Thursday 28 May 1992

Labour Sponsored Venture Capital Corporations Act, 1992, Bill 150

Canadian Federation of Independent Business

Linda Ruth Ciglen, director of provincial affairs, Ontario

Bill Parson, director of political action

Ontario Federation of Labour

Chris Schenk, research director

ESOP (Employee Share Ownership Plan) Association

Perry Phillips, president

David Clark, director

Ontario Securities Commission

Robert J. Wright, chair

Catherine Wade, senior counsel

Canadian Auto Workers

James O'Neil, secretary-treasurer

Sam Gindin, assistant to the president

Investment Dealers Association of Canada

Michael Mackasey, chairman, Ontario district council

Thomas Dalzell, director, Ontario region

Ontario Chamber of Commerce

Don N. Eastman, vice-president, policy

Joe Couto, coordinator, economic policy

United Steelworkers of America

Robin McKnight, legal counsel



*Chair / Président: Hansen, Ron (Lincoln ND)

*Vice-Chair / Vice-Président: Sutherland, Kimble (Oxford ND)

*Caplan, Elinor (Oriole L)

*Carr, Gary (Oakville South/-Sud PC)

Christopherson, David (Hamilton Centre ND)

*Jamison, Norm (Norfolk ND)

*Kwinter, Monte (Wilson Heights L)

*Phillips, Gerry (Scarborough-Agincourt L)

*Sterling, Norman W. (Carleton PC)

*Ward, Brad (Brantford ND)

Ward, Margery (Don Mills ND)

*Wiseman, Jim (Durham West/-Ouest ND)

Substitutions / Membres remplaçants:

*Johnson, Paul R. (Prince Edward-Lennox-South Hastings/Prince Edward-Lennox-Hastings-Sud ND) for Ms Ward

*Owens, Stephen (Scarborough Centre ND) for Mr Christopherson

*In attendance / présents

Also taking part / Autres participants et participantes:

Evans, Jim, executive director, revenue services and operations division, Ministry of Revenue

Clerk / Greffier: Decker, Todd

Staff / Personnel: Campbell, Elaine, research officer, Legislative Research Service

The committee met at 1006 in committee room 1.


Resuming consideration of Bill 150, An Act to provide for the Creation and Registration of Labour Sponsored Venture Capital Corporations to Invest in Eligible Ontario Businesses and to make certain other amendments / Loi prévoyant la création et l'inscription de corporations à capital de risque de travailleurs aux fins d'investissement dans des entreprises ontariennes admissibles et apportant des modifications corrélatives.

The Chair (Mr Ron Hansen): I'd like to welcome everybody to the standing committee on finance and economic affairs. This morning we're having hearings on Bill 150, An Act to provide for the Creation and Registration of Labour Sponsored Venture Capital Corporations to Invest in Eligible Ontario Businesses and to make certain other amendments.


The Chair: The first group to come before us this morning that I'd like to welcome is the Canadian Federation of Independent Business. We have one half-hour for the presentation and in that half an hour, please leave some time for questions of the three parties. Would you please identify yourselves for the purposes of Hansard? You may begin.

Ms Linda Ruth Ciglen: My name is Linda Ruth Ciglen and I'm the director of provincial affairs for Ontario. With me is my colleague Bill Parsons, our director of political action.

You've got two items before you. One is our statement. It's briefer than a brief so we're calling it a statement and it really just focuses on one aspect of the proposed program which is the objective of providing capital to small and medium-sized businesses through labour-sponsored venture capital funds. Accompanying it is a backgrounder, our very recently produced report on the banking industry that just gives you some flavour of how the banks, and not equity financing, are the primary source of funding for small businesses.

As many of you know, because we've been here before, the Canadian Federation of Independent Business is a non-partisan political action organization. It represents about 83,000 members across Canada and about 40,000 here in Ontario. Our members are independent, Canadian-owned and -operated, small and medium-sized businesses. They are from every sector of the economy. They live in every corner of the province.

They range in sizes and ages from one-person proprietorships up to over 500-employee companies. About a third of them are located in rural areas, a third in smaller urban centres and a third in large metropolitan centres. Approximately one out of every eight small businesses in Ontario is a CFIB member.

This is not news to some of you who have seen us before, but I'd just like to stress again the important role that small businesses play in the economy. In 1989, which is the last best year of available data, there were over 320,000 firms operating in Ontario's private sector and 96% of these firms had fewer than 50 employees. It really is a small business universe out there.

These small businesses employ one third, about 30%, of the Ontario workforce and they also create most of the net new jobs in the economy. In the 10-year period 1979 to 1989, which again is the most recent available data, three quarters of all net new jobs in Ontario came from businesses with fewer than 50 employees. Another 300,000 Ontarians are sole proprietors operating without any employees who also count as small businesses.

The labour-sponsored venture capital program is being promoted by the government as a way to "provide small and medium-sized companies with a new source of capital which they can use to modernize for growth and for restructuring of their operations." That's a direct quote from John Whitehead who was before you when the bill first came before this committee. He also estimated that the program is projected to cost Ontario taxpayers up to $250 million at maturity.

Our analysis of the program shows this program is not an appropriate vehicle for encouraging modernization, growth and restructuring in small and medium-sized Ontario companies. It also shows that Ontario taxpayers, including the small business community, will not get good value for their hard-earned tax dollars from this program. A much better use of the $250 million the program is projected to cost and which would accomplish the objectives of the program is to exempt the first $400,000 of payroll from the purview of the employer health tax.

As you know, we gather data from our members on a continuous basis. Our field representatives see nearly 2,000 Canadian businesses a week, and about 800 of them are in Ontario. During these face-to-face visits, the members talk to our field representatives about the problems their firms are facing.

The number one problem, as it has been for a number of years, is not the access to financing but the crushing weight of the total tax burden imposed on small firms by all three levels of government. At the back of your brief, there's a chart that gives the most recent breakout of what small businesses feel are their major problems. Total tax burden is number one, and it just keeps getting bigger and bigger. About 10 years ago, in the last recession, somewhere around 40% to 42% of the members were reporting that total tax burden was a problem for them. Now in Ontario it's over 87%.

By contrast, you'll see near the bottom that less than a quarter of the members report that availability of financing is a problem for them. It's the one just above that catch-all "Other" category. The labour-sponsored venture capital program is thus based on a faulty assumption about what small business needs. The small businesses of Ontario are saying loud and clear that what they need is tax relief, not a program to make financing available, which over three quarters of them don't need and which siphons off even more of their hard-earned tax dollars.

Even if availability of financing were a bigger problem than it is in the small business community, the labour-sponsored venture capital program is inappropriately designed to deliver a solution. Small businesses fund their growth, modernization and restructuring plans through borrowings from their bank, through their own internal retained earnings and through loans or investments in relatively modest amounts from friends and family members. They are not well suited for outside investors to take equity positions.

The amounts of money that small firms typically need, when you weigh them against the amount of due diligence screening that equity investors require, particularly administrators of a mutual fund that have their funds at risk, make equity investments in small firms financially unattractive. It just costs too much up front to do the screening for the amount of money you're actually going to place. It doesn't make sense in a cost-benefit analysis. When the fund holders spend that much money up front doing the screening, they want to place a bigger amount of money for a bigger return to make it worthwhile. When you're only talking about $100,000, it usually doesn't pay out.

When Working Ventures came before you, they basically talked about the fact that they had reviewed nearly 200 business plans to get a short list of 10 proposals, of which two have investment potential. They're obviously doing a good job. That is very par for the course in the venture capital industry. There is an awful lot of screening to do before you come up with the ones that are worth investing in, and in order to recover the costs of the highly skilled investment professionals who have to be employed in this task over the number of months that it takes, the investments need to be chosen in order to produce a substantial return. In a cost-benefit analysis, outside equity investments in small firms just aren't worth it.

The government program designers know this. They have obviously heard and heeded -- rightly so -- the advice from the financial and venture capital industries. The outside parameters for eligible investments -- $50 million in assets and 500 employees -- allow for those bigger investments that are really needed to make this program viable. What that also means is that most of them will be pushing the parameters at the big end. It's just not going to work for the program in any other way. Those are the investments that will produce a cost-beneficial return for the fund investors. It's entirely understandable from an investment perspective. We're not criticizing it at all, but the point is that it will not produce benefits for small business. It's just not appropriate for that.

Table 1 in your brief gives a picture of the distribution by asset size of Canadian firms for 12 manufacturing industries. The data unfortunately are not available on an Ontario breakout. This is the way Statistics Canada provides it. However, these 12 firms tend to be Ontario-based and we can probably, in a ballpark estimate, figure that about 60% to 80% of these companies would be in Ontario.

The table shows the average asset size and average employee size per firm for each industry listed. It's clear when you look at the table that 95% of the firms have assets that are less than $5 million. Those first three columns consist of 95% of all the firms listed. Less than 4% of the firms have assets between $5 million and $25 million, and less than 1% are in the $25 million to $100 million category.

They didn't break it out by $50 million; otherwise we could have just stopped at that because those are the parameters of the program, but again this is the way Statistics Canada provides it. Basically, given that the investment realities dictate that the investments will probably cluster around the $50-million-asset cutoff point, only a minuscule number of firms at the high end of the medium-sized scale will be the beneficiaries of this program.

The available data from the Quebec prototype program, the solidarity fund, bear out these findings. Although reports of the total solidarity fund size vary between $450 million and $575 million, the reports are that only about $200 million, which is 35% to 45% of the total fund, is actually invested in Quebec companies. Again we're not faulting that from an investment perspective; it needs to be that way, but it again shows that that money doesn't flow to the small businesses. Moreover, this $200 million has been invested in only 97 Quebec companies since the inception of the fund in 1985. This is an average investment of over $2 million per company and an investment frequency average of about 16 deals a year.

Under the circumstances, it verges on misrepresentation for the government to portray this program as helping small and medium-sized business. It may do other things, it may have other objectives that are in line with what the government wants to do, but it is not going to be effective to help small and medium-sized businesses. Far from helping them, the program can actually work to the detriment of them; 99% of the small and medium-sized firms will not be able to benefit from this program because investment realities preclude them as a potential investment target, yet all of them will pay for the program through their tax dollars. In fact, their biggest competitors will be subsidized by the program at their expense. This is clearly unfair.

If the government is planning to spend up to $250 million on this program, there is a vastly simpler way to do so and benefit every small business in the province at a low to nil administrative cost. The Canadian Federation of Independent Business has been recommending for a number of years that an exemption be allowed for the first $400,000 of payroll that's subject to the employer health tax. This is parallel to the exemption that was first introduced in Manitoba under the NDP government of Howard Pawley, and the Manitoba exemption now stands at $600,000. Employers with payrolls of under $600,000 do not pay any employer health tax in Manitoba. It exempts all the small businesses. Such an exemption would most benefit the smallest firms that are hardest hit by regressive payroll taxes like the employer health tax.

The government estimates that 90% of the $2.6 billion that's raised yearly through payments by the province's employers to the employer health tax is paid by the larger companies with over $400,000 of payroll. So the impact on revenues of this exemption would therefore be in the neighbourhood of the $250 million the government is projecting will be spent through the labour-sponsored venture capital program.

The beneficial impact of this exemption is really incalculable. Besides the shot in the arm of a tax break where small firms need it most, on a regressive, job-killing payroll tax, the retained earnings that are left in the small business because it is not paying them out to the government could be put to work hiring people and creating jobs. When people are hired they pay personal income tax on their salary, which flows to the government and benefits the government. They also have disposable income in their hands, which they can then spend in the economy and help the economy recover; more retail sales tax revenues for the government again. As the economy gets back on its feet and corporate profits recover, corporate income tax revenues will again go higher.

So it looks like the government is forgoing the money, but if it's planning to forgo it anyway, this is a much better way that's going to benefit everybody rather than just a few minuscule companies that might get the benefits through venture capital investment. More than programs or well-meant words about helping small businesses, Ontario's small firms would appreciate this practical gesture that shows them their government understands small business realities and is on their side. Thank you, and we'd be pleased to take your questions.


Mr Gary Carr (Oakville South): Thank you very much for your presentation. I was interested in the charts which show some of the concerns of small business in back. We brought this up on numerous occasions to both the Minister of Industry, Trade and Technology and the Treasurer, and it often seems that governments worry about the mice in the basement when there's elephants on the roof type of syndrome.

I notice on page 1 you quoted the government, "to provide small and medium-sized companies with a new source of capital." When the government says this program will do that, I think you said very clearly it is wrong about that. Is that right?

Ms Ciglen: That's right. Small businesses capitalize themselves in basically three ways: They borrow from their banks, they use their own retained earnings and they get modest loans from families and friends because they don't have to go through the same kind of structure. A tax break to small business represents increased retained earnings in the firm, which is a source of capital for them. It's a much better, more effective source of capital for them than a program.

Mr Carr: One of the reasons for this program, I believe, is to help the big unionized companies, yet they say they want to help the small and mediums, because I think that's politically popular. I know in New Directions we talked about the employee payroll tax and what we would do when we're in government and outlined some of those things as well. What you're saying is, if you really want to help small and medium businesses with the money you're going to spend, this is how you could do it?

Ms Ciglen: That's right. This is not the way. There may be other legitimate government policy reasons for going ahead with this program, and we're not even addressing those. All we're saying is, don't pretend this is going to help the small business sector.

Mr Carr: I guess that's our feeling as well. If you're going to do it for the big unionized companies, at least be up front --

Ms Ciglen: Be up front about it.

Mr Carr: -- and honest and say that it's going to be for the larger companies.

Mr Bill Parsons: If anyone other than government was advertising this program for small business, the consumer affairs ministry would be after them for false advertising. The facts just don't bear it out.

Mr Carr: Let me ask you this: Having been involved with watching the political workings, why do you think the government is trying to basically -- I don't want to mislead people with this. Why do you believe they are attempting to do this and sell the program that way?

Ms Ciglen: I think a lot of it is just the way this government still doesn't understand the realities of small business. I think they are attempting to get their minds around it, but they're still pretty far away.

When the earlier consultation went on, we went in and met with the Treasury staff and we told them exactly what we're telling you right now. Not a line of it, not a word of it showed up anywhere, and they're still maintaining that it's for small business. I don't know if they didn't understand it or if they just chose to ignore it, but we haven't said anything differently to you than what we said to John Whitehead and the other group we met with last summer when they were consulting about this.

Mr Carr: That's the frustrating part, as you know. The Minister of Industry, Trade and Technology says, "We're listening and consulting." We get rather sick when we hear that comment, because even if they didn't say it, the fact is they are coming in but there are no results.

Again, I'll give this government a little bit of its due and say it isn't purposely doing this to mislead the people but it doesn't understand. Rather than having to have any type of experience in looking at it, all they have to do is listen to the people who represent 83,000 small businesses, who see 800 small businesses. I mean, you consult with them more than this government -- any government -- will ever do. Yet they turn around and say, "We're consulting," but you don't see anything coming in as a result of it. That's the frustrating part.

Ms Ciglen: This is not to say that there isn't going to be the occasional small or medium-sized business a program like this could help, but the benefits to one or two that might be helped compared to the 300,000 that are just going to be paying for it through their taxes and not get any benefits; that's why we feel it's really a misrepresentation to say this is going to be helpful to small business.

The Chair: We have to move on.

Mr Monte Kwinter (Wilson Heights): Thank you for your presentation, and I agree that the intent of the program is different from what the government's advertising of it is. I was a minister at the time when this was being discussed, certainly at the initiative of labour, and my perception at the time was that labour wanted to have a pool it could invest in startup companies to encourage development.

That's really what a venture capital fund is. Venture capital is not used to address providing "small and medium-sized companies with a new source of capital which they can use to modernize, for growth and for restructuring of their operations." I agree with you that the amounts of money the average small business would require would not make it economically feasible to do it.

As a matter of fact, I had someone in just the other day trying to access some government funds and he was told that at $10 million or $11 million it wasn't worth anybody pursuing it and there were no programs available at that level. They'd have to be up at a much higher level before the federal government would get involved. So I agree.

I also think there's a problem in that access to capital doesn't seem to be the problem when you're talking about venture capital. It's projects which are viable that are the problem. I think the government would probably be better advised to encourage that kind of thing because good projects with good viability can attract capital. It's only the projects that are not viable, the companies that are in trouble, that are looking for capital. They're the ones saying, "We need some government help because otherwise we're going to fail." That is a problem. I was just wondering if you have any comments on that.

Mr Parsons: I would say that one need only look to the province of Alberta and what's gone on there in the last week to understand the very risky nature of government getting involved at the bigger-project level through any vehicle. Novatel was the high flyer, high-tech Alberta diversification company that was going to change the province. They now have a $566-million tab to pay. There are a number of other examples in Alberta and the total is $1 billion.

You have to ask yourselves, as custodians of the taxpayers' money, if you want to follow down that path, which is a logical next step with these types of bigger funds and where they go. The money goes to the bigger project, but if the project fails you lose an awful lot of money.

Ms Ciglen: The only thing I'd like to add to that, from a perspective of the problem you've raised, Mr Kwinter, is for government to really address why firms fail and what goes wrong, why they get into trouble. One of the things we keep hearing from our members is that one of the major causes of their problems is the total tax burden. It is just crushingly heavy right now.

The fact that in the last recession only some 40% of firms were saying the tax burden was their number one problem and now 87% are saying it shows how much the burden has grown in the last 10 years, and it's at all three levels of government. Governments have voracious appetites for revenue right now; most of them are in deficit positions or would be.

The problems it's creating in the economy in the small business sector because of that are mammoth and you can't solve them by finding a program to throw more money into small business; you've got to address it at the root. Our entire tax structure really needs to be reviewed and revised to make it more viable for firms to be successful, particularly the small ones that are being hit so much by these regressive taxes. The costs go up and up and up and they just don't have any room to manoeuvre and eventually they go under.

The Chair: Mr Phillips, one short question.

Mr Gerry Phillips (Scarborough-Agincourt): Thank you very much for the comment. Realistically, the government is going to proceed with Bill 150 and I wonder -- this is always a bit of a trap for an organization because once you start commenting on it you've kind of bought into it -- have you any thoughts, on the assumption it is going to proceed, on how it might be improved, from the CFIB's viewpoint?

Ms Ciglen: There really isn't any way to improve it that would make it viable for small business. The best thing the government could do is stop pretending it's going to help small business. The nature of venture capital and the nature of the due diligence screening that needs to be done and the types of money small businesses are typically looking for, there's just not a match. It just doesn't mesh.

That's why traditional venture capital in the private sector doesn't usually have a lot to do with small businesses. Sometimes there can be high-tech startups that are appropriate for it, that start off small but are going to grow fast really quickly, but for the vast majority of small businesses venture capital is not an appropriate vehicle. So it's just not a match.

The best thing the government can do is stop pretending it's going to help the small business community, because it's not. It may have other policy reasons for doing it, and we're not going to comment on those, but it is a misrepresentation to say this program is going to help small business.

The Chair We'll go on to Mr Jamison.


Mr Norm Jamison (Norfolk): I think part of the thrust is that in your opinion you're not being heard as far as the direction your organization would like to see the government go is concerned. I can say that there have been a number of directives from the last budget that may not hit right on the things that you'd like to see in a budget but certainly do help small business, the potential of that help being the $10,000 that is made available for hiring new employees and the 0.5% drop in the tax rate, those kinds of things.

