committee of the value judgments you may have to assign after taking on a group, lending to a particular organization, while having to carefully balance two often irreconcilable imperatives, that of the public mandate and that of the private interest.

Mr. Michel Vennat: The value judgments are based on experience and are not that dissimilar from.... The first thing is that you look at the financial strength of the company, whether it has performed well in the past or not, how it compares to other players in the industry, and then the quality of the people behind it.

It's been demonstrated time and time again that in credit, especially in small business, there is no real difference between your personal life and your business life. If you are an individual who has borrowed in the past and repaid your debt, then you probably will have the same success with your businesses. But if you have 25 credit cards on which you've defaulted regularly, despite the quality of your business plan you're most likely not someone we should back, and things like that.

We have a different number of criteria, but we assign a lot to the character of the people involved, on the soundness of the business plan, and how the business is compared with their industry peers'. That's basically what we look at.

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Mr. Dan McTeague: That doesn't make you much different from traditional, conventional lending institutions. I'd like to ask how you see the public mandate making you different.

Second, at the expense of repeating myself, can you give us a tangible example of where you have applied or had to choose between the public mandate and the private interest?

Mr. Michel Vennat: Well, that said, what we try to do is to be more flexible, and I'll give you two examples. We try to structure the repayment of your loan based on the cashflow of the business and the potential milestones as opposed to regular types of loans. The other thing is that we require a lot less security, for instance in our productivity loans and in our innovations loans. By the level of security I mean, for instance, the value of the building and things like, which could be much lower. We can lend up to 125% of a project.

Now, as for other examples, there are some industries that are finding it quite difficult to finance their growth. Tourism is one of them. Tourism is very important for the economic growth of this country, especially in regions, but it's hard. If you go to the convention of the tourism association and things like that, they'll tell you that they find it hard, so we have made tourism one of our specialties.

With knowledge-based industries, where they don't have hard assets, it's hard to evaluate the value of patents or of research and development. We have developed a specialty in that, and we will extend financing for that.

Mr. Dan McTeague: Do you feel that puts you at variance with other institutions who have acknowledged to this committee before that they will often refer people to your bank, where your bank does do a take-up? I noticed the numbers you've provided us are impressive: more than 30,000 since 1995; 1999 to 2000, financing or consulting services have been provided to almost 1,200 clients.

Because of the overlap between an SBLA, which may also be obtainable by any bank and lending institution, and with the guarantees provided by us to begin with, I'm interested in knowing how many clients you are lending to right now in Canada.

Mr. Michel Vennat: We have over 20,000 clients.

Mr. Dan McTeague: You're lending money to 20,000 clients?

Mr. Michel Vennat: Yes.

Mr. Dan McTeague: Of those 20,000 clients, how many are venture capital? Have you broken those down?

Mr. Michel Vennat: Oh, no. Venture capital is--

Mr. Dan McTeague: A different clientele?

Mr. Michel Vennat: It's a different line of business.

But if you're looking for where we lend, it's about 30% manufacturing, about 15% tourism; and transport is one of our things. I'll give it to you in a second.

Mr. Dan McTeague: Yes, that's fine.

This is my final question, Mr. Chair.

I think there's no doubt for members that there has been a tremendous improvement for many of us. I think it was expressed by my colleague, Mr. St. Denis, just a little while ago.

I'm interested in finding out what the ratio of people would be who've been referred to you by other lending institutions but are not successful ultimately in obtaining...they may obtain information, but they're not able to obtain credit or any form of lending. Is the ratio substantial, minimal? Could you give us an idea of how many people walk in through your door and walk out not getting the money they're looking for?

Mr. Michel Vennat: I can't. We don't keep track of that. But I can tell you that, for instance, we have a joint venture now, an experiment, with the Bank of Nova Scotia in Ontario. They automatically refer to us a certain number of their own clients who don't meet their criteria but who they feel...and we've made quite a few loans out of that. But we don't keep track of what proportion we would have said no to.

Mr. Dan McTeague: Thank you very much.

Thank you, Mr. Chair.

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

Before we adjourn, I have one question I need to ask. It's in regard to the recent debate in softwood lumber in Canada and the United States, and the tax and so forth that's in the debate. There are a lot of small businesses in the forestry business, and my question to you is have you, the bank, done any strategic planning for any small businesses that might be caught in that limbo of not being able to supply wood and are in a holding pattern? Have you had any of your clients in that situation?

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Mr. Michel Vennat: Well, many of the clients to whom we offered a moratorium of four months were in that region. First of all, on softwood lumber, because of consolidation in the softwood lumber industry itself, our book of business is quite limited because it had shrunk, not because.... It's because there was a lot of consolidation in that industry over the last few years.

Our attitude to these people would be one of patience. We've demonstrated time and time again that we are there to support our clients in the long term, and we have been looking with the Department of Industry into what our role should be in the next few months. We were hoping like everyone else that the situation would be resolved.

The department has asked us to look at a few things, and if we do something special in addition to our normal thing, it will be announced by the Minister of Industry.

The Chair: Seeing no more questions, I'd like to thank our witnesses, Mr. Ritchie, chairman of the board, for being here today; and Mr. Vennat, for your presence here today, for your presentation, and for facing all the questions.

And I'd like to thank the members for their questions of yesterday and today.

It's my duty now to inform the Minister of Industry and the Minister of Finance on the completion of this report, and I would ask for your approval to do that.

Some hon. members: Agreed.

The Chair: Thank you very much. I appreciate it, and I hope to see you soon in more discussions with the BDC.