Cost-Benefit Analysis of the Canada Small Business ......for Canadian small and medium-sized enterprises (SMEs). CSBFP reduces the risks of loan losses to lenders ... by sharing default

Cost-Benefit Analysis of the Canada Small Business Financing Program

January 2015

Small Business Branch Reseach and Analysis Directorate

Daniel Seenswww.

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Aussi offert en français sous le titre Analyse coûts-avantages du Programme de financement des petites entreprises du Canada, janvier 2015.

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i

Contents

1. Introduction .........................................................................................................................................1

1.1 Aims of the Study ................................................................................................................................... 1

1.2 Scope of the Project ................................................................................................................................ 1

2. Canada Small Business Financing Program (CSBFP) ....................................................................2

2.1 History .................................................................................................................................................... 22.2 Program Details ...................................................................................................................................... 2

3. Empirical Framework ........................................................................................................................3

3.1 Data and Variables of Analysis ............................................................................................................... 33.1.1 Model Variables ........................................................................................................................ 4

3.2 Estimation Process ................................................................................................................................. 4

4. Estimated Costs of the CSBF Program .............................................................................................5

4.1 SalariesandBenefitsofStaffAdministeringtheCSBFProgram .......................................................... 54.2DirectOperatingExpendituresoftheCSBFP ........................................................................................ 64.3CapitalExpenditures .............................................................................................................................. 84.4NumberofClaimsandClaimsPaidonLoanDefaults .......................................................................... 84.5LoanDefaultCosttoLenders .............................................................................................................. 13

5. Estimated Benefits of the CSBF Program .......................................................................................14

5.1AdministrativeExpendituresbyLenders(Salaries,Wages,andBenefits) .......................................... 145.2DirectOperatingExpendituresbyLenders .......................................................................................... 155.3 InterestRevenuesonLoans .................................................................................................................. 155.4 ProfitsforCSBFPBorrowers ............................................................................................................... 175.5EmploymentCreationandSalariesandWagesPaidbyBorrowers ..................................................... 175.6DirectGDPImpactsofExpendituresbyCSBFPBorrowers ............................................................... 205.7 IndirectGDPImpactsofExpendituresbyCSBFPBorrowers ............................................................. 225.8AdministrationandRegistrationFeesPaidbyBorrowerstoIndustryCanada .................................... 25

6. Estimated Net Program Benefits .....................................................................................................28

7. Sensitivity Analysis............................................................................................................................31

8. Conclusion .........................................................................................................................................32

1 Cost-Benefit Analysis of the Canada Small Business Financing Program—January 2015

1. Introduction

1.1 Aims of the Study

This study has 4 objectives: $ MeasurethecostofresourcesdevotedtoadministeringtheCanadaSmallBusinessFinancingProgram(CSBFP); $ Measurethedirectandindirecteconomicbenefitsthatresultfromtheprogramthatmightnototherwiseaccruetotheeconomyintheabsenceoftheprogram;

$ Calculateprogramnetbenefits/costs;and $ Performasensitivityanalysistodeterminethelowerandupperboundsofprogramnetbenefits/costs.

Thereportisorganizedinto7sections.Section1outlinestheaimsofthestudyandscopeoftheproject.InSection2,thehistoryoftheCSBFPandprogramdetailsaresummarised.InSection3,anempiricalframeworkformeasuringprogramcosts/benefitsispresented.Section4andSection5aredevotedtoassessingcostandbenefitsrespectively.Finally,Section6showcasesthenetbenefitsoftheprogramandSection7presentsasensitivityanalysis.Section 8 is the conclusion.

1.2 Scope of the Project

TheprojectisareviewoftheCSBFP,agovernmentfundedprogramdesignedtosupportaccesstofinancingforCanadiansmallandmedium-sizedenterprises(SMEs).CSBFPreducestherisksofloanlossestolendersby agreeing to cover lenders for up to 85% of the value of defaulted loans. The program is partially funded through loan registration and administration fees. The remainder is funded through government contributions.

Inthisanalysis,thefollowingelementsareconsidered: $ DifferentprovidersofSMEfinancing,namelybanks,creditunionsandCaissespopulaires; $ Financingforequipment,leaseholdimprovements,softwareandrealproperty; $ Numberandvalueofloansinsured; $ LocationofSMEloansinsuredacrossCanadaand,whereapplicable,presentsevidencebysectororregion;and $ The2003/2004to2011/2012timeperiod.

Methodologicalproceduresandassumptionsofthe2009KPMGCost/Benefitanalysisaremaintainedtoensure consistency and preserve comparability through time.

ThestudywasconductedbytheSmallBusinessBranchofIndustryCanada.Itisintendedtoformonepieceofalargerbodyofinformationreliedonbygovernmenttoimprovetheevaluationoftheprogram.InaccordancewiththeCanada Small Business Financing Act,italsoformspartoftheComprehensiveReviewReporttoParliament.

2Cost-Benefit Analysis of the Canada Small Business Financing Program—January 2015

2. Canada Small Business Financing Program (CSBFP)

2.1 History

WhilesmallbusinessesareanimportantpartoftheCanadianeconomy,theyfaceuniquechallengeswhenitcomestoaccesstofinancing.TheCSBFPisdesignedtohelpbusinesseswiththeirfinancingneedsbyhelpingtofillgapsinthelendingmarketforcertaintypesofSMEsand,inparticular,higher-riskSMEs.

TheprogramwaslaunchedonJanuary19,1961,aspartofajobcreationstrategyandwascalledtheSmallBusinessLoans(SBL)Program.ItcontributedtothedevelopmentofSMEsbypromotingbusinessstart-upandexpansion.Undertheprogram,thegovernmentmadeiteasierforSMEstogetloansfromfinancialinstitutionsbysharingdefaultriskswithlendersand,inparticular,higher-riskSMEs.

Atthattime,onlysevencharteredbanksandfourtypesofbusinessesqualifiedaseligiblelenders/borrowers.Theannualgrossrevenuesofeligibleborrowerscouldnotexceed$250,000andthemaximumloanvaluewas$25,000.Loansprovidedundertheprogramcouldbeusedtofundequipment,aswellasrenovationandimprovementoftheworkplace.Initsfirstyearofexistence,theprogramprovided2,977loans,totalingmorethan$25.5million.Bycomparison,in2011,7,141loanstoSMEswereapproved,foratotalvalueofmorethan$978million.

Astheprogramevolved,parameterswererevisedtobetterreflecteconomicconditions.In1993,themaximumloanamountwasincreasedto$250,000andtheeligibilitycriteriawerebroadenedtomaketheprogramaccessibletomoreSMEs.Inaddition,thenumberoffinancialinstitutionsconsideredeligiblelendersincreasedandthetypesofeligibleenterprisegrewtobetterreflectbusinessneeds.In2009,themaximumloanamountwasagainrevisedfrom$250,000to$500,000,ofwhich$350,000couldbeusedforpurposesotherthanthepurchaseofproperty,includingleaseholdimprovementsandthepurchaseorimprovementofneworusedequipment.

Overall,theprogramhasbecomeakeytoolforstimulatingthegrowthofSMEsinCanada,supportingthedevelopmentofcommunities,creatingjobsandcontributingtoeconomicactivity.Between2003and2011,theCSBFPenabledsmallbusinessestoaccessmorethan81,000loans,representingalmost$9billion.

2.2 Program Details

The program’s main objectives are: $ Tohelpnewbusinessesgetstartedandestablishedfirmstomakeimprovementsandexpand; $ ToimproveaccesstoloansthatwouldnototherwisebeavailabletoSMEs;and $ TostimulateeconomicgrowthandcreatejobsforCanadians.

SMEsoperatingforprofitinCanadawithgrossannualrevenuesof$5millionorlessareeligibletoparticipateintheprogram.Farmingbusinesses,not-for-profitorganizations,charitableandreligiousorganizationsarenoteligible.

Uptoamaximumof$500,000infinancingisavailableforanyoneborrower,ofwhichnomorethan$350,000can be used for purchasing leasehold improvements or improving leased property and purchasing or improving neworusedequipment.

Financialinstitutions,specificallybanks,Caissepopulaires,andcreditunions,delivertheprogram.Thedecisiontograntaloanrestsentirelywiththelender.Thelenderreviewsthebusinessesandmakesdecisionsregardingtheirloanapplications.Ifapproved,thelenderregisterstheloanwiththegovernment.


Loansapprovedundertheprogramcanbeusedforfinancingupto90%ofthecostof: $ Purchasingorimprovingland,realpropertyorimmovables; $ Purchasingneworexistingleaseholdimprovements;and $ Purchasingorimprovingneworusedequipment.

Loanscannotbeusedtofinanceitemssuchasgoodwill,workingcapital,inventories,franchisefeesandresearchand development.

Thecostofusingtheprogramdependsonthefinancialinstitutionwhichgrantstheloan.Theinterestratemaybevariableorfixed.Withvariablerateloans,themaximuminterestratechargedisthelender’sprimerateplus3%.Withfixedrateloans,themaximuminterestratechargedisthelender’ssinglefamilyresidentialmortgagerate plus 3%. A registration fee of 1.25% of the total amount loaned under the program must also be paid by the borrowertothelenderbutcanbefinancedaspartoftheloan.TheregistrationfeeandaportionoftheinterestaresubmittedtoIndustryCanadabythelendertohelpoffsetthegovernment’scostsofrunningtheprogram.Lendersalsohavetheoptiontotakeadditionalsecurityintheassetsfinancedandtorequestanadditionalunsecured personal guarantee for up to 25% of the total amount loaned.

3. Empirical Framework

Inthissection,theempiricalframeworkforcost-benefitanalysisoftheCSBFPispresented.1Insection3.1,data and model variables are discussed and section 3.2 outlines the estimation process.

3.1 Data and Variables of Analysis

TheobjectiveofthisempiricalanalysisistoquantifyandunderstandvariationsovertimeincostsandbenefitsgeneratedforsocietyfromtheCSBFP.Themainbenefitsofinterestarethedirectandindirecteffectsoftheprogramoneconomicactivity,whicharemeasuredbychangesinGDP.Tocapturealleffectsoftheprogram,othervariablesandeconomicactorswiththepotentialtobenefitfromtheprogramhadtobeconsidered.

Thefollowingsourceswereusedtoconductthestudy: $ CSBFProgramDatabase; $ TheEconomicImpactStudyoftheCanadaSmallBusinessFinancingProgram,IndustryCanada,2010and2014;

$ CanadianInput-OutputModel,StatisticsCanada; $ 2009KPMGFinancialInstitutionSurvey; $ StudyoftheEconomicCostsandBenefitsoftheCanadaSmallBusinessFinancingProgram,KPMG,2009; $ BankofCanadaInterestRates;and $ ConsultationswithCSBFprogramstaff.

Datathatfailedqualitycheckstoensureconsistencyandrepresentativenesswasexcludedfromtheanalysis.

1.TheanalysiscoverstheCSBFprogramonlyanddoesnotconsidertheimpactoftheSBLprogram.TheimpactoftheCapitalLeasingPilotProject(CLPP)introducedbetween2002and2007hasalsobeenexcluded.


3.1.1 Model Variables

ThemainquestionofinterestiswhethertheCSBFPgeneratesnetbenefitsforsocietyandifso,howmuch.GDPimpactsareusedasthemainindicatorofprogrambenefits.

