Chair and honourable members, thank you for inviting us back to discuss some of the challenges experienced by first nations communities and businesses in accessing capital on reserve.
I understand that the committee has welcomed some new members since our last chance to appear before you in May, so I would like to recap some of our earlier comments for their benefit, and also to update all of you on our recent efforts to reduce barriers and increase access to capital for first nations communities and businesses.
First nations leaders continue to prioritize economic development as a means to greater self-reliance and improved quality of life for their communities. The sizeable reserve land base in Canada is growing steadily with the settlement of comprehensive and specific land claims, and through additions to reserve.
Since 2006, 873,449 acres have been added to the reserve land base. First nations are seeking to unlock the economic potential of their growing land and resource base. As population centres grow, more reserves are now located within, or very near, urban settings. This is opening up new opportunities for economic development, but also underscores the importance of effective tools for supporting access to capital.
Urban reserves in particular are providing first nations with significant fiscal and economic benefits. A recent study from the National Aboriginal Economic Development Board found that six first nations with urban reserves had collectively created over 7,000 jobs and over $77 million in annual economic activity for both their communities and neighbouring municipalities.
A growing number of first nations communities and business are achieving remarkable economic success. Membertou, Osoyoos, Whitecap Dakota, and Kamloops, among many others, are well-known examples.
Aboriginal self-employment is also on the rise. According to the 2011 census, there were more than 37,000 aboriginal people in Canada who had their own business, which is an increase of 85% since 1996.
Despite these many successes and very positive trends, access to market capital and private financing remains a significant challenge for first nations communities and businesses. On reserve, the limitations of the antiquated Indian Act present particular challenges to creating an environment that is attractive to raising capital and advancing economic opportunities.
I would like to speak a bit about Indian Act provisions that affect access to capital.
First, all first nations communities face obstacles to accessing market capital because of difficulties in leveraging land and assets on reserve. Section 89 of the Indian Act prohibits the mortgage, levy, or seizure of real and personal property of a first nation, or an individual situated on reserve.
This provision of the Indian Act was originally intended to prevent unscrupulous creditors from taking advantage of individuals, but it has now become a key obstacle to raising capital. Under this provision, first nation governments and individuals are impeded from using their assets fully as collateral to obtain access to market capital without the direct involvement of the federal government. We know that off reserve, individuals and businesses very often leverage the value of their property and assets to start, operate, and expand businesses.
Second, the Indian Act designation and leasing processes on reserve present potential structural barriers that impede the development of relationships with investors on reserve.
Leases under the Indian Act are possible if there is both a community vote to designate land and the approval of the minister for the designation. The designation provisions of the Indian Act were streamlined in the Jobs and Growth Act, 2012 by changing the community vote threshold to a simple majority, and by granting the Minister of Aboriginal Affairs and Northern Development the authority to accept designations.
This has assisted some first nations in speeding up development processes. Nevertheless, the Indian Act system, which often requires lengthy and complex lease negotiations involving our department and the Department of Justice, still results in delays, added costs, and missed opportunities.
Third, legislative barriers to moneys management impede first nations' abilities to leverage own-source revenues to access market capital.
Indian band moneys are held in the consolidated revenue fund and, pursuant to sections 61 to 69 of the Indian Act, can only be expended for the use and benefit of the band. Except for bands that have authority to manage their own revenue moneys, all expenditures under this Indian Act provision must be authorized by the minister. These provisions have the effect of delaying the disbursement of a first nation's own moneys, particularly capital moneys, which are generated from on-reserve activities, such as natural resource extraction, or from the sale of reserve lands. Revenues from leasings do not carry the same restrictions but are still subject to certain administrative requirements for their access.
Finally, first nations have limited access to financing and are generally unable to raise the capital required for major projects. Although first nation communities can collect property tax under section 83 of the Indian Act and under the First Nations Fiscal Management Act, only 150 of 617 Indian Act first nations are actively collecting some form of property taxation.
Long-term debt provides many advantages over the cash-based approach to financing infrastructure projects, which is a common practice among most first nations, and which is heavily reliant on federal transfers. Comparatively, off reserve, local governments can use cash financing from significant tax bases, but also have access to public debt borrowing, for example, turning to the municipal bond markets, and project financing opportunities, for example, turning to public-private partnerships. Over the past 40 years, most provincial governments have set up finance authorities that have the ability to issue long-term collective debt on behalf of municipalities.
I'll turn to key measures to address these impediments. I will discuss some of the key legislative, program, and institutional arrangements that have helped reduce barriers for first nations in gaining access to market capital.
