Proceedings of the Standing Senate Committee on
National Finance

Issue 29 - Evidence - March 8, 2011


OTTAWA, Tuesday, March 8, 2011

The Standing Senate Committee on Banking, Trade and Commerce, met this day at 9:32 a.m. to examine the expenditures set out in the Estimates laid before Parliament for the fiscal year ending March 31, 2012.

Senator Joseph Day (Chair) in the chair.

[Translation]

The Chair: Honourable senators, this morning we continue our study of the Estimates laid before Parliament for the fiscal year ending March 31, 2012 that were referred to our committee.

[English]

Last week we heard from Treasury Board of Canada Secretariat officials who provided us an overview of the estimates that we are studying and answered a number of questions. In our next two meetings, we will be hearing from specific departments and agencies to discuss their estimates and programs in more detail. We will then submit a report to the Senate prior to consideration of the interim supply bill, which we anticipate we will be receiving before the end of this month, the last month in this fiscal year, which provides interim supply for the government normally for a period of a few months leading into the end of June.

We are charged with our examination of the Main Estimates throughout the year. It will be an interim report that we will be giving after the first four sessions.

In our first session this morning, we will focus on the Department of Finance. We have often had the Department of Finance in to talk to us about their work in relation to other departments, but we thought we would bring them in to talk about their own department.

Representing the department today, we are pleased to welcome Sherry Harrison, Chief Financial Officer and Executive Director, Corporate Services Branch; Chris Forbes, Assistant Deputy Minister, Federal-Provincial Relations and Social Policy Branch; and Douglas Nevison, Director, Fiscal Policy Division.

Before we begin, honourable senators, I have been asked by Senator Ringuette for the floor on a preliminary matter. You have the floor.

Senator Ringuette: I would like to bring to the attention of this committee two written answers that we received. One is in regard to my questions about the purchase of the F-35s for $17 billion untendered. I asked for a cost analysis regarding this purchase. The answer that we received was nothing.

The Chair: There has been no cost analysis? What do you mean by "nothing?" I am sorry.

Senator Ringuette: May I read it to you?

The Chair: Yes.

Senator Ringuette: The answer from the department was:

Canada is procuring the F-35 through the Joint Strike Fighter (JSF) Program due to the significant cost savings, capability advantages, and industrial benefits. The total cost of the System Development and Demonstration (SDD) phase of the JSF Program is currently estimated at approximately $50.8 Billion US dollars shared amongst the partner nations. DND's share of the SDD cost is approximately $100 Million US dollars.

We are paying $100 million for a system development and demonstration.

It continues:

A detailed cost breakdown, including how much of the total SDD cost is related to analysis or research, is not available. The total capital cost of the Next Generation Fighter Capability project, through which Canada will acquire the F-35, is $9 Billion Canadian dollars and includes the cost of the aircraft, initial spare parts, maintenance equipment, infrastructure, weapons, initial training, project management, and contingency.

Nowhere in this answer from the department is the committee provided with the cost analysis that was used to purchase $17 billion worth of F-35s, untendered.

Personally, I can analyze a costing element. I hope that DND, Department of National Defence, can do that, too. However, these are public funds. We have asked for the cost analysis of this, and we are not provided it. That is quite an abuse of their authority. There is no issue here of secrecy or whatever. These are costs that will be paid with Canadian tax dollars, and I truly believe that we should have access to this cost analysis for $17 billion.

The Chair: Is this in response to a question that you asked of Treasury Board Secretariat?

Senator Ringuette: Yes.

The Chair: Are there any comments from any of our colleagues on this?

Senator Ringuette: Maybe it was DND. It was in November that I asked for this.

The Chair: We should know the question, and then we can compare the answer to the question.

First, we will ask the clerk to trace this back and find the precise questions that were asked and of whom and ensure that the undertaking was given. We can compare that to the reply, and then we can make a decision.

Senator Finley: I am new to this, so I would ask the question — and it is certainly not an aggressive question — of Senator Ringuette. However, there are many different kinds of cost analysis, ranging from simple and basic to extraordinarily complex. In asking the question, did you lay down some parameters as to the level of cost analysis that you were looking for? What you have said, I would agree, is not a fulsome cost analysis, but it could be described in some quarters as a cost analysis. I am wondering how you defined it at the time.

Senator Ringuette: In their response, they quote my question, and I did not go back to our November 30 meeting to research my exact question. They state my question as this:

What would be the cost of data and technology research in regard to the purchasing of the F-35? . . . I am asking if you could provide us with the cost of analysis, research, and so forth . . . .

My recollection of my question is the following: "What was the cost analysis that you did to make that decision?" I do not need a 900-page cost analysis; I think that this committee could go through some detailed analysis that could be provided to us to agree to this kind of spending.

Senator Finley: I do not disagree with what you are saying, senator. Perhaps we need to check what the actual question was and whether the question should be rephrased.

Senator Gerstein: Following up on my colleague Senator Finley's comment, I am not quite clear. Was the question asked of Treasury Board or DND?

Senator Ringuette: It was DND.

Senator Gerstein: What occurs to me, Mr. Chair, is that it might be appropriate, as we are studying Main Estimates, to have DND come before us at some point.

Senator Ringuette: Do you mean with the specifics to these costs?

Senator Gerstein: We will have officials from DND come before us as a witness.

The Chair: Any further comments on this issue? If not, thank you for bringing that to your attention. First, we need to get our facts straight. We will get the transcript and find out what the question is. If you can agree to leave this to the steering committee to consider whether the question was properly and fulsomely answered, and if not, we have two options. One is to write a letter saying that it has not been answered and this is not responsive, or bring them back in here. If you will leave that to us, we will report back as soon as we have had a chance to look at it. Is that satisfactory?

Senator Gerstein: Yes.

Senator Ringuette: Yes.

The Chair: Thank you. We will move ahead now. Ms. Harrison has introductory remarks in relation to the Department of Finance, and then we will go into a question-and-answer period. Ms. Harrison, you have the floor.

[Translation]

Sherry Harrison, Chief Financial Officer and Executive Director, Corporate Services Branch, Department of Finance Canada: Mr. Chair, my name is Sherry Harrison. I am the Executive Director responsible for the Financial Management Directorate at the Department of Finance. With me today are officials to assist in responding to your questions on the 2011-12 Main Estimates for the Department of Finance.

These Main Estimates identify total requirements of $85.7 billion for the Department of Finance. It is important to note that $85.4 billion, or over 99 per cent of this amount, relates to statutory items that have already been approved by Parliament through enabling legislation.

[English]

Within the statutory forecast, there is a net decrease of $2.7 billion over the 2010-11 Main Estimates, with the major contributing factors being a $2-billion increase in transfer payments to the provinces and territories resulting from the legislative funding formula; a $3.4-billion decrease in public debt costs as a result of the lower-than-expected take-up of the Insured Mortgage Purchase Program; a reduction in payments to Consolidated Specified Purpose Accounts; and a $1.1-billion decrease for transitional assistance for Ontario and British Columbia related to harmonized value-added tax frameworks.

The 2011-12 Main Estimates reflect the final scheduled payments totalling $1.9 billion for Ontario and British Columbia, while the 2010-11 Main Estimates reflected the $3-billion payment made last year to Ontario.

The voted grants and contributions include a reduction of $117.6 million, resulting from the expected decrease of $78.5 million in bilateral debt relief to be provided in 2011-12, and the decrease in scheduled payments for the Toronto Waterfront Revitalization Initiative and Harbourfront Centre of $39.1 million.

The operating vote reflects a net reduction of $9.4 million over the previous Main Estimates. This is largely due to the decrease in temporary funding for various initiatives. It also includes an increase of $4 million for government advertising programs, and $2.2 million for the Task Force for the Payments System Review. Funding for these two items was included last year in the supplementary estimates rather than the Main Estimates. The operating vote also includes a decrease of $1 million for Budget 2010 cost-containment measures.

We understand that, at your meeting last week with Treasury Board Secretariat officials, this committee sought clarification on by-province federal-provincial transfer payments, additional information with respect to transitional payments under the Canada Social Transfer, technical details on recoveries from the Youth Allowances Recovery and the Alternative Payments for Standing Programs, HST, harmonized sales tax, transitional assistance and public debt costs.

[Translation]

We would be pleased to address those matters and other questions that the committee may have on these Main Estimates.

[English]

The Chair: Thank you, Ms. Harrison. In that penultimate paragraph, you outline a number of points that were previously raised. Have you had a chance to review the transcript?

Ms. Harrison: Yes, I have.

The Chair: Were the points explained to your satisfaction? Were there any points on any of those items that you believe should be clarified?

Ms. Harrison: I think we are fine with the wording in the transcripts but, of course, members may wish to clarify particular points. I have colleagues here that are prepared to help me explain the various items.

The Chair: Thank you. One of the points that we have seen in various supplementary estimates, I think twice before and then in these Main Estimates, is a reduction in the amount reserved for interest on public debt. It seems to keep going down, but interest rates do not seem to necessarily be going in the same direction. Can you explain or help us with just what is happening there?

Ms. Harrison: Thank you for that question. My colleague, Mr. Nevison, will walk you through those changes.

The Chair: Mr. Nevison, can you help us with that?

Douglas Nevison, Director, Fiscal Policy Division, Economic and Fiscal Policy Branch, Department of Finance Canada: I might be able to. Ms. Harrison hit on two of the main structural features with respect to the projections — that is, the lower-than-expected take-up of the Insured Mortgage Purchase Program and the reduction in payments of the Consolidated Specified Purpose Accounts. It might be helpful, though, to provide some context and take a step back from those specific features.

