Indigenous and Northern Affairs Committee on May 28th, 2009

[Steve Berna, Chief Operating Officer, First Nations Finance Authority]

Thank you to the committee for the chance to speak today.

The First Nations Finance Authority is modelled after a very successful operation in B.C. called the Municipal Finance Authority. It's been in operation since 1970 and in 39 years has never had a default on payment from any of its members, which is an absolutely sterling record.

The controls that are in place for the Municipal Finance Authority were put in place for the FNFA through the regulations that we're looking for support for to have passed. I worked at the MFA for sixteen years, nine years as director of finance and seven years as its CEO. During that time we borrowed $10 billion to $12 billion on the capital domestic and international markets for B.C.'s local governments, transportation facilities, utilities, and regional hospital districts. The same model that works in B.C. will work across Canada for first nations.

There are two things that made it a sterling record in B.C. First, the act that allowed the MFA to operate said that all revenue streams for municipalities can be leveraged to support debt--all revenue streams. Second, they had about $110 million in equity. The equity is extremely important to get a credit rating, and it's extremely important for investor confidence when you're doing debenture issuance.

The purpose of the $110 million is that it sits on a shelf. It is not accessed unless one of your clients that you've lent money to does not pay when it's due. When the money has not shown up, you pull money out of the $110 million and pay the bondholder, so there's no default. It is a slush fund and a buffer zone. It is something for the credit-rating agencies when they say, “If a client does not pay, where will you get money to pay the bondholder?”

What we are asking for is feedback from the rating agencies, the banking syndicate, and the bond market. If we have $3 billion to borrow for first nations projects, which is what our estimate is, based on consultation with them, the markets are saying to us that $100 million like MFA has will get us the credit rating to provide the debenture issuance that we need to do.

So it's not a number pulled out of the air; it's based on historical fact out of B.C. Alberta has a similar model, backed up by the province. They have about $150 million in equity. It is something that is extremely important.

As for the opportunity cost of not receiving the $100 million, there are projects ranging from independent power projects to schools, hospitals, roads, and sewer and water, which will lead to private investment and job growth. If the money is not forthcoming, we will not be able to borrow for the first nations that are looking to do these projects right now.

When the tap cuts off on the credit side, it is usually the first nations that get cut off first, and right now that's happening. The projects have stalled all the way from Squamish's port authority, which they're trying to develop, to the independent power projects, both in the west and in Ontario and Quebec.

Estimates based on the numbers we have are that there's $2.1 billion in other revenues right now that first nations are willing to leverage. Some has already been financed. We have the opportunity to refinance that at lower rates. The $2.1 billion in revenues will support about $3 billion in debenture issuance, which will translate into job growth of very close to 100,000.

[The Chair, Conservative, Bruce Stanton]

Okay, that's it. Thank you, Mr. Berna and Chief Hall.

At this point we'll go to questions from members.

The first question will be asked by Mr. Bélanger.

[Mauril Bélanger, Liberal, Ottawa—Vanier, ON]

Thank you, Mr. Chair.

We're just going to keep going, if you don't mind, Mr. Berna, because I haven't read this. I just got it.

I just want to understand. You're in a co-op model?

[Steve Berna]

Yes.

[Mauril Bélanger, Liberal, Ottawa—Vanier, ON]

It's not for me to tell you what expressions not to use, but I certainly don't use the expression “slush fund”.

[Some hon. members]

Oh, oh!

[Mauril Bélanger, Liberal, Ottawa—Vanier, ON]

That's just a thought. We don't have any. But you could call it a guarantee or whatever, which is what it is.

That $115 million--you have it now?

[Steve Berna]

No, we do not.

[Mauril Bélanger, Liberal, Ottawa—Vanier, ON]

That's what you're asking for?

[Steve Berna]

Yes--it's $100 million.

[Mauril Bélanger, Liberal, Ottawa—Vanier, ON]

It's $100 million. And you think it will leverage $2 billion?

[Steve Berna]

We think it will leverage $3 billion.

[Mauril Bélanger, Liberal, Ottawa—Vanier, ON]

You think $3 billion. How does that compare to the banking leverage?

[Steve Berna]

Banking leverage is very similar. Banks around the world leverage differently. That's why some are in more trouble than others. Bank leverage in Canada is somewhere around the 20-times area on that.

[Mauril Bélanger, Liberal, Ottawa—Vanier, ON]

You're going 30 times.

[Steve Berna]

We're going 30 times, but it's not a parallel scenario, because the banks take what you put on deposit as people and turn around and lend out 20 times. There is no other revenue stream backing that up. The reason we can get 30 times leverage from the rating agencies and the banking syndicate is that we have $100 million and leverage it out, but we also have the revenue streams that they're using to repay the debt. So the equity from the $100 million--“slush fund” is a term that rating agencies use, so it is a funny term--sits there. It is actually the revenue streams plus the equity that allows the 30 times leverage.

[Mauril Bélanger, Liberal, Ottawa—Vanier, ON]

So what is the revenue stream?

[Steve Berna]

The property tax regulations have been developed. They're done. Fifty-two first nations are working through the process right now, which will come through our door in the next 12 to 18 months due to a debenture. They're done. They're much smaller in size. The other revenues are anything that are stable revenues. You could have gaming. You could have impact benefit agreements. You could have federal transfers under agreements. You could have contracts revenue, leasing revenue, oil and gas revenue, or fishing revenue. It's any revenue stream other than property taxation that is stable and lawful in nature.

[Mauril Bélanger, Liberal, Ottawa—Vanier, ON]

Will you be audited? Who will audit this?

[Steve Berna]

It will be KPMG.

[Mauril Bélanger, Liberal, Ottawa—Vanier, ON]

Will you be taking deposits?

[Steve Berna]

No. We're not a private bank like that.

[Mauril Bélanger, Liberal, Ottawa—Vanier, ON]

Will you be inspected or audited by the bank inspection agency in Canada as a federal authority?

[Steve Berna]

Our operations will not be. The operations are audited by KPMG. In my previous life at the Municipal Finance Authority, when the province allowed us to build up the equity that we needed to access markets, the province put in place an area that said they had the right to come in, to make sure the $100 million was being looked after properly. They did that up until about 1995 and then had confidence. So it is up to you. If you want some--

[Mauril Bélanger, Liberal, Ottawa—Vanier, ON]

What I'm trying to get at here is the financial institutions inspector general or something like that. All banks--not credit unions, because they're provincially incorporated--and other financial institutions, trust companies, and you name it that have a federal charter are subject to and have to comply with the rules.

Will you be subjected to that?