I see the time is 3:30. We have enough members and we have our witnesses with us, so I'll call the meeting to order.
We want to first thank our witnesses for coming.
Our meeting is pursuant to Standing Order 108(2) and the adoption of the motion on February 11, 2008, on the study of the annual report and business plan of the Business Development Bank of Canada.
We want to thank our two witnesses for coming. They are from the Business Development Bank of Canada. We have John MacNaughton and Jean-René Halde. It is good to have you here with us.
We will open the floor up to you, and then we'll intervene on the question and answer portion of the meeting. The floor is yours.
Thank you, Mr. Chairman, members of the committee. We're pleased to be here.
As you know, the BDC reports to Parliament through the Minister of Industry, but given your committee's interest and role in supporting entrepreneurship, we welcome this opportunity to be here today.
Together Mr. Halde and I will speak to the four points in your motion of March 12. Then we'll welcome any questions you may have.
BDC is Canada's business development bank. Our mandate is to promote entrepreneurship by providing term financing, subordinated financing, venture capital, and consulting services, with special consideration for small and medium-sized enterprises. Put simply, BDC supports Canadians who are creating and growing their small and medium-sized businesses. Many of these endeavours are, by their nature, quite risky. As such, they often fall outside the risk appetite of most private sector financial institutions.
I'm going to begin with your motion's first point, BDC's most recent corporate plan.
In our 2008-12 plan, we state that we will continue to provide innovative small-business financing with special attention to those startups, innovators, fast-growth companies, and manufacturers and exporters that are facing lower financing approval ratios than other companies.
We'll also develop our services of support to the growing number of entrepreneurs who will be retiring and selling their businesses to other young entrepreneurs. We will help Canadian companies to become more globally competitive. We will invest in our consulting services. Our goal is to provide small businesses with quality advice at reasonable prices.
In venture capital, we'll support the commercialization of Canadian R and D. More specifically, we'll invest in new-technology companies, nurture our portfolio of growing companies, and act as a catalyst to help attract greater private sector investment in the commercialization of research in Canada.
We'll do all of these things while maintaining our patient, long-term view of client relationships. Finally, we'll do all of the above in a financially sustainable way. We will be profitable, and we will continue to pay dividends to the Government of Canada.
The motion's second point asks us to discuss our most recent annual report.
Fiscal 2007 was very successful. We've now reached 27,000 entrepreneurs across Canada. Last year we authorized close to $2.6 billion of loans, for an average loan size of $285,000.
Our total portfolio stood at $9.8 billion. Most of this, $9.1 billion, was in loans. It also includes $148 million in subordinated financing and $505 million in equity investments in venture capital. We also started 2,400 consulting mandates.
Our return on common equity was 8.5%. In June of last year, we paid the government a $21.5 million dividend.
Fiscal 2008 ended just two days ago. We anticipate reporting another successful year, as well as another dividend payment.
I speak with confidence when I speak of the BDC, and I do so for many reasons, notably the excellence and dedication of its leadership team and employees, the rigour of its internal controls, its risk management expertise and systems, and the high quality of information that it provides to me and my colleagues on the board of directors.
I'll now turn it over to our president.
Good afternoon, members of the committee.
We will now turn to the third point in the motion: the range of BDC's services and the nature of its relationship with private sector financial institutions.
Our 1,700 employees work from 94 offices across the country, from St. John's to Victoria to Whitehorse, and we partner with other organizations to reach entrepreneurs who do not live in cities and towns. Every day, about 600 BDC employees visit hundreds of small businesses. These client relationships are an unparalleled source of information about Canada's small business community and their competitive market.
The small business competitive environment is very complex. To master it, entrepreneurs need support from advisors, accountants, lawyers and bankers. To meet financial needs, they seek finance sector partners. BDC is one of these. It is important to understand that because we do not offer operating lines of credit or chequing accounts, 100% of our clients have dealings with private sector financial institutions. This means that BDC always works with other financial institutions.
Our involvement in riskier projects is evident in the types of financing we did in fiscal 2007. For example, we financed more than 1,400 loans to start-up companies, more than 5,000 loans to clients who considered themselves in expansion mode, and close to 1,000 loans to aspiring entrepreneurs who are taking over the ownership of companies from the existing generation.