The public debt charge forecast that was used for the 2010-11 Main Estimates was based on the forecast that was included in the September 2009 Update of Economic and Fiscal Projections. For the 2011-12 Main Estimates, the forecast that was used there is from the Update of Economic and Fiscal Projections for October 2009.

In between those two forecasts, as you rightly noted, Mr. Chair, there were some significant changes both in terms of the interest rate profile that is used to put those projections together, and also with respect to the stock of interest- bearing debt. Those are the two key variables that go into projecting public debt charges over the forecast horizon.

Taking some of these specific features one by one, the change in the interest rates, you are absolutely correct that over the forecast horizon in both of those forecasts, there is a slight upward trend in long-term and short-term interest rates over the five-year projection. The main difference between the two forecasts, however, is that in the October 2010 Update of Economic and Fiscal Projections, the level of that interest rate profile dropped quite significantly from the previous update forecast. It came down around 100 or 125 basis points for long-term interest rates and a little higher for short-term interest rates.

You will recall that when we forecast interest rates, those are taken from an average of private sector forecasts. We used the average of their interest rate forecasts to project that. That shift down had a fairly significant impact in terms of interest cost. Still, the profile is going up as we go out.

The second variable is more on the stock of debt side. That is the one that Ms. Harrison mentioned. With respect to the take-up of the Insured Mortgage Purchase Program in the September 2009 Update of Economic and Fiscal Projections, we assumed that there would be full take-up of that program. That was in the order of $125 billion.

By the time the program expired in March 2010, the take-up turned out to be considerably lower than that estimate. In the October 2010 Update of Economic and Fiscal Projections, we had quite a lower estimate of that cost. As a result, we were borrowing less, which led to lower borrowing costs.

The final point was also mentioned by Ms. Harrison. We are expecting in 2011-12 to have lower interest payments on Consolidated Specified Purpose Accounts. That is interest that is paid from one government agency or body to another. We are anticipating that will go down in 2011-12.

The Chair: Could you just explain the mortgage take-up program? That was with CMHC, Canada Mortgage and Housing Corporation, as I recall.

Mr. Nevison: That is right.

The Chair: We had representatives from CMHC here, and they said the take-up was slow at the front end, but they were reducing the interest rate so they thought more people would come in on this or increase the interest rate, whatever they had to do to try to make it more attractive. They buy up the mortgages that are being held by the various other institutions, take those off the books of the other institutions and give them money for that.

Is it the interest on the payments that they have made, or is it a loss with respect to the mortgages that we are calculating in here? There will be some revenue coming in as well on these mortgages, right?

Mr. Nevison: That is right.

The Chair: Are you anticipating a loss that makes the difference?

Mr. Nevison: No. In this case, it is a matter that the borrowing that was required to purchase those assets turned out to be considerably lower than what we originally anticipated.

The Chair: It is the interest on that borrowed money that you are talking about?

Mr. Nevison: We had to change our forecast as to how much borrowing we would have to do to undertake those purchases. It was lower than we anticipated, so we adjusted our total interest-bearing debt forecast downward to reflect that.

The Chair: How do you account for the revenue in?

Mr. Nevison: It is on a net basis, so we also receive income from the assets that we hold. In terms of the whole forecast, it is consolidated, so it covers that.

The Chair: Could you have been making more money than you were spending out?

Mr. Nevison: I am not entirely sure how.

The Chair: What if it became a net revenue generator for you?

Mr. Nevison: I am not familiar with the specifics of the program.

The Chair: We would have to bring CMHC in to talk about that or someone else from the Department of Finance.

Mr. Nevison: Yes.

Diane Lafleur, General Director, Financial Sector Policy Branch, Department of Finance Canada: To complete the answer, the program was put in place on commercial terms. Over the term of the program, the government would have made money on the Insured Mortgage Purchase Program. The fact that we did not use the full scope of the program means that we did borrow less, but the revenues generated in the longer term will also be lower.

The Chair: Thank you for that answer. Are there any follow-up questions on that line of questioning?

Senator Ringuette: What would be the net gain or net loss?

Senator Finley: What are you forecasting?

Ms. Lafleur: I do not have that answer with me, but we could endeavour to get back to you on that.

The Chair: If you would let our clerk know, then that will be circulated to everyone. That is helpful.

Senator Runciman: You may not be able to answer this question. It has to do with the harmonized sales tax with Ontario and British Columbia. There is an election coming up in Ontario and a referendum in British Columbia. The payments were made over two years. Is that the process? I am assuming that if British Columbia, for example, opts out of the HST that that would be a negotiated payback, and there would be an expectation of the federal government being compensated for those investments.

Chris Forbes, Assistant Deputy Minister, Federal-Provincial Relations and Social Policy Branch, Department of Finance Canada: We will bring in another expert.

Pierre Mercille, Senior Legislative Chief, GST Legislation, Sales Tax Division, Tax Policy Branch, Department of Finance Canada: In respect of the payments, British Columbia received a payment of $250 million in 2009-10. The province also received a payment of $769 million in 2010-11, and is scheduled to receive a payment of $580 million on July 4.

Ontario received $3 billion on July 1, 2010 and is scheduled to receive another $1.3 billion on July 1, 2011.

Senator Runciman: I am curious about the implications, especially for British Columbia, with respect to the fact they have already implemented the HST. It has been under way for some time. Those costs have already been assumed. Perhaps you cannot comment, but it would be a difficult transition to go back at this point in the game.

Mr. Mercille: The decision to come into the HST was a decision of the Government of British Columbia. There was an agreement signed with Canada, and that agreement covers the term of what happens if the province wants to get out. There is transition assistance coming in and consequences if they want to get out.

Senator Runciman: Can you briefly tell us what the consequences are?

Mr. Mercille: It is called a "material breach," and the term of the agreement was to stay in the agreement for five years. If the province decided not to stay in for five years, well, the government will have to look at its options that are provided under the agreement for the province.

Senator Finley: Is there anything else relevant to the withdrawal of British Columbia, for example, from the HST? You said that there was a five-year period, and then there are certain ramifications that have already been agreed to.

Mr. Mercille: The agreement that was signed in 2009-10 with the province has an annex at the end that provides transitional assistance. If the parties want to implement those provisions, it would be repayable by the province and the Government of Canada.

Senator Finley: Is that in total?

Mr. Mercille: That is in total.

Senator Finley: What is the period?

Mr. Mercille: The period is not specified.

Senator Finley: If British Columbia opts out, presumably $1.5 billion would be refunded to the Government of Canada.

Mr. Mercille: Canada has the option to notify the province it breached the agreement.

Senator Runciman: On the interest rate figures, you were talking about a five-year forecast, which is the way you approach this. I was listening to Jeff Rubin this morning on my way into work saying that he could see a fairly rapid rise in interest rates, primarily because of fuel costs and the implications for food production, et cetera. What kind of flexibility do you build into that if you see a significant increase in rates over the next fiscal year?

Mr. Nevison: When it comes to doing fiscal forecasts for both the Update of Economic and Fiscal Projections and for the budget, we use the average of the interest rate of private sector forecasters. In that case, assuming that were to happen, it would be reflected in their forecasts and that would work its way into our forecast. We do not have a specific adjustment that we would make.

Senator Runciman: Do you not build in a half point higher or something like that?

Mr. Nevison: We do not on the interest. We just take their interest rate.

Senator Runciman: I am not sure that you will be able to respond to this, but I wanted to ask about Equalization. I was a provincial representative for many years. One of my frustrations, especially in the agricultural sector, was the rural folks complaining about the programs available in Quebec versus Ontario. Of course, at the same time, Ontarians were sending significant monies into the province of Quebec through Equalization.

I am wondering about the concept of Equalization. Without knowing all of the specifics of Equalization and the parameters, I thought it was essentially to level the playing field in terms of the programs across the country. Of course, we have seen a significant distortion of that, if you look at $5-a-day daycare in Quebec, for example, and the whole range of university tuitions. We can look at a whole range of things where have-not provinces have significantly higher social programs in terms of benefits available to the public than do the provinces that are footing the bill.

There has been concern about that in Ontario recently, but even going back to the Harris government, I recall a resolution in the legislature at the time expressing concern about where this was going.

Can you give us a broad indication of how these determinations are made and why this has been allowed to increase tensions, perhaps, across the country with respect to the distortions that we are seeing occur?

Mr. Forbes: On the Equalization Program, the first point to make is this program is financed out of the Government of Canada's general revenues. It is raised from taxpayers across the country; it is not raised from taxpayers in one region and sent to another. It is raised across the country from general revenues.

It is used to bring provinces with lower fiscal capacities up to a certain level. It does not bring everyone up to the level of Alberta; it brings them up to a certain standard. The idea in there, as outlined in the Constitution, is to allow provinces to provide reasonably comparable levels of service for reasonably comparable levels of taxation. It does that.

We are currently transferring money to six provinces this year. New Brunswick, Nova Scotia, Prince Edward Island, Ontario, Quebec and Manitoba are all recipient provinces. Indeed, I have a table, and I think it was Senator Murray who had asked at the last meeting to have a table by province, which I can leave with the clerk for the members. It is on our website as well if anyone is interested.

Senator Murray: For the coming fiscal year?

