Past Session:

Proceedings of the Standing Senate Committee on
National Finance

Issue 17 - Evidence

OTTAWA, Tuesday, September 18, 2001

The Standing Senate Committee on National Finance met this day at 9:30 a.m. to examine the role of government in the financing of deferred maintenance costs in Canada's post-secondary institutions.

Senator Lowell Murray (Chairman) in the Chair.

[English]

The Chairman: Welcome back, colleagues, to our first meeting of the autumn of 2001. We have quite a heavy workload ahead of us in the coming months. I expect the committee will be meeting twice a week every week between now and the Christmas recess. That is just to deal with the two orders of reference that have been sent to us by the Senate, the first of which is the question of financing of deferred maintenance costs at Canadian post-secondary institutions. The second inquiry, which we will begin next month, is on the federal equalization program.

Today we begin our study of the role of government, not the federal government alone, but the role of government in the financing of deferred maintenance costs in Canada's post-second ary institutions. You will know that our friend, Senator Moore, from Nova Scotia, brought this issue to our attention last year. He precipitated a debate in the Senate in which a number of colleagues took part, and this was followed by an order of reference adopted by the Senate in June. We are required as a committee to report to the Senate on this matter by October 31, 2001. The committee's study is based to a large extent on a report entitled, "A Point of No Return: The Urgent Need for Infrastructure Renewal at Canadian Universities." This was prepared by the Canadian Association of University Business Officers, and you will recall that they went so far as to suggest that there is $3.6 billion in maintenance costs which have been deferred for one reason or another at our post-secondary institutions.

You have received this report, other briefing notes and copies of speeches made by senators in the debate. All this was sent to you during the summer months.

Today we have two sets of witnesses. The first witness is from the Natural Sciences and Engineering Research Council of Canada, Dr. Thomas Brzustowski, who, a little later this morning, plans on catching an airplane to Sackville, New Brunswick, to speak at Mount Allison University. We wish him well on that, and we will do our best to accommodate him by not keeping him more than 30 to 45 minutes.

I understand you have a brief statement.

Dr. Thomas A. Brzustowski, President, Natural Sciences and Engineering Research Council of Canada: Mr. Chairman. I look forward to helping in some small way with the committee's mandate. I come to your deliberations from the perspective of the federal funding of research, and I will arrive at the description of a pressure on the universities that results, among other things, in deferred maintenance.

If you will allow me, I would simply like to move to the diagram in the handout. I will leave it to members to read the text. I would like to deal with this diagram because, if it looks complex, it is. It reflects reality. An element of the funding of research in Canadian universities does exert a pressure on the universities that results in deferred maintenance. There is no denying that. We have broken out in this diagram the various kinds of expenses university research faces and who pays for them.

If we begin quite near the top of the diagram, I have arranged the expenditures so that the costs of people involved in doing research in the universities are more or less on the left, and the tools are more or less on the right.

My own agency, the Natural Sciences and Engineering Research Council of Canada, invests in people, discoveries and innovation, so I will direct your attention to this part of the diagram with the three arrows pointing from it.

[Translation]

The direct costs of doing the research is paid from NSERC grants.

[English]

We pay for the direct costs of research, that is, the costs that can be traced directly to every research project, and the costs of expendable supplies. These are on the right-hand side under "Operating costs": instruments and the tools, maintenance of the tools, computing, telecommunications, travel and logistics, publication costs, things of that sort. We also pay for the cost of research staff. These might be research associates and dedicated technicians. Their salaries and benefits would be paid for by NSERC.

Finally in this area, I think many would agree, perhaps most importantly, we pay in two ways for the young people, the students who receive an education in the context of research. There are people who apply, are nominated by their universities, and there are direct competitions, personal competitions, for scholarships and fellowships. Then there are those who are appointed by the professors who are the principal investigators, les chercheurs principaux, as their research assistants, and they are therefore paid out of the money that is transferred through our grants.

That is not all we pay for, however. If you move even further to the left, under "Principal Investigators," you will see three numbers, roughly 9,000 professors, whose research we support in universities from coast to coast. That number is growing, and you will see on the front page of the statement why and how. We do not pay any of their salaries except for 160 to 170 people who hold what we call the "industrial research chairs" of NSERC in which the salary is paid for a five-year period.

You will see there that the Canada Research Chairs, a new program started several years ago, will be supporting about 900 people, as professors in science and engineering, out of a total of 2,000.

Most of the researchers in our universities - that is, the professors who conduct research, supervise graduate students and use their research knowledge to keep their undergraduate courses alive - do not have their salaries paid by NSERC. They depend for their salaries on the operating budgets of the universities, which derive from provincial grants and tuition fees paid by students.

That deals with the left side of the diagram.

Under "Tools," we have something new and something very important in this country, namely, the large research infrastructure.

[Translation]

These are dedicated facilities and big equipment.

[English]

These are the dedicated facilities and the big equipment that the Canada Foundation for Innovation helps fund. CFI pays 40 per cent of the capital costs; universities must find the other 60 per cent. Except for a recent injection of some money into the CFI budget for operating some of this equipment that was installed after a particular date, the universities must operate what CFI puts in on their own.

We have a small program, also described in the handout, called "Major Facilities Access" which provides access to some of these large facilities, but it is quite insubstantial by comparison. We are talking here about an operating cost that conservatively might be estimated at 10 per cent per year of the capital costs and one that does not include amortization. We are talking about billions of dollars worth of research infrastructure that CFI will put in. Universities are coming to realize that they have a real challenge in funding the operating costs.

My last point comes closest to the committee's mandate, namely, that the university facilities and services that are acquired in order to be in the business of doing research are not paid by anyone explicitly. The universities are on their own in funding these so-called "indirect costs," which are quite substantial. They are the costs for the library, for providing service laboratories, and for having animal facilities that must meet standards mandated through the Canadian Council on Animal Care, as well as the costs involved for the computer network, electronics, and other shops. This is hugely important. On a visit to St. FX last year, we discovered that in some cases, because there was no electronics technician on the campus or in the department who could help, when general pieces of equipment needed service maintenance, it either required a technician to be brought in from Halifax at close to $1,000 a day, or the equipment had to be shipped to another city if there was no distributor in Halifax and no service available there. Quite apart from finding the money, the equipment was not available to them for a month at least, and this did not involve specialized equipment. This is the sort of issue that is very difficult to manage if one does not have the budgetary capacity to provide for some of these indirect costs in-house, that is, the service technicians and the workshops. In addition, you must have insurance, accounting and legal capacities. Research administration must meet the requirements for accountability in the use of these public funds that the Government of Canada imposes through agencies such as ours. Also, there must be an ethics review when the research involves human subjects and environ mental assessments under the Environmental Assessment Act when that is required. Reports must follow the practices in the authorization of expenditure and records must be available for spot checks. All of that costs money. These are the indirect costs.

