Proceedings of the Standing Senate Committee on
National Finance
Issue 23 - Evidence - December 1, 2010
OTTAWA, Wednesday, December 1, 2010
The Standing Senate Committee on National Finance met this day at 6:45 p.m. to examine the expenditures set out in the Supplementary Estimates (B) for the fiscal year ending March 31, 2011 (topics: AECL and EDC/Canada Account).
Senator Joseph A. Day (Chair) in the chair.
[English]
The Chair: I call this meeting of the Standing Senate Committee on National Finance to order. Welcome, honourable senators and our guests here this evening.
Before I begin the introduction of the subject matter for this evening, we have a little bit of housekeeping to do. I will call on Senator Marshall at this time.
Senator Marshall: I move that Senator Neufeld be acting deputy chair until Senator Gerstein returns to the committee.
The Chair: I will take the motion as Senator Neufeld as deputy chair of the committee. Then if you wish to make another motion when Senator Gerstein is back, we can do that at that time. I am not sure that it is proper to put that qualifier on there; so if you agree, the motion is that Senator Neufeld be appointed as deputy chair of the Standing Senate Committee on National Finance.
All those in favour?
Hon. Senators: Agreed.
The Chair: Contra minded, if any? Motion carried.
Senator Neufeld, congratulations on your elevation.
[Translation]
Honourable senators, we continue our study of the Supplementary Estimates (B) for the fiscal year ending March 31, 2011, referred to committee.
[English]
This evening's meeting will be divided into two sessions. The first will focus on Atomic Energy of Canada Limited. In the second, we will focus on the Canada Account.
Representing AECL, we are pleased to welcome back to our committee Mr. Hugh MacDiarmid, President and Chief Executive Officer; and Mr. Kent Harris, Senior Vice-President and Chief Financial Officer.
Colleagues, as usual when we have only a one-hour time slot, I hope you will keep your questions succinct and give everyone an opportunity to participate in the question and answer period.
Mr. MacDiarmid, the floor is yours.
[Translation]
Hugh MacDiarmid, President and Chief Executive Officer, Atomic Energy of Canada Limited: Mr. Chairman, it is a pleasure to be back before you to update you on AECL matters. With me tonight is Kent Harris, Chief Financial Officer of AECL.
Since our appearance last May, AECL has made solid progress on its top priority projects.
[English]
I was pleased to report on August 17 that the National Research Universal, NRU, reactor at Chalk River Laboratories, after fifteen months of round-the-clock effort by hundreds of AECL staff, was successfully repaired and returned to service. This was indeed a major accomplishment for AECL and the Canadian nuclear industry. We are justly proud of our highly qualified employees and the contractors who assisted them.
NRU is back. We are producing critical medical isotopes for Canadians and patients all over the world. NRU is the world's largest and most versatile research reactor. In addition to producing isotopes, it serves as the pre-eminent R&D facility to support the nuclear industry as well as dozens of university and industry researchers from all over Canada and the world.
Your colleagues from the Standing Senate Committee on Energy, the Environment and Natural Resources recently paid a visit to Chalk River Laboratories and found the experience to be informative. Mr. Chair, I would like to invite your committee to come to see one of the world's most fascinating nuclear research and development facilities at your convenience.
AECL continues to make progress on its first-of-a-kind CANDU reactor life-extension projects. We have encountered challenges and setbacks. It is nevertheless rewarding to see that the hard work being put into these projects is paying off.
In Ontario, the life extension of two Bruce Power reactors is on track to be completed by next spring. These two reactors will produce enough clean electricity to power 1.5 million homes for another 25 years.
In South Korea, where four CANDU reactors are operating, one is under refurbishment and expected to be completed by next spring. It is with great pride that I note that AECL's CANDU reactors in South Korea are among the world's top- performing units.
As for the Point Lepreau reactor in New Brunswick, life-extension work is expected to be completed by mid-2012. As you know from my previous appearance here, we have experienced many technical issues with the Lepreau project. We have responded to and overcome those challenges with better procedures, oversight, communication and project management improvements.
The current delay to the Point Lepreau schedule is due to the need to remove the long metal calandria tubes that we had previously installed in the reactor core. When metal plugs are mechanically rolled and joined at the end of each tube in the core, a leak-tight seal is supposed to result. However, as our lab analysis showed, the wire brushing technique that was used resulted in a slightly roughened metal surface, preventing an airtight seal in some tubes, so we are replacing all of them.
A technical and economic review of this issue was performed with NB Power management and a panel of nuclear experts. A joint determination was made that replacing all calandria tubes was the right path forward in the circumstances. AECL commissioned an independent root cause assessment and will implement the team's recommendations to prevent reoccurrence.
Honourable senators, we are a learning organization, and I assure you that we are conscientiously applying lessons learned to our work processes and moving forward to complete these first-of-a-kind projects safely.
I am pleased to report that things are now progressing better than planned at Lepreau. All calandria tubes have now been removed, and polishing of the tube sheet bores will begin in early December.
I will address Supplementary Estimates (B), which the committee is reviewing. The $294 million allocated to AECL allows the corporation to address its operational priorities, namely, continued medical isotope production, including the repair and restart of the NRU reactor; continued infrastructure and operational upgrades related to health, safety, security and environmental priorities at Chalk River Laboratories; continued development of new-build power reactor technologies, such as the Advanced CANDU Reactor and the Enhanced CANDU 6 reactor for construction in Ontario and other jurisdictions; and, importantly, fulfilling our contractual commitments on first-of-a-kind reactor life-extension projects, including coverage of project funding shortfalls.
Other initiatives include the windup of the dedicated isotopes facility, provisions of funds from employee reduction costs, and incremental funds to manage operational pressures.
At AECL, we have implemented many belt-tightening measures and expenditure-reduction initiatives in all areas of our business. These include restrictions on hiring and travel, increased focus on spending controls, operating and capital budget cuts, deferred projects and so on. We are very serious about good stewardship of public funds and prudent financial management to make every dollar go as far as possible.
We are happy to respond to questions.
The Chair: Thank you, Mr. MacDiarmid. I have a couple of points for clarification. You mentioned the dedicated isotope-producing units. Would those be MAPLE 1 and 2?
Mr. MacDiarmid: That is correct.
The Chair: Are they being tucked away?
Mr. MacDiarmid: They are placed in a guaranteed shutdown state, which allows us to have flexibility regarding what might be done with them in the future. There are ongoing costs associated with that.
The Chair: You are doing that, but you are not doing further modifications or work on those, other than maintaining them in the state they are in now.
Mr. MacDiarmid: That is correct.
The Chair: Point Lepreau is a CANDU reactor.
Mr. MacDiarmid: Yes, it is.
The Chair: Do you have a similar one in Romania?
Mr. MacDiarmid: Yes, there are two reactors in Romania that were built at slightly different times. They are basically the same design.
The Chair: Is any work going on with respect to the refurbishment of one or both of those reactors in Romania?
Mr. MacDiarmid: They are not due yet. The schedule, particularly for Unit 2, will be 20 years, perhaps. Unit 1 will be sooner than that, but I do not believe that Unit 1 will be up until 2030.
The Chair: Is Point Lepreau the first of the CANDU reactors going through this refurbishment?
Mr. MacDiarmid: The other reactor that is similar to its design, the CANDU 6 that is in roughly parallel schedule, is Wolsong 1, in Korea. In fact, it looks as though the Wolsong 1 reactor will be completed prior to Lepreau. We discovered the issue with respect to the brushing technique sooner at Wolsong than we did at Lepreau. Therefore, we did not have to go through the exercise of removing the calandria tubes.
The Chair: Did I understand you to say that the Lepreau work started prior to Wolsong, but now Wolsong is ahead of Lepreau?
Mr. MacDiarmid: That is correct.
The Chair: Were all the tubes replaced in Wolsong?
Mr. MacDiarmid: The scope of the work was the same — removing the tubes and putting in new ones; however, we did not have to go through the same process that we are doing at Lepreau now because we first encountered the leak testing problem at Point Lepreau. At that time, it was indeed ahead of Wolsong schedule-wise. When the issue was identified, we had not installed all of the calandria tubes at Wolsong. We were able to identify the problem and rectify it without going through the steps that we had to at Lepreau. On that basis, they have already done the polishing and the installation of the calandria tubes.
The Chair: The articles we have read in the media said you decided to remove all the tubes at Point Lepreau.
Mr. MacDiarmid: That is correct.
The Chair: That is not what you were doing previously, but now you have decided that that is what you are doing, and on with it.
Mr. MacDiarmid: When we looked at the nature of the technical issue, we had at least a technical alternative that would have allowed us to remediate the damaged bore surface without removing the calandria tubes. However, our technical experts concluded that the risks of doing that would be too high and that there would be an elevated possibility that the reactor would not have the same service life if we did not do the full removal of the tubes to remediate the damaged bores.
