Public Accounts Committee on June 8th, 2006

[David Marshall]

You're perfectly correct. In an earlier plan the Department of National Defence was interested in moving into this complex. About a year or a year and a half ago, when we had gone quite far in negotiating an acquisition, they informed us they would not want to move, since spending money on a building when they needed armaments was not their priority at that time. We broke off negotiations and didn't proceed. In this case, there's now another suitable client, the RCMP, and that's who we are working with.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

When you were negotiating the deal, was the Department of National Defence the first client you had in mind, and were modifications done to the building to accommodate what was going to happen that would therefore affect the price? With the withdrawal of the Department of National Defence, have there been more modifications done? Where does the landlord go with that?

[David Marshall]

No, Mr. Chairman, we did spend some effort and some money examining and inspecting the building to determine what modifications might be needed, the condition of the building, whether there was any contamination. This kind of inspection, in any event, has served us well in a future transaction, but there was no deal done and no money expended on modifications during the time Defence was looking at it.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

Correct me if I'm wrong. Did you say you had put this out to tender, or was this building sole sourcing?

[David Marshall]

No, we looked at the whole availability. This is a very large complex with a building already built, so we analyzed alternatives to a greenfield site, for example. That's one of the analyses that was done. What would it cost to expand or renovate what we already owned, what would it cost to build greenfield, what would it cost to acquire the property that had come on the market? The comparison was done and we concluded it was in the public interest to acquire this for the Crown.

I might add, Mr. Chair, this is not very unusual. There have been five or six cases like this over the last half dozen years where it's an advantage.

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Ms. Ratansi.

Monsieur Nadeau, pour huit minutes, s'il vous plaît.

[Richard Nadeau, Bloc, Gatineau, QC]

Thank you, Mr. Chairman.

Gentlemen, my question deals with your objective to reduce costs. It is addressed in the Auditor General's document. I am the member for Gatineau. We know that the government has requirements, and if we consider both sides of the Ottawa River, we know that on the Quebec side, leased office space is less expensive than it is in the big city of Ottawa.

How do you decide to go to tender? I am disappointed to learn that you did not go to tender in the case of the RCMP or National Defence. Those tender calls could have provided an opportunity to the people of Gatineau, or at least to the ones on the Quebec side. We could have accommodated the RCMP, another department, an agency, or a crown corporation on the Quebec side. Why don't you always go to tender?

[David Marshall]

Mr. Nadeau and Mr. Chairman, in the overwhelming number of cases, we do go to tender. There are very small exceptional cases where, for very special reasons, it makes more sense to negotiate directly on an opportunity. This happens in the real estate situation, and it also happens in various acquisitions that we do throughout the year.

I should say that in the case of opportunities on the Gatineau side, we already occupy about 80% of the available space and only about 40% of the available space on the Ottawa side. We are a very big user of real estate on the Gatineau side. Mr. McGrath will maybe elaborate a little more on this.

We are also currently examining very large opportunities to move departments over to the Gatineau side. We're looking at something like 100,000 square metres of demand coming from various departments, which we hope to satisfy by building more on the Gatineau side and by rebalancing or reaching closer to the goal of 75% usage on the Gatineau side.

I hope that answers your question.

[Richard Nadeau, Bloc, Gatineau, QC]

You are saying that at certain times, for special reasons, you do not go to tender. What are those special reasons?

[David Marshall]

We would normally go to tender. But in a situation where there is a unique property and nothing else is available, for example, we are very familiar with the area in the national capital region. We know what properties are there, and we are constantly examining them. We're leasing and building, and so forth, in the area.

When there is a situation like the campus at Merivale, where there is land and a building has already been built, we would look around. If we had gone to tender, for example, this would be the only property we're aware of that would have met the requirements. The problem then becomes a situation where the vendor knows he has the only property that would meet the needs and he could bid at a price that is higher than we could negotiate. We would be obliged to accept it because it would now be a tender, there's only one applicant, and you therefore have a price.

It is much to the advantage of the Crown to negotiate directly. This happens in various other types of situations.

[Richard Nadeau, Bloc, Gatineau, QC]

In the long term, would it not be better for the government to build a building that would remain government property? That way there would be no lease to pay, as in the case of JDS Uniphase. We know what that will cost in the years to come, if the agreement is signed. The amounts are astronomical. Why not buy? You can adopt the tighter space allowance policy you want, lease fewer square metres, or have less occupied space, and at the end of the day, you come out ahead. Buying would become a basic element. You could decide to buy to meet your requirements, because the space is available.