But in saying that, as chair of the parliamentary assistants committee for small business I know we listened to a number of groups. We inquired a number of times to meet with you, and you indicated that you couldn't find the time to meet with us prior to the budget. I would have been interested in having this prior to the budget, because I can tell you that when you talk about going to Treasury, the parliamentary assistants committee is set up to interact with the small business community, all the sectors involved there, to try to map out a course, a direction that we as a recognized committee can set forward to the Premier. If there was just some advice I could give you, that is to really consider making the time to meet with the parliamentary assistants committee because it does have that direct responsibility and the responsibility from there to report to the Treasurer.

I don't see that there isn't going to be a positive effect for small business from this document, even if what you're saying is correct, because small business in fact relies very heavily on the success and nature of large business in many circumstances, so I don't necessarily agree with that. But if there was something I should say to you it is that there have been some very recognizable changes, beneficial changes that are coming forward for small business. Again, I detect an overall tone of negativity, but certainly the tax system built around small business was not built in one single move and the changes under financial situations that are exacerbated at this time are ones in which we moved in those directions.

The other thing I'd like to say is that there is a direction now being taken to reduce the paper burden. I remember talking to you specifically about that. That is something again that has to take place in stages so it works, to put it that way.

I'd like to say to you that I detect a very strong tone of negativity. I don't fault you; recessionary times bring that on in people. But if I have any advice for you, it is that the parliamentary assistants committee for small business is a vehicle you should be using and unfortunately haven't used at this point.

Ms Ciglen: Let me just respond to that. I appreciate, Norm, that it wasn't you and I speaking directly and that we were going through the officials at the Ministry of Industry, Trade and Technology. I'm sorry if what you were told was that we didn't have the time, because that was not the case. What we said was that we would like to come and speak to the parliamentary assistants committee about the labour law reform because that was the thing that our members were most concerned about at that time. We were told that was a no-go. That is why we did not appear. It was not a question of time, and I appreciate it was not a direct communication between you and me.

Mr Jamison: There must have been some misunderstanding. We didn't want that to predominate a meeting on looking at the tax structure.

Ms Ciglen: Anyway, that --

The Chair: Mr Sutherland, one quick question.

Ms Ciglen: Can I finish responding to Mr Jamison? There were some questions in there. Basically, the one thing that this government has done that has improved the lot of small business the most is raise the limits in the Small Claims Court. That is something we have been asking for for years and we are extremely pleased to see that. That is going to make a big difference to a number of small businesses.

The fact that there is a commitment to raise the limit province-wide to $6,000 next year is again a help. I know the Attorney General has personally said that he's committed to having it go as high as $15,000, which would be a tremendous help for small business. That's one of the best things this government has done. Under the previous government, the limit was raised but it was never proclaimed in force. It's something small businesses have been waiting for for some time and that's great.

With regard to the tax system, the trouble with looking at dropping a tax rate on corporate income tax as the budget did is that when businesses are not making any money it doesn't help them. It looks good on paper, but it doesn't actually put any more dollars in their pocket if they're not paying taxes now because they don't have any income now. The kind of taxes they are paying, no matter whether they're making money or not, are payroll taxes. They've got to pay them whether they're taking in any revenues or making any profits or not.

That's why we're saying that what would have made a bigger difference would have been some kind of break on the payroll tax level. The corporate income tax level looks good on paper, but for those businesses really hurting it's not going to give them any more money in their pockets to hire somebody. That's our concern and we come to basically tell you the facts about what's going on in small business.

The Chair: Okay, the clock has run out and I hate to interrupt the questioning going on here, but we'll have to move on to our next group. I'd like to thank you for appearing before this committee.

Ms Ciglen: You're welcome.


The Chair: The next group we've got coming forward is from the Ontario Federation of Labour. Do you have a handout, sir?

Mr Chris Schenk: Yes, sir.

The Chair: Okay, the clerk will pick up the copies there. I'd like to welcome you here to the standing committee on finance and economic affairs and your participation coming up on Bill 150. You have one half-hour and in that half-hour, if you can, leave some time at the end for questions and answers with the three parties. If you wouldn't mind identifying yourself, sir, for the purposes of Hansard and the committee here, you may begin.

Mr Schenk: Thank you. My name is Chris Schenk. I'm the research director of the Ontario Federation of Labour. I have a short presentation to make and time for your questions. Perhaps if you're running behind time we can help you out.

The Ontario Federation of Labour is pleased to present its views to the standing committee on finance and economic affairs concerning Bill 150. I want to run through part of the written presentation and part of it concerns details which I will leave for your own perusal. As you know, the vast majority of trade unions in the province, public and private sector, are affiliated to the Ontario Federation of Labour, consisting of about 800,000 affiliated members. Since this subject concerns working people, we are most interested in the provisions of the bill.

As you know, the bill has two parts. The first one concerns employee ownership and the second part concerns the labour-sponsored investment fund corporations. I will talk about these two parts in that order and then I'd like to present the case for a social investment fund, which would involve some changes to the latter proposal in the bill.

The first part is the employee-owned, labour-sponsored venture capital corporations. These are designed to encourage worker takeovers of firms in which they are employed. This concerns majority employee ownership. The participation of the federal government is also a question here in terms of the tax breaks. But, as you know, to facilitate the process of majority employee ownership there will be an Ontario tax credit of 20% to the first $3,500 invested and up to 30% on incremental investments to a maximum annual investment of $15,000.


The Ontario Federation of Labour supports this experiment in employee ownership, as we noted in the OFL convention document, Economic Renewal -- Our Vision.

"In periods of severe economic recession, it may well be necessary to exercise the option of buying out one's employer. Mechanisms allowing for employee ownership in the face of closure, such as Algoma Steel" -- in the Sioux -- "and Spruce Falls Pulp and Paper Mill in Kapuskasing, are valuable experiments and often the only alternative workers have to the loss of their jobs."

While such employee ownership therefore could make a welcome contribution to a more democratically structured and egalitarian society, we are not unaware that coming to grips with Ontario's economic problems will take considerably further innovation and more substantial economic intervention.

The harsh reality is that the option of majority worker ownership has rarely involved workers taking over strong and profitable firms. It usually emerges as a final effort to save jobs by taking over facilities that employers don't want for reasons of market difficulties, central to which of course is the level of corporate profitability. It is therefore difficult to see how this can form the basis for a widespread alternative to an increasingly unregulated market economy.

Fortunately, the government is addressing the issues of economic development in other venues such as taxation, skills development and institutional investment funds. We in the Ontario Federation of Labour will follow these developments with interest. None the less, we think the employee ownership provision is a valuable one and I would certainly like to leave you with that thought.

On the labour-sponsored investment funds, the other part of the bill, these are modelled on the Quebec solidarity fund and are designed to generate venture capital from employees. To qualify for a tax credit, individuals must make investments in a registered labour-sponsored investment fund. The qualifications and the tax breaks are generous. Nevertheless, there are questions concerning the philosophy and purpose of this fund which are not so easily answered.

First, to our knowledge, there has been no research presented to indicate that a lack of venture capital is a major problem in the economy of Ontario. Either we have missed something or you people know something we don't. We have never seen it documented that this is a major problem, and we think it would be valuable not to assume but to document.

Second, if there were such "capital gaps," the question that arises is, why should union members and other employees be the central focus of raising the necessary moneys rather than those individuals and institutions with capital who are in the business of providing it for a fee? If the rules are too rigid or the price is too high, surely amendments in these areas would come first and foremost.

Although working people in Quebec have supported the Quebec solidarity fund, on which the labour-sponsored investment fund is modelled, we remain unconvinced that there is any advantage for our members to use their hard-earned moneys for purposes of bailing out small companies, all the while remaining minority holders.

As an investment, the rate of return for Quebec solidarity fund shareholders has been very low. A Canada savings bond has a higher rate of return in the long term. If you looked at it over 10 years, for example, by the end of 10 years, even with the tax breaks, the Quebec equivalent of the fund you are establishing in this bill would not produce more than a Canada savings bond. We would suggest that the reason many Quebec employees have invested in the QSF is more for purposes of a tax break than an investment with a high or even comparable rate of return. Without detailing the evidence here, it is suffice to note that the Quebec solidarity fund record on job creation is also disappointingly low.

The Ontario Federation of Labour has long debated the role of such venture capital funds, including a lengthy discussion at our last convention. In our view, while majority ownership may well be an option for workers, minority ownership venture capital funds are not. They amount to buying into the margins of the economy without having any say over how it operates or how it is structured. Indeed, in being so peripheral economically and promoting a culture of tax breaks, such funds may function to divert attention from the important and complex problems of economic strategy and the substantial investment necessary for economic renewal.

A labour-managed social investment fund: The purpose of a social investment fund as proposed by the Ontario Federation of Labour is to channel a portion of workers' weekly savings into socially advantageous economic projects such as non-profit housing and environmental projects. Such a fund, designed with social targets, would necessitate substantial amendments to the proposal for a labour-sponsored investment fund in Bill 150.

Let me give you briefly some background on this. The idea of a social investment fund is not a new one in Ontario. Indeed it precedes this government.

Back on January 25, 1989, the Ontario Federation of Labour met with the then Liberal Premier of Ontario, David Peterson, and several cabinet ministers on the topic of a labour-managed investment fund. Following this meeting, Mr Peterson wrote the OFL inviting the labour movement to consider the establishment of such a fund. This invitation followed a similar recommendation contained in volume 1 of the Premier's Council reports -- the Premier's Council which was prior to the one now struck.

The Ontario Federation of Labour proceeded to establish a task force to review the notion of a labour-managed social investment fund. The report of this task force favoured the creation of a social investment fund, was adopted by the OFL executive board and passed by the delegates to the November 1989 convention. This issue was revisited, with similar results, by the delegates to the November 1991 convention.

Let me take just a moment to mention the key principles behind a social investment fund. The Ontario Federation of Labour task force produced a summary statement on four key principles that should inform such a project. These are useful for the committee in assessing the Bill 150 labour-sponsored investment fund and the OFL proposal and are therefore outlined below.

1. The objective: socially useful investment. That would be the objective of the fund. It would be to promote socially useful economic projects, the initial focus of which, we would think, should be affordable cooperative housing, initiatives in the environmental sector involving recycling and conservation technology and, based upon these experiences, perhaps certain types of community economic development.

2. What do we think are counterproductive pursuits? A labour-managed fund should not be geared, in our view, to trying to save plants that are threatened with closure. This problem must be dealt with through other mechanisms. Nor should the fund be set up to promote competitiveness in the manufacturing sector. Finally, the projects undertaken by the fund should not compete with public programs.

3. Part of a broader strategy: The projects undertaken by a labour-managed social investment fund will not solve our major problems. Rather the activities of such a fund should be seen as catalytic. Their purpose should be to increase the pressure on the government to support socially useful investment. A labour-managed social investment fund would therefore fit into our broader strategy of fighting for increased public investment social projects, working to politicize our members to increase their level of awareness and building coalitions for progressive social change.

4. Solidarity and the system of financing a fund: Workers who make deposits in a labour-managed fund would do so because they support the objectives of the fund, not because they are seeking tax dodges or higher capital gains. The financing of a labour-managed fund should be designed so that there is no individual enrichment as a result of either tax assistance or capital gains. The only valid motivation is support for the social goals of the project and solidarity in doing so. The fund would offer a way for those workers who are able to channel a fraction of their savings into socially progressive projects in exchange for a relatively safe and fair rate of return. Under no circumstances would deposits in a labour-managed fund be an acceptable alternative to a pension plan.

The OFL task force stated at the conclusion of its outline of the above principles, "In any discussions that are pursued with the Ontario government, we must make clear that only a model that incorporates these four basic principles will be acceptable to the labour movement in this province." It is for this reason that we have taken the time to outline them for you.


In conclusion, the social investment model that is envisioned is discussed in greater detail in the attached memorandum regarding a labour-managed social investment fund. It is submitted for purposes of providing a practical and viable alternative to the current proposal for a labour-sponsored investment fund. Given economy of time and space, only the key elements of the memorandum are referred to here.

First, it contains a basic description of the proposed fund, its capital base, the focus of the proposed investment activity and its policy regarding a fair rate of return.

Second, the memorandum concerns issues integral to a social investment fund that need to be worked out in concert with the government, such as the legal structure, access to payroll deduction, the pros and cons of various tax measures, the necessary startup assistance and the need for certain technical and feasibility studies. These are outlined, along with some cost proposals.

One additional point should be made here. The Ontario Federation of Labour favours including worker cooperatives as organizations that should be covered under Bill 150. This would involve including in part I, definitions, "an association of federation of worker cooperatives," along with trade unions. In our view, this inclusion should thereafter inform the act.

All of the above points concerning a labour-managed social investment fund are made within the framework of the principles discussed earlier.

In conclusion, we encourage all members of the committee to examine the enclosed memorandum, which is a concise overview of the full task force conducted by the Ontario Federation of Labour.

The Chair: Mr Evans just pointed out to me a few of the items in here where there have been some amendments to the bill. I believe your group has not received them as yet. Perhaps he can just go over the amounts there and maybe you can correct a few in your book, and the rest of the members, so when they're reading your brief it's correct.

Mr Jim Evans: In relation to both the federal and provincial budgets of 1992, there were limits that were modified in relation to the fund activity that you describe on page 4. I believe the asset limit for 1992 is $50 million; the 20% of the Ontario tax credit will now apply to the first $1,000, with matching federal credits; and the limit will be up to the first $5,000, not to the first $3,500. That is on the fund activity only. The employee ownership is as you have described. It's my understanding that the government intends to introduce amendments to the bill to reflect those numbers I have just given you.

Mr Schenk: That was $5,000 instead of $3,500?

Mr Evans: Yes.

The Chair: I believe Mr Phillips had his hand up there.

Mr Phillips: I appreciate the brief. As you quite correctly point out, to accommodate the social investment fund requires fairly dramatic revisions to the bill as it's currently drafted. Is it the OFL's position that, as it's currently structured, the OFL has no interest in it and would not participate in it?

Mr Schenk: We would participate in the first part on employee ownership. That is a part that we think is valuable. In the Algoma Steel situation I think we virtually have a worker buyout. It's a valuable experiment and perhaps, as we state here, the only way to save people's jobs. It perhaps will lead to some interesting experiments in technology and work design as well, so we're very much in favour of that.

It's the labour-sponsored investment fund, which is to raise money from workers to give out to those small and medium-sized firms which allegedly have experienced capital gaps, that we don't think is valuable. We would much prefer to have that socially targeted, along the lines of what we suggest. So, yes, it is something that we think needs substantial amendment and it's something that we do not favour.

Mr Phillips: I guess there were words in here somewhere that suggest you wouldn't participate in it. I'm trying to find those words.

Mr Schenk: We are not interested in participating in the labour-sponsored investment fund aspect of the act.

Mr Phillips: Does it make much sense for the government to proceed with it, then? There are two groups, I think, that are eligible, yours and the Canadian Labour Congress. You're the huge organization here in Ontario. What economic value is there in even proceeding with this if you're not going to participate?

Mr Schenk: That would be something you would want to ask the government. I can only say that we had discussed this in the 1989 convention and we discussed it again at the 1991 convention. As a federation of labour, of course, we are an overall umbrella body that tries to coordinate and develop labour positions on issues like this. We don't have any way, other than moral suasion, of enforcing that view, so you may find some unions are interested in this and some are not, but I think we would do our best to put forward our view and the view these unions themselves voted on through their delegates at our conventions.

Mr Kwinter: I just wanted to make a comment. I'm delighted to hear your comments, because as the response I made to the previous presenter indicated, during 1989 when labour came to us and presented their ideas, exactly what you have outlined is what I envisioned was going to happen. This particular piece of legislation does not respond to that. I echo the thoughts of my colleague Mr Phillips. If this was supposedly a labour initiative and it was supposed to be a response to that initiative and it doesn't address it, why is this being pursued? Because it doesn't do what it's supposed to do, that is, to help small and medium-sized businesses, it doesn't deal with the social fund labour wanted. It's neither fish nor fowl; it doesn't serve the purpose and doesn't answer the need. Do you have any comments on that, other than you say that's not for you to respond?

Mr Schenk: I'm not so sure there's not some need for these kinds of funds. The point I tried to make is that I have never seen documentation. I've never seen it empirically proven to me that there is a problem for small business in getting capital. I think the case could be made, perhaps, but I've just never seen that. I'm not opposed to raising and providing capital to small and medium businesses. I'm not at all trying to suggest that. I'm just saying that I haven't seen that. There just needs to be a case made there, as far as I'm concerned. I certainly would prefer the bill to have a social investment aspect to it.

Mr Paul R. Johnson (Prince Edward-Lennox-South Hastings): I just wanted to say that there's an impression that worker investment will be viewed in some cases as bailing out their employers. That need not be the case and may in fact never be the case, because the intention of this bill is not for employees to bail out their employers if they find themselves in particular difficulty. In fact, in certain situations it may be advantageous for employees, for example, in the cases where an employer may be retiring and wants to divest ownership in his or her particular business; it would be the sort of thing employees might want to gain control over or ensure that the business continue so they don't lose their jobs. That's certainly one aspect of this legislation that isn't seen maybe as clearly as it could be.

Wouldn't you agree that the Canadian economy is changing dramatically and has changed dramatically in the past few years, and our society is changing, our economic climate certainly is changing? It's my opinion at least that worker investment, worker involvement, the relationship between business and labour, has to improve. I think an opportunity like this for employees to invest directly in their jobs is positive. I can't see where one could suggest that's wrong or not a good thing. I think opportunities for people to invest in the province, that is, the tax incentives for them to invest, are positive ones. It means the government invests proportionately less than what the actual investors do with regard to tax incentives. I'm looking for an opinion or maybe a view on what you think the future holds for relationships between workers and employers and the relationship this bill will have on that.


Mr Schenk: I'll try to answer you briefly. Yes, I agree the economy is restructuring and I agree it's beneficial for employees to participate in this economy more and more and to participate in the workforce. I'm certainly in favour of anything that moves us in that direction.

You gave the example of someone retiring from his business and an employee being able to buy it out. I agree with you that should happen and that can happen under the employee ownership labour-sponsored venture capital. It's the other aspect of the fund I have a problem with because it limits you to minority status in the funds. It gives you absolutely no say in how this place is going to run. What you're really doing is using workers' hard-earned money to put into these businesses which are probably non-union, anti-union and may or may not be producing a valuable product or service to the community. If you socially target it, I think it would make some sense. I think that could be done under this bill. It would take some substantial amendments, but I think it could be done.

The Chair: I have to move on to Mr Sterling.

Mr Norman W. Sterling (Carleton): I'm interested in your brief because you're so much in line with the Ontario Federation of Independent Business, which usually is not an ally on other issues.

Mr Schenk: I don't know that we are on this one.

Mr Sterling: It sounds pretty similar, or maybe to the unsophisticated like myself it sounds similar.

Mr Schenk: It is now favouring social housing and those kinds of things?

Mr Jim Wiseman (Durham West): No, not even close.

Mr Sterling: I'm not aware that that's included in this bill; I think perhaps you divert off.

In the first part of the bill that you look at, under section 5 of the bill there's an obligation to present this to a "government committee" to approve the investment. What is your feeling in terms of the obligation of the government back to the workers who put their money in if this endeavour fails? Is there any obligation at all in your view?