One of the key strategies the federal government has undertaken to address structural barriers has been the development of a number of optional legislative tools. These optional regimes, including, for example, the First Nations Fiscal Management Act, the First Nations Land Management Act, and the First Nations Commercial and Industrial Development Act, as well as the First Nations Oil and Gas and Moneys Management Act, provide participating first nation governments with the ability to remove themselves from many of the antiquated and restrictive provisions of the Indian Act. Together, these acts provide ways for first nation governments to leverage on-reserve real property taxation and own-source revenues in order to gain access to capital markets, gain control over their financial management, gain control over the designation of lands on reserve, develop comprehensive regulatory regimes to manage major economic development projects on reserve, and control oil and gas revenue moneys earned on reserve. In total, first nation communities can use such opt-in legislation to remove themselves from 48 sections of the Indian Act that are recognized as barriers to economic development.
The First Nations Land Management Act and the First Nations Fiscal Management Act have been taken up actively, and are reported by first nations who participate to be useful tools in enhancing access to capital. For example, a benefits review of the first nations land management regime completed by KPMG and associates in 2014 affirmed that first nations operating under the regime view their ability to borrow money for capital investments under the act as a significant economic advantage, and they have reported increased attractiveness to investors as well as better partnership opportunities.
In June 2014 the First Nations Finance Authority issued its first bond, which was a major breakthrough for first nations seeking to build both the quality of life infrastructure improvements such as on-reserve housing as well as manage investments and major resource projects. Through pooled borrowing that was secured by projected future first nations revenues to be obtained through property taxation, $90 million was raised on behalf of 14 borrowing members with a competitive credit rating from Moody's of A3. I would note for committee members that this is a higher rating, for example, than those given to pipeline companies like Enbridge and TransCanada.
With the success of this very first inaugural bond, interest in the first nations financial management regime has grown among first nations across the country. As of February 2015, 75 first nations are exercising property taxation jurisdiction under the act; 45 have met the financial performance requirements established by the First Nations Financial Management Board, and 38 are eligible to borrow through the First Nations Finance Authority. There is currently more than $200 million in unused borrowing capacity that can be deployed over the next two to five years among the current 38 finance authority members.
In terms of the role of mainstream and aboriginal financial institutions, the Government of Canada has also been working to mitigate barriers beyond the Indian Act. Major banks and other private lenders provide a limited range of commercial financing to aboriginal business. Mainstream financial institutions focus on securing high volumes of loan activity and use formula-based risk rating approaches to screen loan applications. Most aboriginal businesses are very small, with a significant portion located in small or rural and remote communities; therefore, they often do not meet the risk profile of mainstream lenders. Aboriginal businesses are generally perceived as higher-risk by banks and mainstream lending institutions. Access to developmental loans through the network of aboriginal financial institutions is the only source of capital for many aboriginal businesses across Canada.
Through this national network of aboriginal financial institutions, the Government of Canada provided $205 million in loan capital investment between the late 1980s and 2014. It has recently surpassed 38,000 loans with $2 billion in loan value.
This network does not have enough capital, however, to help aboriginal businesses finance equity stakes in major projects. Federal efforts to increase the number of aboriginal suppliers bidding for and winning federal contracts through the procurement strategy for aboriginal business are also enabling aboriginal businesses to raise capital that can be further leveraged in growing their businesses.
Since the launch of this procurement strategy in 1996, aboriginal businesses have competed for and won more than $1 billion in contracts, with the value of set-aside contracts increasing from $49 million in 2009 to $109 million in 2012.
The government also supports aboriginal entrepreneurs through a comprehensive suite of programs that enable communities and businesses to seize economic opportunities. These programs include the aboriginal business development program, the community readiness and opportunities program, and the ministerial loan guarantee program. These programs support first nations communities in providing business services and facilitate greater use of land and resources, economic development infrastructure, and housing. By providing federal loan guarantees or contributions, they also help fill a financing gap in capital and serve to leverage private sector capital.
We have seen that barriers to accessing capital are far from absolute. Private lenders, including mainstream banks, have provided hundreds of millions of dollars in loans to first nations governments and businesses on reserves. With the Government of Canada's commitment in 2011 to settle outstanding land claims and pay out approximately $1 billion a year to bands that are owed money, aboriginal banking has become a fast-emerging market for major financial institutions, such as the Bank of Montreal, Royal Bank of Canada, and the Toronto-Dominion Bank. Furthermore, multimillion-dollar lease mortgages are common and have been used to finance resorts, casinos, community facilities, residential development, and smaller-scale community business ventures. Since 2009, the department has registered 4,289 mortgages and 5,916 lease arrangements.
