Wednesday 25 August 1993

Community Economic Development Act, 1993, Bill 40

Ontario Social Development Council

Janet Murray, program consultant, Self Employment Development Initiatives division

Social Investment Organization

Robert Walker, director, community economic development investment research


Jennifer Harold, research and training coordinator

Sharwood and Co

Gordon R. Sharwood, president


*Chair / Président: Brown, Michael A. (Algoma-Manitoulin L)

*Vice-Chair / Vice-Président: Daigeler, Hans (Nepean L)

Arnott, Ted (Wellington PC)

Dadamo, George (Windsor-Sandwich ND)

Fletcher, Derek (Guelph ND)

*Grandmaître, Bernard (Ottawa East/-Est L)

*Johnson, David (Don Mills PC)

*Mammoliti, George (Yorkview ND)

Morrow, Mark (Wentworth East/-Est ND)

Sorbara, Gregory S. (York Centre L)

Wessenger, Paul (Simcoe Centre ND)

*White, Drummond (Durham Centre ND)

*In attendance / présents

Substitutions present/ Membres remplaçants présents:

Cordiano, Joseph (Lawrence L) for Mr Sorbara

Haeck, Christel (St Catharines-Brock ND) for Mr Morrow

Hope, Randy R. (Chatham-Kent ND) for Mr Dadamo

Jackson, Cameron (Burlington South/-Sud PC) for Mr Arnott

Jamison, Norm (Norfolk ND) for Mr Fletcher

Wiseman, Jim (Durham West/-Ouest ND) for Mr Wessenger

Also taking part / Autres participants et participantes:

Ministry of Municipal Affairs:

Melnyk, Tania M., director, community development branch

White, Drummond, parliamentary assistant to the minister

Clerk / Greffier: Carrozza, Franco

Staff / Personnel: Anderson, Anne, research officer, Legislative Research Service

The committee met at 1012 in the Humber Room, Macdonald Block, Toronto.


Consideration of Bill 40, An Act to stimulate Economic Development through the Creation of Community Economic Development Corporations and through certain amendments to the Education Act, the Municipal Act, the Planning Act and the Parkway Belt Planning and Development Act / Loi visant à stimuler le développement économique grâce à la création de sociétés de développement économique communautaire et à certaines modifications apportées à la Loi sur l'éducation, à la Loi sur les municipalités, à la Loi sur l'aménagement du territoire et à la Loi sur la planification et l'aménagement d'une ceinture de promenade.

The Chair (Mr Michael A. Brown): The committee will come to order. I'm informed by the clerk that the first presentation has not arrived yet; I also understand that the second presentation on our list has cancelled.

Ms Janet Murray: The first presenter is here.

The Chair: Oh. Then we can get going.

Mr Randy R. Hope (Chatham-Kent): I have some questions to ask legislative research.

The Chair: We'll do that after this presentation.


The Chair: Good morning. I'm sorry; we were looking right at you. First, you have one half-hour to make your presentation. You can divide that time as you wish, some time for the presentation and some time for a discussion with the members, and you may begin by introducing yourselves and your organization.

Ms Murray: Good morning. Our presentation this morning should be probably about 15 or 20 minutes, so we will have time for discussion. My name is Janet Murray. I'm a program consultant with Self Employment Development Initiatives, and this morning I'll be co-presenting with Bob Walker, a colleague of mine from the Social Investment Organization.

First of all, we'd like to commend the government on its initiative in support of community economic development. We feel that it will make a tremendous contribution to support disadvantaged entrepreneurs in Ontario in their efforts to become independent through self-employment, so we are here today to speak in support of Bill 40.

In general, we're satisfied with the legislation as it's now drafted. It appears to cover all the measures necessary to support and facilitate the implementation of the government's community economic development strategy. It's quite comprehensive, although we do have a few comments to make in direct response to Bill 40, which Bob will go through after my presentation. Our comments today will also generally focus on issues relating to the implementation of Bill 40 as it pertains directly to self-employment.

Mr Robert Walker: I'm Robert Walker. I'm director of community economic development investment research at the Social Investment Organization. The SIO is a national non-profit organization. We're membership-based. We provide information to investors who want to attach social, ethical or environmental criteria to their investment decisions. In recent years, more and more people are coming to us with requests for opportunities on investing in their own communities, and that's how we got involved in community economic development.

Ms Murray: I work for SEDI, Self Employment Development Initiatives, which is a division of the Ontario Social Development Council. The council was established I think about 90 years ago and we're a non-profit organization. SEDI is committed to promoting self-employment as an option for the employment- disadvantaged. Since 1985, we've been involved in the design and delivery of training programs which support the unemployed and social assistance recipients in achieving economic independence by starting their own businesses. These programs have provided invaluable evidence and experience to suggest that self-employment is a cost-effective and viable way for people to attain independence.

Just by way of background, both SEDI and SIO have working relationships with more than 20 different self-employment training and business development programs in Ontario. In addition, we're in contact with many other small business development programs across the province. While we do not directly represent these organizations, we can say that self-employment training and credit-delivery practitioners from across the province are generally very supportive and positive about the proposed community loan fund program which I'll direct my comments to today. I think there is broad support for Bill 40 and concern that it be approved and implemented as soon as possible.

It has become clear, especially in the case of entrepreneurs who are on social assistance, that there is an urgent need for accessible credit to support both business startup and expansion. Through our contact with training programs and their clients, we know that there are hundreds of disadvantaged entrepreneurs across the province who urgently require accessible and affordable credit. These people cannot access credit through the traditional banking system, and they do have viable business ideas and excellent business plans that were developed through these programs. They're willing to pay for credit at market rates; they just can't access it. So we feel that this program, as it is planned, should remove a major barrier to the starting of businesses by disadvantaged entrepreneurs, getting people off the welfare rolls and creating new jobs.

In terms of issues that we have with Bill 40, as I mentioned earlier, a number of our concerns relate more to implementation than to the legislation as it's written. Our first general area of concern is to do with accessibility, basically accessibility by communities to the program and also by disadvantaged groups to the loan funds. I think we need to recognize that a broad call for proposals won't really be enough to level the playing field for people.

The first comment that I have is around technical expertise. It seems clear that there will be a fair level of knowledge and expertise required to ensure that community loan fund programs are effectively developed, and capacity-building will likely be required in some communities. We'd like to recommend to the government that in implementing Bill 40 it provide funds for developmental work in the provision of loan fund expertise in order to ensure that programs are well planned and effectively designed and managed. In addition, in consideration of the legal and accounting requirements under the Securities Act, it's imperative that communities be given support and guidance in preparing their prospectus and legal documentation.

The second area is with regard to disadvantaged groups. We're very keen to ensure that various disadvantaged groups who are often underrepresented in these kinds of processes, for example, visible minorities, women and the disabled, be considered in the development of this program. In addition to the barriers of accessing credit experienced by all people starting small businesses, we feel that these groups face additional barriers due to their race, gender and ability. We'd like to recommend that in preparing for the implementation of Bill 40, particular attention be paid to the requirements of these groups and that community organizations be encouraged to involve representatives of these groups in the development and implementation of their loan funds.

The final area regarding accessibility is that some concerns have been expressed by rural and northern communities. We have a bit of a concern that there could be an urban bias in the loan fund model as it is now, which assumes the potential for raising capital for large loan funds and also assumes a fair amount of geographic concentration. Concern has been expressed by various people in our contact that smaller communities and/or groups of communities might require developmental expertise, financial support and some flexibility in the design in order to deliver these kinds of credit programs.

We would like to recommend that, for one, the government promote awareness of the community loan fund program -- some communities aren't very much aware of the kinds of programs that are available to promote community reinvestment -- and that the community loan fund in particular be promoted, its approach and its objectives, taking fairly special measures to ensure that isolated and rural communities are made aware of the opportunities here.

In addition, we'd like to recommend that direct developmental support go to these communities as well, where possible and appropriate.


Finally, one more comment, and it's to do with the role of business development centres; I understand that there were some discussions about this yesterday. We think it's important that we recognize that a network of business development centres exist in Ontario. It's a community-based lending infrastructure, and we're concerned that the community loan fund program should not create new entities that duplicate work that is already being done, promoting unnecessary cooperation.

We'd like to recommend that the government consider applications from business development centres and that those decisions be made in the context of a review of local capacity: seeing what gaps exist and what needs there are in various communities. It's important that there be a clear policy and criteria around selection in communities and that there be a consistency of treatment of the various organizations in the application process.

In conclusion, SEDI and the SIO support Bill 40 and the community loan fund program. We feel that there is substantial demand for these unique credit services and that the program would provide a really valuable service that would create a lot of jobs and other opportunities, so we would like to recommend the program's rapid implementation.

My colleague Bob is going to speak about some of the legal implications. He had questions and concerns.

Mr Walker: I wouldn't put it so grandiosely. I will be speaking to some of the specific articles of the bill, but please keep in mind that I'm not a lawyer and much of the wording of the bill appears to me to be a little opaque.

