Merger not enough for SGF

The Quebec government has just announced its intention to merge the Société générale de financement (SGF) and Investissement Québec, two government corporations that aim to stimulate the growth of businesses in the province. The debate that has begun over this reform offers the perfect occasion for evaluating the historical results of the SGF.

The SGF’s preferred method of intervention since its creation in 1962 has been direct participation in capital and in the creation of businesses, notably in the industrial sector, in collaboration with partners. In 2009, however, the government authorized the SGF to grant loans to help businesses during the financial crisis and supplied it with $500-million of additional capital for this purpose.

As it has long been Investissement Québec’s mandate to extend loans to businesses, this new situation may have created confusion among businesses seeking financing. At first glance, then, the merger of the SGF and Investissement Québec, which would end this redundancy and save some $10-million in operating expenses, certainly seems like a good idea.

A closer look at the SGF’s historical results, however, suggests that a mere merger is not good enough. The SGF has sustained losses one out of every three years since it began operations. Moreover, both the frequency and the size of those losses have increased substantially over the past 10 years. The SGF has lost money during six of the last 10 fiscal years, which translates into a negative balance of $1.07-billion over this period.

The funds invested by the Quebec government since the organization’s inception total $2.6-billion in capital. On December 31, 2009, there remained only $1.8-billion. The management of the SGF has therefore obtained a negative annual rate of return (-1.0%) on the capital entrusted to it by the government since its creation.

Investing in the SGF entails much more risk than buying Quebec government bonds. To compensate for this risk, an acceptable rate of return should be comparable, for example, to that of companies listed on the stock market. The Toronto Stock Exchange has earned shareholders an average yearly return of 9.9% since 1962.

Had the SGF’s management obtained this rate of return since 1962, its holdings would have been worth $9.2-billion at the end of 2009. The SGF therefore represented an opportunity cost of $7.4-billion for Quebec taxpayers — the difference between the amount that would have been obtained by investing the SGF’s capital in the stock market since its creation and the amount actually remaining as of Dec. 31, 2009.

Given the resources put at the disposal of the SGF since its inception, what role has it played in the development of large Quebec businesses? The answer is: a negligible one.

Over the years, the government corporation has invested in seven of the 100 largest businesses in Quebec (based on number of employees): Bombardier, Cascades, Domtar, Rona, Saputo, Tembec and Transcontinental. Only Rona received an investment from the SGF before being listed on the Toronto Stock Exchange, and this in the year immediately preceding its initial public offering, when it had already attained a respectable size. For the six others, the SGF’s investment occurred several years after their listing on the stock market.

None of these “jewels” of the Quebec economy needed the SGF to develop. When the SGF did intervene, it was after these businesses had already reached an advanced stage of development.

The SGF’s disappointing performance since its inception is explained in part by the fact that its portfolio contains a disparate assortment of investments with no unifying thread. Given the inconclusive historical results of the SGF, the Quebec government should seriously consider redefining the role of the new organization that will result from the announced merger with Investissement Québec. In particular, this new entity should abandon the part of its mandate that consists in buying direct shares in the capital of various companies.

Claude Garcia is an associate researcher with the Montreal Economic Institute and a former president of Canadian operations at Standard Life.