BDC snows the Senate

Given that it’s Winter and all in our Nation’s Capital, it may not surprise you to learn than the Business Development Bank of Canada did a masterful job snowing the Senate of Canada’s Standing Committee on Banking, Trade and Commerce (“BTC”) in recent weeks. The Senate BTC Committee had been charged with conducting hearings into the BDC as part of Parliament’s 10 Year Statutory Review of BDC’s operations. From what I have seen so far, the myth-makers continue to ply their trade with impunity, and the Senators represent just the most recent example.

The Committee hearings were held last Fall, and the usual suspects were able to have their voices heard on the various topics. As you can imagine, no one appeared interested in what knowledgable critics might add to the review, so I was unable to secure an invitation to present the facts of life.

The Senate Committee has published its Report, and it is rife with the spin and influence that some of us have come to expect and admire from one of Canada’s finest lobbying machines. Here is the first of a series of examples that I’ll share over the next few days (it is March Break and all):

1. BDC has requested a removal of the $3 billion paid-in-capital limit. According to BDC, capital is at $2.997 billion, and removing the legislated limit would allow the government to have more freedom to “use the BDC to address the needs of capital-intensive activities, such as infrastructure projects and the venture capital sector.” pg. 18

In its Report, the Senate Committee recommended a doubling of the paid-in-capital figure to $6 billion.

You have to admire BDC management’s chutzpah, by pointing to venture capital as a key reason why the current $3 billion limit needs to be removed. The paid-in-capital issue is a red herring, as you’ll see momentarily.

With just 2% of its balance sheet assets in venture capital (2010 annual report pg. 59), it is hard to believe capital constraints are holding BDC’s senior managers back from deploying more money into IT, Clean Tech and Life Science deals. As for infrastructure, who knew they were getting into that well-financed private sector game?

Regardless, according to BDC’s own 2010 annual report (pg. 80) , it has a $1.69 billion “Capital Surplus”. Of the $3.648 billion of “Actual Capital”, only $1.957 billion is being used to underpin everything currently held on the balance sheet. Which means that merely 54% of BDC’s Actual Capital is being utilized, and BDC is asking the Feds to remove the cap completely because there’s not enough room to do more VC deals?

That sounds like the strategy the U.S. Parks Service uses every time Congress asks for cuts to the Parks operating budget:

“If you want cuts, we can always close the Washington Monument.”

According to its own financial statements, which would have been available to the Senators, BDC could increase the value of the VC assets on its balance sheet by more than $1.5 billion (more than four fold), and still operate within its current capital constraints.

Despite the fact that BDC is only using 54% of its capital base today, the Senate recommended the investment of an additional $3 billion of taxpayers dollars.

Chalk one up for the BDC GR machine.

MRM