Mr Schenk: What is the obligation of the government if the investment fails?

Mr Sterling: Yes. The government is basically saying this is a good investment. Do you believe the government has any obligation back to the workers?

Mr Schenk: This was for the labour-sponsored investment funds section?

Mr Sterling: Yes. The employee group has to make its presentation and there's some certification that takes place.

Mrs Elinor Caplan (Oriole): Mr Chairman, on a supplementary: I believe there's actually a requirement for order-in-council approval before -- I see a head nodding. So it's much more than just an application. As I understand it, you must have order-in-council cabinet approval before the investment can be made.

Mr Sterling: What would your feeling be, representing the workers in this area, if the investment failed, if these people lost their life savings as a result of putting their money up?

Mr Schenk: I guess what I did here was try to focus on our alternative to that whole section. It is a different kind of fund than the government set up, so I didn't go through and look at all the pros and cons of those kinds of issues, to tell you the truth. I looked at the essence of what the labour-sponsored investment fund corporation was going to do and thought that this is not in line with what we in the trade union movement have debated and developed policy on, so what I've tried to do is just counterpose a labour-managed social investment fund to that whole section of the bill.

Mr Sterling: We're dealing with this first section. I'm dealing with the first section, the worker buyout, which you have said you are in support of.

Mr Schenk: Okay. I thought you were dealing with the second section.

Mr Sterling: No, I'm dealing with the first one. Part of that is that there's a government committee which reviews the investment, ostensibly for the employees. Then there's an order in council, as my colleague has pointed out, which says in effect, "This is okay." Then we go out and we entice the workers to invest in this by giving them 20% off their first $3,500 invested and 30% off the next up to $15,000, as you've pointed out in your brief.

I think that if I were a worker and the government had approved this investment and I had put not only $15,000 but $150,000 into this business, which I am entitled to over a 10-year period, and it failed, somebody might be looking at the government and saying, "You guys approved this and I've lost my house." Would you not be taking that position, representing labour?

Mr Schenk: I would say that if you're going to take over a business like Algoma Steel, which is a concrete example, there is a tremendous risk involved. There's no doubt about it. That's the danger I see in this. While it's a viable option for people under certain circumstances, there are not many times when workers have an opportunity to buy a company when it's doing well. It's usually when it's not doing well.

Mr Sterling: Yes. I agree.

Mr Schenk: There are reasons why Dofasco didn't want Algoma. So there's a risk involved and I think employees have to be aware of that. There's a real chance that you can be successful and there's a chance that you won't be. That is a problem.

Mr Sterling: You're not answering me, then, are you?

Mr Schenk: You're saying that the government is supposed to guarantee --

Mr Sterling: No, I'm just saying that if you were representing these workers, would you be looking to compensation for your workers who had lost their investment? I've got to tell you, if I were a union leader I would be looking to the government to bail my workers out, especially when it has approved this investment.

The Chair: Mr Kwinter's got a quick supplementary there.

Mr Kwinter: I just want to ask a question and follow up Mr Sterling's question. When I was the Minister of Financial Institutions we had pickets outside our doors every day on the Astra/Re-Mor Trust issue. The point of the investors was that this was a licensed trust company of the province, and as a result of its losing money, the government of Ontario was responsible because it licensed it. They went to court. They went to the Ombudsman. It dragged on for years and years and it was finally resolved with no resolution as far as the investors were concerned.

This is exactly the point Mr Sterling was making: If an investment into one of these funds goes to the cabinet and gets the approval, I can tell you, whether it's intended or not, the workers who invest will have the impression that this is sanctioned by the government of Ontario, it has been approved by the cabinet, and if there's a problem they will look to the government for redress, because, "Why did you approve this thing if it wasn't going to succeed?" I think, and my colleague has suggested, that somewhere along the line maybe we should bring in an amendment to clearly specify that there is no obligation on the part of the government and there is no redress or recourse to the government of Ontario so that is perfectly clear to the investors.

Mr Wiseman: You know that's impossible. I can't just sit here and let you get away with this. If a company town like Kapuskasing or Algoma is going to lose the main industry in that town, the province of Ontario is going to be called into it. The government of the day -- it doesn't matter who it is -- is going to be called in and they're going to say, "Why don't you save this?" As opposition members, you've been doing this on a continuous basis for the last 18 months.

Mr Kwinter: You misunderstand --

Mr Wiseman: No, I'm not misunderstanding, because what we heard earlier was that this fund was part of a vehicle to help save it.

Mr Kwinter: That's a different issue.

The Chair: I'm sorry, but the time has expired. I thought it was a short supplementary you had, a short question.

I'd like to thank you for appearing before this committee. I guess your address is on the pamphlet here so any one of the opposition or government members can address their concerns to your group. Thank you for appearing here.

Mr Schenk: Thank you very much.



The Chair: The next group to come forward is the ESOP Association. I'd like to welcome you to the standing committee on finance and economic affairs. You have one half-hour for your presentation. Can you leave some time at the end for questions and answers? If you will identify yourselves for the purposes of Hansard, you may begin.

Mr Perry Phillips: On behalf of the ESOP Association I would like to thank you for inviting us to give a brief on Bill 150. My name is Perry Phillips. I'm president of the ESOP Association.

Mrs Caplan: No relation.

Mr P. Phillips: No, as far as I know. To my side is Dave Clark, who is a director of our association.

Our association believes this bill will be one of the most significant pieces of legislation brought out in this decade. It will have a profound effect on all workers, their families and their standard of living. Documented research in the United States has shown that both in Canada and the United States allowing employees to participate in the ownership of their companies increases productivity, one study shows, as much as 8% to 11% per annum, increases competitiveness, increases innovation and tends to anchor capital in Ontario, which is where we would want to keep it.

To achieve these results the legislation must be sensitive to the needs of the marketplace, both for the workers and for the owners of businesses. In the US over 22 pieces of legislation have been passed over 14 years dealing strictly with ESOPs. In the United Kingdom three legislative acts have been passed in the last four years, again dealing just with ESOPs.

If we look at the US, close to 10,000 companies have employed ESOPs, of which 90% are closely held companies or small to medium-sized, not public companies. In the UK over 100 companies have employed ESOPs. The relationship there is completely reversed. Over 95% of the companies in the UK are public, not private, companies. We feel that the difference lies in the type of legislation that exists in the different countries.

We believe this act is an excellent starting point and applaud the hard work that went into this act from the various ministries in putting together what is a very difficult piece of legislation. Our brief today highlights eight areas where our association believes the needs of the workers and the businesses can be improved on over time. Our comments and recommendations relate only to the ESOP portions of Bill 150.

I'd like Mr Clark to start off on our brief.

Mr David Clark: I guess our first point is that we believe the legislation is really directed at big company bailout situations like Spruce Falls and Algoma. Based on the US experience, we think that probably represents less than 10% of the potential ESOP market. Our concern is that the legislative requirements set out in the bill, while they may be appropriate for large companies like Algoma and Spruce Falls, will be too onerous for small and medium-sized companies. We think it will be an expensive process that a small company or medium-sized company will simply not be able to afford. As a result, they simply won't engage in the process.

Our recommendation in this regard is that there be a threshold established and "small business" defined and that if a company is a small business as defined by the act, the legislative requirements be less onerous and less costly. We think if that happens there will be a substantial number of small and medium-sized businesses that will participate in labour-sponsored venture capital companies.

There's legislative precedent, of course, for having thresholds. For example, in the Ontario Small Business Development Corporations Act there's a definition of small business. We suggest that a definition similar to that be adopted so that small and medium-sized businesses can participate. We're concerned that because of the legislative requirements they simply won't.

Our suggestion for a small business is that, first of all, it not be a public company or an offering company and that it have less than $5 million in assets, $10 million in annual revenues and fewer than 200 employees. If a company falls below those thresholds, then it can in effect file a short-form application or a short-form business plan and not be put to the type of expense it would otherwise be put to, based on the bill as it now stands.

The second thing I'd like to talk about is control. It is a requirement of the bill that the labour-sponsored venture capital corporation acquire control or together with an outside party acquire control. Again, we think that may be appropriate for the large company bailout situations like Spruce Falls and Algoma, but we think it will discourage small and medium-sized businesses from becoming involved.

Owner-operators who have built up their companies over 25 years may have a number of reasons for wanting to get employee ownership in their companies: They may be a healthy company; they may want some additional financing to do some expansion; they may want to provide additional benefits to their employees; they may want to establish a succession plan -- and we think this is very important.

A lot of owner-operators who may control a company through their family are getting on in years and want to retire. Their family's not interested and they would like to eventually turn control over to their employees. If they're required to turn control over immediately and not over an extended period of time, we think it's going to discourage them from becoming involved.

We think the control provision will be detrimental. Our suggestion is that the control be reduced to 35%, which would give any employee group a large say in the company and encourage owner-operators to get employee ownership in their company.

Those are the two things I wanted to talk about and I'd like Mr Phillips to carry on.

Mr P. Phillips: One of the issues we think is important is having a supply of companies to be purchased by the employees or by the workers. For example, if you take your kid to a toy store and everything's off 90% but there's nothing on the shelves, what's the point of it?

We believe you have to supply some kind of incentive to the owners to sell their companies. As the act reads now, under subclauses 10(1)(c)(i) and 10(1)(f)(iv), the employee-owned shareholder group will buy the company and receive treasury stock. In return the owner, by giving up treasury stock, is basically selling the company and receiving no consideration. The funds go into the equity of the operating company and he does not see any benefit for trading that company which he has built up.

We think this is a serious situation. In reading Hansard we found that Mr Evans, the executive director of revenue services, stated that ESOP may invest in newly issued or existing shares of a corporation. This is not spelled out in the legislation; we think it should be. Our recommendation is that when an employee group buys a company, whatever the situation is, it should either be allowed to issue treasury stock or buy existing shares of the corporation.

Finally, we questioned what would happen down the road if an employee group bought the company, and new employees who were hired or came into the firm wanted to buy into the same corporation. We feel the act has not addressed this issue. We would recommend the bill be amended to provide a mechanism for additional employees to become shareholders after the original subscription.

That basically is our position paper. We're open to any questions you may have.


The Chair: Fine. On the government side, Mr Wiseman.

Mr Wiseman: I don't have any questions.

The Chair: I saw your hand up from last time. I thought maybe you still had a question. Okay, Mr Sterling.

Mr Sterling: I agree with your concern over the complexity of getting into employee-ownership labour. It really is very difficult. When we were briefed by Ministry of Revenue officials at the first, I started to realize the hoops you have to go through. It really is a bill designed, in my view, for a very large employee buyout. I would like to see something in there. The problem is always that when you're dealing with a government guarantee thing -- and you may have heard my question to the OFL representative before -- it's always difficult for the government to lessen the qualifications it's going to be asked to come up with if the thing goes sour later. Notwithstanding that, I agree there has to be some limit.

The one part I have difficulty with in your representation, however, is the majority requirement. Would your suggestion of going down to 35% of the voting stock or the common shares, or whatever way you want to put it, not lead to the possibility of really fiddling with the whole plan in terms of owners jacking up the price of their stock by utilizing the grant in terms of what could happen overall? I mean, if I were an employer and if I were trying to be devious with your suggestion, I might say to my employees: "Look, we're going to get involved in this thing. You're going to get so much back out of this. The present stock is going to increase in value because the price of the stock will be inflated by the government largess, if you want to call it that, under this circumstance. Therefore, we'll be able to modernize our plant, make more money etc and you're going to get paid higher wages."

Isn't there a problem in that when you allow -- I can see the reasoning behind the government's requirement that it needs to control 50% plus one share. I mean, if you say 35% you could say 20%; you could say any amount.

Mr Clark: I think there's no end of possibilities, and if somebody wants to be devious he can be devious. I think what the US experience shows is that a great many of the ESOPs in the US have far less control, and they're successful, they lead to more productivity.

I'm a lawyer. I act for small and medium-sized companies and I think private owner-operators are not going to want to get involved in this program if they have to turn over control right from the start. I think they would be quite happy to turn over control over a period of time if, for example, it was a succession plan. I think they should provide that sort of succession plan as part of their submission before the thing can be approved. But if somebody has built up his company over a long period of time and the only way he can participate in this thing is to turn over control and really not get any money for it, I just don't think it's going to happen. In a large company example like Spruce Falls or Algoma, it's probably right that there should be control. But I'm talking about the smaller companies.

Mr Sterling: A quick question. In the American ESOPs that you are aware of, is the bait as attractive as it is in this legislation?

Mr P. Phillips: American ESOPs give something to everybody, as you'll see in our brief. Basically the employees get a benefit. In the US the employees actually do not put up any net worth to buy the company. The company is bought out by the future cash flows of the corporation. This is different from the approach we've taken in Ontario and across Canada. Basically the approach here is that the employee will put up some money and get the tax credit for that. In the States they also tend to give benefit to the lender so the acquisition can be made at a lower lending rate. They also give a benefit to the corporation, as well as the owner. Everybody wins in this scenario.

For example, in the UK one of the reasons they have not been successful in attracting privately held companies is because of the restrictions put on the owners in terms of telling them: "Look, you have to sell X%. You have to sell control." There're just too many variables out there. The owner may be 55 or 60, thinking of retiring in five years. If he could sell 35%, for example, he would get the benefits of employee participation at this point in time. If there was an option to buy the remainder, they could be put in place.

In terms of value and protecting the employees, the employee group, I would assume, would have to go out and get an independent valuation. A valuation of a closely held company for a minority would be at a discount from the value they would pay for 50%. So if the company were worth $1 million and they paid 50%, they'd pay $500,000. If they were only buying 35% and let's say they had a good shareholders' agreement that had an option and created some liquidity for them, that 35% might be worth $250,000. So you're equating the risk of what the employee group is doing with the acquisition. That's where your protection comes in.

The Chair: We have some clarification from the minister's office.

Mr Evans: In relation to your observations around employee ownership, I want you to understand that the point you were making was a point that relates to subclause 10(1)(c)(i) in the bill. That talks to the acquisition of shares issued by a corporation. In the case of employee ownership, they could be shares that have been issued to a shareholder. The treasury shares are not a limit on the employee-ownership side. They can be shares acquired from an existing owner. Is that in any way at variance with what you've described?

Mr P. Phillips: When we read that, coupled with subclause 10(1)(f)(iv), where you cannot buy shares from an existing shareholder, we were concerned that the act was not clear. But if that is the intent --

Mr Evans: The intention in subclause 10(1)(c)(i) is to allow for the acquisition of shares from an existing shareholder.

Mr P. Phillips: That's fine.

Mr Evans: Further to that, under the regulating powers under section 37 of the act, it is my understanding the government is going to introduce amendments concerning the investor protection regime. I believe under those regulations, under the amended powers, there will be the ability to tailor the nature of the regime to ensure it is appropriate to the size and nature of the business being addressed. So in relation to the elements of your presentation that talk to the nature of the hurdles that would have to be overcome in investing in a small business, I believe it's the government's intention that the investor protection regime should be appropriate to the size and nature of the business, so there will be some attempt there to be flexible.

Mr Wiseman: I'd like to turn to a presentation we had a little earlier on in this process. I can't remember their exact titles, but they were from mutual fund investment groups. They've gone out and put this into the marketplace and have received people investing back into this fund, I think to the tune of almost $29 million. They told us that at the beginning of that process they went into the money markets and said: "This is a very risky venture. This is risk capital and you should be aware of the risk nature of this capital."

Stemming from some of the questions earlier, given that they're told up front that you have a choice of putting money into this or not -- it's like buying into other mutual funds or buying into the stock market; there are no guarantees there -- do you think it's reasonable or even fair that there should be something written into the legislation saying either that these investors aren't going to be protected or that they should be protected by the government in the future?


Mr P. Phillips: It's hard to protect someone from a bad investment. As far as the mutual funds go, they buy a portfolio of stock and therefore hopefully they're spreading the risk based on the portfolio of assets they've purchased, so you're not putting all your eggs in one basket. If I understand the question, you're asking, should the government protect those investors?

Mr Wiseman: Yes, give guarantees to protect those investors or write into the legislation that there are no guarantees. Is it necessary? Maybe I'm sitting on the wrong side, but I always thought about caveat emptor, buyer beware. What we heard earlier was just exactly that: "Don't enter into this if you're 62 years old, you've got three years to your retirement and you want to take your money out. This may not be the kind of investment you want to make. But if you're 30, you have a fairly healthy income and it's only 1% or 2% of your gross, you want to play with it and see what you can get out of it" -- and judging from the numbers you've given us, it's possible that somebody could do really well with a managed portfolio -- "then maybe that's the kind of venture you want to get into. But remember that this is called `risk venture.'"

Mr Clark: I don't think the government should be guaranteeing anything. I think the government should be reviewing the thing to see whether the proposal makes sense and has the proper assumptions and so on and perhaps even has some long-term prospects for being successful. But things can happen that nobody can predict, and that's the risk, so I don't think there should be any guarantees.

Mr Wiseman: Do you think the way this legislation is written in terms of the instructions that are being given -- they're similar to the Ontario Securities Commission's requirements but they're slightly different, because they need to be for this kind of investment. In your opinion, are they adequate? Are they the kind of instructions that should be given in terms of making sure that investors know what they're buying when they buy?

Mr Clark: Frankly, I haven't focused too much on that part of the legislation. One of the things we discuss in our brief is that there seem to be a lot of subjective criteria that the minister or the advisory board is supposed to bring to bear, and we think that presents risks. We think there should be more objective criteria, more like the Ontario Securities Commission has. It's a little more predictable for people who want to engage in the process. It seems to deal with whether you've complied with the spirit and intent of the legislation, and we think that's just a little too broad and a little too subjective. There should be more objective criteria involved in the thing.

Mr Phillips: I really appreciate the presentation. The presentation we've heard today really got at the heart of some of the problems of the legislation.

The OFL, as you've heard -- I think you were sitting here -- said it's not going to participate in the big part of the venture capital one. You're on the other side on the worker ownership and I think you pointed out that if the objective of the bill is as stated, that is, to encourage employees to participate in their workplace, if the objective is to encourage employees in successful operations to participate we should listen carefully to some of your recommendations, because if the bill requires impossible hurdles for employees to get over, then we're going to be counterproductive.

I have nothing other than saying that I appreciate your comments. I think you've given us a lot to think about.

Mr Kwinter: Can I just get a clarification or maybe an expansion on one of the fable-and-fact points you made? I think everybody agrees, as my colleague has just said, that the purpose of this thing is to keep companies going, keep them viable and be a benefit to the employees who are participating.

In your first fable and fact on page 2, you say, "Research shows that real gains are made only when employee owners have a chance to share the information and ideas they have on how they can do their jobs better." Later on you say, "Participation programs alone have little impact on corporate performance." My point is that you can be a non-owner and share, so that you can improve companies like Magna where they have input, lots of other companies where the employees have incentive programs to make suggestions, and you can have employee ownership where that doesn't happen. Could you just expand on that particular part of it?

Mr P. Phillips: I think your analysis is correct. The research has shown that where you combine the two, where you have the ability to basically control your workplace but then also see a direct result of that benefit, other than in a short-run, let's say profit/bonus, situation, that's when productivity improvements of 8% to 11% start to show up. In other words, the employee not only has the motivation to do better, he has the ability to control his own work space and therefore what benefits he does accrue to the company he will see in future.

