Proceedings of the Standing Senate Committee on
Aboriginal Peoples
Issue 14 - Evidence - May 26, 2015
OTTAWA, Tuesday, May 26, 2015
The Standing Senate Committee on Aboriginal Peoples met this day at 9:36 a.m. to examine the subject matter of those elements contained in Division 16 of Part 3 of Bill C-59, An Act to implement certain provisions of the budget tabled in Parliament on April 21, 2015 and other measures.
Senator Dennis Glen Patterson (Chair) in the chair.
[English]
The Chair: Good morning, colleagues. I would like to welcome all honourable senators and members of the public who are watching this meeting of the Standing Senate Committee on Aboriginal Peoples, either here in the room or via CPAC or the Web.
I'm Dennis Patterson, and I have the privilege of chairing this committee. Our mandate is to examine legislation and matters relating to the Aboriginal peoples of Canada generally. This morning we are hearing testimony on a specific order of reference authorizing us to examine and report on the subject matter of those elements contained in Division 16 of Part 3 of Bill C-59, An Act to implement certain provisions of the budget tabled in Parliament on April 21, 2015 and other measures.
Today we will hear from three panels of witnesses. During the first hour, we will hear from the First Nations Finance Authority, the First Nations Financial Management Board and the First Nations Tax Commission. On the second panel, we'll hear from the First Nations Bank of Canada. Lastly, we'll hear from officials from Aboriginal Affairs and Northern Development Canada and the Department of Justice Canada.
Before proceeding to the testimony, I'd like to ask colleagues on the committee to please introduce themselves.
Senator Moore: Good morning, everybody. I'm Wilfred Moore from Nova Scotia.
Senator Lovelace Nicholas: Senator Lovelace from New Brunswick.
Senator Ngo: Senator Ngo from Ontario.
Senator Raine: Senator Nancy Greene Raine from B.C.
Senator Ataullahjan: Senator Salma Ataullahjan from Ontario.
The Chair: Thank you. I know members of the committee will help me to welcome our guests for the first hour. They are familiar to us. Welcome back all of you, and thank you again for coming and assisting the committee. From the First Nations Finance Authority is Ernest Daniels, President and Chief Executive Officer; from the First Nations Financial Management Board is Harold Calla, Executive Chair; and from the First Nations Tax Commission is David Paul, Deputy Chief Commissioner.
Thank you for appearing again. We look forward to your presentation, which will be followed by questions. I understand, Mr. Calla, you will be leading off. You have the floor.
Harold Calla, Executive Chair, First Nations Financial Management Board: Thank you, senators, for seeing us today on this very warm, sunny day here in Ottawa.
I would like to start by thanking the Senate for taking the time to review this important piece of work that we've been working on for a number of years, but I want to go back a little bit to give it some context.
This was a First Nation-led initiative from the very beginning. It's always important to remember that Aboriginal and treaty rights are protected and implemented through First Nation governments, who are recognized by Canada as being represented by their elected band councils. The First Nations Fiscal Management Act was passed in 2005, with all-party support in both houses. It was a First Nation-led initiative. The concepts for this legislation were initially led by the Westbank First Nation, at that time Chief Robert Louie and Deanna Hamilton; the Kamloops Indian Band's then Chief Manny Jules, and the Indian Taxation Advisory Board. The Squamish Nation and the chief of Kettle and Stony Point were also involved in implementing this. It has been 20 years since this legislation's concept. The reasons for the First Nations' desire to have this legislation was to protect taxation jurisdiction, to gain direct access to capital markets as governments, to improve accountability and financial management and to support First Nation capacity development in that area.
The act has been well received by First Nations from coast to coast. There are now about 160 First Nations that are scheduled to the act. The oversight framework that was created by this act has been vetted by rating agencies and investment banks, and, after their assessment, they granted an investment-grade credit rating to the First Nations Finance Authority. The capital markets have responded to this rating, and the FNFA quickly sold its first debenture last June. A second debenture will be issued by July of this year.
I am pleased to say that First Nations from coast to coast to coast are turning to the institutions created under the First Nations Fiscal Management Act for the support they need to implement their social and economic objectives. This act is helping First Nations to move into the 21st century as they manage their finances and manage their wealth, and I think it is an important step toward self-government.
We believe it's absolutely critical for First Nations, as governments, to be recognized as such, to develop the capacity to operate as governments, to have the security to operate as governments. As you well know, governments do have the need to respond to their constituencies. We have been raised on transfer funding from the Department of Indian Affairs as governments, which is not a fiscal framework that can be sustained. We've proven that. We're moving into a different era where First Nations are benefiting from Supreme Court decisions and are able to participate in economic activities that they weren't otherwise able to. Those economies are going to start to develop, and they will generate own-source revenue for First Nations. I think that it's important to appreciate that this act is going to facilitate that transition from a dependency-based economy to a more self-reliant economy as we move forward.
This act was passed in 2005, as we said. There was a report to Parliament in 2012, and part of the report reflected that this legislation needed to be tweaked a bit. I think it's important for us to all understand that this is a living piece of legislation. It will, from time to time, need to be reviewed and amendments will need to be considered. At this particular time, we have some administrative amendments that we are proposing, that we have been working on with the department for quite some time. We're pleased that the government and the department have brought these forward in this act so that we can get these proposals implemented before, we hope, the fall.
It's important also to recognize that we have done a lot of work with our constituency leading up to this. There is a document that you have all seen that was sent to everyone. On each of our websites, we have produced information. We have answered questions. I think the most important thing for you to appreciate is that many of these amendments and changes actually were initiated by dialogue that we have had with First Nations since the date of implementation. These things have been coming, and part of it has been coming to us from our clients. I would like you to appreciate that from that perspective.
I think it's really important to recognize that First Nations are going to have to develop the means to manage their affairs. They are going to have to develop the means where they're not being treated as organizations that are not capable.
We're going to have to make some decisions just like other orders of government and other major businesses do: how we secure debt, what that debt costs, how we manage that debt into the future. Those are decisions that we want to make as governments. The important thing about this legislation is that we have the ability as governments, through the First Nations Finance Authority as the vehicle that accesses the capital markets directly, to function as the government does, the same way the Government of Canada does and the provincial governments and local governments do.
