Public Accounts Committee on Nov. 3rd, 2016

[Brenda Shanahan, Liberal, Châteauguay—Lacolle, QC]

Yes. It's page 2.43, “National Defence—Inventory”.

[Bill Matthews]

It's in volume 1, Mr. Chair.

[Brenda Shanahan, Liberal, Châteauguay—Lacolle, QC]

It's volume 1, yes; it's contained in that chapter under “Observations of the Auditor General of Canada”. It's on page 2.43, where he talks about the recurring problem of the inventory having been overstated by hundreds of millions of dollars, but says that there has been some improvement.

Mr. Ferguson, could you talk to us about what your team observed and where we are in progressing on that matter?

[Michael Ferguson]

I can ask Ms. Hogan to give some more detail, but we have seen some improvements in the way they track the quantity of their inventory, although there still are some problems with it.

One thing in particular that we noted in the observations was that the department is now doing a calculation themselves and recording an allowance. In this particular year, it was $131 million. They're doing some tests and some examination of their inventory to try to figure out themselves what the error rate is. It's good from the point of view of their calculating an error rate, but it's a sort of stopgap measure, because you would still like to see their inventory practices improve to the point that they don't need to record an allowance for those types of errors.

I'll ask Ms. Hogan whether there's anything else that she would like to mention specifically in terms of their actual inventory practices.

[Karen Hogan]

No, I think that was well said.

[Brenda Shanahan, Liberal, Châteauguay—Lacolle, QC]

Could I ask, then, since this is what you observed in this last fiscal year, from your conversations with the Department of National Defence, what their plan is for improving this aspect? Is it a multi-year plan?

[Michael Ferguson]

First, National Defence takes it very seriously. I think we have indicated that there are some particular challenges with their type of inventory, such as when something is inventoried. They have this other item called “asset pooled items”, so some things that might look like inventory they actually treat as fixed assets. Trying to decide which asset belongs in which pool is a particular challenge.

They have, then, some challenges that other people managing inventory don't have, and they are trying to put in place measures to improve those. They have, as I said before, made some improvements on quantity.

Again I'll turn to Ms. Hogan to see whether she has anything else to add.

[Karen Hogan]

I think we mentioned, even last year, that the only thing I could add about their improvements would be the increased coordination between the public servants and the military. That was a big shift a few years ago in the department, so they were collectively focused on accounting for inventory properly.

As Mike said, their inventory is quite unique, and there are challenges. In a normal organization, you would expect to see inventory turn over many times in a year—more inventory in, more inventory out, more revenue—but here a lot of the inventory is associated with long-term assets, like a helicopter, and it has a much longer life than a traditional piece of inventory, so it's hard to get the right value and know when it's obsolete or not.

They are working behind the scenes. It's just that to get the records and to see that materialize is a little more challenging.

[The Chair, Conservative, Kevin Sorenson]

Bill, I think, also wanted to answer on that.

[Bill Matthews]

Ms. Hogan mentioned the culture. It's a culture around comptrollership. We're seeing some other signs of improvement. They're progressing with the implementation of the policy and internal control, which will get at this. Their lapse, which I mentioned a few minutes ago, is down over previous years, which is an indication of financial management.

The other big thing they've done, though, is they now have one system. They used to have to put every part they entered into two different systems. They now have one system. However, we're still dealing with 118,000 people who actually have a role in this in some way or another. It's not 10 people in a backroom that you have to kind of retrain. It's 118,000 people.

Just to manage expectations, I would expect we will see this type of observation again next year, hopefully with words around continued improvement, but this is not going to be fixed overnight.

The new system helps, but they've got a ton of old inventory, as Ms. Hogan mentioned. There are issues with the data migration and whether the data is obsolete or is still current, and frankly, on some days these folks have other things on their minds than properly accounting for inventory.

They're better at tracking quantity than they are at tracking price—and that's important, because the quantity kind of tells you that you need to buy more things—but they still have issues on both fronts. Price is a bigger issue. On quantity they've made some progress, but there are still issues there.

[Brenda Shanahan, Liberal, Châteauguay—Lacolle, QC]

That's very interesting, because we will be seeing them again. As you mentioned in your notes, Mr. Ferguson, they had promised us a response by September 30, and I think we have a meeting scheduled with them again, so that will help us in that regard.

To get back to the lapse issue, is there anything you can tell us about how it will us help as we're moving forward with aligning the estimates process and the budget process? Is that going to help us with managing these lapsed amounts?