I'll turn to alternative financing options and some potential innovative solutions. The First Nations Fiscal Management Act regime in particular is considered to have achieved an effective balance between affirming first nations jurisdiction and providing appropriate institutional capacity. The act not only enables participating first nations to collect property tax and access pooled borrowing regimes, but also creates an integrated system whereby the institutions created to oversee the regime provide ongoing support that mutually reinforces their respective mandates to ensure integrity of the system. For example, the act requires the first nation to possess a certificate from the Financial Management Board in order to become a borrowing member.
Similarly, for the finance authority to issue a long-term loan backed by property tax revenues, a first nation must have a borrowing law approved by the tax commission. This integrated system enhances investor certainty by certifying that participating first nations have the financial capacity and financial management systems to manage large economic development projects.
In 2012 a legislative review of the First Nations Fiscal Management Act was tabled in both Houses of Parliament. This review identified a number of suggested changes to the act, including various administrative and regulatory improvements and expansion of institutional powers.
New and innovative ways of unlocking existing capital could also be pursued. There is approximately $1 billion in Indian moneys currently held in the consolidated revenue fund that could be used as a major source of capital for first nation communities. Much of the Indian moneys held in the consolidated fund are oil and gas royalties paid to first nations which are held in trust by the Government of Canada under the Indian Act provisions.
In a November 2014 article, Maclean's magazine highlighted the stark differences between the affluent municipality of Opportunity and the adjacent Bigstone Cree Nation. Both are located in Alberta's oil sands area. Despite receiving $231 million in cash through a 2011 land settlement and receiving comparable oil and gas royalties to Opportunity, Bigstone continues to experience terrible housing conditions, poverty, high unemployment, alcoholism, and gang violence. Without direct authority over the 77,000 hectares of land that make up its reserve, nor to the royalties that they receive, Bigstone has not been able to invest in community building initiatives and economic development projects that could transform the quality of life of its members.
I would like to conclude today by offering a few other key areas that you may wish to consider further.
The first area is financial management and financial literacy. Communities are telling us that they require support to develop these capabilities to engage in large and complex commercial transactions. According to recent studies by the National Aboriginal Economic Development Board, the Public Policy Forum, and the Task Force on Financial Literacy, financial literacy remains a significant barrier to the creation and growth of aboriginal businesses, particularly on reserve. Exploration of these issues and the next steps for targeted intervention would be useful to inform a forward policy and program agenda to address the capacity gaps.
Second, it may be useful to explore ways to strengthen the network of aboriginal financial institutions, including finding ways to promote their self-sufficiency, introduce additional capital, and have them act as a continuing source of financial literacy for aboriginal businesses and communities.
Third, efforts to modernize and improve land administration tools and processes for those first nations under the Indian Act and to further improve the First Nations Land Management Act should continue to be explored. Recent work to improve commercial leasing on reserve is an example of what the Government of Canada can do to remove or reduce barriers to economic development on reserve.
Finally, examples exist in both the mainstream economy and for more specialized targeted groups of arm's-length organizations that provide a comprehensive suite of tools to help secure financing and leverage private sector investment. As a department, I would offer that we're looking at models like Indigenous Business Australia to determine the range of services they offer, the results they have achieved, and the contributions of the public and private sectors in financing activities. Key considerations include the viability and affordability of such a model. Pending the department's findings, the committee may wish to learn more about the Indigenous Business Australia example and its potential applicability here in Canada.
ln closing, let me underscore that we are very pleased to assist the committee in any further work on this critical issue, with a view to helping improve the economic outcomes of aboriginal people in Canada.
Thank you for your time.
I'm sorry I went over time, Mr. Chair.
Perhaps I could start with the answer. Thanks for the question.
I think Andrew's comments in the presentation are clear around some of the key impediments. The Indian Act is the major impediment to business on reserve, unquestionably. I think that where we have been successful either by sectoral or self-government agreements is we have gotten people out of the Indian Act through things like self-government agreements themselves, or through things like the First Nations Fiscal Management Act or the First Nations Land Management Act. Basically, these are things that are allowing people to remove the constraints of the Indian Act from how they do business. All these things have shown a lot of success, and so I think increasing the use of those regimes as well as finding other alternatives to the Indian Act is a good thing.
There are also provisions within the Indian Act that are kind of paternalistic or anachronistic, like the treatment of Indian moneys. This is something that deserves some attention and needs to be examined in a more fulsome way. The National Aboriginal Economic Development Board provided some recommendations to the minister recently around the need to examine the provisions around Indian moneys.
