Government Operations Committee on Dec. 5th, 2007

[Charlie Angus, NDP, Timmins—James Bay, ON]

I'll read it again. It was for “the confidential information memorandum...to bidders that outlines operating expenses, taxes, management fees, parking income and detailed schedule of capital improvements”. Is that all there?

[Chris Warkentin, Conservative, Peace River, AB]

It's right here. It is attachment number one. It begins with attachment number one.

[The Chair, Liberal, Diane Marleau]

There are other things that are being translated right now, as I was saying earlier. They include the Larco Investments agreement to purchase the nine phase one assets from the federal government, the leases the Government of Canada has entered into with Larco Investments, and details of the financing Larco has negotiated to purchase the seven real estate properties sold by the federal government in phase one.

These documents will be available to all of us as soon as they are translated, but if there are other documents you're looking for, that's fine.

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

We can pass the motion, Madam Chair. If we get the documents twice, it will not matter. At least we will know for sure that a motion was passed.

I have called for the question.

[Chris Warkentin, Conservative, Peace River, AB]

For the sake of clarity, could you read into the record the letter provided by the minister outlining the information that was being provided? All members could then be enlightened as to what exactly is being provided.

[The Chair, Liberal, Diane Marleau]

To save time, we can say that the letter has been read in both official languages. We have it here and we'll make sure it's part of the record. I am sure I can do that with the people taking the notes.

[Chris Warkentin, Conservative, Peace River, AB]

Let them have a copy of that letter, because the opposition seems to be asking for stuff that has been provided.

[The Chair, Liberal, Diane Marleau]

They already have it.

All those in favour of getting all the information, whatever the motion is...?

[Chris Warkentin, Conservative, Peace River, AB]

Could Mr. Angus read the motion into the record?

[Charlie Angus, NDP, Timmins—James Bay, ON]

I just did, about a minute ago.

[The Chair, Liberal, Diane Marleau]

What I'm saying is they essentially wanted his motion.

(Motion agreed to)

We'll continue with the questioning.

Go ahead, Mr. Silva.

[Mario Silva, Liberal, Davenport, ON]

Thank you, Madam Chair.

I would like to begin by saying that because I'm new to the committee, I haven't had an opportunity to express my public view on this particular sale. I will state quite emphatically that I'm opposed to it; I have some serious reservations as well about how they're proceeding, both with this phase and with the next phase and the development.

I'd like to ask questions of the witnesses; I thank them for coming forward and giving us their presentation.

There is always this myth out there that you sell things and then somehow you're going to actually get a better value for taxpayers' dollars. They point to banks that are selling their properties and then leasing them back as a prime example.

You said the devil is always in the details, and I quite agree with you. We're not always very clear on what the details are. Why is the mythology out there that if you do sell property and lease it back, somehow you're getting good value for your dollars? I'm not necessarily speaking only to this particular sale, but that seems to be a general rule. With your experience of 35 years, could you elaborate on why some of those cases are not always the truth as they come out?

[Michael McCracken]

Let me be brief, though, given the hour.

If someone can take and buy the property and do something with it that is not going to be otherwise done, and that new use of that property is a positive contribution to the town they're in or to the businesses they're running, then you might say that it was a worthwhile transaction. And it may well be that the tenant of that building, who had previously been the owner, sold it but didn't want to make that change, and now the new owner can and the old owner can have that residual place of residence.

A very good example of this is what's gone on in many major cities where the air rights of certain buildings have effectively been sold. People have extended a building upward, or they've taken the air over the railroad tracks and built a building, and the train goes underneath it. CN would never have developed the building above it, so you're therefore getting better value out of the whole piece of real estate.

In this case, to my knowledge, we have not seen on the table any proposals for changing the configuration of the buildings. We have the same tenant in the same space for 25 years. So it's not clear that there's this opportunity for innovation or change, the hallmark of which, in the past, has been the assembling of a number of pieces property and the creation of some new, major structure. We don't see that happening here. Now maybe we don't see it because they don't want us to know it's going on, and the people who are buying all this stuff will eventually reveal the grand plan they have. And that's fine, because it's in their interest to keep people in the dark if they're going to be buying up other pieces of property that are related to this area.

The other reason it happens is that you have someone who is cash-strapped. So you may have an organization that owns a building. They can't borrow any more from the bank, so they say, “What can we do? Well, let's sell it. We have someone who wants that real estate. Maybe they want the property it's on and will eventually do something with it. Maybe we can get a good deal to lease it back cheaply and then, effectively, have some financing to continue our operation. And anyway, we're not in the real estate business.” That's the other term that is often raised by someone like that.