Clearly, this is an issue where we are paying an expensive price for the learning involved in it, but we have made what we believe is the correct decision, supported by the customer.
The Chair: Thank you for that clarification. Some newspaper articles were not clear on just what was happening with that repair work.
Senator Eaton: I am very excited that you are now producing medical isotopes again. Good for you.
You are producing 54 per cent of the electricity in Ontario?
Mr. MacDiarmid: That varies up and down depending on demand and other things, but yes, certainly over 50 per cent.
Senator Eaton: Why is it that wind turbines seem to be catching the public's fancy and nuclear is not?
Mr. MacDiarmid: You are giving me an opportunity to sound rather partisan for my technology, which I appreciate. It is interesting because wind turbines are supported by certain segments of the population, but among them are not people who live near them. I do think it is an interesting dichotomy because that is exactly the opposite of nuclear. Communities that have nuclear power plants are quite happy with them. They are clean, environmentally responsible and good employers, so there is a definite skewing of support in favour of nuclear in the communities where we operate.
From a perspective of the total stability of the energy grid and the energy mix, it is clear we need a balance of supply. We need diversity of supply. Renewables like wind and solar have a place, and you can imagine that providing incentives to develop those technologies and explore how far you can take them —
Senator Eaton: I am sorry; I do not agree with wind. I think there is —
Mr. MacDiarmid: I understand. There are certain reasons I can imagine people liking it, but it is a different piece of the puzzle than is the baseload power that nuclear provides.
Senator Eaton: It is a lack of education? Have you not taken the time to educate the public as much as people who support wind turbines, for instance? There is a lot of false data out there about wind turbines.
Mr. MacDiarmid: It is certainly possible that we as an industry have not done everything we could to promote the benefits of our technology. I would like to believe the Canadian Nuclear Association and other bodies are ones to take an active role in supporting and advocating nuclear. We typically do not do so by denigrating other alternatives. We need to sell the case and benefits of our technology, but you end up coming to the point that we are offering baseload generation capacity, and I do not think that solar and wind are really competitive alternatives to that.
Senator Eaton: Thank you. On a completely different matter, you have union contracts, I think, coming up in the spring?
Mr. MacDiarmid: The first one expires at the end of this month.
Senator Eaton: Do you have a game plan going forward with those union contracts?
Mr. MacDiarmid: We certainly do. We intend to negotiate within the terms of the collective bargaining process with all of the unions on our two campuses. This process is complicated somewhat by the restructuring process, which kind of hangs over it, but at this point in time, it is our intention to proceed ahead with negotiations. There is one major union at our Sheridan Park campus with a contract expiring on December 31, and there are a large number of expiries as of March 2011. We are gearing up with negotiating teams, and we have reviewed our negotiating mandates with our board of directors and are proceeding to engage.
Senator Eaton: Are productivity and competitiveness part of your package or something you must deal with, or are you pretty satisfied with the productivity generally?
Mr. MacDiarmid: I think we have a great and talented workforce, but they also have to be in tune with today's realities: fiscal stewardship as well as the marketplace. I think there is realism on both sides as we enter into these discussions, and we intend to ensure that we are very careful with what we are heading into in the next round.
Senator Ringuette: Thank you for being here. My first question is a financial one. Where are the very successful refurbishing that is being done in South Korea and the revenues from the sale of those products and services from AECL shown? Where can we find them? Is it in the income section of AECL or the general revenue of the government?
Kent Harris, Senior Vice-President and Chief Financial Officer, Atomic of Energy of Canada Limited: That is in the revenue section of our profit and loss statement and our financial statements.
Senator Ringuette: Does the $299 million that you are requesting in Supplementary Estimates (B) take into consideration the revenue from sales?
Mr. Harris: Yes, it does.
Senator Ringuette: Including the revenue from sales of isotopes?
Mr. Harris: No. We show isotopes as an offset to operating expenses coming out of Chalk River.
Senator Ringuette: It is in the Chalk River particular financial accounting?
Mr. Harris: Yes, it is.
Mr. MacDiarmid: It is in our consolidated accounts but not as revenue.
Mr. Harris: Right. It is below the revenue line. It is an offset to expenses as opposed to a top-line revenue.
Senator Ringuette: My other question is in regard to future sales of CANDU and CANDU 2. When I was in Argentina in March, the government representatives that I met there were very happy with the current CANDU product they have, and they told me that they were in negotiations for a second CANDU reactor to supply them with the energy they need for their developing economy. That is on one the hand.
On the other hand, I read recently in a newspaper article that you were directed to cease any kind of discussion with any potential buyer of your technology, whether in Canada or outside Canada. Is that the truth?
Mr. MacDiarmid: It is accurate that right now the policy direction we have been given is not to enter into major new contractual commitments until such time as the corporate restructuring is concluded.
Senator Ringuette: Meanwhile, your major competitor, which is an 80 per cent Crown corporation of the French government, is looking at your clients and making a sales pitch for their product instead of your Canadian-made product, including on Canadian soil?
Mr. MacDiarmid: Senator, I think all parties concerned understand the urgency with which we have to proceed with the restructuring process and that the sooner we get through it the sooner we will be able to actively pursue new business opportunities for CANDU. I understand the reason we have the policy direction that we do, and we are working with it, but clearly it does pose risks for us in markets such as where we enjoy a very strong positive reputation, and that is being put under some stress.
Senator Neufeld: Thank you for being here. I did not get to Chalk River but did have the pleasure of touring Darlington and Bruce — I think there is a different name for that one now — as well as Cameco in Port Hope. I was truly impressed with what you do.
Mr. MacDiarmid: I still get a chill up my spine when I go to a CANDU reactor and see what an amazing technological marvel it is.
Senator Neufeld: I did too, and I got too close. My concern, which is shared by a number of people, is on the expenditure side and the requests from government.
I do not want you to think I am being negative about your process or anything like that. One thing I was told or learned when I was there is that how the pellets are loaded into the CANDU reactor and those kinds of things have been basically the same technology from conception. I do not want to get into a technical discussion with you, but that is what they said. They did it the same way 25 years ago as they are loading those today.
All of this money is being spent. Maybe you have these numbers, or you could get them for me. There seemed to be quite an increase in 2007-08. That was $322 million provided by the government. In 2008-09, $658 million; 2009-10, $962 million; and today with what you are asking for in Supplementary Estimates (B), we are again at almost $1 billion.
Can you tell me what part of those dollars are for expenses with Chalk River, with isotope production, and what is involved in the refurbishment and all of the other things that AECL does? I do not expect you to have those numbers here. If you could get them to us, that would help me understand why it is around $1 billion a year. This is Supplementary Estimates (B), and we are expecting another one.
That will be my next question. Will you be coming back for more in the next while before the end of the fiscal year? What do you project for the next year? That might be hard to do with the process that you are in.
Mr. MacDiarmid: It is certainly difficult for me to speak to that. I will say, though, that we are going through a period of time where the convergence of a number of forces has created significant cash demands on the corporation. They range from the continued development of our new generation of reactor technologies, and that was specifically spelled out going back to 2007-08 and 2008-09. Second is the program to continue to upgrade the facilities and infrastructure at Chalk River. Frankly, the infrastructure there has not been funded adequately for a decade or more. Therefore, we are playing a bit of catch-up, but it clearly needs to be brought to modern-day standards of readiness to operate a nuclear reactor.
That was topped up by the need to do the repair and return to service of the NRU and is also being increased by the need to continue to have the NRU be producing isotopes when we made the decision to terminate the MAPLE project. On one hand we avoided a substantial expenditure by terminating the MAPLE project, but on the other we also increased the amount we need to spend on the NRU in order to bring it to operational readiness to produce.
The life-extension projects are the biggest single source of variance over that period of time. This has been a period where the life-extension projects were frankly designed to be the revenue and profit bridge from one generation of new builds to the next generation of new builds. In fact, it has become quite the opposite in the sense that while we originally expected roughly $2 billion in revenue and hundreds of millions of dollars of profit, we will have $2 billion in revenue but hundreds of millions of dollars of losses. Clearly, when we look at the overall picture of what has happened to AECL over this period of time, the life extension has been the biggest variance.
However, that should give you some comfort that we are getting through that period of time with those life- extension projects. We are also through the bulk of the spending on the new product development, and I would expect that the financial requirements for AECL going forward — assuming we are a consolidated entity and ignoring the restructuring — in years to come would be substantially lower.
The Chair: Could you send us confirm about the figures Senator Neufeld gave you for the last five years? We have different figures in our briefing note, and it is important for us to be reading from the same song sheet here. I am talking about the last five years — the Main Estimates and Supplementary Estimates (A), (B) and (C).
