Government Operations Committee on June 1st, 2006

[David Marshall]

Madam Chair, the decision did cost the Crown money. It was unfortunate. However, from our point of view as a service provider, we received a legitimate request from the minister in charge of that agency. Our department, the officials at the time, responded to that request in a straightforward manner and satisfied the wishes of the client.

Now, I must say this has changed considerably over the years. Today, Public Works, with the support of the secretariat of the Treasury Board, is much more rigorous in not allowing clients to have sole discretion over what they want to do. We are much more mindful of value to the public purse.

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

Could you identify who asked you to make this request?

[David Marshall]

Yes, I believe we have on file the official request in writing from the minister of the agency in Quebec. We can probably table that for you.

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

Would you table that to this committee? I'd appreciate that very much.

[David Marshall]

Sure, yes.

[The Chair, Liberal, Diane Marleau]

We'll go on. I'm going to take a moment here.

I apologize, Ms. Thibault. It should have been your turn. That is very much my fault. I moved too quickly.

[Louise Thibault, Bloc, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I was pleased to give Mr. Kramp my turn, to show him that I really do work very collegially. I did not object to his taking my turn.

Thank you for being here once again, Ms. Fraser. We are always pleased to have you with us. I would also like to thank Mr. Marshall and the colleagues from the Treasury Board Secretariat.

We have already dealt with this subject, but I would like to come back to it. In your statements, Mr. Marshall and Ms. Fraser, you spoke to us about the important matter of sharing responsibilities.

I would like you to break down the responsibility in the case of the lease on Bay Street in Hamilton, where Treasury Board chose one option over another, the Centennial Towers and the Jean-Edmonds Towers in Ottawa—did the shared responsibility involve shared accountability as well?

As parliamentarians working on behalf of the people of Canada, how do we define who is responsible—Public Works, Treasury Board or the departments? In this way, we could detect errors that have been made and correct them so that they do not recur in the future.

Is it possible that you will always have to deal with this triumvirate in the future? Or should we be thinking of a different philosophy or a practical approach to ensure, as you've just said, that all the partners are fully aware of the fact that they are spending public money?

I will start with Ms. Fraser. Do you see a way of doing that? Do you have any recommendations along these lines? I would then ask Mr. Marshall and Mr. Libbey to give me their views on this.

[Sheila Fraser]

First of all, Madam Chair, the issue of the parliamentary votes must be dealt with within the examples mentioned. A more expensive option should not be chosen simply because there are inadequate funds in the annual budget.

It is illogical for that to cost more. We understand that there may be other reasons why leasing is chosen over purchase or construction. In the files we studied, we did not find any other factors justifying the selection of one option over another. Of course, as auditors, we recommend that the least expensive option be chosen.

I think we must start by reviewing the way in which parliamentary votes discourage the purchase or construction of a building. Second, as we mentioned—and Mr. Marshall will be able to say more about this—it is the client department that should normally be responsible. However, given that the responsibilities are so divided—it may be difficult to tell—ultimately, no one is really responsible.

[Louise Thibault, Bloc, Rimouski-Neigette—Témiscouata—Les Basques, QC]

That is our impression as well.

Thank you.

[Sheila Fraser]

Mr. Marshall could perhaps...

[Louise Thibault, Bloc, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Yes, I would like to hear from him. Thank you.

[David Marshall]

Thank you, Madam Fraser.

[Voices]

Oh, oh!

[David Marshall]

I wish I had the wisdom to solve this one.

Madam Thibault, look, the fact is that we do 500 leases a year. We are now discussing some cases that, even though they're few, are important in terms of the principles that we might use to improve things. I don't want to minimize that, but I also want to put it in context, because there's a lot going on. However, we do want to examine the issues that help us do better.

In the case of the shared responsibilities, clearly the departments need to have responsibility for their operations. If they tell us they need to be downtown, or they need to be in a certain region, we have to respect that in terms of at least the reasonableness of that requirement. In that sense, we endeavour to help departments do what they need to do and meet their operational needs.