ThereareadditionalbenefitsthatresultfromCSBFP-relatedactivitiesandso,thefollowingvariablesareconsidered: $ Expendituresmadebylenderstoadministertheprogramincluding1)salariesandwages;and2)directoperatingexpenditures;

$ Additionalsalariesandwagespaidbyborrowers; $ InterestrevenuesearnedbylendersfromCSBFloans;2 and $ RegistrationandadministrationfeespaidbyborrowerstoIndustryCanada.

ThecostsofresourcesdevotedbyIndustryCanadatoadministertheprogramandcostsbornbyfinancialinstitutionsandborrowersthatwouldotherwisenotbeincurredintheabsenceoftheprogramhavealsobeenconsidered:

$ SalariesofIndustryCanadastaffinvolvedintheadministrationandmanagementoftheCSBFP; $ DirectoperatingexpendituresfortheCSBFPincludingIM/ITleases,travelcosts,supplies,andprofessionalcontracts;

$ CapitalexpendituresincludingpurchasesofITsystemsandothertangibleassets; $ CostsofloandefaultstoIndustryCanada(paymentofclaims);and $ Costsofloandefaultstolenders(loanlosses).

Time period

Forallvariables,datawascollectedfrom2003/2004to2011/2012.

3.2 Estimation Process

Ineconomictheory,ParetoEfficiencyistheprimarybasisuponwhichgovernmentprogramsareevaluated.Paretoefficiencyisattainedwhennoonecanbemadebetterofffromaprogramwithoutmakingsomeoneelseworseofforwhenthosewhogainfromtheprogramcanreasonablycompensatethosewholose,suchthatsocietyisstillleftbetteroffwiththeprogramthanwithout.Suchaprogramissaidtoprovide“ParetoImprovements.”Ineconomictheory,itisgenerallyacceptedthatgovernmentprogramsthatproduceParetoImprovementsshouldbesupportedorimplementedwhilethosethatdonotshouldbeavoided.

Theaimofcost-benefitanalysisistoprovideabasisuponwhichtoassesswhetheraprogramcanprovideParetoImprovements.Ideally,benefitsshouldoutweighcostsandnetbenefitsshouldbemaximized.

Programnetbenefitsaremeasuredbydiscountingprogrambenefitsandcostsovertimebythesocialopportunitycostofcapital.Thiscanbeexpressedasfollows:

NPV = �n

t=1

2.Therewasalackofinformationonkeyinterestratesandcapitalcostmeasureswhenthisstudywasfirstdonein2009—datathatiscriticalforproperlymeasuringsocialcosts.Assuch,asurveyof30financialinstitutionsacrossCanadawasconductedwhichprovidedabetterunderstandingofnetinterestrevenuesgeneratedfromtheprogramforlenders.Giventhattheprimeinterestrate,businessborrowingrates,andyieldsonlong-termgovernmentbondsremainlittlechangedsince2009,itwasnotnecessarytorepeatthesurvey in 2013.

(Bt−Ct ) (1+r) t


WhereBtisthebenefitinyeart,Ct isthecostinyeart,andristhediscountrate.Ingeneral,whenNPV>0,therearepositivenetbenefitsfromaprogram(generatesaParetoImprovement).Ifdecidingbetweendifferentprogramstructures,itisadvisabletoselecttheonethatgeneratesthehighestNPV.

Alternatively,aprogram’sbenefit-costratio(BCR),measuredasthediscountedpresentvalueofprogrambenefitsdividedbythediscountedpresentvalueofprogramcosts,couldbeusedtoassessaprogram.ItprovidesasenseofhowmuchinbenefitsaregeneratedperdollarofcostsandcomplementstheNPVcalculation.Thisisexpressed as:

BCR =

Ideally,theBCRshouldbegreaterthan1.

4. Estimated Cost for the CSBF Program

ThissectionassessesthekeycostoftheCSBFprogram,including: $ Programadministrativecosts(salaries,wages,operatingandmaintenancecosts,andcapitalexpenditures); $ DirectprogramcostsbornbyIndustryCanada(paymentofclaims);and $ Loandefaultcoststolenders.

4.1 Salaries and Benefits of Staff Administering the CSBF Program

Methodology

TodeterminethetotalcostoftheCSBFprogramtothegovernment,itisnecessarytomeasuretheinternalcostsofmanagingandadministeringtheprogram.Thisincludesthecostofsalariesandbenefitspaidtoprogramstaffwhoregisterloans,processclaims,performresearchfunctionsanddevelopprogrampolicies.Specificcostsstudiedandmeasurementprocessesfollowedinclude:

$ Total Salary Costs Attributable to the CSBF Program.DatawasobtainedfromtheSmallBusinessFinancingDirectoratefinancialmanagementsystemforthetimeperiod2003/2004to2011/2012onthetotalsalariesofallstaffwithintheSmallBusinessFinancingDirectorate(SBFD),includingstafffromthefollowingteams:Director’sOffice;CSBFPPolicy/BDC/OECD;EconomicandPolicyAnalysis;Operations;andRegistration,ProgramIntegrityandRevenues.

$ Estimate costs of other staff activities not attributable to the CSBF program.StaffwithintheSmallBusinessFinancingDirectoratealsospentaportionoftheirtimeonactivitiesotherthantheCSBFloanguaranteeprogram.Asaresult,salarycostsofstafftimespentontheseactivitieswasremoved.Inparticular,thecostsofadministeringtheSmallBusinessLoansProgram(SBLP),theCapitalLeasingPilotProject(CLPP),andsupportfortheBusinessDevelopmentBankofCanadahavebeenestimatedandsubtractedfromthetotalSmallBusinessFinancingDirectorate(SBFD)salaries.

�n

Bt

t=1

(1+r) t

�n

Ct

t=1

(1+r) t


$ Estimate corporate management costs.Corporatemanagementcostsandthecostsofseniormanagement(includingDG,ADM,andDM)whooversawCSBFPactivitieswereapproximatedat2percentofsalaries.

$ Estimate employee benefit costs.Totalbenefitswerecalculatedas20percentofsalarycosts.Thisisthestandardbenefitcalculationmethodusedacrossthefederalgovernment.

Findings

Totalsalarycostsaveraged$2.1millionperyearbetween2003/2004and2011/2012tosupportCSBFPrelatedactivities(Figure1).Thisequatedtoatotalcostofabout$19millionovertheevaluationperiod.Therewereminordifferencesinsalarycostsbetweenyearsfrom2003/2004to2009/2010withcostfallingfrom$2millionto$1.9million.However,salary,benefitandmanagementcostsincreasedsharplyin2010/2011.Mostoftheincreasewasattributedtothesigningofnewcollectivebargainingagreements,anorganizationalrestructuring,andone-offcostsrelatedtoseverancepayments.

Figure 1: Total Salary, Benefit and Corporate Management Expenditures of the CSBF Program

Source:InternalCSBFPDatabase.

4.2 Direct Operating Expanditures of the CSBFP

Methodology

Administrativecostsoftheprogramincludeoverheadcosts(suchastrainingforstaff,etc.)anddirectoperatingcosts(suchasresources,products,contracting,andIM/IT).IndustryCanadareportstheseitemstogetherasOperatingandMaintenanceexpenditures(thefollowingcostsdonotaccountforofficespaceleasingprovidedbyPWGSC).

AnnualdatawasobtainedfromtheIndustryCanadafinancialmanagementsystemforthetimeperiod2003/2004to2011/2012onthetotalOperatingandMaintenancebudgetoftheSmallBusinessFinancingDirectorate(SBFD).O&M expenditures include:

$ TransportationandCommunications(includingtravel;postageandfreight;computertelecommunications;andothertelecommunications);

$ Information(includingpublishing,printingandexposition;communicationsprofessionalservices);

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Employee benefit costs

Corporate management costs

Total CSBFP salary costs

2011/20122010/20112009/20102008/20092007/20082006/20072005/20062004/20052003/2004

39 41 42 38 4033 39 54 54

394 413 423 380 398334 389 541 538

1,971 2,066 2,116 1,899 1,9901,671 1,941 2,703 2,692

Expe

nditu

res (

$000

)


$ ProfessionalandSpecialServices(includinglegalservices;training;otherprofessionalservices;hospitality;temporaryhelp;otherspecialservices/fees;translationservices);

$ Rentals; $ Repairsandmaintenance(includingrepairsofbuildings); $ Utilities,materialsandsupplies; $ Othermachineryacquisition(includinginformaticsequipmentandparts;machinery,furnitureandparts);and $ Allotherexpenditures(includingotherexpenditures;accountspayableinterest).O&MannualexpenditureswereadjustedtoincludeonlytheshareofcostsattributedtotheCSBFP.Thatis,anyshareofO&McostsattributabletotheSBLP,CLPP,orBDCwereremoved.ProfessionalFeeswereincludedintheirentirety(excludingprofessionalfeesfortourismpolicyandresearchwheretheseappear)andwerenotproratedasitisunderstoodthatthesefeesarepaidforactivitiessupportingtheCSBFP.

Findings

O&MexpendituresattributabletotheCSBFPtotaledalmost$7millionovertheevaluationperiod,averaging$0.8millionperyear(Figure2).Annualcostsvariedsignificantlybetweenyears,fluctuatingbetweenahighof$1.1millionin2004/2005,to$0.3millionin2009/2010.O&Mexpendituresbaredlittlerelationshipwiththenumberofloansregisteredorthenumberofclaimsprocessed.Expendituresfellsteadilybetween2003/2004and2009/2010onlytoriseagainthrough2011/2012.Asignificantdeclineinprofessionalserviceexpenditureshelpsexplainthedeclineincostsbetween2003/2004and2009/2010.Nonetheless,professionalserviceexpendituresremainthelargestcomponentofO&Mexpendituresfollowedby“otherexpenditures”andtransportation and communications expenditures. An increase in professional service expenditures and other machineryacquisitionspartiallyoffsetbyadecreaseinmaintenanceandrepairfeeshelpsexplaintheuptickinO&Mexpendituresin2011/2012.

Figure 2: Estimated Operating and Maintenance Expenditures of the CSBF Program


0

200

400

600

800

1,000

1,200

O&M expenditures

2011/20122010/20112009/20102008/20092007/20082006/20072005/20062004/20052003/2004

1,036 1,108 982 769 581947 277 477 696

Expe

nditu

res (

$000

)


4.3 Capital Expenditures

Methodology

DataonCSBFPcapitalexpenditures,includingpurchasesofInformationTechnology(IT)andvehicles,wasobtainedfromtheCSBFProgramDatabase.Capitalexpenditureswereexpensedwhenincurredandnotamortizedovertheassets’expectedeconomiclives;consequently,theylikelyoverestimatethiscomponentofcosts.Becausetheyonlyrepresentasmallfractionoftotalcosts(<0.5percent),however,thisoverestimationwillhaveanegligibleimpactonthefinalnet-benefitcalculations.

Findings

CapitalexpendituresonITsystemsforelectronicregistrationtotaled$1.3millionovertheevaluationperiod,withallexpenditurestakingplacebetween2006/2007and2008/2009(Figure3).Spreadovertheperiod,capitalexpendituresaveragedabout$0.45millionperyear.Recallthatallcostshavebeenexpensedasincurredratherthan being amortized over the assets’ useful lives.

Figure 3: Capital Costs of the CSBF Program


4.4 Number of Claims and Claims Paid on Loan Default

Methodology

ClaimsmaybesubmittedtotheCSBFprograminseveralforms,asdefinedbytheCanadaSmallBusinessFinancingGuidelines.Theyareusuallymadeafterrealizationonallsecurity,guaranteesorsuretyshipsand/orpersonalliabilityiscomplete,andallproceedshavebeenappliedtotheloan.3 Data on the annual volume andnumberofclaimspaideachyearwereobtainedfromtheCSBFProgramDatabasefor2003/2004to2011/2012.Thecostofclaimsinagivenyearwascalculatedasthecostofclaimssubmittedthatyearlessrefundsonprevious years’ interim claims.