There is a role for that type of lending through the Finance Authority. There is also a role for commercial lending, but unlike other orders of government, First Nations have the ability to participate in the mainstream economy. Provincial governments and local governments don't have Aboriginal rights of title. Our band councils — which is why I started my comments with that reference — are not just managing programs and services. They are managing the Aboriginal rights and title as defined through the Constitution and through various court decisions of their constituencies. In the course of that, it necessarily involves their engaging and the discussions around economic activity.
Projects can sometimes come to be or not, based upon the means by which you're able to secure the financing for those projects. It is critical that the First Nations Finance Authority be in a position where it can respond to the request for First Nations, where it's appropriate, to support their social and economic objectives.
Let's remember that the First Nations Finance Authority, as an entity, is governed by the borrowing pool. It is those First Nations who come together and pledge to one another that they will go to the capital markets and will support one another. That is a really important difference that I think needs to be recognized. It's for those governments to decide, through the representation, where they want to use that tool.
As you will hear in testimony today and probably into the future, this notion that the First Nations Finance Authority is moving into a more risk-based approach I don't agree with. We were very pleased, as the First Nations Financial Management Board, with the process that was undertaken in the first debenture. Because the First Nations Finance Authority, under the act, has intervention powers should there be a risk of default, we were always very careful in understanding how the risk was going to be managed.
We are very pleased at the process that was laid out by the First Nations Finance Authority and the rating agencies and investment banks when that first debenture was issued. The inclusion of the other revenue streams regulation will be essential for First Nations from coast to coast to coast, many of whom aren't yet in a position where they have taxable interests but they have economic opportunities. As those revenue streams flow, they can be directed into their social and economic objectives.
So I think we should celebrate this act. As I say, over 160 First Nations and representatives from coast to coast to coast are now participating. More First Nations every day are wanting to be scheduled, and I think that it is a clear example where, when First Nations represent their interests and government responds to them, as they have through this legislation and the amendments that are proposed to them, good things can happen.
Mr. Chair, a lot of material has been provided, but we are here to respond to the questions that you may have on this legislation. We're thankful to the department and to the government for moving this legislation forward at this time. With that, I will close, Mr. Chair.
The Chair: Thank you very much, Mr. Calla. You are always eloquent and clear, and I'm sure I speak on behalf of members of the committee in saying we savour the opportunities when we have what seem to be good news stories coming to this committee. This seems to fall into that category.
I would like to thank you and your colleagues for having also taken the time to brief members of the committee privately on these amendments as they were being developed. That was very much appreciated. Maybe I will just open with one question.
These are technical amendments that you folks understand well since you work with the legislation and are aware of its intricacies. I know that you have been collaborating with the First Nations Tax Commission and other key stakeholders. Does this bill give you what you had wanted? Does it meet the needs that were developed through the consultations you've had, the needs that you spoke to this committee about when you addressed us this past year? I recognize that it will evolve. As you said, I think it's a living thing that needs to evolve. But does this bill do the trick in your objectives of modernizing and tweaking it to meet current needs?
Mr. Calla: If I can respond, Mr. Chair, we believe it does. The First Nations Tax Commission and the forerunner to that, the Indian Taxation Advisory Board, have 25 years of experience in these kinds of matters. Through the processes that they followed in engaging with their constituency, in meetings, dealing with property taxation associations, we got a lot of feedback, and we're very satisfied with the results of that. We're very satisfied that this bill actually represents what we asked for, actually much more satisfied with the amendments than we were with the bill at the time, as I recall, be that as it may.
Does that mean that we're finished? No, I don't think we will ever really be finished in looking at how we can span the scope of these institutions to support First Nation governments, but we're happy with these amendments. There are no surprises as we've met with most of you before. We are happy that what we asked for and what was agreed to are represented in what we see.
The Chair: Very good. Thank you.
Senator Moore: Thank you, gentlemen, for being here again. Mr. Calla, what was the amount of the first debenture that was put in place in June of last year?
Mr. Calla: It was $90 million.
Senator Moore: You say that financial markets were happy to participate. Were they banks? Who was doing that? Who was working with you when you put that in place?
Mr. Calla: Let's let Ernie answer that.
Ernest R. Daniels, President and Chief Executive Officer, First Nations Finance Authority: We actually worked with a syndicate made up of all the major banks, so the six banks. Each bank has a commercial side and an investment side. So it was the investment bankers on the investment side that actually made the syndicate, and they purchased the bond and took the risk to sell it to their clients. It sold out in 30 minutes.
Senator Moore: Thirty minutes. Wow.
What happened to the money? What was it used for?
Mr. Daniels: The money was mainly used for infrastructure. There was some economic development, but most of it was for infrastructure.
Senator Moore: Such as?
Mr. Daniels: Housing. One community in B.C. did a track. They modernized their track and made facilities for the youth to have change rooms. Also, hydro. In northern B.C., there is a First Nation up there that had a hydro project.
Senator Moore: So, this July, you're looking at a second debenture. Can you tell us the amount of that?
Mr. Daniels: We won't be going to the market unless it's $100 million. We're expecting it to be about $110 million or $115 million.
Senator Moore: Those funds are being targeted to what kind of expenses? What kind of projects?
Mr. Daniels: Again, most of it is infrastructure. There is quite an element of economic development that's going on, especially in alternative energies.
Senator Moore: Very good. We've certainly heard about the need for infrastructure projects on First Nations, so this is good. That's all I have for now. Thank you very much.
Senator Lovelace Nicholas: Welcome, everyone. Mr. Calla, you mentioned that this act will be reviewed. Who will it be reviewed by? The First Nations or —
Mr. Calla: Senator, it has been reviewed by First Nations, but this act will continually be reviewed by us, the department and yourselves over the years.
Senator Lovelace Nicholas: Thank you for your answer.
Just another quick question: What about First Nations? Is this positive for First Nations that are in third-party management and remote First Nations?