Mr. Forbes: Yes. A key point you raised was the issue of $5-per-day daycare as an example. The important point to remember is that provinces have significant taxation powers of their own and indeed make their own decisions as to what levels of taxation they will have. They choose how much tax to levy and what forms of tax to levy.

Senator Runciman: Your wording purports that policy decisions could be an argument made as well.

Mr. Forbes: Pardon me?

Senator Runciman: We are rewarding provinces for poor policy decisions.

Mr. Forbes: In terms of the level and types of services they deliver, Equalization provides them with a certain amount, but I think it is important to recognize that the vast majority of any province's revenues — and certainly when one looks at Quebec and Ontario as the two largest recipients in dollar terms, the vast majority of their revenues come from their own sources. Those governments make decisions about levels of taxation that they apply provincially.

There is sometimes a perception out there that the Equalization Program is in and of itself funding provincial programs. It obviously contributes to allow provinces that are below average in terms of wealth to provide a certain level of services, but in the end, the provinces themselves make decisions about the services they provide and the taxation they need to do to arrive at those services.

Senator Ringuette: You indicated an increase of $4 million for government advertising programs. That is an increase from what amount?

Ms. Harrison: In the existing current fiscal year, 2010-11, there was no funding in the Main Estimates, so it is shown in the table from Main Estimates to Main Estimates as a $4-million increase because there was nothing in the Main Estimates last year. However, $10 million was approved for government advertising in Supplementary Estimates (A).

Senator Murray: For your department only.

Ms. Harrison: Yes. Thank you for that.

Senator Ringuette: Just for the Department of Finance?

Ms. Harrison: Yes, for the Department of Finance.

Senator Ringuette: Would the $4-million increase bring it up to $14 million for this fiscal year?

Ms. Harrison: No. There is a total of $4 million for the Department of Finance in fiscal year 2011-12. Last year —

Senator Ringuette: You spent $10 million, just your department.

Ms. Harrison: — we received $10 million for the department.

Senator Ringuette: That is a lot of advertising dollars.

You are the department that is responsible for the Task Force on Financial Literacy, and I believe $5 million was spent on that. I would like to have the breakdown of that $5 million with regard to the Task Force on Financial Literacy that was put in place.

Ms. Harrison: Would you like that responded to?

Ms. Lafleur: I want to point out that we are just closing the books on the Task Force on Financial Literacy at fiscal year-end, so it would probably be sometime in April or May that we can give you a detailed breakdown of the final accounts.

Senator Ringuette: That is okay. The final report has been tabled —

Ms. Lafleur: On February 9. We need to close up the secretariat, et cetera.

Senator Ringuette: Do not go away; maybe the other witnesses can answer.

With regard to the Task Force for the Payments System Review, how much was spent last year? It started last year. How much do you anticipate it will cost this year with regard to federal government spending alone? There is a private sector cost. If the private sector wants to participate in the task force, they have to pay. I would like to know who has paid, how much they paid in order to participate in that task force last year, and what will they be paying this year.

Ms. Lafleur: The Task Force for the Payments System Review was set up in June of 2010. It was given a two-year budget because it is due to report at the end of this calendar year, roughly December of 2011. We can probably give you the detailed breakdown for the fiscal year ending March of what was spent so far, and then we can give you a full reporting at the end of the task force.

I think you were also referring to the scenario planning exercise that the task force has engaged in.

Senator Ringuette: Yes.

Ms. Lafleur: I would be pleased to take that away and speak to the members of the task force and try to get some information for you on that.

Senator Ringuette: Yes, because there is some private sector funding there. I would assume that there was a cost analysis done prior to asking for private sector participation with regard to what the cost would be of those scenarios for the federal government. The more information you can provide would be better.

Ms. Lafleur: Noted.

Senator Gerstein: Thank you to the witnesses for being before us. I might preface by saying my question is in the millions, not in the billions.

Perhaps you are aware of the fact that this committee recently reported on the future of the costs and benefits of the 1-cent coin to Canadians, and we recommended that it be removed from circulation, partly because it is a losing proposition for taxpayers. It was with some interest that I noted in the Main Estimates that you show a $10-million decrease in the amount being requested for the purchase of domestic coinage. I suspect that has to do with the changes that will take place in the loonie and the toonie, perhaps offset by some increased costs — I do not know if they are increased; that will be my question — with regard to the replacement of paper currency that was talked about at the same time the new bills are being used, which I understood would have a longer life, they would be more difficult to counterfeit and have less transmittal of germs. Could you comment on that, please?

Ms. Lafleur: You are correct in the first part of your question wherein the decrease that is forecast in terms of coinage costs is a reflection of the changing in the plating materials for the loonie and toonie. That will save the government some costs there. In terms of the actual bills, that is a separate issue.

Senator Gerstein: That is not in this at all?

Ms. Lafleur: That is not in here. The coins are produced by the Royal Canadian Mint and the bills are produced through the Bank of Canada. It is a different accounting completely.

Senator Gerstein: This 7 per cent decrease is totally as a result of the change in plating and the manner in which you are producing the coins?

Ms. Lafleur: That is right.

Senator Gerstein: They will be introduced —

Ms. Lafleur: That is starting to roll out this year.

Senator Murray: I decline to rise to the provocative bait that Senator Runciman has offered and get into a debate on Equalization. However, I think I should say, because Mr. Forbes told us that there are now six recipient provinces, what has been happening in recent years is that some provinces that were in Equalization — such as Newfoundland, Saskatchewan and British Columbia — are now out. Some that were out, such as Ontario, are now in. To that extent, I think the formula is working as it should, depending, as it does, upon the rise and fall of the provinces' economic and, therefore, fiscal situations.

Senator Runciman wonders whether we are subsidizing bad provincial policy. I presume that comment or suggestion comes from the fact that Ontario is now in a recipient of equalization, and there is a government there to which he is not very friendly.

I did hear that the Minister of Finance of Alberta recently suggested that the federal government should impose all kinds of drastic conditions on equalization payments. I think some have suggested even conditions relating to provincial budgetary policy on Equalization payments. I would have thought that kind of conditionality, if applied to Alberta, would be an anathema to him, as it would be to most provincial governments.

Thank you for bringing the province-by-province entitlements. Did you bring the entitlements for the Canada Health Transfer and Canada Social Transfer?

Mr. Forbes: Yes, they are all there.

Senator Murray: Thank you very much. I have asked this question before, and I cannot remember the answer, so you will have to refresh my memory. With Equalization, there are caps. The overall pool is limited by the three-year moving average of GDP, gross domestic product. Then the individual entitlements are such that no recipient province, post-Equalization, can have a fiscal capacity higher than the average of the recipient provinces, and then there is the formula.

Where do you start? Is it the formula, or is it the overall pool of funds?

Mr. Forbes: We start in the reverse order that you outlined. We start with the formula and determine the pre-cap, pre-ceiling Equalization, the basic entitlement. Then, as you indicated, we bring it down to keep it to an average, and we scale that back to reflect the GDP growth ceiling, as you said, which keeps in line with federal revenue growth by linking it to nominal GDP over time.

Senator Murray: You have solved the fiscal problem with Equalization, the problem that the Department of Finance has always complained about with the unpredictability and so on.

Mr. Forbes: We have it on a track that is sustainable for the federal government.

Senator Murray: Did those caps kick in this year?

Mr. Forbes: Those changes were legislated with Budget 2009, so we are going into the third year of this. It was in place for 2009-10, 2010-11, and 2011-12.

Senator Murray: What are the three years from which you take the GDP average?

Mr. Forbes: For the calculation for the upcoming fiscal year, 2011-12, we would be looking at 2009, 2010, and 2011. It is a three-year moving average.

Senator Murray: For 2011, all you have is a forecast.

Mr. Forbes: As Mr. Nevison referred to, the private sector survey done for the fall economic and fiscal update, we used, in this case, the actual 2009 number because Statistics Canada published it.

Senator Murray: It was a contraction. GDP went down.

Mr. Forbes: In 2009, I would have to check.

Senator Murray: It says here minus 2.46 per cent.

Mr. Forbes: For 2010 and 2011, we have increases forecast by the private sector survey that is done for fiscal purposes.

Senator Murray: Did the overall pool shrink when you applied that cap?

Mr. Forbes: The overall pool is growing over time, as you can see here.

Senator Murray: Is it smaller than it would have been without the cap?

Mr. Forbes: If you had no cap, the number would be higher.

Senator Murray: What about individual entitlements? There is that other cap, which is that no recipient province can have a fiscal capacity post-Equalization higher than the average of the recipients.

Mr. Forbes: That was put in place when Ontario entered into Equalization.

Senator Murray: Did that bring them down?

Mr. Forbes: It would depend on an individual province, as you alluded to earlier. It is almost a hypothetical question: What would they have gotten absent the cap?

Senator Murray: I am sure it is a hypothetical question they are asking.

Mr. Forbes: Some of them would have lower entitlements than if we did not have the cap and, similarly, if we removed the GDP ceiling, entitlements would go up.

Senator Murray: We know the overall pool of funds in the Canada Health Transfer increases by 6 per cent per year out to 2013-14. How are the individual entitlements calculated?

Mr. Forbes: There is a cash and a tax-point component, as you will recall. We take the overall cash, which is legislated. We estimate the value of the tax points that are transferred, and we add those two together. That gives us a total entitlement.

Senator Murray: You are still equalizing those tax points.