3.Aninterimclaimforlossismadewhenrealizationontheprimarysecurityandanyadditionalsecurityonthebusinessassetsiscomplete,butbeforethelenderhasfullyimplementedacompromiseorfullyrealizedontheguaranteesorsuretyshipsorpersonalliabilityofthesoleproprietororpartner.Foraninterimclaim,aportionoftheclaimpaymentwillbeheldbackuntilafinalclaimismadeandisbasedonestimatedguaranteesandamountsyettobepaid.Occasionally,alendermayrealizealargeramountthanwasestimatedatthetimeoftheinterimclaim.Inthiscase,theIndustryCanadashareoftheamountmustberefundedtotheCSBFprogram.

0

100

200

300

400

500

600

Total CSBFP capital expenditures

2011/20122010/20112009/20102008/20092007/20082006/20072005/20062004/20052003/2004

0 0 0 480 470393 0 0 0

Expe

nditu

res (

$000

)


Findings

Figure4presentsthenumberofCSBFPclaimsprocessedperyearovertheevaluationperiod.

Figure 4: Number of CSBFP Claims Processed


Onaverage,1,669CSBFPclaimsareprocessedperyearondefaultedsmallbusinessloans.Themajorityofclaimsarereceivedwithin2to4yearsafterloansareissued.Stafftimerequiredtoregisteranewloanissignificantlylowerthanthetimerequiredtoreview,audit,andprocessaclaim.Totalclaimsprocessedovertheevaluationperiodequaled15,023.Annualclaimsremainedfairlystableintheearlyyearsoftheevaluationperiodbutrosesignificantlyin2007/2008asthefinancialcrisisandrecessionunfoldedandreachedahighof1,955in2008/2009.In2010/2011,claimsdroppedbyalmost25percent.Severalfactorscanhelpexplainthis.Primarily,manylargelendershadreachedtheirmaximumliabilityclaimlimitsbetween2004and2009,atwhichpointsubsequentclaimswerenolongersubmissibletoIndustryCanada.4Inaddition,theeconomicrecoverywaswellunderwayatthispoint,andthesteadydeclineinthenumberofloansoverthereviewperiodmay have also contributed to the decrease in claims.

Figure5presentsthedollarvalueofclaimspaidondefaultedloansinisolationandexpressedasapercentageofoutstandingloanbalances.ConsistentwiththefindingsinFigure4,thevalueofclaimspaidwasfairlysteadyatthebeginningoftheevaluationperiod,averagingabout$75millionperyearbetween2003/2004and2006/2007,onlytorisesharplyin2007/2008andcontinuetorisetoahighof$109millionin2009/2010.

0

500

1,000

1,500

2,000

2,500

Claims processed

2011/20122010/20112009/20102008/20092007/20082006/20072005/20062004/20052003/2004

1,553 1,620 1,598 1,835 1,9551,681 1,933 1,475 1,373

4.Foreachfiveyearlendingperiod,theCSBFPhasanestablishedMinisterialliabilitylimitwhichrestrictsthetotalamountofeligibleclaimsthatcanbepaidtoanindividuallender.Claimsarepaidoneachloanthatdefaults(i.e.85percentoftheeligibleloss)untilalenderreachesthismaximumlimit(cap)inclaimpayments.Forlargevolumelenders,thisliabilitylimitwasroughly10%ofthevalueofallloansmadebyalenderfrom2004-2009.Oncethislimitisreached,nofurtherclaimscanbepaidondefaultedloansmadeduringtheperiod.

Duringthe2008-09and2009-10fiscalyears,theCSBFProgramexperiencedasignificantincreaseinclaimsfromthemajorfinancialinstitutions.Asaresult,threeofthemajorfinancialinstitutionsreachedtheirliabilitylimits,onein2009,onein2011andonein2012forloanstheyhadmadefrom2004-2009.Asaresultofreachingthislimit,subsequentclaimsforlossesonloansmadeduringthe2004-09periodwerenolongersubmittedtoIndustryCanada.

AssuchthereductioninclaimsshowninFigure4,netclaimspaidinFigure5,andlenderlossesinFigure8,areduetothefactthatafewlendersnolongersubmittedclaimsforlosstoIndustryCanadaforpayment.Itdoesnotreflectadecreaseintheamountoflossesrealizedontheseloans.Lenderswhohittheircapswereresponsiblefor100%ofanyfurtherlossesthatincurredonloansmadefrom2004-2009,butIndustryCanadadoesnothaveanydataabouttheactuallossesthatlendershaveincurredafterclaimpaymentsceased.


Figure 5: Net Claims Paid on CSBFP Loan Defaults

Source:InternalCSBFPDatabase. *After refunds on previous year’s expenses.

Expressedasapercentageofoutstandingloanbalances,claimspaidremainedflatthrough2008/2009asgrowthinclaimspaidwasmatchedbygrowthinnewloansissuedandhigheroutstandingloanbalances.Atthepeakoftherecession,claimspaidasapercentageofoutstandingloanbalancesspikedtoalmost5%.Thiswasdrivenbybothanincreaseinclaimspaidandadecreaseinoutstandingloanbalancesasnewloanissuancedeclined.

Table1presentsdataonnetclaimspaidbysector.NetclaimspaidwerenotablyhigheronloanstobusinessesintheAccommodationandFoodServicesector.Specifically,netclaimsaveragedabout$29millionperyear,or35%oftotalclaims.Thiscomparedtotheretailsectorinwhichclaimspaidonloandefaultsaveragedabout$14millionperyear,or17percentoftotalclaims.Averageannualclaimspaidondefaultedloanstobusinessesintheotherservicessectorandthemanufacturingsectorwerethirdandfourthhighestatabout$13millionand$9.5millionperyearrespectively.Theshareoftotalclaimsforthesesectorsaveraged15percentand11percentrespectively.Onaverageacrosssectors,theshareoftotalclaimsweresimilarforagriculture,arts,andtransportationatabout3percentperyear.Overall,itshouldbenotedthatclaimslevelsweregenerallyin-linewiththerespectivelevels of lending by sector.

Netclaimspaidvariedsignificantlybetweenyears.Claimsgrewsignificantlyondefaultedloansintheaccommodationandfoodservicessector(15percentperyear),thetransportationandwarehousingsector(16percentperyear),retailtradesector(11percentperyear),andtheeducationalservicessector(13percentperyear)between2003/2004and2009/2010.Therewasnegativegrowthinclaimspaidonloanstobusinessesintheprofessional,scientificandtechnicalservicessector(-16percentperyear)andtherealestateandrentalandleasingsector(-11percent).

0

20,000

40,000

60,000

80,000

100,000

120,000

Net claims paid ($000)*

2011/20122010/20112009/20102008/20092007/20082006/20072005/20062004/20052003/2004

71,663 76,460 71,679 96,341 101,50980,289 109,459 76,318 66,153

0%

1%

2%

3%

4%

5%

Net claims as a share ofoutstanding loan balances 3.04% 3.08% 2.63% 3.01% 3.29% 3.48% 4.71% 3.03% 2.54%

($00

0)


Table 1: Net Claims Paid on CSBFP Loan Defaults by Sector ($000)


Figure6presentsdataonnetclaimspaidbyageofdefaultingfirm.Totalclaimswereconsistentlyhigherondefaultedloansofstart-upbusinesses(businessesthatwereinoperationforlessthan1year).Specifically,claimspaidonloandefaultsofstart-upstotaled$586millionovertheevaluationperiod,averaging$65millionperyear.Asapercentageoftotalclaimspaidinanygivenyear,claimspaidonloanstostart-upsaveraged80percent.Claimspaidondefaultedloansofbusinessesthatwere1to3yearsoldtotaled$75millionovertheevaluationperiod.Totalclaimsgrewbyabout7percentperyearbetween2003/2004and2009/2010beforereversingby42percentin2010/2011and21percentin2011/2012.Aspreviouslyexplained,thesharpreversalwasdrivenbylenderliabilitylimitsreachedonclaimspaidinprioryears,theeconomicrecovery,anddecliningoveralllendingundertheCSBFP.Claimsarenowbelowpre-recessionlevels.Asapercentageoftotalclaimspaidinanygivenyear,claimsonloandefaultsforbusinessesbetween1to3yearsoldaveraged10percent.

Sector 2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012

Accommodation and food services 20,777 25,212 24,026 30,811 33,760 36,369 39,684 25,388 26,484Adminandsupport,wastemanagement 601 312 476 210 400 315 331 344 475Agriculture,forestry,fishingandhunting 2,564 1,988 2,390 2,046 2,823 3,676 3,425 1,198 1,000Arts,entertainmentandrecreation 3,493 3,238 2,625 3,027 3,721 3,627 2,596 1,621 1,943Construction 1,504 1,612 1,231 810 1,382 1,479 1,970 1,534 2,287Educational services 628 319 502 756 361 968 1,306 625 545Financeandinsurance 0 162 67 178 419 253 489 58 22Health care and social assistance 1,395 2,354 1,548 902 1,627 932 1,543 1,466 1,592Information and cultural industries 279 315 406 159 561 346 240 394 524Manufacturing 11,692 9,921 8,374 9,432 11,691 9,162 11,119 8,107 5,740Mining,andoilandgasextraction 179 298 48 102 299 0 203 370 173Other services 10,344 11,427 11,145 12,453 15,249 19,442 17,754 11,562 5,758Personal care services 0 0 0 0 0 20 0 1,363 3,337Professional services 2,733 2,831 1,307 925 1,293 1,327 989 1,410 342Realestate,andrentalandleasing 675 1,131 163 1,122 2,270 1,121 339 981 263Repair and maintenance service 0 0 0 0 139 0 450 258 661Retail trade 10,474 11,885 14,245 12,268 15,392 17,423 20,109 14,594 12,599Transportationandwarehousing 2,066 1,513 1,052 2,559 2,043 3,017 4,908 2,866 1,720Utilities 30 0 0 239 223 100 0 210 0Wholesale 2,230 1,942 2,076 2,290 2,689 1,931 2,002 1,970 689

Total 71,663 76,460 71,679 80,289 96,341 101,509 109,459 76,318 66,153


Figure 6: Net Claims Paid by Age of Defaulting Firm


Growthinclaimsbetween2003/2004and2009/2010washighestonloandefaultsofolderbusinesses(businessesmorethan3yearsold)whichsawclaimsriseby9percentperyearfrom$55millionin2003/2004to$83millionin2009/2010.Intotal,claimsondefaultedloansofolderbusinessesequaled$90millionovertheevaluationperiod.Thisamountedtoabout$10millionperyear.Asapercentageoftotalclaimspaid,however,claimsondefaultsofbusinessesover3yearsoldaveragedonly12percent.ThesefindingsconfirmthatdefaultsofyoungerbusinessescontinuetorepresentaprimaryCSBFPcostdriver.

Figure7presentsdataonnetclaimspaidbyassettype.Claimsmadebylendersthatissuedloansforequipmentpurchasesaveraged$51millionperyear.Loandefaultclaimsmadebylendersthatissuedloansforrealpropertyandleaseholdimprovementsaveraged$26millionand$7millionperyearrespectively.Expressedasapercentageoftotalloandefaultclaims,claimsonequipment,realpropertyandleaseholdimprovementsovertheevaluationperiodaveraged61percent,31percentand8percentrespectively.