Mr. Calla: Thank you for that question because it's probably really germane to people's misperception of this act. One of the communities we certified is St Theresa Point, a fly-in, fly-out community, a smaller community, but they're benefiting from this. We are working with the department now on how we might support those in third-party management by having them become certified and start the process. We can't undo the past, but we can create a different path for the future by bringing better financial management and capacity development to First Nations, which is a big part of what this act does, through the Financial Management Board and the Tax Commission, in helping to develop an understanding that wouldn't otherwise be there. So, yes, it has application for everybody. Eventually, everybody will get themselves into a position where they can use their revenue streams to be able to borrow money to meet their community's needs.
Senator Lovelace Nicholas: Thank you for your answer.
Senator Raine: Could you explain the different kinds of revenue streams that First Nations have? I know there are quite a few different revenue streams available. Do they all qualify to become part of their capacity for financial capabilities?
Mr. Calla: Not all of them do. Obviously, the transfer payment systems that come from the federal government, at this point, are not part of the financing scheme. Local revenues, as defined under the act, which will be amended to include fees and other revenues that are raised by governance, development cost charges and those kinds of things will now be able to be utilized. Certainly, taxation is the big one.
The other revenue streams regulation that was passed allows certain revenue streams to be used by the Finance Authority as well. These revenue streams are rated by the rating agencies and investment banks. I know there is a tendency to suggest that we're taking business risk through the Finance Authority. I think it should be understood that we only lend on existing revenue streams. So, if you are borrowing money and want to make another investment in economic development, we're not necessarily dependent on the success of your decision to go down that path to service the debt.
We're not looking for that revenue stream to be the source of the payment. So I think that that needs to be recognized. In the work that was undertaken by the rating agencies and the investment banks, through the Finance Authority, at the time when the first debenture was issued, every revenue stream was actually reviewed, and I don't think they got anything less than a single-B credit rating. So they're very high. Many of the revenue streams come from revenue sources from other orders of government, whether federal or provincial. For example, in some provinces there is gaming revenue that's shared. Those things become leverageable. Hydro arrangements with the various power companies in the various provinces that have arrangements are viewed as very secure revenue streams again. Those are the types of revenues that are being made available to the Finance Authority through the other revenue streams regulation.
Senator Raine: If, for instance, a First Nation has some kind of organization — hydro, road, railway, whatever — that wants to utilize some of their land and pay an annual fee for that, that becomes a revenue stream.
Mr. Calla: Yes, it does.
Senator Raine: If they make a settlement of some kind for resource revenue sharing, if they take a lump sum, that could be invested, and revenue from that investment would be a revenue stream. Or it could be an annual payment. So this tends to put, then, their earning of resource and land-based revenue on a long-term basis where it can be leveraged to deal with immediate needs. Am I right to say that if a First Nation took a lump sum payment and spent it all on infrastructure, it would be spent? It would be gone? If they invested, they could borrow the money and go forever?
Mr. Calla: You raise an excellent point. When we talk about needing to into the modern day world and how you manage your affairs, it is how you're going to manage your assets and your debt. As we all know, I didn't save enough money to buy my house. I had to get a mortgage. Most of us do. I wasn't prepared to wait until I could save the money to buy a house. That's the case for many First Nation communities, where they need to be able to match their revenue streams with their needs and find the way in which those communities' needs can be met today. I think it is the way in which this is going to move forward into the future, particularly with these major projects that are being considered across Canada in fossil fuels and mining. As those impact-benefit agreements drive revenues down to the First Nation communities, they're going to find those revenue streams very useful in developing a capital plan for their community and what financing needs they would have resulting from that capital plan and how they're going to deal with it. Part of what we do in the Financial Management Board, through our financial management system certification, is to facilitate that kind of thinking and the development of that kind of planning.
So, senator, that's exactly what we believe will happen in the future.
Senator Raine: Thank you.
Mr. Daniels: If I can add, senator, we actually met with one of the rating agencies two weeks ago. They told us at this meeting that they looked at each of the First Nations that were part of the debenture and the one that's coming up and assessed their revenue streams. They said that probably 75 per cent of them would be rated better than most local governments and cities, even Ottawa.
The Chair: Maybe in that connection of revenues and revenue streams, there is an amendment in clause 177 that I believe expands the definition of local revenues to include payments in lieu of tax. I guess that would be grants in lieu of tax and other like revenues.
Could you explain why it was felt necessary to amend the definition of local revenues and broaden it?
David Paul, Deputy Chief Commissioner, First Nations Tax Commission: Thank you for the question. Clause 177 includes two additional revenue sources, those being grants in lieu, which are payments made by all parties, such as governments or Crown corporations, who are not liable to pay taxes to another government. The payments made currently to First Nations are not local revenues under the FMA.
The second revenue source is fees that could be levied by the communities in terms of water, sewer, garbage collection and other types of fees such as that. These amendments level the revenue-raising playing field for First Nations, and the revenue powers are common for other local governments in Canada. If First Nations are ever going to be close to their infrastructure and close the economic gap with the rest of Canada, they need these revenue sources to be included.
The Chair: Good. As Mr. Daniels was saying, the rating agencies seem to be quite impressed with the revenue streams that are available to First Nations at present, and this amendment will make that even more solid.
Mr. Paul: Yes, clearly.
The Chair: Very good.
Senator Ataullahjan: How would the proposed amendments reduce the administrative burden on participating First Nations, and what specific processes or reporting requirements are being streamlined or removed in this regard?
Mr. Calla: If I can start, then I'm sure these two will jump in.
I think the most important change that will come is the delegation to the minister of the ability to add people to the schedule. At the moment, we have a number of communities who would like to borrow in the July debenture, but it takes time to get a cabinet meeting to put somebody on schedule because it takes a cabinet meeting, and even five minutes of cabinet is very precious time. The most significant one, in my view, is the delegation of that authority to put someone on the schedule, to allow them, on receipt by the minister of a band council resolution indicating they would like to be on the schedule, to be put on the schedule without waiting for a cabinet meeting.
It's important to also appreciate that at the time the legislation was developed, there were communities who wanted to be sure that they were not impacted by this legislation until they chose to be because it is optional legislation. The means by which that was achieved was to require a scheduling provision in the legislation. Now, some of those communities who, at the time, felt that was necessary, who have now become our clients, are now feeling the consequences of requiring a cabinet meeting to get on the schedule. So that's going to change.
