Public Accounts Committee on June 6th, 2013

[Lysane Blanchette-Lamothe, NDP, Pierrefonds—Dollard, QC]

You are saying—

[The Chair, NDP, David Christopherson]

A real short question, please.

[Lysane Blanchette-Lamothe, NDP, Pierrefonds—Dollard, QC]

Okay.

You are committing to looking at other methods of financing in the event that financing costs show a sharp increase.

What do you understand by “sharp increase”?

Do you already have different financing methods in mind that you could turn to if financing costs show a sharp increase?

[Richard Botham]

The financing means, as I say, would be invariable. The financing means are general government revenues and general borrowings.

It was our view that the appropriate way of calculating a hypothetical borrowing cost is to use treasury bills, given the nature of PPP Canada's drawdown of funds. We would continue to monitor the hypothetical borrowing costs using the methodology we established. We think it's appropriate given the hypothetical construct we're working within, so we would continue to do that.

[The Chair, NDP, David Christopherson]

Thank you. Time has expired.

Mr. Kramp, you have the floor, Sir.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you, Chair.

I'm going to direct a number of my questions to start to Mr. Smith. I'm basically looking for some information with regard to the investment strategies and investment responsibilities.

What I would like to know to start with is about the one who is responsible for your investment strategies. Is it an individual, a group, an agency, or do you actually have an investment board?

[Greg Smith]

PPP Canada is responsible for that. Initially the governance around that goes to our board of directors, whom we report to regularly, who review our investments every quarter during an audit committee meeting. They look at the strategies and make sure we're compliant with all of the policies that have been handed to us from Treasury Board. So it starts with them.

Then there are delegations down to management that on a regular basis are going into the marketplace. You have to understand we can only deal with the major financial institutions. We can only deal in bankers' acceptances or treasury bills. We are very limited to what we do. We make the calls around to all of the financial institutions when we have a maturity coming, and we choose the highest rate that's available for that day.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

You're limited as to what you can do. Who mandates that limitation? Treasury Board or what?

[Greg Smith]

That policy was established by Treasury Board.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you.

You have significant funds held in short-term investments. If a significant part of your funding is not expected to be disbursed for several years, why are these investments still held in short-term funds?

[Greg Smith]

The policy established by Treasury Board allows us to lock in a longer than one-year term investment when we know we have a payment that's going to go on a contract when that public asset is constructed and our payment is due.

If we don't have those in contractual arrangements and know when our payment's going to be due, the Treasury Board policy we have says we can only invest up to one year.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Maybe my colleagues on the other side will permit me a little bit of indulgence here, but that almost sounds pretty conservative from the point of view of investment potential, in that obviously when we take a look at market returns.... You're obviously just being very safe though. Has that been mandated by Treasury Board rather than taking a look at, potentially, some other gains that could be significant?

[Greg Smith]

You would have to ask Treasury Board, but our view is that we are a very safe investment.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Okay. Thank you.

With regard to some of the other factors, I've lived through that period where I had both investments and capital costs and interest was a single digit, and I've lived through that disastrous period when the interest rates went to 22%. If you were heavily leveraged at that point, you had a huge challenge, but of course on the investment side it also presented other circumstances.

As the financing costs change with the rise of interest rates—and I think it's a given—are you saying, “Well, with interest rates where they are now and it having been stable for the last number of years, it looks like we're probably going to stay there for the next five or ten years”? Or, are you anticipating and/or prepared to adjust your investment strategy? Are you locked into a particular manner that basically negates your having the flexibility to do what you need to do?

[Greg Smith]

The strategy that's discussed with our audit committee.... To the extent that we have investments with a maturity of less than one year, we try to get those maturities to happen equally during the 12 months, so we can be ready should there be any changes in the interest rates within the market. That's the strategy. The audit committee does not anticipate what interest rates are going to do. We've been handed the rules under which we can invest, and we're going to spread it over the year, compliant with that, to make sure we have the liquidity when we need it.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you very much.

I have one more brief question, if I have an opportunity. I'll direct this to the Auditor General's office.

I want to make sure we're talking about apples and apples, not apples and oranges here. The Department of Finance noted that the Auditor General used a different methodology to estimate net financing costs.

Could you tell me why you used a different methodology than the Department of Finance?

[Sylvain Ricard]

We describe in the report the reason that we felt the method we used was the appropriate one.

I think even as recognized by the department—in the response on the operating statement, or maybe both—borrowing at the government level does not link specific payments to any specific organization. Nobody can say, well, that dollar going there is financed short term or long term. Given that I couldn't claim it was short term or long term, we felt the appropriate rate to use would be a weighted average of short-term and long-term borrowing tools.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Okay, fine. Thank you.

Now, you—

[The Chair, NDP, David Christopherson]

Sorry, Mr. Kramp. Nice try.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you very much, Chair.

[The Chair, NDP, David Christopherson]

You're welcome.

Moving along over to Monsieur Giguère. You have the floor, sir.

[Alain Giguère, NDP, Marc-Aurèle-Fortin, QC]

Thank you, Mr. Chair.

My thanks to the witnesses for coming to meet with us today.

Mr. Smith, you surprised me a little. At one point, you mentioned the importance of having the money to meet your commitments. In the entire history of Canada, this is the first time that we are hearing that Canada is not honouring its signature in a financial transaction. I thought that, once the Canadian government's signature was at the bottom of a financial document, the money then followed. That is why your comment surprised me a little.

So let me ask the official from the Department of Finance this question.

Given the significant number of requests for support from other governments, municipalities in particular, why was a non-agent crown corporation specifically created to solve an infrastructure problem, when it would have been possible to use a single-window approach? If that were the case, you would have needed neither to set up an agent crown corporation, nor to make loans and disbursements before expenses. It would not have been necessary to operate with a two-tier or three-tier structure. There would only have been a single structure; it would have been much more economical and you would have had no financing costs.

[Richard Botham]

I think there were two points that I heard you raise.

The first point is whether PPP Canada requires cash on hand, given that it is making undertakings for specific infrastructure projects. As a non-agent crown, the commitments that it makes are not binding on the Government of Canada. That's the distinction between non-agent and agent. So for that reason they require appropriations. They need to have cash on hand so that other funding partners believe that those commitments are credible. If they were an agent of the crown, there would not be the same imperative.

The second reason goes more to the fundamental purpose of the creation of PPP Canada, as I understand it. I think at the time of the creation, the thinking was that for the Government of Canada, it was important to become a credible and active participant in the P3 market. It was important because not all infrastructure projects are P3 projects, but those that are possibly P3 projects can deliver better value for taxpayers. That was the rationale.

The Government of Canada, I don't think, had extensive experience in that endeavour, and the government felt that it was important to bring to bear private sector experience in the form of a private sector board of directors to constitute a corporation to undertake what was a relatively new, but very important activity. It was for that reason the corporation was created.

[Alain Giguère, NDP, Marc-Aurèle-Fortin, QC]

Excuse me for interrupting, but I would prefer to understand your comments.

You have just told us that PPP Canada is a crown corporation only because of its financing. In terms of its direction and its investment choices, it is a private company. Is that correct?

[Richard Botham]

No, what I'm saying is that PPP Canada is a non-agent crown corporation for the purpose of the infrastructure projects and the management of the P3 fund.