I have to resort to second-hand statements here. This is the area that universities tell us exerts such a pressure on them, among other areas, that one of their responses is to defer maintenance on physical plant. If the building can be used safely it will be used, but it will not be brought up to the standards, perhaps, that are needed. It will not be maintained well enough.

This is a complex picture. One thinks that the federal government is funding research through the agencies. Yes, it is, but it is not funding it alone. The provinces are partners through the operating grants to the universities, and sometimes even more directly in the funding of infrastructure in partnership with CFI. The students are partners because their tuition fees help pay for the time of the principal investigators. Ultimately, however, the universities are in the position of having to juggle all of this and make their ends meet.

I will stop right there, Mr. Chairman. If I could offer help by answering your questions, I would be delighted to do so.

The Chairman: Thank you, Mr. Brzustowski. Senator Moore was the instigator of this study. I will therefore turn to him to open questioning.

Senator Moore: Welcome, doctor. I do not know where to start here. You have raised many aspects of this matter in your presentation. When you talked about NSERC paying the direct costs of research, you mentioned the Canada Research Chairs. How do you fund those? Are those on a matching basis? Do the institutions have to match funds?

Dr. Brzustowski: Not for the Canada Research Chairs program. The institutions receive $100,000 a year for the junior chairs - that is, the so-called "tier two" chairs - $200,000 a year for the so-called "tier one" chairs or the senior chairs. There is no requirement to match. What we hear from universities is that their range of responses is very broad across the country. Some universities put in additional funds to help the chair holders get started in research; other universities draw a lot of that money to help with the indirect costs for research across the whole university. It is very variable across the country. The universities were given that freedom in the design of that program.

Senator Moore: You mentioned the Canada Foundation for Innovation. Approximately 40 per cent comes from federal government funding and 60 per cent from the universities?

Dr. Brzustowski: That is correct. About 60 per cent comes from partners, whoever they might be. Sometimes those partners turn out to be the provincial governments that match exactly the federal funding. Sometimes the university itself dips into its endowment funds and its fundraising campaigns to provide some of that funding. Sometimes, as I understand it, even federal agencies such as ACOA take a hand in helping to provide the remaining 60 per cent.

Senator Moore: This is not directly on the point, Mr. Chair man, but I think all these things are interrelated.

What happens with the smaller schools who do not have the corporate partners in their neighbourhoods or who do not have the endowments? How do they participate?

Dr. Brzustowski: That is a real challenge. It is a challenge that we have been hearing at NSERC about our own programs, in which we provide money in partnership with industry. There is not an absence of that in Atlantic Canada specifically. However, if there are no industries in the area, then finding industrial partners is very difficult. There is no question about that.

At NSERC, we were very concerned when the issue was first raised in connection with the distribution of Canada chairs. Our senior management team visited 11 universities in Atlantic Canada. I was part of a group that visited five universities - the other group visited six - to find out what the problems were. We then went to Manitoba and to Saskatchewan in the fall of that year to visit five universities there. There is no single reason why universities are where they are. The difficult case is that of a small university that, because it feels it can contribute to local development, economic and social development, has now decided to get into research without a previous history of it.

They may not have graduate programs and therefore they have no access to our graduate funding. There may be no industry in the area. They cannot find industrial partners. This is difficult because they also find it hard to attract faculty members who would see that as a place to conduct their careers if they have aspirations to do research. They must bootstrap themselves. Our program of providing research support in laboratories for selected undergraduates is one of the biggest assistances to the small universities.

However, one also sees universities that at one time had a far better research reputation than they do today. Why? The intellectual capacity remains. The capacity to be productive has declined. Budget cuts have eliminated technicians in laboratories. There is a university in the Prairies that at one time was one of our leading research universities. Its faculty of science has lost every single technician.

Senator Moore: Where have they gone?

Dr. Brzustowski: They were allowed to take early retirement because the university needed to make budget cuts over the years due to provincial funding decisions.

Senator Moore: Was it a function of the facilities as well?

Dr. Brzustowski: It is a function of the facilities now. The facilities are decaying because the technicians are not there. It is a vicious circle. It is very tough.

Senator Moore: How do we break that circle?

Dr. Brzustowski: We break it by recognizing the problems and making targeted investments. The problems are different in different universities. We do not expect suddenly that these institutions will win those funds in the national competitions for research funds. It would not do them any good anyway because they do not have the capacity to fund the indirect costs. They must have targeted funds for a number of years. They will demonstrate that their greatest need is for technicians; therefore, the money can be used for that. If the greatest need is to improve this building and build a modern workshop, the money can be used for that. If the greatest need is to attract a couple of young faculty members, give them money to get started and the promise of a career. The money can be spent this way. What is needed is targeted funding, perceptively used.

One must balance, on the one hand, the requirements for accountability - accountability in the spending of public funds - but, on the other hand, the ability to be discerning in providing money for what is needed, rather than making the universities fit into some program that does not really meet their needs. This is what we need to do.

It is easy to say that, senator. That is our diagnosis after visiting 16 universities that have had problems. It is easier to say than do, obviously.

Senator Moore: It is easier to say than do. It is difficult to observe and to study this matter without looking at the universities that we have across the country and the tremendous range of endowments and abilities to participate in funding programs that are available. It is quite a chicken and egg thing. If you do not have the funds, you do not attract the researchers, you do not attract the professors, you do not attract the good students. They cannot all go to the major cities in the country and they cannot all go to the United States. We do not want that to happen.

I think of my own region, and as a senator that is part of my responsibility. In Atlantic Canada we have 17 universities.

Senator Stratton: Why?

Senator Moore: We are good at teaching people. We have been doing it for hundreds of years.

Senator Stratton: My question always comes down to, why 17? What is the population of Atlantic Canada?

Senator Moore: Shall I respond to the honourable senator's question?

The Chairman: Be my guest, Senator Moore.