Mr. MacDiarmid: Yes. We can provide that.
The Chair: Then we can compare them to these figures.
Senator Peterson: Thank you for your presentation. Did I hear you say that Lepreau is not going into service until 2012?
Mr. MacDiarmid: That is correct.
Senator Peterson: The reason I ask is that the briefing notes I have say 2011. That is quite a difference. Are there sufficient funds in here? That is over a year away.
Mr. MacDiarmid: The Supplementary Estimates (B) is simply for this fiscal year, fiscal 2010-11. Therefore, there will be a requirement for continued funding for the Lepreau work for fiscal 2011-12.
Senator Peterson: I was at Bruce Power last week as well on the two A reactors. You people are part of the process, and they are on schedule and on budget. Is it the same process there as Lepreau, the same structure?
Mr. MacDiarmid: The reactors are different at Bruce. They are 480 channels versus 380 at Lepreau. Other than the size, the generic process we are doing of removing the tubes and replacing them with new ones is exactly the same. There is different tooling because of the workspace available and the different reactor designs and so on, but generically it is the same process.
I have to say, however, that each reactor develops almost a personality, and after it has been in operation for 30 years, irradiated materials can develop different deformations. A lot of customized work needs to be done with highly complex machinery.
We certainly did have our challenges on the Bruce project as well as Lepreau.
Senator Peterson: You just overcame them more quickly.
What is the life extension when you do this work, 25 or 30 or 40 years?
Mr. MacDiarmid: We do not offer a warranty, per se, but certainly we think 25 years, and we hope 30 years.
Senator Peterson: Is the design for the CANDU 6 completed and approved?
Mr. MacDiarmid: The Enhanced CANDU 6, which is the post-911 containment structure and more modern control systems, is not complete. We still have about a year to a year and a half of work to do on the Enhanced CANDU 6. Frankly, we were focusing our energies on the ACR-1000 reactor for most of the previous two to three fiscal years, whereas we have just begun to ramp up the work on the Enhanced CANDU 6 now, within the past three to six months.
Senator Peterson: Would Darlington use the Enhanced CANDU 6?
Mr. MacDiarmid: I cannot speak to that specifically because ultimately the decision as to exactly what design Ontario wants to install at Darlington will be made by Ontario officials. I do think which reactor design they will select is still an open question. The simple answer is that we will build them what they want to buy.
Senator Peterson: Yes, because they obviously want to buy Canadian, and that is the game. It is two years away.
Mr. MacDiarmid: In nuclear years, two years is the blink of an eye, unfortunately.
It comes down to a basic choice. The ACR-1000 is a new design. It evolved from the EC6, but it is new. It has some innovations that we think are important and make it what we consider to be the best reactor design in the world. However, it is not proven; it has not been built anywhere. Someone somewhere must assume the risk associated with building a brand new reactor. That is an issue Ontario officials and Government of Canada officials are weighing carefully.
With the Enhanced CANDU 6, we are retaining the core reactor physics exactly the same as the EC6. You are talking about a new containment structure for post-9/11 and some new circuitry, but basically all concerned see building an Enhanced CANDU 6 as being a much lower-risk proposition.
Senator Peterson: What is the timeline for the sale of AECL? What are you working on? People are bidding on it now, I imagine, or looking at it now.
Mr. MacDiarmid: I believe government officials are treating the timeline as confidential.
Senator Murray: I beg your pardon. When the officials from Natural Resources Canada were here during debate on Bill C-9, they said the government's hope and expectation and target was the end of this calendar year.
Mr. MacDiarmid: I was kind of heading in that direction in the sense of hope and expectation. Clearly, it is not a process that can be managed to a hard and fast deadline, as I am sure you know.
My belief right now is that the sincere intent is to conclude a transaction that can be announced with a future owner early in the new year and to close the transaction as soon as possible thereafter.
Senator Runciman: Senator Peterson covered a lot of the ground I wanted to ask you about with respect to Ontario and the status of the Ontario situation, given the release of their energy plan last week or two weeks ago.
How does the development of the Enhanced CANDU 6 fit into what Ontario is suggesting in its energy plan? Are you saying that about a year from now you will be in a position to market that reactor?
Mr. MacDiarmid: The design and development process of a nuclear reactor can extend over multiple years; that is just the nature of it. A big portion of that is the licensing process. We are already engaged with the Canadian Nuclear Safety Commission in Phase 1 of the licensing process and starting Phase 2 of the licensing process, much as we did with the ACR-1000. We are catching up to that timetable.
We believe that our development and licensing timetables will meet the market requirements of Ontario, and those are a little more relaxed than they were a few years ago. They were looking for an in-service date of 2018 or 2019. I do not believe that applies at this stage. Given the economic downturn and the reduction in energy demand, I think those dates are slipping a bit.
Senator Runciman: Are you talking about the request for proposals that was cancelled?
Mr. MacDiarmid: That is right. That was a 2018 or 2019 deadline, and I do not believe that applies today.
The main comfort I can give you is that we have been in direct discussions at an extremely high level of detail with Ontario Power Generation with respect to both the ACR and the EC6 reactors. They understand them thoroughly. You can imagine that they are as experienced as anyone in the world in operating CANDU. We are certainly hopeful that the time will come soon that we can come to a understanding of exactly what reactor they want and what timetable we need to deliver it on, and I am confident that we can do so.
Senator Runciman: I inferred from your comments in response to Senator Peterson that you would prefer to see the ACR-1000 as the Ontario choice.
Mr. MacDiarmid: I am proud of what we did and have done with the ACR-1000. It is an absolutely superb reactor. It is coming to the marketplace at a time when the willingness to absorb risk is low because of some of the things that are happening around the world with delayed projects, so it is understandable that there might be reluctance to undertake that risk, despite the many fine features of the ACR. The CANDU 6, again, is a workhorse. It is the highest- performing reactor anywhere in the world. We will be pleased and proud to build an EC6 if that is what they want. We will work with our customer, and I am sure we will get to the right answer.
Senator Runciman: I may be wrong on this. The information I was given may be incorrect, but I believe the bidders who expressed an interest in the commercial reactor division have not expressed any interest in financing the completion of the ACR-1000. I am wondering how that fits in with your view of the potential for that unit.
Mr. MacDiarmid: I will not comment on what might have been attributed to something I cannot talk about anyway. Honestly, I think that we, as a management team, made a strong case for both our reactor designs in whatever meetings we had with prospective investors. I will continue to believe that the ACR is a great reactor and that the EC6 is an excellent modernization of a proven design.
Senator Runciman: Where do the Enhanced CANDU 6 and the ACR-1000 stand with respect to marketability? Are they both along the same timelines?
Mr. MacDiarmid: I would say, with reasonable judgment, that within plus or minus a year, we could bring either one of them to the market at the same time.
When I first arrived at AECL at the beginning of 2008, we were pursuing multiple market opportunities for the ACR, including the U.K. By about mid-year that year, it became clear that we would not be selected, so we made the decision to pull out of the U.K. competition and concentrate on Canada as being the launch country for the ACR- 1000. That is still our basic philosophy, that we need to build that new reactor in our home country, and we clearly focused our energies in the Ontario bid process to make that happen.
Today, we are faced with international opportunities that are very substantial for the EC6, because that is what we have been marketing. The senator mentioned Argentina. Certainly Romania will not be an EC6 market, but it will build on the EC6 technology if we build Cernavoda 3 and 4. Ukraine, Turkey, Jordan and China are some of the many jurisdictions where we are active in the marketplace, and those are all EC6-type markets.
Senator Murray: For the record, would you state what the financial arrangement is with New Brunswick with regard to the refurbishment of Point Lepreau? I ask the question because there was a bit of a dust-up as recently as yesterday in the New Brunswick legislature on the general question.
Mr. MacDiarmid: Without being too specific, I can simply say that we entered into a fixed-price contract to supply the life-extension services associated with that, and that is the contract we are managing towards and planning to fulfill.
Senator Murray: What are New Brunswick's obligations?
Mr. MacDiarmid: In a sense, implicit in that, we did not undertake in the contract to pay for any replacement power, for instance. That would be one of their major cost items at this point in time.
Senator Murray: Was there competition for that refurbishment?
Mr. MacDiarmid: It predates me, but my understanding is that there was indeed a competitive alternative that came to a certain point, and when that deal was not satisfactory to New Brunswick officials, they turned to AECL, and, in a relatively short time frame, we did a deal with them.
Senator Murray: You see, the rap against you — not against you personally but against the institution, against AECL — among people who would make radical changes is that you made bad business deals, specifically with regard to refurbishment. I take it that it is the fixed-price contract arrangement they are talking about. Even though it predated you, could you explain yourself?
