The failures of a closely watched savior

BRUCE WALLACE August 19 1985

The failures of a closely watched savior

BRUCE WALLACE August 19 1985

The failures of a closely watched savior

For Terry Johnson, a rancher and owner of a road construction company in Oliver, B.C., it was the unhappy climax of a long and bitter relationship. Last week Johnson signed an agreement to sell his 460-acre cattle farm 10 km south of Penticton. With that, he ended a stormy four-year association with the Federal Business Development Bank (FBDB), the Montrealbased Crown corporation that acts as a lender of last resort to small businesses. In 1981 Johnson used his $1.2-million ranch as collateral for a $140,000 loan at 21-per-cent interest from the bank in order to buy Willowbrook Construction Ltd., a roadwork company operating in the south Okanagan Valley. But the business started to weaken in 1982, and in January, 1984, with the FBDB unwilling to renegotiate the loan and about to foreclose on the ranch, Johnson was forced to begin attempts to sell it. Said Johnson: “I had a buyer willing to pay $230,000 last April, but the bank would not take that. Now we have sold to the same people for $180,000.” Johnson added, “I felt that the FBDB was there to break me.”

To many critics Johnson’s difficulties symbolize the bank’s current estrangement from small business—the very sector it was set up to serve. Indeed, the FBDB’S leading critics come from the

small-business community itself. The Canadian Organization of Small Business recently reported that 69 per cent of its members who responded to a survey said that the FBDB should either close or be sold to private interests. Declared Geoffrey Hale, vice-president of the 6,000-member group: “The FBDB has outlived its usefulness to the enormous majority of small businesses.” Added John Bulloch, president of the 72,000-member Canadian Federation of Independent Business: “We are now totally convinced that the bank should be privatized.”

In an attempt to reduce _

massive losses on loans to high-risk small companies, the FBDB has angered many business groups by showing an increasing willingness to force the closure of operations that default on loan payments. At the same time, in order to avoid further losses the FBDB has made more loans to stable, medium-sized companies and cut back drastically on loans to smaller firms. And by lending larger amounts, its critics charge, the FBDB is competing with private lending institutions which

it was not intended to do.

Conservative MPs, many of whom are philosophically opposed to the involvement of a government lending agency, pose the main threat to the continued existence of the 41-year-old institution. Indeed, Liberal MPs last month made public a government document that argued that the FBDB’S lending function should be terminated and the bank’s loan portfolio sold off. The document appeared to be a report of decisions made by the Tory cabinet’s powerful priorities and planning committee. For his part, Minister of State for Small

_ Businesses André Bisson-

nette, one of three ministers to whom the FBDB reports, has often stood alone in defending the bank, and he has delayed making his final recommendation on a new mandate for the Crown corporation until later this summer. Declared Bissonnette, who built a small chicken farm in Saint-Jean, Que., into a multimilliondollar business before entering politics last year: “I believe a bank such as this is a useful instrument for the Canadian government.” FBDB president Guy Lavi-

gueur, 48, has avoided a public war of words with his critics. Instead, Lavigueur—who served as assistant deputy minister in the federal industry, trade and commerce department in 1975—has quietly lobbied the Tory government to save the bank. Colleagues also credit Lavigueur with guiding the FBDB through its financial crisis of the past five years. The bank operated without a loss from its inception in 1944 until 1979. Then, largely as a result of the recession, it lost $299.7 million between 1979 and 1984 on bad loans.

Lavigueur responded by reducing staff by 57 per cent from 1980 levels and closing six branch offices. Last year administrative costs were cut back by 19 per cent, a saving attained partly by firing almost one-quarter of the bank’s 1,200 lending officers. As a result, the bank posted a profit on its loan operations of $932,000—its first in five years —for the fiscal year that ended last March. The cuts have clearly taken a toll on Lavigueur. “We sweated through a lot of long days and sleepless nights,” he told Maclean's. “But we have come through it and we are ready to take on whatever job Ottawa gives us to do.”