Senator Moore: I will finish up with the previous item first and then I will come to Senator Stratton's question.

This is the situation: We are educating a huge percentage of the university students from across the country, including some from out West, but we are not getting, in any sense of fairness, the appropriate participation. We are not able to participate in the funding programs, all of which exacerbates the matter of the accumulated deferred maintenance.

Dr. Brzustowski: May I differ with you in one particular? I think you will be happy that I differ with you on this. You mentioned that the universities are not able to attract good students.

Senator Moore: I am not saying that we do not have good students. I am saying that this circle, if it is not broken, could lead to a reduction in the quality of teachers, researchers and students.

Dr. Brzustowski: It may be that the students will lead the way out of the vicious circle. Our experience has been that universities, even those that do not have graduate programs, do not have access to funds for graduate student support, do expose their best students to serious research experiences in laboratories over the summer. Some of that undergraduate research is sufficiently good that it is actually published. Our program, called the Undergraduate Student Research Award, is in fact targeted at the small universities to assist in that. These people are superb candidates for graduate study. It so happens there is graduate study available elsewhere if those universities do not have graduate programs, but if some of these universities collectively decided to open graduate programs, they would have first-rate graduate student candidates on the spot.

This is not unique to Canada. Some of the best of the New England small colleges, the arts and science colleges, produce superb candidates for graduate studies in the research universities of the United States. It is an exact comparison.

Senator Moore: With respect to indirect costs, I assume by that you mean deferred maintenance?

Dr. Brzustowski: I would include maintenance; deferred being the accumulation of decisions.

Senator Moore: Exactly. When NSERC decides to award funds, is there a percentage allocated for facilities and ongoing maintenance of those facilities? You said in your remarks that universities are on their own.

Dr. Brzustowski: They are, and it is worse than that. The answer is no. In fact, on the first phase, you will see that we are able to give 39 per cent of what people request. We have a fragmented research funding system in this country, and com pared to the United States, for example, we provide far less money.

In the United States, the National Science Foundation would provide for all of the indirect costs. They would provide the salaries of the professors, who are the principal investigators, for at least two months in the summer, and they would do it all from one source. They would either accept the proposal and fund it almost totally, or not accept it. We have this fragmented approach, which has resulted in a difficult situation.

Senator Moore: I understand that in the United States, the funding for facilities and indirect costs can be anywhere from 15 to 115 per cent, and it averages out to 50, 60 per cent.

Dr. Brzustowski: Absolutely.

Senator Moore: I view those people as competition for our teachers, for our researchers and for our students, so perhaps we need to get away from this fragmented approach and try to address the situation in a different manner.

Dr. Brzustowski: If one addresses that within the current budgets, without providing new money, then obviously a smaller percentage of people would be funded and the chances that the small universities will surge ahead in that are pretty slim. That is why I come back to the point about targeted investments, recognizing their specific needs and allowing them to compete much more successfully in the national competitions.

By the way, that is what the universities are asking for. They do not ask us to lower the standards for them. They do not. The intellectual capacity is there. The ability to be productive is lacking.

The Chairman: Senator Moore, I am concerned about the witness's schedule. Perhaps we can come back to you.

Senator Banks: Following up on what you just said and the question that Senator Moore asked, would we, in your candid and personal view, be better off right now to solve the problem by assuming there is not much more money available - which at the moment, given events, might be the case - and spreading the butter less thinly? Would we be better off doing fewer little projects that are not properly funded, reducing the number of research projects, and fund each of them better? Would it be better to reduce the numbers of things that are going on and specialize?

To put the question in another way, if there were not more money available, would we do a better job of dispensing funds by restricting the things on which we require that it be spent?

Dr. Brzustowski: I will answer that and I will be candid. This is my personal opinion. We need two things: We need a strong base of well-educated people and a large number of faculty members active in research so that they are capable of teaching people who understand today's science and today's technology, not just because of the new knowledge they will create in Canada, but because that gives us access to new knowledge from around the world. That requires the base. Above that base, what we need is a strategy. A strategy that I like, that I think is the only one that makes sense, I label "strategic leapfrogging." Do not try to catch up on all fronts by providing more money for everything that we do so that we do a little more of it a little faster, a little better. Rather, accept the fact that in some areas, we are not at the leading edge, but we are sufficiently good that a targeted investment will take us to the leading edge. That would be my answer - a strong base across the country, and that does include those targeted investments into smaller universities. Beyond building that base, with strategic leapfrogging, making tough decisions about where we have the potential to leap ahead of the competition, we should invest in a targeted way in our best areas. This idea did not originate with me. The strategy of Genome Canada is precisely that.

Senator Banks: To take that as an example, there are some products of this research - I hesitate to use the word "products," but sometimes they are products of one kind or another - in which the university retains an ongoing, proprietary and residual interest. To what extent does that return any of the research's expenses to the university?

Dr. Brzustowski: Again, I will give a candid opinion and I will paint with a broad brush. At this point, that activity is only sufficiently developed in Canada on the average to pay the costs of administering the research offices. What matters is that "invented in Canada" should mean "made in Canada," if the invention came out of publicly funded research.

This is the case with those short-term research projects where industry is a partner and comes to the table with its own money. Our experience is that a dollar of NSERC funds in our research projects attracts $1.70 of industry money, and that $2.70 is spent at the university. If it puts money on the table, industry will use the results more quickly.

The longer-term results of basic research that can make huge changes and produce radical innovations in the way we do things take time. Many of these innovations should not be commercialized. They should be in the public domain for all the good reasons. However, some of them should be commercialized to provide the feedback to the economy that creates the tax revenues that pay for this stuff.

The main goal should be new economic activity, new jobs, industries and companies. It should not be to get revenue back into the universities. The perspective becomes quite distorted if the whole object of the exercise is for the university to retain control and to seek relief from its budgetary problems in trying to commercialize the results of some of its research. That should be done by the private sector for the benefit of the economy as a whole. Realistically, that is the only thing possible, because the people who know much more about this than I do say that the private investment required to take a proven idea out of a research lab and turn it into a successful product in the market is many times greater than the public investment in doing the research in the first place. In addition, the private investors take on all the risks of failure to reach the market or failure in the market.

I do not see that as a solution, but I see it as a hugely important activity for the nation.

Senator Banks: With most stories, there is side A and side B, and the truth is somewhere else. Do you have any sense that if the cavalry came charging over the hill with bags of money, that we would be rewarding imprudent management?