Claimsacrossallassettypesincreasedoverthe2003/2004to2009/2010period.Claimsrelatedtodefaultsonrealpropertypurchasesgrewmostrapidly,averaging16percentperyear.Thiscomparedtogrowthof5percentperyearforequipmentand2percentperyearforleaseholdimprovements.

Figure 7: Net Claims Paid by Asset Type


0

20,000

40,000

60,000

80,000

100,000

120,000

>3 years

1 to 3 years

<1 year

2011/20122010/20112009/20102008/20092007/20082006/20072005/20062004/20052003/2004

8,210 8,037 7,268 11,382 13,9017,993 14,024 11,075 7,825

8,179 6,809 7,210 10,535 9,3857,526 12,241 7,072 5,621

55,273 61,614 57,201 74,424 78,22364,770 83,194 58,171 52,706

Cla

ims (

$000

)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Leasehold improvements

Real property

Equipment

2011/20122010/20112009/20102008/20092007/20082006/20072005/20062004/20052003/2004

49,547 49,502 43,367 62,051 58,63546,274 64,740 45,065 36,080

15,241 20,030 20,620 28,034 34,13126,522 36,814 25,755 25,684

6,874 6,928 7,692 6,256 8,7437,493 7,905 5,498 4,388

Cla

ims (

$000

)


4.5 Loan Default Cost to Lenders

Methodology

AccordingtoCSBFProgramGuidelines,lenderscannotavoidabsorbinga15percentshareoflossesbytakingcompensatorysecurityofanykindorbymakingaclaimagainsttheborrower/guarantorafterpaymentoftheclaim.Therefore,theclaimsthatlendersareeligibletomakearebasedontheloanamountafterallrepossessionactions,personalguarantees,etc.arerealized.Inaddition,oncetheloanissubrogatedtoIndustryCanada,lenderscannottakefurtheractiontorecoverlosses.Consequently,thereisalosssharingratiobetweenthegovernmentandthelenderof85percentand15percentrespectively.Forthisanalysis,therefore,lenderlossesarecalculatedas15 percent of the total value of loan losses after any realizations have been made.

Findings

Figure8showslenderlossesonloandefaultsbetween2003/2004and2011/2012.Lossesremainedfairlystableintheearlyyearsoftheevaluationperiodaveraging$13millionperyearbetween2003/2004and2006/2007.Thiswasduetorelativelystableloandefaultclaimsovertheperiod.Lossesjumpedby20percentin2007/2008,14percentin2008/2009and13percentin2009/2010duetoagrowingnumberofloandefaultsandanincreasein loan size per defaulted loan.

Therisingtrendin“known”lenderlossesreversedin2010/2011fallingfrom$19millionin2009/2010to$13million.Lenderlossescontinuedtofallin2011/2012to$11millionasthenumberof“known”defaultsdeclinedandthenetprincipaloutstandingondefaultedloansfellto$75million.AprincipalreasonforthiswasthatfewerlargelenderswereabletosubmitclaimsforlosstoIndustryCanadabecausetheyhadalreadyreachedtheirliabilitylimits.Lenderswhohittheirlimitswereresponsiblefor100percentofanylossesincurredbeyondthatlevel.ThedatainFigure8,andinparticularfor2010/2011and2011/2012,doesnotcapturethevalueof losses incurred by lenders after claim payments ceased.

Figure 8: Loan Default Costs to Lenders


0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

Total loss

2011/20122010/20112009/20102008/20092007/20082006/20072005/20062004/20052003/2004

84,309 89,953 84,329 113,342 119,42394,458 128,775 89,786 77,826

Lender loss 12,646 13,493 12,649 14,169 17,001 17,913 19,316 13,468 11,674

Loss

es ($

000)


5. Estimated Benefits of the CSBF Program

Thissectionofthereportassesseskeyprogrambenefits,including: $ Administrativeexpendituresbylenders; $ Interestrevenuesonloans; $ Salariesandwagespaidbyborrowers; $ DirectGDPimpacts; $ IndirectGDPimpacts;and $ AdministrationandregistrationfeescollectedbyIndustryCanada.

ThefindingspresentedinthissectionareNOTadjustedforincrementality.Adjustmentsforincrementalitywillbe made in Section 6.

5.1 Administrative Expenditures by Lenders (Salaries, Wages, and Benefits)

Theoretically,incrementalsalaries,wagesandbenefitspaidbylendersforstaffandmanagementtodelivertheCSBFProgramwouldhaveapositiveimpactontheeconomy.Whysuchexpendituresmadebylendersareconsideredbenefitsratherthancostsisasubjectofdebateandforthepurposeofthisstudyhasbeenchosentomaintainconsistencywiththeassumptionsofthe2009KPMGstudy.InthatstudyitwasassumedthatlendershadfullautonomyingrantingCSBFloans,receivedinterestrevenuesforthatpurpose,andwouldnotbearthoseexpendituresifitwasnotbeneficialtodoso.

Thatbeingsaid,thedecisiontoviewtheseexpendituresasabenefitwillnotimpacttheassessmentas,forvariousreasons,theywillnotbeincludedinthecalculationofprogramnetbenefits.

$ Insufficient data:Generally,lendersdonotmeasurethesalarycostsofadministeringCSBFloans,ratherthosecostsarereportedaspartoftotalsalarycostsforloanofficers,accountmanagers,administrativestaff,legal,andotherstaffwhoareinvolvedinadministeringbusinessloansandprovideothertypesoffinancingforSMEs.Estimatingtheproportionoftimespent,andhencecosts,ofadministeringCSBFloansgivenextremevariabilityinloanpracticesacrosslenderswasnotpossiblewithanacceptabledegreeofconfidence.

$ Few dedicated staff:Formanylenders,CSBFloansareadministeredbyloanofficersinthecommerciallendingdepartmentaspartofthenormalportfoliooffinancingoptions,andthevolumeadministeredbyeachisrelativelylow(KPMG,2009).Furthermore,alargenumberoflendingorganizationsdonothireadditionalstafftoadministerCSBFloansandadministeringtheseloansrepresentsasmallproportionoftheirtime(KPMG,2009).

BecauseonlyasmallnumberoflendershavestaffsolelydedicatedtoCSBFPloansandbecauseCSBFPloanactivitiesrepresentonlyasmallshareofloanofficertotaltime,itisunlikelythattheexclusionofsalariesandwagespaidbylenderstoadministertheprogramwillhaveasignificantimpactontheassessmentofnetbenefits.


5.2 Direct Operating Expenditures by Lenders

Directoperatingexpendituresmeasureanynon-salarycostsassociatedwithCSBFPadministrationthatwouldotherwisenotbebornbylendersintheabsenceoftheprogram.Someexamplesofdirectexpendituresmadebylendersincludelegalexpenditures,ITsystemstomeetrequiredreportingonCSBFloans,andregistrationof loans for real property purchases. They also include the costs of administering claims such as repossession activities,professionalfees,purchases,etc.Aswithsalariespaid,theseexpenditureswillalsohavepositiveimpactsontheCanadianeconomy.Thechoicetoviewtheseexpendituresasabenefitratherthanacostforthepurposeofthisstudywasdonetomaintainconsistencywiththe2009KPMGstudy.Again,itisassumedthatlendershavefullautonomyingrantingCSBFloans,receiveinterestrevenuesforthatpurpose,andwouldnotbearthoseexpendituresifitwasnotbeneficialtodoso.

AsurveywasconductedbyKPMGin2009withselectedlenderswhowouldbeknowledgeableabouttheprogram.Aspartofthesurvey,lenderswereaskedtoassessthedirectoperatingexpendituresofadministeringCSBFPloans.Limitedinformationwasavailableontheamountandtypesofdirectexpendituresmadebylenders.Also,giventhesmallsizeofthesurveyandextremevariabilityinCSBFPrelatedactivitiesacrosslenders,itwasnotpossibletoapproximatethesecostswithanacceptabledegreeofconfidence.Consequently,directoperatingexpendituresmadebylenderswerenotincludedinthecalculationofnetprogrambenefitsnorforthepurposeofthisstudyweretheyincluded.

Basedontheorderofmagnitudeofdirectoperatingexpendituresforloansidentifiedthroughlenderinterviewsin2009,itisunlikelythattheexclusionofdirectoperatingexpenditurespaidbylenderstoadministertheprogramwillhaveasignificantimpactontheassessmentofthenetprogrambenefits.

5.3 Interest Revenues on Loans

CSBFPparametersallowlenderstochargeamaximuminterestrateofprimeplus3percentonloansregisteredwithIndustryCanada.Oftheinterestcharged,lendersarerequiredtoremita1.25%/annumadministrationfeetoIndustryCanadawhiletheremaindercanberetainedbythelendertocovercostsandasprofit.Interestrevenuesonloansrepresentrevenuetolenders,wherenetrevenuesarethedifferencebetweentheinterestchargedtoborrowers,andlenders’costofcapitalplusadministrationfees.Assumptionsonthelenders’costofcapitalwereconfirmedthrough2009KPMGsurveyinterviewsandindiscussionswiththeCanadianBankersAssociation.Astheinterestrateenvironmenthaschangedlittlesince2009,itisreasonabletoassumethatresponsesremainedapplicablethrough2011/2012.ThefollowinganalysisshowcasesnetrevenuesonCSBFPloans.

Methodology1. Interest rate data.DatawasobtainedfromtheCSBFProgramDatabaseforthetimeperiod2003/2004

to2011/2012ontheannualaveragerateschargedbylendersaboveprime.DataonbusinessprimeratesadministeredbycharteredbankswasobtainedfromtheBankofCanada.

2. Calculation of cost of funds to lenders.Thecostoffundstolenderswasestimatedasthe5-yearGovernmentofCanadabenchmarkbondyields,obtainedfromtheBankofCanada.Thisassumptionwasconfirmedthrough2009KPMGstakeholderinterviewsandwasmaintainedforthepurposethisstudy.

3. Interest revenue calculation.ToestimateinterestrevenuesearnedbylendersonCSBFloans,thecostoffundstolendersandtheadministrationfeerate(1.25%)remittedtoIndustryCanadaweresubtractedfromthetotalinterestratechargedonloans.ThisratewasthenmultipliedbytheoutstandingloanbalanceundertheCSBFprogramforeachyear.


Findings

Theaveragebusinessprimeraterosesteadilyduringtheeconomicexpansionof2003/2004and2007/2008(Table2).Itfellsharplyin2009/2010astheeconomyslippedintorecessionandtheBankofCanadacutrates.Theprimeratereversedslightlywiththereboundintheeconomyin2010/2011butstillremainsbelowpre-recessionlevels.Lenderschargedthemaximumrateofprimeplus3percentineachyearovertheevaluationperiod.Averageinterestrateschargedbylenders,therefore,variedbetweenalowof5.25percentin2009/2010andahighof9percentin2007/2008.Theaverageratechargedbylendersoverthefullevaluationperiodwas7.15 percent.

Table 2: Estimated Average Interest Rate Charged

Source:InternalCSBFPDatabase. *Afteradminfees(1.25%)andcostoffunds.

Thecostoffundstolendersfollowedasimilartrendasthebusinessprimeratewiththeaverage5-yearbenchmarkgovernmentbondyieldreachingahighof4.11percentin2006/2007andalowof1.78percentin2011/2012.Thespreadbetweentheaverageinterestratechargedonloansandthecostoffunds(revenuerate)fluctuatedovertheevaluationperiodtrendinggenerallyupwardsbetween2003/2004and2007/2008,reversingin2009/2010attheheightoftherecession,andreboundingwiththeeconomyin2010/2011.Theaveragespreadovertheevaluationperiodwas2.67percent.