Part of the participation, of course, is training the employees to understand this and to understand how to read a balance sheet and to understand if that they can cut their work from eight hours to seven hours or six hours and get the same amount of work out, then the bottom line improves and they will in fact reap the rewards. That's where the participation comes in.

The Chair: I'd like to thank you for appearing before this committee.

This committee will adjourn until 3:30 sharp this afternoon, when we have six other presenters. We'll start right at 3:30 so we can finish at 6 o'clock tonight.

The committee recessed at 1137.


The committee resumed at 1534.

The Chair: I'd like to welcome you to the standing committee on finance and economic affairs. This afternoon we're going to have presenters on Bill 150, An Act to provide for the Creation and Registration of Labour Sponsored Venture Capital Corporations to Invest in Eligible Ontario Businesses and to make certain other amendments.


The Chair: I'd like to welcome to the committee this afternoon the Ontario Securities Commission. I believe we have Mr Robert Wright, Mr Joe Oliver. Welcome. I believe we have another --

Mr Robert J. Wright: That's Catherine Wade.

The Chair: Miss Catherine Wade.

We have one half-hour, and if you can wind up leaving some time at the end for questions from the three parties, you may begin.

Mr Wright: I appreciate the opportunity of speaking to the committee with respect to a matter which is of considerable importance to the Ontario commission and the role it plays in the regulation of the capital markets in the province.

We've been engaged for some time in a discussion with officials of several government ministries with respect to the concept and drafting of the legislation and regulations relating to the Ontario investor and worker ownership program. Our goal has been to see that neither the commission itself nor the staff are placed in a position of either prejudicing our ongoing ability to regulate the capital markets of the province or alternatively that we deal with the initiatives of this proposed legislation in a way which will defeat its policy objectives.

The concepts in the bill and its amendments are a bit foreign to securities regulators. The intent of the bill, as I understand it, is twofold: to provide small- to medium-sized Ontario businesses with access to new sources of equity capital and to provide workers with the opportunity to have input into the ongoing ownership, management and direction of their employer. Obviously this initiative raises questions, particularly ones relating to investor protection, which you will want to ensure are answered.

Until now the existing framework in Ontario for investor protection in the capital markets is that set out in the Ontario Securities Act. While that act provides the commission with broad discretion, this discretion is to be exercised in a public interest context. The courts and the commission have from time to time had occasion to determine the scope of the public interest mandate and have consistently related and limited that concept to investor protection and the regulation of the market. The Securities Act and its regulations provide a strong investor protection requirement and mandate for our work.

Without the proposed amendments, Bill 150 would require full compliance with the Ontario Securities Act for both parts of the program. It is my view that such a requirement would almost certainly result in limited use of the incentives provided for under the bill. Most of those who wish to avail themselves of them would either not be able to meet the requirements of the Securities Act or would find these requirements so costly as to prejudice the program. This comment is applicable to both investment vehicles.

From the beginning it has been apparent to us that unless the legislation and regulations were carefully drafted there would be a serious risk for either the commission or the program or both. The risk for the commission is that by granting exemptions under a new and expanded public interest concept, our ability to regulate the capital markets in the province will be jeopardized. On the other hand, not to do so would mean that the commission was by its processes effectively undermining an important government policy.

This problem became very evident in the Spruce Falls application. The decision of the commission in that case signalled our view of the need to draft the regime in a manner which will accomplish the policy objectives of the government while at the same time not affecting adversely the ability of the commission to perform its mandate.

In my view, the broad public policy considerations which are inherent in the objectives of Bill 150 are just not the same as the more narrow focus of the Securities Act. The mandate of the commission is, as I read the Securities Act and the decisions of the courts and the commission, the protection of the public and the regulation of the securities market to ensure a fair and efficient capital market in which the general public will have confidence. This confidence is critical to the capital markets and therefore to the economy of this province. It is for this reason we have made it clear that if the role of the Ontario Securities Commission is to change, it must be changed by legislation.

For a number of reasons, it is my view that the appropriate regulatory model for investor protection for the investment vehicles provided for in Bill 150 is something other than that provided in the Securities Act and regulations. It will not surprise you when I express the view that the investor protection features of the Securities Act should not be abandoned without careful thought. They have served investors and those seeking capital very well over the past 50 years and in my view there must be good reason to abandon the framework, either entirely or for a limited purpose.


Having said this, I do not believe the current regulatory regime can accommodate the spirit and intent of Bill 150. To accommodate the policy objectives of Bill 150, a choice must therefore be made to revise the Securities Act, which is a law of general application, or to develop a separate regime under the bill itself. Our choice, in order to make the intention of the government clear and to clearly limit the extent of the change, is the latter.

This is not the first time the government has been faced with this difficult decision. The cooperatives situation is one such example. Investors who invest in cooperatives are provided with an alternative, and I might say, less stringent model of investor protection than that existing under the Securities Act.

The bill creates two new investment vehicles. One is the employee ownership vehicle, such as that used in the Spruce Falls and Algoma situations. The second is a mutual fund with features somewhat different from the mutual funds with which we are familiar.

I have reviewed Bill 150 and the amendments with the staff. I accept that they set out a clear role for the Ontario Securities Commission which should not prejudice our general mandate.

I'd like to discuss for a moment the employee ownership vehicle. As I have mentioned, the OSC has had the task of dealing with one of these under the Securities Act prior to implementation of the bill. The Spruce Falls acquisition matter was difficult for both the staff and the commission. The level of protection both expected and requested by those involved in that transaction was different from and less than the level contemplated by the Securities Act. Of particular concern to the promoters of the transaction and the dealers involved was the regulatory requirement that there be a full-blown prospectus and that dealers should meet their statutory duties to "know your client" and to advise clients based on the suitability of the investment in question. These are considered key elements of investor protection for those buying securities. It was their view that these investor protection measures should not be imposed.

Staff of the commission did not agree with this view and the issue was taken to the commission. After a public hearing, the commission granted an exemption from certain of the investment protection provisions of the Securities Act, while making it very clear that future applicants should not expect similar treatment.

The mindset of the investor in these situations is not in my view the mindset of a person looking to whether this particular investment fits his or her portfolio. Rather, the investors are weighing such things as whether they'll have a job in the near future, whether their children will have the opportunity to grow up in the community, whether their major investment to date, their home and their mortgage, will have value and whether they will be forced to relocate. These are not issues which registrants under the Securities Act have been trained to consider when providing investment advice. They are individual life decisions.

The regulatory framework of prospectus disclosure and advice by trained investment counsellors does not in my view, when balanced again cost, create a benefit of equal value. Perhaps more important, it would not provide an adequate level of investor protection. Reliance on the normal securities regulatory regime would not provide an adequate basis for decision-making. This in my opinion is true of employee investment vehicles which are not in financial difficulties as well as those which are.

As most of you are aware, the Ministry of Financial Institutions, its counsel, Stikeman Elliott, and other ministries have worked very hard to determine the appropriate level of investor protection. We have participated in this process to ensure that the regulatory regime necessary to achieve this level is in place.

As the person ultimately responsible for securities regulation in this province, I believe very strongly that all investors in the capital markets should be afforded the appropriate level of investor protection. In my view, there are investor protection features now provided for in the bill and its amendments. These include requirements that there be a business plan, the consideration by an advisory board of the commercial viability of the project, the requirements of a supervised vote of the employee investors and the control in a trust account of employee funds. These requirements provide a measure of protection for these investors. Given the desire of the government to encourage this vehicle, they are in my opinion more effective than those presently provided in the Securities Act.

I'd now like to turn to the second investment vehicle created under Bill 150. The funds proposed fall squarely within the definition of "mutual fund" in the Securities Act. We've had the opportunity to deal with one of these fund vehicles prior to implementation of Bill 150. Working Ventures, from which I understand you have already heard, was the first labour-sponsored venture capital corporation in Ontario. To date, its funds have been invested in fully liquid and fully secure investments as a result of a condition imposed by the commission pending completion of this legislative process. The investments in which Working Ventures must invest within the next two years in order to maintain registration under Bill 150 are, however, not nearly as liquid and may be speculative in nature.

The Ontario Securities Commission, together with the other Canadian securities administrators, has implemented a policy on a national basis which sets out guidelines as to investment criteria and other investor protection-based criteria to which mutual funds must adhere in order to distribute their funds in the province. These criteria have been considered by this and other commissions to be necessary to meet the public interest mandate of the legislation we administer.

There are two basic principles inherent in the investment criteria under this policy: diversification and liquidity. As you are probably aware, mutual funds do not trade; rather they are bought and then redeemed. In order to fund investors' requests for redemption on a timely basis, a mutual fund must have access to cash which is ensured by the liquidity of the underlying investments of the fund itself. Diversification of portfolio attempts to provide a reasonable safeguard against the possibility of sustaining losses materially affecting liquidity if any particular segment of the economy fails.

The funds created under Bill 150 will not have the same levels of liquidity and diversification as are required of other mutual funds sold in this province. Liquidity and diversification are investor protection features, and this should be recognized. This issue is unavoidable in a vehicle which promotes investment in small to medium-sized businesses which otherwise have limited access to the capital markets. It is also inherent in the provisions of the bill which allow for significant investment in a particular enterprise. The design feature of tax credit recapture if a redemption occurs within five years from the date of purchase may also create a monetary constraint to the ability of investors to access the redemption features inherent in a mutual fund.

In making these observations, I do not want to be taken as saying these investments are not meritorious. In my view, however, it is important that these issues be considered and balanced with the policy objectives underlying the creation of these new investment vehicles.

To encourage participation in the equity market for investors who might not otherwise invest in the market or who might not otherwise invest in small to medium business, the government is proposing what is in effect a revenue bill which provides tax credits to such investors. The tax credit not only provides an incentive to invest; it can be seen as reducing the real cost to the investors. In addition, the amendments include a reduced recapture of tax credits where the investment has lost value between the time of acquisition and the time of resale or redemption if such event occurs within the period for which recapture is applicable. These are features which may make the investment attractive and may balance other features of the funds.

Unlike the employee ownership initiative, it is presently contemplated that the provisions exempting these funds from the liquidity and diversification requirements imposed upon other mutual funds offered in the province will be implemented by way of regulation to the Securities Act. While it would be my preference that such regulation be dealt with by way of amendment to Bill 150 or pursuant to regulation under that statute, thereby making it very clear that these are somewhat unusual investments and are being authorized for policy reasons outside the Securities Act, it is not critical to the commission that this be done, as it is in our view with respect to the employee ownership vehicles.

Our degree of comfort with these proposals is subject to the resolution of certain issues which I understand remain outstanding. In particular, Bill 150 requires valuations to be undertaken in respect of both vehicles. The valuations are important for the program. In particular, the pricing of the shares will be based on the valuations, as will the redemption price.

As I understand it, it has not been determined who should have the responsibility for regulating to the extent deemed necessary the preparation of the valuations and the independence of the valuer. We have made it clear that in our view this should not be left to the OSC. The OSC does not currently review or assess valuations for the purposes of investor protection. While under some OSC policies guidelines have been provided for preparing valuations and determining the independence of valuers, we have left ultimate responsibility in these matters to the entity which retains the adviser.


This is consistent with the whole concept of securities regulation. We are not equipped and do not have the expertise to ensure the validity of the valuation or the valuation procedure. Our role is to ensure disclosure by issuers to all investors who are being asked to make a decision in relation to their investment. It is not and has not been a role which in any way assesses or passes on merit. Any significant involvement of the OSC in the consideration of valuations would involve a new responsibility for us and would require legislative instruction on the nature of the mandate and how it is to be carried out.

The Ontario Securities Commission will continue to fulfil its mandate under the Securities Act to the best of its abilities. It also will fulfil whatever mandate is given to it under Bill 150 to the best of its abilities. As presently contemplated, this initiative does not adversely affect our ability to carry out our responsibilities nor will the discharge of our responsibilities be likely to jeopardize the policy initiative which Bill 150 reflects. We trust that, as the program is finalized, this will continue to be the case. Thank you.

Mr Sterling: Thank you very much for your brief. I assume, therefore, the bottom line is that the OSC doesn't really want to be involved with these two investment vehicles.

Mr Wright: I don't think it's quite right to say we don't want to be involved with it. We're quite prepared to do what we're asked to do, but we think it's appropriate that we might have a role where we determine that, for instance, a summary of a valuation or of a business plan is a reasonable representation of the plan. Where we do not think we should be involved is in any way assessing whether the business plan itself makes sense. We don't have the capacity to do that.

Mr Sterling: This morning we had some other people -- I know at least one of your people was here -- and the question I asked was that it seems, under Bill 150 and particularly the first plan, the employee ownership plan, the government is requiring or almost sanctioning the investment in terms of its viability, etc. They're asking for significant plans with regard to what's going to happen, etc. Would the concern you have, in terms of taking on that role, be the upshot of a failure? In other words, what would happen as a result of the failure and the investor coming back to the OSC saying: "You sanctioned this investment. What went wrong?"

Mr Wright: No, I don't think that would be our concern, Frankly, we approve prospectuses, and occasionally companies who have filed prospectuses with us either go under or the stock price goes down. That's something we live with.

What we're concerned with is that in any way we would be involved in a process which suggests we think that -- for instance, supposing there's an advisory board that says this investment is commercially viable. It may be possible for an advisory board to say that. It is not possible for us to say it. We don't have the people who can make that kind of assessment and it's not the kind of thing we do. The same is true for a valuation. We have said in certain of our policies that companies, when they're doing things, have to provide a valuation. We've given them some indication of who can do the valuation but we don't pass on whether the valuation is good, bad or indifferent. That's up to the shareholders, if something goes wrong.

Mr Sterling: In your scenario, or in your normal function under the Ontario Securities Commission, if the investor interprets the information in such a way and invests but loses, then he loses and that's the end of the matter in terms of his investment, as long as the prospectus --

Mr Wright: Could I just interrupt you here? That's not quite right. It's right the way you've said it, but I'm not sure it's the question you're asking. If an investor loses because the information is wrong, the investor has rights but not against the commission. The investor has rights against the issuer. If you exempt employee ownership vehicles from the Securities Act, unless there's something else in the bill or in the arrangements, there may be no such recourse for the investor. I'm saying that with reasonable --

Ms Catherine Wade: There will be civil liability, but it's individual.

Mr Wright: Yes, there is civil liability, but it's a new issuer.

Mr Sterling: If I'm reading your brief correctly, you're saying that there's a higher degree of investor protection needed for employee ownership.

Mr Wright: I hope the brief doesn't say that, Mr Sterling, and if it does, I think it would be expressing a view which is not ours to express. What I've tried to say -- and not everybody at the commission agrees with me about this, but I feel fairly comfortable about saying it notwithstanding -- is that the kind of investor protection provided under the Securities Act will not, in my opinion, give very good value or very much comfort to an investor buying under the employee ownership particularly and specially in a case where it's an investment in a troubled company, to save a company.

I have made it very clear to anybody who's asked and to some who didn't ask that, in my view, you can't ask the commission to deal with those vehicles under the act. We said that in effect in the Spruce Falls decision. There has to be some other arrangement to provide whatever the government determines is an adequate and appropriate level of investor protection, but it's not up to us as a commission to say what that level is.

The Chair: Okay. We'll have to go on to Mr Kwinter. Four minutes.

Mr Kwinter: I want to follow that same route because we discussed that this morning. One of my concerns is that if an investor purchases a stock on the Toronto Stock Exchange or any of the other exchanges governed by the Ontario Securities Commission, that investor has a certain confidence that this stock has met the requirements of the filing: There's a prospectus, certain standards have been met. As you say, you certainly don't warrant or guarantee that these companies are going to succeed, but you do warrant and guarantee that, in all cases unless there's fraud, the prospectus truly states the state of the investment.

My concern is this: Under this act, every vehicle covered by Bill 150, as it goes to the advisory committee and everything else, ultimately gets to the cabinet and the cabinet makes the decision that, "Yes, we have seen all the representations and we are satisfied this is a vehicle that qualifies under our program, or we're going to approve it." Then that begs the question: You said the securities commission is not there to provide redress, but something else has to be there.

Given the fact that this gets the seal of approval of the Ontario cabinet, if the company does go down, my concern is that those investors will be looking to the Ontario government for protection on the assumption that, "You approved this thing, this is your proposal, it's not through the securities commission, you have given it your approval and we would like you to compensate us for it."

How do you get around that? I know it's a problem, but I can tell you that, as Minister of Financial Institutions, I've lived through it with the Astra/Re-Mor situation. I've seen what happened in Alberta when the Canada Deposit Insurance Corp went to $60,000: The government topped it up another billion because it felt it had no choice politically. How do you deal with that?


Mr Wright: I think the only possible way you could deal with it is to make very clear whether or not there is a back-stop like that. If you don't make it clear, then I would think there would be a risk such as you are talking about. There are features of the bill, as I read it, including particularly what's before the advisory board, which could lead to that, and, of course, as you say, cabinet approval.

I think it would be only fair, in some kind of disclosure document or whatever, to make it very clear either that there is a back-stop, if I can use that word, or that there isn't. One of the features of what we try to do at the commission is to say there has to be full, plain disclosure. I would think that should be a feature of this aspect as well.

The Chair: Mr Phillips, you have one minute.

Mr Phillips: This is a whole very important issue, and I think you've quite correctly identified that these are unique situations where people's lives are really at stake. This isn't an investment; this is their future.

The proposal here essentially says to a group of employees, "Get your plan together and then send it off to an independent board." It would do the advising. I share the concerns of my colleagues here: I think that once the stamp of agreement is on, five, six or seven years later people will have an expectation that it has been looked at by an advisory board. Is there a better vehicle? Is there another way of doing it, for example, saying, "Here are the criteria that must be satisfied and you, the employees, have to have done all of these things using whatever outside counsel you want to use and have satisfied yourselves on that," as opposed to this one, which is essentially to prepare it all, send it to the government and it will approve it? Have you examined a better alternative?

Mr Wright: I'm not sure that it's really up to us to examine the alternatives, and frankly, no, we haven't. We have been concerned about whether or not there is recourse in the event that something untoward happens. I think the best I can do is repeat again that I personally think that, either in the legislation or wherever, it should be clear whether or not there is disclosure, whether or not there is that back-stopping, and that there should be full disclosure to the employees, the people who are buying this. Either they do or they do not have some recourse if this thing doesn't turn out as everybody hopes it does.

Mr Stephen Owens (Scarborough Centre): Mr Wright, as the parliamentary assistant to the Minister of Financial Institutions I want to thank you for your presentation. I know your staff has worked hard on the regulations and at looking at some of the protections we're talking about here today.

In terms of the health warnings and the disclosure process that I understand is going to be part of the process, and indicating in plain language that the investment, like many other investments, is a risk, I'm getting the sense from yourself -- and perhaps I'm incorrect -- that perhaps another level of protection or a different kind of protection is required. Is that a correct sense?

Mr Wright: I don't think it's a correct sense. In my judgement there are -- and I know some people don't call them this -- what I consider investor protection features in Bill 150. They are things like the preparation of a business plan, the participation of an advisory board and the other things, and I've mentioned one or two others. Whether those are adequate investor protection features, frankly, I don't know, and I don't think it's up to the securities commission to say. They are investor protection features, and I would go so far as to say that in my view -- this is a personal view -- they are more appropriate and better than the requirements in the existing Securities Act when applied to purchases of securities.