[Bill Matthews]

What I would say on that front is we've got good data that shows departments get money in the main estimates, then supplementary estimates (A), (B), and (C). The later in the year departments get their money, their parliamentary authorization, the less chance there is that they will spend it. Money that is in mains has a pretty high rate of being spent. It is the same with supplementary estimates (A), which come early in the year. As for supplementary estimates (B) and (C), those dollars frequently lapse.

I'm oversimplifying here, but if you align the mains and the budget, you can see that budget items get into departments' reference levels earlier. The earlier the departments get their funds voted by Parliament, the earlier they can start spending.

That's the big link to lapses.

[The Chair, Conservative, Kevin Sorenson]

Thank you.

We'll now move to Mr. Doherty.

Mr. Doherty, you have five minutes.

[Todd Doherty, Conservative, Cariboo—Prince George, BC]

Thank you, Mr. Chair.

Thank you to our guests. It's always good to participate in this committee. I think this is the second time I've had the opportunity and, Mr. Ferguson, I believe the last time I was here, you were appearing before the board as well.

The government announced their latest fiscal update on Tuesday. Given the recently announced increased spending, could you tell us, Mr. Ferguson, when you would forecast that we would be able to get to a lower debt-to-GDP ratio than we're seeing right now?

In 11 years, I think we're estimated to be another $81 billion in debt, or potentially more. I think in the report, we're at a 31.1% debt-to-GDP ratio.

Given the latest announcement in spending, how far would you see our debt-to-GDP ratio coming down?

[Michael Ferguson]

That's really a question for the deputy minister, but one thing to keep in mind when you're dealing with a ratio like debt to GDP is, first of all, to make sure that you understand what the definition of “debt” is in that calculation. That would have to be looked at.

The other thing to remember is that a debt-to-GDP ratio can stay the same, or can even improve, at the same time that debt is increasing. If the growth of GDP is sufficient to offset the growth in debt, then you can still have a debt-to-GDP ratio that's improving, while at the same time debt is growing.

Where that's important is if there are changes in interest rates in the future. Then the cost of that is driven off the debt. I can't really give you projections of what's going to happen in the future. As auditors, we're blind to the future; we look to the past. Perhaps a deputy minister could give you some more details about what their projections are.

[The Chair, Conservative, Kevin Sorenson]

Thank you.

We will go to the minister. Maybe there is a way in long-term planning in the public accounts, but as we know, public accounts look back, and this question looks ahead.

Could you wade into those waters, sir, and give us an idea?

[Paul Rochon]

Sure. I can outline very briefly the forecast that the government released earlier this week on the debt-to-GDP ratio, which was 31.1% for the year that ended March 31, 2016. That ratio is projected to rise somewhat to just under 32% by 2018-19, and then to decline from there to 30.4% by 2021-22. That is the current projection as of earlier this week.

[Todd Doherty, Conservative, Cariboo—Prince George, BC]

Thank you, and I thank the chair for his intervention. Again, to use the expertise that we have at the table today is the reason the question is raised.

I have another question with respect to the fiscal update. This is for any of you. Is there a significant risk for Canada in using a part of, or the whole, or some of our Canada Pension Plan in an infrastructure bank?

[Paul Rochon]

I'm sorry. Would you be able to repeat the last part of the question?

[The Chair, Conservative, Kevin Sorenson]

The question was on risk in terms of using the pension plan for infrastructure, and allowing the pension plan, the CPPIB, new mandates.

[Paul Rochon]

I don't particularly think it exposes the country or the pension plans to risk. The pension plan would make an assessment of whether any particular investment is worthwhile based on the fiduciary responsibility that it has to the members of the plan.

In the case of the Canada Pension Plan, for example, it is investing in infrastructure in many places in the world today—Australia and Chile are two that I'm aware of—as well as in Canada, the 407. I would think those pension plans would be making investments where they have a fair degree of certainty as to the security of the underlying asset.

[The Chair, Conservative, Kevin Sorenson]

Time is up. We'll come back to you later, Mr. Doherty.

We'll now move to Mr. Arya.

[Chandra Arya, Liberal, Nepean, ON]

Thank you, Mr. Chair.

Mr. Rochon, the amount for guarantees with no authorized limit is about $266 billion, primarily from the four agent enterprise crown corporations. What are the guarantees for which we don't have to set up an authorized limit? This is on page 2.38, contingent liability, note 18.

[Bill Matthews]

Mr. Chair, I'll start answering that, and then I'll have my colleague, Mr. Rochon, chime in.

I think the question relates to the fact that for crown corporations to borrow money, there are legal limits, and they need the authority to borrow the money. The idea being expressed here is that to issue loan guarantees, there's no such legal limit. Is that what—

[Chandra Arya, Liberal, Nepean, ON]

Yes, that was my question.