Mr. MacDiarmid: I have made this comment previously and read about it in the paper, so I guess I can say it again. I believe that we underestimated the technical demands of this life-extension work and we overestimated our own technical preparedness to execute it, and that was a combination that has ended us up where we are. I think all parties understood the risk, and it has come to pass in a way that none of us are happy with. Clearly you can draw no conclusion other than that, in retrospect, undertaking that contract on a fixed-price basis is not something we would want to do again.
Senator Murray: I understood that the competitor would have exacted a large premium from the province.
Mr. MacDiarmid: I am told, with no verification, that even with the additional costs we are incurring, this will still be a better deal than the one they walked away from; but that is hearsay.
Senator Marshall: I have some other questions, but I want to pick up on something Senator Murray spoke about. What was the fixed-price contract for Point Lepreau?
Mr. MacDiarmid: I will put the number at roughly $600 million.
Senator Marshall: What is your projected loss on that?
Mr. MacDiarmid: I cannot give you a number on that, senator, although it is several hundreds of millions of dollars.
Senator Marshall: Would you have the number on the loss to date?
Mr. MacDiarmid: I do not know exactly. In a sense, it is a mid-course direction because we re-estimate the time to completion of projects on a regular basis. We do that with our board. I understand that it is the number you want. I treat that as a commercially confidential and sensitive number, so I prefer not to put it on the public record.
Senator Marshall: Going back to the estimates, in the Main Estimates $102 million was approved, and in the Supplementary Estimates (A) $300 million was approved. Could you please explain how the cash flows? When those amounts were approved, did you know that you would be back for $294 million under the Supplementary Estimates (B), or does time pass and then you determine you need the additional money?
Mr. MacDiarmid: I will give an overview comment first and then ask Mr. Harris to comment on the process. We have to keep in mind that restructuring has been about to happen throughout the year. I believe that the government made conscious decisions not to award us a full year at each tranche. That has had an impact on the decisions made. I do not believe that the original $102 million plus $300 million was seen as a realistic full-year figure. The $294 million builds on that. Yes, indeed, there may well be a further request beyond that.
Mr. Harris: I will reiterate what Mr. MacDiarmid said. We submitted our business plan at the beginning of this year in early January. When we received approval from Treasury Board in both the Main Estimates for $102 million and in the Supplementary Estimates (A) for $300 million it was with the knowledge that it was a partial approval.
Senator Marshall: Okay. Earlier we had understood that the restructuring would probably take place early in the new year. With this $294 million approved, early in the new year could even be sometime after March 31. What would your projections be until the ending of the year? Do you think you will be back for more in the Supplementary Estimates (C)?
Mr. Harris: Currently that is under discussion with AECL and our shareholder. We are trying to get an understanding of that number. We went through a similar process for the Supplementary Estimates (B) for the initial budgetary number. We provided our estimates of what we would need until the end of year. That is currently under review.
Senator Marshall: Will the $294 million bring you to the end of December?
Mr. Harris: It will not be sufficient to get us to the end of the fiscal year.
Senator Marshall: I was looking for something more specific. How much of the $294 million is for Point Lepreau?
Mr. Harris: The $294 million is not a defined number, per se. It is a partial amount to get us to a place in time. To allocate it specifically to a particular project is difficult.
Mr. MacDiarmid: It is only a slice in time for this fiscal year as opposed to the total project. The increased spending on Point Lepreau will be more in future years than it is in the current year because we are extending the project.
Senator Callbeck: I have a couple of questions about cost. You said Point Lepreau was a fixed price. Was South Korea a fixed-price contract? I believe you said you would finish that project next spring.
Mr. MacDiarmid: South Korea was also a fixed-price contract. They had slight variations in the various provisions but, basically, the same fixed-price nature was in place.
Senator Callbeck: Have you ever decommissioned an old reactor?
Mr. MacDiarmid: Well, yes, I suppose we have if you consider Douglas Point and the other early-stage reactor, the Nuclear Power Demonstration reactor. We have not decommissioned a full-scale CANDU power reactor.
Senator Callbeck: Roughly what would have been the cost to decommission Point Lepreau and build a new reactor?
Mr. MacDiarmid: That is two different questions, in a way. There is a cost associated with decommissioning a unit, and there would have to be an estimate of the cost for a new build. Today, you could pick a number. I hate doing this because, honestly, we have so many people looking at numbers that it becomes treacherous territory for me to put a number out for a CANDU 6 reactor off the cuff. It is unwise of me to do so, in fact.
Senator Callbeck: What about a rough estimate on the cost of decommissioning?
Mr. MacDiarmid: I would be speaking well beyond my knowledge if I were to estimate the cost of decommissioning a reactor. I am not sure whether you are in a roundabout way asking whether it was still a good deal for them to do that. I believe the answer is yes. I take the senator's caution that the Government of Canada is taking some financial pain, but the decision to life-extend the Point Lepreau reactor, even with the additional costs, is still a very good and correct economic decision, just like the decision to life-extend the Bruce and Darlington reactors in Ontario. They are good solid technology, and we will get an extra 25 to 30 years out of them for less than half the cost of building a new reactor.
Senator Eggleton: My questions on the $294 million have been asked and answered.
I was puzzled by this Argentinean situation. I can understand not proceeding too far down the path in terms of pricing if there is to be a new owner at some time. I thought I heard you say that you absolutely stopped any discussions with them. Even under a new owner one assumes that the CANDU reactor would still be for sale by AECL. I do not understand why that has come to a halt, if I understood your answer.
Mr. MacDiarmid: I am operating within the guidelines provided by government officials as opposed to necessarily what AECL might be doing if it were not in the midst of the restructuring process. I understand the reasons why we are where we are. Clearly, from my point of view, an urgent priority is for us to get that new owner identified and put us in a position to contract for the life extension of the Embalse CANDU reactor.
Senator Eggleton: In the interim, you cannot have any contact.
Mr. MacDiarmid: We have contact, and we are providing some significant technical service support for them at the existing reactor.
Senator Eggleton: Is there no discussion about a further purchase?
Mr. MacDiarmid: No discussion today, senator.
Senator Eggleton: Why was the MAPLE 2 reactor mothballed?
Mr. MacDiarmid: That was probably the first major decision of my tenure at AECL. We announced the decision to terminate the MAPLEs about four and half months after I arrived. That decision is the subject of litigation, as you know, so I will be cautious in what I say.
We made that decision based on a number of factors. Primarily, we felt that the cost, the time frame and the technical risk of continuing were simply too great. We did not have confidence that we could produce a technical solution no matter how much we spent or how much time we took. We made that decision based on the available evidence. In particular, we conducted tests with respect to the power coefficient of reactivity, which was a big issue for the licensability of the reactor, and those tests gave us what we thought was pretty conclusive evidence that we would not be able to get it licensed in the future.
Despite the many compelling arguments that would suggest the MAPLEs were going to be a great opportunity for our future, the technical reality and the licensing reality were that we could not justify continuing with them.
Senator Eggleton: Thank you.
Senator Dickson: You may not be able to answer my two questions because they relate to costs. However, could you give some idea, using either of your technologies, what the estimated cost would be per kilowatt of nuclear capacity generated? In other words, are we competitive with other technologies? First give me the numbers for yours.
Mr. MacDiarmid: I do not give it to my customers. I am a little concerned about putting numbers on the public record. It is the subject of many months of negotiations with various buyers, and there are very different cost structures in different countries.
Senator Dickson: I will give you a specific country: China.
Mr. MacDiarmid: The Qinshan complex we built in 2003-04 was less than $2,000 per kilowatt at that time. It would be twice that or more today.
Senator Dickson: I am looking at an article from the Wall Street Journal of November 29. An executive of CLP Holdings, which is the biggest utility in Hong Kong, estimates the cost per kilowatt of nuclear capacity for a new plant in China, including decommissioning and dealing with the spent fuel, to be from $1,500 to $2,000, compared with $4,000 to $6,000 in the U.S.
You would be in the $4,000 range, if I understood what you said.
Mr. MacDiarmid: In North America that would be the beginning of your assessment; that is correct. I believe the number $1,500 has been bandied about publicly. We attended a large meeting in China last week where that went up. It is yet to be proven, but we have many people looking long and hard at what they are doing differently and better to be able to do that.
Senator Dickson: It sure got me looking.
The Chair: Are you thinking of building one?
Mr. MacDiarmid: I would suggest that is a delivered price in that country, not in Ontario.
The Chair: On the second round I will ask senators to put your questions on the record. If there is not sufficient time to receive answers, perhaps you could provide us with written answers.
Senator Ringuette: Going back to my line of questioning, the government policy that you must stop talking with potential customers has probably prohibited you from getting new revenues from sales, and therefore you are here to ask for more money to move on.