EstimatesoftotalincomegeneratedovertheevaluationperiodarepresentedinFigure9.IncomewascalculatedbymultiplyingtheaveragerevenuerateineachperiodbytheoutstandingloanbalanceofCSBFPloans.Lenderincomegrewfromapproximately$60millionin2003/2004toahighof$109millionin2007/2008.Theincometrendreversedcoursein2008/2009fallingto$90millionandcontinuedtofalltoalowof$33millionin2009/2010mainlyduetoasharpdeclineinrevenueratesandthewrite-offofnon-performingloans.Incomereboundedin2010/2011(+58percent)and2011/2012(+47percent)asbothrevenueratesandoutstandingloanbalancesincreased.Annualincomeearnedbylendersoverthefullevaluationperiodaveraged$71millionperyear.

Figure 9: Interest Income to Lenders on CSBFP Loans

Sources:InternalCSBFPDatabaseandBankofCanada.

Interest Rate 2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012

Average business prime rate 4.58% 4.02% 4.69% 5.98% 6.00% 4.04% 2.25% 2.79% 3.00%Average rate charged above prime 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%Average interest rate charged 7.58% 7.02% 7.69% 8.98% 9.00% 7.04% 5.25% 5.79% 6.00%Costoffundstolenders 3.80% 3.85% 3.69% 4.11% 4.04% 2.70% 2.57% 2.45% 1.78%Revenue rate* 2.53% 1.77% 2.75% 3.62% 3.71% 3.09% 1.43% 2.09% 2.97%

0

20,000

40,000

60,000

80,000

100,000

120,000

Total interest income ($000)

2011/20122010/20112009/20102008/20092007/20082006/20072005/20062004/20052003/2004

59,585 43,873 74,828 108,507 90,10396,654 33,252 52,614 77,503

Inte

rest

Inco

me

($00

0)


5.4 Profits for CSBFP Borrowers

FindingsfromIndustryCanada’s2014EconomicImpactStudyproducedinconsistentresultsregardingtherelativeprofitpotentialofCSBFPborrowerscomparedtootherborrowers.StatisticsCanada’s2008and2004economicimpactstudiesalsodidnotproducestatisticallysignificantresultsconfirmingwhetherthereareincrementalprofitsforCSBFPborrowers.Assuch,incrementalprofitswerenotincludedinthecalculationofprogramnetbenefits.

5.5 Employment Creation and Salaries and Wages paid by Borrowers

Within-Firm Employment Creation

Aspartoftheloanregistrationprocess,borrowersareaskedtoidentifyhowmanyadditionalemployees(fulltimeequivalents)theyareexpectedtohireasadirectresultoftheloan.

Methodology

Employmentdataisself-reporteddatacollectedthroughCSBFPregistrationformsandstoredintheCSBFProgramDatabase.Forthissection,itwasassumedthatwithouttheCSBFloan,borrowerswouldnothavereceivedfinancingelsewhereandnoemploymentgrowthwouldhavetakenplace.Therefore,itisassumedthatalladditionalemploymentwasincremental.

Findings

TotalemploymentcreationexpectedbyborrowersafterbeingapprovedforaCSBFPloanispresentedinFigure10.

Figure 10: Total Employment Creation and Employment Creation per Loan


Expectationsdeclinedsharplysincethestartofthedecadebuthavesincestabilizedfromabout32,000in2003/2004to,onaverage,18,000peryearin2005/2006through2011/2012.Totalemploymentcreationovertheevaluationperiodequaled186,000FTEs.Onaperloanbasis,borrowersexpecteachloantogeneratepositionsforabout2additionalfulltimeemployees.Somevariationinemploymentcreationperloanwasobservedovertheevaluationperiodbutitwasminimal,fluctuatingbetween2to3employees.Thoughnotshownhere,employmentexpectationswerehighestamongstart-upbusinesses(<1yearold)andbusinessesusing loans for leasehold improvements.

32,206 26,494 17,617 20,214 16,90917,795 18,119 19,337 17,325

2.91 2.38 1.63 1.85 2.26 2.17 2.40 2.59 2.43

0.00.51.01.52.02.53.03.54.0

Employment creation per loan

2011/20122010/20112009/20102008/20092007/20082006/20072005/20062004/20052003/20040

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Total employment creation

Empl

oym

ent p

er lo

an

Tota

l em

ploy

men

t


Salaries and Wages Paid by Borrowers

Additionalsalariesandwagesrepresentvalueresultingfromemploymentcreation(madepossiblethroughthereceiptofaloan),andsubsequentcapitalinvestment.Thefollowinganalysisdoesnottakeintoaccountadditionalwagespaidtonewpart-timeand/ortemporaryemployees.Italsoappliesa50-percentemploymentdisplacementrate.Thatis,itisassumedthat50-percentofadditionaljobscreatedand,hence,additionallabourincomegenerated,arenotnetnewjobsbuthavebeenshiftedfromoneemployertoanother.TherateofemploymentdisplacementwasestimatedbyaveragingannualnetnewemploymentcreationbygrossnewemploymentcreationperperiodusingdatafromIndustryCanada’sKey Small Business Statistics publication.Thisassumptionisnecessarysoastonotoverstatetheincomefigures.

Theanalysisisbasedonwithin-firmemploymentcreationdatafromtheprevioussection,tax-linkeddataprovidedbyStatisticsCanada,resultsfromthe2009KPMGstudy,andlinearlyinterpolateddata.Itisalsoimportanttonotethat,whileregressionanalysiswasusedtoestimateanymissingsalarydataandfirmsurvivalrates,theestimatesrepresentconditionalmeanvaluesforCSBFPborrowersthatdonotcontrolforfirmlocation,industry,size,age,orotherfirmcharacteristicsthatmayimpactchangesovertime.Forthefollowinganalysis,ithasbeenassumedthattheabove-mentionedcharacteristicswereheldconstant.

Methodology1. Estimate of within-firm employment creation.Dataontheaveragenumberofemployeescreatedperfirm

between2003/2004–2011/2012forninecohortsofCSBFPborrowerswereobtainedfromFigure10above.

Whileitispossiblethattotalemploymentcreationcouldmatchexpectedemploymentcreation,ithasbeenconservativelyassumedthatitwouldnot.Thatis,thegrossnumberofjobscreatedwouldequal50percentoftheexpectednumberofjobscreated,asreportedbyborrowersontheirloanregistrationforms.Thisassumptionisbasedondatafromthe2010and2014CSBFPEconomicImpactstudieswhich,takentogether,suggestthatforaboutevery2.54jobsCSBFPborrowersexpecttocreate,onaverageonlyabout1.21jobsareeveractuallycreated(or48percentwithoutrounding).

Furthermore,alladditionalemploymentbetween2003/2004and2011/2012wasadjusteddownwardsbasedonaconservative50-percentemploymentdisplacementrate.Asexplainedabove,itisunrealistictoassumethatalljobscreatedarenetnewjobs.Manyjobsrepresentatransferofemploymentfromonefirmtoanotherwithno“real”employmentcreationeffects.

Also,forthissection,itwasassumedthatwithouttheCSBFPloan,borrowerswouldnothavereceivedfinancingelsewhereandnoemploymentcreationwouldhaveoccurred.Therefore,itwasassumedthatalladditionalemploymentwasincremental.

2. Estimate of additional salaries and wages by cohort of CSBFP borrower. Data on additional average salaries andwagespaidbetween2005/2006and2008/2009wereobtainedfromtaxlinkedStatisticsCanadadata.Datafor2003/2004and2004/2005wereobtainedbyadjustingbackwardforinflation.Datafor2010/2011and2011/2012wereobtainedusingregressionanalysis.

Findings

Figure11presentsdataonsalariesandwagesforeachyearoftheevaluationperiod.


Figure 11: Salaries and Wages Paid to New Employees of CSBFP Borrowers

Sources:StatisticsCanada;CSBFPDatabase;andauthor’scalculations.

Ascanbeseen,additionalsalariesandwagespaidbyCSBFPborrowerswerehighestatthestartoftheevaluationperiod.Salariesandwagespeakedin2003/2004asbothemploymentlevelsandrealwageswerehigh.In2005/2006,employmentcreationexpectationsfornewcohortsofborrowersfell.Thisreversedin2006/2007and2007/2008,thenfellagainin2008/2009astherecessionunfolded.Althoughatamuchlowerleveltodaythanatthebeginningoftheperiod,additionalsalariesandwagespaidtonewemployeeshasstabilizedatapproximately$106millionperyearsince2005/2006.

Out-of-firm Employment Creation

AsaresultoftheadditionaldemandofCSBFPborrowersforthegoodsoftheirsuppliers,thesuppliersmustalso increase employment to support the higher production and sales.

Methodology

TheStatisticsCanadaCanadianInput-OutputModelwasusedtoestimatetheemploymentimpactsamongCSBFPsuppliers.Thenumberofdirectfull-timeequivalent(FTE)jobswasmeasured.Specifically,out-of-firmemploymentcreation,aspresentedinFigure12,measuresthenumberofjobscreatedinfirmsthatsuppliedCSBFPborrowerswiththeloan-eligibleassetstheypurchased.Thenumberofjobsshowndoesnottakeintoaccountpart-timeand/ortemporaryjobs.Itisalsoimportanttonotethattheanalysisdoesnotadjustforincrementalitynordoesitaccountforanyemploymentdisplacementthatmighthavetakenplace.

Findings

About59,000grossnewjobswerecreatedovertheevaluationperiod,orabout6,600peryear.

JobcreationtriggeredbyCSBFPlendingactivitiespeakedin2005/2006,reacheditslowestlevelin2008/2009,andhassincereturnedtopre-recessionlevels.ThemajorityofjobswerecreatedinQuebec,Ontario,AlbertaandBritishColumbia.Significantemploymentwasalsocreatedintheconstructionandmanufacturingindustries.

020,00040,00060,00080,000

100,000120,000140,000160,000180,000200,000

Salaries and wages ($000)

2011/20122010/20112009/20102008/20092007/20082006/20072005/20062004/20052003/2004

180,480 151,501 102,795 113,709 99,061105,026 106,309 114,008 102,678

Sala

ries a

nd W

ages

($00

0)


Figure 12: Out-of-Firm Employment Creation

Sources:InternalCSBFPDatabaseandBankofCanada.

5.6 Direct GDP Impacts of Expenditures by CSBFP Borrowers

DirectexpendituresbyborrowersbackedbyCSBFPloansonmachineryandequipment,realproperty,andleaseholdimprovements have a positive direct and indirect economic impact on the economy by stimulating expenditures on goodsandservicesandboostingincome.TheStatisticsCanadaCanadianInput-OutputModelwasusedtoestimatetheseimpactsfortheyearsinwhichtheexpendituresweremade.5Specifically,directGDPatbasicprices6 by industry wasusedtogaugethecontributionofloanexpenditurestoeconomicoutput.Evaluatedatbasicprices,GDPimpactsreflectfactorincomesattributedtowagesandsalaries,supplementarylabourincome,mixedincomeandotheroperatingsurplus,plusindirecttaxesonproductionlesssubsidiesonproduction.Inthefollowinganalysis,itisassumedthatthereisnosocialopportunitycosttoexpendituresmadebyCSBFPborrowers,includingexpendituresonsalariesandwages.Inparticular,itisassumedthatgrowthinGDPasaresultofexpendituresmadebyCSBFPborrowersdoesnotcrowdoutprivate and public sector investment.

