Proceedings of the Standing Senate Committee on
National Finance
Issue 14 - Evidence
OTTAWA, Wednesday, June 6, 2001 The Standing Senate Committee on National Finance, to which was referred Bill C-17, to amend the Budget Implementation Act, 1997 and the Financial Administration Act, met this day at 5:51 p.m. to give consideration to the bill. Senator Isobel Finnerty (Deputy Chairman) in the Chair. [English] The Deputy Chairman:. Honourable senators, this evening we have some officials from the Department of Finance who will assist us while we are awaiting the arrival of the Minister of Finance. Mr. Bob Bartlett, Senior Analyst, Government Financing Section, Financial Markets Division, Financial Sector Policy Branch, Department of Finance: Honourable senators, this bill essentially amends two acts: the Budget Implementation Act, 1997 to provide funding for the Canadian Foundation for Innovation, and the Financial Administration Act to clarify issues relating to borrowing and to correct a legislative error concerning the exemption of the Canada Pension Plan Investment Board. That, essentially, is the essence of the bill. We are open for questions. Senator Banks: I am very much in favour of the aims of the CFI. It is terrific. Its objectives are wonderful, and it has achieved great success. I have no doubt that it is being operated properly. However, some of us have concerns about what one would colloquially call "outsourcing." Does CFI qualify as an agency? Mr. Richard Botham, Chief, Knowledge, Economy and Innovation, Economic and Corporate Finance Branch, Department of Finance: It does not qualify as an agency. It is a not-for-profit corporation that operates at arm's length from the government. Senator Banks: That agency now has $3.15 billion of government money. Its operations of dealing with and investing with that money are not subject to the same level of scrutiny, and certainly not the same kind of scrutiny, as many other government organizations. I am also a big fan of the necessity - and I understand from personal experience - for remaining at arm's length when expertise in adjudication is required and things like that. However, none of the other organizations of which I am aware, and to which that would apply - for example, the Canada Council and the National Arts Centre Corporation are utterly exempt, if I understand it correctly. The CFI is exempt from all of the audit provisions of the Financial Administration Act. Am I correct in that assumption? Mr. Botham: Yes, you are correct. Senator Banks: My concern is not with the principle, therefore, because I understand, applaud and support the principle as it applies to the Canada Council and to the National Arts Centre Corporation, but they do not have $3.15 billion in their pockets to do with as they please. I am looking for some kind of assurance. I am concerned, as I know some others are. The special examination, which is referred to in sections I to IV of the Financial Administration Act, and which can be performed by the Auditor General at least ever five years, cannot be done with the CFI. I am assuming that that is correct. Please correct me if I am wrong. Could you give us any assurances as to the scrutiny, the reporting, the transparency, and the assessment of effectiveness? I have no doubt that this is possible, but in the long term circumstances, could we satisfy Canadians that their tax money, in this case $3.15 billion, will be spent properly and be seen to be spent properly? I am sure that you understand the thrust of my question. Mr. Botham: I understand the question that you have posed. Perhaps I can provide a bit of information about the provisions that are available. The Canada Foundation for Innovation, as part of its agreement with the government, must undertake regular audits by a private sector auditing company. The results of those audits are made public on an annual basis at public meetings. An annual report of the foundation is published and also tabled annually by the Minister of Industry in each House. There were comments made by the Auditor General concerning the kind of performance evaluation, the value for money that you touched on. Concern was raised about the provisions that the government had and whether they could be strengthened. This is going back, I think, two years. In response, the government's framework that was set in place with the foundation was strengthened in regard to the performance evaluation. That has now become a regular part of what the foundation must do, which is evaluate the effects of their investments. That, too, will be a public document and provided to Canadians. Those are some of the provisions that have been put in place to respond to the kinds of considerations you have raised. Senator Banks: An internal evaluation of effectiveness, efficacy and value for money, is one thing; an external and, one assumes, completely objective one is quite another thing. Also, with all due respect to KPMG, Coopers, Lybrand or whichever private sector company may be engaged to do the audits to which you refer - they are one thing. The Auditor General is also quite another thing. I can tell you that from personal experience. There are examples - and I will not name