My remarks do have two main themes or overarching recommendations that build on Janet's recommendations: (1) that we strive to build into the program and into the legislation as much flexibility as possible, and (2) that we strive to make the program as accessible as possible to rural and northern communities.

I have seven points with regard to the bill. The first point deals with part II, the community investment share corporations, specifically section 6, which prohibits the corporation from lending money or providing financial assistance to a shareholder or a member. This of course is entirely appropriate. We would like to see built into the program -- I'm not sure if it's appropriate in the legislation, but into the program at least -- that we allow past beneficiaries to become not just shareholders but also board members.

The SIO, in developing three loan funds in this province since last spring, has found that people who potentially benefit from the loan fund have a strong desire to put back in once they've gotten a leg up. Once having received from the community, they want to put back into the community, and I wouldn't want to see anything in the legislation or the program prohibit that from happening. There's a more utilitarian reason for this as well, and that is that people, having gone through the process, have valuable experience and can help out, particularly as board members, in devising a more effective CISC or CLF.

My second remark has to do with CLFs and with section 22, which states, "A community loan fund corporation shall not provide collateral for a loan to an eligible borrower if...the amount of the collateral is greater than 10 per cent of the corporation's total assets." Our concern here is that the restriction may choke off important opportunities in communities where economic initiatives are few and far between. We want to suggest that the province consider relaxing this provision at least for rural and northern communities.

The third remark has to do with the provincial grants and guarantees, part IV of the bill, specifically section 26, in which municipalities are deemed ineligible for startup of financing for a community investment share corporation. This again might act as a barrier to the takeup of the program and we'd like to see this relaxed, perhaps at least for rural and northern communities.

Point 4: section 28, which deals with the guarantees, again, not specifically in the legislation. One of our concerns is the amounts that have been specified of $10 million guarantees for loan funds and $20 million for the assists are in keeping with the small-scale nature of CED financing, but may be perceived in many communities as a kind of a limit on the program itself, and those communities that are behind in getting together, in developing the capacity to take up these programs, might feel that they're too far behind and there's no point even getting started. If there could be at some point in the program at least the proviso that this program will continue if it's judged to be a success, then I think that could go some distance in encouraging communities to get started in the process of CED.

The fifth point has to do with the offering statement, section 33 under part V. Our concern is that this document not come to be a prospectus-like document because prospectuses are extremely costly to develop and it might be too onerous for many of these communities to develop them if they're expected to meet the standards of typical Securities Act prospectuses. Our recommendation here is that we keep these offering statements as simple as possible.

The sixth point has to do with a time limit on raising capital for development corporations. A time limit of six months has been placed on the offering. Again, in rural communities and in northern communities where resources are scarce and where the problems of distance may slow marketing efforts, I would suggest we relax that time limit.

My last point has to do with the Municipal Act where municipalities are prevented from investing in an economic development corporation. We recommend that the province consider allowing those municipalities with reserves to invest perhaps a small proportion of those reserves in an economic development corporation to get the ball rolling, so to speak.

In conclusion, I want to reiterate that the demand for these programs is high, not only on the part of the potential recipients of this financing but also on the part of potential investors. People are looking for opportunities to help their communities and we come into contact with them on a weekly basis. Thank you.

Mr Bernard Grandmaître (Ottawa East): Mr Walker, in your opening remarks you mention that more and more people are visiting your office to invest; they want to invest. Can you give us a few examples of the type of people who come to your office?

Mr Walker: Typically, they are people who might have holdings already in ethical mutual funds or environmental mutual funds, and they are simply unaware of opportunities in CED. Once we mention these kinds of opportunities to them, they do express an interest. We have had people literally come in off the street. One woman came in last month claiming to have $600,000 that she wished to invest in some way, but her concerns were the more typical concerns of socially responsible investors. She didn't want to invest in firms that have holdings in South Africa, for example. We gave her a set of options to look at and when we began to talk a little bit about this program, that really attracted her interest.

It's amazing the kind of people who are out there looking for opportunities. They won't put their entire nest-egg in these programs, but they are willing to put a part of it and we come into contact with them.

Mr Grandmaître: I find it somewhat strange that a person with $600,000 who would go to your office.

Mr Jim Wiseman (Durham West): What's stranger is somebody with $10 million who leaves it to their cat.


Mr Grandmaître: I don't know all of your services, but why would a person off the street, with $600,000 --

Mr Walker: First of all, we don't manage anybody's money. We're not money managers.

Mr Grandmaître: No, I realize this.

Mr Walker: We provide information. I don't know what else to tell you other than that we have 350 members across the country. I can tell you that there are five ethical mutual funds in this country now. I think their assets are in the hundreds of millions of dollars. The performance of these mutual funds is as good as and exceeds the performance of other conventional mutual funds. The ethos of the SIO is that this isn't charity. You don't invest for charitable purposes; you do invest to get a return, but we believe it is possible that you can get a financial return and not abandon your social and moral values. This seems to be the case. We only started up in 1989. We have experienced growth during a rather severe recession and we look at that as rather remarkable and we look forward to more growth in the future. We have a target now of 2,000 members that we want to reach in five years. Whether that will happen or not, I can't say at this time.

Mr Grandmaître: How long have you been in business?

Mr Walker: Since 1989.

Mr Joseph Cordiano (Lawrence): I don't have any questions.

Mr Hans Daigeler (Nepean): I'm also interested, like Mr Grandmaître, in exactly what you do. Who is behind you? Do you have a board?

Mr Walker: We have a board of directors, yes.

Mr Daigeler: Where would they be coming from?

Mr Walker: Some from the legal community, the investment community, foundations.

Mr Daigeler: How do people hear about you? It's not something I'm familiar with.

Mr Walker: We have a newsletter. First of all, we're membership-based and that's where our capital comes from. We receive no government financing. As I said, we have 350 members of individuals, organizations and businesses. We publish a newsletter quarterly, plus updates. We hold a national conference annually. This year's conference is on financial institutions and social responsibilities. We have people from the Royal Bank, Mouvement des caisses populaires et d'économie Desjardins, some caisses populaires in Quebec, Vancity out on the west coast coming to town to speak about our financial institutions.

Mr Cameron Jackson (Burlington South): First of all, Robert and Janet, thank you for your presentation. I'm not having any difficulty understanding your operation. I think it's quite contemporary and appropriate and people like to invest with a conscience as well as with a return. It's probably as simple as that.

Mr Grandmaître: High risk.

Mr Jackson: Holistic investing is not spreading the risk. For those traditional investors it may be a difficult concept.

I appreciate one of your opening comments about this whole issue of flexibility and access. It's something which two previous deputants have raised. You articulated it very clearly as the potential for a strong urban bias. That's been corroborated by staff, that there is an emphasis in urban areas, that there are 40 targeted as a number, of these planned institutions and that parallel to this are the business development corporations, and there are a number, about 55, in Ontario.

I appreciate very much your recommendation that we don't need to reinvent the wheel, but with flexibility there is room to move quickly in those smaller communities that are currently serviced by business development corporations. I think that was your point. It's not that they should be the vehicle, but that, all things being considered, they may be an ideal situation, modify their boards slightly, expand their terms of reference, divide the two portfolios but brace it under one set of expenses. Are those the concepts you're referring to?

Ms Murray: With regard to the business development centres, there may have been some misunderstanding originally as to whether a program that was federally funded would be eligible to partake in this provincial program, and we wanted to make sure that there would be fair and due consideration for all parties who are applying. But we are also concerned that there are limited resources and that, where possible, existing and effective systems can be used and that competition is not necessary.

In some cases, business development centres are not doing this kind of lending. They're lending to much larger organizations. In some cases, it's a very appropriate thing. We wanted to ensure that there are clear and transparent criteria that ensure that all organizations are given fair consideration in the process.

Mr David Johnson (Don Mills): There was a deputant yesterday who drew an analogy with the insurance business -- I think he was with the inventors' association or something like that; I just forget exactly -- but he said that this program is doomed. There was a reference, I think, one of you made to the amount of money -- I think it was yourself -- $10 million in the loan fund, $20 million in the CISC, which he said is just too small a base, that essentially what we're trying to do here is insure six people.

In the insurance business, you pick winners and losers. Some people die early, some people die later but, on average, because you're insuring a whole lot of people, it sorts out. Here, because of what he considers to be a small amount of money, the $10 million and the $20 million, again we're trying to pick winners and losers, but there just isn't enough money. The likelihood is that there'll be losers that will be picked, and because you're dealing with a small amount of money, in his view you won't be able to pick enough winners, so the whole process is doomed to failure. I'm wondering what your reaction is to that.

Ms Murray: I think it might be helpful to give you a sense of the kind of people who will probably use this loan fund. I was just visiting a client who's a woman on FBA. She has three children under the age of 4 and she's 22 years old. She started a pet shop, more a pet supply store, out in Ajax, and this was the third week of operation. She's having issues around suppliers, and we went to do a consulting visit. She's got, I think, gross revenues of $300 a day, and it looks like she's going to be able to break out and support her family. It was gradually increasing. The look on her face was quite astonishing, to see the hope in her face that she could somehow get off family benefits.