We often “de-risk” projects. Let's take an example: the financing of a new mid-size hotel. In these instances, we help the entrepreneur with two large risks. The first is a construction risk: will the building be built on time and on budget? Next is a market risk: will the hotel attract the expected number of guests and revenue? When the hotel succeeds, the entrepreneur often chooses to refinance it with private sector financing where he or she can often get cheaper rates since the project has been “de-risked” by BDC.
Prepayments constituted almost $1 billion of our portfolio last year.
One of our key competencies is evaluating and pricing risk. We have a sophisticated pricing model to ensure we're compensated for the risk we take. This ensures that we remain commercially viable.
Cyclical financial markets can sometimes make it hard for entrepreneurs to secure project financing. Because BDC takes a patient, long-term approach to development, we're able to minimize the impact of such cyclicality on entrepreneurs as well as on other financial institution partners. For example, last autumn, when the financial markets tightened their credit in response to the asset-backed commercial paper problem, we became an even more attractive alternative.
Sometimes financing gaps correlate to industry sectors or geographical regions. We do not use blanket exclusions on project proposals in troubled industry sectors or economically depressed places. We will consider any solid project proposal regardless of the industry sector or region in which it is found.
In venture capital, the support we provide high-technology companies shows that for each dollar we invest, more than $4 is invested by other investors. We provide small business with high-quality consulting services at prices they can afford.
You should also note that when we are tailoring our response to a request for financing, we do not always know if another financial institution is also considering the same request. Clients are not obliged to tell us, and often they do not. On occasion we find ourselves offering financing to an entrepreneur who is also considering an offer from another financial institution. Ultimately it is they, the entrepreneurs, who should decide which offer best meets their needs.
In closing, I'll speak to the motion's point about financial market volatility and our financing requirements. We have never held, and we have no exposure to, the non-bank asset-backed commercial paper, the source of much of the financial market volatility. The very little asset-backed commercial paper we do have is backed by the five chartered banks. As far as our clients are concerned, financial market volatility is but another source of competitive strain for them to manage as they steer their companies through globalization, the rise in value of the Canadian dollar, rising energy prices, the difficulties in finding qualified employees, and the threat of an economic slowdown.
In these days of regular worrying reports of economic uncertainty, I am pleased to report that the delinquency rates or levels of impaired loans in our portfolio have not deteriorated. This would indicate that thus far at least our clients are holding steady. But obviously, 2008 is not over yet. We're keeping a very prudent eye on the situation.
Thank you for your time. We would be pleased to answer your questions.
Thank you, Mr. Chair, and thank you to the witnesses for appearing today.
Gentlemen, in November 2006 our government introduced our financial plan, which was called “Advantage Canada”. In that we talked about a couple of advantages that we were looking to create, one being a tax advantage and the second being an entrepreneurial advantage. That's where I see the Business Development Bank of Canada playing a key role as an arm of government.
In the 2008 budget we specifically set aside $75 million for the Business Development Bank to support the creation of the new privately run ventures. Specifically, it's a capital fund to support venture capital for growing companies. Can you talk a little bit about how this is good for Canadians, who it's going to benefit, and whether that fund is available in all regions of Canada and so forth?
I'd be pleased to answer that.
The $75 million that was earmarked is going to a fund that will be larger, because we will be seeking a third-party manager to invest their own capital and the capital of other interested parties. It's intended to be a late-stage fund, because one of the issues that was identified by the management of the Business Development Bank--and the board of directors encouraged them to seek a solution--is that very often Canadian entrepreneurs grow their businesses to a certain stage where they need financing of $30 million to $50 million. So they've had very good success in the start-up phase, but they now need money at a larger level. The number of parties in Canada that are there to provide that level of equity financing is small, and the amount of capital they have to support them is modest.
Very often, Canadian companies that look like they have the opportunity to become important national players, and even global players, are forced to sell to foreign buyers before they've fully exploited their proprietary technology or their differentiated strategy. So the intention of this fund is to provide late-stage funding so those companies don't have to sell themselves to foreign interests before they reach their more mature levels--and possibly never.
That's obviously something quite complex. Our small and medium-sized businesses live in a complex world where they need help. Remember, not only do we provide financial help, but we also provide consulting help.
On the financial side, as I said during the presentation, we only do project financing, and they have another institution they deal with at all times for their other needs.
We tend to focus on the more difficult segments, whether they be innovative firms that tend to have a hard time getting financing, or fast-growth firms, or manufacturers and so on, and venture capital where we're focusing on the very early stage. We take the initial risk. I think earlier someone said de-risk. That's exactly right. That's what we do, de-risk the transaction.