I do think there should be very full disclosure of what the risks are. I don't want to be taken as saying I think the investor protection is appropriate, but I certainly don't want to be taken as saying it isn't appropriate either. I'm saying it's better than if you'd just left it under the Securities Act. In fact the program would not work under the Securities Act.

Mr Owens: You've mentioned the issue with respect to recourse if in fact something happens down the line and the investment goes down. Even with all the protections, the health warnings and plain language and people understanding that what they're doing is inherently risky, and in the employee ownership scenario under a company that may not have made it anyway, do you still see the need for recourse for investors?

Mr Wright: I do not want to be taken as saying I see a need for recourse for the investors, because I think that is very much a matter for the people who set the policy and pass the legislation to decide. All I meant to say was that I think it should be clear whether or not there is recourse. It's a personal view, frankly, whether there should be recourse. If you want a personal view from me -- maybe you don't, but I'll give it to you -- I don't think there should be recourse, but I think that I should know.

The Chair: I'd like to thank you. Time has expired and I don't think we want to send out for supper tonight. I'd like to thank you for coming before this committee with your presentation.



The Chair: The next group to make a presentation is the Canadian Auto Workers. I'd like to welcome you to the standing committee on finance and economic affairs. If you have a handout, the clerk will hand it out for you. We'll have half an hour, and if you can, leave some time at the end for questions and answers. If you wouldn't mind, identify yourselves and your positions for the purpose of Hansard. You may begin.

Mr James O'Neil: My name is Jim O'Neil. I'm the secretary-treasurer of the Canadian Auto Workers. With me is Sam Gindin, assistant to Bob White, the president of the CAW. We have a brief. I thought what we'd like to do is read over the first few pages, and then Sam Gindin would like to spend some time, just five or 10 minutes, explaining some of the attachments and hopefully leave about 15 minutes for some questions.

Worker venture funds, the rationale: Worker venture funds are, first of all, a response to a failure in how Canadian capital markets work. New companies, particularly smaller and mid-size companies, have had trouble getting access to finances for investment. The idea is to get workers to put their savings into a central fund that can correct this market failure and therefore support the strengthening of our future manufacturing base. Tax breaks -- very generous tax breaks -- are the inducement for workers to participate in such investments. The involvement of workers is also viewed as a democratization of the economy.

But is this the appropriate way to deal with a legitimate problem? Does it really contribute to job creation? Is it a good investment for workers? What about the implications of the tax breaks? Does it really contribute to worker control? Does labour have a better alternative? Can workers' funds solve the failure of the capital market?

A worker venture fund would necessarily remain a bit player in the overall scheme of things. The Quebec solidarity fund, in place now for eight years, has assets of some $425 million, a good portion of which come directly from the taxpayer. Allowing private pension funds to invest a further 10% abroad, as the federal government has just done, could mean losing 50 times as much funds as the Quebec solidarity fund has accumulated. The Caisse de dépôt is another matter. Having control over massive funds like the Quebec pension fund and the workers' compensation fund, which are accumulated through premiums on all employers and workers, it has been a major player in Quebec's economic development.

Why are so much of our savings ending up in speculation, real estate or leaving the country? Why aren't they being invested productively? Why, if we need funds in Canada, is the federal government easing the restrictions on sending pension moneys outside our country? Shouldn't we, at a minimum, be discussing greater regulation over the banks and other financial institutions? Common sense suggests that focusing on working people to solve a major problem in Canadian capital markets is either marginal or a cynical and ultimately very costly diversion from dealing with the real issues behind private mismanagement of the country's savings.

Won't they create some jobs in Ontario? Workers investing in such funds face limits that capitalists do not normally face: You can't take your money out if the return is poor -- the investment is locked in -- and the ultimate investment of funds has to take place in Ontario. These are positive features from the perspective of job creation in our province, and the job argument seems to be reinforced by the only example we have to look at, the Quebec solidarity fund, which, it is argued, has maintained or created some 23,000 jobs. But this must be put in the following context:

(a) There are reasons to believe the Quebec numbers are an exaggeration. But even if we accept them at face value -- an average of less than 3,000 jobs per year -- this has not made any kind of dent in Quebec's unemployment rate. Quebec's unemployment rate has not improved at all relative to Ontario's in spite of the dramatic deterioration of Ontario's manufacturing base, and Quebec lost more jobs in the latest two months than the Quebec solidarity fund supposedly maintained or created in over eight years.

(b) Where such a fund does play a prominent role in preserving a facility important to the community and the future, the point remains that even if no fund existed the government should and could be acting directly to save those jobs.

(c) If the government used the taxes it is providing to subsidize venture capitalists more directly, would it create equivalent numbers of jobs? If the taxes were used to alleviate pressures on public sector jobs, would this create equivalent numbers of jobs? Is this, in other words, the best use of taxes for a job creation strategy?

Are such funds a good investment for working people? The extremely attractive tax breaks of these funds are used to lure workers into the funds. The relatively low rate of return and the risk involved keep other investors away, and without the tax breaks workers would not be considering them at all.

For workers saving for the future, however, the issue is long-term: What will they have when they retire and how secure will it be? While venture funds might get a return of about 5% -- the experience of the Quebec solidarity fund showed an average return of 5.1% -- safer funds might get more than twice as much. Canada savings bonds over the same period earned an average return of 10.5%. The advantage of the seductive tax breaks is, because of the lower return, eroded over time.

We have put together some numbers in attachment 1. While they are not conclusive and do depend on assumptions made, they suggest that as an investment for retirement the benefits, even after the tax breaks, are questionable. For workers close to retirement and with relatively higher incomes, the investment may generate more moneys than alternatives, although the risk factor is higher; for younger workers and relatively lower-paid workers, other investments are likely better.

Moreover, and again based on the Quebec experience, the limited ability of workers to generate savings in today's economic circumstances means that such funds are competing with the traditional focus on pension funds. The tendency to erode future pensions in favour of venture funds is, for working people, a dangerous mistake.

If we want to do something about retirement income for workers, let's do it directly by improving on the CPP and OAS through higher premiums and let's make sure the funds are also invested productively in Canada so that in the future Canada will have the strong economic base that can support retirees.

Is the tax break a sensible tax? Corporations get all kinds of tax breaks. What's wrong with workers also getting some?

This particular tax break represents a regressive and unproductive tax reform. First of all, if it weakens worker opposition to corporate tax breaks by buying us off with some crumbs, we've been had. We should be attacking those tax breaks to the rich that are unfair and serve no defensible social purpose. Second, the tax break is not for workers as a whole but is only for those workers with enough savings to invest in such funds, and, when combined with RRSPs, the tax breaks are higher if you earn more. Workers who are unemployed or who end up working part time or who are unorganized or who are simply having trouble making ends meet are not going to share in the tax goodies. Third, it erodes the tax base at a time when funds are desperately needed for health care, education, infrastructure, training, housing and other social programs.

What does this have to do with worker democracy? The workers' venture fund does not control the companies it invests in. Essentially, it is shifting workers' savings and taxpayers' moneys to others who do have control, although when it comes to risks, the workers are very involved. Nor do the investments even have to meet social criteria like the existence of a union or an affirmative action program. In short, it offers neither workers nor their representatives any significant control over the economy.

Other jurisdictions and the business community have supported such funds and articulated the rhetoric of democratization and partnership while simultaneously attacking working people when any concrete democratic measures are actually put on the agenda, measures like increasing the capacity of workers and unions to participate in the economy by providing us with more information about specific sectors; providing resources so we can do more of our own research towards the development of economic alternatives; democratizing, through regulations, private decisions that have a social impact; introducing greater worker input into corporate decisions before they are allowed to close plants and offices; expanding the commitment to widely available and broadly defined training for workers so we have the tools and skills to increase our participation in the economy.

In the debate on worker participation, our union places its focus on the combination of such directions and measures, measures which develop workers' skills, strengthen their organizations and reinforce workers' rights.

Conclusion: The Ontario federation alternative: If the government is serious in its intent to increase worker participation in the economy, it hardly makes sense to begin by introducing a proposal the labour movement has itself rejected, and rejecting, while talking about worker input, the proposal the labour movement is recommending.

The Ontario Federation of Labour has considered worker venture funds at the executive board and at convention. The conclusion was that such structures were not in the interests of working people and we developed an alternative: attachment 2, the social investment fund. This alternative would cost the taxpayer no more money and would offer workers a place to put their savings that promises both a secure rate of return and a socially progressive use of those funds. Instead of tax breaks to individuals, government funding would go directly to the fund. Instead of dabbling with venture funds and pretending that this held the key to developing our economic base, the funds would be used to support low- and middle-income co-op housing or integrated into a broader green industrial strategy.

We strongly urge the government to withdraw its current proposal and seriously consider introducing an alternative based on the OFL model.

Mr Sam Gindin: I'll take you through the attachments and then maybe we can have questions. I won't take long.

The first attachment is an earlier letter we sent. While the brief concentrates on the worker venture fund, the attachment also comments on the question of workers directly owning their own factories or workplaces.

I think the second attachment is more important. We tried to deal with the issue that when you have a tax break, you obviously do very well in the short term but you're locking yourself into a lower rate of return in the long term, and at some point the two lines cross. The example we chose is to take two workers. To make it comparable, we imagined the first worker investing in the fund and getting a 40% tax break: he invests $10 and gets $4 back, so he invests $6 but gets a return on $10. In the second case, we take a situation where somebody with the same $10 just pockets the first $4, so that it's the same as the first individual, invests the other $6 without the tax breaks, so gets his return only on $6.

In that table, we took the actual performance of the Quebec solidarity fund, and we see in the column under "value" that the solidarity fund shares go from $10 to $14.80. Then we compared that to somebody who only started with the $6 investment because he didn't get the tax break. We take that through based on the Canada savings bond average for each year. What you find is that after about 10 years you're in the same place and after 10 years you actually begin to fall behind if you're locked into the solidarity fund type of investment.


You can make that more complicated by throwing in the rollup of the RRSPs; that extends the period at which they cross, but they do cross. There's a table there that people may want to ask some questions about.

I want to make one point on that table, because one of the changes both in the BC model and the Ontario proposal was that people could actually take their money out after eight years. I presume that was partly a response to what the table shows, that if you leave it locked in it turns out to be not a very good investment for the long term. The problem with having the option to take it out after eight years is that it contradicts other objectives of the program. If you take it out after eight years either it simply ends up costing the taxpayer a lot more money, because every eight years you take it out with one hand and with the other hand you put in an equivalent amount and get the tax breaks again, so you get a lot more tax breaks, or from the worker's perspective you obviously have to pay the tax when you pull it out, which removes some of the advantages. If you do take it out it defeats the point of making this into some kind of savings plan for retirement, which was the original rationale for why it was locked in.

The second attachment I think you may have seen earlier today when the OFL was here. It just summarizes the OFL's alternative. I want to emphasize that it's an alternative in the sense of a different direction based on some different principles rather than a detailed proposal. I attached an example of how that alternative might work in terms of a social investment fund that essentially issued shelter bonds or green bonds.

Maybe we can take questions now.

Mr Kwinter: I'd like to address this to Sam Gindin, with whom I've had the pleasure of debating over the years as he talked about things like free trade. I'm puzzled. The reason I'm puzzled is that I was approached by labour representation in 1989 about their plan to put up a social fund financed by workers, wanting the support of our government, which we gave and which we felt had some merit. What has happened on the way? This is supposedly a labour-oriented fund, and to date, and from the presentation you've made -- I see the signatories, Gordie Wilson, Julie Davis, John Calvert, Sam Gindin, Hugh MacKenzie, John O'Grady and Robin Sears, all signing a document that essentially says: "Labour has rejected this plan. We have another idea." Why hasn't that idea come forward? This was certainly a government initiative. It certainly implies that it's to benefit labour. So what happened on the way?

Mr Gindin: You're looking for possibly the first thing we have agreed on, Monte. I guess this started with the Liberal government approaching the Ontario Federation of Labour with whether it would be interested in the fund. The response of the OFL was that we weren't interested in the kind of fund that discussions were about, but we wanted an alternative. I wasn't part of the actual meeting with the Liberals at the time but, as I understand it, what you said is basically true: Your response was that you'd be sympathetic to looking at the kind of alternative we put forth. The OFL has been lobbying on this kind of proposal although, to be honest, there is some division within the labour movement. Although this did pass our convention, there was a debate over it. I can't tell you what has happened since then. I think the Ontario government is basically following the Quebec model. It looks like that's what's happening across the country. Part of this may be that the federal government matches the tax credits, and if you changed the structure of the fund you'd also have to get the approval of the federal government that would go along with it. I don't see why that should be a problem.

From our perspective, we really don't understand why, if this is supposed to be a labour-oriented fund, the alternative put forth by the labour movement isn't what we're discussing today. Maybe somebody else can answer that question. I can't answer that question.

Mr Carr: I can't answer it, but I'll ask my own question; it's along the same lines, though. With the opposition you've shown, obviously you've had a chance to discuss numerous issues with the government. How far along in the process did you have a chance to sit down with the government and say, "We don't like this"? Did they pop the bill on you and say, "There it is," as sometimes happens, and then you're into it and sometimes it's tough to back out politically? How far back down the road did you voice your opposition to this plan? When and where and so on?

Mr Gindin: Let me comment on that, because I was involved rather than Jimmy at that point. First of all, the debate that was taking place before the last election wasn't taking place in secret. The position the labour movement came out with was well known. Robin Sears was actually one member of the subcommittee that discussed this. The position was distributed, so our position hasn't been a secret. There may have been an assumption that the Quebec-type fund was acceptable; I don't know. But about the middle of September 1991 we were contacted that there were hearings taking place and that this was very far on the way. I think we had something like a week or 10 days to put together a brief. That's why we've enclosed the attachment. We were surprised that it was moving ahead so fast and moving in a different direction, so we quickly put together that letter to lay it out. Nothing has happened since then; no one has contacted us to say, "Let's talk about this alternative."

Mr Carr: It seems to me to be something that has been driven not by the government -- forgive me, some of the people who work in the ministries -- but it seems to be a bureaucrat-driven initiative, where the government has been pushed. Of course there are two options that come in: the policy up through the people in the various ministries and then the one that's set by the government of the day. This seems to be one that has been driven, going as far back as the Liberals -- again, I don't say it in the negative sense -- by the same people working in government; we refer to them as bureaucrats. They pushed it during that period of time and are pushing it now, and they seem to be successful. Is that your assessment, that it isn't a policy of the government, but that the bureaucrats have pushed this forward?

Mr Gindin: I don't know. That may very well be the case. I'm less interested in who's doing it and more interested in stopping it and getting it changed.

The Chair: Mr Kwinter. There's one minute left.

Mr Kwinter: I'd like to ask another question. It seems to me, just by the very dynamics of the presentations made to us by the Ontario Federation of Labour and by the CAW, that this whole project is doomed to failure. How could you possibly encourage an employee to buy into a program where the two major entities in the labour movement are saying, "This is of no consequence, a terrible deal, and we don't think it should be done"? How do you deal with that?

Mr O'Neil: If you're asking whether, if this happens to pass, we will encourage, in fact we'll discourage workers and will lay out what we think are the consequences of investing in this program. So we will not be supportive; there's no question that at the end of the day we will not be supportive of this bill if it gets passed.

Mr Kwinter: Yet it's supposed to be --

The Chair: We have to go on.

Mr Kimble Sutherland (Oxford): If I understood your presentation correctly, what you're saying is that the idea of some type of worker-sponsored venture fund is fine if it goes far enough in terms of dealing with some other issues you have concerns about: (a) a guaranteed return and (b) some democratization in the workplace, or some say in how the company is going to work or how the economy is going to. Is that basically what you're saying? In other words, this doesn't go far enough in terms of dealing with the concerns that the labour movement has about its involvement in the overall thing. "All you're asking us to do is put in the money, but you're not allowing us to have any say in how it's operated." Is that what the concern is?


Mr Gindin: No, I don't think that's a fair characterization. I think we're really saying we'd like to see this thing move in a different direction, a direction which in some ways is less ambitious. We're saying there really is a major problem in how capital markets work in this country, and you can't expect to solve that by trying to get voluntary contributions from workers. We think that's the wrong direction to go and that to lure workers with major tax breaks which may not be in their long-term interest is also a dangerous thing to do.

What we're suggesting is something quite different. If the idea is to mobilize workers' savings, we're saying the best way of doing that is to say to workers, "Okay, maybe you will get a lower rate of return, but in exchange for that you'll have a safe rate of return and you'll know that what the money is being put into will be socially useful, like co-op housing or a green industrial strategy, and you may have some input into making sure it's done in an innovative way." We're not saying this would be a vehicle for solving the co-op housing problem or replacing the government, so at that level it's more modest, but it would illustrate something that could be done.

Mr Sutherland: I want to take an example, let's say one of the plants that maybe even CAW has organized. Due to some of the rationalization that's gone on, the plant is still making money and has been making money, but companies are rationalizing, they're setting their priorities and they don't want to operate that part of the branch, or a buyout has occurred and they've bought out their competition, so now they're going to close it down.

You said you're concerned about pension contributions, but if that plant closes down, there aren't going to be any more pension contributions. In that type of scenario, in the long run, is it not in their interests to try investing to keep it going so there are ongoing pension contributions and so in the long run they will have an adequate pension? In that type of scenario, would you encourage your members to look at it?

Mr Gindin: No. There may be circumstances, in kind of an ad hoc way, where it makes sense for workers to say, "We think there's no alternative to getting involved in worker ownership." It's different from what we've been talking about. This is a worker venture fund. Direct worker ownership might, in certain very specific situations, make sense, although we wouldn't recommend that as a general model. The idea that workers should take their savings and put them into things businessmen don't want to put into or have decided are going to be failures makes no sense. If you're a worker and you're afraid of losing your job, it makes a lot more sense to invest your money in something else rather than to throw it at something that seems to fail. I'm not objecting to the fact that there may be unique circumstances, and I think Algoma might have been one, where this would make sense, but it doesn't fit as a general solution to those kinds of problems at all.

The Chair: Mr Sutherland, we've run out of time.

Mr Sutherland: Okay, I'll have to pass.

The Chair: With the brief here I imagine there's an address where you can get a hold of Mr Gindin. I'd like to thank you for coming before this committee with your presentation.

Mr Gindin: Thank you.

Mr Kwinter: Put a mark on the calendar. We both agree on something.


The Chair: The next group to be here is the Investment Dealers Association of Canada. I'd like to welcome you here to this committee. We have one half-hour, if you can leave some time at the end for questions. If you wouldn't mind identifying yourselves and your position for the purposes of Hansard, you may begin.

Mr Michael Mackasey: Good afternoon. My name is Michael Mackasey. I'm the chairman of the Ontario district council of the Investment Dealers Association of Canada. We have been involved in the early stages of consultations on the issue of labour-sponsored investment and ownership plans. We are pleased to have this opportunity to meet with members of the standing committee on finance and economic affairs to discuss Bill 150.

The district's concern with both components of the legislation is similar: We believe that the dual aims of the program, worker ownership and increased liquidity in the capital markets, are not substantially achievable through the two mechanisms set out in the bill. The costs of $250 million for the program's first year are sufficiently high to make the success or failure of the program a matter of general concern.