Many elements of the tax system I think are going to be refined in terms of notices. The taxing system will run much more smoothly than it did in the past. Appreciate that you can sit in a room and bring all the experience into the room and try to think of everything, but, invariably, you don't. We found through the implementation that some refinements were needed to those processes. We needed to find ways around. I think that has been achieved through the amendments that are proposed here. I think the processes for certification will be improved as a consequence of that, so we're happy with that.
There may be others that others may wish to speak to.
Mr. Daniels: The biggest one is the delegation of authority to the minister, but the other thing is that it just really clarifies some of the grey areas, which is very helpful when we're dealing with the various aspects of the lending process or even the property tax regime process.
Senator Moore: I wanted to clarify so that I understand the process. Mr. Daniels, the First Nations Finance Authority is the body that puts together the package and goes to the markets and receives the money from the sale of the debentures. Mr. Calla, your organization, the First Nations Financial Management Board, looks to provide advice to get those First Nations in the positions that they can be scheduled and participate in that process?
Mr. Calla: That's 95 per cent correct. We have to certify First Nations that they have met our financial performance standards and have passed the financial administration law and are prepared to seek a financial management systems certificate within 36 months before they can go to Ernie and ask Ernie that they be considered to be a member of the borrowing pool.
Senator Moore: If my First Nation is not scheduled, can I go to the First Nations Finance Authority and seek funding for a project?
Mr. Calla: No.
Senator Moore: I must be part of the scheduled group to participate in that fund; is that the way it works?
Mr. Calla: That's correct.
Senator Moore: I was encouraged to hear your mention earlier about a remote First Nation that is participating. How did their participation come about? Do they come to you, Mr. Calla, and say, "Look, we've heard about this. How do we get ourselves in a position where we can participate?" As a committee, we visited some of these First Nations in remote situation, and they are crying out for help. I don't know that they have the management wherewithal. They certainly have the will, but I don't think they have the know-how. How do they connect with you and your organization to put them into this system where they can be meaningful, proud participants?
Mr. Calla: Part of our corporate plan each year that gets approved by the minister and that we get resourced is outreach to communities. Actually, I was supposed to be in the Yukon today, meeting with communities up in the Yukon. I have other staff out there now speaking to all of the communities in the Yukon at an economic development conference about how to become engaged with the act. A lot of it comes from our outreach to communities and going to regional events. We will be at the national AFOA, Aboriginal Financial Officers Association, conference and the provincial AFOA conferences. We host some of our own. We respond to inquiries that come. Word of mouth is spreading. The moccasin telegraph is now starting to work. So we're getting phone calls from places we wouldn't otherwise.
Major resource development in this country is also spurring interest in how you get access to capital and what is required and what this act is all about. Those are the means by which we engage with communities, but it does require a commitment from band council to begin to work with us. The first thing we ask for is a band council resolution inviting us to come in to begin the process of certification and development of laws so that we have the confidence when we begin to go down the path that the band council is supporting it.
Senator Moore: We've heard in the past at this committee that some councils or bands have elections of their councils every two years. When you come across that situation, when your authority does, what kind of commitment do you get so that you know that won't be upset by a subsequent election and a new band council? You have to have that stability of commitment. How do you ensure that? Can you get a resolution that will carry on regardless of who is in the chair and who is around the table?
Mr. Calla: I wish we could. We can't. There is a lot of stop and start, particularly as these institutions got off the ground. We've done some communities in as short as six weeks. We've been working with some communities for five years as they go through the various political processes. Once you're in, you're in, but it takes a while to get that commitment.
What we try to have people appreciate is that this is not a political process. This is a process. It's business. It's how you manage your affairs. Do you want to be in a position where you're responding to your constituency in a way that is responsive to their requests? So it takes a commitment. We usually not only engage with the chief and council, but I've spoken before many a band meeting of membership around this issue as well. The deeper we can go in the beginning into the community and have them understand what this process is about, the more likely it is that as elections happen and whatever changes take place, there is a continuity in the thinking about why they're engaged with us.
Mr. Daniels: Once a First Nation is borrowing under the regime, we actually employ an intercept mechanism for revenue streams. What that means, it's like a lock box system where we would intercept the revenues at the source. That goes into a secured revenue trust account that's managed by a custodian whose responsibility is to pay the debt, and any balance left goes back to the First Nation. This is irrevocable, so it survives future changes in chiefs and councils. They can't make a change without our consent.
Senator Moore: I guess the consortium would insist on that as one of their top things. I was just wondering how that would work. Thank you.
Senator Lovelace Nicholas: My question would be towards everyone approves of this management act. Is anybody or any organization opposed to this?
Mr. Calla: Senator, it is an optional piece of legislation. Yes, there are First Nations who I expect don't yet see the benefit of this. I expect there are First Nations out there who don't believe that treaty entitlement rights have been fulfilled, that treaties have not been settled, that self-government hasn't been implemented, that the fiduciary duty of the federal Crown is not being upheld, and that anything you do that detracts from that is not welcomed at times, I expect. But many First Nations, most First Nations, I would venture to state, who are now seeing economic opportunity at their doorstep now realize they need the tools of this act to move forward. I think that's the positive we take from this. I think if we're to do something beyond that it is to understand how we can put economic assets in the hands of those who don't have them so that they will benefit from this act.
Senator Lovelace Nicholas: In this case, will there be Indian Affairs? Not Aboriginal Affairs, they're Indian Affairs. What about their part in repayment or continued funding once this is in effect?
Mr. Calla: This is independent of Indian Affairs. Indian Affairs does not guarantee these loans. It is a collective. It's like a credit union or a cooperative. We come together and say we're going to go together and borrow money, and we'll make sure it all gets paid back. The institutions developed a system amongst us where we helped First Nations ensure that they are able to honour the obligations that they made to one another.
Senator Lovelace Nicholas: So what happens if the obligation isn't met, if they can't pay back the money or something goes wrong?