We don't ever exclude industries. We stay the course in tough environmental or economic cycles. We're a very patient lender if we believe in the business plan and the management team.
And by the way, we meet all the time with other financial institutions just to make sure the relationship is good and we're staying within our mandate. And I'm pleased to report that whenever we have these meetings they tend to be quite favourable. As a matter of fact, we get a lot of loans referred to us by other financial institutions that are quite happy to pass on some of the riskier projects.
It's an interesting question. I've only been with the bank for three years, so I can't go back more than that.
First, let me assure you that we have a board of directors that keeps us quite honest, and they're doing a great job at it. We're never fully satisfied, because there's always more you could do—just following the last question. We're a development bank, so what else could we be doing? We're planning our strategic retreat for the fall, and the question we have on the table is, is there anything else we could do to help out?
So are we doing as much as we could? The answer is probably no, because there's probably something better that we could be doing, but that said, we like to think we're capable at what we do. I think we price for risk well. We take the kinds of transactions and risks that others will not take. In venture capital, we go where others don't want to go, which is at the very early stage of venture capital. We provide very affordable consulting. So I think SMEs are well served by the presence of BDC.
There are a number of ways where I think we've been helpful. Clearly one way is on the consulting side, where I think we provide excellent quality service at very affordable rates. The average mandate is about $10,000, so these are not the fees that would be charged, obviously, by large private sector consulting firms.
Secondly, we will finance people in organizations that we believe in, even if they're having some difficulties. If we believe, as I said earlier, that the business plan makes sense and if we believe that the management team is capable, we have an internal program called “Manufacturing Plus”, where we'll go the extra mile to support those people as they're restructuring.
Thirdly, we had our postponement campaign on capital. Clearly some of them were happy to have a six-month reprieve on capital repayment. That was very useful to them.
I'm sure there are others, but those are the three that come to mind very quickly.
There are sectors that are....
As I responded earlier, I don't think we should focus strictly on the asset-backed commercial paper, because a range of issues have affected our small and medium-sized businesses. So if you're in the tourism sector, the rise of the Canadian dollar has probably affected you a lot more than other factors.
The key areas, the ones where we have the highest levels of impaired loans, are tourism and manufacturing. Those are the two key sectors that seem most impacted by the overall economic environment.
I will start reading again:
|| In addition, manufacturers must also have a global view of their supply chain. They should consider adding imported components to their production to raise the economies of scale and cost competitiveness.
At that point, you are telling those companies to find suppliers elsewhere, to abandon components made in Quebec or in Canada and to import them. But that is a problem, and I will give you an example from my own riding. A plastics manufacturer pays 4 cents for the raw materials he needs to produce a plastic part a foot long. He tells me that he can buy the same part ready-made in China for 4 cents. Even if he changed his assembly line, laid off all his employees and used nothing but machines, he could not match the price from China.
Have you told the government specifically what you can do about that? What suggestions have you made to the government about globalization in general and about China in particular?
I'm not a regular member of the committee, but I'm substituting today, and I have seen BDC when I was filling in at the international trade committee or previously at the industry committee. I have a couple of small questions, maybe not too important, but a couple of small questions of interest to me.
One of our notes talks about BDC having more than 27,000 Canadian entrepreneurs as clients, 6,000 of whom are exporters, accounting for nearly 40% of BDC's portfolio. I guess what I'm curious about is that BDC is one entity working with the Government of Canada. We have the Department of Foreign Affairs and other entities to help with export development. My question is, how integrated are the government's various services between DFAIT, BDC, and so forth, to help Canadian exporters, particularly small and medium-sized enterprises? Are the various services integrated? If they are, how effective is the work? If they aren't, why aren't they, and would it be effective if we had a more integrated approach between various government departments and crown corporations?
Does the question make sense?
We've had numerous internal debates on that issue.
Right now we're providing an increasing number of mandates to Canadian entrepreneurs. Every year we're going to go to 2,500 mandates and 2,600 mandates and so on, which means that we're helping more and more entrepreneurs to deal with their challenges.
Remember that we deal with very small firms. Of our clients, 76% have fewer than 20 employees and 96% have fewer than 100. We are talking about small firms, and they're very price-sensitive when it comes to laying out dollars for consulting.