A central theme of the program appears to be that there is insufficient capital currently available for the restructuring of business on the scale the government would like to see undertaken. We believe there are enormous pools of readily available capital for Canadian enterprise, which are only waiting for the appropriate economic conditions to be employed as equity in the restructuring of the Canadian economy. In the absence of appropriate economic conditions, the government has chosen very narrowly focused tax incentives, in the case of employee investment funds, to free up capital for small cap Ontario businesses. In so doing, the risks of speculative investment have also been focused. In our view, the government would be better advised to apply its fiscal and policy weight to the development of a far more broadly based incentive to capital formation.

There exists already in Ontario a system of public equity markets that, judging by the press of foreign delegations, is the envy of the world. The market system is the only true means of broadly assessing the value of company shares and there is a far broader spectrum of investment options available in the public markets than there will be in either of the investment vehicles proposed in Bill 150. The appeal to the investor is the tax benefit, and the prospect of retained jobs in the case of the ownership plan, not necessarily the underlying investment, as we believe should be the case. This approach creates distortions in the marketplace that would not be present if the government focused on providing a broad framework for efficient markets.

We have heard it widely suggested that the government will examine policy options to encourage the listing of small businesses some time in the near future. We encourage this. While this presents its own set of policy challenges, it also presents the opportunity for greater market efficiency and liquidity.

Although not necessarily a direct concern of the government of Ontario, the high capital gains tax structure in Canada, particularly when compared with average tax rates on dividends and income, has discouraged individuals from participating in domestic equity markets. The tax reform measures introduced in the late 1980s have shifted the incentive away from risk investment. Effective capital gains tax rates have increased by more than one third under tax reform, bequeathing Canada with the highest capital gains tax rate of any major industrial country; further, the capital gains tax rate exceeds the rate on dividends. The tax system creates a disincentive for risk investments which provide return primarily on the increased asset values rather than dividend payouts. The tax structure thus discourages the growth of small and medium-sized businesses which will come to depend on public markets for equity capital as they grow.

We have some specific comments on Bill 150. The first is with respect to employee investment funds. We understand from conversations with officials that one reason for the structuring of this incentive in its current form is the availability of matching dollars from the federal government. We consider this reason to be insufficient. We can clearly understand the government's interest in structuring an incentive on that basis, but we see little public policy benefit to it. The taxpayers in Ontario will foot their share of the bill regardless of whether they do so through taxes at the provincial or the federal level.

We would prefer to see a more broadly based incentive rather than a narrowly based one selected for the sole purpose of the multiplier arising from federal contributions. We are concerned about the credit risk that some of the venture funds will present. There will be less reason for the fund's managers to be concerned about the fund's investment objectives, we think, if governments on the surface provide 80% or more of the cost of the investment. This is also a particular concern if the fund is not subject to the regulatory review of the Ontario Securities Commission and either the full force of the Ontario Securities Act or some other regulator or regulatory authority set up to deal with it.

On the basis, however, that such a policy is already in place, particularly from the federal government, we would express our strong concerns with respect to employee investment funds, that all such funds that are set up to function under this bill be structured under stringent guidelines. Items such as liquidity, quality of management of the funds, fees and expenses of the funds, startup costs, their use of proceeds, regulatory supervision, their method of distribution and, in particular, the valuation question are all items that must be strongly considered.


Under the topic of worker ownership plan, we support the government's program to encourage worker ownership. While this program has been widely reported as being an option for a range of employee ownership initiatives, from hostile takeovers to employee buyouts at the time of a founder's retirement, we believe the conditions in which such buyouts will be attractive are relatively narrow, for the following reasons.

Since under this program employees are required to acquire control of the employing company, their resources, within the $5,000 to $15,000 range provided, must be sufficient to acquire that control. The deal can't be so small that regulatory and underwriting costs are prohibitive. The equity in the corporation has to be worth something. The current owners have to be willing to cede control. The government, with scarce resources, has to be willing to approve the proposal, and therefore it must represent a fairly compelling case.

We believe that, properly used, the employee ownership buyout will assist an orderly transfer of ownership to employees in situations in which market conditions have made sale to an independent third party difficult. In these cases, and we hope in only these cases, the public subsidy of the purchase price would be acceptable to ensure that viable situations or companies can survive, and we expect that the lost tax revenues at the early stages will be more than recovered through future profits of the enterprise.

As long as the program is administered in that manner and is not designed to prop up businesses which are doomed to ultimate failure through natural changing markets or technology or other economic conditions, and as long as securities regulations are followed, we support the government's initiative in this view.

One specific comment we do make is the difficulty with the threshold of control and that this might be reconsidered. It may be more effective, given the size of some of these transfers, that the amount of money required to be raised to fully control the company is large and that the program can apply to significant equity ownership by the workers in conjunction with the changing control, as opposed to dictating that majority control go to the workers. We feel such a relaxation might add to the universe of healthy investments and give the public and the government more leverage in these situations.

We could go on considerably with a list of constraints. It is our assessment that many, if not all, of these situations will continue along the lines of the Spruce Falls deal, as a bailout option for some companies. In this regard there seems to be general support among investment dealers for this approach as an alternative to outright government bailouts. The worker ownership approach can significantly reduce the cost to taxpayers of either a company bailout or the social assistance that may be required to provide transitional support to a whole community should a linchpin industry fail. The cost to taxpayers is reduced to a one-time payment of 10% to 20% of the company equity, with considerably reduced ongoing liability.

When assessing this program in the light of the government's objectives of worker ownership and venture capital investment, it is doubtful that this program meets the test, however. The investment's value to workers may be minimal in conventional investment or regulatory terms. The payoff for the workers is the survival of their economic base.

From this analysis we conclude that if the government is interested in increasing the scope of this program, it should seriously consider whether it's necessary for workers to have control of the restructured company, as I've already suggested. We also believe it is important to develop an understanding of the role of pivotal regulatory concepts, such as the "know your client" and suitability provisions, of these transactions.

I'd like to thank you for the opportunity to comment before the committee today. We are at your disposal to answer questions.

The Chair: Mr Sutherland.

Mr Sutherland: Actually, I think I'll pass to Mr Johnson.

Mr Johnson: Thank you very much for coming today with your submission. I listened with a great deal of interest to what you had to say. I'm curious to know your own opinion. Bill 150 becomes law and now there's an opportunity for people to take advantage of all the options within that law. How often do you think the worker ownership plan -- how many businesses are there, because you mentioned something about this, that you expected there wouldn't be many options where this would actually be put into place? I was just wondering if you could elaborate on that a little more.

Mr Thomas Dalzell: In answer to that, I guess what we're really getting at in that section is to point out not so much the total number of businesses that would be eligible or would want to make use of this sort of situation, whose employees would want to do so, but more to talk about the narrow focus. If you look at the program in total -- and I went back to look at some of the Hansard discussions -- there were an awful lot of possibilities that were raised as options for using that particular section of the bill.

We want to narrow our focus and say, "Look, we have some experience through one of our members, Spruce Falls, and looking at budgetary constraints and other factors, we think the real use will be in this one narrow range." Now, we could be wrong. That would depend entirely on how much money the government made available and what the intention of the government is in doing it. That was just our assessment so we could narrow the focus of our response. I suppose the use that's made of it will largely depend on how it's received once it's generally known and what the economic conditions are.

Mr Johnson: I'd like to say too that there are certain situations where it won't be a bailout situation. This isn't the intent of the legislation. The intent of the legislation isn't to encourage employees to bail out their companies; it's to encourage employees, where a company is still viable, to become involved and to go for that option, which will be made available under this legislation.

Mr Dalzell: That's perhaps an unfair term we used in that regard. Certainly when we were talking about such matters as the necessity that there be true value left in the shares and so on, we were referring to the fact that the potential investors, the employees, would have to regard this as being an ongoing concern, at least for some period, before they would be willing to come up with the money required. So that's not contrary to our view.

Mr Sutherland: There's been quite a bit of discussion today about the ability to access capital. We had the Canadian Federation of Independent Business here this morning and a survey indicated that 25% of its members have indicated they've had trouble accessing capital or problems with their institutions. They're not always happy with the mainstay financial institutions.

I guess too that the last time we went through a recession, with some of the impacts on the banking industry and for small investors and medium-sized companies as a result of some of the problems with Dome in 1982-83, financial policies tightened up a great deal in terms of accessing capital. Given the nature of some of the events that have been happening in the last few weeks and the last couple of years, do you see access to capital becoming a more difficult thing, particularly through the mainstay financial institutions?

Mr Mackasey: Currently in today's environment, with respect to the banking system -- and I'm not a banker; you may want to ask one; you may disagree with me -- with the Olympia and York problems and real estate values in general, what we typically see at the end of any recession is that the banking system tends to tighten up and become much more restrictive in terms of its propensity to lend money and its risk profile. That tends to loosen up as economic conditions improve.

At the same time, in the event that you've had a restructuring of companies, admittedly a painful but probably a healthy restructuring over the longer term in terms of cutting costs and becoming more efficient, to those people who provide equity in smaller situations -- I don't want to use the term "venture capitalists" -- both on the venture capital side and on the mezzanine capital side, the return commensurate with the risk will start to get back into line, as asset values have declined and returns will become generally more attractive. My feeling is we will probably see more equity money over the next few years forwarded to smaller situations, as opposed to what we see right now. We saw that coming out of the recession of 1982. We saw that in 1983-85 where we saw a lot of smaller situations coming to market for the first time in initial public offerings and having their equity listed.


Mr Carr: I don't know if you were here earlier for the presentation of the Canadian Auto Workers. They basically said that they don't see anybody investing in the worker ownership plan. What is your assessment of how much activity you'll see if this bill goes the way it is now?

Mr Dalzell: I guess there were two points discussed there. One is the question of, what would the impact be of the fact that those two organizations might be sending out a negative signal on this thing? I guess the other main issue is, is it a viable program? We have the one instance of Spruce Falls already. I suppose, under certain circumstances, it's going to be a viable program. Particularly where jobs are at stake and so forth, you're going to find people certainly considering it. That particular element of the program is relatively broadly based.

As to the matter of what impact union or non-union membership would have on that, I think you'll find that it'll be mainly judged on the circumstances at the time.

Mr Mackasey: Just following up on that, I've not been directly involved in the previous issue, the labour-sponsored fund side as opposed to the Spruce Falls side of it. I think that over the long run, whenever a new issue is brought to market or whenever a mutual fund or another kind of investment fund or vehicle is brought to market, that's the time typically when you raise the most money. I think how much money you're going to raise in these kinds of vehicles over the long term is going to depend largely on how the funds treat their investors in terms of return, risk, liquidity and so forth.

I think the concerns of the gentlemen before us were that the historic returns on these funds, particularly the solidarity fund in Quebec, have not been terribly good. Their concern, I think, was that enticing people into funds with essentially short-term tax incentives, particularly when part of that tax incentive, to my knowledge, in Quebec has been discussion of placing the units of the fund in your RRSP, can be a detriment for the long term if not handled correctly by the management of the fund.

You're asking me how much money will be raised. If you look at the mutual fund business in general, although this is different, typically the moneys are attracted by the managers and their track record over time. I think that's what the test will be.

Mr Carr: Just on that point, you say that how the fund responds is going to be the big question. What criteria do you see as the most important? I know people obviously look at track records, but what do you see as the most critical things for them to do?

Mr Mackasey: I think clearly the most important aspect of any fund is its management. I have some concerns with respect to the valuation of these funds, both on the illiquid and difficult, in many situations, challenge of valuing what is going into and coming out of the funds.

I also have a concern with the illiquidity aspect, particularly of smaller situations. It's okay to put 20% or 25% or 10% of a private company into a fund and its shares, but when it comes time for the investor to take his money out, where does the fund get the money to pay the redemption when the underlying assets themselves are not necessarily liquid? As such, we've seen funds in the UK that in themselves have either had to bring the underlying investments public -- they've been at it since 1945. They ended up going into a closed-end structure and listing themselves on the stock exchange and allowing liquidity in that view, but that's different from what we're talking about here.

The Chair: Before we go on to Mr Kwinter, Mr Evans just wants to make a comment -- I guess a typing mistake or whatever was in the brief -- just to identify a figure here.

Mr Evans: The Investment Dealers Association of Canada brief refers to $250 million for the program's first year. I believe that's a quotation, probably from John Whitehead, and in fact the $250 million is a treasury estimate of the cost at maturity. Strictly speaking, 1991 was the first year of operation. Spruce was the only employee ownership operation, Working Ventures was the fund, and the tax credits in that year were $8.2 million. That's merely a question of fact.

Mr Dalzell: That's correct. We did get that.

Mr Kwinter: I want to thank you for your presentation. I agree with virtually all of it. I just want to ask you a question. It's hypothetical, but given the vehicle that is described in the proposed legislation -- and you're an investment dealer -- and removing the fact that someone may feel this is the only way he can protect his job, if someone came to you, given all of the other investment vehicles that were available, is this the kind of program that you can, in all consciousness and knowing your responsibility to know your client and everything else, something that you could recommend over and above other vehicles that are available?

Mr Mackasey: I'm sorry, Mr Kwinter, are you referring to the labour-sponsored funds or to the one-off Spruce Falls kind of --

Mr Kwinter: To either one.

Mr Mackasey: We'll refer quickly to the one-off Spruce Falls type of employee ownership. It would clearly, upon investigation, depend on the determination of return, on the viability of the business and basically to analyse the situation on a one-off basis to see if the investment return, commensurate with the risk involved in entering into the deal, is worthwhile when compared with other alternative investment choices out in the marketplace, which range anywhere from 30-day government of Canada treasury bills to some venture capital funds. Whether it would be recommended would be clearly one of economics and looking at the situation independently.

With respect to the funds, because of the longer-term nature of the funds -- essentially you're investing in a blind pool and leaving all the investment decisions up to the manager of the fund as opposed to having a chance to look at each individual piece of business that goes into the fund -- before I would recommend it to anybody I would certainly want to know the manager's track record, his view on investment merits, how the fund will be able to pay me out, what the expected returns are etc, and compare that with the spectrum of investment product out there.

Mr Dalzell: I'll respond to that also. Certainly in talking about the funds, the clear purpose of this is to move investment into areas where it hasn't previously been achievable at an economic return or not at the level the government would like to see, so it almost becomes a matter of definition, that if you simply strip away the really substantial tax credits there's going to be something to be made up there.

On a kind of Spruce Falls deal, there seemed to be a number of different levels at which -- and you mentioned suitability in particular. First of all, the mere fact that the money is there, the tax credit is there, creates an opportunity for people to look in that direction and that, I'm sure, puts a focus on something that wouldn't have been considered as much, perhaps, in the past.

I also point out what the CAW mentioned before -- I believe it was the CAW -- certainly the previous group mentioned the fact that if business isn't going to invest in it by definition, then why should workers invest in it. There may be cases where there's some overall strategic move that a company is taking to do something and it might make sense, in the short or the long term, for the workers to step in in that situation where it didn't make sense for the business.

Finally, on the specific issue of suitability, there was certainly something we heard back from our members who had been involved in Spruce Falls. Specifically, you get into the situation of whether such relatively large chunks of money are suitable investments for investors who typically may not be terribly high in the earning bracket and so forth. I think that raises real questions and it was probably addressed obliquely in some of the remarks about what kind of regulatory structure this would have to be under.

The Chair: Mr Kwinter, the clock has run out. I would like to thank you, gentlemen, for coming before the committee.



The Chair: The next group to come before the committee is the Ontario Chamber of Commerce. Mr Eastman, you're by yourself today?

Mr Don N. Eastman: Yes, I'm all on my own right now.

The Chair: Okay, I had two names down here. I'd like to welcome you again to the standing committee on finance and economics. Your face is quite familiar around here.

Mr Eastman: No, I'm not by myself.

The Chair: Would you identify yourself for the purposes of Hansard. I believe it's Mr Couto.

Mr Joe Couto: Yes.

The Chair: You're coordinator, economic policy, correct? Okay, fine. We have half an hour, until 5:30. Please leave some time at the end for questions from the committee.

Mr Eastman: Thank you for having us. As you've heard before, the Ontario Chamber of Commerce represents 165 local chambers of commerce and boards of trade and about 65,000 businesses in the province.

Before I begin to address Bill 150, I'd like to ask your indulgence for a couple of seconds. I've just come from our annual convention, three very full, very hectic, and I'd like to think very productive days in Windsor. We are tired of crabbing, complaining and generally depressing ourselves about the political economic climate we find ourselves in. We dramatically changed what we normally do at that convention.

Instead of spending most of our time on a series of specific policy resolutions, we committed ourselves to developing a positive strategy for economic prosperity in Ontario. It's called Ontario Today and Tomorrow: An Agenda for Renewal. It's a strategy for all stakeholders in Ontario's economy and recognizes the interdependence of quality social programs and a healthy economy. We commend it to you and would be delighted to discuss it with you either individually or on a group basis.

Turning to Bill 150, we have some general concerns about the consultation process that preceded this legislation and some concerns about the proposed legislation.

Let me begin my expressing some frustration. The day before the original set of hearings were to begin, I and thousands of other Ontarians received this leaflet in my newspaper: Take Advantage of New Tax Legislation.

I consider the timing of this leaflet to be an insult to the consultation process that was supposedly under way and an insult to the responsibilities of this Legislature. The presumption of automatic passage of the legislation is offensive, even if it does reflect political reality.

On the consultation process, this government has taken some bold and positive initiatives in improving and extending the consultation process in the province. By opening up the process, the government has helped all of us to better understand what that process could be and should be. It's in that context of understanding that Bill 150 can be seen as the product of a consultation process that really didn't begin soon enough.

For a consultation process to be truly effective, it has to begin at the problem definition stage: "We have some concerns. We think this is the problem we are dealing with. Is this the right problem? Have we described it properly? What are we missing?" It's only when that stage is complete that we can begin to talk productively about possible solutions.

Bill 150 has been another one of those consultation processes that didn't begin at the problem definition stage but with: "Here's our solution. What do you think of it?" That's certainly better than no consultation, but it sure leaves a lot of room for improvement.

Our major problem with Bill 150 is that when we work our way through it, it attempts to deal with several perceived problems at once and as a result doesn't deal with any of them as simply, effectively and positively as we think they need to be dealt with. We see two major pieces of new legislation rolled into one document, and as a result neither piece is receiving the focused attention it deserves. The employee ownership labour-sponsored venture capital corporations are addressing problems that are very different from those addressed by the labour-sponsored investment fund corporations. We are all for consistency, but not at the expense of clarity and focus.

Let's address the labour-sponsored investment fund corporations portion of Bill 150 first. The objective of this portion of the act is to assist employees in buying the companies they work for.

While a lot of wonderful things have been said about employee-owned companies, their track record here and elsewhere is mixed. There have been some successes, some failures, and in a number of instances it's simply hard to tell. Certainly, for some companies in trouble, employee ownership is an option that may make it possible to salvage companies and jobs that would otherwise be lost.

We endorse the concept of the provincial government facilitating employee ownership under these circumstances, but we do question whether this is the most effective, most responsible way of proceeding. We have a sense that with some more imagination, it should have been possible to work with the RRSP concept to free up investment funds.

There is a positive role for the province to play in facilitating the process. The legal challenges faced by a worker group in contemplating a buyout are immense. By simply providing assistance through that process, the provincial government could be immensely helpful with relatively little direct cost to itself.

What is before you may actually be the best way of solving this specific employee ownership problem, but we are not comfortable that the alternatives received sufficient attention.