them - of large, supposedly reputable accounting firms being fined large amounts of money for having been found guilty of collusion and other things in criminal courts. So far, that has not happened with the Auditor General of Canada. I understand the assurances that you have given me because they are the same things that pertain to the Canada Council and those other organizations that I have talked about. There is that degree of transparency. I suppose we could review them when those annual reports and audited statements are tabled in Parliament. They are tabled in Parliament by the minister, correct? Mr. Botham: Yes, they are. Senator Banks: Then we could always call your department to answer some specific questions, should we have any. You have confirmed my assumption that there is not, despite this amount of money, the same kind of principle. There is an exemption from the Financial Administration Act. The larger question, then, that we would ask of the minister, and through him the government, is: How much of what the government does from now on will be done by means of these arm's length organizations? There is a great deal of that going on. One could, I suppose, to be absurd, put the army into an arm's length organization of some kind. Every government function could, ostensibly, be done in this way, and right now a lot more of it is being done. There is a removal of accountability, transparency, access and scrutiny every time this happens. I am not implying that any of these organizations have, so far, done anything wrong. I am sure that they have not. I applaud without reservation everything that the CFI has done so far. I have now doubt as to their absolute proprietary. However, my larger concern, and it is shared by others, is the extent to which the government intends to operate in this way. It is very efficient, and kind of neat: There is not a lot of bother, and there is no need to go to Parliament to have many of your decisions, etcetera, reviewed. However, it remains a concern. You have answered my specific questions, and I made a speech. I apologise. Senator Stratton: You have an annual report that is filed with the Parliament of Canada? Mr. Botham: That is correct. Senator Stratton: It is vetted by the Auditor General at times, I would assume. Senator Banks, as part of our responsibility, could not your committee look at those statements? Would you not think that that was appropriate? Senator Banks: Yes, indeed. Senator Stratton: For the record? Thank you. Senator Morin: The CFI is not alone in that position. Genome Canada is also in that position. Am I right? Mr. Botham: Yes. Senator Morin: The Canada Council that Senator Banks talks about has recurrent funding year after year, while CFI does not have recurrent funding. Is there any other way to give non-recurrent funding, apart from setting up an organization like that? Mr. Botham: You have touched on the major difference. If recurrent funding were provided to organizations such as the Canada Foundation for Innovation or others - and there are others - it would characterize those more as government programs. That would detract from the arm's length status, as well as the kinds of partnerships that those organizations can provide, either partnerships with other stakeholders in terms of decision-making or partnerships with the funding that they are capable of levering. That certainly could be done. However, it would change the nature of such bodies and perhaps make it more difficult to achieve some of the benefits. Senator Morin: If it is a government organization, can you not roll over funding? Whereas councils, for example, cannot roll over money from one year to the other. Senator Banks: Yes, they can. Senator Morin: This is new for me. Mr. Botham: There are different arrangements for different bodies. Senator Morin: I am referring to research councils. Mr. Botham: The granting councils, for example the research councils - NSERC, SSHRC and CIHR - cannot roll over. Senator Morin: Thus, the advantage of CFI is that it can roll over funds. That is the nature of the beast. That is a major difference between councils and organizations such as this one? Mr. Botham: Absolutely. Senator Banks: As a supplementary, I agree with Senator Morin that there is that difference. However, I do not agree with the rationale, which is that the difference between placing a lump of capital into CFI, for example, on the one hand, or an annual parliamentary appropriation to Canada Council on the other, in any way reduces its arm's-length relationship. I can assure you that nobody is more arm's length than the Canada Council, otherwise, all those whacko things that we all hear about would not happen. I say that with my tongue firmly planted in my cheek. If you are to do something avante guard, there must be failures. These organizations provide the right to fail, or else nothing would happen. I agree that there is a difference. We do not need to have an annual parliamentary appropriation for future planning. The Deputy Chairman: Honourable senators, I would like to introduce Minister Peterson. Minister, it is a pleasure to have you here. Is the vote done? Will we be richer? The Honourable Jim Peterson, P.C., M.P., Secretary