Dr. Brzustowski: I do not think so. That would not come spontaneously. Do not forget, researchers are people who are at their best when they do what they are trained to do: research. They very often do not understand the financial structure of their own universities. If the university obtained additional funds, they would have to be serious about managing the money. The money would not be suddenly distributed as a new source of research funds. It would have to be targeted to solving the problems that existing research funds create. Those problems are all listed and include issues such as insufficient technicians and deferred maintenance. If this were seen as a windfall for researchers to suddenly do more of what they were doing before, the whole point would be missed and the problem would not be solved, no matter how much money you put in.

Senator Stratton: It behoves those of us sitting around this table to perhaps ask some difficult questions. When I think of post-secondary education, part of the problem I see is that we have a population of 30 million people spread unevenly across the country. As an example, 40 years ago, Manitoba had one university and a college; it now has three universities with community colleges in a population of 1 million people. It becomes very difficult to support that kind of infrastructure with that kind of population base. That was my question to Senator Moore: If there are 17 universities in the four Atlantic provinces, that is a pretty high ratio when you think about it.

We must ask ourselves a question, and it follows from what Senator Banks has stated. Perhaps there must be a rationalization that, as you have said, targets rather than continues to expand. I know that in Manitoba they are talking about developing another university of the north. I really am amazed at that kind of thinking, not that it is inappropriate for the folks up there, but simply because of the cost.

In British Columbia, Prince George has a university of the north. One starts to wonder. It is relatively easy to create new bodies, but when you talk to anyone in the universities, and in any other venues like that, for example, symphony orchestras or the ballet, it becomes clear that as soon as you create an infrastructure, you must support it from there to eternity.

It is extremely difficult and it is of serious concern to me. Despite our small population base, we continue to create more and more institutions. That puts a severe strain on the situation.

Would you care to respond to that?

Dr. Brzustowski: You are posing a difficult question, senator.

Senator Stratton: Yes, I am, but I think it has to be posed.

Dr. Brzustowski: I hope you will be satisfied with my opinions as an individual because these are not issues that the council has considered.

I think we make too much of the fact that our population is small. Thirty-one million is not a small population. It is dispersed, and not all the distances are in the West. I can tell you that from personal experience.

The fact is, some of the things we are talking about do not depend on the size of the country. Sweden's population is 2 million smaller than Ontario's, and it has some superbly equipped scientific institutions. Their only drawback is that there are not enough people in them.

Ultimately, what matters in universities is the average number of students facing the average professor. We cannot increase that beyond a certain number and still maintain an effective education system that contains a component of social interaction. It must do that. People must have the chance to test out ideas on one another.

If you say that number has to be 20 or 25, I say that it is closer to 25 in this country than 20. When the universities were saying they were in a crisis, it was 16, but now it is much closer to 24. Once you have that situation, then what are the costs of either aggregating that number into small units in big universities or exclusive units in very small universities? I have not seen a study of that, but I suspect that the cost is not huge. The important point is getting the young people in certain numbers into the classroom. Whether you do that in a very large university but still maintain quality through relatively small class sizes, or whether you do it in the smaller institutions, depends a lot on local choice and local culture.

You mentioned British Columbia. I have been informed that one of the effects of creating the University of Northern British Columbia in Prince George is that, contrary to the expectation that this should be the "university of the north," it is in fact meeting the needs of people from the southern parts of the province where the spaces are in short supply.

I would have to know a lot more about local details before I could answer the question.

I have visited the University of Winnipeg and the University of Manitoba several times. I see places full of young people getting an education. I do not see places sitting empty with infrastructure being paid for and not used.

These are very difficult issues. The way the system has evolved in this country, we deal with the kind of question I just addressed separately from the issue of research and working at the intellectual frontiers.

The Chairman: Thank you, Dr. Brzustowski. Bon voyage.

Our next group of witnesses is from the Department of Finance. We greatly appreciate their attendance and their willingness, as always, to help us in our work. I do not suppose they are here because the federal government wants to take full ownership of this problem. Perhaps they wish to leave an entirely contrary impression with us.

Senators, our principal witness today is well-known to all of you from her previous appearances at this committee. I refer to Susan Peterson, Assistant Deputy Minister, Federal-Provincial Relations and Social Policy Branch.

Ms Peterson, I invite to you introduce your colleagues and to make your opening statement.

Ms Susan Peterson, Assistant Deputy Minister, Federal- Provincial Relations and Social Policy Branch, Department of Finance: Mr. Chairman, with me today are Barbara Anderson, Director of Federal-Provincial Fiscal Relations; Stéphane Hardy, who is part of the Social Policy Branch of the Department of Finance and who has been working on the education issue in particular; and John Connell, who is from the economic development part of the Department of Finance. Mr. Connell has worked closely on some of the new initiatives that the federal government has taken with respect to research efforts.

Mr. Chairman, I very much appreciate your invitation to join you again today. Your committee is inquiring into deferred maintenance costs in Canada's post-secondary education institu tions. Of course, post-secondary education is fundamentally a provincial responsibility. It is provincial governments that decide how much funding they will provide to these institutions in this country for their ongoing operations, including deferred mainten ance.

However, it is certainly true that the federal government does play a significant role with respect to post-secondary education, notably through its transfers to provinces and territories, through investments in research, and through programs to ensure post-secondary education is widely accessible to qualified Canadians everywhere, regardless of their income.

The Department of Finance is responsible for administering the major federal transfers to provinces and territories. I understand that is why you have invited me here today.

The funds that the federal government transfers to the provinces and territories each year are significant. This year, the three major transfer programs will amount to approximate ly $45 billion. To give you a sense of what this means to the provinces, it make up about 18 per cent of Alberta's revenues, at one end of the scale, and about 43 per cent of Nova Scotia's revenues at the other end. The territories stand apart from the provinces. In the three territories, federal transfers make up 72 per cent of Yukon's revenues, 78 per cent of the Northwest Territories' revenues, and 95 per cent of Nunavut's revenues.

Given their magnitude, these transfers obviously support many different provincial programs and services. They ensure the provinces have the financial capacity to provide Canadians, wherever they live, with reasonably comparable levels of public services.

Having heard some of the remarks of the previous witness, I would like to point out that these transfers to provinces and territories create a big difference between Canada and the United States. There is nothing equivalent in the U.S. Thus, when one looks at how universities are funded in the United States and what they get through their research institutions and what have you, we could add that up. However, these major transfers to provinces and territories in Canada have no equivalent in the United States.

