Public Accounts Committee on June 6th, 2013

[The Chair, NDP, David Christopherson]

I will now reconvene the 96th meeting of the Standing Committee on Public Accounts and welcome our guests.

Prior to jumping in I would advise everyone that our first hour was in camera, where we were hosting a delegation from Guyana as we shared best practices in terms of public accounts procedures and oversights. They are here still with us to witness one of our regular hearings.

Again, I welcome our guests and friends from Guyana.

With that I would now move to the matter at hand and would look to Monsieur Ricard, who is the assistant auditor general, acting on behalf of the Auditor General today. I will ask you to introduce your delegation and to read your opening remarks, please.

[Sylvain Ricard, Assistant Auditor General, Office of the Auditor General of Canada]

Thank you, Mr. Chair.

Mr. Chair, thank you for this opportunity to discuss chapter 10 of our spring 2013 report on advance funding of the P3 Canada Fund. Joining me at the table are, Lucie Cardinal, Principal, and, Shawn Audette, Project Director, who were responsible for this audit.

PPP Canada, a crown corporation established in 2008, administers the P3 Canada fund. The fund provides support to infrastructure projects procured by other levels of government through public-private partnerships known as P3.

To minimize the impact on government resources and borrowing levels, a Treasury Board directive prevents crown corporations from receiving advance funding. However, PPP Canada has received yearly exemptions from this directive and received funding long before its disbursement needs. As a result, the corporation had accumulated about $670 million in short-term investments as of September 30, 2012.

The audit objective was to determine whether PPP Canada's funding arrangement results in a financing cost to the government. We examined the amounts provided to PPP Canada to fund P3 projects, when these funds were disbursed, and the related financing costs.

We noted that as of September 30, 2012, PPP Canada had received $683 million of the $1.2 billion approved for the P3 fund and had disbursed $23 million for P3 projects. We also found that the amount of advance funding it receives is expected to grow over the next two fiscal years. By the end of 2013-14, the corporation is expected to receive the balance of the $1.2 billion with only $83 million of those funds likely to be disbursed by that time. In addition, in budget 2013, the government announced that it will provide PPP Canada with an additional $1.25 billion for the P3 Canada fund over five years, starting in the 2014-15 fiscal year.

We also found that the government did not calculate the cost of providing advance funding to PPP Canada. We estimated that advance payments to PPP Canada for the P3 Canada fund resulted in $1.6 million in avoidable financing costs between the 2009-2010 and 2011-2012 fiscal years.

More importantly, the government is exposed to risk related to financing costs with the current funding arrangement of providing money to the corporation years before it is dispersed. In our view, there are approaches that would minimize the government's exposure to this risk.

We made two recommendations in this chapter. The Department of Finance and PPP Canada agreed with our first recommendation to examine the current funding arrangement, taking into account the financing costs to the government. They committed to monitor the investment returns and borrowing costs associated with the advance funding. In response to our second recommendation, the Treasury Board of Canada Secretariat committed to specific actions to confirm that financing costs are taken into account in cases where crown corporations seek an exemption from Treasury Board to get funding in advance of needs.

Your committee may wish to explore progress made to date, including the adequacy of any action plans and timelines to address the recommendations of this chapter.

Mr. Chair, this concludes my opening remarks. We would be pleased to answer any questions the committee may have.

Thank you.

[The Chair, NDP, David Christopherson]

Merci.

I should formally mention, just for the record, that this is chapter 10, “Advance Funding—P3 Canada Fund” of the 2013 Spring Report of the Auditor General of Canada.

Acting Assistant Deputy Minister, I'll turn the floor over to you and ask you to introduce your delegation, please.

[Richard Botham, Acting Assistant Deputy Minister, Economic Development and Corporate Finance, Department of Finance]

Thank you, Mr. Chair.

Thank you for inviting us to speak to chapter 10 of the 2013 Spring Report of the Auditor General of Canada.

My name is Richard Botham. I am Acting Assistant Deputy Minister, Economic Development and Corporate Finance at the Department of Finance.

I will be making an opening statement on behalf of my colleagues here today: Greg Smith, vice-president and chief financial officer from PPP Canada Inc.; and from the Treasury Board Secretariat, Gonzague Guéranger, executive director for government and parliamentary operations, and Sylvain Michaud, executive director, government accounting policy and reporting.

PPP Canada Inc. is a crown corporation that was created in 2008 and became operational in 2009. The mandate of PPP Canada is to utilize the public-private partnerships in order to improve the delivery of public infrastructure.

PPP Canada acts as a centre of expertise on P3s, provides advisory services to federal departments on their P3 projects, and delivers the P3 Canada fund, an infrastructure contribution program that is part of the government's building Canada plan.