Mr. Calla: Under the act, the Financial Management Board can come in to assist that First Nation through an intervention, and we can provide the support that's needed to correct the problem, which usually will be either they haven't administered their tax system correctly or they missed a payment, for whatever reason, and they agree by being part of this that we have the ability to go in and provide that assistance and ensure that things come back to normal.
Senator Lovelace Nicholas: Okay, sounds good. Thank you.
The Chair: I will perhaps jump in here. Senator Lovelace Nicholas wanted to know if there were any critics or opponents. We always try to get some balance before our committee, so I want bring up a comment that was made by a banker, who need not be named, before this committee as part of its on-reserve infrastructure study. The comments were not related to this bill, but the opinion was offered that combining government-like revenues with other revenues obtained from business and economic development into the First Nations Finance Authority's pooled borrowing model was problematic.
To quote from the testimony before the committee:
The danger of this amalgamation of this government and non-government-like financing is that the underlying risk of all the entities is not reflected in the borrowing rate, the terms of the loan or the conditions of the loan. The default risk of some of the participants in such a pool are much greater than others, and with joint and several liability, the good credit in the pool may end up carrying the cost for the bad credit in the pool.
I would like to ask for your response to those concerns.
Mr. Calla: I would be pleased to, and I'm sure Ernie will jump in as well. I'm going to start by saying that I don't agree completely with the statements that are made.
I think the framework that we have in place, the revenue streams that have been vetted, are not reflecting the fear described in those comments. When the first debenture was issued, every revenue stream that was pledged — and most of it was from the other revenue streams regulation — was rated by the rating agencies. Most of those were single-A and double-A revenue streams, if my memory serves me correctly, Ernie. The lowest was a single-B, as I recall.
The revenue streams being considered by the Finance Authority are not reflective of that. I think that the Finance Authority's approach to measuring what a revenue stream is able to create as debt is reflective of that risk. For example, if I have a government revenue stream, I get a much higher leverage of that government revenue stream than I do for my own-source revenue for a business I operate. That risk factor is already reflected in the amount of debt you are able to acquire by revenue stream. There's a whole matrix. If you went on the FNFA website, and I do because they could be a client, you look at it and there's this whole mechanism.
The other important thing to remember here is that FNFA is governed by the borrowing members. You are allowed in by the colleagues that you are working with and by your fellow First Nations who are part of the borrowing pool.
Risk management takes place at that level as well. It does it not only through the administrative process, but it takes place at that level. It takes place through the Financial Management Board, that for every borrowing, the law requires the First Nation to have a financial performance certificate. It takes the last five years' financial statements and runs them through our financial ratios, which we took a long time and a lot of consultation to develop.
You don't get to the Finance Authority to borrow until you meet those standards; so on an ongoing basis, I don't see the risk being there. More important, I think that First Nation governments deserve the right to choose how they want to raise their debt. I believe there is a role for commercial banks, and I respect the role commercial banks play; where there is risk lending, they should be there. But where risk is minimized and there are benefits to borrowing through the Finance Authority, why should First Nations not be allowed to realize that benefit through the cost of borrowing?
As I mentioned to you before, the communities in British Columbia who had had the option to acquire a 30 per cent interest in a pipeline weren't able to exercise that option because they couldn't raise the capital. When they went to the capital markets and asked if they could get the money, the capital markets said yes, but we want the rate-regulated return of 11.25 per cent, which left nothing for the communities. They could have borrowed through the Finance Authority at less than 4 per cent.
That's the power that comes from the pooled borrowing environment that First Nations need to exercise. As an example of these major projects, there's going to be many different business activities. Those are the kind of activities that could be financed by banks because they will be run by individuals, companies.
There's a role for everybody, Mr. Chair. There's a stacked level to this. Clearly, from my background as an accountant and the boards I have served on, managing your treasury function is an evolving science that is coming to First Nation communities. How much debt should you have, how can you manage it, what's the risk to it, what's the long-term interest rate?
I see the notion that we should be matching current amortization periods with what we believe to be the short-term interest rate structure. Many companies that I have been part of are realizing the opportunities today with the low interest rates and managing it. Yes, there is an interest rate risk that we all face; whether you are with a bank or the Finance Authority, it is always there.
The difference with the Finance Authority is that if you choose to get a fixed rate you can go up to 30 years. Some are not. It is not uncommon, particularly in today's world, for companies to have an amortization period that is not in sync with the end of the debenture period date and they refinance again and again. There is risk in that. Let's not be paternalistic in how we try to look at First Nation governments and their ability to manage their affairs. Are there going to be some challenges? Absolutely.
Canada needs to look in the mirror. The banking community itself, remember something called "asset-backed commercial paper"? The capital markets meltdown of 2008? We're not going to replicate those things, but too often I find there's an expectation that the First Nation community that's evolving and maturing has to be perfect when the rest of the country is not.
Yes, there are risks, Mr. Chair. I accept that there are risks, but let us manage those risks.
Mr. Daniels: I want to say this is an excellent piece of legislation. All the safeguards that are in place that have been developed throughout the 20 years have been vetted by the rating agencies, securities commissions, investors. Investors wouldn't buy this if they didn't see any benefit for them, for their investors.
The safeguards that are built into the system, the amendments that are coming, will only make it better; so I think that's what we want. The First Nations are voluntarily coming into this. Three years ago about 70 First Nations were scheduled, and there are 160 today. That's quite an increase. It is increasing every month.
Senator Raine: We're doing a study on infrastructure and housing on First Nation reserves. We know there's a big issue with raising the massive amounts of capital needed for infrastructure, and there is an obligation by the federal government to provide this. We have been looking at ministerial loan guarantees as a way of, if you like, fixing the obligation for long-term investing in infrastructure.
If ministerial loan guarantees were in place for a revenue stream from AANDC, could it be used as pooled borrowing?
Mr. Daniels: Yes.
Mr. Calla: Yes, it can.
The Chair: That brings us to a conclusion of this part. I would like to warmly thank the witnesses for appearing again. I'm not sure how many times, but you're familiar and welcome.