The kind of capital she needed to start this store was not a great deal, because she's been trained, through the programs that we're involved in, to assume a very low input of capital and to plan on a very lean basis.

Our whole philosophy of the growth of these businesses is that they should step up gradually, that they start with very little risk and very little capital and build with what they have. It's the whole idea of sweat equity.

Mr David Johnson: How much money were we talking about, just for example?

Ms Murray: Actually, I wasn't privy to the books on this visit.

Mr Cordiano: Did she use a New Ventures loan?

Ms Murray: I'm not sure. I think she actually got started with a loan from friends and family and is now in the process of trying to apply for one of these kinds of loans.

Mr David Johnson: On the flip side, I wonder how the investors --

Ms Murray: I don't think she would have been eligible for a New Ventures loan.

So I guess what I'm saying is that the size of the loans are probably going to be very small. In fact, a lot of the trainers in these programs are concerned that people will get carried away and want to borrow $10,000 right away, and it's just not necessary. They're encouraged to start very small, and if they do use that money effectively and pay it back, then at that point they would go for another loan, so that they may, over the course of a year, apply for and pay off a number of loans for different things.

So I think it's important to keep in mind that there really is a backup system of business development training programs that's assumed in this whole model as well, that the loan fund fits into an overall picture of business development support at the community level that's quite effective.

Mr Drummond White (Durham Centre): Mr Walker, Ms Murray, I was very impressed with your presentation. I have a particular interest in your organization because a very close friend of mine was your founding president, Dr Warren. It was very gratifying for me personally to hear SIO being referred to by its initials and as an institution after only four years because of the tremendous role that you have had in the community and also, of course, your good work with the Ontario Social Development Council and the obvious cooperation and collaboration you've had in this and, I might mention, other presentations.


The issue about social investment I think is worth exploring further because frankly that's what this bill is about, in terms of the community loan fund particularly: the risks that people assume, the important investment in people, in getting them off a state of dependency and being involved in the community.

I'm wondering if you could, for the purposes of the community, explain a little bit more in regard to the programs that you're familiar with that are parallel to the CLF, the ones that you mentioned yourself as having initiated. Perhaps if you could talk about how that would fit in as part of the network of services that are essential for people who are receiving assistance or needing their first startup. Mr Walker?

Mr Walker: Perhaps I could speak a bit about the three loan funds that we have worked to develop so far, since the spring. One loan fund in eastern Ontario, which will work in several Ontario communities, has actually been started up by a foundation, the Grindstone Island foundation. They have capital and I'm not sure at this point if they'll be applying to this program or not, but in any case, that's one loan fund that's up and running.

The second fund in Ottawa has arisen from a revolving fund that was in existence in Ottawa and that financed housing cooperatives mainly. They have now agreed to expand their mandate and they've made a significant deposit in the Ottawa-Carleton loan fund, and that loan fund is now in search of more investors.

There is a third loan fund here in Toronto, the greater Toronto area community loan fund, which will be starting up shortly, which is on a search again for investors. They have yet to receive a deposit.

There's almost a famous example now of where socially responsible investors can arise and how they can arise in the most unlikely places. There is a similar program in Saskatchewan you may be aware of, the Saskatchewan community bond corporation program in Rosetown, Saskatchewan, a community of 2,800 people. They started up a CDC in 1990. Under that program you have three months to raise capital. Within that 90-day period, the residents of Rosetown raised $800,000, which was their target, for the corporation. This is in rural Saskatchewan.

The point is, there's desire out there, and not just on the part of people who are already in socially responsible investment, but people who are interested specifically in helping out their communities.

Mr Hope: I was particularly interested in your comments around rural Ontario, being a rural member. I don't always like adapting programs to Metro because they don't always work. I had a corporation in my own community, Navistar, which is a truck manufacturer. Workers volunteered their time, put the truck together and now they're using it to raffle off to build an indoor pool in the community. So it does have its benefits.

But where I'd like to focus -- you touched only on welfare and I'm wondering -- I'm not sure about time; I know I don't have much time -- if you worked at the older worker program where the workers are eligible through plant closures, moneys that are sitting there that are available and they have investment ideas, because a lot of the plant workers are very intelligent people and they have opportunities; your linkage with Innovation Ontario Corp, which I'm very curious about; and also around the rural communities. You said you've had a conversation with them.

The problem that we're starting to see is the urban centre of a rural community. The larger of them all seems to be the hog and the rest of them suffer as a consequence. I know some of us are trying to push Kent county economic development versus the specific individual community in its own economic development. I'm just wondering what feedback you're getting on that end of it, if you're getting any.

Ms Murray: My first comment was about older workers and dislocated workers. Forgive me; I was referring specifically to social assistance recipients, but a number of the programs that we work with are funded through Jobs Ontario and there are a lot of people who are UI-ineligible, which would include people who have benefits packages from being laid off. So we do work a lot with those people. They tend to have some savings and therefore are able to start sometimes more ambitious businesses. So there are programs that are working with these people. I would assume that there will be people who will access the credit funds who are involved at that level, but it's more likely that the people who will need the loan fund are people on social welfare, social assistance.

Does that answer your question?

Mr Hope: Well, I'm wondering, with your linkage, because I'm hearing that some people have a hard time understanding the social value of investing a dollar and making 10 cents versus investing a dollar and making a dollar. You can invest a dollar and make 10 cents, but there's a social fabric that is re-established in your community, like putting people back to work, which is important. As we read in the papers today, there is no money from the federal government for jobs, so I guess we have to do it as a community base through this process. I'm wondering, do you see that in the context, because it is important for a lot of our people in our community to invest, even if they break even on it, in rural communities?

Ms Murray: I have some experience working in Elliot Lake, for example, at the time of the mine closures. It was astonishing to see how people who had made an investment in that community really wanted to find any way possible of staying and reinvesting in their home town. So there was a lot of interest in small business startup, especially around the seniors' community and that kind of thing, and it really did have a broader effect on the morale of the community in the kind of sense of trying to ensure that the community had a future and that people were going to stay and invest. So I think there is a broader context. It's not just individual people starting their own businesses, it does have a broader context of investment and community morale.

The Chair: Thank you. As the member representing Elliot Lake, I'm always interested in those comments. Thank you very much for coming this morning with your presentation. As you might know, the committee will be considering this bill clause by clause next week.

We have a cancellation for the next presentation, but Mr Hope, I think, has some questions for the researcher.

Mr Hope: Yes. Last night I stayed up late to read this stuff. You find your social life, being a politician, at the very minimum, nothing. But I was up looking at this documentation --

Mr Jackson: How many friends do you have?

Mr Hope: I have lots, Cam. Don't worry about me.

Mr David Johnson: No voters?

Mr Hope: Lots of voters too. You'd be surprised.

The Chair: Mr Hope, just ignore it.

Mr Hope: I'm being intimidated here and I'm trying to make a serious comment.

Mr Jackson: Are you getting your hair fixed today?

Mr Hope: Don't worry, some of us can comb our hair, Cam. You can't.

The Chair: Order. We would like to get to --

Mr Hope: Yes, I would like to get to the point as I'm trying to make it. As we were handed the document, directory highlights, first of all I don't know the title and I'm wondering if it's important, as we have a photocopy of it, to get a copy -- or the title of the book that this was being brought out of.

Second of all, I notice a lot of the programs being American-related communities. I remember a while back there were studies that were done around risk factor in the social fabric that we just heard from the presentation where, if there's any -- I'm wondering if Legislative research knows of any information that would be out there pertaining to risk factors. I'm talking about investment, through Statistics Canada, or others have done studies where they say in Canada or in Ontario when they invest a dollar the expect x amount of dollars return, and in the United States they invest x amount of dollars and they only expect -- I know there was a study done by Statistics Canada or somebody, but if the Legislative researcher might have access to some information pertaining to what I've just tried to explain, because I'm trying to draw a linkage comparator as we try to look at this overall program around economic renewal and economic stimulation in rural communities.

The Chair: Do you have any questions of clarification so you get exactly what Mr Hope's looking for?

Ms Anne Anderson: I will look into that and see what we can find on that.

In terms of title of the directory, I believe it's called the Directory of Microenterprise Programs from the Association for Enterprise Opportunity, but I'll confirm that for you later on.

The Chair: I'm sure the ministry might be able to be of some assistance also. Are there any further questions? If not, I think we'll take a 10-minute recess.

Mr Jackson: If I may, is there any deputant from the morning's grouping who has arrived?

Mr David Johnson: Anybody else who'd like to make a deputation?

Mr Jackson: I wouldn't go that far.

The Chair: We will recess until 11 am.

The committee recessed from 1051 to 1104.


The Chair: Our next presentation will come from the Calmeadow Foundation. Jennifer Harold, you have been allocated one half-hour by the committee for your presentation. Typically, you will allow some of that time for a conversation with the MPPs.

Ms Jennifer Harold: Okay, great. I'm not sure how many of you are aware of the Calmeadow Foundation. We're an organization that actually has split into three parts. The part I work with is called just Calmeadow. We do the program side, so in all our reports it's just Calmeadow now. The foundation side has gone off to the side. It's our fund-raising arm.