Methodology

ItwasnecessarytoobtaininformationonthelikelytypesofexpendituresmadebyCSBFPborrowers:1. Loan expenditure data was obtained from the CSBF Program Database.LoanamountsfromtheCSBF

ProgramDatabasewereobtainedforeachcohortbyindustrysector,province,andthefollowingassettypes:equipment,newandexistingleaseholdimprovements,andrealproperty.

2. Registration Fees.Manyborrowersfinancetheirregistrationfeeaspartoftheirloans.ThesefeesdonotcontributetoeconomicactivityandhencewereremovedwhencalculatingInput/Outputshockvariables.

3. Identify common expenditures by commodity by industry sector.Typesofexpendituresforequipment,leaseholdimprovements,andrealpropertywereassumedtofollowsimilarpatternsasotherborrowersintheInput/OutputmodelandweresupportedbyCSBFprogramstaffknowledgeableintypicalborrowerexpenditures.

5,800

6,000

6,200

6,400

6,600

6,800

7,000

FTE jobs

2011/20122010/20112009/20102008/20092007/20082006/20072005/20062004/20052003/2004

6,427 6,592 6,880 6,567 6,226 6,608 6,533 6,891 6,624

Num

ber o

f FTE

s

5.AttemptswerenotmadetomodelthemultiplicativeimpactofexpendituresmadeinoneyearonGDPinsubsequentyears.Onlythecurrentperiodimpactwasmeasuredand,hence,theresultspresentedherelikelyunderestimatethetotalGDPimpactovertime.

6.GDPatbasicpricesisGDPatmarketpricesminustaxeslesssubsidiesonproducts.GDPatbasicpricesisalsoequaltothetraditionalvalueatfactorcostplustaxeslesssubsidiesonthefactorsofproduction(labourandcapital).


4. Estimate commodity expenditures for each sector and province. Actual loan expenditures adjusted for financedregistrationfeeswerethenapportionedacrosscommodities.Becauseacertainportionofloanswereusedtopurchaseexistingleaseholdimprovementsandrealproperty,7 some of the assets purchased werecreatedinpreviousyears,andtheirtransferfromoneentitytoanotherdoesnotcontributetoGDPtothesameextentastheoriginalcreationoftheasset.Althoughthepurchaseofthesepre-existingassetswouldhaveresultedinsomecontributiontoGDPforthatyear(e.g.salariesandwages,andprofitstoretailers,wholesalers,andrealestateagents),alargepartofthevalue-addtotheeconomyfortheircreationwouldhavealreadyaccruedinpreviousyears.Therefore,tobeconsistentwith2009KPMGassumptions,itisassumedthatonlyhalfofpaymentstosuppliersforrealproperty,andexistingleaseholdimprovements,contributedtoGDPintheyeartheloanswereissued.

ForanalysisofeconomicimpactsbytheInput-Outputmodel,itwasalsoassumedthatinternationalandprovincialimportsareallowedtomeetoutputrequirements.

Findings

Figure13presentsthedirectGDPimpactofexpendituresmadebyCSBFPborrowersoncapitalequipment,realpropertyandleaseholdimprovementsforfiscalyears2003/2004through2011/2012.ThedirectGDPimpactwashighestin2010/2011comingoutoftherecessionwhenthetotalvalueofCSBFP-backedloansissuedsurpassed$1billion.

Figure 13: Direct GDP at Basic Prices ($000), 2003/2004-2011/2012

Source:StatisticsCanada,CanadianInput-OutputModel.

Withthevalueofloansissuedremainingfairlystableovertheperiod,8 the direct GDP impact also remained fairlystableaveragingabout$320millionperyear.DirectGDPimpactsequaledabout33percentofthetotalvalueofloansissued.Thetotaldirectimpactovertheevaluationperiodwas$2.9billion.

Table 3 presents the direct GDP impacts by region.

Asexpected,directimpactsarelargestinOntarioandQuebecgiventhelargeconcentrationofbusinessesoperatingintheseregions.Specifically,directGDPimpactsaccruingtobusinessesinOntarioandQuebecrepresented,onaverage,40percentand33percentperyear.BusinessesinAlbertaandBritishColumbiaalsobenefitedsignificantly,accruingdirectGDPimpactsofabout$32millionand$18millionperyearrespectively.

309,742 319,856 334,155 319,030 298,834320,775 314,475 335,092 320,166

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

Direct GDP

2011/20122010/20112009/20102008/20092007/20082006/20072005/20062004/20052003/2004

($00

0)

7.Inthe2009KPMGstudy,itwasassumedthatabout5percentand20percentofCSBFPloanswereusedtopurchaseleaseholdimprovementsandrealpropertyrespectively.Thesameassumptionwasusedinthisstudy.

8. CSBFProgramDatabase.


Table 3: Direct GDP at Basic Prices by Region ($000), 2003/2004-2011/2012


Furthermore,whilenotshownhere,themajorityofthedirectGDPimpactaccruedtobusinessesintheconstruction,manufacturing,andwholesaletradesectors.Thisresultisconsistentacrossyears.Businessesintheretailtradesectoraswellasthetransportationandwarehousingsectoralsobenefitedsignificantly.

5.7 Indirect GDP Impacts of Expenditures by CSBFP Borrowers

ExpendituresmadebythesuppliersoffinalgoodproducersandtheexpendituresbetweensuppliersalsogenerateindirectGDPimpactsfortheCanadianeconomythroughsalaries,wages,benefits,andcompanyprofits.WhensupplierssellassetstofinalgoodsproducerswhicharethenpurchasedbyCSBFPborrowersusingloanedfunds,thereisanindirectimpactoneconomicgrowthtriggeredbythepurchasesoffinalgoodsbyintermediarysuppliers.

IndirectGDPatbasicpriceswasmeasuredusingtheInput-Outputmodelwhichtracksthevaluecontributionsofexpendituresbetweenintermediarysuppliers.Inthefollowinganalysis,itisassumedthatthereisnosocialopportunitycostonexpendituresmadebysupplierstosuppliers,includingexpendituresonsalariesandwages.Inparticular,itisassumedthatgrowthinGDPasaresultofexpendituresmadebysuppliersdonotcrowdoutother activities that contributed to GDP.

Methodology

TheStatisticsCanadaCanadianInput-OutputModelwasusedtoestimatetheimpactsofloanexpendituresintheCanadianeconomy.IndirectGDPatbasicpriceswasthemeasureusedtovaluethecontributionofexpendituresonsuppliersmadebybusinessesthatsuppliedCSBFPborrowerswiththeassetsthattheypurchased.Asdescribedinsection5.6,itwasassumedthathalfofpaymentstosupplierstopurchaseexistingrealpropertyorleaseholdimprovementscontributedtoGDPintheyeartheloanswereissued.Itwasalsoassumedthatinternationalandprovincialimportswereallowedtomeetoutputrequirements.

2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012

NewfoundlandandLabrador 3,064 2,871 2,457 1,894 2,730 2,125 1,886 2,791 1,718PrinceEdwardIsland 1,401 748 879 933 819 856 796 737 1,727Nova Scotia 7,707 6,811 5,593 5,686 6,545 6,333 5,734 5,348 6,244

NewBrunswick 8,526 6,937 7,940 6,676 5,459 7,059 9,400 8,848 8,769Quebec 108,796 110,885 118,992 107,028 98,466 97,509 99,375 110,536 108,297Ontario 112,505 123,053 126,984 133,414 143,673 121,470 125,871 133,951 122,541Manitoba 8,017 8,206 8,728 7,723 6,770 7,066 7,722 6,439 7,452Saskatchewan 8,820 9,909 11,107 9,175 8,925 8,611 9,025 9,671 10,719Alberta 29,371 30,327 31,905 29,356 28,205 31,056 35,704 40,592 34,828BritishColumbia 20,970 19,574 19,241 18,646 17,217 16,702 18,719 15,794 17,809Yukon 353 364 66 125 104 18 28 46 37NorthwestTerritories 195 154 244 102 104 18 202 254 16Nunavut 16 18 17 18 13 11 13 84 9Canadianterritorialenclavesabroad 0 0 0 0 0 0 0 0 0

Total 309,742 319,856 334,155 320,775 319,030 298,834 314,475 335,092 320,166


Findings

Figure14depictsthecontributionofexpendituresmadethroughCSBFP-backedloanstoindirectGDP(atbasicprices)foreachyearoftheevaluationperiod.

Figure 14: Indirect GDP at Basic Prices ($000), 2003/2004-2011/2012


IndirectGDPestimateswereadjustedfortheshareofloansthatwereusedtopurchasepre-existingassets.AllestimatespresentedinFigure14accountfortheseadjustments.IndirectGDPimpactsresultingfromCSBFP-backedloanexpendituresrangedfromalowof$205.1millionin2008/2009toahigherof$230.3millionin2011/2012.Thesefindingshighlightastrongmultipliereffectthroughouttheeconomy,withtheindirectGDPimpactequalingabout70percentofthevalueofthedirectimpactand40percentofthevalueofthetotalimpact.

Table 4 presents the indirect impacts by sector.

TheindirectimpactsofexpendituresmadebyCSBFPborrowersarespreadacrossalmostallsectors.Businessesinthemanufacturingsectorandtheprofessional,scientificandtechnicalservicessectorseemtobenefitthemost,withonaverage$49millionand$42millionaccruingtoeachsectorrespectively.Businessesinwholesaletrade,transportationandwarehousing,andthefinancesectoralsobenefitedsignificantly,withonaverage$22million,$14millionand$35millioninindirectGDPaccruingtoeachsectorrespectively.

207,515 212,737 222,019 211,854 205,069212,589 215,253 230,307 220,554

0

50,000

100,000

150,000

200,000

250,000

Indirect GDP

2011/20122010/20112009/20102008/20092007/20082006/20072005/20062004/20052003/2004

($00

0)


Table 4: Indirect GDP at Basic Prices ($000), 2003/2004-2011/2012

2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012

Cropandanimalproduction 412 419 437 416 413 403 427 453 437Forestryandlogging 788 786 821 785 788 780 823 854 825Fishing,huntingandtrapping 7 6 6 6 6 6 6 6 6Support activities for agriculture and forestry 169 171 178 170 168 164 172 181 175

Mining,quarrying,andoilandgasextraction 7,546 7,757 8,188 7,875 7,801 7,674 7,764 8,241 7,610

Utilities 4,861 5,005 5,265 5,002 4,860 4,562 4,755 4,979 4,756Residential construction 0 0 0 0 0 0 0 0 0Non-residentialbuildingconstruction 0 0 0 0 0 0 0 0 0Engineering construction 0 0 0 0 0 0 0 0 0Repair construction 2,035 2,114 2,211 2,094 2,019 1,881 1,977 2,139 2,045Other activities of the construction industry 816 834 858 824 816 811 854 902 855

Manufacturing 46,954 48,071 50,138 48,153 48,541 47,510 49,926 53,267 51,186Wholesaletrade 21,060 21,597 22,525 21,604 21,627 20,902 22,024 23,237 22,293Retail trade 4,972 5,109 5,361 5,087 4,927 4,584 4,768 4,987 4,770Transportationandwarehousing 13,508 13,946 14,591 13,796 13,387 12,524 13,191 13,857 13,270Information and cultural industries 8,375 8,636 9,043 8,543 8,279 7,862 8,307 9,137 8,734Finance,insurance,realestate,rentaland leasing and holding companies 33,945 34,991 36,498 34,958 34,526 32,621 34,297 36,361 34,716

Owneroccupieddwellings 0 0 0 0 0 0 0 0 0Professional,scientificandtechnicalservices 40,283 40,978 42,605 41,063 41,748 41,614 43,695 47,507 45,690

Administrativeandsupport,wastemanagement and remediation services

10,767 11,068 11,545 11,068 10,975 10,568 11,106 12,058 11,516

Educational services 271 277 289 279 276 261 273 285 272Health care and social assistance 384 391 408 386 382 373 389 430 416Arts,entertainmentandrecreation 681 708 744 700 670 618 647 700 672Accommodation and food services 2,148 2,216 2,326 2,187 2,111 2,015 2,121 2,329 2,233Otherservices(exceptpublicadministration) 2,753 2,817 2,939 2,804 2,788 2,751 2,908 3,213 3,057

Repair,maintenanceandoperatingandofficesupplies 0 0 0 0 0 0 0 0 0

Advertising,promotion,meals,entertainment,andtravel 0 0 0 0 0 0 0 0 0

Transportation margins 0 0 0 0 0 0 0 0 0Non-profitinstitutionsservinghouseholds 241 249 261 247 239 227 238 259 249



TheindirectimpactsofexpendituresmadebyCSBFPborrowersarespreadacrossalmostallsectors.Businessesinthemanufacturingsectorandtheprofessional,scientificandtechnicalservicessectorseemtobenefitthemost,withonaverage$49millionand$42millionaccruingtoeachsectorrespectively.Businessesinwholesaletrade,transportationandwarehousing,andthefinancesectoralsobenefitedsignificantly,withonaverage$22million,$14millionand$35millioninindirectGDPaccruingtoeachsectorrespectively.