Mr. Forbes: We are equalizing those tax points; it is a good point. From there, we determine a per capita, so it is tax- plus-cash per-capita amount across Canada, and we say that cash plus tax should be equal across the provinces.

Senator Murray: Does that include the cash for the equalization?

Mr. Forbes: It is the equalized value of the tax points.

Senator Murray: Is that included in that?

Mr. Forbes: Yes. Then we subtract the value of those tax points by jurisdiction to come up with a cash component. Every province has the same per-capita total transfer, namely, cash plus tax.

Senator Murray: When did that start?

Mr. Forbes: I have to check, but it certainly goes back to EPF days.

Senator Murray: I am sure about that because I think there is another equalization component.

For the Canada Social Transfer in 2008-09, you increased it by almost $678 million, then you put another $800 million notionally earmarked for post-secondary education for the next year, and it was supposed to escalate by 3 per cent per year. We have the 3 per cent.

There was transitional money because you fell for this argument that there should be equal-per-capita cash. The reason there had not been equal-per-capita cash is that the tax points were worth less in some provinces than in others. You decided it would be equal per capita so that there would a couple of big winners and some losers. You put in some transitional cash to ensure there was no decline. The estimates indicate the transitional payments are no longer.

Mr. Forbes: No one needs the transitional protection anymore because, with the growing overall envelope, everyone has been brought above the 2007-08 pre-changes level. Therefore, there is no need for transitional protection anymore.

Senator Murray: Will there be a renegotiation of the Canada Health Transfer?

Mr. Forbes: I cannot speak to how the government will decide to proceed but the legislation, as you indicated, expires in March 2014, so it will need to be replaced or renewed. Obviously, it is the government's decision. It is federal legislation, so the government will have to decide that.

Senator Murray: I would not mind having a look at those entitlements, if they are available. Someone can make copies, I think.

The Chair: We will, and we will circulate them.

Senator Neufeld: My colleagues have asked almost all the questions about the B.C. HST.

Although it was stated that $1.6 billion would have to be paid back, $580 million of that has not been transferred to the province yet, if I heard you correctly. It will not happen until July of 2011; would that be correct? You are nodding.

Mr. Mercille: Yes, $580 million still has to be paid out of the $1.6 billion.

Senator Neufeld: The person who has been selected to be the premier who has not been sworn in yet has said there will be a referendum, but it will be moved up to June. Let us say that referendum says that British Columbians say they do not want it, and the government decides that, and they have to pay back the billion dollars. I appreciate that. I would not imagine the $580 million would transfer.

Would that make any difference to the revenue for the federal government? Different things are chosen to be in and out, but if you went back to collecting straight GST, goods and services tax, would it reduce the revenue to government if, in fact, the HST was cancelled, or would it increase revenue to the federal government?

Mr. Mercille: The GST and the HST are collected by the Canada Revenue Agency and the Canada Border Services Agency. In the agreement, there is a revenue allocation formula. Basically, the money that is collected is attributed based on statistical data. This revenue is not revenue of the federal government; it comes in and goes out.

Senator Neufeld: I understand that. Are you saying that B.C.'s participation in the GST and HST is absolutely revenue neutral to the Government of Canada? Maybe that is a better way to put the question. Would you say then, B.C.'s participation is totally revenue neutral? I know there are formulas, et cetera, and that is what I am asking the question about.

Mr. Mercille: I do not think I can answer that question. I do not have the expertise.

Senator Neufeld: Will that answer take a lot of work?

Mr. Mercille: It is a function of what the impact would be of the gain in productivity of the HST compared to the old retail sales tax that was known to be a less efficient tax. It is difficult to estimate the consequences on overall revenue. Will consumers in B.C. have more money to spend? When they spend money, will the GST apply? Will they have more before or after? It is difficult to say. I am not a quantitative expert on that kind of analysis such that I can answer the question.

Senator Neufeld: I agree that there are a lot of hypotheticals, and you can put as many hypotheticals into something as you want. In terms of collecting HST, I assume you know how much money you collected from British Columbia. There must have been a revenue figure someplace that said X amount of dollars were taken in through GST. If, in fact, B.C. switches to HST — a whole bunch of things change, and I appreciate and understand that — will the revenue to the federal government from the HST remain exactly the same as the GST prior to changing if, in fact, B.C. changes to the HST?

I am not asking you to be hypothetical or to decide whether people have more money or not. I am talking about cold hard cash.

Mr. Mercille: The Canada Revenue Agency administers the HST, and they did not administer the provincial sales tax before. More assessments will be made under the HST for the Canada Revenue Agency, so the money goes into the Consolidated Revenue Fund. At the same time, the provinces are paid, I believe, 48 times a year, so the money comes in and goes out. I am not expert enough in government accounting to know if they refer to it as government revenue.

Senator Neufeld: I am having a hard time getting the question across. There must be a figure for what the federal government collected in GST prior to the July 2009 change to HST, compared to what they will receive from July 2009 forward from the HST. I know part of that calculation involves the provincial government.

I have been involved in the provincial government for a long time. I do not need hypotheticals or anything like that. I only wanted to know whether the change to HST made any difference to the federal government. I assume by your response that it makes absolutely no difference to the federal government in revenue. Am I correct?

Mr. Mercille: I have to be clear that if something is worth $100 and it is taxed at 5 per cent, they pay $5 extra. If it is taxed at 12 per cent, they pay $12 extra.

Senator Neufeld: I understand that.

Mr. Mercille: If that is what you call revenue, it is an increase. If you look at the net at the end of the year —

Senator Neufeld: A portion of the HST belongs to the federal government and will stay with the federal government. All the HST collected does not go back to the province.

Mr. Mercille: The 5 per cent, but not the 7 per cent.

Senator Murray: Is the base the same?

Senator Neufeld: It stays exactly the same?

Mr. Mercille: The base is the same with the exception of point-of-sale rebate, which is up to 5 per cent of the base that the province allows. That base includes books, clothing and those kinds of things.

Senator Neufeld: Then the revenue to the federal government stays exactly the same either way?

Mr. Mercille: The net at the end of the day should be essentially the same.

Senator Neufeld: Second, you mentioned a savings of $1 million on cost containment. If I remember correctly, the government wanted all agencies and ministries to look at saving money. I assume that saving is what this $1 million is.

Can you tell me what kind of a number the $1 million represents? Does it represent a saving of $1 million out of a cost of $200 million, or $1 million out of a cost of $50 million? Can you provide those numbers?

Ms. Harrison: Budget 2010 announced that the department budgets will not be increased to fund the 1.5 per cent increase in wages, so $1 million reflects 1.5 per cent of our wage envelope for the Department of Finance.

Senator Marshall: Thank you for being here this morning. Going back to the interest charges, which are about 10 per cent of expenditures, does the Government of Canada have any foreign debt, or is it all payable in Canadian dollars? Is it fixed, or is there a risk of foreign exchange fluctuations?

Ms. Lafleur: I do not have the numbers on hand, but I can provide them to you. A small portion of the debt is indeed in foreign currency.

Senator Marshall: The portion is minor in relation to all the debt?

Ms. Lafleur: Yes.

Senator Marshall: I noticed in the estimates that, last year, interest was at $33.7 billion, and this year it is at $30.3 billion. In each of the Supplementary Estimates (A), (B) and (C), interest projections were rolling down. Do you know what the final revised figure is for interest last year? I want to compare it to the $30.3 billion for this year, and I do not have the numbers here.

Mr. Nevison: The final number for 2010-11 was $28,306 million. The total for the year went down but then the number for 2011 goes up.

Senator Marshall: That is what I wanted to know.

Talking about the health transfers now, with respect to the Canada Health Transfer, 6 per cent inflation or whatever is tacked on every year. That amount finishes in 2014. With respect to the Canada Social Transfer, there is also maybe a 3 or 4 per cent increase there. Is there an end date for that amount also?

Mr. Forbes: It ends the same year. It is 3 per cent per year legislated to March 2014, so to the end of the 2013-14 fiscal year.

Senator Marshall: Are those transfers up for renegotiation?

Mr. Forbes: Yes, as is the equalization legislation and the territorial financing legislation, which expires at the same time.

The Chair: Is that 2014?

Mr. Forbes: Yes, at the end of the 2013-14 fiscal year.

Senator Marshall: What about the $250 million for the Wait Times Reduction Transfer? Does that end in 2014 also?

Mr. Forbes: I will check. I think that transfer will end at the same time, yes.

Senator Marshall: Who is responsible for monitoring those transfers? My understanding is that there are targets for the provinces to meet.

Mr. Forbes: Health Canada monitors them. Health Canada follows the whole implementation of the 2004 10-year health plan.

Senator Marshall: Do those transfers go out regardless of the progress, or lack thereof, by the department?

Mr. Forbes: The transfers are an unconditional legislated amount. Obviously, for example, in the health transfer, there is some conditionality around following the Canada Health Act. Absent that, they are —

Senator Marshall: Did you say the Wait Times Reduction Transfer finishes in 2014 also?

Mr. Forbes: I believe it goes to 2014, yes.

Senator Marshall: What else ends in 2014? The transfer receiving the most discussion is the health transfer. We are saying the social transfer and wait times reduction ends in 2014. What else ends in 2014?

Mr. Forbes: We think of the four large ongoing transfer programs, the major transfers, as being the Canada Health Transfer, the Canada Social Transfer, equalization and Territorial Formula Financing.

The wait-times transfer is linked to the 2004 health accord as part of that 10-year agreement. The agreement is a slightly different arrangement than the ongoing programs that existed before 2004.