I wanted to talk about Ontario Bill 40. I think that this is a really important piece of legislation in terms of creating opportunities and creating windows. Too often legislation restricts, so it's very good to be seeing legislation that opens up opportunities. So I like that, first of all, and I like the philosophy behind it in terms of inviting participation of communities instead of the government coming down with a lot of money, a lot of programs. This is something that is invitive and participatory. So I think the philosophy behind it is very good and I would like to thank the people who put a lot of time and effort into developing this legislation, because as we at Calmeadow went through it, we realized the points in that must be very difficult. So thank you for the time and effort.

At Calmeadow, we're an organization that specializes in micro-credit loan funds. I'm really going to focus on the community development loan fund part of the legislation. For the last 10 years, we have been looking at credit programs, micro-credit for low-income micro-entrepreneurs all over the world. We started in South America, have done a lot of work in Bangladesh and Africa and in the past four years have been bringing that methodology to Canada. We have a loan program in 20 native communities and we have two non-native communities, one in urban Vancouver and another non-native program in the rural part of Nova Scotia.

What we've been trying to do is look at methodologies that will create sustainable loan programs. I think that as we have looked at how we can create, well, really a financial institution that is going to be sustainable over the long term, we've really wrestled with some issues that I think come out in this legislation. We're very pleased that sustainability and viability over the long term is a priority in the philosophy behind this legislation.

There are really three things about the legislation that I'll point out and then some comments that really I guess would come in the regulations part of it. You have a handout that I've provided here.

The first point is an issue of eligible borrowers. That's not defined. What we found is, in government programs and non-government programs, there tends to be a creaming where the people who normally would come to us, the low-income micro-entrepreneurs who are doing something out of their home, a program comes along and it just doesn't catch those people. The eligible borrowers tend to be the cream of the crop. Again and again and again, with self-employment asssistance program, with New Ventures loans, with all these different programs for the eligible borrowers, the threshold is too high for the ordinary people we were looking at. Not that those programs aren't excellent, but I would just really strongly want to say that in defining "eligible borrower," the threshold should be sufficiently low enough that the part-times, the startups, those people who are involved in seasonal employment or supplemental employment should not be excluded. I'm not suggesting that you target those only but just that they would be included.

Also, I just ask a question about, what will happen if those people with limited money -- the money tends to go to those who are more formal, more full-time. So my question is, is there going to be an appeal process or a review process for people who are not included in that framework, "eligible borrower"?

Our biggest concern is related to the viability of these funds, and the second point is that in paragraph 17(1)4, the community loan fund corporation must "restrict its activities to providing collateral for loans to eligible borrowers."

It is our opinion at Calmeadow that if funds are only allowed to provide collateral, they will not in the long term be viable funds, because in this situation, if you're providing collateral, the actual lender is the bank, not the fund. So the interest is accrued to the bank, not to the fund. So our question is, how is this fund going to make any money? Who is going to invest in a fund where the return isn't guaranteed? Really, I question how any return is going to be accrued to the fund. At Calmeadow we have been in this collateral situation, and there is no fund in North America that is covering its operating costs by providing only collateral.


I have given you a handout from the National Association of Community Development Loan Funds. It's a survey that just came in yesterday, so it's hot off the press. I want you to be aware that this survey -- it says "community development loan funds," but these are substantially different types of funds than what we're talking about, micro-credit. These funds fund mortgage and housing. If you look at the average loan size under "Lending Activity," you'll see it's $60,000, and these funds have been operating for nine years. Yet when you look at their sources of fundings, every single one is dependent to some degree on grants.

No funds, if they can only provide collateral, are able to survive even on the interest. These funds are able to lend their own money, but they are not able to survive on the interest alone. So just be aware that the structure you set up has to be open enough that these funds are going to be able to make money, because otherwise the government is going to be involved in supporting these funds long beyond three years.

Calmeadow was the first organization in North America to do peer group lending or to do any kind of micro-credit lending. We do not believe we have a method for being financially sustainable, and we have cut costs, we've used the peer group method, we have one loan administrator where other funds have six, we have more borrowers with that one loan administrator, and we are still not breaking even.

So just be aware, these funds are going to cost you money. To figure out what the cost is going to be and is that worth it, I think it's worth it, because when we look at the social benefits alongside the financial benefits, they are worth it. If you make the eligible borrower broad enough, it is worth it; the benefits, aside from the social, are worth it. But don't expect that they're going to be financially viable, unless they're able to lend their own money.

The other question I have is on section 18, just a question about who can purchase these class A securities. We are in the process of setting up a loan fund in Toronto, and the foundation arm of Calmeadow would like to own most of the loan fund. We're wondering if it's possible for foundations or charities to buy these securities and also what the limit's going to be. We would probably want to own most of it.

The last question is, what expenses are going to reimbursed? Will you cover lawyers' costs? These loan funds should have a professional consultant come in and design them. That's very expensive, $50,000 at least. Are you going to cover that? If not, my concern is that a lot of loan funds are going to get started that really aren't going to be able to do what they need to do to be successful.

These are some other questions that I've outlined here. The size of the loan funds: If you have a limited amount of money, and we understand that, and you want to see 35 loan funds set up, you will be able to guarantee a portion. We want to know, if we want our loan fund to be bigger, say, than $250,000, can we expand that by getting unsecured securities, or non-guaranteed securities? Could we sell securities beyond what you are able to guarantee, or is our fund going to be limited by the amount that you're going to be able to guarantee? So that's a question.

The other thing was -- I think that was the main question, about the size of the loan funds that you're going to be able to -- is that my time? Just about.


Ms Harold: Okay. Another thing -- just a comment; this is for the legislation side of it -- is determining the eligibility of the sponsor of these loan funds. I'm the training coordinator at Calmeadow, and there are many, many, many communities and organizations that come to us for training in setting up community loan funds. The first thing we have to do is really, really work hard with them to sort out what they want to do.

There was a group from Sudbury that I worked a lot with and they wanted to solve all the ills of their community with this loan fund. I would just warn you, if you run into somebody who comes along like that, they can't do that. These are $5,000, $3,000 loans. People are not going to turn into Horatio Algers overnight. It's just not possible; it's not feasible.

The other point that I would like to make is about monitoring, aside from the collateral. We have had a lot of problems getting banks and other financial institutions to join in with us. In Vancouver, the CCEC credit union was very helpful to us in coming alongside, but they are not useful for us. We need to be with a chartered bank. It took years for us to hammer out agreements with the chartered banks. We know the problems of getting chartered banks on side with these loan funds. It's not just because the borrowers don't have collateral; it's because the administrative costs per dollar lent are too high.

If the banks are doing the lending, which is the collateral side of this setup, I don't know if banks are going to do it. I am very concerned that they are not going to do it. Who is going to do the monitoring? As it is now, the chartered banks are not set up to do monthly monitoring. What they can do is withdraw a certain amount every month from someone's account. But if the money's not there, they really do get lost. They're too big; they don't work that well. We have had very, very complicated discussions with banks to get them to do any sort of monitoring. That's where we have had full-time loan administrators on site. That's another problem: Who's going to do the monitoring?

We talk about it as being credit, but really it's debt. We are selling people debt. What happens is the organization thinks they're doing great things, selling credit. Then the good cop becomes the bad cop when they have to collect. That's another issue around the repayment.

The last thing, I think, that I would really like to focus on is other barriers. This is a very important, good piece of legislation, I think, that will open up opportunities. But alongside that needs to be something from the Ministry of Community and Social Services that enables people on social assistance to pursue self-employment. As it is now, loans are treated as income, not as business liabilities, so they are penalized. So, most of our borrowers who are on social assistance are scared to death of being cut off. It's a little bit clandestine. We get around it in another way.

Those are the points I want to make; any questions?

Mr David Johnson: Well, are you available to run this program?

Ms Harold: Well, we have a program that we're setting up in Toronto now. We're in the design phase of it so we know what it costs to design programs.

Mr David Johnson: You obviously have a great deal of practical experience.

Ms Harold: Yes.

Mr David Johnson: It's an excellent presentation. I was most interested in, when you were talking about sustainability of the programs over the long run etc and the fact that your own programs, you've indicated, are not sustainable. I agree with you 100%: That would be the objective. Otherwise, you know, there just isn't enough money in the world to fund all the various programs that we'd like to do.

How close to sustainability do you come? Can you give us any kind of measure -- some measuring stick -- on this thing?

Ms Harold: Yes, that's a good question. One of the reasons to get closer to sustainability, we have chosen the peer group lending method where, instead of having a collateral-based or business plan-based lending, it's character-based. You join up with four other people. The group acts as the banker; the group monitors the loans; the group does repayment. So all those things that you normally need someone else to do are covered.

But right now, all of our programs are funded by donations. At this point we're not sustainable. But our strategy is action research. So what we're doing is trying to penetrate a certain market, a certain per cent. We figure -- so we take a slice of that and say, "If we can get 30% of this market and then over the years expand that, we believe we will be sustainable." So within time, we will be sustainable.


