Public Accounts Committee on Sept. 29th, 2016

[Christopher Padfield]

Just to be absolutely clear, what the Office of the Auditor General commented on was our performance measurement framework. We had intended to release information publicly and they added a few additional indicators to it. There was never any intention of not reporting publicly. Every intention was there. What they commented on was an existing performance measurement framework that we had prepared, and they added a few other indicators to it. It wasn't that we weren't reporting, it was just they added a few additional indicators to the performance framework.

[The Chair, Conservative, Kevin Sorenson]

We may come back to that.

Mr. Poilievre, please.

[Pierre Poilievre, Conservative, Carleton, ON]

I realize the Auditor General is correct in saying that this is not an expenditure, the 2012 budget didn't expend $400 million. In fact, there is an asset, which is the investment, but in order for that money to be provided for the investment, it had to be secured from the consolidated revenue fund. Is that accurate?

[Richard Botham]

Yes.

[Pierre Poilievre, Conservative, Carleton, ON]

In a deficit year, which it was, even though money is fungible, we can assume the money would have been borrowed. Is that correct?

[Richard Botham]

That's correct.

[Pierre Poilievre, Conservative, Carleton, ON]

Then we would be paying the going rate on that money. I'm not sure what the government marketable bonds were going for in 2012, but—

[Richard Botham]

Nor I.

[Pierre Poilievre, Conservative, Carleton, ON]

—over the 12 years there is an accumulated cost, even just to money.

I guess what I'm trying to inculcate here is the notion that our analysis of these kinds of initiatives should not only take into account the purported benefits, but also the actual costs. Otherwise, we leave ourselves with the false notion that there are no costs and that this was just created out of nothing.

Do you have any intention of including any such analysis in what you publish, your performance indicators?

[Richard Botham]

If I understand you correctly, the government cost of capital should be taken into account when the government thinks about what the return is on that capital, and there should be some kind of adjustment made for that to get a real rate of return given that the money was borrowed and that there is a cost to government capital for all expenditures, investments as well, but investments are performing investments until proven otherwise.

[Pierre Poilievre, Conservative, Carleton, ON]

I do believe that, yes. I would suggest to you that we should also consider the harm that those net costs have, if there are any, on the economy that paid for it. You mentioned earlier that some of your indicators are the number of people who will be employed, but companies that pay taxes employ fewer people. The more tax they pay, the fewer people they employ. I realize these things are hard to measure, but I know that Finance Canada does have some methodology to measure these things. I know that when a proposed reduction in a corporate tax rate is made, Finance does an analysis on how many net jobs it will create or...an increase will reduce.... We get these reports as this process unfolds.

Would you consider matching the purported benefits with the actual economic costs of deploying the public money in the first place?

[Richard Botham]

As I indicated, I have not given it a lot of thought. But since you just raised it, it seems to me the relevant adjustment is the government cost of capital in this case.

[Pierre Poilievre, Conservative, Carleton, ON]

Okay, we'll have to agree to disagree on that.

I'd like to move on to predetermined returns. In the Auditor General's report, it says, “Class B investors provide money earlier but receive distributions...after Class A investors receive a predetermined level of returns.”

The class A investor is the private sector. The class B investor is the public sector. What is the predetermined level of return that the private sector investor is promised?

[Neal Hill]

Perhaps I could speak to that.

That's actually a rate of return. It's an interest rate that is covered by a confidentiality clause in the limited partners agreement between the investors and the managers.

[Pierre Poilievre, Conservative, Carleton, ON]

I'm not asking for the actual rate, but just tell us how it works.

[Neal Hill]

Shall I just describe the flow of the funds on the way out?

[Pierre Poilievre, Conservative, Carleton, ON]

Yes.

[Neal Hill]

We refer to it as the waterfall. When there are returns to be had, the capital comes out and the private investors get it first, and the private investors get all of the returns until they have been kept whole, brought whole, on the capital that they previously put in. Then they get the stated return, the preferred return. Then they get the management fees that they've paid into the funds of funds rebated to them. Then the government goes through the same cycle.

[Pierre Poilievre, Conservative, Carleton, ON]

May I ask for a quick clarification?

[The Chair, Conservative, Kevin Sorenson]

I can't take any more questions. We'll let them finish because your time is up.

[Neal Hill]

Then the government goes through the same cycle. Our capital that's been contributed comes back...the preferred return, the fees. Then and only then, after those two cycles are complete, does the fund manager have a right to start sharing in the profits of the fund.

[The Chair, Conservative, Kevin Sorenson]

Thank you.

Mr. Arya, please, for five minutes.

[Chandra Arya, Liberal, Nepean, ON]

Thank you, Mr. Chair.

[Inaudible—Editor] Mr. Botham gave big numbers: 126 Canadian companies [Inaudible—Editor] and $420 million, but when we look at it, our original investment of $350 million, not $400 million...the funds of funds raised $1.35 billion. Out of $1.35 billion, $555 million was invested in 17 Canadian funds, which in turn raised $2.4 billion. Out of the $2.4 billion, $420 million has been invested. When you do the math, probably less than 10% of the government funds have been invested. Is that correct?

[Richard Botham]

That went by very quickly, but I would say I think the math....

[Chandra Arya, Liberal, Nepean, ON]

Okay, let me repeat it slowly. I know sometimes when I talk fast, people have difficulty in understanding.