Needed changes for Québec public venture capital corporations
Report of the Working Group on the Québec government’s role in venture capital
Québec, December 17, 2003 - “Major change is necessary. The Québec government must completely revise its approach to venture capital, notably with regard to the SGF, Investissement Québec, and the Innovatech corporations. The existing structures are too numerous, and must be simplified. The state must make more room for the private sector, particularly in high technology, and leave more control in the hands of local business communities in the regions.” So declared Mr. Pierre Brunet at a press conference in discussing the conclusions of the Working Group he chaired at the behest of the minister of economic and regional development, Mr. Michel Audet, on the Québec government’s role in venture capital.
More targeted government intervention and simplified structures
Mr. Brunet noted the public sector’s dominance of venture capital in Québec, stating that in 2002, some 70% of all such capital invested in the province was public in nature. In Ontario, the situation is the exact reverse, with only about 30% of public funds.
“We must arrive at a more logical sharing of roles between the private and public sectors, like already found in a number of other countries. The state must not be the only risk taker. Our Working Group is suggesting we build on our current model by adopting a new approach whereby the public sector plays a more targeted, complementary role, and acts in support of the private sector,” explained the Working Group chair, Mr. Brunet.
Over the years, Québec has set up 19 distinct entities that finance businesses: the SGF and its 12 subsidiaries, including SOQUIA, SOQUEM, REXFOR, and SOQUIP; Investissement Québec and its subsidiary La Financière du Québec; and the four Innovatech corporations. The government has invested over $3.6 billion in 10 years (1993–2002), with nearly 80% of that coming in the last five years (1998–2002).
To foster more cohesiveness of action, the Working Group recommends keeping two state corporations with the specific mandate to finance businesses—the SGF and Investissement Québec—and incorporating their subsidiaries into their respective parent corporations.
SGF and Investissement Québec roles refocused
While acknowledging that the SGF has an essential role to play in economic development, the Working Group recommends it take a whole new approach, notably to restore the corporation to profitability and counter the substantial losses it has rung up in recent years.
“The SGF should concentrate on large-scale projects of over $100 million, except in agrifood, forestry, and mining, where it has recognized expertise. Moreover within the next few years, the SGF should be able to generate the cash flow it needs from its own portfolio, and completely self-finance its operations,” explained Mr. Brunet.
Furthermore, the group has proposed that Investissement Québec focus on its core mission, i.e., loans and loan guarantees to businesses, particularly SMEs, and that it take more targeted action under the FAIRE program. In addition, Investissement Québec should take steps to cut its loan losses and self-finance its operation costs over time.
More room for the private sector
Despite adequate overall levels of venture capital, the report authors have identified specific weaknesses in the business financing chain, particularly in high tech and smaller projects in the regions. In response, they suggest creating three types of funds managed by the private sector:
- A mixed, private/public fund specialized in high technology for businesses in the initiation or startup phases, to replace the Innovatech corporations
- A private fund for high tech firms requiring subsequent rounds of financing in excess of $20 million when they reach the expansion stage, which generally coincides with the product commercialization stage
- In all regions of Québec, joint public/private regional initiative funds (RIFs) to finance smaller-scale projects whereby the government would contribute two dollars for every dollar invested privately, and management would be in the hands of the regional business community
Setup of an ad hoc committee on fiscal incentives
Lastly, the Working Group recommends setting up an ad hoc committee (Ministère des Finances, Ministère du Développement économique et régional, and business community) to examine the advisability and feasibility of introducing tax measures to encourage sufficient private sector participation in these three new types of fund.
“If the government elects to go ahead with these major changes, they will require a transitional period to smooth the passage to this new approach,” concluded Mr. Brunet.
For more, consult the WORKING GROUP REPORT ON THE ROLE OF THE QUÉBEC GOVERNMENT IN VENTURE CAPITAL at the following address: www.mder.gouv.qc.ca/accueil.html.
Chair, Working Group