Mr David Johnson: What's the greatest problem in reaching sustainability? Is it the fact that some loans go sour, or is it administration costs, or what is the biggest problem?

Ms Harold: For us, it's volume. We don't have enough loans. With our non-native program, we haven't lost a single loan yet, but we don't have enough borrowers, and the loans are so small that the interest we make on those loans is nothing. Also, because we lend through a bank, the bank gets all the interest; we don't get any interest on it.

Mr David Johnson: So a lot of your programs, I guess, have been overseas, from the way you introduced it -- Bangladesh, Africa you mentioned.

Ms Harold: Those are partners; they aren't our programs. We work with them to develop them.

Mr David Johnson: What sort of volume do you have here in Canada?

Ms Harold: We have about, let's see, 50 borrowers in Nova Scotia and 50 in Vancouver; that's our non-native program. I think that probably 70 loans each -- people are on their third and fourth loans.

Mr David Johnson: One of the deputants yesterday mentioned critical mass, that there's a critical mass that you need to make this thing go. I think that's what you're saying.

Ms Harold: That's right.

Mr David Johnson: Have you identified or given any thought as to what that critical mass is?

Ms Harold: Yes, we considered a per cent of the labour force in an area that is interested in self-employment, so not just those who are currently self-employed but those who are potentially -- but at the same time, we do not consider ourselves in the business of promoting self-employment. So, of those who are self-employed currently, we would like to get, say, 30%.

But it is incredibly difficult to figure out who those people are because the majority of them are informal. They are not formal businesses, and when you see a Maclean's article, front page, cheaters, talking about those people who are operating under the table, those are the people we're working with.

Mr David Johnson: I think the deputant the other day was referring to the fact that there just weren't enough loans.

Ms Harold: That's right.

Mr David Johnson: And that the $10 million in the loan fund just wouldn't generate enough loans that, in his view, it could be sustainable, I think, or successful. Do you have the same view that the $10 million in the loan fund -- is that enough to achieve the economies that you apparently lack with your foundation?

Ms Harold: I think that amount can be used to leverage all kinds of other money. That's not my primary concern, the $10 million; that money's going to be spread over a number of communities.

The only way you're going to know some of these things is by doing it. You just have to try it. So I think that this is a good step in trying it. But just beware: It's going to cost a lot of money.

Ms Christel Haeck (St Catharines-Brock): Thank you for coming. If anything, I have probably 50 questions, and we won't have enough time to answer that. I am interested in your comments regarding monitoring and I wanted to raise the issue of marketing.

One of the previous presenters talked about getting the word out, and you said you don't really see yourselves as promoting self-employment, and yet that's in fact what you do -- at least, you're trying to promote self-employment among a limited group, but most people don't know about you. Who does know about you at this point? Until this committee, I had absolutely no idea that a group like yours existed, and as an MPP, people come to my office, they're interested, being social assistance recipients, in getting off welfare and starting their own business, and yet there is no mechanism. Now you've given me the mechanism, but you don't want to market. So how do we in fact get together other than by happenstance being on this committee?

Ms Harold: Those are good points. First of all, we see ourselves as fulfilling a need. That's why we don't say we're promoting self-employment, because self-employment is not something that's going to work for every person. So if there is a credit need and a gap there, that's our service we're providing, rather than promoting or telling people to get into this.

The reason you haven't heard about us in Ontario is because at this point our programs are in Vancouver and Nova Scotia, and in those areas, the programs are called PAL and PARD. What people hear about are PAL and PARD, rather than Calmeadow. The other program we have, the native program, is First People's Fund, but again it's very reasonable you wouldn't have heard about that.

We haven't tried to push ourselves in Ontario because we don't have the resources to meet all the demand that there is right now. But January 1, we're starting a loan fund in Toronto, so hopefully you'll be hearing more about us then.

Ms Haeck: That definitely answers that question.

As far as the monitoring side, you said that the bank is not in a position of knowing that there is -- or when they see that there is not the money there to pay off the loan that particular month, they don't, basically, make the call to John or Joan and say, "Is there a particular problem why the money isn't here?" They issue an NSF report and that's basically what happens at their end. But what do you do to keep people on track and make sure that the business stays viable?

Ms Harold: That's why we have peer groups. It's the groups themselves that -- everyone in that group has a vested interest in everybody else maintaining their repayment, and so then they have an interest in everybody else's business surviving. Some groups have set up their own incubators. Some groups actually have businesses that start interlinking: one does the selling and one does the buying and all sorts of things. So ideally, that's how the peer group mechanism works.

One of the concerns we have is that if you have 20 individual loans it's a lot to keep up on. If you have those 20 people organized into four groups of five, it's easier to keep up on. That's how we do it.

Ms Haeck: Okay. Where do you draw your money from? Who is behind the Calmeadow Foundation?

Ms Harold: There are about 20 private foundations, about 50 corporations and hundreds of individuals. It's all private money, privately funded.

Ms Haeck: Sort of the ethical borrowing concept?

Ms Harold: No, we don't -- the ethical borrowing?

Ms Haeck: That somebody who is an investor, as we heard from our first deputant this morning -- that people who have a desire to put their money for, say, the good of the community rather than investing it in South Africa.

Ms Harold: Right. But we're not an investment. This is straight donations, grants, things like that. It's easier to get a donation, it's easier to get a grant, than to get an investment. Corporations will give money but they won't invest, because the return isn't guaranteed and also they can't get their tax-deductible receipt for it. That's what we've found. The whole corporate side of it is that they're more willing to give than invest.

Ms Haeck: I see.

Mr White: I just wanted to congratulate you on your presentation, and certainly I'm familiar with your foundation and some of the excellent work that's gone on for some time. I think it's somewhat ironic that your knowledge of Third World development will now come in very handy in Canada with some economic changes that have happened.

I didn't really have a question, but simply that you have a number of concerns in regard to specific points in the legislation and how the program will work, and I hope that you will take advantage of this time now to consult with the ministry people who are behind you and will be able to answer many of those questions and, frankly, given your extensive experience, will be working with some of the CLFs throughout Toronto or other areas to be able to advise them. But please, after you've finished your presentation, please feel free to consult with some of the folks at the back who can answer some of the questions that you posed in regard to the legislation.

Mr Cordiano: I just want to touch on some of the very real concerns that you had with respect to the legislation that's being proposed. It's my understanding Calmeadow provides management expertise and consulting services, essentially.

Ms Harold: Yes.

Mr Cordiano: And you assist in groups or individuals accessing moneys and you do this through banks.

Ms Harold: Yes.


Mr Cordiano: Okay. You obviously may have made use of the New Ventures program that currently exists.

Ms Harold: Some of our borrowers might have, but we don't. One of the problems we've found with New Ventures is that the borrowers have to have the $7,500, or whatever, upfront matching.

Mr Cordiano: There's no stipulation as to the amount. It's just that there has to be an equal amount of cash or assets to the amount that's being borrowed.

Ms Harold: Right.

Mr Cordiano: In the north, it's half the amount that's required.

Ms Harold: Okay.

Mr Cordiano: So there is that possibility; if someone wanted to borrow $1,000, say, and they were in northern Ontario, they would have to put up $500 or $500 in assets. You're indicating that you're involved in micro-borrowing, or micro-businesses.

Ms Harold: Yes.

Mr Cordiano: The amount of loans, what would the average loan range from?

Ms Harold: Our loans start at $500 and in the native communities go to $3,000 and in the non-native $5,000, so that's our top. I wouldn't say that anyone in North America really understands how micro-credit works. What you have to do is try it, and so I think you've got to try it. The investment side of it -- we haven't found investors, but try it. I'm encouraging; try it. It's worthwhile trying.

Mr Cordiano: I think some of the concerns that you've expressed with respect to, will the banks handle this; in fact, they're showing some hesitation and some reluctance to take up these loans because of precisely what you pointed out. The administrative costs would probably exceed what return there is for them. There isn't the recognition of the overhead that's going to be required and I think there are probably ongoing negotiations with the government over that.

You point out here that with respect to private investors, it will be difficult to have private investors interested in the programs, probably because there won't be much of a return. It's not attractive enough for private investors. I would say to you that those are very valid concerns and most useful to the discussions that we're having because those are the concerns that I would share with you. So far, some of the other items that you've mentioned, size of loan funds and determining eligibility of sponsors, CLFs, again very much a part of what we're dealing with and unanswered questions remain in those areas. But I would say you've touched on some of the most important aspects of the legislation and hopefully we can deal with those when we go to clause-by-clause. I doubt we'll get many changes that are substantial in that regard, but thank you for making those views available to us.

Ms Harold: Thank you. Again, I'd just like to say, consider direct lending. The organizations could do direct lending rather than just collateral. I think that would help a lot.

The Chair: Thank you for appearing today at the committee, a most interesting presentation. I know of your good work in some of my part of the world, in northern Ontario and on my first nations. Thank you.


The Chair: Sharwood and Co, Gordon Sharwood. Good morning. As you know, we have allocated one half-hour for your presentation. I would tell members that we have just distributed a rather large brief.