You said that 80% of the leased space on the Quebec side was occupied. So that leaves 20%. Earlier, you mentioned that the ratio is 25% to 75%. On the Quebec side of the river, the ratio is between 19% and 23%. Why didn't the government choose to build?

[David Marshall]

Mr. Chairman, we do a very careful analysis of building versus leasing. It is something that is front and centre in the analysis we do. We look at the best option in each case. As the Auditor General pointed out in her report, we do a very thorough analysis.

On the situation in the JDS case, for example, we did an analysis of what it would cost to build. This was a unique situation in which a very expensive building had already been built by the previous owner and then was abandoned. It really became available at a very low price.

When you build, it's not necessarily always cheaper to build, but sometimes it is. We have to look at the whole life-cycle costs, the mid-life fit-up that is necessary, and all of the costs over 25 years. We then discount it to present value and see whether there is an advantage or not.

When we do the analysis, we sometimes recommend buying and we sometimes recommend leasing. It can also be a lease to purchase. For example, we can lease and have an option to buy at the far end. We examine that option as well.

[Richard Nadeau, Bloc, Gatineau, QC]

Bear in mind that $27 million to lease a building is huge.

Mr. Sloan or Mr. Campbell, Mr. Marshall has just told us that careful analysis is done. The Auditor General's report says that there is a lack of careful analysis.

Can you provide some clarification? Is the department doing the necessary analysis to get the best price for taxpayers?

[Ronnie Campbell]

Merci, monsieur le président.

Yes. Certainly in comparison with what we found in 2002, we are satisfied the department is doing the analysis that we would expect them to do.

[Richard Nadeau, Bloc, Gatineau, QC]

I would now like to ask you a question about leases that are expiring. We are familiar with the process used to determine a department's requirements.

Do you look elsewhere? How do you proceed? Do you automatically go back to the former owner? Do you analyze what is available on both sides of the river to ensure that you respect the ratio of 25% to 75%?

[David Marshall]

Mr. Chairman, I'm going to let Mr. McGrath, who is in charge of this, answer the question and give you a little more than I already have.

[Tim McGrath, Acting Assistant Deputy Minister, Real Property Branch, Department of Public Works and Government Services]

There's usually an investment made in a particular location, and if it's a five- or seven-year lease, we essentially find it more financially advantageous to renew in situ because we avoid the investment of moving and refitting a space.

We do have a strategy specifically for the Gatineau side in order to bring that 75-25 into balance. We'll be rolling out that strategy over the course of the next couple of years. We've identified six major departments that have their headquarters in Gatineau. They are working with us to move different locations from the Ontario side to the Quebec side to close that gap.

[The Chair, Liberal, Shawn Murphy]

Thank you, Mr. Nadeau.

Thank you, Mr. McGrath.

We'll now move to Mr. Williams for eight minutes.

[John Williams, Conservative, Edmonton—St. Albert, AB]

Thank you, Mr. Chairman.

In Montreal, 800 Place Victoria seems to be an issue.

The Auditor General has pointed out that you did your due diligence, Mr. Marshall.

You say you do a very careful analysis of buying and leasing and so on. A lease came up for renewal. You put it out for tender. They were number four; they weren't the lowest-cost bidder. You decided you were going to move somewhere else. In steps the politicians. The secretary of state for the Economic Development Agency of Canada sent a letter to the Minister of Public Works asking him to stay put. The minister agreed. Why? By the way, this cost the taxpayer $4.5 million.

[David Marshall]

Mr. Williams, clearly the economics and the analysis showed that it would have been cheaper for that agency to move.

[John Williams, Conservative, Edmonton—St. Albert, AB]

I know.

[David Marshall]

We proceeded on that basis, and towards the last minute, so to speak, we received a request from the ministry to remain where they were.

[John Williams, Conservative, Edmonton—St. Albert, AB]

It was two weeks after the tender had closed, after the successful bidder had been awarded the contract, and after you had therefore incurred costs of having to lease the space from the lowest-cost bidder, even though you had no tenant. The space remained empty and the politicians said stay put. That was against the rules. I want to know why you bent the rules because a politician said so.

[David Marshall]

Mr. Chairman, let me put this in context. We do 500 leases a year--

[John Williams, Conservative, Edmonton—St. Albert, AB]

I'm talking about 800 Place Victoria in Montreal. I don't need the context. I need to know why the rules were broken.