Government Operations Committee on May 1st, 2007

[The Chair, Liberal, Diane Marleau]

It's referred to as Canada Lands.

[Diane Bourgeois, Bloc, Terrebonne—Blainville, QC]

Fine then, Canada Lands. However, the witness was talking to me about land.

[The Chair, Liberal, Diane Marleau]

No. Canada Lands is a Crown corporation that sells surplus federal government properties.

[Diane Bourgeois, Bloc, Terrebonne—Blainville, QC]

I understand. I apologize.

So then, has Canada Lands mismanaged any properties? The corporation is responsible for maintaining properties on behalf of Public Works and Government Services Canada. Could it have sold these properties, in light of its expertise in the area of business standards?

Perhaps I misunderstood?

[The Chair, Liberal, Diane Marleau]

By Canada Lands, what exactly do you mean? Are you referring to Public Works and Government Services Canada, the department that manages federal property? Each department, Heritage Canada for instance, also has certain responsibilities.

[Diane Bourgeois, Bloc, Terrebonne—Blainville, QC]

The Canada Lands Company Limited is a Crown corporation.

[The Chair, Liberal, Diane Marleau]

Is it Canada Mortgage and Housing Corporation?

[Diane Bourgeois, Bloc, Terrebonne—Blainville, QC]

It's not the Canada Mortgage and Housing Corporation. I'm talking about a Crown corporation that reports to PWGSC and that is responsible for managing our Canadian heritage— that's what our binder says—and for selling federal properties, albeit commercially managed properties.

Why then did we turn to the banks for help when Canada Lands has this expertise?

[The Chair, Liberal, Diane Marleau]

Mr. McKellar, maybe you can try to answer that. I think she's talking about Canada Lands and their expertise, and why we didn't use them versus going out to somebody else. Maybe that's the question.

[Prof. James McKellar]

Well, I think Canada Lands' expertise is in a particular area, and that is to take surplus property, add value to it by taking it through zoning and changing the use, and then sell it. They actually act as a broker on behalf of the different ministries. In other words, they act on behalf of the ministries themselves, and they get the money in their account. They actually provide a professional service.

Could they deal with this? I suppose they could, but they probably wouldn't have the expertise to deal in what we call the capital markets. We're not selling bricks and mortar; we're actually selling future income. In a sense, we're really selling a bond, and that's what the government is saying. We guarantee that if you can take these buildings, upgrade them, and do whatever we require, in a sense, we're willing to pay you a sum of money for 25 years.

The market really looks at this as being like a bond. It's why I say it's very comparable to a mortgage-back security and that kind of thing. It's not really a building they're selling, because the people who are going to buy it are people who need to get an income--pensioners, institutions, etc.

Could Canada Lands do it? They likely could, but it isn't their expertise.

[The Chair, Liberal, Diane Marleau]

You have one minute remaining, Madam.

[Diane Bourgeois, Bloc, Terrebonne—Blainville, QC]

Thank you, Madam Chair.

Nevertheless, I want to check into Canada Lands' mandate, because I feel this is rather important. Perhaps we could even hear from some corporation officials.

Mr. McKellar, you stated that not every single detail is disclosed when the government enters into a sale/leaseback agreement. We asked some questions about certain clauses, but we were told that this was confidential information that could not be discussed.

In your opinion, should the committee know the details of all of these clauses? Is it normal to be told that these clauses are confidential and that the scope of the business arrangements cannot be disclosed? Should members of Parliament know the specifics of these clauses?

[Prof. James McKellar]

I'm not sure if I know how you should do your business. Again, I don't know the extent to which this is held to be confidential in negotiations. It's a very difficult issue when the government deals privately, because there is this issue of confidentiality and then subsequent disclosure. I don't know what your powers are to request more detail. Certainly, I don't know any more than you on this.

I can appreciate your concerns, because, as I've indicated, there are the two big variables of public perception and political risk. You can't transfer those. You can transfer all the other risks, but you can't transfer those two.

[The Chair, Liberal, Diane Marleau]

Thank you.

Mr. Albrecht.

[Harold Albrecht, Conservative, Kitchener—Conestoga, ON]

Thank you, Madam Chair.

Thank you, Mr. McKellar, for your very good summary of this issue. I feel that you pointed out in a very clear manner both the risks that are inherent and some of the potential benefits of the sale/leaseback.

You pointed out on page 2 of your summary that the big problem is the inability of almost all governments at all levels in all countries to meet the obligation to maintain their assets. You went on to point out that deferred maintenance is pervasive, from school boards to national groups.

