Small and Medium-sized Enterprise Financing in Canada - Appendix: SME Financing Data Initiative — Stakeholder Consultations, Fall 2002

In the fall of 2002, Industry Canada, Statistics Canada and the Department of Finance Canada consulted with stakeholders in Toronto and Ottawa on a series of questions related to the implementation and improvement of the SME Financing Data Initiative (SME FDI), which was launched in 2000. The objective was to engage stakeholders in the resolution of two issues that remained outstanding from the first round of consultations in 2000:

Develop measures to link authorization size to employment size for client businesses as an approach to resolving this issue; Develop a revised definition of knowledge-based industries (KBI) based on the North American Industrial Classification System (NAICS) codes.

During the consultations, the SME FDI partners proposed:

• a practical approach to link authorization size of loans to employment size of firms by number of employees; and
• a revised KBI definition, based on the methodology used in 1996, which made the fewest possible changes to the current definition of KBIs.

Based on a series of questions from SME FDI partners, stakeholders were invited to provide written comments on the proposed approach, including: What legal/technical issues need to be addressed? What other compliance issues need to be considered? Are there alternative approaches? When should the link between employment size and authorization size be implemented? Are there sectors that fall outside the boundaries of the converted Standard Industrial Classification (SIC) codes from Tiers I and II that should be included in NAICS (e.g. advanced materials that were not included previously because the industries in question made up very small portions of a large number of SIC codes)? If so, on what criteria?

Linking Authorization Size to Employment Size of Firms (By Number of Employees)

Issue

Through the Survey of Suppliers of Business Financing, Statistics Canada collects and publishes data from Canadian financial institutions on the amount of financing supplied to businesses by authorization size of loans and leases. Since 2000, Industry Canada has used authorization size as a proxy measure to report on SME financing to the Industry Committee on the state of SME financing. However, 2000 data from the (demand-side) Survey on Financing of Small and Medium-sized Enterprises show that the average debt authorized for medium-sized businesses (100 to 499 employees) was over $1.5 million. For smaller businesses, this average ranged from $64 000 for businesses with fewer than five employees to over $600 000 for businesses with between 20 and 99 employees. These results illustrate the risk of using a proxy measure — the average authorization for a medium-sized business in 2000 was well above the proxy threshold. Also, Statistics Canada found considerable variation between the average amounts authorized for businesses with fewer or more employees. These findings indicate that a sound assessment of the state of SME financing will require solid employment size estimates for several employment size categories.

Proposed Approach: A Supplement to the Survey of Suppliers of Business Financing (SSBF)

During the last round of consultations (2000–2001), financial institutions indicated that they could not provide reliable data on employment size from their own database. In the proposed approach, Statistics Canada would select a sample of suppliers (banks, credit unions, leasing companies) and ask them to provide information (name, address, telephone, CCRA number, authorization size, amount outstanding) about a random sample of their business clients. Statistics Canada would then use this information to link each business to the Statistics Canada Business Register to obtain an estimate of employment that would then be combined with the authorization size and supplier type information to create a model of employment size by authorization size, by supplier type. This model would distribute all authorizations reported by suppliers to the size of the firms to which they likely were given.

Stakeholder Reaction:

1. Privacy and confidentiality of information: Stakeholders raised a number of legal implications, including privacy and confidentiality concerns regarding potential legal breaches, notably with the Personal Information Protection and Electronic Document Act, the Bank Act and the Statistics Act, under the purview of Industry Canada, Finance Canada and Statistics Canada, respectively.
   
   Action: To alleviate stakeholders' legal concerns and stimulate an informed debate, the SME FDI partners requested formal legal opinions. According to the various counsels, the privacy and confidentiality issues raised by stakeholders are not well-founded and should not hinder the implementation of the partners' proposed approach. The SME FDI partners will propose a realistic action plan for the implementation of the approach, and discuss it with private sector stakeholders.
   
   
2. Using the demand survey: Stakeholders suggested adding questions to the Survey on Financing of Small and Medium-Sized Enterprises to identify the amount of liabilities and total number of employees, which would allow an assessment of the relationship between authorizations and employment size.
   
   Action: Although using the demand survey to ask small and medium-sized businesses about their liabilities and employees seems to be a reasonably promising method, this approach holds a number of challenges that must be considered prior to implementation. The SME FDI partners are currently examining the advantages and disadvantages of using the demand survey as well as its likelihood of providing positive results within the five-year implementation period, scheduled to end in 2005.

Definition of Knowledge-based Industries

Issue

The definition of knowledge-based industry (KBI) must be modernized, based on the North American Industrial Classification System 1997 (NAICS-97) used by chartered banks to report to the Industry Committee on lending activities.

Background

In 1997, Industry Canada, the Business Development Bank of Canada (BDC) and the Canadian Bankers Association (CBA) developed a standard KBI definition in response to the Industry Committee's request. The definition was based on Statistics Canada's Standard Industrial Classification 1980 (SIC-80). Since the development of this definition, the BDC and the CBA have used it extensively to report on their volume of lending to KBIs.

All parties recognized in 1997 that this definition was handicapped because of the limitations linked to the age of SIC-80 — for example, several critical sectors of the new economy were not covered in this industrial classification. In 1998, however, the successor to SIC-80, called the North American Industrial Classification System (NAICS-97), was finally adopted. This system, which was implemented under the North American Free Trade Agreement (NAFTA), reflects the current economic and industrial structure and has the added advantage of being the standard for the all of North America. In 2000, Industry Canada reviewed the definition of KBI to convert it from SIC-based groupings to NAICS. However, this conversion was rather mechanical and did not consider stakeholders' views.

Commercial banks have yet to adopt the new NAICS-based definition and continue to use the original 1997 definition of KBIs. They advised in the fall 2002 that their SIC-based reporting systems met their needs and that they did not see any benefit in changing their database to NAICS. As a result, when Statistics Canada requests information from the banks on their lending and other financing activities by industry, they provide their data using the old definition. Statistics Canada then converts them into NAICS, but since many businesses are likely not classified properly, the results are unreliable.

The lack of a revised KBI definition based on the NAICS could compromise the capacity of the federal government to understand the impact of KBI enterprises in the Canadian economy. This definition gap will increase in the future with the introduction of a new industrial classification system in 2007. At that time the industrial classification system should allow international comparison between Canada, the US, Mexico, the European Community and the United Nations statistical system. The introduction of these new systems will require a deeper revision of the KBI definition.

Proposed Approach

In the fall of 2002, a joint public-private sector consultative group was proposed to discuss the revision of the KBI definition. It was proposed that the group make minimal changes to the current SIC-based definition to reach an agreement on a revised KBI definition. While a limited number of stakeholders expressed interest, the BDC was enthusiastic about participating in such a group.

Next Steps

In the short term, Industry Canada will consult with Statistics Canada to update the present NAICS-based definition of KBI. Such work will cover inter alia, the inclusion of advanced industrial materials and Internet-related activities into the definition. The CBA and the BDC will be invited to participate in the proceedings should they be interested.