of State: We are working on it. There are 70 amendments to that bill at Committee of the Whole stage. The whip said that I could leave for 15 minutes. The Deputy Chairman: Do you have a few opening remarks? We started without you. Mr. Peterson: I hate to interrupt your flow. I am happy to give you some prepared remarks if you would like, very briefly. The Deputy Chairman: I would like you to put those on the record, please. Mr. Peterson: I would be happy to do that. I am grateful to you for the opportunity to bring before you the amendments to two acts, the Budget Implementation Act dealing with the Canadian Foundation for Innovation and the Financial Administration Act. [Translation] The CFI was established to help fund the modernization of research infrastructure in hospitals, research hospitals and not-for-profit institutions working in the health, environmental, sciences and engineering fields. [English] The budget of 1997 created this agency, giving it $800 million. In 1990, another $200 million was added, and in the 2000 budget, another $900 million; in October of 2000, an additional $500 million; and in March of this year, another $750 million was added. The total endowment has been $3.15 billion. These last two figures, that coming out of the budget of October of last year and this March, the $500 million and the $750 million, that is what we are dealing with today. Of this money, $400 million will allow the foundation to contribute to the operating costs of new awards and $100 million will be used to access foreign research on international research projects. The $750 million announced this March will help us to buttress all of the funding that they have. [Translation] The CFI provides up to 40 per cent of the funding for research infrastructure projects. This funding helps universities and research hospitals set up laboratories and purchase needed equipment. [English] I am pleased to be able to report, honourable senators, that the foundation has funded projects in every part of Canada, and created vast new opportunities for many new researchers. It supported 95 research organizations right across Canada, including 65 universities, 18 colleges and 12 research hospitals. It will play a major role in helping this government achieve its goal of doubling research and development by the year 2010, as was announced in the Speech from the Throne in January. The two amendments to the Financial Administration Act are fine tuning. They are of a technical nature and I will not deal with them unless you have specific questions on them. I thank you very much for the opportunity to appear before you, and for your consideration of these two amendments. Senator Bolduc: Until 1997, Mr. Minister, we had two types of financial assistance for higher learning. The grants council has been in place for years, as have unconditional transfer payments. I understand that we now have another type of financial assistance for higher learning through this foundation. Why not give the money to the provinces? Why not put that type of money into the transfer payments? Why is the federal government involved in specifying grants to individual institutions and agencies? Mr. Peterson: That is a good question. It goes right to the heart of the matter. Senator Bolduc: In other words, you are saying that the provinces do not know their business and you will do it yourself? Mr. Peterson: Are you proposing that we give it to the provinces with the string attached that they must direct it to research? Senator Bolduc: Some funding they get with no strings attached. They do with it what they wish. It is possible to give some with strings attached? Mr. Peterson: Is that what you are suggesting as the alternative to this approach? Senator Bolduc: I am asking your opinion on this. Mr. Peterson: My own opinion is that this is a very important initiative because it allows us to concentrate on where the needs are greatest. I agree that we do have the granting councils. We have increased their funding by $900 million, and we have greatly increased transfer payments. As a result of the historic accord of last September 11 between the Prime Minister and the premiers, transfer payments were enhanced by over $23 billion. In addition to the CFI, we have developed a number of other initiatives in the areas of productivity, education, innovation, research and development. One example is the Millennium Scholarship Foundation, an historic initiative in terms of giving students direct access to higher education in the face of escalating costs at the provincial level. We have made major breakthroughs in terms of RESPs. The Government of Canada is contributing up to $400 a year per child to help families and friends save for post-secondary education. The Canada research chairs were lauded by every institution in this country because they will enable our institutions to compete for the best and brightest academics in the world. We have made amendments to the Canada student loans program and major income tax concessions, even when we were in a deficit position, in order to help students defray the costs of education. We believe that education is the way to enhance productivity and to take Canada into the new economy. We