Government Operations Committee on Dec. 10th, 2007

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

Therefore, I would assume that the federal government is paying more than it would pay if it maintained the ownership. Otherwise why would the private sector want to purchase this building and lease it back to the federal government if they're not making money on it?

[Michael Fortier]

We're not in the business of making money on these buildings. We're actually in the business of losing money. If you look at our deferred capital bill, this is what we've accumulated over the past several years of--basically these are repairs we haven't performed on our entire portfolio. It's over $4 billion.

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

I'm sorry, my time is limited and I want to get to this point. Is the private sector, the purchaser of this property, going to lose money for doing this transaction?

[Michael Fortier]

Ask Larco why they bought. I just read in the press what they said. They were looking for a nice asset that was in terms of its yield not as great as some of the other assets they own in the world, but they liked having an asset in Canada, having the federal government as a lessee, as a tenant, for the next 25 years. They like to mix their portfolio. These were the reasons they gave. If you want to ask them to come here and tell you why they would buy, I would suggest you do that.

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

I can say it without even asking them. I'm sure they're making money. Otherwise they wouldn't have invested that much money in buying these transactions. My argument is that you're going against the recommendation of the Auditor General, in my opinion. She looked at some of the behaviours and said that with some of these leasing contracts, it would have made a lot more sense to buy rather than lease, especially when it's a long-term leasing contract. What we appear to be doing now is perpetuating that behaviour, what the Auditor General said was not good for taxpayers' money.

[Michael Fortier]

Any way you look at this, Mr. Alghabra, it's been good for the taxpayer. Look at the book value of $346 million. We got $1.4 billion. In terms of the independent valuations, we are way north of those independent valuations. Look at the net present value. The proceeds versus the costs were way over.

I would say this to you. I actually hope the Auditor General wants to look at this transaction. You and I should have a conversation when she looks at the transaction. I'm sure she'll come to the same conclusion that these independent real estate experts came to when they blessed this transaction via their reports and the opinions they tabled only a few weeks ago.

[The Chair, Liberal, Diane Marleau]

Thank you very much.

We'll go to Mr. Albrecht.

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

Thank you, Madam Chair.

Thank you, Minister, for being here today.

Referenced a number of times today has been the involvement of Royal Bank, the BMO, and also the Deutsche Bank in having done a preliminary study and then a post-operative study, if you like, to confirm the value for taxpayers. In addition, in the study we did here, as a committee, we had Professor McKellar from York University. He's a professor of real property. He informed our committee in many different ways that government bodies of any stripe--municipal, even school boards and other bodies--are not good managers. In fact, I'd like to read directly from the statement he made to the committee in May. He said:

The bottom line, I will say right at the outset, is that every government does a terrible job of managing its assets, so that's a given. We are no better than most former communist countries in that regard, and there are lots of reasons why. I think that now many of the assets have been so badly managed over the period of time that we have to do something about it. I think the problems we face in Canada are no different from those faced by Australia or the U.K. or France or Switzerland, etc.

And he goes on. But then he says:

To talk directly about sale/leaseback, it's essentially a financing mechanism. It's really a form of releasing capital and redeploying it in the private sector, as I've outlined. It's well used in the private sector, and more so now because a lot of industries really don't want to be managing real estate or owning real estate when in fact they're making gadgets and so forth. So over the past 10 to 15 years, most organizations, including our major banks,

which you pointed out, Mr. Minister,

have basically gotten out of real estate. Part of that is also driven by the fact that there's so much money that wants to buy real estate today.

We have three large, reputable companies that have put their clear advice to us. A professor of real property has given his advice, and there was an open, competitive process to put these buildings up for sale, and I would assume, like in any auction, the sale went to the highest bidder, and yet we have this small group of critics who are saying somehow we have a bad deal for taxpayers. I just wonder if you could comment further on the question that Mr. Kramp framed in regard to Informetrica's position that we may have lost millions of dollars here on behalf of Canadian taxpayers.

[Michael Fortier]

That's not the case at all.

Given Mr. Alghabra's question, it's good to remind ourselves that the banks sold buildings. If there's one industry where people are there for profit, we think it's obviously the banking industry. If there was so much money to be made in running your own bricks and mortar, Mr. Alghabra, they wouldn't be selling those buildings. And everybody has. I'm sure you can find this out on your own, but even the retailers now--large department stores like The Bay--have thought about spinning off the real estate portion of their assets because it's really not part of their core function. And if it's not part of theirs, with respect, I think it's not part of ours.

With regard to Informetrica, there are two issues that I have with the analysis. The first is that they assume the behaviour of the government as an owner of the asset would change drastically over the next 25 years. I'm talking about being consistent year after year in terms of investing the money, doing it on time, and with no cost overruns. That's not just today while I'm here, but in 5 years or 25 years. They assume that all these checks and balances are going to be done and that they are going to be done properly. As a witness I have our past behaviour as successive governments and how we've neglected the assets--money and otherwise--and I can't buy this. For them to suggest that at the end of the day this asset would be worth so much in our hands is ignoring decades of behaviour.

The other point is that they attribute a value to these nine assets that is totally unrealistic. We had an auction. If I had come here today and told you Monsieur Guimont went to Larco and signed a private deal, then people would say why them, why not others?

This was a very robust auction. There were ten or eleven people who actually bid. Eighty-six books were requested, and there were eleven bids. This is as robust as they come in Canada. We chose the highest bidder. I respectfully suggest to those who believe otherwise that this is the market value of these assets, i.e., the result of a robust auction. We chose Larco because they were the highest bidder.

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

Thank you.

[The Chair, Liberal, Diane Marleau]

Ms. Bourgeois.

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

I will share my time with my colleague.

Mr. Minister, in 25 years, what will we have left of these assets?

[Michael Fortier]

What will we have left?

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

What will we have left?

[Michael Fortier]

In 25 years there will be money, a lot of money.

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

Really? Can you explain that?

[Michael Fortier]

I explained it earlier. It is the value—

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

Could you start over? Since you think I seem to have trouble understanding, I will need to see the figures.

[Michael Fortier]

Okay. I will start over.

Take the present value of the amounts received today, compared to the present value of rent payments we will have to make over 25 years—

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

Okay.

[Michael Fortier]

—to which you should add the maintenance costs that will be shared equally between year 11 and year 25, which are estimated at a few hundred million dollars. If you add the rent over 25 years, plus the 50% of our maintenance costs and you deduct that amount, in constant dollars, from the amount we received from Larco Investments, we have $300 million in constant dollars, which, over 25 years, represents close to $1 billion in actuarial present value.

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

Will these figures be in the documents you will be giving us in the next few days?

[Michael Fortier]

No. They are in the study by Deutsche Bank. I am surprised you do not have it.

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

It is in the study by Deutsche Bank. Okay.

I would like to get back to the study by the two banks. First of all, I think that the two banks did not actually conduct a study. They used PWGSC's figures, if my memory serves me right and if that is what I read.

It was difficult to get very accurate figures from PWGSC, because a lot of its assets are not quantifiable, for example, heritage buildings, bridges, and so on. It was difficult for these banks, and they mentioned that.

How can we be sure that Deutsche Bank has accurate figures about what our earnings will be? That is what I am having a hard time understanding.

[Michael Fortier]

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