In terms of the split for funding and so forth, there is an issue here. Up until now, the departments have been responsible for finding money for the fitting up of their own accommodations, which is quite a considerable amount of money. What happens in that case is that in order to get that funding from Treasury Board or other sources, it takes quite a bit of time. What happens then is that time stretches in between trying to get them what they need and when we can execute, which in the real estate market often means extra cost delays and so on.

In the relationship with a department, we certainly would favour...and many departments have come to us and asked why we don't have a turnkey solution, where they say, “Here's what we want; you are the real estate professionals, so why don't you get us what we need and tell us what it's going to cost? Then let's agree on it and go ahead.”

We think that is very sensible. We've been discussing that with the secretariat. If we can make that happen, that's going to help.

In terms of responsibility for whether we put money up front or whether we take a lease, I must say we would need to take into account the obligation of the government to decide whether they want to invest or whether they want to rent and so forth, given the pressures that exist at the time and the trade-offs for all the different things the government has to fund. The Treasury Board ministers, of course, weigh that up before they give us a decision as to what they want us to do.

However, we come back to the fact that, as Madam Fraser pointed out earlier, if you have accrual appropriation, then the impact of dispensing capital in a single year will be minimized from a financial point of view, because it will be spread over the period of the actual usage of the asset. So an accounting change may well help ministers make better decisions, there's no doubt about it.

Ultimately we are all responsible. It's not very easy to just simply say it's the Treasury Board, or it's Public Works. Departments are responsible for telling us what they need and so on. But I think we're getting better. Partly by being prodded by the Auditor General and partly by being accountable to Parliament and so on, things are improving.

[Louise Thibault, Bloc, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Do I still have some time left?

[The Chair, Liberal, Diane Marleau]

You may ask a brief question if you wish.

[Louise Thibault, Bloc, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I would just like to hear what Mr. Libbey has to say about this.

What does Treasury Board think with respect to the issue I raised and to which your two colleagues have already replied in part?

[Jim Libbey, Executive Director, Financial Systems Acceptance Authority, Office of the Comptroller General, Treasury Board of Canada Secretariat]

Thank you. Yes, it is a complex situation, and no doubt when you discuss the first chapter, we'll discuss this whole issue in considerably more depth.

I have a couple of things to point out. First, I don't think there is a panacea here in terms of accrual accounting being the final solution and once you have that you're done, because other things do come to bear on these decisions.

I would just reflect on Mr. Marshall's comments towards the end, where ultimately the Treasury Board ministers have to look at all the things that are in front of them. It may well be that even if you're in an accrual mode, the lack of cash is still a matter of interest to government. Do you have to go into further debt in order to acquire the lease? They may not want to do that. They may prefer to pay cash up front, and I think those kinds of decisions will still be in front of us. But the accrual basis of accounting used for appropriations and budgeting does definitely bias these decision-makings in favour of long-term thinking, which is what I'm hearing around the table here. So perhaps what we need is to understand that the decisions are influenced by different things and that the transparency of the rationale for a particular decision is perhaps one of the things we need to focus on.

I would just add that one of the problems we have with this issue of when and how we move to accrual-based appropriations is that we, the accountants--and I represent the Office of the Comptroller General in this matter--are responsible for establishing accounting principles related to reporting externally, as we do in the public accounts, for example. The appropriations, on the other hand, are legal matters, and the way they unfold and are calculated is governed by another group, which is the expenditure management sector. Hopefully when you look at chapter one, both those groups will be represented. Right now, the expenditure management sector people were not available on the short notice of yesterday.

I guess the bottom line is that it is not a panacea, but it certainly is a move in the right direction.

[The Chair, Liberal, Diane Marleau]

Thank you.

Madame Nash.

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

Thank you, Madam Chair, and thank you to all of you for being here this morning--and especially to you, Ms. Fraser, for once again making something that always seems very murky seem much clearer. I found it very helpful reading your documents.

I was interested in your comments around the cost of accommodation, concerning short-term versus long-term costs, and that sometimes what seems like a smart decision in the short run ends up costing a lot more in the long run. I would like to pursue what mechanisms you think would help deal with that more effectively. I'm wondering if you have some general advice as to how to solve this, because one can be penny-wise and pound foolish, as my granny used to say, and certainly when we're dealing with billions of dollars it adds up to a significant amount of money.