I can certainly attest to the school board issue, having served as a trustee for a number of years. There was nothing easier at budget time than to find a few extra million dollars by deferring maintenance that we all knew was really necessary. But the horrendous challenges that would face us down the road, whether it was roof maintenance, avoiding mould, or structural challenges, certainly came back to hurt us.

You also went on to suggest that we need to admit we are lousy managers of property. You pointed out that finding good people to manage them is difficult because the competition is fierce.

You then indicated that the timing is good in terms of the value of the real estate right now. In addition, you've pointed out the possible improvement of working conditions for employers.

Having said all that, it seems to me as a committee member that this is a very reasonable path for our government to pursue in terms of getting good taxpayer value for the taxpayer dollar.

If we were to sign a lease and go to sale/back-leasing, what are some of the key contractual elements or agreements that you would encourage a prospective tenant, the Government of Canada, to make sure are in that lease?

You mentioned the possibility of a poor landlord not meeting obligations. What are some of the key items that we should make sure are in the lease?

[Prof. James McKellar]

I think you have to be very clear on the performance requirements you want. You have to have measures by which you can force that performance or change the lease. So I would say that the lease should certainly have in it what I would call output factors.

I think a second thing that you would want is the ability to vacate that space, or portions of it, some percentage. For example, in the deal that England had, which was called the PRIME deal, I think they were allowed to vacate up to 35%, and it was something like 10% a year. In other words, you would want the ability to be able to move.

A third factor you may want to look at is a way in which you gain some benefit from the cost savings because you are the tenant. If tenants turn off their lights, they should get some benefit. So you may want to look at factors by which the efficiencies and the cost savings don't just go to the landlord but also go to the tenant.

[Harold Albrecht, Conservative, Kitchener—Conestoga, ON]

Do you have a summary as to whether other governments, whether provincial or other national governments, have gone down this road? Subsequent to that, has it been a good experience economically? Has there been evidence of political fallout? You said we can't assess that risk, but do you have any experience on that front?

[Prof. James McKellar]

I do. I had experience with one in the Ontario Realty Corporation, in which we did the sale/leaseback. Unfortunately, it was subject to political influence because the owner went to the local MPP and said “I got a bad deal.” Then all of a sudden it was, “This poor guy got taken by the government”, and they wanted to renegotiate the lease. It was such a can of worms that I think we said we're not going to do anything with those.

I don't think at the federal level you're as subject to this. At the local level it's terrible. But every local politician is a real estate expert, and for everything you do they want to be involved. I remember at ORC trying to sell a small site that no one would care about in a small town. Before long, it was the local MPP. I'm not sure if you have the same at the federal level, and I'm not saying here. But there was a point at ORC when I said, “I just don't want to sell anymore assets, because every time we do it's on the front page of The Globe and Mail, and there's John Barber writing some article of which he knows nothing about.” So it was just fraught with this kind of problem.

As I say, it is a very imperfect asset, and it's subject to all kinds of speculation. I recall we sold a site in the Muskoka area and around it were very wealthy people; it was sold for about $4 million. Somebody phoned the press and said it was worth $8 million. That was it. We pulled the deal because it wasn't worth $8 million.

So anytime you get into this there is that. As I said near the end of my paper, the process is very important, because if you don't handle it well, it'll come back and blow up in your face.

[Harold Albrecht, Conservative, Kitchener—Conestoga, ON]

You mentioned some local and provincial issues. Do you have any examples in other countries--England, Australia, New Zealand--any other countries that have gone down this road with their national assets?

[Prof. James McKellar]

Actually, I would say Australia, New Zealand, and England have been much bolder in doing it, and they've done it on a massive scale.

[Harold Albrecht, Conservative, Kitchener—Conestoga, ON]

In the recent past? Or has this been in operation for many years already?

[Prof. James McKellar]

I would say that over the past decade we've had good examples of doing this in other countries.

What you're doing is actually what other countries are doing. We learn from them, and they make their mistakes, etc., but this isn't new. In fact, you might say selling eight buildings compared to what we've seen in Australia and England is a rather timid approach. The famous PRIME one was a massive deal, as I said. One ministry turned over all their properties.

I will come back to my point. Most governments realize they're not good managers of their assets, so they're all looking for solutions.

[Harold Albrecht, Conservative, Kitchener—Conestoga, ON]

Thank you. I think you've given a very candid overview, and I appreciate it.

[The Chair, Liberal, Diane Marleau]

Thank you, sir.

Madam Nash.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you.

Good afternoon to you. Thank you for coming here to share your expertise with us.

The first question I have is a question we asked the minister when he was here, about having the companies that do the assessment of whether or not a property should be sold be the companies that are engaged to transact the sale.

Is this a normal situation in these types of real estate arrangements?