As indicated in the Auditor General's report, the government established PPP Canada as a non-agent of the crown for the purpose of delivering the P3 Canada fund. This means that commitments of the corporation are not considered binding on the crown. In short, in order for the corporation to make credible commitments to funding partners, it must be able to demonstrate it has financial resources to back up project commitments.

This is the reason why the Minister of Finance has sought and received approval from the Treasury Board, on behalf of the corporation, of annual exemptions from the directive on the use of the consolidated revenue fund for crown corporations. Like other expenditures, funding that is advanced to PPP Canada is sourced from a mix of general government revenues and general borrowings. Associating a particular spending item, such as funding for the corporation, to a specific borrowing can only be done as a hypothetical exercise.

We undertook such an analysis for the purpose of the audit. In a scenario in which all of the funds advanced to PPP Canada are sourced through borrowing, the government would meet such an uncertain and periodic requirement via the short-term debt that is being issued continuously to address variations in liquidity requirements—that is, through treasury bills.

The period covered by the audit was April 1, 2011, to September 30, 2012. We calculated the average rate on treasury bills for 2010-11 and 2011-12 and applied such rates to amounts drawn down, which yielded hypothetical borrowing costs of $2.6 million in the first year and $4.3 million in the second. PPP Canada's return on its cash reserves was $2.2 million in the first year and $5 million in the second. The hypothetical financing costs of less than $500,000 in year 2010-11 was more than offset by a small amount of hypothetical financing surplus of less than $1 million in 2011-12.

Notwithstanding this finding, given the importance of managing the advance payments with due economy, we have agreed with the recommendations in the chapter and have developed an action plan that has been submitted to this committee.

As indicated in the departmental action plan, the department is monitoring the returns that PPP Canada generates on its advance funding and the hypothetical borrowing costs associated with the drawdowns of the appropriations for the P3 Canada Fund.

This information will be provided to the Department of Finance and to Treasury Board ministers when the corporation seeks an exemption to the directive, and to the deputy minister of Finance when the corporation seeks to draw down its appropriated funding for the purpose of the P3 Canada fund. The department will also advise the deputy minister and the Minister of Finance of any significant change in the corporation's returns or estimated hypothetical borrowing costs as appropriate. Should the department identify significant net financing costs, the current funding model will be reviewed, and recommendations will be provided to the Minister of Finance. PPP Canada will be providing assistance in the context of this process as required.

In response to the Auditor General's report, the Treasury Board Secretariat, in consultation with the Department of Finance, will review the Treasury Board directive to determine whether changes need to be made to clarify that financing costs are to be taken into account when a crown corporation seeks an exemption to this directive to obtain funds in advance of disbursement needs. Any necessary adjustments to the directive will be brought forward to the appropriate authority by March 31, 2014.

Thank you, Mr. Chair. We would be pleased to answer any questions you may have regarding chapter 10 of the Auditor General's report.

[The Chair, NDP, David Christopherson]

Very good. Thank you very much. Unless there's an intervention from colleagues, I will now move us to our rotation of questions.

With that, Mr. Saxton, you have the floor.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you, Chair.

Thanks to our witnesses for being here today. My first question is for the Office of the Auditor General. The scope of this audit looked primarily at the funding model of PPP Canada, which is a relatively technical issue. It didn't look at the overall value proposition of P3s. Is that correct?

[Sylvain Ricard]

That's exactly what we did. We didn't look at the project per se, as you say.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you very much.

My next question is either for Finance or for PPP Canada. Why was this funding model chosen, and what are the strengths and weaknesses of this particular funding model?

[Richard Botham]

Maybe I can start and Greg can certainly add any details.

I think the main reason the model was chosen—and by the model, I'm referring to the fact that PPP Canada is a non-agent crown corporation—is that PPP Canada is undertaking infrastructure projects with other partners. It does so though contributions, and the projects are of long-term duration. In this case, because they are private sector managed, the view was that it was appropriate that PPP Canada be a non-agent of the crown. I think the main advantage of doing that is that these projects are undertaken without the crown being bound to any future liabilities that might be created as a result of the projects. It holds the crown harmless.

[Greg Smith, Vice-President, Finance, Risk, Administration and Chief Financial Officer, PPP Canada Inc.]

I will add that in our case, when we execute a contractual arrangement with another level of government, say a province where there's a project, and we're committing to making a payment three or four years down the road, when I actually sign and execute that agreement, I have to know in my mind that the corporation, PPP Canada, is able to honour that commitment down the road.

As Richard said, not being an agent of the crown and having the cash invested in accordance with investment policies approved by Treasury Board, we know those funds are available to honour that commitment and that the jurisdiction, which is actually entering into the P3 arrangement and having a public asset constructed, will have our money to contribute to the substantial completion payment of that asset.

[Andrew Saxton, Conservative, North Vancouver, BC]

It was reported in the audit and also repeated today that PPP Canada through the P3 Canada fund had about $670 million on account in December of 2012. Can you explain how those funds are being invested? Do you have an oversight body? Do you have an investment officer? Is there a committee that makes a decision on where those funds are invested?