Now, you can imagine some governments being in that position. You know, some of the provinces in the thirties were on the verge of bankruptcy. Maybe, if they'd been such financial innovators as we are today, they would have had opportunities to sell off some of their properties and lease them back. But by and large, the current position of the federal government would not appear to be that of a cash-strapped entity. Certainly the surpluses that have been appearing now for a number of years would suggest that there's no major financial constraint that they're trying to appease through this particular transaction. They're not going to be able to borrow as a result of this transaction at a significantly lower rate than if they had not undertaken this transaction, and they haven't told us that this is a sale for some purpose. It isn't a case of telling us what they are going to spend the $1.4 billion on. It will just go into general revenues and will be parcelled out in tax cuts or in other actions or as debt reduction at some later point in time. So I don't see that innovation, that imagination, and the application of the funds as being evident in this transaction. Those would be the kinds of things you would look for.

I mean, people buy and sell real estate. It's not an odd thing. It's a huge market, and it's happening all the time. But in this particular case you ask them again to explain why they're doing this when the value they're getting for this seems to be a low value. That's all we're asking.

[Mario Silva, Liberal, Davenport, ON]

This is not quite on the real estate issue, but I can tell you a little bit of history. When I was on city council in Toronto, there was also a deal to lease back our computers and there were fantastic reports saying how wonderful this would be for the city because we were cash-strapped. It ended up costing us millions of dollars in an MFP scandal. So I always wonder about these reports saying what a great deal it is leasing back things that we originally have and own.

Thank you.

[The Chair, Liberal, Diane Marleau]

Mr. Nadeau.

[Richard Nadeau, Bloc, Gatineau, QC]

Thank you, Madam Chair.

Good afternoon, Ms. Ducharme and Mr. McCracken.

Given what we were hearing earlier, I was wondering if it was possible if the figures that Public Works and Government Services Canada gave to the Deutsche Bank were in error.

[Michael McCracken]

I see no evidence of that. I just see evidence of carelessness in putting together their spreadsheet and not making sure the data they have is properly aligned. But I have no sense that the numbers they're using were incorrect, in some sense, from the basic information that was provided.

I just think what they did was not skilful or not analytically correct. It's not enough to make you say the whole piece is garbage, but it's something that does make you worry about what's underlying it.

[Richard Nadeau, Bloc, Gatineau, QC]

Earlier, we heard a quotation from an expert who appeared here to the effect that public authorities did not make good property managers. That troubles me, given that the Government of Canada owns about 4,600 buildings.

Is being a property manager really a recipe for disaster in the public service? Are public servants really averse to the work? Does the statement hold water?

[Patricia Ducharme]

Mr. Nadeau, I'm looking at the blues from Mr. McKellar's evidence that he gave to the committee on May 1. I understand that at that time there was a discussion about the federal government as a manager for federal government buildings. In his evidence he said that as “a general rule of thumb...a government should budget annually somewhere between 2% and 3% of the capital costs of an asset for annual reinvestment”. He was talking about the whole issue of recapitalization of our real estate holdings when he did that.

He goes on later in his testimony to say, “Now...Public Works, if the question is, have they done a bad a job....I would turn it around and say they've never had the money to do a good job. In other words, I remember not that long ago...” and he goes on.

So my take on this is that Public Works hasn't had the funding to do the job they need to do. I think we just have to look at the Library of Parliament to see what Public Works can do when it's sufficiently funded. They can obviously deliver excellent real estate property management and maintenance. I think that is a prime example right here on the Hill.

[Richard Nadeau, Bloc, Gatineau, QC]

Thank you.

The Informetrica study indicates that we are going to pay four times more for these buildings over 25 years. Can you tell us more about what you mean by that?

[Michael McCracken]

This is simply a device to try to help people size what's happening, which is that you're paying a lease cost over 25 years. If you accumulate it without discounting, it is a multiple of the original outlay. It is of course precisely the imprecision of such statements that leads us to take the net present value when we analyze this. There's a big difference between a dollar you pay today and a dollar you pay in five years, or in ten years or in 25 years.

So that's why you try to bring the story into a common base and value it as of some arbitrary date like the present. That's the arithmetic, if you will, we go through. But I wouldn't take it as other than you're going to be writing a lot of cheques, and more cheques than if you owned the building yourself. Keep in mind there is the transaction cost here of making your lease payments and of determining that you've gotten value for money on an ongoing basis. That takes resources too on the government side to manage the leases when they're paying out these kinds of funds.

So it will take some additional resources inside government. How much that is varies, I think, in estimates, but certainly the kinds of management fees that the lessors are charging are in the order of 3%, 4%, 5%, or more.

[The Chair, Liberal, Diane Marleau]

We're going to go to Mr. Albrecht.

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

Thank you, Madam Chair.

I'd just like to follow up some of the comments made by Ms. Ducharme in her opening statement.

You refer on page 2 to the fact that PSAC commissioned Mike's firm to analyze phase one. Did you get other proposals from other companies to do a study for your group?

[Patricia Ducharme]

We didn't actually seek proposals. We went out and sought companies that we felt had the ability and expertise to do the job, and we retained Mike's firm at that point in time.

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

And are you prepared to disclose the cost of the study to PSAC?