believe it is the single greatest liberating force to help individual Canadians achieve their potential. We are doing this directly rather than in a political way in order that we can bring these opportunities to all Canadians. Senator Bolduc: In other words, when it is important, the federal government must be in it? Mr. Peterson: I believe that.We have seen areas in which we can cooperate with and partner with the provinces. Another example is the infrastructure program, which was a historic accord. We achieved this type of accord with the CHST transfers as well. The provinces all said that they wanted certain conditions attached to what they did, and certain levels of accountability on what they did. They said that they wanted some of this money to go into their general coffers in order that they could direct much of it while being held accountable. One billion dollars will go into new equipment that will be required. I believe that we will achieve the greatest potential from public funds if we act in cooperation and consultation with the provinces. Senator Banks: Senator Bolduc specifically mentioned higher education. I believe that CFI also goes into partnership agreements and contributes to industrial research in for-profit corporations, as it quite properly should. It is not only for higher education. Some Hon. Senators: No, no. Mr. Peterson: It is my understanding that we are putting up about 40 per cent. We are looking to universities themselves and any partners they can bring in to put up the rest of it. We are encouraging that type of partnership and that type of leverage. That is how we will get the most out of it. We know that when we have the private sector involved, the prospects for commercialization are far greater. Senator Banks: Exactly. I want to ensure that we understand that there are, quite properly and very desirably, business undertakings that are properly beneficiaries of, and first contributors to, in partnership with CFI, many innovative undertakings. Senator Bolduc: In paragraph 23.93 of the 1999 report, the Auditor General wrote: ...the Canada Foundation for Innovation was created to renew Canada's aging research infrastructure, yet it has no baseline figure for the age of the research capital base before the program began. It has no obligation to measure the effectiveness of its spending in reducing the average age of the capital base, nor any target to achieve for age reduction. Before this committee passes legislation providing the foundation with another $1.25 billion, can you tell us whether these particulars concerns of the Auditor General have been addressed? For example, do you now have a baseline figure for the age of the research capital base when the program began? Do you now have a target to achieve for reducing the average age of the capital base? If so, what is that target? How do you intend to measure your success? Mr. Peterson: That is a very good question. I do not know the answer. All I can say is that the older I get the more I am in favour of venerability and, perhaps, maturity. I will pass this to the officials. Mr. Botham: The direct answer to your question is that such a calculation has not been done. In defence of that, I would suggest that it would be very difficult to do such a calculation. The age of the research infrastructure would vary quite a bit between institutions. Senator Bolduc: How can you, therefore, allocate it between various provinces? For example, Ontario has received something like $311 million, Quebec received $230 million, Nova Scotia received $15 million, and Prince Edward Island received $730,000. Do you have a quota by province, or do you just answer to the request of the institutions? Mr. Botham: In terms of the way that the funding is allocated, it is done on a competitive basis. The foundation establishes a target envelope for competitions. Senator Bolduc: For example, Ontario will have 40 per cent? Mr. Botham: The allocations are not done on a provincial basis. An example would be a competition established for, say, this year. The foundation would indicate that $300 million is available for that competition. Institutions would identify their research infrastructure requirements and make proposals to the foundation. The foundation would convene expert panels, domestic and international, to review those proposals. Then the most meritorious of those proposals would receive funding. In terms of the provincial involvement, a number of provinces have created dedicated funds to match CFI awards. As Mr. Peterson has indicated, the CFI provides 40 per cent of the funding towards a project, and the other 60 per cent comes from other sources. Quebec and Ontario are both provinces that have done that. In the case of Quebec, all proposals coming forward from Quebec-based institutions are first vetted through the Quebec granting councils and the Quebec government before they are forwarded to the foundation. In that case, the province has an ability to decide which among those proposals it feels it would like to advance, and for which ones it is willing to provide matching funding. Senator Stratton: The Auditor General, in his report of 1999, at paragraph 23.106, stated that the sponsoring