Government Operations Committee on June 1st, 2006

[Tim McGrath]

We're very conscious of the issue raised about expiring leases and not going partway through a lease and doing a major investment. As the deputy has pointed out, we have put a plan in place. We have 40 major projects that we've already engaged the client. Generally in Crown-owned facilities, as part of the mid-life retrofit, we would go in and do that at the same time as the reduction in the amount of space occupied.

We also have 80 other projects that are on the way through expiring leases. We have over 500 leases a year that expire and as part of that exercise we are doing the space optimization. Often it's as simple as adding two or three or four or five additional people into a current office facility and reconfiguring some of the workstations in order to get to that average. Since we've started the program, we've moved from what was on average 21.4 metres a square person down to 20.5 metres. This may not sound significant as it's only close to 1 metre savings, but one metre for 235,000 public servants is a significant amount of space and a significant cost driver. It amounts to the tune of in excess of $44 million a year already saved through the application of this program. Client departments have acted extremely responsibly in their acceptance of the new space standards and there has been very little argument when it comes to the allocation that's being attributed to each of the client departments.

[The Chair, Liberal, Diane Marleau]

Mr. Alghabra.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

I don't have any more questions.

[The Chair, Liberal, Diane Marleau]

I'm going to ask you a question. Do you still have in a lot of towns and cities underutilized spaces that are owned by the federal government, and there are leased accommodation in that same place? There were decisions made to do that at some point. I don't know why. I'm wondering how extensive that is still, because I know it's still occurring.

[Tim McGrath]

It is extensive, there is no doubt about that. When Canada Post decided on a different service delivery structure, that also added to some of the vacancies that we have in the Crown facilities. We are looking at rationalizing federal buildings within the various communities to ensure that we are backfilling when opportunities exist. We are also taking a serious look at the state of some of these buildings and doing that investment analysis as to how much do we invest in a particular building when there are other options available. We put the same rigour around the investment analysis we do in urban centres as we do in smaller communities to ensure it is best value for taxpayers.

It is a problem and we're hoping to be able to rationalize it, not only at the federal level, but we've also engaged provincial governments and municipal governments to see if we can get a rationalization of use of inventory amongst all three levels of government, as different levels start to take a view at how services are being offered to the one taxpayer. We've had some success with that program, particularly in Winnipeg. We have some situations here in Ottawa. We're trying to push that agenda as well in order to get the best use of everybody's inventory.

[The Chair, Liberal, Diane Marleau]

I think Mr. Alghabra did have a short question. I took his spot.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

I realized I did have a question. My question is to the officials from Public Works.

Regarding the maintenance of those properties, especially the properties that we own, I assume the ones that we lease are probably the responsibility of the landlord, but maybe not. Do we have any central strategy where we can leverage our real estate across the country that looks after the maintenance--mechanical, electrical, etc.?

[Tim McGrath]

Actually, back in the mid 1990s, we embarked on a major outsourcing activity in which Brookfield LePage Johnson Controls won the contract for managing almost 80% of our inventory, from which we achieved over a $20 million savings. That contract came due; we retendered it. SNC-Lavalin ProFac recently won the contract that was put in place at the start of April 1, 2005, which produced a further savings of $18.4 million on just the fees. We were able to reduce the oversight of that contract to the tune of $12 million on an annual basis. We very much have a national strategy in place for the operations and maintenance of the federal holds.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

Okay.

[The Chair, Liberal, Diane Marleau]

You have a few minutes.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

The other question is about the JDS property. What stage has it reached? Was there a letter of intent signed? Was there a lease signed? Where is the file right now?

[Tim McGrath]

Essentially we have an agreement in principle, but as in all of our transactions that require Treasury Board ministers' approval, it's very clear in that agreement that this is subject to the Treasury Board ministers' approval. It's quite standard in any project over $30 million that needs consideration by ministers. That is a clause in the agreements that we put in place, and it's well known in the industry. That is this case with Minto Developments.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

Is there a waiting period? Is there a time for us to get back to them?

[Tim McGrath]

There is time. Certainly there was an adequate amount of time negotiated to allow full consideration by ministers.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

When does that time expire, do you know?

[Tim McGrath]

Yes, I do know; it's June 15. We've been working with colleagues for a number of months on this.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

Thank you.

Thank you, Madam Chair.

[The Chair, Liberal, Diane Marleau]

Mr. Warkentin.

[Chris Warkentin, Conservative, Peace River, AB]

Thank you, Madam Chair.