Still, the resolution of the FBDB’S most pressing financial worries has not decreased the widespread hostility directed at it. That is largely a result of its abandonment of its traditional smallcompany market. In 1980 loans of less than $50,000 accounted for about 75 per cent of the total number of FBDB loans and 31 per cent of the dollar value of the bank’s lending. Last year only one-third of FBDB loans were for less than $50,000, and they made up only five per cent of the bank’s total portfolio.

By lending larger amounts to bigger clients, the FBDB, which charges on average two percentage points above the prime lending rate, has attracted complaints that it is competing unfairly with chartered banks and other lenders. Said John Thompson, president of Montreal-based term lender RoyNat Inc.: “We have lost business to them, and we think a Crown corporation should not be competing with the private sector.” But FBDB officials insist that most FBDB customers have first been refused loans by private institutions.

Small-business leaders are convinced, however, that there are more efficient ways of serving their financing needs. The Small Business Loans Act (SBLA) of 1961 provides government-guaranteed loans of as much as $100,000 to small businesses at the prime rate plus one per cent and is administered through the chartered banks. If the lender cannot repay the loan, Ottawa covers 85 per cent of the loss. James Hatch, a University of Western Ontario business professor who recently conducted a study on loan programs for the Canadian Bank-

ers’ Association, pointed out that businesses can get SBLA loans through any of the chartered banks’ 7,000 branches from “thousands of bankers who are closer to the small-businessman on a day-to-day basis” than are the loan officers in the FBDB’S 88 offices.

Still, the FBDB has its defenders. Even some of its critics support the bank’s

extensive small-business counselling services, which are available to its customers for a small fee. Said Hatch: “It is a very useful function. Small business often has slack management.” Added Kenneth Lord, a 26-year-old mechanic who used the FBDB’S counselling service in June when he bought West Coast Marine, a small outboard-motor repair

shop in Port Moody, B.C.: “It _

cost $120 and was well worth it. In fact, I just signed up for another $200 worth so my wife and I can learn how to do the books.”

The bank’s supporters also say that the FBDB is more flexible than private banks. Said Robert Ahoy, president of Ahoy Industrial Corp., a truck parts manufacturer in Vancouver:

“When I started my company 14 years ago with nothing, I borrowed the first $25,000 from the FBDB. If you only have a dollar and need $100,000, you are not

going to get the money anywhere else.” Added Robert Chevrier, president of Westhill Industries Inc. of Montreal, a holding company which has borrowed from the FBDB when things started to go sour: “You really have to go down the drain for the FBDB to get on your back.” The FBDB’S strongest support comes from Quebec, where business groups have been vocal in their backing of the federal bank. The reason: the FBDB’S Montreal head office has always been closely attuned to the needs of Quebec’s smalland medium-sized firms. Declared André Vallerand, executive vice-president of the Montreal Chamber of Commerce: “We are worried that the Tories will bring back the federal bank in a new guise and locate the head office in Toronto.”

Opposition MPs in Ottawa say that taking away the FBDB’S ability to make loans would eliminate one of Ottawa’s most effective tools for regional economic development. WinnipegFort Garry MP Lloyd Axworthy, one of the three Liberals who obtained the FBDB document, declared that abolishing the bank’s lending function would “signal that this government no longer believes in stimulating regional development.” Indeed, the promotion of regional development has been a function of the FBDB since it was established in 1944 as the Industrial Development Bank.

The bank has lent over $8 billion to more than 120,000 smalland medium-sized firms—many of them in the tourist and manufacturing sectors _ —since its inception. Declared Lavigueur: “Nobody knows the daily ins and outs of small business like we do.” Still, the bank’s record may not prevent its dismemberment. Terry Johnson, for one, would have no regrets. Said Johnson, who now has a smaller ranch 100 km from the farm he was forced to sell: “I would never go back to them again.”