Wednesday, May 02, 2012

Path looks clear for the Southwestern Ontario Development Fund

Quick takeaways:
  • Looks like the Bill that creates the Southwestern Ontario Development Fund will pass
  • No big changes in committee, although there will now be a standalone corporation managing the fund
  • SWEA and Invest Ottawa were among the presenters at the public hearings
  • I like a lot of SWEA's vision for the fund, except its reliance on commercial lenders
  • That's sounding like the old Michelin Development fund in Waterloo Region, which may be an achievable model, but not one I'd prefer

We're down to the homestretch at the Ontario Legislature for Bill 11, the proposed legislation that would establish the Southwestern Ontario Development Fund and continue the Eastern Ontario Development Fund. The NDP seem to be on board with the governing Liberals—and had the run of the place when the bill went to committee in April—while the PCs remain opposed. That means that, barring a late surprise, the bill should have enough votes to pass third reading [UPDATE: Had enough votes? Probably. Third reading vote? Never happened. See "No Southwestern Ontario Development Fund ... for now, anyway," June 21.]

Most of the details that will be of interest and debate are going to be in the regulations rather than the bill itself, which avoids such messy issues as which areas are eligible and ineligible and how the fund will actually operate.

Clause-by-clase amendments
Since the details are in the regulations, the clause-by-clause consideration by the Standing Committee on General Government mostly dealt with higher level issues. The PCs supported every amendment the NDP proposed, so all of them passed and became part of the bill. One amendment—which the NDP said was modelled after the Northern Ontario Heritage Fund—will require the creation of two new corporations to manage the SWODF and the EODF. Each will have its own board, consisting of the minister and at least seven other people, who must be residents of the area covered by the fund. The board will establish a local advisory committee that "must reflect sectoral and sub-regional interests" in the region.

A second amendment will require every funding agreement to include performance standards and that payments received by companies be paid back to the fund if they don't satisfy the standards agreed to. All funding agreements would be available for public inspection, with any commercially sensitive information removed. Nothing particularly dramatic, and those were the two biggest changes.

Public hearings
Public hearings were held two weeks before the clause-by-clause review. There were fewer requests than expected to speak to the committee, so there was only one day of hearings instead of the two that had been pencilled in. One of the groups appearing before the committee was SWEA—which MEDI Minister Brad Duguid identified as the main instigator for the creation of the SWODF, with support from SCOR, SOMA and the Western Ontario Wardens' Caucus (all groups I had the opportunity to meet when I was overseeing Ontario Network of Excellence outreach in small urban and rural areas across much of Southwestern Ontario). Other groups to present included ONE member Invest Ottawa, the Windsor-Essex Economic Development Corporation (WEEDC), and the Greater Niagara Chamber of Commerce, along with representatives of Durham Region and the District of Muskoka. Two businesses and an individual also gave presentations.

Durham and Muskoka were concerned about falling through the cracks of the three regional funds that would exist if the bill is passed. They aren't in the north, east, or southwest. There may be several others in the same boat once all the definitions are in. There'd better be, because there isn't enough money in the three funds to cover everyone. Even so, if I'm an oddsmaker, I think the coverage for SWODF will be broader than I'd prefer.

Even Invest Ottawa was mostly trying to get in on the action, since the urban parts of Ottawa are currently excluded from the EODF. Invest Ottawa CEO Bruce Lazenby (who mentioned growing up in London) told the committee that Ottawa has "hundreds of companies that will not succeed because they can't get $5,000, $10,000, $50,000, $75,000, that little bit which is going to tip them over into the next phase." He said Ottawa is "on the cusp" and will either succeed or "get beat up" over the next couple of years.

The role of commercial lenders
SWEA has consistently been advocating for a fund that is both loan-based and integrated with commercial lenders—and Harry Joosten from Libro Financial Group was part of its delegation, along with chair Dan Mathiesen and president Serge Lavoie. Much of what SWEA has recommended is compatible with my preferences—a low ceiling on the funding received by any one company, a low threshold on the number of jobs any single company is required to create, an emphasis on what Lavoie called "a grassroots approach to building small business" and a specific reference to startups (Lavoie was the only presenter who explicitly refered to business startups, although they were implicit in Lazenby's presentation as well)—all of that was great for the committee to hear.

But I'm still skeptical of the commercial lender-focused approach. The model described by Joosten would have companies first go to a bank, credit union, or other qualified lender and "go through all the normal credit assessment procedures." Companies would have to complete this assessment before being evaluated by a committee from the fund. They would then get credits at the end of each year for each job created (smaller amounts in the second and third years), and could use those credits to repay their loans.

Joosten undoubtedly has a rosier view of the value of commercial lenders to growing companies—particularly early-stage ones—than my experience has provided me. Above all else, this fund is supposed to be a tool for regional economic development, and I don't agree with Joosten that "the expertise is there" within banks or that they've shown themselves to be sufficiently progressive in working with high-potential companies that I would make them the gatekeepers for the fund.

The SWEA vision for the fund doesn't sound very different from the Michelin Development fund that we had in Waterloo Region a few years ago—although the banks would be even more hands-on in this case, which I don't see as a positive. I was on the review committee for the Michelin fund for about a year. It made some good loans (Miovision was one of the recipients), but had a hard time dealing with companies without hard assets and overlooked many promising companies. As long as companies met the credit worthiness check, it was mostly a superficial matter of dividing the loan request by the number of jobs they were claiming to create and seeing if they met the threshold. There was no consideration for regional economic development—which wasn't Michelin's mandate, so that was fine but I don't think anyone could say it had any kind of transformational effect on the community.

Maybe for $20 million that's as good as we're going to get with the SWODF—the Michelin fund was one-seventh that size and served a population about one-seventh as big (assuming the City of Hamilton isn't included in the SWODF). So that could be a realistic model, which is a sobering thought. Better than nothing, but I'm hoping for more.