We mentioned developmental lending and access to capital, and I think in terms of business development the network of AFIs has been very useful to building a class of entrepreneurs across Canada. In terms of the value for money, that regime works very well indeed. The other thing is, on a comment made around access to capital, it's not only access to capital, but rather the cost of capital as well.
Part of the challenge is around not having secure, let's say, ownership or tenure on reserve; for instance, you can't securitize it. Lending certainly happens on reserve, but a lot of the lending is secured only by people's income. So, you're paying more for the money than you would be if you were able to borrow or take out a mortgage against your house, which is kind of difficult. So, it's also the cost of capital, not just access to capital.
Another thing is infrastructure spending and how we support infrastructure on reserve, which is critical to economic development. The Senate committee is looking at this issue itself, so there might be some crosswalks to be made between what their deliberations are and your thinking around some of the issues around access to capital.
Financial management literacy is the other important element as well. We have something called the First Nations Financial Management Board in addition to some of the stuff that Brad spoke about. The Financial Management Board is working with communities across Canada to increase their capacity around financial management both with respect to their financial management processes and systems and with respect to their performance. That has been exceedingly successful, and it's also building on that success particularly. I noticed in your list of potential witnesses that you have representatives from the First Nations Fiscal Management Act regime, so the the First Nations Tax Commission, the First Nations Finance Authority, and the First Nations Financial Management Board. Those institutions all work together in a way that is extremely useful for first nations in terms of having first nations governments having access to capital in a way that would not have been possible without that regime.
I will close by saying that those are some of the key issues around access to capital.
I'll offer an initial answer and then ask my colleagues to join in as well.
For this committee, this is actually one of the areas for which there really should be some tremendous optimism. You have a growing reserve land base. You have greater closeness of first nations with neighbouring communities as they expand. You have more and more experience of many first nations with heavy-duty commercial activity. You have an increasing generation of tax revenues and this initial experience with bond financing.
I agree with my colleague, Allan. Over the next three to five years, this is going to grow quite significantly and that will have a multiplier effect of unlocking more and more opportunities.
What needs to happen in order to help that move along, I would suggest again moving away from the Indian Act restrictions, which I think we've talked about both on lands and moneys management. We need to build more capacity and stable capacity among first nation governments. We have programming where we try to do that. The more that they have the experience, and the direct capacity and knowledge of financial systems, the more effective they're going to be at unlocking these opportunities.
I would also offer for your consideration an interesting emerging area. We have done a fair amount of work in recent times on land use planning and associated economic development planning on reserve. Typical of what you see in other governments in Canada with commercial development, real estate development, environmental controls, infrastructure, including roads and so on, these are introduced, financed, and taxed all in accordance with well-developed plans. We've had some success with this on a pilot basis and we're looking to expand it.
I would also note for committee members, and be willing to provide a follow-up, that we had an interesting pilot project where we joined first nations and some of the neighbouring municipalities. They were willing to work together on land use planning. We had demand for at least 40 partnerships between first nations and neighbouring municipalities working with the Federation of Canadian Municipalities and the Council for the Advancement of Native Development Officers. We were only able to move ahead with six, but that was a good way to pilot. The interesting thing is that all six of the pilot participants have been a success. It's opening up new avenues and new opportunities.
While we're seeing these successes, the opportunity over time for first nations and neighbouring governments to work together to lift the financing and access to capital may be an emerging area as well.
I thank the witnesses for coming in.
Allan, you mentioned in regard to the Indian Act how it's impeding development for first nations business opportunities on reserve. One of the things we mentioned, or what first nations have been doing or have been in partnership...was the First Nations Land Management Act, and how that's providing opportunities for businesses. You look at Osoyoos; you look at Westbank where they've moved away from that and we've seen them grow.
One of the things that Carol mentioned was in regard to first nations being able to draft their own legislation. Bill , which I drafted, would allow first nations to develop their own band bylaws. Would that assist? That's one.
Two, in regard to first nations, also in my private member's bill, the Indian Act would actually be removed, and first nations could grow their own crops and sell them. How do you feel about that? Do you feel it would be beneficial?
I look at opportunities for first nations across Canada. They have different soils where things could be grown. You look in, say, Ontario where tobacco is being grown, for instance. You look in the Prairies where wheat, potatoes, corn, and anything like that can be grown for, say, alcohol production. Then you look at B.C., where they're actually growing grapes and making their own wine in Osoyoos. Could you elaborate further on that?