[Translation]

The federal government provides most of its transfers to provinces and territories through three large programs: first, the Canada Health and Social Transfer (CHST), which was created in 1996.

The CHST is a block fund intended to support health care, social assistance, social services, early childhood development and post-secondary education. Under the structure of this block fund, provinces are entirely free to choose how they will allocate their CHST money.

Transfers under the CHST are made in two forms: cash and tax transfers. This year, the CHST will provide $34.0 billion to provincial and territorial governments - $18.3 billion in cash and an estimated $15.7 billion in tax points.

A bit of history might be useful here. One of the CHST's predecessor programs was Established Programs Financing, or EPF.

Like the CHST, EPF was a block fund which took the form of a cash transfer and tax transfer. Unlike the CHST, however, EPF legislation notionally earmarked how much money would go to health care - 70 per cent- and how much would go to post-secondary education - 30 per cent.

I say "notionally earmarked" because even under EPF, provinces were free to allocate the federal transfers according to their own priorities. The notional allocation reflected the distribution of federal funds for post-secondary education and health care when EPF was introduced in 1977.

[English]

When the Canada Health and Social Transfer came into effect in 1996, federal transfers for post-secondary education and health care, as well as the funding for social assistance and social services under the Canada Assistance Plan, were rolled into this new program. The important thing is that under the CHST, there is no notional amount allocated for any specific sector. As I indicated earlier, provinces can spend the money they receive according to their own individual priorities. This approach is part and parcel of the maturing of the fiscal relations between the two orders of government in the Canadian federation.

The second major transfer program is equalization. I have been before you before to discuss that and I know that you will be studying it in more depth at a later date.

In brief, equalization ensures that the less prosperous provinces have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation. As you know, seven provinces currently qualify for equalization payments. These payments, too, are unconditional. Provinces can spend them as they see fit. This year, the seven eligible provinces will receive payments under this program totalling approximately $10.6 billion.

The third major federal transfer program is designed specifically to support the territories and is known as territorial formula financing. It ensures that territorial governments can provide services to their residents, recognizing the higher costs of providing such services in the North. This year, these payments to Canada's three territories will total $1.5 billion. Again, the territories can use these funds as they see fit.

Together, these transfer programs constitute the primary financial instrument through which the federal government contributes to the ongoing support of the post-secondary education sector and its institutions.

The picture of federal support for higher education is far from complete if one looks only at these transfers. These general transfers are supplemented in several ways by federal programs and instruments closely targeted to post-secondary education and to research. These targeted programs are important in understanding the full role that the federal government plays in post-second ary education, and therefore I want to mention them today.

First, I would like to outline the long-standing role of the federal government in promoting access to higher education for Canadians. The Canada Student Loans Program was introduced as far back as 1964. It has played a very significant role for almost 40 years in helping young people with the cost of their education. This year, it is providing $1.7 billion in loans to nearly 400,000 students in Canada. In 1998, the program was expanded to include Canada study grants. Students with dependants who have financial needs in excess of the maximum loans available can now receive grants of up to $3,000. Last year, nearly 65,000 students were awarded these grants and they totalled close to $100 million. At the same time, in 1998, a number of measures were put in place to help graduates who encounter difficulty in repaying Canada student loans.

Perhaps the most significant among recent initiatives is the Canada Education Savings Grant. To assist families in saving for their children's higher education, the government adds to the amounts that families put into Registered Education Savings Plans each year. The grant is equal to 20 per cent on amounts up to $2,000, or $400 a year.

This grant is proving to be a great success. Before it was introduced in 1998, there were approximately 700,000 RESPs in the country, representing $2.4 billion. As of September 2000, a very short time later, the number has increased to 1.6 million RESPs, representing $6.7 billion. You can see that in a very short time, there has been nearly a threefold increase in funds being set aside by families specifically for the higher education of their children.

I will mention also Canada Millennium Scholarships, which were introduced in 1998. They also help to make higher education affordable. They provide about 90,000 needy students each year with scholarships averaging $3,000. This directly reduces the debt that they would otherwise incur.

I would like to turn to investments in research at universities.

[Translation]

The federal government also has a long-standing role in supporting the research role of Canada's post-secondary institu tions. I would like to speak to this now.

First, there are the three federal granting councils that support research: the Social Sciences and Humanities Research Council (SSHRC), created in 1977; the Natural Sciences and Engineering Research Council (NSERC), created in 1978; and the Canadian Institutes of Health Research (CIHR), created in 2000.

The granting councils are the principal source of government funding for researchers in Canada's universities, community colleges and research hospitals. Their budgets have been increased significantly since the recent period of fiscal consolidation. Today, the budgets of the granting councils total over $1 billion per annum.

In addition to the granting councils, the government has recently put in place new instruments to support and promote research. In 1997, the Canada Foundation for Innovation was created. It is an arm's-length foundation with a mandate to fund research infrastructure and equipment in universities, research hospitals, community colleges and other research institutes. The government has invested a total of $3.2 billion in the CFI.

[English]

Most recently, in the 2000 budget, the government announced the creation of the Canada research chairs.

This program is designed to help universities attract and retain world-leading researchers and to build a critical mass of research excellence in Canada. Funded at $900 million over five years, this program will support about 2,000 chairs throughout Canada's universities. You can see that the federal government has recently found innovative ways of helping research in this country.

This completes my opening remarks, Mr. Chairman. As you can see, the federal government plays a significant and a multi-faceted role in supporting higher education in the country. It transfers large sums to the provinces. It promotes equality of opportunity by helping to ensure that financial barriers do not stand in the way of as many Canadians as possible benefiting from higher education. It plays a very active role in supporting the research function of our universities.

The Chairman: Thank you, Ms Peterson. You have properly drawn our attention to the block-funding concept that exists under CHST and existed also under EPF to a lesser extent. When Dr. Brzustowski was here from the Natural Sciences and Engineering Research Council, you perhaps heard him advocate targeted grants from the federal government to universities. His concept was that the government or its agencies would say to one university, "You need to beef up your research capacity in this or that area," and to another university, "You need to improve your physical facilities in this or that area, and here is money to do so." That is far from the block-funding concept that we have been discussing. Can you think of any constitutional reason why agencies such as NSERC could not engage in that kind of targeted funding direct to universities?