Mr Gordon R. Sharwood: The appendices are larger than the text, as is usual. I am delighted to be here and make this presentation, because I've been involved in this area of activity for some time. In the first part of my presentation I put some qualifications which might interest you and I've been involved in the banking business and a number of entrepreneurial companies.

Sharwood and Co is an investment bank which basically grows companies. We're in the entrepreneurial financing business and we find equity and debt for small and medium-sized, rapidly growing companies and we've financed over 100 over the past decade. I'm also the founding chairman, as you will see, of the Canadian Association of Family Enterprises, which is a burgeoning organization which assists family companies in dealing with succession problems, some of which involve financing the transfer from one generation to another due to the tax issues.

I'd also point out that I've been involved in issues like this for some time. I was involved with the federal government in examining a reinsurance scheme like the National Housing Act to be applied to small-business and medium-sized-business loans. We actually passed a law, but it's one of those interesting things, which I think this legislation may suffer from, where the law gets passed and it never gets used because the pension funds and life insurance companies went into the market directly, finding the cost of insurance was not worth the losses they were taking. The recent recession might possibly change their minds. I've been involved in advising the Ontario investment fund, and various communities have talked to me about their own initiatives.

I want to make two major points. I'm going to really talk from the summary, which is at the front of the material I've given you. I think I would say, paying great homage to the Calmeadow Foundation which, as you have grasped, is in the micro-lending business, which is a very niche-market kind of business, that I would argue that no market survey I have looked at shows there's a real problem with debt in this country. I've looked at it over and over again. The anecdotes are marvellous, but when you examine the actual cases, you will find that in case after case the person who is complaining about the banks is really asking for the banks to lend equity, which is an oxymoron. You cannot lend equity.

It's true that entrepreneurs don't take corporate finance in school and that the dividing line between debt and equity is a bit of an art and not a science, but the evidence is that over and over again Canadian companies are overleveraged compared with US companies. You'll have that; you see that in the appendices that I've produced here.

RoyNat is an interesting example. They went down to make term loans in the US and they find that all their US customers are less leveraged, they get less out of the banks than Canadian banks. They lend to midsized companies in Canada, as you probably know, and are one of the major factors in the market, with $2 billion in loans outstanding.

I am going to say that the case is not proven and I have seen no market research that says there should be any need for any debt assistance, apart from things like the New Ventures loan, which I think is a superb program. I've been a big supporter ever since David MacKinnon introduced it. But otherwise I am not going to spend any time on that. If you want to ask me some more questions about that, I'd be delighted.

I will then turn around to address the so-called equity gap, and I believe there is an equity gap. I deal with it both in some of the material and in the text. The problem I'm having is that I think a guarantee as is proposed for an equity investment is, again, a contradiction in terms. The very word "equity" denotes risk. You're asking the Ontario citizen who puts up money not to take any risk because there's a government guarantee behind it.

I've examined this over a long period. The problem about all these kinds of schemes is that they encourage irresponsibility, just like deposit insurance encourages irresponsibility in small trust companies; they went bankrupt because they made bad loans. I think a guarantee will ensure bad investments, because people will feel they have nothing to lose, so they'll put the money out. If the government wants to guarantee equity, why doesn't it do it directly and put money directly into the scheme rather than sucking in a bunch of citizens to put up $25,000 or $10,000 and then put the thing in, collect -- the mechanism is mind-boggling.


I will be prepared to answer more questions, but I've really not treated that in very great depth because I don't know where the scheme came from. I don't believe it's based in reality.

I would now like to turn to the issue of community development, and maybe you might quickly look at page 6 of the presentation, at the bottom of the page. I think that, going back to the previous presentation, one of the things that is an issue for me is the word "ambition." I think government programs have to make a choice as to whether or not they're going to back people who are building world-class enterprises or whether or not they're going to back people to create jobs in micro- enterprises selling to the local economy.

This legislation doesn't make that choice. The federal studies have, and I've been involved with them and they're going to back world-class companies and they're not going to back their community venture programs micro-enterprises. They've made that philosophical decision.

Look at the new business starts at the bottom of page 6. We can't get these statistics in Canada. Nobody keeps them. You ask a community like Windsor or Waterloo or Hamilton who the rapidly growing entrepreneurs in their community are, they have no evidence. It's all anecdotal. "We think that so-and-so is doing pretty well." In the US these communities keep track of their fast-rising stars. We don't. Communities have no record of business starts. People don't know what's going on in their communities and I've been pushing for them to keep statistics.

The point I'm making is that I think we have to make a decision when we're putting a scheme into place as to whether or not we are going to support owner-managers who are selling to the local community or whether or not we are going to support the rising stars which are going to build world-class companies, and you'll see on page 8 the importance of this.

On the bottom of the page, you will see the average salaries. This is 1987, but I have no reason to believe that these figures are changed in terms of the gap between the amounts paid to small companies and the amount paid to mid-sized companies. What I see in communities is the importance of promoting organic growth from the entrepreneurs in the community and moving them up to be mid-sized companies and larger companies and they will pay more. To me, that is where my priorities lie and what I do as a living, of course, is to build these kinds of companies in world class.

I use the example -- I made a speech at Our Local Economy network -- of my son. I financed my son to start a restaurant in Spadina village called the Village Idiot which I always say is named after the fellow who backed him. He'll be happy as a clam if he makes sales of $300,000. At the very same time, I was financing a fellow the same age, 24, and he's in the software business. His first year sales were $2 million, all export, and he's moved to $6 million and next year he's going to do $15 million.

Somebody came up to me after the meeting and said, "Gee, you were hard on your son." I said: "No. One is equally as valid as the other, but the fellow we can take more risks and put more support behind is the fellow who's going to build the world-class company that we win." If my son goes down the tube with his restaurant, he may have a supporter who might help him out, but a lot of small enterprises when they go bankrupt, the entrepreneur, the owner-manager, is on welfare. If you finance a Waterloo computer engineer and he goes bankrupt and he wants to build a $100-million company, he can probably find another job or start a business again because his self-esteem won't be quite so destroyed. So you have to be careful, I think, in making the distinctions.

Somebody asked me whether or not you had to have a psychiatric test, which is one -- and that people do start small businesses and grow them. I can tell you that many of the small business operators, even if you go back to Frank Stronach when he started here, and you just spent half an hour talking to him, you would have known that he would have built a world-class business.

I think, going back to my summary, just to close off, I really summarize in the middle of the page that you need in a community an inventory of rapidly growing businesses so you can construct that table I have on page 6. You need an infrastructure and this is a very difficult issue. When somebody comes in with a small business and says, "I need some help, some accounting" -- and it's a challenge that you might want to put to Larry Zepf this afternoon because I've had numerous debates with him -- how do you make the distinction at that stage between whether or not he gets -- if he is government-subsidized, the government can't turn anybody away, so it has to help him, the fellow who has a dry-cleaning store, one store, with his accounting and his business plan, as well as the fellow who wants to build a large company. It's interesting that the feds have backed away from that, because they don't want to make that choice. It's difficult for a government to make that choice. We have to think a lot about that.

The Ottawa-Carleton Economic Development Corp, because it's sufficiently funded by the private sector, does make that choice in its inventory. I hope you've seen the Ottawa-Carleton inventory. Their matching service is the best in this province. Alberta has one. It's something that we really should support every community in this province to do.

Then, of course, the venture capital fund; I talked about that.

On the second page of my summary you will see I've talked about some rules. These rules are important. I think you have to have critical mass. I think a fund of half a million dollars or $350,000 or $200,000 is crazy. How many investments are you going to put out? Again, it depends on whether or not you're backing the little guys or the big guys. I think it's very important that there be a co-investment rule. There are more cons around when there's money around. I live in the business. I call all my clients maniacs with a vision. Once you accept that they're maniacs trying to make a company grow, you know that they get up to some interesting tricks from time to time in convincing me that I can make the money available to them.

One of the things I think you should be aware of, my view is that most of the people involved in communities are unknowledgeable and naïve about technologies, so they can get conned just as quickly.

The co-investment rule, as I said to the people in Ottawa, the mayor's son may have an inside track, and we want to avoid that at all cost, so a co-investment rule is a good idea. The Federal Business Development Bank does it and I think it's a good idea.

In the text, I talk about eligible business threshold size of investment. Obviously, if you're going to build a fund and put money in, you have to manage the uninvested funds. Who's going to do that? What are the rules? Obviously, Mr Laughren wants it all to be invested temporarily in Ontario government treasury bills pending the investments, but you have to have rules.

I think what I don't see in here is an exit strategy. How do you get the money back? Every venture capitalist, that's the prime thing he's looking at. Is it an IPO, an initial public offering? What is it? Is it redemption of preferred shares? I don't see any discussion of this issue. You put the money out; how do you get it back? That's another reason why you look at it. This is equity. This is not a loan. Shareholders' agreements? This is not discussed anywhere.

As I have said, in all these issues there's no target rate of return. I've discussed that.

Most venture capitalists, and you'll have a chance to ask them this afternoon, say that about a third to a half of the value comes arising out of the after-investment, the monitoring. Who's going to do it? I suggest that you put a senior businessman on the board if this moves ahead in some way, shape or form.