Our belief is that we're providing an awful lot of good to those Canadian entrepreneurs, and whenever we try to increase the price, there seems to be a bit of a threshold at which people back off and say they will wait. In the greater scheme of things, given the fact that we are profitable as a development bank, we feel we're better off helping more entrepreneurs--even if we lose $4 million--than not. We could try to increase the price and break even, but we are somewhat convinced that the way to get there.... We'd probably end up doing fewer mandates.
The positive side effect that we can't measure, but which we know is there, is that most of these clients in consulting are BDC financing clients. You don't have to be a BDC financing client--
Thank you, Mr. Chairman.
Just to continue on that train of thought, actually, I have a BDC in my riding and I know BDC a little bit through my years as an accountant. One aspect I would say we could criticize BDC for is its consulting. A lot of comments I get from some of the clients of the BDC is that the consultants are not providing them with any of the business, so I'm not sure.... It's a limited number of people I've spoken to, but that's one of the aspects where I could be critical of the BDC, the consulting part, from my own personal point of view.
Also, the fact that it does generate loss, maybe you can look at that, but I'm not sure how you evaluate whether it is something where the clients are satisfied or how you determine its return.
I always think that BDC gets unfairly compared with banks. Sometimes it's an insurance company. Sometimes it has public policy goals. Sometimes it's treated as a business entity. Sometimes it has to change its name from this to that and that back to this again. There has been, over the last few years, however, a bit of stability, I think.
I was noticing your average loan was about $285,000, which doesn't strike me as a huge amount of money. If it's such a small amount of money, it would be, relatively speaking, overhead-intensive.
How do you compare, in terms of return on equity or return on investment, with the chartereds?
We certainly, on our side, don't take issue with the motion. Mr. McCallum's intent is something that we, first, don't have a problem with, and second, actually think is a pretty good idea.
The difficulty we have rests around his comments with respect to timing. We have in good faith tried to seek some approval and at least some unanimity around the table that in fact this is a good motion and that its concept is well thought out and, as I think, will be helpful.
The difficulty is, this is a huge issue in the industry. They have gone through negotiations, they currently have Mr. Purdy crossing the country trying to explain exactly what they have come up with in terms of at least a responsible position, and they have tried to get support from shareholders. One of the difficulties we face is a dynamic whereby we and the Liberals and Bloc, if they are going to support this motion, put ourselves in the position of exerting potentially a negative influence on the outcome of a private sector debate on a private sector issue in which we, while we certainly have responsibilities with respect to resident citizens of this country, certainly should not be putting ourselves in the position of influencing, whether by accident or on purpose, the outcome of the vote on April 25.
I would respectfully submit that due consideration be given by the mover of the motion to our waiting until shortly after April 25—we're not talking that far into the future, just three weeks—to allow all of the work surrounding this issue that has taken place within the private sector, outside of the realms of the federal government, to take its proper course. Once that vote has been completed, we are in a much better position, not to put ourselves into a subjective position of potentially influencing the outcome, but in fact into an objective position of assisting the individuals who've been impacted by this issue over the last number of months.
I appreciate Mr. Dykstra's concern, but I think it's poorly founded. His argument is essentially that you're assuming hearings would create a negative atmosphere prior to April 25. I frankly don't agree with that.
The issue for the retail investors who have contacted me and contacted us is that the deal around the $32 billion has largely been conducted among the large institutions that are most directly affected, and that the retail investors are, if you will, almost an afterthought.
The curiosity is that first, because it's “one man, one vote”, the retail investors actually will have a significant influence on the ultimate outcome.
The second thing that appears to be coming out in the press is that this is a very confusing presentation on the part of the people presenting to the retail investors. As I recollect one quote from one individual, he said: “I have a BComm and a PhD. I may be 78 years old, but I do understand what's going on here.” And he found the 400-page presentation quite confusing.
It seems to me that the people's representatives, the House of Commons and the finance committee, should be the ones who give the forum and opportunity prior to the vote to let those retail investors—and others, for that matter—present in a fashion that allows a more positive and informed outcome, rather than simply saying we'll just sit back until the vote.
There is a huge and significant amount of money involved here that has a considerable impact on the overall functioning of our financial system. Anything the House of Commons and the finance committee can do to create a forum to allow an informed discussion is a good thing, I think, and will in fact lead to a positive outcome rather than a negative one.