Senator Neufeld: Is AECL involved with any other life-extension projects in the world that are on a fixed-price rebuild and on which there is a possibility that the Canadian public will lose money?
Senator Marshall: In your introductory remarks you listed half a dozen projects that the $294 million is being spent on. Could I have a breakdown of the $294 million?
The Chair: Can you answer any of those in a minute or so, or would you rather answer them in writing?
Mr. MacDiarmid: Yes, I can.
First, it is important to say that we have not been instructed not to talk to customers. We are clearly in discussions with customers around the world. We want very much to remain a going concern and a company that will be active in the market in the future. At this time we have received the clear guidance that the government does not wish us to enter into major new contracts that would expose the Government of Canada or the Canadian taxpayer to risk. We do not want to be negotiating on behalf of a future owner who will be delivering the project. It is a point in time. I understand why we have been given the instructions and, as I said, we simply want to get through the period as quickly as possible so that we can go on to pursue those opportunities.
With respect to the fixed-price issue and the contracts we have today, I have already talked about Wolsong. There are some complexities in how we have renegotiated the Bruce contract, but that renegotiation has mitigated our exposure, so I think I can give you some assurances in that regard.
The only other major life extension that has been signed is the Gentilly 2 project with Hydro-Québec, and that project has a dramatically different scope and risk profile. We bid it on a fixed-price basis but with very different and much lower risks.
Senator Neufeld: There will be absolutely no losses?
Mr. MacDiarmid: I am prepared to say that I cannot imagine us losing money on the Gentilly 2 project.
On the breakdown of the $294 million I will be cautious, simply because it will be mathematically accurate but will not give much insight, because it is simply a slice in time in a whole range of activities that add up to a financial picture. It is clear that in the move from the original $102 million plus $300 million, the first thing that changed was the extension of the NRU project. At the time we did the budget, we were hoping to have it done in March or April and it ended up being August. That was $30 million to $40 million of additional costs. Second was the life-extension projects, which I will say are in the neighbourhood of $150 million to $200 million.
The major changes were NRU and the life extension projects. We have been operating under very strict expenditure controls in all other aspects of organization. In fact we reduced our spending on product development, and we have had two layoffs, one at Sheridan Park and one at Chalk River.
We have been carefully shepherding our funds and maintaining good controls over the areas that we can. Now that the NRU is back, the life extensions are the single significant residual exposure that we have.
The Chair: Thank you, Mr. MacDiarmid. Unfortunately, our time has run out. On behalf of the senators of the Standing Senate Committee on National Finance, we would like to thank you and Mr. Harris for being here and for giving us a very frank assessment. We look forward to some good news coming from you in the next while.
Mr. MacDiarmid: I keep hoping that we will come with really good news.
Senator Murray: Mr. Chair, if I may, I do not know how much time we have before the Christmas break, but I would like to put forward for the consideration of the steering committee that we should try to schedule an early meeting with officials of Natural Resources Canada to pursue some of the matters we have been talking about tonight.
The Chair: Thank you. That is a good suggestion, and the steering committee will make note of that.
Honourable senators, you will recall that there were some discussions during our meeting with Treasury Board last week about the reduction of the $1.1 billion in payment to Export Development Canada, EDC, to discharge obligations incurred pursuant to section 23 of the Export Development Act. We were advised that this amount represented repayments to the Canada Account, stemming from the auto bailout and Air Canada.
To help us understand the operation of the Canada Account, both in general and in relation to those two specific situations that appear in the Supplementary Estimates (B), we are very pleased to welcome a team here this evening. Thank you all for being here. From the Department of Foreign Affairs and International Trade, we welcome Michael Fine, Director General, International Trade Strategy and Portfolio Bureau; and Julie Insley, Director, International Trade Portfolio Division. From Export Development Canada, we have Derek Layne, Vice-President and Chief Risk Officer. From Industry Canada, we welcome Alison Tait, Director General, Auto and Transportation Issues, Automotive and Transportation Industries Branch. Finally, from Transport Canada, we have Brigita Gravitis-Beck, Director General, Air Policy.
I understand that Ms. Tait might have an introductory statement regarding some sensitivities. This would be an appropriate time to make that statement, if you would like.
Alison Tait, Director General, Auto and Transportation Issues, Automotive and Transportation Industries Branch, Industry Canada: All issues related to General Motors' IPO should be addressed by the Department of Finance Canada. We have Finance Canada officials here, as well.
The Chair: We will see if we can find a seat for him. Can you state your name for the record, please?
Richard Botham, General Director, Economic Development and Corporate Finance Branch, Department of Finance Canada: I am the General Director in the Economic Development and Corporate Finance Branch at Finance Canada. I believe there were some discussions with the committee, and the clerk in any event, regarding the kind of information that we could provide around the initial public offering, IPO, of shares of General Motors.
The key issue for us is that, with the initial public offering, there are restrictions on what selling shareholders can discuss. There are boundaries that we would like to adhere to because if we make any forward statements regarding expectations around share price, it creates liability for the Government of Canada. If questions go into the area of the initial public offering, we will provide as much information as we can without stepping over those boundaries.
The Chair: Please stay here and ensure we do not step over those bounds.
Mr. Botham: If there are questions around the initial public offering, I would be happy to address them.
The Chair: This is a quiet period. If there are certain questions asked that you cannot answer now, could you undertake to answer those later after that period is over?
The Witness: Absolutely.
The Chair: I understand Mr. Fine has a presentation. You have the floor.
Michael Fine, Director General, International Trade Strategy and Portfolio Bureau, Foreign Affairs and International Trade Canada: Thank you for the invitation to appear before this committee. As the chair said, tonight we want to address the Supplementary Estimates (B) and the changes that those supplementary estimates reflect in terms of normal fluctuations or projected payments and disbursements for Canada Account transactions.
First, I want to say that Export Development Canada is responsible for managing Canada Account on behalf of the Government of Canada. Canada Account, established by section 23 of the Export Development Act, allows Canada to directly support exporters with loans, guarantees or insurance policies that exceed the risk capacity of EDC on its corporate account but are still deemed to be in the national interest.
Transactions considered for Canada Account support are assessed against criteria that consider commercial risk, national interests and Canadian economic benefits of each transaction. Cabinet approval is required for the Minister of International Trade, with the concurrence of the Minister of Finance, to authorize transactions over $50 million. The two ministers may authorize transactions under this amount.
Through Budget 2009, section 24 of the Export Development Act was amended to set the statutory limit to $20 billion for all outstanding and contingent liabilities under Canada Account. As of September 30, 2010, Canada Account's position against the statutory limit was $5.87 billion, leaving the remaining $14.13 billion in available capacity.
Canada Account loans are accounted for by the Government of Canada mainly as non-budgetary expenditures, through the main and supplementary estimates. Non-budgetary transactions are amounts that provide authority for spending in the form of loans and repayments of such loans. Under Canada Account, non-budgetary transactions relate to disbursements for loans extended on commercial terms and are expected to be repaid in full with interest.
In the 2010 Supplementary Estimates (B), repayments for non-budgetary transactions exceeded disbursements, amounting to $965.5 million in net repayments to the Crown. This represents a decrease of $1.132 billion from the previous estimates filed in the Supplementary Estimates (A) in April 2010.
This change in non-budgetary amounts is due to early repayments by General Motors of $1.1 billion and Air Canada of $100 million. Both companies repaid their outstanding Canada Account loans ahead of schedule, with interest and fees. The combined repayment amount has been reported through Supplementary Estimates (B).
I will take just a minute to provide a little additional context.
In the case of General Motors, in early 2009, the governments of Canada and Ontario, in tandem with the U.S. government, jointly supported the restructuring and renewal of the North American automotive industry. In total, $10.8 billion in support was provided to General Motors through Canada Account. As part of this agreement, Canada and Ontario agreed to convert most of the debt support to equity as GM proceeded with its restructuring.
In July 2009, the governments reached an agreement with GM to exchange $9.7 billion of the outstanding loans into equity in the restructured General Motors. Canada's equity, including Ontario's one-third portion in the new GM, was equal to a total of 4.5 per cent of the preferred shares and 11.7 per cent of the common shares. These shares are currently held by Canada GEN, a wholly owned subsidiary of the Canada Development Investment Corporation, which is part of Finance Canada's portfolio.
As the new GM began to benefit from its restructuring, it was able to repay its outstanding loan of $1.1 billion earlier than anticipated, and this occurred in April 2010. This is the repayment that is reflected in Supplementary Estimates (B).
In the case of Air Canada, the global air industry also suffered from the effects of the recent economic recession and tighter credit conditions. In the summer of 2009, the Government of Canada provided Air Canada with $100 million in Canada Account financing as part of a syndicate loan that involved Export Development Canada and three private sector creditors.