The four big ones are expiring in 2013-14.

Senator Runciman: Mr. Forbes mentioned, in terms of services and the equalization program that they are at reasonably comparable levels. Is there some sort of metric that is utilized to measure those levels? To the casual observer it would seem those comparable levels are not being achieved but you suggest they are.

Mr. Forbes: My quick answer is that we use the equalization program to ensure that provinces have a reasonably comparable level of revenue-raising to address, for poorer provinces, their revenue-raising capacity. The program does not measure the service side per se.

Senator Ringuette: This question is a follow-up to Senator Runciman's question.

In New Brunswick, there was a major change with regard to the way that the social transfer was calculated in budget year 2006-07. Starting from that given year, New Brunswick, with regard to social transfer, which includes social programs and post-secondary education, lost $28 million a year for these two identified outputs for social transfer. Five years later, we are looking at New Brunswick having, cumulatively, about $160 million less for social programs and post-secondary education.

Have you conducted an impact study in regard to what you referred to, namely, "comparable level of revenue raising," and reasonable access and funding for those two items? Has the department studied that impact?

The Chair: Do you have another question? We will give you both questions. You are well over time now.

Senator Ringuette: My other question is: You state that grants and contributions have been reduced by $117.6 million. Is it possible to have a list of those reductions?

The Chair: Can you provide the list, and can you answer the last question with yes or no?

Mr. Forbes: I think we can provide the list. In response to the second question, that is not my question to answer. On the first question, I am not familiar with the $28 million figure. That is news to me. In 2007, we significantly increased the overall Canada Social Transfer envelope.

Senator Ringuette: Yes, overall, but the small provinces were penalized.

The Chair: Will you look into the records to see if you can confirm or otherwise refute the comment that was made?

Mr. Forbes: Yes, if we can find an answer to that question it would be helpful.

The Chair: I thank the officials from the Department of Finance Canada. You have done a great job for us.

In our second session we turn our attention to the public-private partnerships, sometimes referred to as PPP Canada Inc. This is a separately incorporated entity, a Crown corporation, more commonly referred to as PPP Canada Inc.

We are pleased to welcome Greg Smith, Chief Financial Officer of PPP Canada Inc. Again, senators, we have less than one hour so we will try to keep questions and answers to five minutes per senator for the first round.

Mr. Smith, you have introductory remarks so we will start with them.

Greg Smith, Chief Financial Officer, PPP Canada Inc.: I am pleased to be here on behalf of PPP Canada Inc. to discuss the corporation's mandate and progress to date, and to answer any of your questions on the corporation's Main Estimates for fiscal year 2011-12.

PPP Canada Inc. is a Crown corporation established by the Government of Canada to improve the delivery of public infrastructure by achieving better value, timeliness and accountability to taxpayers through public-private partnerships. This infrastructure delivery model, known as the P3 procurement, has been successfully implemented through the creation of government agencies in the United Kingdom, Australia and across Europe.

The Crown corporation model is becoming more popular with governments in Canada as well, where public corporations and agencies have been created in British Columbia, Ontario, Quebec and, most recently, federally, to leverage greater value for money through P3 procurements.

PPP Canada's operations focus on building P3 procurement knowledge and capacity amongst federal departments, leveraging greater value for money from federal investments in provincial, territorial, municipal and First Nations infrastructure through our Corporations P3 Canada Fund.

This $1.2-billion fund is a merit-based program with the objective of supporting P3 infrastructure projects that achieve value for Canadians that develop the Canadian P3 market and generate significant public benefits.

In September 2009, after a market-sounding to gage interest in the program and to streamline the process for applications, the P3 Canada Fund was officially launched.

To date, the Government of Canada has announced three investments under Round One of the P3 Canada Fund. The first investment is $50 million towards the Maritime Radio Communications Initiative, a connectivity and broadband project in the Maritimes that provides emergency service to Prince Edward Island, New Brunswick and Nova Scotia. The second project is $25 million toward the Chief Peguis Trail extension, a local road project in Winnipeg, Manitoba. Finally, there is an investment of $25 million toward the Agence métropolitaine de transport, AMT, a new commuter train maintenance centre, a public transit infrastructure project in Montreal.

Round Two of the P3 Canada Fund was launched last May, and we received an overwhelming response to the call. Project proposals were received from all provinces except two. For the first time, projects were received from Newfoundland and Labrador, Nunavut and Ontario, and we saw a marked increase in interest from municipalities and First Nation communities.

Projects varied in scope and by sector, which for us is a measure of the development of P3s as a procurement tool for governments, and demonstrates that the fund has been able to generate interest, not as a supplement to municipal and provincial infrastructure funds but as a means by which jurisdictions can leverage greater value for taxpayers' dollars.

The expiry of other sources of federal infrastructure funding, such as the stimulus funding and the Building Canada Fund has also played an important role in the increased interest in the P3 Canada Fund in 2010-11.

As interest in the fund continues to grow, we are becoming more adept at recognizing the challenges and opportunities present in the Canadian P3 market. It is our hope that through the fund, we will be able to continue educating applicants to attract good P3 projects that demonstrate value for money and to refine PPP Canada's marketing initiatives.

We will continue these efforts as we prepare to launch Round Three this spring. In addition to our work under the fund, PPP Canada Inc. has additional responsibilities to work with federal departments that are considering or undertaking P3 procurements.

To date, we have supported two federal P3 projects coming to the marketplace: the Communications Security Establishment's Long-Term Accommodation Project was one, and the RCMP E Division headquarters in British Columbia was a second. Both these projects have been strong indicators of the need for new innovative approaches to infrastructure delivery that have been driven by a desire to produce greater value to Canadians.

PPP Canada Inc. will focus on several key priorities for developing the federal PPP market over the next 12 months. We will continue to support the success of federal P3 projects that are coming to the marketplace. We will work with federal central agency policy leaders to create clarity and consistency in decision-making and procurement practices with respect to P3 practices, and we will build PPP Canada Inc. services and capacities to support those federal departments in their projects.

In general, the Canadian P3 market has continued to evolve rapidly over the past two years as the Canadian global economies emerge from the financial crisis. With its solid credit ratings, relatively low exchange risk and reliable legislative frameworks, Canada is a top international market for P3s. We work with our colleagues across all levels of government to streamline the P3 process and to support an attractive climate for investment.

In terms of growth, Canadian P3 markets have made significant gains. We are seeing more consistency in deal pipelines among the advanced provincial P3 markets in Canada, and we continue to work with our provincial, territorial, municipal and First Nation counterparts, as well as the P3 industry to track the development of financial markets as they relate to P3s in Canada.

We also work with other federal Crown agencies such as Export Development Canada and the Business Development Bank of Canada, as well as central agencies to ensure that the business climate for investment in Canada is supportive of the financing needs of these major infrastructure projects.

Overall, we are maintaining our strategic approach to the development and deployment of our corporations business lines, which is to leverage more and better P3 projects to develop the market. To accomplish this goal, PPP Canada Inc. continues to favour an incremental approach to the growth of business, which reflects the readiness of procuring public authorities to consider the P3 procurement and to commit the necessary resources to implement the approach as a procurement solution.

Internally, we continue to build the foundation for a high performing organization. We have recruited qualified staff, developed strong human resource and governance practices, and created effective planning and management, as well as control mechanisms. We also continue to develop a culture of fiscal prudence with respect to the cost containment measures in previous budgets. We believe that the increased value and accountability generated by more and better P3 procurements, in addition to the budget certainty they provide, will leverage savings for taxpayers far beyond the operations of the organization.

In 2011-12, the corporation will continue to implement a strategy of prudence, enhance our internal controls and balances, and continue to formalize and document the corporation's governance structure.

We are, and remain committed to, building an effective organization that leverages the best value for the taxpayer in public infrastructure procurements.

I welcome your questions.

The Chair: Thank you very much for that overview, Mr. Smith. Can you look to page 123 of the Main Estimates under the Department of Finance Canada where PPP Canada Inc. is located.

Mr. Smith: Yes.

The Chair: In vote 40, for payments to PPP Canada Inc. for operations and program delivery, we see the same figure as last year.

Mr. Smith: Yes.

The Chair: I am wondering about vote 45. It is "Payments to PPP Canada Inc. for PPP Fund Investments." Does that item mean that the $1.2 billion is being topped up?

Mr. Smith: The $1.2 billion was included in the fiscal framework over a five-year period. The $275 million for 2011-12 is the portion of the $1.2 billion in 2011-12, and the $242.5 was the portion of the $1.2 billion that was in 2010-11.

The Chair: Was the $242 billion the amount you put out in Round Two? The first round was $100 million, so you must have had some left over in your bank account if you received roughly $250 billion.

Mr. Smith: That is true. The process to procure under a P3 model is lengthy. The time frame between making a commitment to a project and the procuring jurisdiction actually going through the procurement, through the request for quotation, RFQ, to qualified bidders, through the request for proposal, RFP, process to select the preferred proponent, and negotiating with the preferred proponent before the construction starts, is two to three years. As soon as the funds are appropriated, we try to launch a round and commit those funds as quickly as possible.

The Chair: Do you anticipate that in due course in Round Two you will have used up the entire $242 million?

Mr. Smith: That is our plan. Many projects are still in the due diligence process. We will make more announcements soon.