5.8 Administration and Registration Fees Paid by Borrowers to Industry Canada

RegistrationandadministrationfeesaredirectlyproportionaltothevalueofloansregisteredundertheCSBFprogram.A2percentregistrationfeeispaidonthetotalvalueoftheloanwhenitisregisteredbythelenderwithIndustryCanada.Anadministrationfeeof1.25percentperannumispaidontheoutstandingvalueofeachloan.ThesefeesareremittedtoIndustryCanadaquarterly.

Findings

TotalregistrationandadministrationfeesreceivedbyIndustryCanadaareshowninFigure15.Totalfeesreceivedfluctuatedonlymodestlyovertheevaluationperiodaveragingapproximately$54millionperyear.

Figure 15: Registration and Administration Fees, and Claims Paid


2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012

Government education services 929 921 958 918 927 920 966 1,031 1,024Government health services 240 246 257 243 240 230 240 263 251Other federal government services 1,069 1,081 1,121 1,075 1,090 1,034 1,093 1,162 1,113

Other provincial and territorial government services 757 757 793 730 713 712 744 832 812

Other municipal government services 1,545 1,588 1,654 1,576 1,537 1,461 1,542 1,637 1,571

Other aboriginal government services 0 0 0 0 0 0 0 0 0

Total 207,515 212,737 222,019 212,589 211,854 205,069 215,253 230,307 220,554

71,663 76,460 71,679 96,341 101,50980,289 109,459 76,318 66,153

51,553 53,821 56,221 55,770 55,067 52,895 52,393 51,732 53,117

0

20,000

40,000

60,000

80,000

100,000

120,000

Registration and administration fees

2011/20122010/20112009/20102008/20092007/20082006/20072005/20062004/20052003/20040

20,000

40,000

60,000

80,000

100,000

120,000

Claims paid

Fees

($00

0)

Cla

ims (

$000

)


Whiletotalfeesreceivedeachyearhaveremainedfairlyconstantovertheevaluationperiod,totalclaimspaidconsistentlyexceedfees.Theaverageshortfallequaledabout$30millionperyear.Excludingthe2007/2008to2009/2010financialcrisis/recessionaryperiodinwhichclaimsrosetounprecedentedhighs,averageclaimspaidperyearequaled$72millionandtheaverageshortfallequaled$19millionperyear.Thisshortfallfelltoitslowestlevelat$13millionin2011/2012;however,thiswasprincipallyonaccountofliabilityclaimlimitsbeingreached.

ItisimportanttonotethatthisanalysishasnottakenintoaccountadditionaltaxdollarsgeneratedforthefederalgovernmentfromexpendituresmadebyCSBFPborrowers.TheStatisticsCanadaCanadianInput-OutputModelwasusedtoestimatethetaximpacts.Inparticular,themodelgeneratesestimatesofthetotalGST,federalgastax,dutytax,excisetax,andairtaxgenerateddirectlyorindirectlyonCSBFPborrowerexpenditures.Provincialandmunicipaltaxestimateswerealsogeneratedbutarenotpresentedhere.

Figure16showsthefederaltaxesgeneratedoffCSBFP-backedloanexpenditures.TotaltaxesaredirectlyproportionaltotheexpendituresmadebyCSBFPborrowers.Totalfederaltaxesgeneratedwereconsistentlyabove$9millioneachyearandexceeded$85millionoverthefullevaluationperiod.

Figure 16: Federal Sales and Excise Taxes


Furthermore,sinceanincreaseinexpenditures(triggeredbyanincreaseinCSBFP-backedloans)ledtoanincreaseinemployment,anyadditionalwagescollectedbytheseemployeeswouldhaveresultedinadditionalincometaxescollectedbythegovernment(Figure17).

Asdiscussedinsection5.5,loanregistrationformswereusedtodetermineananticipatedlevelofwithin-firmemploymentcreation.Theseestimateswerethenusedtocalculateadditionalsalariesandwagespaidtoemployeesfollowingadjustmentsforfirmsurvivabilityandemploymentdisplacementwherebyaportionoftheadditionaljobscreatedwerenotassumedtobenetnewjobs.Rather,theywereassumedtobejobsshiftedfromotheremployers.A50percentdisplacementratewasused.Thisassumptionimpliesthatforevery10newjobscreated,5jobswenttoworkersemployedinotherfirms,and5jobswenttopeoplethatwereunemployed.Incometaxesgeneratedfromalreadyemployedworkersdonotrepresentnetnewtaxesforgovernment.DatawasthenobtainedfromRevenueCanadaonfederalmarginaltaxratesfor2003/2004to2011/2012.TheappropriatemarginaltaxratewasdeterminedbasedonaveragesalariespaidbyCSBFPborrowers.RateswerethenappliedagainsttotaladditionalwagesandsalariesidentifiedinFigure11.

7,500

8,000

8,500

9,000

9,500

10,000

10,500

Total

2011/20122010/20112009/20102008/20092007/20082006/20072005/20062004/20052003/2004

9,393

9,815

10,226 9,362 8,627

9,686

9,241

10,131

9,793

($00

0)


Figure 17: Federal Income Tax Remittances Due to Additional Salaries and Wages

Sources:KPMG;StatisticsCanada;CanadaRevenueAgency;CSBFPDatabase;andauthor’scalculations.

Thesefindingshavesignificantimplicationsfortheanalysisofthecostrecoveryoftheprogram.Whiletheprogramwasnotcost-recoverableinanyyearwhenconsideringcostsagainstadministrationandregistrationfeesalone,itwasrecoverablein6of9years,and97percentoverall,whenfeesandtaxeswereconsideredtogether.

AscanbeseeninFigure18,comparingfeeincomeandtotaltaxrevenuesagainstclaimspaidbetween2003/2004and2011/2012showedthattheprogramwascostrecoverablepriorto,andaftercomingoutof,thelastfinancialcrisisandeconomicrecession.Duringthecrisis/recession(2007/2008-2009/2010),however,outgoingclaimsgrewsubstantiallyaboveincomingsourcesofrevenuesandresultedinanaverageshortfallofabout$24millionper year.

Figure 18: Taxes, Registration and Administration Fees, and Claims Paid

Sources:KPMG;StatisticsCanada;CanadaRevenueAgency;CSBFPDatabase;andauthor’scalculations.

0

5,000

10,000

15,000

20,000

25,000

30,000

Income taxes

2011/20122010/20112009/20102008/20092007/20082006/20072005/20062004/20052003/2004

27,072 22,725 15,419 17,056 14,85915,754 15,946 17,101 15,402

($00

0)

71,663 76,460 71,679 96,341 101,50980,289 109,459 76,318 66,153

88,018 86,361 81,866 81,210 81,485 76,381 77,581 78,964 78,312

0

20,000

40,000

60,000

80,000

100,000

120,000

Fees and taxes

2011/20122010/20112009/20102008/20092007/20082006/20072005/20062004/20052003/20040

20,000

40,000

60,000

80,000

100,000

120,000

Claims paid

Fees

and

Tax

es ($

000)

Cla

ims (

$000

)


6. Estimated Net Program Benefits

ToanalyzethenetimpactoftheCSBFPontheCanadianeconomy,itwasnecessarytocomparethediscountedpresentvalueofprogramcoststothediscountedpresentvalueofprogrambenefits.Thefollowingsectiondescribestheestimatednetbenefitcalculations.

Methodology1. Assumptions on Discount Rate:Time-value-of-moneyhasbeenaccountedforinthecalculationofthenet

presentvalueoftheprogramovertime,usingablendedrisk-free-equivalentdiscountratethatisbasedonBankofCanada10-yearbenchmarkbondratesoverthetimeperiodanalyzed(Table5).Otherratestypicallyregardedas‘socialdiscountrates’wereappliedtothemodelaspartofthesensitivityanalysis.Inparticular,theTreasuryBoardSecretariatidentified8percentastheappropriatediscountrateintheCanadianCost-BenefitAnalysisGuide.However,fortoday’sstandards,thisrateisconsideredrelativelyhigh.Therehasbeenatrendtowardtheuseofalowersocialdiscountrate.TheBritishTreasuryprescribesa3.5percentdiscountrate.AlowerratebasedonCPIorshort-termGICratesmayalsobeusedasadiscountrate.

2. Assumptions on Rate of Incrementality:ForthepurposeoftheCost-BenefitStudy,theterm‘rateofincrementality’referstothepercentageoffullfinancialincrementalityorpartialfinancialincrementality.ACSBFloandemonstratesfullfinancialincrementalityifnoloanwouldhavebeengrantedtotheborrowerintheabsenceoftheCSBFprogram.Therefore,theborrowerwouldnothavequalifiedforaloaniftheCSBFprogramwerenotavailable.Therefore,therateoffullfinancialincrementalityreferstothepercentageofCSBFPborrowersthatwouldnothavequalifiedforaloaniftheCSBFprogramwerenotavailable.

ACSBFloandemonstratespartialfinancialincrementalityifasmallerloanwouldhavebeengrantedtoaborrowerintheabsenceoftheCSBFP.Therefore,therateofpartialfinancialincrementalityreferstothepercentageofCSBFPborrowersthatwouldhavereceivedasmallerloaniftheCSBFprogramwerenotavailable.Intheanalysisofnetbenefits,itisassumedthataloanofhalfthesizewouldhavebeengrantedintheabsenceoftheCSBFprogram.Partialincrementalitymayincludemorefavourableloantermsthatwouldnothavebeenreceivedwithouttheloan,alsoknownasloanqualityincrementality.Forthepurposesofthisstudy,anydifferencesinloantermsduetotheCSBFprogramarenotincludedduetothedifficultyinobtaining accurate data.

It has been conservatively assumed that the rate of full and partial incrementality remains unchanged throughout thestudyperiod.Therateofincrementalitywasdeterminedbasedonfindingsfromtwoincrementalitystudies(Table6).Inparticular,theIncrementality of CSBF Program Lending,Volumes1,2and3,EquinoxManagementConsultantsLtd.(2004),andSources of Portfolio Risk and Revenue Generation of the Canada Small Business Financing Program,Phase2,EquinoxManagementConsultantsLtd.(2008).