Finally, I talk about in the proposal that I think a properly organized community -- Larry Zepf has done a pretty good job of warming people up. He's been pursuing a tax break with the Department of Finance, which I tell him is an exercise in futility, but he persists. He's a stubborn fellow. I give him credit. I think the investors -- he's got Mutual Life. In any community, there are large companies and I think those are the kinds of people who should put the money up. In the discussions in Windsor, I've had discussions with them about getting the Chrysler pension fund to put the money in, and in Hamilton you can get Stelco and Dofasco. Those sorts of things can be done and that's the direction I think the money should come from rather than guaranteed investments from small people guaranteed by the province. Those people will be prepared to take the risk.

Mr White: I certainly would defer to other questions as well, but I was quite impressed with your presentation, Mr Sharwood, some of the very issues that I've been involved with in my community in terms of what is it that we're best at doing, what is it that Durham region is best at, where can we best be using our resources? Fortunately, we have something of an economic development committee starting now and it's a secured funding.


I was very impressed that in the United States there is a wealth of information in regard to the nature of the investment and the growth industries in those various areas. Some of the articles you have in your appendix certainly indicate that if you are a company in this area, these are the areas to go as opposed to everyone should be doing everything.

Certainly a good deal of what a community economic development corporation would be doing would be that very kind of assessment planning inventory, as you mentioned, in the Ottawa-Carleton area. Do we have other, more global experience, a more wide-ranging experience in Ontario that you're familiar with in terms of that strategizing?

Mr Sharwood: The answer to that -- as far as I know, not. Ottawa-Carleton has been going now for some time and it arose out of a peculiarity of the Ottawa community. There's a fellow up there called Denzil Doyle who is a remarkable character, and Michael Coupland and Terry Matthews got to be rich. What happens is they pass the hat around in Ottawa, and they got used to passing the hat around for deals and they fund a lot of software companies, but they've now run out of that money. But they got that together, and of course out of Kanata, and as you know, that's one of the major growth centres.

The unemployment rate is lower in Ottawa than it is in any other major community, and that's not because of the growth of the federal government.

Mr Daigeler: Not so much any more.

Mr Sharwood: Well, it's still better.

Mr Wiseman: There are the 6,000 new jobs they've created going the wrong way.

Mr White: I just want to go further a little bit on that because the issue that Mr Sharwood brings up obviously is that, from a community economic development corporation which might be sponsored partly by the municipality, there may be the follow-through in assists and community loan funds, but of course that community economic development corporation might be sponsoring moves towards other branches of government in terms of venture loans, in terms of other financial institutions. They might be going, in the situations that you suggest, to Innovation Ontario or other arms of government that aren't, of course, under the Ministry of Municipal Affairs.

So I just wanted to suggest that what the legislation does is set in place the opportunity for those community economic development corporations and those planning bodies, as has happened in Burlington and elsewhere to be operative, but where they go isn't necessarily the point in the legislation. All the legislation does with the CLF and CISCs is to say these additional mechanisms, but Innovation Ontario and other areas might be better suited -- we don't want to duplicate again what's already been established there -- to the kinds of organizations and the kinds of venture capitalists you've described.

Mr Sharwood: Thank goodness we're now getting out of the period, almost, where the major role of the community economic development is what I call industrial development. You buy a park and you try to attract Toyota to come in and put a plant there.

If you read the material, you'll find that organic growth has been the best growth, that spending your time flying around the world, trying to attract major companies is a waste of time -- not a total waste of time, but it's misdirected -- and the communities that had the best growth are the ones that have looked at supporting their existing entrepreneurs.

What worries me is what I see out there, that the people who run those organizations, there has to be some kind of -- they should be privatized. Ottawa works because Brenda Valois is the most remarkable person and they're very lucky to have her there, but most of what I see in these corporations is run by people who don't know much about what they're doing. They get conned by the entrepreneurs easily, because there are lots of them around, and they're not knowledgeable. That's what worries me; they lead with their chin. It's this knowledge base and how do we make use of that knowledge base?

In this particular document, I suggest that you do have a centralized due diligence process. Due diligence is clearly the key to this kind of thing. It's easy to sort of say, "We'll take a retired Royal Bank manager and put him in charge of the community fund in Windsor," but (a) he's a banker, and bankers are not good venture capitalists. That's why the bank venture capital arms never work. The committee is always the senior bankers who look at things like a credit instead of a venture capital investment.

So those people who are looking at the equity requirements are different than bankers, and it's fine, as I say -- you have a man of integrity, obviously, if you've got a retired banker, but he's not going to be able to have the skills to say, as I do with all the guys who sit in my office, "You're a maniac with a vision here; you want to build a company."

If you're going to promote local enterprise and help the people open dry cleaning stores and flower shops on the main street of town, fine, but there are lots of misfires in the business of rapidly growing companies and you've got to accept that you will lose money, that some of them are going to go bankrupt. The history of venture capital is that you get, as I say in the document, one winner, three what we call "living dead" that never are going to go anywhere and your big problem is to get out of them, basically, and one big loser. That's the statistics, and if you aren't doing that, you aren't doing the job. You must accept, just like an insurance company, that you're going to have some deaths.

I don't know how you train community people to do that, to think of things that way. It's a very distinct kind of difference of approach.

Mr Daigeler: Thank you for a great presentation that puts a different perspective on what we have before us, and also for an excellent document. I look forward to reading it with a little bit more leisure.

How did you hear about the committee meetings? Did you see the advertisement or were you contacted?

Mr Sharwood: I was contacted. I think it's fairly widely known that I have some interest in this area.

Mr Daigeler: Okay.

Mr Sharwood: I may say that nobody contacted me from the government bureaucracy, ever.

Mr Daigeler: I've been sitting through these hearings now and have looked at the material. I think the way we have to look at this, and I think that's what the government wants to do, is as a social policy initiative, not an economic policy initiative.

The government probably will argue that this also has an economic impact and so on, but I think primarily I have come to the conclusion that this is an effort, and I see some reason for it, to, I guess, keep people off the welfare rolls -- there would be a cost there too -- and they'd rather take the chance of investing some money there on the possibility that it might work than simply paying out in other ways. So really it is perhaps not appropriate to apply the economic criteria that you're coming from and that in my opinion, of course, are the only ones that will pull this province out of its economic problem. That is perhaps why the government is limiting the amount of money available for this project to a relatively small amount.

I would be worried if this were the only economic initiative being put forward by the government. In fact, I'm still waiting for others that really fall more in line with what you're saying: "How can we really provide the venture capital for those who will be internationally competitive?" But I think this really goes far beyond as to what this particular initiative tries to achieve, which I think is probably just a social -- well, perhaps "just" is the wrong word, but which is really more a social policy initiative than an economic initiative.

Do you care to comment on that?

Mr Sharwood: I have no difficulty with that. I think there's validity to the social lending side. You've heard from Calmeadow, and I was a director of the Federal Business Development Bank for a while. They do a lot of that kind of lending in small towns, and I tried to make them see the same distinction that I saw in this. If you give people money -- it's too easy sometimes to give the small businessman money and the returns aren't there if you invest in them. I talk about rate of return in my document. If you invest in a dry cleaning store on the main street of Timmins, you're not going to get a rate of return which is high enough to attract an outside investor.


We do a lot of this kind of thing. I mention, and you might want to talk to, Rein Peterson. He did a study of startups in 12 countries with Joel Shulman, who was a professor at Berkeley about 10 years ago, and 90% of the startup money comes from individuals: Molly money, we call it.

I think if an entrepreneur can't convince his relations or the lawyer in town and the dentist to put money behind him, then he's not much of an entrepreneur. So you've got to question where you cross the line between -- I mean, Windsor had a scheme where if you were on unemployment for six months, they'd give you $5,000 if you wanted to start a business. I said: "Gee, how many bankruptcies are going to arise out of that? I think it's a highly dangerous thing." They went ahead and did it and they got what they asked. They got a lot of poor people -- I mean "poor" in the sense of their mental space, because they didn't succeed in the businesses that they tried. Willing though they may be, they weren't business people.

So this is the issue that you have. You have to be very careful in this micro-lending to not lead people into jobs, into running businesses they don't know how to run. Then they really get dashed in their self-esteem, and that's the part that concerns me most. You do good and you end up doing bad because you've given people money for something they really can't do. Some of that goes on in the venture loans. If you talk to the ODC, they are very conscious of that problem.

Mr David Johnson: If this legislation were to go through exactly as it is here today and if you were to look down the road several years, what in your estimation would be the outcome? For example, what sort of takeup would there be for investors investing in the share corporation?

Mr Sharwood: I think it wouldn't go anywhere. My frank view of this would be a damp squib. It wouldn't go anywhere. There would be very little money go in. You've got some insight into the administrative costs of these small funds -- they're huge -- from the Calmeadow people, and I'm fully conscious of their activities. There's a huge amount of nursing that goes one around this, and I don't know how much the government wants to subsidize that kind of thing.