In this second part of our hearing, I'm pleased to welcome Keith Martell, Chairman and Chief Executive Officer of First Nations Bank of Canada. Mr. Martell is kindly joining us by video conference from Saskatoon. We thank you for appearing again before this committee.
The floor is yours. Please proceed.
Keith Martell, Chairman and Chief Executive Officer, First Nations Bank of Canada: Good morning. I look forward to our discussion today. I would like to address three issues on the proposed amendments to the legislation being discussed today.
First, I would like to again add my ongoing support to the elements of the legislation that enable taxing First Nations to participate in a borrowing pool to leverage government-like revenues for financing infrastructure required to support their delivery of services to taxpayers.
Second, I want to again warn you of my concerns as they relate to leveraging of other revenues, as described in the act, and some errors being made in the design of this financing as being proposed by the fiscal institutions.
Last, I want to register my concern with the Government of Canada's interference in what I see as a free market provision of financing services to First Nations for commercial purposes.
To my first point: I agree with the creation of the fiscal institutions as a solution for providing structured financing for taxing First Nations. This solution replicates success already in place in a number of provinces, specifically the Municipal Finance Authority of British Columbia. This model is consistent with basic principles of sound lending practices while allowing First Nations more certainty and affordability in financing their infrastructure that supports the delivery of services to their taxpayers.
Many First Nations in Canada have government-like sources of revenue from taxation, royalties and land leases but are unable currently to leverage these revenues with bond-like debt financing for infrastructure that is required for the ongoing provision of services to their taxpayers.
The institutions created by the First Nations Fiscal Management Act were developed to address this issue. I firmly believe these institutions, which were designed to help leverage government-like revenues for government-like financing, are needed, and that is what the First Nations Finance Authority, management board and taxation commission were designed to do.
As for the amendments in Bill C-59 that streamline this process of financing government-like revenues, I support the amendments.
My second point is that I have to stress my concern with the inclusion of other revenues as described in the First Nations Fiscal Management Act and the amendments before you today.
After the First Nations Fiscal Management Act institutions were created, their mandates were expanded, and they are now aggressively lumping all other revenues, including those from other business enterprises owned by First Nations, into their borrowing models. As was indicated in earlier testimony, actually, a vast majority of some of the first debenture was related to other revenues as planned for the second debenture issue.
These other revenues have been specifically defined by the FNFA to include revenues from everything, including forestry operations, oil and gas developments, hydro developments, convenience stores, hotels and gaming organizations. FNFA's definition does not include only the government-like revenues like taxes, royalties or levies from these businesses but includes the equity-like return from these businesses.
FNFA is effectively institutionalizing the commercial borrowing of the First Nations for commercial purposes to a government financing model, and I think this is going to be a big problem.
In fact, most of the revenue used to leverage the first FNFA bond, as I mentioned, was commercial revenue. Also, much of the amount borrowed was used to repay existing debt with commercial banks, not to finance new projects that were unable to attract capital.
FNFA also often quotes large amounts saved by First Nations borrowing from FNFA with one example repeatedly used of a First Nations saving $140,000 a month in debt service. When you look more closely at the details of this example, you discover that these savings are primarily due to the fact that the community refinanced existing loans that were being amortized over five and 10 years with a loan from FNFA amortized over 30 years. Most of the savings claimed are, in fact, a reduction of principal paid in the early stages of the loan.
One further problem with the example is that while the loan was amortized over 30 years, the interest rate on the bond issued by FNFA was only set for 10 years. If in 10 years interest rates are higher than the current all-time lows, there will be a significant amount of principal still to repay at a much higher interest rate. In fact, by amortizing the loan over a much longer period, the true debt service cost, which is really the interest paid on the loan, will, in fact, be much greater.
The Government of Canada, through its support of these fiscal institutions and its practice of leveraging other revenues, is supporting an increase in the overall debt of First Nations without any protection for the long-term ability to service the debt.
There are also a number of basic financing principles that are violated by this model of leveraging dissimilar commercial revenues, including the danger of amalgamation of many dissimilar revenue sources from many First Nations into one pool. The underlying risk to each of the entities is not reflected in the borrowing rate, the terms of the loan or the conditions of the loan.
The default risk to some of the participants in the pool is much greater than others, and with FNFA borrowers having joint and several liability for the bond, the good credit in the pool may end up carrying the debt service for the poor credit, while there are, in fact, many unique borrowers in one pool.
Secondly, the term of the borrowing may not match the life of the assets being financed. The first bond issue of FNFA repaid commercial financing that was used for many purposes and had various amortization periods based on the use of funds. All these commercial loans were refinanced over 30 years. Little consideration was given to matching the life of the income-earning asset to the term of the loan.
Third, the debt service capacity of First Nations was assessed when interest rates are at an all-time low. This is especially important because the interest rates in the first FNFA bonds were only fixed for 10 years, while the loans from FNFA are amortized often over 30 years. Little consideration is given to how First Nations or FNFA, for that matter, will actually service the debt if interest rates rise.
Unlike taxation revenues, the First Nation had little or no capacity simply to raise the level of commercial profits to service increased interest costs.
If default happens in the FNFA borrowing pool, two things will occur. First, it will definitely be more difficult for even the best-rated First Nations' credit to get bond financing. Second, everyone who ends up carrying the cost of the losses in the pool is going to be looking for someone to blame. The Government of Canada is going to be in the middle for a cleanup, which will make it infinitely harder to get federal government participation in future Aboriginal financing or economic development.
Last, I want to advise the committee that when it comes to financing commercial enterprise of Aboriginal communities by commercial banks, a lot is being done, and the institutionalizing of all First Nations financial services is not a good idea. Our bank was created to focus on the Aboriginal community, and, while I think we have an advantage because of our focus and our ownership, other banks are very competitive. They have teams focused on this market and are getting much better at serving the needs of First Nations customers. There is a free market for the provision of debt for commercial purposes to First Nations.
There are also many large and very successful First Nations commercial developments that have secured correctly priced and termed bond financing for commercial developments, including hydro and resource developments and other large enterprise investments.