Thank you very much, all of you, for coming in.

I appreciate the job it must be to manage all the properties. I have had some experience with building and with owning properties, so I know some of the issues. Mine were only matters of hundreds of thousands of dollars. Yours, on the other hand, are far more expensive.

I guess this would be a question for Public Works. In making your assessment as to whether a building should be purchased or leased over the long term, there are a number of assumptions that have to be made by the government or by Public Works. Those assumptions include, obviously, where inflation might take us as we look toward what the following five-year or ten-year leases will look like. When looking at purchasing a building, there also has to be a future value forecast, the idea that these buildings will be worth something.

I'm curious as to how you make those assessments. Has it been your experience that the assessments made in the past have been correct when those time periods are finished? And are the forecasted appraisals differentiated across the country? That would be my first question.

[David Marshall]

Madam Chair, a very extensive set of factors is taken into account, built into the equations we use. If you like, we would be happy to walk you through them. There are probably close to 100 factors. They include inflation, include discounting the future value to net present value in order to compare like with like in assessing purchasing versus leasing, and so on. We also include the mid-life fit-ups that are necessary if you buy a building, so that we can take that into account.

The issue about whether our forecasting is good and valid or we should change it is a very important one. The reason I'm going to pause on that and elaborate a little bit is that very often we will make a forecast of that kind and then find that various pressures of one kind and another, budgetary and otherwise, mean we don't get the money to do the mid-life fit-up.

So what we forecast should be the value of a property 25 years down turns out.... We end up with a property that needs to be torn down, because it hasn't been maintained, and so the business case, if you like, doesn't pan out in reality, because if we had leased and had had the landlord do the maintenance, it might have looked more expensive, but in the end you might have been still in a building that is worth occupying.

Those are the very serious issues we want to deal with. In government it's very hard to look back, pull your file out from 25 years ago, and say it did pan out as we thought it would.

What we have right now is an inventory of federally owned properties that have several billion dollars' worth of backlog to bring them up to standard. Now we are faced with trying to figure out how to access enough funds to get that done. Even if we got the funds, could we do it in a timeframe that is reasonable? These are issues we're grappling with right now.

[Chris Warkentin, Conservative, Peace River, AB]

Yes, certainly, and that concerns me a little bit, only because I know the reality, which is that if buildings don't have the care, as you say; they don't have the lifespan we might expect.

Has there been any consideration from any government department or from your particular department to individual buildings to allocate funds as if it were being leased within the marketplace--to ensure that the building has a pot of money, in a way similar to that of a condo association, and ensure a certain dollar allocation for that particular building to ensure that in the future we aren't looking to get these huge pots of money or huge allocations of money to do the necessary repairs or renovations?

[David Marshall]

Yes, we do what we call an allowance for capital improvements. A pool of money is allocated to us by Parliament. That is calculated based on a certain percentage of the value of the building. Then we're responsible for actually maintaining those buildings, but then reality creeps in, and what happens is two things.

First of all, when we are leasing to purchase, the leases are considered operating leases, and therefore we don't get any money to maintain them. Then when we finally buy them for a dollar at the end of the lease, they're not as good as we would like them to be, so we need that corrected--and that is partly an accountant's nightmare: Is this a lease? Do you want it or don't you want it? Of course, who's going to walk away from a building when you pay a dollar and take it, so in effect you own it. In fact, the lease payments imply you're paying for the whole building over 25 years anyway, so that's an issue we've got to work with. That really ends up resulting in the fact that the pool of capital is not sufficient to do the maintenance.

The second reality that intrudes is that we are judged on so many different factors. One of them is whether we have space we're not using, so that means we don't have swing space. If you don't have swing space, it's very hard to tell the Department of Agriculture to please vacate and get out of this building so we can do something to it, so we defer maintenance based on the fact that we can't get at the place, and it stretches out, and so forth. In the end, we lapse the money--give it back to Parliament--but the buildings don't get maintained as they should. These are realities we have to deal with.

[Chris Warkentin, Conservative, Peace River, AB]

Is it your assessment that maybe we're going down the wrong road, in terms of the space allocation per person, when it comes to this whole question as to how we go about renovating spaces to ensure the long-term investments pay off? I mean, I know the importance of saving money today, but are we going to shoot ourselves in the foot by doing this?

[David Marshall]

No, not really. I mean, the space standard that we--

[Chris Warkentin, Conservative, Peace River, AB]

Sorry, I should qualify. I meant in terms of allowing for some swing space.