Ms Peterson: The federal government, in its role in supporting research in universities, has worked through third parties, in effect through the granting councils, which have a system of peer review for all the requests they get for grants. The federal government certainly leaves it in the hands of these agencies to decide who merits the money.

Similarly, when the federal government created the Foundation for Innovation, it made sure that it was an arm's length, independent body that received the applications for the improvement of research facilities. That institution makes the decisions about who gets the money and who does not.

The federal government has carefully established a pattern of ensuring that intermediaries make those decisions.

The Chairman: Those agencies do not have to go through the provincial authorities, do they?

Ms Peterson: No, they do not.

The Chairman: If those agencies were able to persuade the government to let them have the money, no present policy of the government would be violated if they got into the business of capital funding for physical facilities at those universities?

Mr. John Connell, Senior Chief, Economic Development Policy Division, Economic Development and Corporate Finance Branch, Depart of Finance: The granting councils are free to support the research environment at the universities. There exists provision in their legislation for making grants and contributions for that purpose. Indeed, we have seen over the years the granting councils making contributions to the capital costs of research infrastructure, a role that the CFI now plays to a much greater extent. There certainly would be questions from a policy perspective about contributions from the granting councils for capital costs of buildings, renovations, repairs and so forth at the universities concerned.

The Chairman: Currently, they are not prohibited from doing so except by budgetary considerations; is that correct?

Ms Peterson: There is a difference between supporting the infrastructure to do research and supporting the construction of parking lots and student residences and teaching theatres.

The Chairman: I will leave it at that.

Senator Moore: When the department decides on the policy of establishing one of these funding institutions or augmenting their funds, what thought is given to the facilities component and the maintenance of those facilities in arriving at the sum of money to be provided?

Ms Peterson: When the federal government set up the Canadian Foundation for Innovation and the research chairs, it had a very clear idea of the sorts of things it wanted to support, and the mandates of these institutions are clearly set out. Beyond that, in setting these up and deciding how much money to provide, the government did not say, "We know exactly how much money is needed for buildings or how much is needed for test tubes." It is more global than that, but nonetheless targeted. No tally sheet was done of the sorts of things that I have seen from some of the associations as to, for instance, how they arrived at a global figure on deferred maintenance. The federal government does not do that because it effectively is not, at the moment, in the business of dealing with deferred maintenance on university facilities at large.

Senator Moore: If one of these agencies, Ms Peterson, decides to provide millions of dollars of funding and the university does not have the facility or has a facility that it will have to be expanded or somehow altered to be able to conduct the research work properly, is that not considered? As I understand it, and I mentioned this to the previous witness, in the United States, anywhere from 15 to 115 per cent of the research monies is added to that sum for facilities and their maintenance. The work has to be done somewhere.

Mr. Connell: Again, I think the reference is to the so-called "indirect costs" of research, funding for which, universities are seeking.

Senator Moore: Yes.

Mr. Connell: The American system is a very different one in the types of cost that are covered - for example, the costs of research. Infrastructure in CFI would be considered an indirect cost in the United States. We are indeed providing contributions now toward the so-called "indirect" research costs. There are several other examples to which I would draw your attention.

The first is the decision in the 2000 economic statement and fall update to provide an allocation of $400 million to the Canada Foundation for Innovation to support the operating costs of research infrastructure. Hitherto, the CFI had been restricted to the capital costs of the equipment concerned, and they are very specific about the types of costs that would be covered. However, through an amendment to the funding agreement between the Minister of Industry and the foundation, the foundation was provided with this sum for what is arguably part of the indirect costs of research.

Another consideration is the Canada Research Chairs Program, with an allocation of $900 million over five years. For the first time, the government recognized that this sum would be for the entire costs of research, not just the direct or indirect, so they are free to use that money to support a world-class research environment for the chairs in whatever way the universities see fit.

Third, I think a very interesting and helpful result of the federal government's increased support for research has been the filing of strategic plans by the universities concerned with the chairs program, with the Canada Foundation for Innovation. It has sparked a real rethinking of the research environment the universities themselves are trying to create.

Clearly, when there is a proposal to the CFI, to the chairs program, to the granting councils, those strategic research plans must demonstrate that the university is capable of seeing the project through and achieving the results associated with it.

Increased coordination within the whole research complex has resulted from much of this funding, and we consider that a positive development.

Senator Moore: This has now started with CFI and Canada Research Chairs Program?

Mr. Connell: Exactly.

Senator Moore: That must be the first time that we have really addressed it directly, so it is a start, but we still have this outstanding matter with which to deal.

Senator Banks: Staying on the point of Senator Moore's question, the Chair has raised a cogent point. We need to find out what constraints, if any, exist in the mandates of the granting organizations with respect to answering this question. I will give you a show business analysis because that is the area I come from. If I am investing in a movie - God forbid - and the producer says to me, "This movie will cost $4 million," I look at it and say, "How much is your marketing budget?" If the answer is not at least $2 million, in other words, making the total budget $6 million, no one in his or her right mind would invest in that movie.

It seems to me that we are downloading on the universities, because we heard this morning from Mr. Brzustowski that there are important administrative overhead expenses attendant upon research - for example, the critical mass of stuff, the physical plant and the fertile ground they have to have - which, at the moment, seem to fall outside the granting ability of the organizations, including the new money. If I am not mistaken, the $400 million to CFI, for example, pays for expenses that are directly attributable to particular research projects. This machine will cost this much money, and it will cost this much money to fix the room to house the machine and have a technician to operate it. That does not allow for the payment of any money having to do with, as Mr. Brzustowski pointed out, the library, the parking lots, the teaching theatres, the accounting, the legal research and the ethical research that might have to go into this. It seems to me there are constraints in the granting programs of the federal government. Am I correct in that assumption?

Mr. Connell: Yes.

Senator Banks: Before CHST took its present form, there was, as you described, a notional amount of 30 per cent of the previous grants which had strings attached, and the federal government indicated, more or less, that this money would be spent on post-secondary education. Do we know, and failing that, can we find out, whether the provinces in an aggregate way, or individually, spend notionally 30 per cent of CHST grants on post-secondary education?