The Chair: At page 2 of your remarks, you said that you have seen "a marked increase in interest from municipalities and First Nations." Are they bringing in private sector investors? Am I correct that this money is federal money invested only in private sector projects, and not with municipalities and First Nations?

Mr. Smith: We might want to talk about what the PPP model is.

The Chair: Will you explain that model to us?

Mr. Smith: That might clarify how the model works.

In any procurement, the public jurisdiction has to determine whether it needs a certain piece of infrastructure. Once the public jurisdiction determines that it needs the infrastructure, we suggest that they go through a procurement options analysis to determine whether P3 procurement makes sense or whether they should stay with traditional procurement.

The majority of our work goes into the financial and nonfinancial analysis to determine that the P3 procurement is the better procurement; that it provides more value for taxpayers over the long run. Once that determination is made, the procuring jurisdiction will proceed with the procurement.

The value in P3 procurement is based on an analysis of transferring risks associated with the procurement to the private sector. The best example is on-time delivery and absolute cost certainty. The cost of construction and the risk of cost increases are transferred from the public jurisdiction to the private sector.

In a public-private partnership, the private sector takes on the responsibility to design, build and finance — and perhaps also to operate and maintain — that piece of public infrastructure over 25 to 30 years.

Typically, when the asset is substantially completed, if we make a contribution, we will make it to the procuring jurisdiction. Then, it is given to the private sector, which has project financing for the long term through private sector pension plans and life insurance companies, for example, that decide to invest in that project with that private sector operator. They ensure that the private sector operator operates the asset on a long-term basis in order for them to receive the payments from the procuring jurisdiction so they are paid.

That is the linkage between having the private sector involved, at least from the financing side of things, to ensure that the private sector is operating the asset in accordance with the long-term agreement with the procuring jurisdiction.

I hope that provides some context.

The Chair: How many people are employed in your department?

Mr. Smith: We have nearly 40 employees.

The Chair: Some write and negotiate contracts. Do some look at the long-term viability, and follow the projects and manage the investment?

Mr. Smith: Currently, we are making our commitments to the three projects that we have identified and committed to publicly. Winnipeg is under construction, which we are monitoring; and the Maritime Radio Communications Initiative and the maintenance centre in Montreal are in the procurement process, which we are monitoring as well.

The Chair: As you take on more and more of these projects, do you anticipate needing more and more personnel to supervise and monitor?

Mr. Smith: As we go through more rounds and have a portfolio of investments, there could be some increase in the number of employees.

The Chair: Do you anticipate that increase?

Mr. Smith: I anticipate one or two employees to manage these projects.

Senator Ringuette: PPP Canada was set up in September 2009, and has an operating budget of about $12.7 million per year.

Mr. Smith: Yes.

Senator Ringuette: In the last three years with 40 employees, you have funded three projects: $50 million for the Maritime Radio Communications Initiative; $25 million for Chief Peguis Trail extension, in Winnipeg, Manitoba; and $25 million for the Agence métropolitaine de transport, in Montreal, Quebec. Do those expenses represent value for taxpayers' money?

Mr. Smith: I can tell you that we are engaged in due diligence on 40 to 50 projects currently. These P3 procurements take two to three years to complete in the marketplace. We are engaged in due diligence on those projects.

Senator Ringuette: I find your operating costs versus the projects we are funding plus your processing time incredibly high in the current economic context. By taking two to three years to build infrastructure, the initial cost analysis becomes completely skewed from day one.

Mr. Smith: That is why, in a P3 procurement compared to a traditional procurement process, there is a significant increase in due diligence on market soundings to ensure that the marketplace is prepared to receive this proposal and bid on it. There is value in all those transactions for the taxpayers as a whole.

Our due diligence is to ensure that when we invest in projects, we invest in the best projects to maximize the value for Canadians, for the $1.2 billion invested.

Senator Ringuette: Let us talk about the three projects you have funded to date.

Mr. Smith: We have not funded them, but we have made commitments to those projects. As I said, two of them are still in the procurement process in jurisdictions that have RFPs. For the Montreal project and the one in the Maritimes, the jurisdictions are talking to and dealing with suppliers in the marketplace. They have not closed their requests for proposals. Only the Winnipeg project is in construction.

Senator Ringuette: Page 2 of your document states:

To date, the Government of Canada has announced three investments under Round One of the P3 Canada fund . . .

The government has announced three investment projects.

Mr. Smith: Yes.

Senator Ringuette: You have made the announcement, so you have made a financial commitment.

Mr. Smith: Yes.

Senator Ringuette: What is the federal commitment to these three projects from the P3 Canada Fund?

Mr. Smith: The total is $100 million.

Senator Ringuette: The total amount stated from the PPP is $1.2 billion.

Mr. Smith: Yes.

Senator Ringuette: Who are the other financial participants in these three projects?

Mr. Smith: I am sorry; I do not have that detail with me. I can provide that information. There would be contributions from the procuring jurisdictions and long-term financing from the private sector on these projects.

Senator Ringuette: Will you provide the committee with the details of these three projects?

Mr. Smith: Yes: The maximum federal contribution to any of these projects is 25 per cent. The balance of the funding for the projects must come from the procuring jurisdiction or, in a P3 model, from long-term, private-sector financing.

Senator Ringuette: We have the amount of federal funds that have been committed to these three projects.

Mr. Smith: Yes.

Senator Ringuette: How long did each of these projects take to process from the moment of initial interest? Did it take two to three years for each project?

Mr. Smith: Perhaps I will use the Maritime radio project as an example. We received an application in September 2009. They are only now in the marketplace with their request for proposal for companies wanting to enter bids. They will complete their RFP process, and then negotiate with the preferred proponent.

Senator Ringuette: Excuse me, sir, who are "they?"

Mr. Smith: In this case, they are Nova Scotia, New Brunswick and Prince Edward Island. Collectively, they are in the marketplace together.

Senator Murray: How much are they bringing in?

Mr. Smith: I do not have those details.

The Chair: We will receive the details on each of the projects?

Mr. Smith: Yes, I will provide those details.

The Maritime radio project gives you an idea of the time frame. More than a year ago, they came to us. We supported the project. They are still in their procurement process. They still have to negotiate an agreement with the proponent, and then the proponent still has to provide the construction of the infrastructure.

Senator Runciman: I have a follow-up to the question of Senator Ringuette. She was driving at, and I am curious about, the approval process of your organization; and I know you have not been in business for long. From the time you receive an application to the time that you give it the green light, what average timeline are you looking at?

Mr. Smith: After we receive a project application, we try to have an answer to the jurisdiction within 90 days as to whether they are in the running or out of the running. Sometimes the applicant is not an eligible recipient, or not in the right sector.

Senator Runciman: They might not meet the right criteria. Until you say that the project is a go, how much time are you looking at?

Mr. Smith: Much depends on the state of the project development within the procuring jurisdiction. If they have prepared a detailed analysis of the business case, and are prepared to show us the documents of the case for value for taxpayers, then we can move the project fairly quickly.

Senator Runciman: What does "fairly quickly," mean?

Mr. Smith: When we have all the necessary information, we want to make a decision within 90 days. I can tell you that it takes time for the procuring jurisdictions to provide us with the documentation we demand.

Senator Runciman: Who can initiate an application? You mentioned First Nations and municipalities.

Mr. Smith: The eligible recipients are provinces, territories, municipalities and First Nations.

Senator Runciman: Can a hospital initiate an application?

Mr. Smith: No: It is not an eligible sector. It is a provincial jurisdiction.

Senator Runciman: Can the province?

Mr. Smith: It is not an eligible sector.

Senator Runciman: It is too bad, from a personal perspective. I had a project in mind.

Mr. Smith: Many provinces have P3 projects. The Province of Ontario has many P3 projects.

Senator Runciman: They do not call it P3, but that is another story.

Is this money a straight grant from the federal government?

Mr. Smith: We have a number of instruments. We can use what we normally consider a non-repayable contribution. It can be a repayable contribution or it can be a loan or a loan guarantee. We have a number of instruments available. These three projects that we have supported so far are a non-repayable contribution of the federal government.

Senator Runciman: In terms of the asset, we are talking about a trail here and about a commuter system, but if the project is a building of some sort of, is there any requirement with respect to ownership of that asset at the end of the day?

Mr. Smith: The ownership remains. The title remains with the procuring jurisdiction. In fact, in terms of accounting for these assets, you will see them and the associated liability on the balance sheets of the procuring jurisdictions, much the same as in accounting rules, assets under capital lease. You will see these assets, and the ownership stays.

Normally, at the end of the concession period, say 25 years, the agreements require that the asset be returned to the procuring jurisdiction in a certain state. Typically, a few years before that period ends, they start inspecting the asset to see what has to be repaired, so it is returned in the state that was laid out in the project agreement at the start of the project.

Senator Neufeld: I can say that, in British Columbia's case, we have used P3s successfully. We use them with roads. In fact, at the present time we are building a hospital in the community I live in. So far, in our experience, things have come in on time and under budget and, in many cases, earlier than expected. I will refer to the Olympics, where, in some cases, projects were a year early, and the private sector financed those projects.

The provinces are responsible for those things. The situation is a little different with this federal government process. I would think the federal government would use P3s for some projects — I can understand the RCMP division headquarters, because they are responsible for it.

I am interested in how you decided on these three projects and who decides on these projects. You said the first ones you have on the books are all non-repayable. The money is a grant, in a sense.

Senator Murray: It can be done by any department.