departments should ensure that, where appropriate, the design of delegated arrangements provide for formal mechanisms and guidelines to resolve disputes with partners, means to deal with non-performance and termination of the arrangements, periodic program evaluations, the results of which are reported through ministers to Parliament, consideration of value for money, and an independent assessment of the fairness and reliability performance information tabled in Parliament. I am not suggesting that perhaps you can answer every question I wish to ask now because you do not have this document in front of you. However, can you advise this committee what specific measures have been taken to address these concerns with respect to the foundation? For example, before deciding to provide the foundation with a further $1.25 billion, did you conduct any kind of evaluation to see if the program is having a significant incremental effect? Has any kind of value-for-money audit been conducted on the way the foundation conducts its business, and if not, why not? According to the foundation's website, only projects valued at more than $10 million are subject to audit. What mechanisms do you have in place to identify and deal with non-compliance in the case of smaller projects? When can we see an evaluation of this program tabled in Parliament, if ever? Mr. Peterson: Those are very good questions. On a preliminary basis, I am not sure what would be the best period for this thing to be in existence before we try to conduct the review as to the efficiency and the impact that these investments have had. I can comment anecdotally, and then I will turn it over to Mr. Botham for further elucidation but, anecdotally, we have received more praise from the university community for this undertaking than for any other single thing that we have done. In terms of the objective criteria for assessment, I will turn that over to Mr. Botham. Mr. Botham: You asked what has been done in response to the concerns. As I mentioned in my remarks, we did take note of the Auditor General's concern around performance and outcomes and what kind of value was created from the investments. In the government's funding agreement with the foundation, subsequent to the release of that concern, we negotiated new conditions under which the foundation must undertake a third-party evaluation of the outcomes of those investments. The first evaluation is under way at present. The foundation has put together an expert panel under the guidance of the Royal Society of Canada, bringing together experts from Canada as well as other countries, including France and the United States, that have experience in this regard. They are now undertaking the first such evaluation. The Royal Society's conclusions from that evaluation will be made public. You asked about audits of projects valued at less than $10 million. Senator Stratton: What I am getting at here is that you do not want to see another HRDC debacle inadvertently occurring. If you have no monitoring of projects under $10 million, the potential for that is there. Senator Bolduc: Many projects are under $10 million. Mr. Botham: I cannot speak to that. As far as I know, that is a guideline that the foundation has put in place for itself. That may be something that we can look at with them. We do put conditions in place through our funding agreement. Mr. Peterson: Senator Stratton, the questions you have raised are all important. I am not sure which ones we should emphasize the most, but this committee, going forward, could perform a very valuable service for us if you were to revisit some of these questions and make suggestions. You might even wish to have those people before you to see if we are getting a proper bang for our buck, or whether there are ways that we could do it better. I can tell you this: We would welcome your input. Mr. Peterson: I am being told that the whip is calling us. We must return to the House for things far less important than this, but equally demanding of time. Senator Banks: Of the $1.25 billion we are talking about today, $500 million was announced in October 2000, is that correct? Mr. Botham: That is correct, through the budget update. Senator Banks: A further $750 million was announced on March 6, 2001; do I have that right? Mr. Botham: Yes. Senator Banks: These two amounts were announced in October of 2000 and March of 2001, and those are the amounts with which we are now dealing. Has the cheque been written yet? Mr. Botham: The cheque cannot be written until parliamentary approval has been provided. Senator Stratton: Mr. Botham, I know I threw a lot at you in a short period of time. You could get back to us, if you so desire, in a written form, and I would appreciate that. I would recommend to this committee that we follow the minister's recommendation to take a closer look at this matter. Nobody likes an HRDC type of fiasco. The potential here for projects under $10 million to have that occur makes us very nervous. We would be remiss in our responsibilities if we did not at least address that issue. Senator Cools: I have a quick question regarding page 2 of the bill in clause 3 which amends section 95 of the act to read: From and out of the