It's like the SBDC legislation in this province. I said to Frank Miller, when he conceived that: "This is made for the funeral director and the gas station operator in Wawa to invest in the kitchen table company, because you have to give the money back if you grow." I think what I'm pushing out at this committee is to think about whether or not it's worth while doing this, whether more informal mechanisms might work better, and that there's a lot of social judgement that you're putting in encouraging people to go into business.

Mr David Johnson: Let me skip to that sort of line, then, because I'm not really sure -- you've raised a lot of problems and, hearing you, I think it's wonderful advice you're giving us, but what would you do with this? I mean, it sounds like you scrap it and start all over again. Would you?

Mr Sharwood: Yes, I would. I think there's very little left in this scheme. I don't know where it came from, who did the studies. I have no idea. I have been unable to get any copies of any studies which led them to the conclusion that this would be a useful instrument.

Mr David Johnson: You're talking both from the share corporation and the loan fund, the whole thing?

Mr Sharwood: If you take away the guarantee, I think you could turn the share corporation into something useful. I don't see the debt side.

Mr David Johnson: If people did come forward and invest, notwithstanding that you feel that they won't --

Mr Sharwood: Well, I think there will be people --

Mr David Johnson: You'd get some, sure.

Mr Sharwood: Yes, sure.

Mr David Johnson: Then with the mechanisms that are in place right now, what sort of rate of success would you expect in terms of the investments that would be put into whatever kind of businesses they're going to invest in? What sort of success would you see and what sort of --

Mr Sharwood: I think it's hard to predict. One of the reasons is that if you look at all these list of questions that I've raised about minimum size and diversity, they're not answered in the legislation.

Mr David Johnson: My guess is it's going to be up to the local board to decide that. So you can pull it out of the air, whatever they -- so from your experience, what will happen?

Mr Sharwood: We've had lots of history of these sorts of things having very bad records.

Mr David Johnson: And the rate of return on the investment would be?

Mr Sharwood: Very low.

Mr David Johnson: Very low. And in terms of the government guarantees, there's a $20-million guarantee in this whole thing. Would you expect that this would have to be invoked?

Mr Sharwood: Yes.

Mr David Johnson: You mentioned that you have maniacs on a mission or something --

Mr Sharwood: With a vision. It may be the same thing as a mission. Who knows?

Mr David Johnson: What sort of cons would you expect them to try to pull? What sort of devious -- or would it just be being overly optimistic?

Mr Sharwood: There has recently been a major scam pulled on the rich people in London, Ontario, which resulted in a senior partner of Coopers and Lybrand being removed from his job. They all got conned by a guy who said he had a hedge fund and they kept putting money in. It was what we in the business call a Ponzi scheme; it was using the new money to pay returns on the old money.

Mr David Johnson: You're talking about illegal --

Mr Sharwood: These are sophisticated people with Coopers and Lybrand in there. The names of the people who were conned out of $60 million are a Who's Who of London, and you would never think that they'd get conned into that kind of thing.

Mr Hope: That was a perception, though.

Mr Sharwood: You can have that going on with much less sophisticated people.

Mr Hope: Instead of indicating Who's Who, why not just the normal individuals? I understand where you're coming from, but I think you might be carrying a personal view here.

The Chair: Thank you, Mr Sharwood, for appearing before us. You've given the committee a lot to think about in the clause-by-clause deliberations next week.

The committee recessed from 1207 to 1412.

The Chair: The committee will come to order.

Mr Grandmaître: I would like to ask the parliamentary assistant a question. Can you tell me who initiated this program? Was it the Minister of Municipal Affairs or was it the Ministry of Finance people? Was it a combination? Who initiated this program? I'll tell you why I'm asking this question after.

Mr White: I believe it was the government of Ontario that initiated the program, but if you're asking which specific ministry has been involved, I would suggest to you that --

Mr Grandmaître: I know it's the government of Ontario.

Mr White: -- both the Ministry of Economic Development and Trade and the Ministry of Municipal Affairs have been involved.

Mr David Johnson: Nobody wants to 'fess up.

Mr Grandmaître: Maybe my second question will be out of order, Mr Chair, but I don't want to give a hint. I've just received a news release from Frances Lankin -- I suppose everybody received a copy --

Mr Norm Jamison (Norfolk): No. Can I read that?

Mr Grandmaître: -- creating the Ontario Investment Service. Are you aware of this?

Mr White: Of the news release or the Ontario Investment Service?

Mr Grandmaître: Both. Apparently this Ontario Investment Service was, let's say, invented or created by the Premier's Council on Economic Renewal's task force on investment. Is it the Premier's council task force on investment that created Bill 40 or this program? Is this a fair question? I think so.

Mr White: Bill 40 was clearly something that was spelled out by the Ministry of Municipal Affairs. But the issue of the Premier's task force and the existence of economic development initiatives in both of the ministries I've described I think have some long standing. I'd ask Ms Melnyk to comment on that.

Ms Tania Melnyk: The community economic development initiative is a priority, I believe a signature priority, of this government. The involvement of Municipal Affairs in this particular initiative comes very much from a community development orientation. We have formulated many of the initiatives around the issue of bringing the municipality closer to the community table and involving the municipal sector more closely with the various community groups in the various areas. The concept covers not only geographic communities but also what we call communities of interest, so that there is an opportunity for some of these initiatives to be accessed not only by municipalities but by community groups, as we heard yesterday, like the Kensington Market Review Committee, which obviously has some very real priorities that it wants to get off the ground.

Mr Grandmaître: Is it by the task force on investment?

Ms Melnyk: It didn't come from that orientation, as far as I know. There has been interest in doing community-based economic development for a while, and this was built up. The former minister had a very active interest in it. The current minister had a very active interest -- he still has -- in economic development. You probably are aware that there is a now an interministerial approach to this whole initiative, and our piece of it comes from bringing the municipal sector to the table.

Mr Grandmaître: I'm not trying to compare the Ontario Investment Service to Bill 40, because it's not the same thing. What I'm trying to get out of staff and also the parliamentary assistant is what coordination there is when this government talks about investment. I realize that Municipal Affairs has an interest -- municipal communities and so and so forth -- but what's the umbrella? Is it the Premier's council task force on investment or everybody has a dream?

Ms Melnyk: I think it's important to distinguish between broad industrial strategy and community-based economic development. There is a difference.

Mr Grandmaître: Oh, yes.

Ms Melnyk: I think the investment strategy is in the broad industrial area.

Mr Grandmaître: But there's no godfather to this investment program?

Ms Melnyk: I would presume it's with the Ministry of Economic Development and Trade.

Mr White: I would just suggest that the overall vision of which this a part, and a significant part, in terms of providing legislative mechanisms, comes not from one ministry alone but as a significant part of the government's vision. I'm sure Mr Jamison can comment on that as well, given his lengthy experience.

Mr Jamison: The question really deals with a number of issues. The Premier's councils, which were around during your party's tenure in government, were there to advise and to express their concerns and their ideas about direction in general terms. Where they sat together for any period of time to come up with a consensus, that would be put forward to government, and government would consider those issues put forward by the Premier's councils. There was some good work done with certain Premier's councils during the tenure of the Liberals and there's been good work done during our tenure in that area. When those ideas are brought forward, a lead ministry is chosen to head a certain thrust on a subject pertaining to legislation or, for that matter, regulations. That ministry takes the lead, but that doesn't mean it is the only ministry to be involved in developing the legislation in practical terms to go forward in what we hope will be a very workable way to initiate what could be thoughts coming from the Premier's council, which advises the Premier directly, as you all know.

Mr Grandmaître: That's my question.

Mr Jamison: The process then would go from those ministries, as you're well aware, being a past minister in the previous government, to cabinet for consideration and dialogue and discussion.

Mr Grandmaître: I realize that.

Mr Jamison: I understand that is the process, involving some caucus consideration along the way.

Mr Grandmaître: I can understand this process, but my original question was, was the Premier's council task force on investment involved in -- not the formulation of Bill 40, but was the idea born at that level?

Ms Melnyk: It wasn't perhaps born at that level, but I have been involved with the Premier's council. I have been serving on one of their working groups, so I have been involved with that.

Mr Grandmaître: Good.

Ms Melnyk: I've made them aware of some of the thinking coming from our side of the equation.

Mr Grandmaître: So you were involved with the Premier's task force?

Ms Melnyk: Yes.

Mr Grandmaître: This program was not initiated, though, by the task force?

Ms Melnyk: They made a number of recommendations to government that have been acted upon, primarily in the Ministry of Economic Development and Trade, one of which is, I believe, the investment service. I'm not aware of this initiative coming from the Premier's council as a specific recommendation.

Mr Grandmaître: I hope you can see where I'm coming from; I'm trying to find out who's doing what to whom and who's in charge.

Mr George Mammoliti (Yorkview): Why?

Mr Grandmaître: I think it's important, because I want to know the real direction of the government.

The Chair: Any further technical questions that should not wait till clause-by-clause consideration? If not, I will advise the committee that unfortunately our list of presenters has evaporated or cancelled out for this afternoon, so we will see everyone tomorrow at 10 am.

The committee adjourned at 1423.