Senator Neufeld: Yes, but it is just a grant. I will take the "just" out. It is a grant.

Is there a responsibility for the federal government, in the Maritime Radio Communications Initiative, the Chief Peguis Trail extension or the maintenance centre in Quebec? Is there any responsibility of the federal government to fund any of those projects, outside of this funding?

Mr. Smith: We were created to promote the use of P3 procurements as an alternative to procuring public-sector infrastructure. Our funds and the rules, terms and conditions under which we make our decisions, require that we apply a merit-based principle. The procuring jurisdiction must prove that there is a need for that infrastructure. Procuring jurisdictions have to demonstrate to us that there is value in the P3 procurement, as compared to a traditional procurement. I suggest to you that our money is not a grant. There are many conditions associated with our funding.

The behaviour and the procurement process of the procuring jurisdiction, we lay out specific steps that they have to go through to ensure the integrity of the P3 procurement, and to ensure that there is competitiveness in the process and that the price will continue to drive value for money. We reconfirm at every stage along the way that the value that was estimated when we made our decision continues — the marketplace is continuing to show that the value in that project will still be realized — all the way through to the financial close, and then ensuring that the infrastructure is available for use. We have independent engineers who certify those conditions before we make a payment.

Senator Neufeld: The question was, are any one of those three projects a federal responsibility, a provincial responsibility, or a private-sector responsibility? Out of the three, who has responsibility?

Mr. Smith: They are public infrastructure projects for the procuring jurisdiction, so they are the responsibility of the procuring jurisdiction.

Senator Neufeld: That is the answer.

Mr. Smith: The creation of PPP Canada came out of the federal government's infrastructure plan a few years ago. We are similar to the Building Canada Fund, where they accept recommendations from the provinces on the federal government's transfer and support for infrastructure funding to those jurisdictions, and our work is similar.

Senator Neufeld: Your answer then is no, the federal government is not responsible for any one of those three projects.

You told us also that it takes two to three years to complete all the homework. In your experience, did it take two to three years for the one project that is up and going, the trail extension? Are you saying that Manitoba worked for three years on that project, prior to even knowing that you were going to be something, to have you fund $25 million of that project?

Mr. Smith: That project, I know, has been talked about in the City of Winnipeg going back to — and I could be wrong here — the 1960s. They knew there was a problem with the road they had to fix. The City of Winnipeg put in place a P3 framework themselves, and decided to pursue the P3 model. They have other P3 roads that they have funded. This project was being worked on. When our program was announced, they applied for funding in the First Round for the project they had already completed a lot of work on.

Senator Neufeld: When did they apply and when did you approve the project?

Mr. Smith: In September 2009. They applied in Round One, with all the other projects. I am not sure of the date on which the funding was announced. It would have been earlier in 2010 when the commitment was announced.

Senator Neufeld: I can talk about roads and everything in my province; they have been talked about for years. You say, then, in this project that work was completed to anticipate the use of P3 funding from the federal government up to three years prior to September of 2009?

Mr. Smith: No: What I am saying is that Winnipeg has a P3 framework. They had been pursuing the P3 model on a number of their road infrastructures, including this one. They had completed a lot of the detailed analysis that must be completed to prove that there is value for money in this particular procurement. They had completed much of the documentation that we require to make our investment decision.

Senator Gerstein: Thank you for appearing, Mr. Smith. I want to pursue the issues that Senator Ringuette and Senator Neufeld have raised.

On page 1 of your remarks, paragraph 2, as I understand it, those criteria are the ones you use to evaluate submissions made to you, including "to improve the delivery of public infrastructure by achieving better value, timeliness and accountability to taxpayers."

When I go to page 2, I see the three projects that you have approved to date. Can you relate to us, picking any one of the three, how any of these three projects, in your view, relate to the criteria you outlined on page 1? Take us through one so we have a better understanding.

Mr. Smith: Let us take the Maritime radio project. Three provinces are involved. If someone becomes ill in Prince Edward Island and has to go to a Halifax hospital for heart surgery, the ambulance will have three different radios to go from one jurisdiction to another. The public need for this project is clear, that coordination was needed in that region for the delivery of emergency services.

The value is created by transferring the project, in this case, to the private sector. The private sector will provide continuous bandwidth support. These radios will operate when we need them, all the time, and the private sector will maintain the equipment. If they do not, they will be penalized in their payments, and they will have to build towers — if they have to build towers — to provide coverage on this frequency throughout all Maritime provinces.

The private sector is better equipped to build innovation into the product and to buy the best radios because they have to maintain those radios over the next 15 years. They will not buy a cheap radio that they will have to replace two years from now. They have to maintain that service over the long term.

When we look at transferring that responsibility to the private sector, compared to how the public service can provide that service, there was significant value in maintaining that service and giving that responsibility to the private sector, compared to the public sector.

Senator Gerstein: Taking the emergency services you are talking about, would this project have gone forward without your participation? In other words, I am trying to understand whether you are only another source of funding that people come to? Would this project have taken place without you? How do you view that you are receiving better value? Can you give us more detail? I assume you felt that they would buy radios at one price, and they said, "We can buy them at a better price."

Mr. Smith: Again, when you look at the value for the taxpayer, and whether the P3 procurement can provide better value and better service to taxpayers than the public service can, there was long-term value over, in this case I think it was a 15-year period, for the private sector to do the project.

Would the project have gone forward without our money? I am not sure. However, I can tell you that this project was a unique opportunity for three provinces to come together, and not have to deal, as individuals, with, for example, the Building Canada Fund. Because we were created to, and can, deal with them collectively, clearly it was a win-win opportunity.

Senator Gerstein: Do you know whether they applied to other government agencies for funding?

Mr. Smith: In fact, they cannot.

Senator Gerstein: They cannot or did not?

Mr. Smith: I cannot answer if they did or did not. What I can say is that, again, the federal contribution is limited to 25 per cent of the capital cost. One of the conditions is, if they have any other federal funding, they have to disclose this funding to us, and we reduce our contribution.

Senator Murray: There are the proponents, the procuring jurisdictions and the federal government. In the case of the Maritime Radio Communications Initiative, who are the proponents?

Mr. Smith: The three provinces; I am interchanging proponents and the procuring jurisdiction. They are the same.

Senator Murray: I see, but you told the committee that the three provinces are in discussions with the private sector.

Mr. Smith: The three provinces collectively have created an office to govern and manage this project, so they all have participation in the committee of those three provinces that manages this process on their behalf.

Senator Murray: With respect to connectivity and broadband projects in the Maritimes, various private-sector companies will deliver that service, such as Bell Aliant, EastLink, Shaw and whomever else. Is that the case?

Mr. Smith: Yes, they could be the bidders on these projects. I cannot speak to that situation. The procuring jurisdiction is in the RFP process now.

Senator Murray: The three provinces together have an RFP. Is that right?

Mr. Smith: Yes.

Senator Murray: The companies that will bid presumably will be the ones who are in the business now?

Mr. Smith: It could be radio suppliers or those that have knowledge of communication infrastructure, yes.

Senator Murray: Perhaps I do not understand this point well. I am woefully under-informed about PPP. I am vaguely aware of it operating in some provinces at different times. PPP built some schools in Nova Scotia, but somewhere at the end of this process, there are companies in the business that will provide this service. What else is involved?

Mr. Smith: Let me clarify the project. A portion of the bandwidth is reserved for emergency services, so that portion is not available to these providers. They have to build the transmitters now and the radios, and purchase the radios that work within the bandwidth that is reserved for the emergency services. The public, at large, will not have access to that bandwidth. I am getting technical.

Senator Murray: I understand that, but that is a portion. What about the rest of the project? We are talking about a connectivity and broadband project.

Mr. Smith: Within that bandwidth, there is the capability, for example, to transmit x-rays from one health care facility to another.

Senator Murray: Is there a commercial application here?

Mr. Smith: No, the service will be provided only to the public services — such as fire, health and the Coast Guard — and they will be the users of the service being provided.

Senator Murray: Will someone make money out of the service? I do not ask in a pejorative sense.

Mr. Smith: The private sector clearly is bidding on these projects, and anticipates making money on a long-term basis.

Senator Murray: The private sector probably will be, generally speaking, the people I mentioned such as Bell Aliant, EastLink and the rest of them. Those are the people in that business; right?

Mr. Smith: Yes.

Senator Murray: You tell us that the federal involvement — whether by grant, loan, loan guarantee or whatever — can be to a maximum of 25 per cent of the total investment.

Mr. Smith: Of the capital cost of the project.

Senator Murray: As we speak, the capital cost of the project will be no less than $200 million. You have $50 million invested.

Mr. Smith: If we were at 25 per cent.

Senator Murray: Yes: if $50 million is 25 per cent, the total cost will be more than $200 million, one would think. How much are the three provinces contributing?

Mr. Smith: Again, I do not have those details with me. I will provide what the anticipated funding is from the other jurisdictions on those three projects.

Senator Murray: It was the three provinces that made the proposal to you.

Mr. Smith: Correct.

Senator Murray: Why did you decide to make it a grant rather than a loan or some kind of investment? Are you be able to make money on another project?

Mr. Smith: Yes, we will consider a repayable contribution if the project generates revenues for the procuring jurisdiction. If the province will generate general tax revenues, then we want a share in those revenues at the same risks that we are contributing to the project.

In this case, no revenues will be generated by using those frequencies. The project is all to provide services. The provincial shares will be funded only through their general tax revenues; therefore, we did not want a repayable contribution.