Ms Peterson: Certainly, when the EPF had these notional, invisible strings attached, if transfers from the federal government were increasing and, in turn, the provinces were not increasing their funds to the post-secondary education community at large, then the constituencies certainly made sure that their provincial governments heard about it. In the days of strings attached, no university ever spent less on post-secondary education than the notional 30 per cent it was getting from the federal government. If a university were spending just a little more than that, it would mean that the federal government was funding most of the post-secondary education in that province, and that was never the intent. However, it is true that no province ever spent less than the amount it was notionally getting for post-secondary education from the federal government.

Senator Banks: Now we do not look at that question?

Ms Peterson: No, we do not.

Senator Banks: Thank you.

Ms Peterson: The public debate on that goes on. The federal government cut transfers to provinces when it created the CHST, but since then, transfers have more than regained that lost ground and will continue to grow. In fact, transfers to provinces will grow faster than anticipated growth in federal revenues. There is a good track record out there, but as I say, as part of the maturing of the federation, the federal government no longer looks over the provinces' shoulders with respect to these major transfers. I want to say it is part of the deal - and in a sense, that is right - the idea being that the provinces are not accountable to the federal government for the use of these transfers. The provinces are accountable to their own citizens for the use of the money.

When first ministers came to an agreement on health care and early childhood development last September, there was an innovative approach taken to transfers to provinces in the sense that they undertook to report to their citizens on their health care systems and on what they were doing in the field of early childhood development. The Prime Minister said, "Here is money to support these agreements." Again, the pattern has been established that provinces are not reporting to the federal government. They are reporting to citizens, not just how much money is being spent in these areas, but also what the outcomes are.

Senator Banks: Is there a corporate view, if that is the right word, in the department on the general question of earmarked, targeted funding?

Ms Peterson: Nothing is ever uniform and simple. The federal government pursues its objectives with and through the provinces in a number of different fashions. For instance, there are labour market development agreements with most of the provinces, and there the money is earmarked for certain things. Money is being transferred to the provinces for official languages and education. That money is earmarked. There is earmarked money for legal aid.

There are a number of earmarked transfers. Compared to the CHST, they are small, but nonetheless they are earmarked transfers, and one way of pursuing common objectives with the provinces.

There are the big transfers on the post-secondary education and health fronts, supplemented now by these other instruments we have been describing, which are recent innovations and are new ways of targeting money for specific purposes in the post-second ary education field.

Some new instruments are targeting money in the health field, too, for medical equipment and so forth. One never has to do just one thing or the other. It is a combination of these major transfers that come with no strings attached, and these other instruments, some of them old, some of them new, which are targeted.

The Chairman: However, we do have the Social Union Agreement now. I presume that if the federal government, in its wisdom and flush with cash, decided to institute a new program, for example, a shared-cost program with the provinces to try to address the problem we have been discussing here - capital facilities and so on at universities - it would have to follow the process set out in that agreement?

Ms Peterson: Indeed, some people think the social union framework agreement applies to absolutely everything in the social policy domain, but it does not. I am trying to refresh my memory as to whether education is one of them. Frankly, my memory does not serve me well at this particular juncture. If it is one of the ones named, then the answer to the question is yes.

Senator Cools: I wish to continue on the point that Senator Banks has raised and Ms Peterson's response, in which she said two things, one of which was that provincial governments account to their own citizens for the expenditure of these dollars.

My question is: What are the formal means and mechanisms by which provincial governments account for these expenditures to their own citizens; and two, please explain to me the meaning of your words, "this approach," on page 6 of your presentation.

This approach is part and parcel of the maturity of fiscal relations between the two orders of government in the Canadian federation.

Perhaps you could tell us what "maturity" means, in dollars and other terms?

Ms Peterson: With respect to your first question, of course the provinces have always put out public accounts as to how they spend their taxpayers' money. What was innovative in the agreements reached by first ministers was that there will be - and an attempt is underway now - both in the health care field and in early childhood development, to sit down with the provinces and come up with some common ways of measuring what good this money is doing. Instead of each province reporting on whatever it chooses and ending up with something that is not at all necessarily comparable, the idea is to come up with at least a set of common measures that all provinces will use so that their citizens can then say, "Hey, you are doing a great job here compared to the other provinces," or, "You are not doing a good job compared to the other provinces." To have meaningful measures, they must be comparable. Work is going on now with the provinces to come up with a set of common measures in those domains so that the reporting to citizens can be increasingly meaningful.

With respect to the use of the word "maturing," when the federal government started to support the provinces in a number of domains, the first instrument tended to be a cost-sharing one, which, for instance under the Canada Assistance Plan, stated that however much money was spent on social welfare would be matched dollar for dollar. This is when these programs were new and the idea was to make it easier for the provinces to get good programs up and running. As time went by, cost-shared programs became problematic for both orders of government.

You can imagine provincial ministers sitting around the cabinet table and minister X says, "If we spend a dollar here, you know what that will mean - two," and minister Y says, "Well, I do not have anything as good as that but my priority is just as important. I need to spend a dollar here." These cost-shared programs skewed provincial decision-making in favour of spending more money where the federal government would match dollars, as opposed to other areas where it may have been more sensible and more effective. It was like a magnet attracting money, not necessarily in the most cost-effective way.

Second, the not-so-well-off provinces resented the fact that the better-off provinces could attract more federal dollars simply because they could spend more. Some provinces did not like this open-ended cost-sharing for that reason.

It also meant that the federal government was not in control of its own budget. It had to match whatever dollars provincial governments spent. It certainly had that downside.

One of the things that I recall from debates under the Canada Assistance Plan is that the federal government would cost share some child care expenses under the plan, but you could not have the child care facilities in an elementary school setting because then the boundary line between school, that is, education, and child care was being crossed and the federal government sure as heck was not getting into the business of cost-sharing education. If the provinces wanted child care money from the federal government, they needed to be sure that those facilities were anywhere but where may have been the most sensible place to have them. Any cost-sharing program must have boundaries between what is sharable and what is not, and those boundaries had some bizarre, and not necessarily effective, results.

When I talk about maturing, I am talking about getting out of that way of doing business, not hanging over the shoulders of the provinces so much, and saying, "Look, here is some money; go spend it according to your priorities in the most efficient, effective way, and be accountable to your own people."

Senator Cools: I understand what you mean now by "mature."

Senator Tunney: My intervention will be slightly different from the one I would have presented previously.

I have two issues that I believe are important or I would not have intervened at all. The first is something I have been dealing with virtually all of my adult life, and that is to persuade the people with whom I deal of the benefits and the value of education.