One of the concerns we had with the initial version of the bill appears to have been addressed in the government amendments. The initial proposals would have permitted an employee group to proceed with far less than majority support of the affected employees. A majority of the relevant unionized employees would have sufficed without regard to the relevant non-union workforce. That was a necessary change and it appears to have been made.

The portion of Bill 150 that is much more problematical is the one dealing with employee ownership labour-sponsored venture capital corporations. At the risk of sounding a little dull, we are not sure what problems this portion of this bill is trying to cure; and, yes, we do understand that this portion of the bill has been largely driven by federal initiatives.

Let us list some of the problems this portion of the bill is apparently trying to address, at least in part: increase the number of people in the province who have a clear and visible link to the market economy through investment in companies; increase the funds available for relatively new, developing companies with difficulty of access to traditional sources of capital, and increase the financial resources and financial clout of the unions.

We're not sure that the list is complete, and we hesitate to list the union "problem" in that fashion, but there's no other way to explain the exclusivity of what's being proposed. If we had started the consultation process at the problem definition stage, it's highly unlikely that process would have arrived at the set of solutions we see before us.

We have deeply rooted concerns about legislation that uses tax money to turn the labour movement into investment bankers, even if that legislation is stimulated by a federal initiative that was itself inadequately considered.


Is the labour movement so much in control of the other challenges it faces that it can afford to divert the substantial time and effort required to competently manage this investment activity?

Is it fair to Ontario's taxpayer base and competing requirements for funds for health, education and social services to use tax money to substantially subsidize labour movement activities?

What effective constraints are possible to prevent the union movement from using this new-found, tax-based financial power unfairly in the marketplace? For example, unless your small company has a union connected with a labour-sponsored venture capital fund, should it forget about access to this source of money? That's a concern, not a conclusion.

We encounter a great deal of legislation that diverts the province's real resources into non-productive activities. We are concerned that we have already overinstitutionalized our savings and investment. The result is that we appear to be losing a lot of our savings to administration costs instead of productively investing them. We need legislation that simplifies the investment process, not further complications.

We wholeheartedly endorse the concept of broader share ownership in the province and feel this would assist an appreciation of business and market realities that is sadly lacking in the current environment. Unfortunately, we do not believe the proposed legislation moves us forward on these very legitimate objectives.

Ideally, we would like to see Bill 150 divided into two pieces, with a positive problem definition-based consultation process for both of them. If that is not possible, the legislation should at least be opened up to eliminate the union exclusivity.

Mr Sutherland: First of all, thanks for being here. The pamphlet you passed around was of course sent out by an organization, and for whatever reasons, it has decided to do that before legislation is passed in its final nature. It may be a bit presumptuous on their part to know what the final outcome is going to be and whether they are going to be eligible.

I just had a chance to glance through this other document you gave us, An Agenda for Renewal, and may I say that I think it's a very good document overall. It's very constructive and positive. It doesn't mean I agree with everything I saw in it, but overall I think you should be complimented for taking a very positive and constructive approach in terms of outlining some ideas as to where you think the province should be going in terms of economic issues and other issues. That was certainly striking in terms of some of the comments on social issues in there, as well. I just wanted to make note of that and I hope you will take that back to your people. Certainly I'm only speaking for myself on that, but I thought overall it was a very positive document.

Mr Eastman: Thank you. I shall.

Mr Carr: I also had a chance to put your document forward to the Treasurer today. He said that he liked some things in it, and as Deputy Premier and Treasurer, hopefully he will have the authority to do something with it, although two days ago I gave him your resolutions during January and February or February and March and he wasn't as receptive. So maybe changing the format from a resolution style might help a little bit in terms of getting it through. It is helpful.

Just on this particular piece of legislation, one of the concerns small businesses in particular have is that governments of the day seem to be -- I think I've referred to it this morning as worrying about mice in the basement when there are elephants on the roof. They'll put a program together for whatever reason, but it isn't the most critical question. Some of the business groups that were here this morning said that. If you looked at it, they said, in terms of rating priorities, financing was farther down the list, behind taxes, regulation and so on. Is that your assessment as well?

I'm thinking particularly from the small businesses' perspective, which normally aren't involved in a lot of complicated investment deals. Is that what your membership is saying, that in the overall scheme of things they're looking at something that isn't as important as taking a look at the taxes, regulations and all the other things slowing down business?

Mr Eastman: Yes, I think that's a fair assessment if you were to look at the things in order of their relative importance. Certainly the regulatory burden and the whole paperwork challenge, for a small business in particular, is immense. If that could somehow be streamlined, I think we would all benefit from it. Taxes are easy to focus on and, boy, we sure do a lot of complaining about that with more than a little validity.

I think the access to capital will depend on the specific company. It is not a universal problem, but certainly there are companies out there that have that problem. One of the reasons that arises is that we have institutionalized savings. The normal access to capital for a company in a small-scale startup operation is being diverted into such things as RRSPs where it's no longer available. With friends, family, cousins etc, who you could normally rely on for that kind of capital without having to put together a great formal business plan etc, it has been dried up.

Mr Carr: That's what a lot of businesses I've talked to say. Again, I won't say specifically in Ontario, because governments at all levels and political stripes do this as well. They say that governments put things in place where you tax and regulate people so you can turn around and bring in programs and somehow give tax credits so you can help those companies you've taxed and regulated out of existence. That's the way it turns out. They look at it and say, "My goodness, essentially that's what has happened." I try to be non-political by saying that regulation and taxation is by governments at all levels.

Specifically on this bill, though, looking at it from the standpoint of how many people you see will be investing in it and taking a look at where we're going with this, do you see it as being very difficult? You may have been here during the presentation when the Canadian Auto Workers and some people from the labour movement said they don't see too many people investing in either of these particular ventures. What's your assessment? If the bill stands as it is, do you see many people jumping into this particular aspect?

Mr Eastman: Again, I think it's important to really look at the two different portions of the bill very differently. I believe there will be opportunities for specific companies where an employee buyout kind of approach is appropriate. How often that will come along, I'm not sure. I think it will be primarily in a salvage operation kind of concept. There will be some of those. The risk will be that they will tend to be companies in industries that are facing pressures for other reasons and this kind of thing will not be sufficient to bring them out of it. I think that's one end of things. There are a number of limited opportunities, but the ones that do exist may be of significance.

I think there are two major parts to it: How much incentive is there for the investor and how many investment opportunities are there for the funds? If I just look at the numbers, one of the things that annoyed me was, boy, this looked attractive. When you worked the numbers out that was, superficially anyway, an attractive place to put funds. To the extent that it is successful -- I'm not sure how many appropriate investment opportunities there are that could make use of that without absorbing far too much of the funds in the administration process.

The Chair: Before we go on to Mr Kwinter, there were just a few items in the brief that Mr Evans from the Ministry of Revenue wanted to comment on -- the headings.

Mr Evans: In your brief you have a specific reference to "Labour-Sponsored Investment Fund Corporations," and following that heading there are a number of items I would recognize as being appropriate to the employee ownership side rather than to the investment side. Was there some other part of your presentation that might have got missed in the construction that relate to the investment side? These do not seem to be investment fund comments under the investment fund heading.

Mr Eastman: Could you be more specific, please?


Mr Evans: Yes. In particular, your references to voting in the last paragraph there are an amendment under the employee-ownership aspect of the bill, which is your following heading -- the agreement of employees before the investment can be made. I believe that is specifically employee ownership.

Mr Eastman: Are you dealing with our brief or with the previous one?

Mr Evans: With your brief, I believe, that whole centre section there. Under the fund situation as presently described by the bill, the employees do not gain control of corporations. They invest in a fund that takes minority positions in corporations. The points you raise are points that I think properly relate to the employee-ownership segment, which is the point that follows. So I wondered if there were other points you had intended to make there appropriately referring to the investment fund.

Mr Eastman: I'm still trying to wrestle with the comments you're making and trying to sort them out. Can I spend a couple of minutes with you on that for clarification, or we can share the same piece of paper? I think that would be helpful.

Mr Evans: Certainly.

The Chair: Okay, we'll go on to Mr Kwinter then.

Mr Kwinter: Mr Eastman, we've listened to several groups all day today and we've been getting some very strong signals. A survey of members of the Canadian Federation of Independent Business showed that their number one concern is taxation and overregulation by government. Lack of access to capital was down at the bottom of the list, somewhere around 23% or 24%. We had other groups coming in saying there was a vast pool of investment capital available to business in Canada. It does not seem to be the problem; the problem is having the right vehicle to access it.

We had the Ontario Federation of Labour saying it's not supportive of this, even though it's supposed to be a labour-driven fund. They don't see this as the vehicle they had envisioned. We have the Canadian Auto Workers saying that not only are they not supportive of it, but that they will be encouraging their members not to participate, that they see this is not going to do anybody any good.

What does the chamber feel on that kind of level? Other than your comments saying there was no consultation and everything else, what is the feeling of the chamber? Does it feel this is something that is going to help the economy of Ontario? Is it something it would support on that broad level, as opposed to its concerns about the consultation and also about the union orientation? Talking for the chamber, is this something you would support with some modification, major modification? Or is this something you see a need for?

Mr Eastman: I think our preference would be to go back to the problem-definition stage and try to understand what problems we are trying to solve and how we might best address those. What we see here has been driven by federal legislation. I understand that, but again it appears to add a layer of complexity to a world that is already far too complex.

I keep a file of quotations. One I particularly enjoy is from Einstein and says that everything should be kept as simple as possible but no simpler. I think we can move a lot farther in that direction of "as simple as possible but no simpler" than what I see in Bill 150.

Mr Phillips: I share with I guess all three parties in complimenting you on your earlier brief; it was a thoughtful document and I appreciate it.

I've found these hearings quite informative, because originally this bill was just going to slide right through and it was only that we thought it might be worth a couple of days of hearings to see if there were any little hitches in it. As my colleague just said, we're finding very few people who think it's going to have any merit, particularly the venture capital portion. The union movement is solidly against it, the business community doesn't seem to be particularly enthused about it, and I gather from listening and reading your document that you've got some significant reservations about the venture capital part of this.

Mr Eastman: Particular reservations on that end of it, yes.

Mr Phillips: On the employee ownership side, there seems to be much broader support for that concept, I think, among the groups we've heard from. I don't necessarily mean the chamber, but among groups. Have you any recommendations on how it can be enhanced to further the document your group presented today, how that portion of the legislation could advance the agenda the chamber has put forward?

Mr Eastman: Basically, we would like the opportunity to divide this up and look at the worker ownership aspect separately and then consider how that might be facilitated, relying less heavily on taxpayers' funds and more on what are the current barriers to that and how much of that can we help solve by clearing away, simplifying the process through all the legal roadblocks.

Mr Phillips: Has the chamber seen the latest estimate of the annual cost of this?

Mr Eastman: No, we have not.

Mr Phillips: I think it's now up to $250 million a year for the total, for the venture capital part of taxpayer --

The Chair: Excuse me, Mr Phillips. We had a correction earlier.

Mr Phillips: Did you?

The Chair: Maybe Mr Evans can repeat it. At that time I think you'd just stepped out for a minute.

Mr Evans: It was $250 million a year at maturity. In the first year, 1991, the actual tax credits were $8.1 million.

Mr Phillips: I had assumed we always look at maturity.

The Chair: Sorry I interrupted you. But your time has run out too, Mr Phillips. We'll have to go to Mr Johnson.

Mr Johnson: First of all, I want to say thank you for coming, but I found that your presentation today is rife with error; if not that, there are certainly misunderstandings or misconceptions.

You start off on one page talking about labour-sponsored investment fund corporations and in your second paragraph you talk about employee-owned companies. There's no relationship there, and it makes it somewhat difficult to follow.

You also say there should have been more imagination and it should have been possible to work within the RRSP concept. At this point in time it isn't said that it will happen or it won't happen.

But what I found most offensive is on the next page when you talk about employee ownership labour-sponsored venture capital corporations and say this will increase the financial resources and financial clout of unions. My goodness, sir, you're starting to sound like Mr Carr from the Progressive Conservative Party. We don't want to propagate that kind of misinformation, because that absolutely is not correct, and I want to make sure -- that's why I'm saying it now -- that it's on Hansard. This is not correct. There is no intention in this legislation to increase the financial resources and financial clout of unions. Labour-sponsored investment funds are opportunities for people -- they don't have to belong to a union -- to make investments that are sponsored by labour organizations in the province of Ontario. Certainly anyone in the province can do that. Anyone can invest, anyone can get the tax breaks we're talking about here if he or she wants to invest, but in no way is this going to increase the financial resources or the financial clout of unions.

With regard to employee ownership labour-sponsored venture capital corporations, these people don't have to be unionized at all if they want to invest in their business or invest in their employer's business and help maintain their jobs or their future by some kind of sound investment in the business they are already working in.

I think we've got to make sure these facts are clear. That's why I wanted to raise that.


Mr Eastman: May I respond? I think one of the problems here is, yes, we do understand, as proposed, they are investments that are available to everybody, but they're only available for them to take place through the union movement. If there was a need, then it was our opinion that that vehicle should have been available on a broader basis rather than specifically through the union movement.

It was on that basis -- not of how the funds flow, but the potential effective control of them -- that raised the concern with us that we felt we had a responsibility to convey to you.

Mr Johnson: I am curious to know, if you could elaborate just a little more, how you think this is going to increase the financial resources and even more so the financial clout of unions when unions aren't going to benefit directly from this.

Mr Eastman: Because the funds are administered by the union.

Mr Wiseman: How's that going to do anything?

Mr Phillips: He who has the authority to make an investment often has a little bit of clout. That's common sense.

The Chair: Can I just ask for some clarification from the ministry?

Mr Evans: The investment funds are managed by the sponsor and invested accordingly. It is not the intention that the sponsoring organizations exact any sort of levy on the fund or any contribution from the fund as a consequence of their sponsorship.

Mr Phillips: The sponsoring organization is the union.

Mr Evans: Yes.

Mr Phillips: Isn't that obvious to everybody?


Mr Owens: Yes, but the insinuation that's coming across is that the levers of power are going to be thrust in the workers' hands.

Mr Johnson: Did you say "lovers"?

Mr Carr: I thought he said "lovers" too.

Mr Owens: Notwithstanding the mispronunciation, in terms of the unions controlling the funds, I don't see the direct relationship in what you seem to fear as some group of labour types gaining the upper hand.

Mr Eastman: I guess I'm more concerned about the extent to which all of us have limited capacity. Asking the union movement to become professional fund managers I think diverts it from other activities. In terms of the funds available, there is a question of how are the decisions going to be made on how those will be invested. There are some checks in place to ensure that there are not specific abuses, and I accept that.

Mr Owens: Look at the professionals, like Olympia and York, that follow traditional models and you're looking at the kind of catastrophic results that take place. Do you find that problematic? They're certainly not a labour-sponsored group. They're going bankrupt.

Concentration of power: Banks, financial institutions are looking at the amount of their exposure on this issue and looking at it with some concern. They're certainly not --

The Chair: Mr Owens, I'm going to have to cut you off. I know you're not going to get the answer you want back right away.

I'd like to thank you for coming before this committee with your input. Mr Evans here from the ministry can meet you out in the hall just to discuss what he was trying to get across to you on page 3 there.

Mr Owens: Good.

Mr Phillips: Just for clarification, I think Mr Owens indicated two weeks ago that he was bringing the amendment in that I think may answer the chamber's concern anyway on who will be eligible to manage the venture funds. It's going to be substantially broadened. You may have anticipated the chamber's concerns, and we'll be bringing that amendment in anyway.

Mr Owens: Not with respect to who controls the levers of power, though.

Mr Phillips: No, the Saskatchewan model I've got here. But you're bringing in the Saskatchewan definition.

Mr Owens: I didn't commit to the Saskatchewan definition. If you look at the Hansard, I wasn't able to commit on a particular model.

Mr Phillips: It should be in the Hansard.

The Chair: Okay, thank you.

The next group to come forward is the United Steelworkers of America and Mr Robin MacKnight.

Mr Sutherland: Just before we begin with their presentation, I was wondering if we could do one procedural thing, and that is get a clarification as to what we'll be doing next week and next Thursday. I believe there was some request that after all the presentations we could have staff come back in for some more questions, so some sense of maybe doing that next Thursday morning and then possibly in the afternoon looking at the specific amendments.

Mr Phillips: When will we see the amendments, by the way?

Mr Sutherland: They've already been presented, have they not?

Mr Phillips: No, the one that Mr Owens was referring to.

Mr Sutherland: I don't know about that one.

Mr Owens: I indicated at the last committee meeting that the wording is still being worked on. There are some difficulties to overcome, but as soon as the amendment is ready it will be provided to you, Mr Phillips, and your other colleagues in opposition.

To your point with respect to the Saskatchewan process, I point you to page F42 of the Hansard of May 14 of this year. It clearly indicates that I made no such commitment with respect to the Saskatchewan amendments.

The Chair: Okay, Mr Owens, would there be any amendments before Thursday?

Mr Owens: We're certainly hoping so. As I say, there are some difficulties that were in the process.

The Chair: But any that are going to be brought forward on Thursday, so that as soon as possible the members of the committee --

Mr Owens: Chair, if we have amendments, you will certainly see them and our colleagues in opposition will certainly have them. It's our intention to do that as expeditiously as possible.

The Chair: I think it would be very important.

Mr Phillips: Does that mean before next Thursday?

The Chair: This is what I'm asking Mr Owens for if at all possible, so that when staff are here, members of the committee can ask questions on the amendments.

Mr Owens: "If at all possible" is the preface I would use. If it's possible to have them here, we will have them here.

Mr Phillips: I'm sorry to take the time from the Steelworkers; maybe we can run a little bit late. But the other area that our caucus is quite interested in is the budget and just having an opportunity before we break in July or August, whenever we break, to review some of the questions that we have about the budget. If the amendments are not going to be ready for next Thursday, it may be possible --

Mr Sutherland: Are you looking at the Treasurer or the treasury staff?

Mr Phillips: Ideally, the Treasurer. You may want to talk to him. We've got three or four questions we'd like to --

Mr Sutherland: Okay, we'll do some follow-up and see whether he's willing to appear, and if not, maybe add some treasury staff then. Okay?

Mr Phillips: Great.

Mr Owens: Just a quick comment. Because of the newness of the issue here in Ontario, we want to make sure the correct wording and the best language available are coming out. So as I say, as soon as we can get the amendments here we'll certainly be pleased to provide them to you. Thank you, Chair.

The Chair: Okay, Mr Phillips, you're satisfied?

Mr Phillips: Yes, I'm happy.



The Chair: Mr MacKnight, welcome to the standing committee on finance and economic affairs on Bill 150. We have a half-hour. We didn't use up any of your time there. Mr Phillips said he's going to sit until 10 after 6, so no problem. If you want to begin, leave some time at the end of your presentation for questions from the committee.

Mr Robin MacKnight: First of all, let me apologize. I have a terrible cold, and if I break down into a coughing fit it's because I've been trying to nurse this for the last several days.

My name is Robin MacKnight. I'm a partner with the law firm of Gowling, Strathy and Henderson and I've been asked to appear before this committee this evening to represent certain of the interests of the United Steelworkers of America.

