The LSIF Economic and Fiscal Impact Study was conducted by Don Allen, President of Regional Data Corp. Mr. Allen started his career in econometric research at Statistics Canada in 1965. He has been developing and analyzing databases for 40 years.

The study examined investments made by labour-sponsored investment funds (LSIFs) in the mid- to late- 1990s and in 2000-01. It analyzed results obtained by a sizeable sample of firms that received financing from ALSIF member funds up to 2001.

The study obtained detailed data on 185 investee companies into which members of the Ontario-based Association of Labour-Sponsored Investment Funds had placed $1.15 billion. The study measured their growth from pre-LSIF financing to the year 2002. Using conservative estimates, a portion of this growth was attributed to the LSIF share of all company financing. To estimate the impact on GDP, the impact of the total company growth attributable to LSIFs was simulated on the full economy. This also generated estimates of government revenue impact, leading to a payback period estimate on the costs to government of raising LSIF capital.

The study used the FOCUS and FOCUS-Ontario macroeconometric models built and maintained at the Institute for Policy Analysis of the University of Toronto. For this study, the University of Toronto prepared estimates of the effect of LSIF funding on the economy in 2002. Input data for the models was gathered by the funds from investees and files. These are impacts occurring one to five years following the fund investment in the firm.

II. LSIF FUNDING IMPACT ON INVESTEE FIRMS

ALSIF Funds accommodate financing requests from a good deal of start-up enterprises. In fact, approximately one third of investee firms are start-ups.

A. Employment and Payroll

Prior to receiving LSIF funding, the investees in the study sample had a cumulative total of 9,000 employees. After receiving funding, this number grew sharply to 31,800 by 2002, and payroll jumped from $430 million to $1,800 million.

B. Exports

C. R&D

A good deal of ALSIF investment is to finance R&D. According to the survey, almost two-thirds of investee firms carry out R&D – 116 of 185. Before ALSIF financing, these companies carried out $175 million of R&D and by year 2002, this total had quadrupled to $700 million.

D. Role Played by ALSIF Funds in Investees' Development

ALSIF funds play a significant role in the business development plans of investee firms, and provide one third of the total capital obtained by these companies.

42 per cent of investee firms in this study states that their project would not have proceeded if LSIFs did not exist and another 3 per cent would have moved the investment outside of Ontario, if the province had no LSIF. This means that almost half found the LSIF essential to their project proceeding here.

Close to one third (31%) responded that their project would have been scaled back, without the LSIF, possibly with a delay in proceeding.

III. ECONOMIC IMPACT OF LSIF FUNDING

A. Taxes Paid by ALSIF Investees

As investees of ALSIF funds are becoming profitable , they are subject to corporation income tax. As employers, they pay significant amounts in employer health tax. Below is the distribution of taxes paid by the 185 study sample investees in 2002.

The largest growth in tax remittances since ALSIF Funds first participated in these firms was Ontario employer health tax, rising from $8m. to $38m.

B. Economic Impact

For this study, the author used a 5-step procedure to calculate estimates of the incremental growth of each investee that could be attributed to the existence on LSIFs. He totalled the sample data, and modified them to an estimate for financing by participating Funds to investees still active in 2002.

ALSIF Fund investees grew in size to $5.8 billion by the year 2002, as measured by total annual operating expenses. The 5-step procedure attributes $1.6 billion of this growth to the Funds' participation.

The following table outlines the amounts of incremental growth attributable to ALSIF funding.

The author submitted these totals to the University of Toronto Policy and Economic Analysis Program. PEAP staff simulated the impact of the incremental Ontario companies' activity attributable to the existence of ALSIF Funds upon the economy of Ontario and Canada, using econometric models. Essentially, their methodology addressed the question, "If LSIFs did not exist, how much smaller would the economy have been in 2002, for Ontario and Canada overall?"

The UofT estimates indicate that company growth attributable to ALSIF investments contributed $2.3 billion to the GDP of Ontario $2.6 billion to the GDP of Canada. That is to say, if ALSIF Funds had not existed, GDP would have been smaller by those amounts.

It is estimated that the direct, indirect and induced impact on employment was 27,000 jobs in Ontario and 29,400 jobs for all Canada.

Ontario's unemployment rate in 2002 was 7.1%. If the $1.6 billion investment of ALSIF Funds had not existed, the rate would have been about 7.4%.

From the investee database, not the model, the author dervied an estimate of export growth attributable to ALSIF Funds financing of $650 million. Financing by the Funds contributed to R&D growth totaling an estimated $170 million in 2002.

C. Fiscal Benefits - Taxation

The UofT models provide estimates of incremental revenues flowing to governments as a result of increased economic activity. These benefits result from (1) the direct activity of investee firms, (2) indirect activity through increased business for supplier firms and (3) induced activity throughout the economy from the expenditure of increased direct and indirect incomes.

From the Ontario model, the study estimates that provincial revenues would have been lower in 2002 by the following amounts, if ALSIF Funds did not exist. Employer health tax is included in indirect taxes.

From the Canada model, the study estimates that federal revenues would have been smaller by the following amounts, if ALSIF Funds did not exist:

The table below shows, for the period from inception of ALSIF Funds that operated in 2001, the estimated fiscal costs up to and including 2000 tax year. This table concludes with an estimated cost of $983 million to the two levels of government for capital raised by ALSIF Funds from inception through tax year 2000.

Canada/Ontario Fiscal Cost for ALSIF Funds, 1992-2000 ($ million)

These data imply that the majority of government cost of raising capital from inception through the 2001 RRSP season (2000 tax year) was recovered from the activity of investees during 2002. For Ontario, the payback period was 1.4 years. For the federal government, with its higher tax rates, the payback period was 1.1 years.

Because most investees are growing firms, the fiscal return in 2003 would have been larger in 2003 than 2002, and so on. Therefore, these are lower bound estimates on payback periods for governments.

D. Future Economic and Fiscal Impact

As investee firms grow, there will be longer-term company growth, job creation and revenue benefits for governments, that may continue long after the Fund exits from the investment. R&D spending by investee companies helps to attract and maintain human capital by providing job opportunities in Ontario. A successful business in a particular sector can lead to spin-offs and development of industry clusters.

The payback period should be less than one year for each government, for at least three reasons:

• In this study, the author looked at the costs from Funds' inception to tax year 2000, which were on the order of $500 million per government. However, on an annual basis, combined government costs would be of the order of $150-250 million, depending upon amount of capital raised. Therefore, there is a much smaller amount to be "paid back" on an annual basis than what the author has computed in this study.
• Venture capital investees and former investees are generally growing companies. Therefore, if their activity generated fiscal benefits of the order of $800 million in 2002, the sum should be greater in 2003 onward.
• More and more ALSIF Fund investments will come at no cost to government, as time passes. As the Funds mature, they will exit from more and more investments, liquidate their capital and re-invest it in new projects. There will be no cost associated this recycled capital investment, because the cost was a one-time cost, occurring when the capital was originally raised from shareholders. Therefore, the ratio of government cost to amount invested will diminish and the ratio of benefits to costs should improve.