Senator Murray: That was the proposition put to you, correct?

Mr. Smith: Yes.

Senator Murray: The proposition was for a non-repayable contribution, a grant.

Mr. Smith: Again, when I think of grant, I think of money with few conditions attached to it — a grant versus a contribution. Our money is a financial contribution; but in the traditional definition within government of "contribution," I suggest to you that our financial contribution has a lot more conditions than typical contributions.

Senator Murray: Is there a written agreement between two of the Ps, or are the three Ps in it?

Mr. Smith: In this case, there would be an agreement between the three provinces and whoever they choose to be the private sector partner. That agreement would lay out the service that is expected to be provided, and also the payment stream that those three provinces will pay to the private sector. We are once removed from that agreement. We will contribute only to the capital cost of the asset.

Senator Murray: Your contribution goes to the provinces, correct?

Mr. Smith: It goes to the provinces to contribute to the capital cost of the infrastructure.

Senator Murray: You are not involved —

Mr. Smith: We are not involved in managing the project on a long-term basis.

Senator Murray: You are not involved in the private-sector side of the project.

Mr. Smith: Correct: That is between the province and —

Senator Murray: It is two Ps; the province and the private sector on one end, and the province and the federal government on the other end.

Mr. Smith: In this case, there are two publics. One is the federal public and the other is the provincial public; the private is the private sector, and the partnership is all of us.

Senator Marshall: Regarding the $1.2 billion fund that you referenced in your opening remarks, has all that money flowed from the federal government by now? I see from the estimates an amount of $242 million last year and $275 million this year. Is that money forwarded to you right away or is it as you draw down on it?

Mr. Smith: When Parliament votes full supply, we request the funds. We have invested, by ourselves, $242.5 million from 2010-11 and $165.4 million from 2009-10; so we have invested $400 million. When we make a commitment, the private sector wants to know; they are not interested in conditions associated with our funding, so our commitments are backed by cash.

Senator Marshall: You must have cash on hand, do you? There are three projects approved for $100 million.

Mr. Smith: As I said, we have over $400 million in cash invested in accordance with our investment policy, approved by Treasury Board.

Senator Marshall: I want to talk about the non-repayable aspect of the money that has been given out. Who are the proponents for the trail extension? You said for the Maritime Radio Communications Initiative, the proponents were the three provinces.

Mr. Smith: The trail extension was the city of Winnipeg.

Senator Marshall: Is the proponent for the new commuter train the City of Montreal?

Mr. Smith: No, it is Infrastructure Québec.

Senator Marshall: You said the reason these contributions are non-repayable is because there will be no future revenue stream. Will there be a revenue stream for a new commuter train — fares, et cetera?

Mr. Smith: This facility is a maintenance facility. Currently, CP or CN has a facility. They will not allow that facility to continue to be used so the City of Montreal, working with Infrastructure Québec, has to come up with a new solution for a facility to maintain the rolling stock.

Senator Marshall: This corporation reports to the Minister of Finance; that is my understanding.

Mr. Smith: Yes.

Senator Marshall: You will be subject, I expect, to some sort of performance audit by the Auditor General. Do you fall into that pool?

Mr. Smith: Absolutely: They have a schedule for their special investigations. We are subject to that schedule.

Senator Marshall: Do you know when the Auditor General will conduct that audit?

Mr. Smith: I do not know for sure. I think it is around 2015 or 2016.

Senator Marshall: I think my memory serves me right that the Auditor General of Canada audits your financial statements.

Mr. Smith: We have joint auditors. Clearly, the OAG has lead responsibility. Our board felt it would be good to have a joint auditor, so we have KPMG as a joint auditor. That joint audit brings more of a private-sector flavour to the audit.

Senator Marshall: Are we able to obtain a copy of the management letters that have been issued by the auditors?

Mr. Smith: There have not been any management letters. We have had two audits and no management letters.

Senator Marshall: Regarding the project from Newfoundland and Labrador, which is my home province, what project is that? You said projects were received from Newfoundland and Labrador.

Mr. Smith: I believe that project was with respect to bringing hydro in through an undersea cable.

Senator Dickson: I was fascinated by the fact that you are giving out grants, because I thought the whole idea of public-private partnership was to leverage financing. Many government departments give out grants. Why does government need another institution to give out grants?

Mr. Smith: Our mandate is to promote the P3 model to bring more value to taxpayers and to provide more timely, faster, better, long-term infrastructure that provides services to the taxpayers.

There is private sector again. Our monies are to incent procuring jurisdictions that do not have P3 projects to start these projects. However, on the leverage, the financing, long-term financing is provided to these projects from the private sector over the long term. There is leverage of private-sector financing.

Senator Dickson: Let us stay with that subject for a moment. What models of P3 did you look at? Did you look at Britain and British Columbia? What models did you start with to build this organization? I am curious.

Mr. Smith: We looked at all of them.

Senator Dickson: Which one did you come up with as the best?

Mr. Smith: Again, we are a little different.

Senator Dickson: I would say so.

Mr. Smith: Both in Ontario and in British Columbia, who are leaders among the provinces, they are, effectively, procuring departments. They procure; they exercise the P3 procurement. We are different; we do not do that.

We have a fund, the $1.2 billion, as an incentive to expand the use of P3 into those jurisdictions that might not consider P3, and then to provide them with the knowledge so that they can replicate the process and provide better value to their taxpayers in the long run on a broader base of public infrastructure. That is what our fund is about. That is why we are different; we do not execute P3 projects.

Senator Dickson: You say you do not execute; what do the 40 employees do?

Mr. Smith: We do all the due diligence that is required to determine, and provide, a recommendation to our private sector board that we would recommend this project be supported for a P3. That recommendation requires a significant amount of work to ensure there is value; to work with the procuring jurisdiction to ensure that their documents — their legal documents, their documents that are in the marketplace — are valid, that they anchor the risk that was planned to be transferred to the private sector. We do a lot of that due diligence on these projects.

Senator Dickson: You have 40 people in house. How many outside consultants do you have; how many lawyers? I happen to be a lawyer, so I am interested. I may call for a job.

Mr. Smith: We rarely go to a lawyer; we have our own legal counsel.

Senator Dickson: Oh, it is inside.

Mr. Smith: It is with another Crown corporation. Our agreement is with the procuring jurisdiction. It is not the agreement that is between, say, the Province of Ontario and the private sector project company; that is where the real legal stuff is. We are once removed from those agreements. We want to see them. We review them internally to make sure that the clauses there transfer the risk.

For instance, if the performance required in the emergency radio is that those radios are up and running 24 hours a day, 7 days a week, 365 days a year, we want to see those words in the agreement. However, the legal work on that agreement is between, say, the province and the private sector. We are once removed from that agreement. We only review those agreements.

Our agreement with the procuring jurisdiction, say the Province of Ontario, is similar to a contribution. We make our payment when there is substantial completion; when we have evidence that the asset is complete and ready to provide service, we will make our payment. I do not want to trivialize our agreements, but they are a lot simpler than what the province goes through with the private sector in their legal documentation.

The Chair: Mr. Smith, we are out of time but I have four people on round two. I will ask you to make note of their questions and provide us with written answers to those questions.

You are on round 2, Senator Dickson, so go ahead and finish your question, but you will not have an answer right now.

Senator Dickson: I know. I want you to comment about the success or non-success, from a public-private partnerships point of view, of the Prince Edward Island bridge crossing.

Senator Ringuette: I want to know who your board of directors are. How are they appointed? What is their per diem or income for sitting on the board? What are the "eligible" sectors for making a request to your fund?

This is not a question but a comment. As far as I know, the federal government has paid money to provide broadband service and connectivity throughout this country. Usually the telecommunications people install towers, if need be, without any kind of 3P funding. The Council of Atlantic Premiers has a lot of experience with regard to 3Ps.

Senator Neufeld: Senator Ringuette asked one of my questions.

Second, if I understood you correctly, 2009-10 was $165 million, 2010-11 was $287 million, and 2011-12 was $242 million.

Mr. Smith: For the fund, 2009-10 was $165.4 million and 2010-11 was $242.5 million.

Senator Neufeld: Whatever it was — you gave me the correct numbers and I wrote them down wrong, obviously — were those projects that took that money repayable or non-repayable?

Mr. Smith: Those are those three projects that I have spoken to.

The Chair: The rest of the money is in the bank — over $400 million.

Senator Neufeld: Then you have answered my question.

Mr. Smith: The other deliverable is the details on the funding.

The Chair: Yes: we appreciate receiving that information as quickly as you can send it, because we have to deliver an interim report.

You can tell from a lot of our questions, which are basic, that we are not awfully familiar with your separate corporation. Any other background that you can send to us at the same time will be helpful in us having a good understanding of the corporation. Are the objectives in the legislation or in regulations?

Mr. Smith: They are in our corporate plan. We were not created through legislation but the objectives are in our corporate plans.

The Chair: You are called Inc.

Mr. Smith: We were incorporated under the Canada Business Corporations Act.

Senator Gerstein: Is there a public statement available?

Mr. Smith: An annual report? Yes; it is on our website.

Senator Gerstein: Can you arrange to circulate that report?

The Chair: We will ask the clerk to circulate it.

Senator Gerstein: That will have all the board members and everything else?

Mr. Smith: I will leave one with the clerk.

The Chair: Thank you very much, Mr. Smith and honourable senators. This meeting is now concluded.

(The committee adjourned.)