In the last two years, I personally have been involved in three large bond financings, one for a hydro project, one for a hydro transmission line and one for a hotel gaming facility. These are only a few of the properly structured and priced financings that have occurred in First Nations across the country. The expansion of the mandate of the fiscal institutions will not be the first time the Government of Canada felt it knew better than the free market. The implicit guarantee of FNFA bonds by Canada, the fact that all of the operating costs of the fiscal institutions are currently paid by Canada and should be expected to be paid for some time by Canada and the provision of a $10 million loan stabilization fund for the institutions are indications that Canada is directly involved in competition with the free market for the provision of financial services.
In closing, given that these amendments in Division 16 are part of a larger budget implementation bill, which will undoubtedly pass very soon, I really have no faith that this committee can actually do much to really fix the situation with regard to the fiscal institutions and their expansion of their mandate into leveraging of other revenues for First Nations.
The train seems to have left the station in regard to this development. I simply am pleased to be able to again answer your questions and to state my concerns for the record, and we will see how this development turns out over time. For the sake of the First Nations that I care deeply for, I hope I'm wrong about the negative aspects of this legislation. I look forward to your questions.
The Chair: Thank you, Mr. Martell, for giving us this important perspective. I would like to start off by asking you about your position. I heard you state at the outset that you support the amendments, and then you went on to explain that you are concerned about the risks that could result from mixing higher-risk sources of revenue in the revenue pool.
I have a couple of questions. First, in supporting the amendments and telling us that you believe the amendments will pass as part of the budget of a majority government, are you really saying, "Keep your eyes open, everybody. There has to be great caution used by the First Nations financial management authorities to make sure that they stay out of trouble and don't have unpleasant results"? Is that really what you are saying today, that this has to be managed very carefully going forward?
Mr. Martell: Let me clarify the first point. I do support the amendments as they relate to the taxing of First Nations revenues. That's the revenue that is government-like structured finance. A lot of these amendments deal with that and can frankly make the fiscal institutions better able to do that task. I do support those amendments.
There are also some amendments that relate specifically to other revenues, and I have, as I stated very specifically a number of times, a number of concerns with the other revenue leveraging.
You are correct. I state that we have to go in with our eyes wide open. It has been said by the fiscal institution that they only leverage existing revenues, and, as a commercial banker, we effectively don't simply underwrite a loan when it becomes a new loan. There's sort of a misconception by the fiscal institutions that commercial banks only lend to brand-new businesses that are start-up and that that creates the risk.
Every business that has an ongoing business, an ongoing revenue stream, is effectively a new business every year. As a commercial bank, we effectively underwrite those customers every year. We do annual reviews. We do interim reviews. When a business is in trouble or has issues, we do an interim review every month. We really underwrite those credits on an ongoing basis. For the First Nations Finance Authority to state that they only use existing revenues, in that case, they would have looked at BlackBerry 10 years ago and said, "We will only look at existing revenues and lend them money for 30 years." The revenues, the last time I looked at BlackBerry, are significantly less than they were 10 years ago. In the First Nations Finance Authority world, where they're not commercial bankers, they consider that existing revenues will exist forever, and that's simply not the case.
The Chair: Thank you. The other thing I'd like to ask you in this connection is that First Nations Finance Authority and the management act representatives, the board representatives, told us that they do indeed have a very rigorous process for certifying the creditworthiness of the First Nations listed on the schedule. They go back and require five years of previous financial statements. They're analyzed in detail. The markets, the credit rating agencies, have told them that the ratings that they give are generally A or double A. Therefore, these are impressive compared to other borrowing agencies.
They say, "We have this rigorous process. You don't get certified easily. Therefore, this reduces the risks of default that we should all be concerned about." Would you agree that they have a pretty rigorous certification process?
Mr. Martell: We have seen the certification process. We do think that it is quite rigorous. There are a lot of checks and balances in it that, frankly, are taken out of the commercial bankers' stream.
The concern I have is that there's almost a misconception that once in, always in and that once certified, there's no change ever. As was mentioned earlier by one of the questions to the earlier panel, leadership changes regularly. Often changes in management come with changes in leadership. You can't certify a community once, ignoring the fact that the people in those communities and the people running those systems may change over time.
I have every faith in First Nations governments to continue to do the right thing, but, often, there are people with different capacities who come and go. For example, when we have key persons who are identified within our customers, if one of those persons leaves, we really have to underwrite that client again because the circumstances may change.
Senator Moore: Thank you, Mr. Martell, for being here. On page 3 of your comments, you say that the default risk of some of the participants in the pool is much greater than others so that the good credit may end up carrying the debt service cost of the poor credit.
You go on to say that little consideration was given to match the life of the income-earning assets for the term of the loan, and you talked about the money being spread over 30 years to finance infrastructure projects that had been set up for a 10-year payout.
The first debenture was for $90 million. Do you know what portion of that was used to refinance existing projects versus new projects?
Mr. Martell: That wasn't disclosed by FNFA, but from the customers we have seen borrow from FNFA, a lot of them have financial statements that are posted and publicly disclosed on the Government of Canada's website. We have seen a lot of it displace existing commercial debt. Our bank personally hasn't had a lot of debt paid out by FNFA at this point, but we know other banks have had a lot of their commercial debt repaid by FNFA borrowings. This was First Nations who had borrowed against commercial revenue.
Senator Moore: Yes.
Mr. Martell: It was re-borrowed from FNFA. It repaid those commercial debts. Sometimes it was put into infrastructure projects. Sometimes it was just refinancing existing commercial debt.
Senator Moore: So what percentage was used to do refinancing?
Mr. Martell: It is hard to tell. You would have to assemble all of the borrowing customers. That's something that FNFA really should disclose. If they're simply refinancing commercial debt with government guarantees — and that's another misconception. One of the answers to an earlier question was that Indian Affairs doesn't guarantee FNFA. When you read the rating agencies, you will find they have a strong likelihood that the Government of Canada, frankly, is behind the bond, and that's a lot of the benefit that allowed them to get their investment-grade rating.
Senator Moore: What do you mean by a strong likelihood? Is there something in writing?
Mr. Martell: It is right in the rating agency's reports. They indicate a strong likelihood, which is defined in the rating agency's definitions as a 51 per cent to 71 per cent likelihood, that it is a Government of Canada guaranteed bond.