As global economic and credit conditions improved over the past year, Air Canada was able to secure additional credit on better terms and therefore prepaid its syndicate loan, including the government's $100-million contribution, in August 2010. This is also reflected in Supplementary Estimates (B).
All repayments on Canada Account loans, including interest, are remitted to the Consolidated Revenue Fund. EDC reports to Parliament through the Minister of International Trade. Given this reporting relationship, the Department of Foreign Affairs and International Trade, DFAIT, has historically acted as the home department, essentially to serve an accounting function for withdrawals from and remittances to the Consolidated Revenue Fund for transactions entered into by EDC under Canada Account.
For this reason, Canada Account activity appears under the public accounts of DFAIT and the department's main and supplementary estimates. However, since these transactions are not funded from DFAIT's reference levels, starting in fiscal year 2011-12, they will be reported as a separate item in the Main Estimates under DFAIT's portfolio and will not be part of the department's financial statements.
To ensure transparency on Canada Account transactions, EDC discloses the transactions on its website and prepares an annual report, which is tabled in Parliament.
I thank you for the opportunity to share this additional information on the recent repayments made by both GM and Air Canada. We look forward to your questions.
The Chair: Thank you very much, Mr. Fine. I have one point of clarification. In the change in the amount of Canada Account in Budget 2009, which would have been in the Budget Implementation Act at that time, section 24, the statutory limit was set at $20 billion. What was it prior to that?
Mr. Fine: It was $13 billion.
The Chair: I should have remembered that, but I had forgotten. Was that not part of the stimulus initiative, and should we anticipate that it will be reduced, rather than leaving it at $20 billion?
Mr. Fine: I do not know the answer to that.
The Chair: We will make a note of that and ask some others. Does anyone else have an answer to that — all this talent here? No?
On the $100 million that was paid back by Air Canada, what is the total amount outstanding for Air Canada?
Mr. Fine: Zero.
The Chair: That is it. Thank you. I will now go to senators for question or comments.
Senator Ringuette: I have two questions. One is with regard to the Air Canada loan that was roughly for one year, $100 million. You said that was repaid, but I would like to know how much interest was paid on that $100 million.
Mr. Fine: For that, I would turn to my colleague from EDC, if I may.
Derek Layne, Vice-President and Chief Risk Officer, Export Development Canada: I do not believe I can present the exact number because I do not have that information with me. However, I can assure you that the loan was structured with a commercial interest rate in excess of 10 per cent — so approximately one year's worth of interest at that rate.
Senator Ringuette: You were a worse fund provider with regard to the interest rates you required than any private bank out there. That is amazing. Is it the same interest rate for the loan to General Motors and Chrysler? Is it in the 10 per cent range, as well?
Mr. Layne: I do not have the information on those interest rates. I am informed that CDOR — the Canadian Dealer Offered Rate — plus 5 per cent was the basis of the interest.
Senator Ringuette: We are charging a Canadian corporation twice as much interest. It is not very Canadian-like.
I am looking at page 2 of your statement, Mr. Fine. You say in your second paragraph that as of September 30, 2010, your statutory limit was left at $8.87 billion. You still have $8.87 billion out there in loans; is that correct?
Mr. Fine: The amount in loans currently outstanding is $5.87 billion.
Senator Ringuette: Yes. That is what I am reading. Could we have a breakdown of how much and to whom that $5.87 billion is outstanding?
Mr. Fine: Absolutely. I would be happy to provide it. In fact, it is posted on EDC's website and is publicly available information, but we will be happy to provide it.
Senator Ringuette: You do not have that information with you?
Mr. Fine: I may. I do happen to have a copy of their website here.
Senator Ringuette: I am taking notes right now.
Mr. Fine: I would be happy to pass it to you because it is a fairly long list.
The Chair: We can have it reproduced and passed around to everybody.
Senator Ringuette: That would be very helpful.
Senator Marshall: I have never heard of Canada GEN, the wholly owned subsidiary of the Canada Development Investment Corporation. Does that have only the GM investments, or is that a holding corporation for a number of investments?
Mr. Botham: At this time it holds equity only in General Motors.
Senator Marshall: What would the valuation be at this point in time?
Mr. Botham: Its total equity position?
Senator Marshall: Yes.
Mr. Botham: I do not have that number. It can be calculated. With the initial public offering, the holdings have been reduced by the amount it was sold, so I would have to calculate it and net it out. I do not have that exact figure.
Senator Marshall: It has been reduced only by what has been sold. Has there been a writedown in the value of those investments?
Mr. Botham: No. The corporation will report, and the report will be tabled through the Canada Development Investment Corporation, its parent, next spring. It will include a valuation of the remaining GM shares held by the corporation at that time, as well as a reflection of their current carrying value. That will be the equity position of the corporation when it reports at the end of this fiscal year.
Senator Marshall: You are not able to tell us whether those shares have been written down at this point in time, are you?
Mr. Botham: The shares have not been written down. They currently have a carrying value that was reported in their last corporate plan, and it will be updated to reflect the share price at the time of reporting.
Senator Marshall: Is Canada GEN a newly created Crown corporation?
Mr. Botham: It was recently created, and it was created to hold the shares in General Motors.
Senator Marshall: Was it created under its own legislation or under the Canada Corporations Act? How is it incorporated?
Mr. Botham: I would have to check. I have someone here who can give me that answer.
Senator Marshall: Would there be any revenues flowing through that subsidiary? I am thinking about dividends.
Mr. Botham: Yes. Canada GEN provides dividends to its parent corporation, Canada Development Investment Corporation, which in turn provides dividends to the Government of Canada.
Senator Marshall: Would you be able to give us a dollar value on that? Do you have that information there?
Mr. Botham: A dollar value at which point in time?
Senator Marshall: When would the fiscal year-end be?
Mr. Botham: The year-end for the corporation will be the end of December, and it will report in the spring.
Senator Marshall: Is this the first fiscal year for that corporation?
Mr. Botham: No, it is not.
Senator Murray: I have a supplementary: How will all this show up on the government books? Should I ask Treasury Board that question?
Mr. Botham: How will it show up? It will be reported in CDIC, Canada Development Investment Corporation.
Senator Murray: They wrote it off originally, did they not?
Mr. Botham: No, the shares —
Senator Ringuette: Yes.
The Chair: Let us have the answer, please, and then if you have a follow-up question, you can ask it then.
Mr. Botham: I would like to make a distinction between the loans and the equity. Canada GEN holds the equity. It recorded a value for that equity, and that will be updated. That is what I was referring to. Canada GEN has not written down or written off the equity it holds.
To go back to your previous question, Canada GEN is incorporated under CBCA, Canada Business Corporations Act.
Senator Marshall: Did you say that this is not the first fiscal year and that last year was the first fiscal year?
Mr. Botham: It was incorporated in 2009, so this would be the second.
Senator Marshall: Would you know how much revenue flowed through that subsidiary last year in the form of dividends and how much so far this year?
Mr. Botham: There will be dividends at the end of the year. I am sorry; I am wrong about that. It has equity both in common shares and in preferred shares, and the preferred shares provide a dividend on a quarterly basis. Those funds have flowed to the parent corporation, CDIC. In respect of the common shares, with the sale in the IPO, dividends also go to CDIC, the parent. The recording of those will all come out in the financial statements at year-end.
There may have been dividends during 2009 for the preferred shares, but I would have to verify that.
Senator Marshall: Would the financial statements for the fiscal year ended December 31, 2009, be on the government website?
Mr. Botham: I believe they would be reflected in the Canada Development Investment Corporation summary, which is tabled in Parliament.
Senator Marshall: Thank you.
Senator Callbeck: Thank you for coming this evening. I am confused here because I thought that the government completely wrote off the investment in General Motors.
Senator Ringuette: Yes. That is what we were told by the minister.
Senator Callbeck: Now I am hearing differently, that the equity is actually on the books.
Mr. Botham: It is.
The Chair: Supplementary?
Senator Murray: It does not appear in any of the documents that the Department of Finance has tabled with us, though, does it? Where would we find it?
Mr. Botham: The accounting treatment may be such because the Canada GEN Investment Corporation is a non- agent Crown. Its books are not consolidated into the Government of Canada's books. Therefore, I would have to look, but there may not be a recorded value. When the dividends flow through the parent, the parent flows dividends to the government, and they show up on the government's accounts.
The Chair: We are all of the impression that the government was carrying this as all written off as zero value for the shares. It may well be that in one set of books there is zero value, and in another set of books there is something else. If you could help us out with that, it would be helpful and solve the confusion we have here.
Mr. Botham: As far as carrying value of the equity, it was ascribed a value of $15 a share. That is the value it was recorded at in the books of the Canada Development Investment Corporation.