[Greg Smith]

I'll answer that. There's an investment policy approved by Treasury Board. It lays out the types of investments we can enter into, which are very liquid. It identifies the institutions we're able to invest in, basically banks. We have a certain percentage we have to maintain in provincial or federal products. It lays out the rules for the timeframes we can invest in and the rating services ratings of those institutions we can invest in. It's very prescriptive. That policy was established in 2008. We continue to make our investments in the market in accordance with those policies annually. The Auditor General audits our financial statements to make sure we're compliant with the authorities we have.

We report regularly to our audit committee on our investments and where they are. Those are the rules under which we can invest those funds.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you. Can you explain how the amounts and timing of the advance funding are decided on?

[Greg Smith]

I think Finance might want to answer that.

[Richard Botham]

Sorry, I'm not sure exactly. The amounts of...?

[Andrew Saxton, Conservative, North Vancouver, BC]

You're getting another $1.2 billion, right? I think you originally had close to $1 billion.

I'm just wondering whether you requested those amounts. How was it decided that those would be the amounts and what the timing would be for you to receive those amounts?

[Richard Botham]

Well, the amounts that would be drawn down by PPP Canada are identified in their corporate plan. It's a corporate plan that was approved by Treasury Board according to the projects that the corporation saw it would have in a coming year. They make a request on that basis.

[Greg Smith]

Those amounts are set out in the estimates documents that are part of the supply process and the appropriation process of Parliament. Our business was basically laid out to have various annual rounds where we say we're open for business and we accept applications. To a certain extent they were spread out over five years to try to match our activity in the marketplace in accepting applications.

[The Chair, NDP, David Christopherson]

Okay. The time has expired. Thank you.

Moving along, Madame Blanchette-Lamothe, you have the floor.

[Lysane Blanchette-Lamothe, NDP, Pierrefonds—Dollard, QC]

Thank you very much, Mr. Chair.

My thanks to the witnesses for joining us today.

Mr. Ricard, could you talk to us a little about the financing costs?

In your report, you set those costs at $1.6 million. In your opening statement, you said that those costs could have been avoided between 2009-2010 and 2011-2012. In reply to the first recommendation, the department has concluded that there is no unequivocal evidence as to the financing costs. My impression is that your assessment and the department's conclusions contradict. Can you shed some light on that for me, please?

[Sylvain Ricard]

As we mentioned in our report, the government's financing tools, meaning short-term and long-term loans, do not go directly through PPP. When we try to determine the financing costs of PPP activities, we have to work with hypotheses. Here is the one we chose. Given that PPP funding comes from overall government disbursements to various organizations, the best rate for the loans would be a weighted rate for the financing tools or debt issued by the government through the year. That is essentially what we are describing.

The department says no, it was entirely short-term financing and that should therefore be the rate of short-term Treasury bills. We came to our own conclusion, which gave us the figure of $1.6 million. Using its own calculations, the department has come to a different conclusion. In other words, our working hypotheses are different. We can support the reasons why we feel that our hypotheses are the right ones. That gave us our result.

[Lysane Blanchette-Lamothe, NDP, Pierrefonds—Dollard, QC]

As I understand it, the department officially accepts your recommendation, but it does not agree with you about the financing costs.

[Sylvain Ricard]

In our report, we wanted to stress two or three points. First, we emphasized the need to establish a directive that would prevent funds being disbursed to crown corporations too far in advance of their needs. We also pointed out that, when the decision about PPP Canada funding was made, no analysis of the financing costs was done, whichever hypothesis is used. Last, as you can see in the table in item 10.3, the level of loan rates and performance rates fluctuates with time. Whichever hypothesis is used, there is still a gap.

It is important for us to point out the need for follow-up in this regard to avoid ending up, whatever the model, with net costs linked to the difference between investments and loans. That would cost Canadians more.

[Lysane Blanchette-Lamothe, NDP, Pierrefonds—Dollard, QC]

Mr. Botham, do you want to add anything to that?

Using another method, you perhaps did not note any overrun. Despite that, do you commit, as Mr. Ricard has suggested, to following up so that you can be sure, whichever method of calculation you use, that there will be no major financing costs?

[Richard Botham]

As I mentioned in my opening statement, the way we would approach the question of the cost of PPP Canada really starts from how the Government of Canada provides funds for particular programs. The Government of Canada sources the funds it provides both from its general revenues and from general borrowings.

From our perspective that is how the government proceeds. It doesn't attach a specific borrowing instrument to a specific program ever.

That being said, we agreed with the Auditor General's recommendations that it is important to manage programs with a view to due economy. To that extent, as you see in our action plan, we agree this is an undertaking we will do, which is to continue to monitor and evaluate whether there are financing costs.