I have handed to the clerk of the committee a copy of a letter which Leo Gerard, the national director of the Steelworkers, sent to the Chair of this committee this morning -- I understand the original either has been delivered to you or is on its way -- to express the disappointment of the Steelworkers that they were not consulted earlier in this process. In fact, we did not get the invitation to attend tonight until Tuesday, and unfortunately this week, starting yesterday and going until tomorrow, is the national policy conference of the Steelworkers and all the senior members of the union are down in Hamilton attending that conference.

Mr Phillips: I would be personally happy to invite the Steelworkers to come participate next week, if that would be helpful. I agree with Mr Gerard's letter. I think probably no one in the country has been more involved in this than Mr Gerard.

The Chair: I've just been handed the letter now from the clerk, so I haven't had a chance to read it.

Mr MacKnight: Thank you, Mr Phillips. I'm sure the Steelworkers would be happy to comply with your request, if invited again. I understand I'm the last person making a presentation tonight. I guess it's sort of appropriate that the Steelworkers make the last presentation since they were one of the first people who were not only interested in but actively promoting the concept of worker ownership about a year ago and some kind of government assistance to promote worker ownership in the Algoma Steel restructuring and worker buyout.

What I've also handed out to the clerk is a copy of the submission which the Steelworkers presented to the government back in September during the early consultative phases of this legislation. That submission was based upon the green paper draft legislation which pre-dated the introduction of Bill 150. I'm happy to report that a number of the issues raised in that submission have been addressed in ongoing consultations between the Steelworkers and various ministries in the government. Unfortunately there are still a few significant issues which have not been addressed or which do not seem to have been resolved in a practicable fashion, and I would like to address four of those this evening.

The four key points are: first, the issue of ministerial discretion; second, the operation of the advisory board; third, the type of disclosure and investor protection required for employee ownership companies under part II of the bill; and fourth, labour-sponsored investment funds under part III of the bill, and in particular the mechanics. I note that in the gallery we have representatives of a number of the ministries, and I'm sure my comments may seem repetitious to certain of them. However, we'll try them one more time.

Dealing first with the issue of ministerial discretion, the committee is undoubtedly aware that many industries in Ontario are export-oriented, and because they are export-oriented they are very concerned about the reactions of their foreign competitors. In particular in the United States many foreign competitors of Canadian industries and Ontario industries are quick to bring trade action over perceived subsidies and government interventions.

The concern the Steelworkers have is that if Bill 150 is passed in its current incarnation there is a perception that there is too much discretion vested in the hands of the minister, and there is a considerable perception of government intervention in the marketplace. In particular, there is concern that companies that try to adopt Bill 150 and use the tax credits to promote worker ownership will be exposed to trade retaliation. At least, in the context of certain transactions the Steelworkers are interested in, we have consulted trade lawyers in the US who have commented that the ministerial discretion provisions of Bill 150 could give rise to countervail action in the United States. That is a serious concern for any export industry in this province.

As is pointed out in the submission you have been given, there are a number of specific areas of Bill 150 that give the minister discretion. I understand from reading Hansard of a couple of weeks ago, the comments made by some of the staff members, that the ultimate approval process for tax credits under Bill 150 will be a cabinet order in council. When we raised the concept of a cabinet order in council being the final decision generating a tax credit, we almost had to peel our trade lawyers in Washington off the ceiling. In their view, there could not be anything clearer than a cabinet order in council as an indication that there is some kind of government intervention in the marketplace here, and that means countervails, and that means a lot of the companies who probably need worker ownership and need the assistance of this bill will not be able to access it simply because their foreign competition will take them to whatever trade tribunals are appropriate in the foreign countries. That is a serious problem with this bill, and I can't overemphasize that point.

Turning to the second point, and this one may be related to the first one, the operation of the advisory board: The view of the Steelworkers is that the advisory board should have its scope of activities limited either by the act -- preferably by the act -- or at least by the regulations. One of the main concerns with the operation of the advisory board is that it should not have the power to second-guess the people who are actually putting their money on the line. The advisory board should act as a compliance board. It should act to ensure that the spirit and intent of the legislation is satisfied -- just in passing, I note that there is no definition of what the spirit and intent of this legislation is in the bill; that's a point that's in the submission -- but the advisory board should not go beyond that. It should not have the right or the power to put its decision on whether a business plan is feasible ahead of what the investors think is feasible.

We suggest that the regulations make it clear that any business plan put forward by an employee group should be presumed to be commercially viable and that the onus on the advisory board should be to show that the assumptions underlying the business plan are not supportable, taken as a whole, and that unless they can show that those assumptions are just clearly unsupportable and clearly uneconomic, the employee proposal should be allowed to proceed.

I notice there was some commentary among members of the committee in Hansard a couple of weeks ago about why the government should have the right to approve certain businesses which may ultimately fail, and yet they could prevent investments in other businesses where the advisory board feels for its own purposes that the conditions in the act are not satisfied.

Turning to the third issue, the investor protection code, which is something that we understand is relatively controversial -- that may be an understatement -- the basic concern of the Steelworkers, and I suspect this has been echoed by a number of other people who have made submissions to this committee, is please don't make the system so cumbersome that it can't be made to work; please don't impose such a high level of disclosure on small companies that they can't possibly afford the professional fees to go through the process to get the employee approval.

I must say that a number of us read with some dismay the comments in Hansard a couple of weeks ago which explained the concept of a disclosure document that would have to be sent to the Ontario Securities Commission, reviewed by the Ontario Securities Commission for a full, true and plain disclosure, and ultimately receipted by the Ontario Securities Commission. To a number of us, that sure sounded like prospectus-level disclosure. Let me tell you that when you're looking at some of the small operating companies the Steelworkers have interests in or in which they're considering implementing this legislation to promote employee buyouts, if you're dealing with a small company that has 100 or 150 employees and maybe $5 million or $10 million in annual revenues, you just can't afford $100,000 in professional fees to go through a prospectus clearance process with the Ontario Securities Commission. The company just can't afford the cost of that. So please, when you're going through the regulations, don't impose a standard that is too high.


Also bear in mind that many times, where the investors are the employees of a business, the employees are not ultimately, at the end of the day, making an investment decision, they're not dipping into their RRSP to say, "Where should I invest for my retirement?" Their concern is a lot more immediate than that. Their concern is, "If I don't make this investment, will I have a place to go to work tomorrow?"

Bear in mind that in many cases -- hopefully not in all, because this legislation is, after all, designed to support active and profitable companies; it is not designed just strictly for bail-outs and turnarounds. Let me emphasize that the Steelworkers support that concept; they want this to work for all companies, not just turnarounds and bail-outs. But in many cases -- and certainly at the implementation stage that we've seen over the last year and in this recessionary economy -- where employees will participate in ownership of their employer, they will be asked to make employment decisions, not investment decisions. The disclosure document and the regulatory regime that the employees have to go through to get approval for their business plan should reflect that very basic economic fact. We're not dealing with Bells and Northern Telecoms and Norandas and IBMs here; we're dealing with small and in many cases owner-manager companies, some of them profitable, some of them borderline. They're very keen not to incur unnecessary expenses.

Just looking at the OSC process in the last 12 months, the committee may be aware of the two large transactions we're using Bill 150 for. In the Spruce Falls case they did manage to get an exemption order from the Ontario Securities Commission to approve that transaction. Unfortunately that relief was not available to the Algoma transaction, and you may be aware of two regulations under the Securities Act that had to be approved by cabinet in order to allow the Algoma transaction to proceed. There aren't too many small businesses that can afford the luxury or have the political expertise to go through a process of getting a special regulation under the Securities Act in order to allow their employee buyout to proceed.

Another point on the formal disclosure documents: In one of the proposed buyouts that is referred to in Mr Gerard's letter the employees don't speak English, and any document that is meaningful or legal would have to be sent to those employees and would have to be translated into another language. In this particular case it would have to be Portuguese. You can't mandate that, or that's going to be very difficult to mandate, in any regulation.

Instead of imposing a standard of disclosure that has to fit across the board, maybe consideration should be given to having the advisory board determine what level of disclosure is required and put that in as one of the conditions of its approval, instead of sending it to the securities commission. In the Algoma transaction there was a constant flow of information to all members of the union and to all employees in Sault Ste Marie. There were weekly newsletters, there was a phone-in show and there was a weekly talk show on television. There was a constant flow of bite-sized, meaningful and manageable information made available to the employees. It was much more meaningful and understandable than the 130-page information circular they ultimately had to approve in April. That kind of process of ensuring that meaningful information is given to employees to let them make a reasonable, informed investment decision could be made a condition of the approval process rather than building it into some regulations that don't offer much flexibility.

Finally, turning to labour-sponsored investment funds, one of the concerns the Steelworkers have expressed about labour-sponsored investment funds is who can sell them. Labour-sponsored investment funds could be a good source of venture capital for small businesses, and if the object is to get broad-based worker participation you've got to get access to the workers, you've got to get out in the place where the workers are. They're not at King and Bay. And if you try to get investment dealers to sell labour-sponsored investment funds you will find that they will hit a wall of resistance for the simple reason that the potential investors, people in the workplace, the blue-collar people who make industry work, are not used to dealing with Bay Streeters. They have a natural scepticism for Bay Streeters.

If the requirement is that only registered investment dealers are authorized to sell it, you won't find many of them in Hearst, Timiskaming, Field, Nipissing or Nipigon, but you will find people in the workforce who are creditable and credible and who are believable by the workers. Those are the people we have to access. Those are the people who should be empowered to sell securities and labour-sponsored investment funds.

We understand that in Quebec one of the key factors leading to the success of the solidarity fund is the people who can actually sell units. In Quebec, apparently, people on the shop floor -- members of the union, shop stewards and so on -- are authorized to sell LSIFs or sell units in the solidarity fund.

The Chair: How about you take 15 seconds and get the cough candy in there and take a sip so you don't lose your voice by the end of the presentation.

Mr MacKnight: Thank you. I'm not entirely certain who the best person is to sell LSIFs. I suggest it's still open and something that should be given consideration, but please don't restrict it to investment dealers, don't restrict it to the people at King and Bay. You won't find a Wood Gundy office or a Richardson Greenshields office in a lot of the small towns, and if you want to access capital from those small towns and if you want to get people in those towns investing in local businesses, you have to get at that capital, you have to get at those people. So please give some consideration to who in the local community should be allowed to sell those. Those are my formal remarks.

The Chair: Thank you. We'll start off with Mr Carr.

Mr Carr: I'll try and be very brief, recognizing your problem there with coughing.

Mr MacKnight: My infirmity.

Mr Carr: I'm surprised by Mr Gerard's letter. We used to have a bit of a standing joke around here that we saw more of him here for a while than we did cabinet ministers. I notice on page 1 he says, "This has left us surprised and angry." I don't know if he underlined that. Are you really saying that, through all those meetings he had with the Premier during this period of time and with the Deputy Minister of Industry, Trade and Technology, somewhere along the line somebody didn't say to him, "As a result of this Algoma situation we're planning to do such-and-such"? Is he really saying in here that he didn't have any consultation whatsoever and that this piece of legislation came in, knowing he spent literally -- I saw him, because we had a bit of a joke with Mr Sorbara, who was a Labour minister during that period of time. He's saying there was no discussion. What type of involvement has he had with this piece of legislation?

Mr MacKnight: Let me first of all address the comment. I just have a faxed copy, which is what you have a photocopy of, so I don't know who made the underlining. I think the comment is the fact that the Steelworkers did not find out until Tuesday about hearings and were not invited to hearings today until Tuesday. I think that's the cause of the disappointment.

Certainly the Steelworkers have been active in consulting with the various ministries in the government on Bill 150. That process started a year ago and continued through last summer and last fall and has continued through this spring. If you talk to members of the staff they will say they've probably seen representatives of the Steelworkers almost as often as you've seen Mr Gerard in this area. So please don't take it that Mr Gerard is disappointed that the Steelworkers have not had the opportunity to be involved in the process. I think it is directed to this particular hearing.

Mr Carr: Someone was saying the reason you didn't call him in is that he's the one who wrote it and it was his piece of legislation. That's why we were laughing.

Mr MacKnight: I don't think Mr Gerard would like to take the credit or the blame for that.


Mr Carr: I understand. The second thing is regarding the situation with the US. You talked about anything that is signed by the cabinet being a trade irritant. I can't believe this government hasn't looked at it, but it's a government that has been opposed to the free trade agreement. One can say that a provincial government that can't stop a federal free trade agreement can, for want of a better word, stir up trouble with pieces of legislation.

Looking at it and knowing that the US will see this as a problem, do you think this particular piece of legislation was introduced as a means of creating some trade irritants between Canada and the US?

Mr MacKnight: I wouldn't like to speculate on that, but I would hope that was not the case. I accept the rationale expressed by the Treasurer last summer when he introduced this legislation. I think this kind of legislation is probably good for this economy. That's my own personal view, that's not any official view.

Mr Carr: Thank you.

Mr Phillips: These hearings are proving far more interesting than we thought. It was myself, I think, who wanted to have them and I thought it would be fairly routine, but so far we're running into an awful lot of major comments. Your comments really struck a responsive chord. We've been talking about the order in council, the implication being that the government is backing it. It's not just the free trade agreement, there's probably some GATT stuff involved in this.

You expressed concern about the advisory council. I'd like you to expand a little bit on that. My concern about the advisory council having the role of reviewing and commenting on and approving business plans is that there's an implication that somehow or other the government has approved the business plans, certified that they are viable, put its stamp of approval on them, and I think in the final analysis reasonable workers would say, if the thing goes sour: "Wait a minute. Six or seven years ago the government signed this thing and said it was okay. What's happened?"

That's my worry about the advisory council. It takes it out of the hands of the workplace partners who have the fundamental responsibility for it and just kind of shovels it all over to an advisory council. That's my worry about it. What's the Steelworkers' worry about the advisory council?

Mr MacKnight: I think one of the concerns -- and they're probably better expressed in the submission you have there -- is that there is the potential for the advisory board to look at an investment and say, "We don't think this works." That's an interesting comment for a third party to make, considering it has no economic interest in it and probably has no understanding of either the industry or the business.

One of the concerns is that in looking at a particular investment, the advisory board will ask for quite detailed financial information. Unfortunately, the only financial information that will be available will be historical information. One of the key points of worker ownership is that when the workers take control of the company, one hopes they can institute new forms of workplace participation, that they can introduce new forms of production, enhance productivity, reduce expenses and give new life to the company and point it in a new direction so that this historical information is interesting but largely irrelevant.

What the advisory board is forced to look at are the projections. They will be looking at information going forward and in some cases, it is going to be a hope and prayer; in some cases it's going to be well thought out, and in some cases it may even be possible to document some of it based on comparisons: other industries, other companies, other countries. I'm sure that's something MITT is addressing in its guidelines, but our concern is that the requirement that the advisory board focus on future activity rather than past activity be formally built into the regulations; and further that the advisory board, in looking at those projections and that future activity, not have the right to substitute its view of future events for the view of the people who are putting their money on the line.

After all, the people putting their money on the line are involved in the business. They know the business. They know the industry. They know the competitive factors. They know which products are profitable, which are not. They know which strategies work for their companies and which don't. Frankly, the advisory board is detached from that by its very nature; it is detached from any particular industry.

Mr Owens: I was interested in your comments around the investor protection code. I found the issue with respect to the newsletters and the bite-sized information to be an interesting one.

However, my question is, as counsel, what test do you use to determine where you would draw the line between what you call "cumbersome," as you describe it, and protection? My understanding of the proposals we're making through the OSC is that it's simply a well-thought-out disclosure statement, an explicit health warning. I'm not quite sure how that becomes cumbersome.

Mr MacKnight: Let me use the Spruce Falls prospectus as an example. I like to think I'm fairly adept at reading prospectuses and relatively knowledgeable about how this program works. Since I'm a lawyer, I can usually translate legalese into something that at least I can understand, and I had to read that prospectus four times before I figured it out.

A comment made by one representative of the Steelworkers when he saw that prospectus was, "You're asking me to prepare this prospectus and deliver it to somebody on the shop floor at the same time that I'm going to the Ministry of Labour and the Ontario Training and Adjustment Board to try to get funding to improve the literacy of that worker on the shop floor."

You're asking them to create a document that is never going to be read and is not going to be understandable. They're going to look at this document and say, "What does this mean?" They're going to turn around and they're going to look to somebody they deal with and believe in and who they find credible to explain what it means. Those people are going to be their peers in the workforce and whoever the promoter of the employee group is going to be.

Those people, because they're in the workforce, because they're in the community and they're trying to convince people to participate in this, are going to have a relatively significant vested interest in ensuring that their friends, neighbours and coworkers don't come back and say, "You sold me a bill of goods." They're going to try to break down that complicated prospectus and that indigestible lump of information into pieces they can explain to people in the workforce and say, "You know that reference in that document to such-and-such, this is what it means and this is how it applies." That's really what you have to get across.

You want people to make an informed and reasonable decision, but when you ask them to make that kind of a decision, you've got to give them some information they can deal with. There's no point in going through the exercise of hiring lawyers and accountants to generate a huge, beautifully worded in legalese prospectus that nobody's going to read. That doesn't accomplish the goal of the legislation.

The Chair: There are two minutes.

Mr Johnson: Two minutes may just be enough. I want to say thank you very much for coming today, Mr MacKnight, and sharing your views with us.

Mr MacKnight: It's my pleasure.

Mr Johnson: I also want to apologize -- and I guess I'm going to apologize certainly on behalf of the government -- for the oversight with regard to notification of the United Steelworkers of America and their participation in this process. Certainly I think it's clear that the government has worked closely with the Steelworkers, especially with regard to the Algoma situation, and I think there's no doubt we have a good rapport and certainly a good understanding and relationship.

I think it's very unfortunate that probably the most important participant in this forum, in this venue -- because of the experiences that you now have -- had not been invited formally to these hearings. I think that's very unfortunate. I hope that you'll take that back to Leo Gerard and let him know we are aware of that oversight.

Mr MacKnight: I'll pass that on to Mr Gerard.

The Chair: Just some direction from the committee here, and maybe you, Mr MacKnight. Mr Phillips had brought up that [inaudible] you feel that you were able to bring across enough today, or would you like to come back another time? I'm looking at the steering committee of this committee also.

Mr Phillips: I'd welcome the chance to talk to Mr Gerard. I think he's the principal in this. Presumably we'll have some time next week.

Mr Sutherland: Sure. If any of the other officials from the Steelworkers would be available next Thursday morning, I guess we start our hearings again at 10 o'clock next Thursday morning. If not, I suppose probably any time in the morning if someone's available I would be more than happy to have them come back.

Mr MacKnight: I'll be speaking with people at the Steelworkers over the next 24 hours, so I'll raise that with them and invite them to contact the clerk of the committee and try to arrange something.

The Chair: That would be fine.

Mr Phillips: I have another question on some of the comments, but I can raise them with them when someone from the Steelworkers is here.

Mr Wiseman: Could I perhaps suggest that the clerk contact Leo Gerard. As well, if you could just inform him that we're going to --

The Chair: The clerk is going to be contacting him.

Mr Wiseman: -- his formal presentation with the appropriate contact.

The Chair: I'd like to thank you for appearing before the committee. I guess my apologies too, as the Chair here, that overlooked, oversighted -- I know Spruce Falls was supposed to be here. Maybe that was one example we were taking a look at, and they did cancel out. My apologies go out to Mr Gerard and the Steelworkers.

The committee adjourned at 1812.