The Chair: When you go back to your office, could you find any of your colleagues who could help us with this zero value that we were told about? In my recollection, it might have been the minister who was here at the time who told us that.
Mr. Botham: I believe the distinction we are making is between the value of the equity and the value of the loans.
Senator Ringuette: No, no.
The Chair: It is the equity that we were told about. We knew about the loan. Could you find that for us? No one knows for sure what we are talking about.
Senator Murray: We want to know how it is affecting Mr. Flaherty's bottom line, you understand.
Senator Callbeck: It would be great if you could get that information.
On Canada Account and the repayments by General Motors, Senator Ringuette asked about the interest, but you also have fees here. Roughly what percentage are you talking about in fees?
Mr. Fine: I will refer to EDC again, if I may.
Mr. Layne: I do not have information about fees on the GM loans. I can try to follow up on that.
The Chair: Each transaction is negotiable, is it not?
Mr. Layne: Typically.
Mr. Fine: If I may, it is a fee for the early termination of the loan, which is typical in these sorts of agreements. As the chair said, we understand they are negotiable. EDC will have that information.
Senator Callbeck: Will you provide that information to the committee, then?
Mr. Layne: We will follow up and get that information back to the committee, yes.
The Chair: Senator Murray, a former chair of this committee, is next on the list.
Senator Murray: I had a question not on the Canada Account but for EDC, if that is okay. It seems to me that a couple of years ago, in the course of budget legislation, we encouraged or allowed EDC to get into the domestic scene for two years, was it? Do you remember? There was a beginning and an end to it.
Mr. Layne: Yes, the current ending period is approximately March 2011.
Senator Murray: You are on schedule and preparing to withdraw from the domestic scene, are you?
Mr. Layne: Absent any changes in that date, yes.
Senator Murray: Thank you.
The Chair: Senator Murray, my recollection is that when we approved that, there was a provision that allowed for it to be extended beyond the two-year period by ministerial decree.
Senator Murray: Yes. There has been no such decree, I take it?
Mr. Layne: Not to my knowledge, no.
The Chair: Not yet.
Senator Peterson: Thank you for your presentation. Right now there really is no loan any longer, is there? You have shares and equity in General Motors with the IPO?
Mr. Botham: I will defer on the loan. I do not know what the loan is.
Mr. Fine: The loan has been paid off.
Senator Peterson: Yes. You have $9.7 billion at risk, and you hold a bunch of shares. The IPO came out at $34. How much does that represent today in the shares you hold?
Mr. Botham: In answer to that question, approximately 35 million shares were sold by Canada in the initial public offering. They were sold at a value of $33 per share, so there were gross proceeds of $1.15 billion.
Senator Peterson: How many shares do you have now?
Mr. Botham: Do we have that calculation? It was 20 per cent of the shares.
Senator Peterson: I just asked how many shares you have now. You guys can figure that out, can you not?
Mr. Botham: About 175 million.
Senator Peterson: At $34 per share. I presume you cannot sell these shares. Do you have to work with the United States? Do they tell you when you can sell shares?
Mr. Botham: I am starting to get into a territory where it is difficult to speculate about shares and future share sales because it starts to influence decisions in the market by other shareholders. That is not an area I can really comment on.
Senator Peterson: You are partners with the U.S. government because they hold shares, too. Is that right?
Mr. Botham: I am sorry; I missed the last question.
Senator Peterson: The U.S. government holds many shares as well, right?
Mr. Botham: Absolutely.
Senator Peterson: Far more than you have?
Mr. Botham: Yes.
Senator Peterson: Obviously these cannot be thrown in the market, or it will disturb it quite radically and not be in the best interests of everyone. Do they decide when shares can be sold? How long do you have to sit on these?
Mr. Botham: There are no restrictions beyond those imposed by the initial public offering regarding future sales by shareholders, but there are restrictions in that. Any decision by any shareholder about future disposition is something I really cannot comment on.
Senator Peterson: I was just trying to get some sense of when you might be clean on this $9.7 billion — how many years.
Mr. Botham: I really cannot comment on the timing of future share sales.
Senator Meighen: Along the lines that Senator Peterson was exploring, what is the time period or time frame during which you are not at liberty to make comments or speculation about new shares? It has a beginning and an end, does it not?
Mr. Botham: It does have a beginning and an end. It was extended because of a transaction that followed on the initial public offering, the exercise in an over-allotment. That occurred last week, and that extended the period.
We are advised by our counsel that there are really two time periods involved in that: one with respect to the U.S. markets and the Securities and Exchange Commission restrictions on that; the second in Canada because shares are also listed on the Toronto Stock Exchange. Those periods may not coincide when they end, and it is a requirement of the underwriters to advise selling shareholders the time period at which that ends. It is not too far in the distant future, but we are covered by that period right now and quite possibly into next week.
Senator Meighen: Quite possibly it will end next week?
Mr. Botham: Into next week.
Senator Meighen: Extend into next week?
Mr. Botham: Yes.
Senator Meighen: Following next week, then you would be at liberty to talk more freely?
Mr. Botham: Following next week I will have a better idea of when the time period ends, and I expect it will be short on the heels of that.
The Chair: Senator Murray, did you have a supplementary on this line of questioning as well?
Senator Murray: Yes. I thought I recalled that at some point we made a commitment to dispose of those shares in certain tranches — I thought over a five-year period — and there was a minimum number we were supposed to unload per year.
Mr. Botham: No, that is not the case.
Senator Murray: There was never any commitment of that kind?
I am sure some minister, someone told us that we were obliged to sell — what was it? Do you remember the percentages? I cannot remember.
The Chair: No, I do not remember. I was just asking a researcher about that. We do not have that information, but it was communicated to us.
Mr. Botham: I know there was some speculation and reports in the press to that effect, but that is not the case.
Senator Murray: It arose the day the agreement was made between us, Ontario and the U.S. It was just speculation by journalists, you think?
Mr. Botham: I am not sure what the source of it was.
Senator Murray: There is no such commitment on the part of the government?
Mr. Botham: That is correct.
The Chair: There is none; is what you are telling us?
Mr. Botham: No. I am saying there is no commitment to that effect.
The Chair: Yes, there is no commitment.
Senator Runciman: I have just a quick question about where Chrysler fits into this situation. What is the status there?
Mr. Botham: Would you like to start with the loans?
Mr. Fine: No.
Mr. Botham: Canada also received equity in Chrysler Corporation. It is being held by a subsidiary of the Canada Development Investment Corporation as well, not Canada GEN.
Senator Murray: What is it called? Another non-agent Crown, whatever that is?
Mr. Botham: I think I have that. Canada CH Investment Corporation.
Senator Runciman: Is it paying dividends as well?
Mr. Botham: No. There are no preferred shares in this case. They are common shares.
Mr. Fine: If I may respond to your question on the loan, the Government of Canada and the Province of Ontario provided $2.9 billion in total financing for Chrysler through a loan. Through this financing, the government also acquired the 2 per cent interest in Chrysler that my colleague was referring to. Repayment of these loans is scheduled to be completed by 2017.
My colleague from Industry Canada may wish to comment and add a little more information, if she has any.
Ms. Tait: Yes. The difference between the Chrysler deal and the General Motors one is that basically Chrysler is primarily debt — 2 per cent in equity, but most of it is debt.
The total amount of the package, including Ontario, was $3.775 billion. Mr. Fine might have actually said the amount without Ontario, I think.
I do not know how much more we could add. Right now, up to this point, Chrysler has not repaid any of the loan.
Senator Runciman: As a person who does not really understand this process, I am assuming that you have made a loan and that interest is building on this loan as well. This is a growing liability for Chrysler then, is it?
Ms. Tait: Yes. The cost of this debt for them is CDOR plus 5 per cent. Interest is charged on the loan.
Senator Neufeld: You will have to bear with me. I am not a chartered accountant. I am reading the sheet that was just handed out to everyone. I see two items. One is seven items down, purchase of refunds of softwood lumber duty deposits and accrued interest, $1 billion; and the last one on the page is supply of goods and services for a CANDU 6 reactor with respect to the completion of Unit 2 power project, $100 million-plus, and that was to Atomic Energy of Canada Limited. Can you tell me what that means?
Mr. Layne: I will do my best. With respect to softwood lumber, EDC played a role for the Government of Canada in effecting the arrangements that were made there, acting as agent, and this was the mechanism used. I do not have additional details with me this evening, but that was basically the nature of that. We effectively acted as payment agent in remitting and collecting funds.
Senator Neufeld: Are those the dollars that were held by the U.S., the $5 billion, and that are slowly being collected back, or is this just a regular, constant collection? You just transfer money, the U.S. gives it to you, and you then hand it off to the finance minister?