[Sheila Fraser]

As noted in the report, there are some examples where space has been leased for a very long period of time but using short-term leases. I think all would agree that a short-term lease is going to be more expensive than a long-term lease, so what we're saying is that there should be a better analysis of this, and where possible--and there will obviously be cases where short-term leases are appropriate--there should be longer-term leases negotiated, and not have these renewals after what I think in some cases was five years, going five-year to five-year.

Mr. Marshall might want to mention this, but I believe the government has agreed with that and is in fact trying to move towards longer-term leases and to eliminate all these short-term leases.

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

Yes, rollovers.

I suppose sometimes it is actually cheaper to purchase property than to lease it, depending on how the costs come out. I know there was a high-profile case recently--it was in the media--where there was an opportunity for the government to purchase a property here in Ottawa for around $30 million in 2003. That was rejected, and now it appears there's going to be a leaseback of the property that was subsequently purchased for in that neighbourhood--$28 million to $30 million--by Minto. The number that was put out for the leaseback was $670 million, which doesn't seem to be the most cost-effective way of doing business.

Mr. James, can you explain to us the analysis that went into this tendering process? How was this deemed to be the most cost-effective course of action?

[Blair James, Executive Director, Assets and Acquired Services Directorate, Government Operations Sector, Treasury Board of Canada Secretariat]

Madam Chair, I'll defer to my colleagues at Public Works.

I'm at the Treasury Board. I'm familiar with the case. We are working quite closely with our colleagues at Public Works and Government Services right now to look at that transaction.

Regarding the specifics of the case, for commercial confidentiality purposes I'm not sure how much we can divulge right now, but I'll defer to my Public Works colleagues, who can explain some of the general background at this time.

[The Chair, Liberal, Diane Marleau]

Mr. Marshall.

[David Marshall]

Thank you, Madam Chair.

As the Auditor General has observed, we have been moving quite aggressively over the past year to lengthen the terms of the leases we sign in order to get better value. We've done this, to some extent, using our own judgment, if you like, because often departments say to us, “I'm not going to need that space for very long. I only need it for three years”, and then we have this issue of renewing.

So we have, to some extent, gone out on a limb and said we're just going to look at history and try to get better value. We may sometimes get caught out, but on the whole we will save a lot of money--and we have been doing that, which is very helpful.

In terms of purchasing versus leasing, you could say it is intuitive that if you're going to be occupying a place for 25 years or more, it might be better to buy than to lease. But that equation has to constantly be re-examined, because economic conditions are changing quite rapidly. For example, there is a lot of excess capital available in the capital markets; pension funds and so forth are ready to invest money. So the cost of capital for private developers versus the cost of capital for the government is narrowing very sharply. It's not as wide as it used to be. The decision to buy versus lease has to re-examined to see if advantages still exist.

This is a relatively new phenomenon, and we're looking at it closely. In each case for which we make a recommendation, we will endeavour to make sure all these factors are taken into account.

In terms of the specific lease or purchase that you referred to, Madam, it is the JDS Uniphase campus that was reported in the newspapers. Certainly, I would expect you to be quite alarmed if we recommended paying $600 million versus $30 million. I'm not sure I'd want to be in town when I dropped that file on someone's desk.

But the reality, Madam Chair, is that various numbers are being reported. We are handicapped by not being able to discuss it. Ministers of the board have not received the file to exercise their judgment on it. We can assure you that we have analyzed the case to determine the implied cost of the property within the lease payments that are being negotiated. So you have a series of lease payments, and they cover not only the implied cost of the property, but also the fit-ups and the maintenance over 25 years.

You have to tease out, if you like, what the implied cost of buying it would be and then what it would cost you, if you bought it, to do the fit-ups and the maintenance, and then compare those two numbers--discounted to net present value.

We have done analyses and we believe the proposal the ministers will be asked to examine is a good value for taxpayers. I hope when you're able to see it in all of its detail you will agree with us.

Obviously we may yet be asked by ministers to go back and.... We can't really discuss the details now.