TherateoffullandpartialincrementalityhasbeenappliedtodeterminethebenefitsthatwereincrementaltoCSBFPborrowers,i.e.thesebenefitswouldnothaveaccruediftheCSBFprogramwerenotavailable.

Table 5: Discount Rates

Scenario Discount Rate SourceHigh 8% Treasury Board SecretariatMedium(BaseCase) 5% 2009KPMGCSBFPCost/BenefitStudyLow 3.5% 10-YearGovernmentofCanadaBenchmarkBondYield(average2003/2004to2011/2012)



Inparticular,interestrevenuesonloans,increasedsalariesandwagespaidbyborrowers,growthinGDPresultingfrompaymentstosuppliersasaresultofloans,andgrowthinGDPresultingfrompaymentsofsuppliers to suppliers are adjusted for incrementality.

3. Net Benefits and Cost Benefit Ratios:Thenetbenefitsandcost-benefitratiosfortheCSBFProgramhavebeencalculatedforeachfiscalyearinthestudyperiod.Thenetpresentvalue(NPV)ofallcostsandbenefitswerecalculatedusinga5percentdiscountratetobeconsistentwiththediscountrateappliedinthe2009KPMGcost/benefitstudy,thoughthisishigherthantheaverageGovernmentofCanada10-yearbenchmarkbondrateof3.5percentoverthestudyperiod.Allbenefits,withtheexceptionofadministrationandregistrationfeespaid,areadjustedfortherateofincrementalityoftheloansinceaportionofCSBFPborrowersmayhavereceivedallorpartofthefinancingtheyrequiredintheabsenceoftheCSBFprogram.Netbenefitsforeachfiscalyeararecalculatedastotalbenefitsadjustedforincrementalitylesstotalcostsforeachfiscalyear.Thebenefit-costratioforeachyeariscalculatedasthebenefitsadjustedforincrementalitydivided by total costs for that year.

Findings

CSBFprogramcostsbetween2003/2004and2011/2012aresummarizedinTable7.Programcostsincreasedfromabout$130millionin2003/2004to$145millionin2009/2010.Thegrowthinprogramcostswaslargelyduetocontinuedgrowthinclaimspaidandloandefaultcoststolenders.ProgramadministrationcostsbyIndustryCanada(i.e.salariesandbenefits,O&M,andcapitalexpenditures)representonaveragelessthan4 percent of total program costs.

Table 7: Summary of CSBFP Costs ($000)


CSBFprogrambenefitsaresummarizedinTable8.

Table 6: Rates of Incrementality

Scenario Rate of Full Incrementality Rate of Partial IncrementalityHigh 75% 0%Medium(BaseCase) 50% 25%Low 25% 50%


2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012

Salariesandbenefitsofprogram staff 2,404 2,520 2,581 2,038 2,317 2,428 2,369 3,298 3,284

Direct operating expenditures 1,036 1,108 982 947 769 581 277 477 696Capitalexpenditures 0 0 0 393 480 470 0 0 0Claimspaidonloandefaults 71,663 76,460 71,679 80,289 96,341 101,509 109,459 76,318 66,153Loandefaultcoststolenders 12,646 13,493 12,649 14,169 17,001 17,913 19,316 13,468 11,674Total costs 87,749 93,581 87,891 97,836 116,908 122,901 131,421 93,562 81,807

Discounted costs (at 5%) 129,645 131,678 117,783 124,866 142,103 142,274 144,892 98,240 81,807


Table 8: Summary of CSBFP Benefits ($000)


Totalannualbenefitsrangefromalowof$504million2011/2012toahighof$775millionin2003/2004duetobenefitsaccruingbothasaresultofnewloansissuedandthecompoundingeffectofloansissuedinpreviousyears.ThelargestcontributorstoprogrambenefitsaredirectGDPeffects,wagesandsalariespaidbyborrowerstonewemployees,andindirectGDPeffects.

Figure19presentsnetprogrambenefitswhendiscountedatarateof5percent.Netprogrambenefitsareatthehighestin2003/2004.Adeclinewasobservedinnetbenefitsthrough2009/2010duetohighclaimspaid,loandefaultcosttolenders,andadeclineinsalariesandwagespaidtonewemployees.

Figure19alsopresentsthebenefit-costratioforeachyearoverthestudyperiod.Thebenefit-costratioidentifiesthedollarvalueofbenefitsthataccruetosocietyforeverydollarofcostrelatedtotheprogram.Thebenefit-costratiodecreasedafter2003/2004asclaimspaidincreasedandcontinuedonadownwardtrendthrough2009/2010onlytorecoverin2010/2011and2011/2012asclaimspaiddecreasedandGDPimpactsincreased.

Figure 19: Discounted Net Benefits ($000), 2003/2004-2011/2012


TotalnetbenefitsovertheevaluationperiodarepresentedinTable9.Benefitsexceededcostsbyasignificantmargin.Specifically,NPVofprogrambenefitstotaled$5.6billionbetween2003/2004and2011/2012comparedto$1.1billionincosts.Alternativelystated,foreverydollarincosts,about$5.0inbenefitswerecreatedfortheCanadianeconomy.

2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012

Interest revenues on loans 37,241 27,420 46,767 60,409 67,817 56,314 20,783 32,884 48,440Salariesandwagespaidbyborrowerstonewemployees 112,800 94,688 64,247 65,641 71,068 61,913 66,443 71,255 64,174

Direct GDP impacts 193,589 199,910 208,847 200,485 199,394 186,771 196,547 209,432 200,104Indirect GDP impacts 129,697 132,960 138,762 132,868 132,409 128,168 134,533 143,942 137,846Administration and registration fees 51,553 53,821 56,221 55,770 55,067 52,895 52,393 51,732 53,117

Totalbenefits 524,880 508,799 514,844 515,173 525,754 486,062 470,699 509,245 503,680

Discounted benefits (at 5%) 775,487 715,932 689,940 657,506 639,057 562,678 518,945 534,707 503,680

6.0 5.4 5.9 4.5 4.05.3 3.6 5.4 6.2

645,841 584,253 572,157 532,639 496,954 420,404 374,053 436,468 421,874

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Net benefits

2011/20122010/20112009/20102008/20092007/20082006/20072005/20062004/20052003/20040.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Benefit-cost ratio

Net

Ben

efits

($00

0)


Table 9: Total Net Benefits and Benefit-Cost Ratio, 2003/2004-2011/2012


7. Sensitivity Analysis

Itisusefultoassessbyhowmuchmodelresultscanchangewhenkeyassumptionsarechanged.Accordingly,asensitivityanalysiswasconducted.Theanalysispresentstwoadditionalscenarios(lowandhighscenarios)inadditiontothemainCost-Benefitanalysispresentedabove(whichconstitutesthe‘medium’scenario).Themethodologyusedtocalculatenetbenefitsandbenefit-costratiosisthesameasdescribedabovewithchangesmadetoassumptionsondiscountrates,ratesofincrementality,employmentdisplacementrates,andratesofemployment creation.

Methodology

Table10summarizesthechangesmadetokeyassumptions.

Table 10: Assumptions for Sensitivity Analysis


Findings

Table11presentsfindingsfromthesensitivityanalysisforthelow,mediumandhighscenarios.Inthehighscenario,thebenefit-costratiois8.1,anincreaseof3.1overthemediumscenario.TheincreaseisdrivenbyariseindirectandindirectGDP.Inaddition,aboutathirdoftheincreaseisattributedtothechangeindiscountrates.

Category ValueNPV of program costs $1,113,288,000NPVofprogrambenefits $5,597,931,000Netprogrambenefits $4,484,643,000Totalbenefit-costratio 5.0

Low Scenario High ScenarioDiscount rate 3.5% 8.0%

Incrementality y 25% full incrementality

y 50% partial incrementality

y 75% full incrementality

y No partial incrementality

Employment displacement rate 75% 25%

Employment creation

y Employmentcreationis25%lower.Thatis,grossjobscreatedequal25%of the expected number of jobs created asreportedbyborrowersontheirloanregistration forms.

y Employmentcreationis25%higher.Thatis,grossjobscreatedequal75%oftheexpectednumberofjobscreatedasreportedbyborrowerson their loan registration forms.


Table 11: Net Benefits ($000) and Benefit-Cost Ratios—Low, Medium and High Scenarios


Inthelowscenario,thebenefit-costratiois3.5,adecreaseof1.5fromthemediumscenario.ThedecreaseisdrivenbyafallindirectandindirectGDP,areductioninwagesandsalaries,andadecreaseinthediscountrate.

Thesensitivityanalysisdemonstratesthatprogrambenefitssignificantlyexceedprogramcostsevenwhenbenefit-costmodelassumptionsarevaried.Thedifferencebetweenthehighandlowscenariostotaledabout$5billionmainlyduetothedifferingdiscountrate,employmentcreation,employmentdisplacement,andincrementalityassumptions.Totalprogramnetbenefitsofthemediumscenariowereabout$1.7billionhigherthanthelowscenarioandabout$3.3billionlowerthanthehighscenario.

8. Conclusion

Thecost-benefitanalysisoftheCanadaSmallBusinessFinancingProgramfocusedoncoststoadministertheprogramincludingsalariesandbenefitsofIndustryCanadastaff,directoperatingexpenditures,capitalcosts,andcostsofloandefaultstobothlendersandIndustryCanada.Theanalysisfocusedonthebenefitsgeneratedthroughtheprogramtovariousagents,includingadditionalsalariesandwagespaidtonewemployees,interestrevenuesearnedbylenders,directandindirectGDPimpactstotheeconomy,andregistrationandadministrationfees collected by the program.

Consistentwithpaststudies,theanalysisvalidatedtheprogram’screationofsignificantnetbenefitsfortheCanadianeconomy.Theestimateofnetbenefitsisbasedonanine-yearevaluationperiod,2003/2004to2011/2012,usinga5percentdiscountratetocalculatethepresentvaluesofbothcostsandbenefits.Thetotalnetpresentvalueofcostsoftheprogramwere$1.1billionwhereasthetotalnetpresentvalueofbenefitsoftheprogramwere$5.6billion,resultingintotalnetbenefitsof$4.5billion.Thistranslatesintoabenefit-costratioof5.0,indicatingthatforeverydollarincostbornbytheprogram,$5.0inbenefitsaregeneratedforsociety.

Asensitivityanalysisofcostsandbenefitswasalsotestedunderlowandhighscenarios.Thisinvolvedvaryingthediscountrates,ratesofincrementality,employmentcreationandemploymentdisplacementassumptionsandassessingtheresultsonnetprogrambenefits.Variationsintheseestimatesledtothesameconclusion,namelythatCSBFPbenefitssignificantlyoutweighedcosts.

2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 Total

Low scenario NetBenefits 347,743 327,603 354,953 331,095 304,256 259,393 227,007 289,875 293,257 2,735,182Benefit-costratio 3.7 3.5 4.0 3.7 3.1 2.8 2.6 4.0 4.6 3.5Medium scenarioNetBenefits 645,841 584,253 572,157 532,639 496,954 420,404 374,053 436,468 421,874 4,484,644Benefit-costratio 6.0 5.4 5.9 5.3 4.5 4.0 3.6 5.4 6.2 5.0High scenarioNetBenefits 1,330,268 1,139,682 997,693 911,767 846,284 696,147 617,962 666,001 608,247 7,814,050Benefit-costratio 11.5 9.9 9.7 8.5 7.1 6.0 5.3 7.8 8.5 8.1

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