Mr. Layne: Effectively, we are a go-between; that is correct. I would have to get more details. I believe this is largely complete in terms of this activity.
Senator Neufeld: To AECL, $100 million?
Mr. Layne: To my knowledge, that is more of a traditional Canada Account financing in favour of export contracts of AECL relating to the Romania nuclear facility.
Senator Marshall: I want to make sure I understand this correctly. The transactions relating to Chrysler are going through the Canada CH Investment Corporation; is that correct?
Mr. Botham: That is the corporation that holds the equity.
Senator Marshall: Do all the revenues and writeoffs and everything relating to that company go through that subsidiary company? Does everything relating to Chrysler go through that subsidiary? The dividends are not going through somewhere else, are they?
Mr. Botham: Any transaction related to that equity would be conducted by that Crown corporation.
Senator Marshall: If I went onto the government website, would I be able to find the financial statements of the Canada CH Investment Corporation and the Canada GEN Investment Corporation? Would they be on the government website? Discussions here this evening raise many questions, and I think some of them could be answered if the financial statements were on the government website. If they are available there, I would just go and look there; if not, is that something you could provide to the committee?
Mr. Botham: If the information is available, I will certainly provide it. I am not certain whether they report independently or whether their financial statements are rolled up into their parent. This is why I am unable to answer that question. I will verify what the situation is.
Senator Callbeck: I have a quick question. The equity in Chrysler is held by the Canada CH Investment Corporation, but the equity in General Motors is held by Canada GEN. Why is that? Why are they not held by the same company?
Mr. Botham: I think the main reason for having the equity held by two separate corporations is that it was anticipated that any transactions regarding the equity would be done quite separately, and in some cases it would be done with completely different commercial partners. Because of the non-agent status, it enables those transactions to be done in a commercial manner and also to hold the Government of Canada from harm regarding liability. It is in part for that reason that separate corporations were created.
Senator Callbeck: Is the equity in General Motors all that is in Canada GEN?
Mr. Botham: That is correct.
Senator Murray: I am the only person at the table with the humility to admit his ignorance of this matter. What is a non-agent Crown?
Mr. Botham: A non-agent Crown has a specific legal status. I would defer to my legal counsel on all the ins and outs of that. She is looking uncomfortable, so she may not be able to answer exactly that question.
Senator Murray: Her answer will be that her duty is to advise the Crown and not the Senate.
I suspect CDIC is the agent. What is a non-agent? Do any of you understand it?
Mr. Botham: As a non-agent, it is incorporated under the Canada Business Corporations Act. CDIC is an agent Crown; it is created under statute.
Senator Murray: What is the significance of that in commercial terms?
Mr. Botham: The main significance in terms of the Government of Canada's perspective is one of liability, as I understand it. When a non-agent Crown undertakes activities for which liability is created, that liability rests with that corporation; it does not transfer through to the Government of Canada.
Senator Murray: Does this have implications for the books, for the public accounts, for the financial statements that the Minister of Finance tables with us?
Mr. Botham: As I understand it, the financial reporting of the two subsidiary corporations that we referred to, Canada GEN and Canada CH, is subsumed within Canada Development Investment Corporation; those corporations would not issue separate reports.
Senator Murray: Could we get them if we asked the minister or the deputy minister, or someone who is there and who knows?
Mr. Botham: I think what would be provided is the financial information contained in the Canada Development Investment Corporation's financial statements.
Senator Murray: We could ask what portion of that is accounted for by Canada GEN and Canada CH and expect to get an answer; could we?
Mr. Botham: I default to my last answer, which is that I really should look at the last financial statements in order to be able to give you a better idea of what was contained in them and the information I can provide to you.
Senator Dickson: I have a supplementary question. Would it be possible to get a legal opinion from someone in this whole array of witnesses that there is no liability to the Crown insofar as a non-agent Crown is concerned? Could we have copies of that legal opinion distributed?
Mr. Botham: I can undertake to provide some information on that, but I cannot give you better information tonight than I have already provided.
Senator Dickson: However, you will undertake to table with the committee a copy of that legal opinion, if you have one? If you do not have one, would you please obtain one? I am interested.
Mr. Botham: The nature of my undertaking is that I will provide information clarifying the statement I made.
The Chair: Thank you. We have that undertaking.
In your discussion with Senator Murray, you were talking about these two non-agent Crown corporations and how they reported. Their assets would be reported through the Canada Deposit Insurance Corporation?
Mr. Botham: It is the Canada Development Investment Corporation.
The Chair: We were using acronyms, and I assumed the wrong one.
The discussion earlier was that Canada Account activity is through DFAIT and that we should go to DFAIT to find that activity. Is that correct?
Mr. Fine: Canada Account activity is reported through DFAIT.
The Chair: It is through DFAIT.
Mr. Fine: Yes.
The Chair: It is good to know all of these things so we can tie it together one of these days. When you are dealing with EDC and Canada Account do you ever bump heads with the Canadian Commercial Corporation? We had them in here a few weeks ago to tell us what they are involved with. Do you ever bump into them along the way?
Mr. Layne: To my knowledge we do not see them frequently with respect to Canada Account transactions.
The Chair: In terms of Export Development Canada work generally?
Mr. Layne: We work cooperatively from time to time around export projects where they may have a role in what they do and fronting contracts. We may look at or offer financing related to those contracts from time to time.
The Chair: Okay.
Senator Meighen: Speaking of whom you bump into along the road, do you bump into the Business Development Bank of Canada, BDC, more frequently than you once did?
Mr. Fine: Perhaps I can answer that question and tie it to the earlier one. Both EDC and the Canadian Commercial Corporation report to Parliament through the Minister of International Trade. Therefore, they are part of the international trade portfolio. We work closely with them on an ongoing basis. In the case of BDC, we are developing a much closer working relationship with them through DFAIT and BDC. Over the past couple of years, we have co- located five of our staff in their offices in Canada to do a better job of serving the Canadian exporters. As well, we are in the process of negotiating a memorandum of understanding with them on further collaboration.
Senator Meighen: As you know, BDC is required to deal only within Canada at the present time, but I think it is pretty widely known that they are seeking a role in following their customer abroad. Given the different natures of financing between the two organizations — one being balance sheet financing and one being inventory financing — do you foresee any problems if BDC were able to follow their customer abroad, so to speak?
Mr. Fine: Frankly, it is not an area I am qualified to comment on. The issue is going through a great deal of discussion, and it will be up to the government in the end to decide whether it wants to expand their mandate.
Senator Meighen: I realize that it will be up to the government and not up to you. You have told me you have joint offices or joint relationships within Canada. Presumably that would be exported.
Mr. Fine: At the moment, if any of the companies we are dealing with together require export financing or credit insurance assistance, we refer them to EDC.
Senator Meighen: And vice versa?
Mr. Fine: Yes.
The Chair: It might be an interesting study for this committee to look into the entities to see whether there are synergies we could recommend, especially where we see that EDC was supposed to function outside Canada but is functioning inside Canada and will continue doing that. We will hold that for another day. Thank you each and every one of you. I apologize for putting some of you on the spot.
Senator Peterson: Have you determined the value that GM shares have to go to to break even?
Mr. Botham: No.
Senator Peterson: If you calculated it, would it be your mandate to hold until you came as close to that as possible?
Mr. Botham: I suppose the disposition strategy will be up to the government. They will determine what is acceptable.
The Chair: Our objective this evening was to learn a little more about Canada Account, which we have done. There may be more to explore in the future. Our focus was primarily on Supplementary Estimates (B) at this time. You have helped us in that regard, and we thank you for that.
Senator Murray: On the last question about disposing the GM shares, describe the process briefly. You said ``the government.'' It is up to your minister, one assumes. Is there a submission to cabinet? Does cabinet authorize the disposition of a certain number or percentage of shares? Is that the process?
Mr. Botham: There is no fixed process. The government determines how it would like to have a decision made about the sale of those shares. Currently, the shares are being managed by the Crown corporation in a commercial manner. That Crown corporation typically provides advice to the Minister of Finance.
Senator Murray: The Minister of Finance would give the corporation authorization to dispose of a certain number of shares at a specific time. They are operating under some kind of mandate from the minister, if not the whole government.
Mr. Botham: They operate under a mandate that stipulates they should manage their holdings in a commercially responsible manner.
Senator Murray: I see. Within that mandate, the government does not say when.
Mr. Botham: As I said, the relationship is that the corporation provides advice to the Minister of Finance.
Senator Murray: We will presume, I guess.
The Chair: We will have to pursue this at another time since our time has run out. You see how difficult it is for me to bring a meeting to an end because honourable senators have so much interest in this. Thank you very much, and have a good holiday season.
(The committee adjourned.)