I am an active, operating farmer who has spent many years within farm organizations and working with farmers. I have always tried to persuade them that education, research and training is not a cost, but an investment with a dividend, and we have many instances within agriculture to prove that.

Governments, and others, need to keep at this matter of persuading people that education is beneficial. Then governments would be more inclined to respond to funding in areas where it is critically short now and has declined over these few years when cuts of all sorts were underway. That is the first issue.

I have been involved with NSERC for many years, and much of it with good responses and benefits. However, as government support declined, farmers and farm organizations moved to fill in the shortfall and to increase productivity, efficiency and food safety to an optimum level. That is to the benefit of farmers, and all of the other players and consumers. We need to see what we can do better with less money. In this regard I am talking not just about the University of Guelph, but others across the country where we could not continue to maintain research farms, such as the Central Experimental Farm in Ottawa, at the level we had previously.

We have benefited from the enthusiastic cooperation of individual farmers who now allow us to use research projects in animal husbandry, as well as genetic and plant research, to the point where we have to be proud of what has happened in the last 40 years.

The Chairman: Thank you, Senator Tunney. Ms Peterson, would you like to comment?

Ms Peterson: Was there a question?

Senator Tunney: If you do not care to comment, I will not be offended. If you do care to comment, go ahead.

Ms Peterson: I do not have a comment, Mr. Chairman. Thank you, Senator Tunney. It was an interesting comment.

The Chairman: I have the impression that the Department of Finance, pre-eminently among the federal departments, keeps an eye on a lot of things going on around the country with a view to identifying future financial pressures on governments and operating a kind of early warning system for ministers and other people in the federal government.

Since I do not follow these matters at all, I was rather startled to learn from the study done by the Canadian Association of University Business Officers that post-secondary institutions, apparently for some considerable time, have been trying to address their budgetary problems by allowing physical plant to deteriorate, to the extent that there is now a backlog of $3.6 billion in deferred maintenance.

Whether or not you saw this coming, have you done an analysis of the study by the Canadian Association of University Business Officers? Do you have any comment to make on it?

Ms Peterson: I will ask Mr. Connell to comment.

Mr. Connell: We are certainly aware of the study and have looked at some of the recent Statistics Canada data on the situation. Statistics Canada has just put out a report on university finances in 1999 and 2000. It is showing significant increases in the university sector, as we expected would be the case, given the importance attributed by Canadians to health and education. The provinces are now responding, after some periods of cuts.

The provincial contributions are up significantly. There was an increase of about 15 per cent in university revenues in the last fiscal year. As to the buildings themselves, they reported expenditures on those of about $430 million last year, which is up about 5.7 per cent from the previous year. However, it is still down from levels of spending in 1994 and 1995.

One way you could look at the deferred maintenance question would be to go back over those fiscal years, determine what was being spent before the program review period, which was about $750 million per annum on buildings, equipment, renova tions and so forth, and see the tailing off of that. It is now coming back. I do not think that produces a figure close to $3.6 billion. It is probably more in the vicinity of under $1 billion.

However, the business officers are in the best position to gauge the needed repair of their own facilities and institutions. They have said that there are urgent repairs that are more in line with the number we expected, something which remains to be seen. We have looked at the problem, but not in depth. We would certainly rely on recommendations from the line departments concerned in that area.

The Chairman: What line departments?

Mr. Connell: From Human Resources Development Canada and possibly Industry Canada.

The Chairman: Has your department done an analysis of this problem or this study of the business officers? If we asked for it under the access to information regime, could we get it?

Ms Peterson: No.

Senator Moore, do you want to have the last word?

Senator Moore: I have three last words. Can I get them all in?

Looking at this amount of $3.6 billion as identified by CAUBO, no one will write a cheque for that. We are not here thinking that will happen. I would like to explore a few possibilities, which I think come under your department, as ways that we may approach this, such as encouraging the private sector, philanthropic foundations, governments, universities themselves and alumni to participate.

The culture in Canada is that private foundations only like to invest in new structures. That is in spite of this situation we are facing today. How do we change that culture to get them to invest in deferred maintenance?

Most of these foundations like to put the money out, have it recycled, and carry on so that they can continue to exist and to help the universities. Could we have some sort of a system whereby these foundations could be encouraged to provide interest-free loans to universities? The interest costs involved in the funding of these renovation projects is substantial. We could have such a regime in place and the government could act as guarantor for the repayment of those loans. Most universities are pretty good risks. This has to be approached in a more businesslike and structured manner. Mr. Brzustowski mentioned earlier that we seem to have a fragmented approach. Perhaps this is one idea we should pursue. We should encourage these private foundations to provide funding for fix-ups, and not just a new building with their name on it.

I would like you to consider that, and perhaps come back with some kind of a response to the committee.

There was a piece in The Globe and Mail on August 18 wherein it was stated that Statistics Canada had reported that donations from individuals had increased in the year 2000 to more than $5 billion. Do you know what portion of that $5 billion was donated to universities and colleges? I would like to know the source, by province or territory. I would like to know the destination, by province or territory. I am wondering if similar data exists with respect to corporate giving. If so, I would like you to provide the committee with those figures.

If there are ways to encourage the private sector, and the universities themselves, to demonstrate their administrative abilities and their needs, then we can get alumni, and private individuals who may not be alumni but who may have some connection to the institution, to give.

My third point, Mr. Chairman, has to do with charitable donations. We permit political donations to be deducted from the income tax that an individual is obliged to pay. Why do we not look at some sort of a scheme whereby individuals can be encouraged to give to universities and set up some type of a deduction standard? The thesis behind political donations is that this is how we support democratic systems in our country.

Education, as Senator Tunney and others have mentioned, is deemed to be very important. How can we encourage that? It seems to me that such a measure would help take the pressure off the federal treasury and encourage people to do that.

I would like you to look at that and let us know if there is a way that we can have donations to universities dealt with in a similar fashion as political donations, with the same tax rate or something similar.

Ms Peterson: Mr. Chairman, we can look into some of these issues. Certainly, some of them have come up before. We will get back to you with some information on them.

The Chairman: If there are no other questions, I wish to thank Ms Peterson and her colleagues. As always, it has been extremely helpful.

The committee adjourned.

National Finance

Proceedings of the Standing Senate Committee on National Finance

Issue 17 - Evidence

Proceedings of the Standing Senate Committee on
National Finance