Consolidated Revenue Fund there may, on the requisition of the Minister of Finance, be paid and applied a sum of one billion, two hundred and fifty million dollars for the fiscal year beginning on April 1, 2000, for payment to the Canada Foundation for Innovation for its use. Can you provide some explanation around that particular clause? Tell us a little bit more about it. Mr. Botham: The main purpose of the clause is to authorize payment for the foundation. I believe your question is directed around the fiscal year? Senator Cools: I was not about to pose the question until you told me what it was, but my question then is about the fiscal year beginning April 1, 2000. That fiscal year has now ended. Mr. Botham: That is correct. The payment would be made from fiscal year 2000-2001, subject to parliamentary approval taking place before the end of June. Senator Cools: Of this year? Mr. Botham: That is correct. This practice is consistent with conditions being met that a government intent to commit is established before the end of the fiscal year, as was done both in terms of the announcements and the introduction of the legislation into Parliament. All of this is, of course, subject to parliamentary approval within that time period. Senator Cools: Could you explain to us why it would have to be before June of this year? Mr. Botham: That is the date of the closure of the books for the government. Senator Cools:Very well. Are you satisfied with that? Senator Banks: Yes. I even understand it. Senator Tunney: In looking over the amounts of money going to the various centres of education, I am wondering if this committee could have before it some representatives of some of those receiving institutions to explain not just the financial but also the physical results of the investments or grants? I do not know if that is proper or not. Perhaps it is beyond our purview. It would, I think, allay some concerns about management of funds and the results of the funds being spent. It would give us a better insight into just why this whole concept is in place and how well it is doing. The Deputy Chairman: Senator Tunney, we can conduct a study on this aspect in the future. There seems to be a lot of interest in it, and we will put it on the agenda for the fall, if that would be agreeable. Senator Stratton: I was about to say exactly the same thing. It is an appropriate time to look at exactly these issues that Senator Tunney described. Senator Tunney: We are responsible for a lot of dollars. If we are to carry out our duties, we need information and background to be able to explain to our taxpayers just what is being done. Senator Stratton: It may be more appropriate for another committee to conduct such a study, not necessarily the Standing Senate Committee on National Finance. The Deputy Chairman: We will look at it. Senator Bolduc: There are two other provisions in the bill. One is to exempt the pension board and various other agencies from the application of Divisions I to IV of the Financial Administration Act. Are you familiar with that? Mr. Bartlett: Yes. Senator Bolduc: I understand that is just to correct a technical error? Mr. Bartlett: Correct. Senator Bolduc: We will come back on the problem of those organizations another day. Let us forget that for now. The other question is on the control by the Minister of Finance over pouvoir d'emprunt. Mr. Bartlett: It refers to the control by Parliament over the right and power to borrow on behalf of Canada. Senator Bolduc: Yes. The Minister of Finance would be authorized to look at every case, if I understand it properly, because some loans have been undertaken by some departments without the authorization of the Minister of Finance. Is that true? Mr. Bartlett: The instance which most concerned us was a loan that did not take place in the end. However, a legal loophole was indicated, and we are closing that. Senator Bolduc: Was that with reference to the Department of National Defence? Mr. Bartlett: Yes. The Deputy Chairman: Thank you, officials. Is it agreed, honourable senators, that the committee move to clause-by-clause consideration of Bill C-17? Hon. Senators: Agreed. The Deputy Chairman: Is it agreed to stand the title? Hon. Senators: Agreed. The Deputy Chairman: Shall clause 1 carry? Hon. Senators: Agreed. The Deputy Chairman: Shall clause 2 carry? Hon. Senators: Agreed. The Deputy Chairman: Shall clause 3 carry? Hon. Senators: Agreed. The Deputy Chairman: Shall clause 4 carry? Hon. Senators: Agreed. The Deputy Chairman: Shall clause 5 carry? Hon. Senators: Agreed. The Deputy Chairman: Shall clause 6 carry? Hon. Senators: Agreed. The Deputy Chairman: Shall the title carry? Hon. Senators: Agreed. The Deputy Chairman: Is it agreed that this bill be adopted? Hon. Senators: Agreed. The Deputy Chairman: Is it agreed that the Chair report this bill at the next sitting of the Senate? Hon. Senators: Agreed. The Deputy Chairman: It is agreed. Honourable senators, I have asked for leave in the chamber today for this committee to sit at 3:30 p.m. tomorrow, when we will hear from the Minister of Finance for an hour. On June 12 at 9:30 a.m., we will hear from the Minister of Finance from Newfoundland on Bill C-18. The committee adjourned.