Senator Moore: That's a pretty serious statement. Wouldn't that have to be in writing somehow before they could take that into consideration doing the ratings?
Mr. Martell: It is right in the rating agency's report. If you would read the rating industry's report, they base that on a number of considerations. It is government legislation which enacts the legislation. Government of Canada funds FNFA, the First Nations Financial Management Board and the First Nations Tax Commission, and Government of Canada, they indicate, is unlikely to walk away from such a structure once supported.
Senator Moore: You say little consideration was given to matching the life of the income-earning assets to the term of the loan. I guess the obvious question is, how do you know that? You said you haven't done many of these refinancings of loans to do with your bank. How do you know what the experience is, and how much of that, in fact, was actually done? How much non-consideration was given? Do you know that?
Mr. Martell: I have taken a look at a couple of the First Nations that did use FNFA borrowings to refinance existing debt, and most of the commercial debt that was repaid was commercial debt being amortized over a five or ten-year period. In commercial banking, you always look at the amortization period based on the life of the asset and the security of the revenue stream. You look at a whole lot of considerations before you determine what the amortization period would be.
For example, some of the bond structured financing that I talked about is hydro development. I dealt with one First Nation in Ontario that purchased a large percentage of a hydro development, and they had bonds that were amortized over a 17-year period, which reflected the risk tolerance of the community and the power of purchase agreements they had with hydro, and it allowed them to get very low-cost financing, frankly lower cost than what FNFA is offering, over a 17-year period because it matched the risk and term of that project.
Whereas really what they're looking at under FNFA's model is blanketing all risk, whether it is, as I said, a convenience store, a forestry operation, a gaming operation or hydro, all under one 30-year bond, which really looks at all of those things and effectively tries to use structured lending practices to be able to eliminate the risks of any of those individual revenue streams, which is frankly exactly what asset-backed commercial paper did when they tried to take a lot of various revenue streams —
Senator Moore: I remember.
Mr. Martell: — and structure out the financing risk and say everything is perfect.
Senator Moore: Yes, it was a $32 billion non-perfection, I guess. You mentioned that one example, but this is quite a blanket statement: Little consideration was given to matching. How do you know that? These are responsible people trying to do a job here, but you don't think that they have given proper consideration to the matching of the life.
Mr. Martell: If I had a pool of various revenue streams that we were lending to with the First Nations Bank, if I had clients with hydro, forestry, convenience stores, grading operations, oil and gas service rigs, I would look at all those customers and I would expect a vast distribution of amortization periods based on the risk of those revenues, the assets being purchased and the support of the repayment capacity of all those revenue streams. I would expect a fairly wide distribution of amortization periods.
Senator Moore: Okay.
Mr. Martell: Whereas if you look at what FNFA has done, they have taken a fairly wide range of revenue streams, and somehow it has all become a 30-year amortization period, which frankly, from a commercial banker's perspective, raises my concern. Convenience stores are a good example. If a convenience store goes up across the street, your revenues could go in half overnight. How do you justify that being over a 30-year stream? Forestry is a good example. Anybody who has ever been involved in the forestry industry knows there are definite cycles in forestry. Forestry in 2007 wasn't the same as forestry in 2014. Banks build in amortization periods that reflect the cyclicality of that revenue. To say that everything has been structured out and now we have everything qualifying for 30-year amortization just indicates, I would say, a concern that needs to be looked at.
Senator Raine: Just to follow up on that, then, would you recommend that the government-type revenues and own-source revenue, other revenues, be separated out in the amortization?
Mr. Martell: Frankly, the way the fiscal institutions have been structured and the legislation you have given them and the implicit guarantee you have given the rating agencies, as I mentioned, I think the train has left the station on that.
Frankly, what I'm really supporting is a frank and open disclosure of the risks. As others have mentioned, First Nations have the right to go in and secure this kind of borrowing, and we have seen individual First Nations secure bond financing on their own capacity. We have seen First Nations group together. We have a group of First Nations who jointly invest in forestry operations and borrow together based on the underlying risk of that industry.
We support the FNFA. If they go in making sure everybody's eyes are wide open, then I think there are a few things that have to be disclosed. First of all, the government has to make it perfectly clear to the rating agencies that this isn't a government-guaranteed bond. You have to clarify that with the rating agencies. That would maybe re-price the financing they're going to be able to secure to a properly rated structure that fits the risk of the underlying assets.
I looked on the FNFA website recently. Almost nowhere on that website could I find a specific disclosure of the joint and several liability of First Nations. First Nations have to understand that if there are failures in the system, they have to make up for those failures. If your neighbour decides that for some reason their business fails and they're going to stop making payments, the lockbox idea is fine, but if nothing is going into the lockbox, there's nothing to take out of the lockbox. Really, if your neighbour stops paying because their forestry operation hit a down cycle, you as the First Nation, the chief, have to get into the pot and start paying. The gaming revenues or the resource revenues or the hydro revenues that they have go to make up the shortfall in the other borrowers. That's not specifically enough disclosed. I have talked to First Nations who are in the advanced stages of certification with the First Nations Financial Management Board, and they still don't really grasp the fact that there's joint and several liability with the other borrowers.
I don't mind competing, but I don't want to compete with a government-backed agency that doesn't disclose the risks to the borrowers who are going into the pool.
The Chair: Mr. Martell, I was just looking at or scanning your financials for 2014, and I recognize this is a First Nations bank. Maybe I didn't read it right, but it seemed that many of the loans you issued were for personal mortgage and not so many yet to First Nations governments. Would that be correct? Is there room in the banking world to expand the financing to First Nation governments beyond what it is today?
Mr. Martell: I apologize. That must be a misread of our financial statements. About 90 per cent of our revenue relates to Aboriginal governments and Aboriginal-owned entities. About 43 per cent of our revenue and our loan volume relate to direct loans to First Nations governments. Those would be lines of credit to support their ongoing delivery of programs and services. Those would be financing around infrastructure developments, schools and interim financing. But another 25 per cent of our revenues would be related to Aboriginal-owned enterprise. This would be Inuit and First Nations-owned enterprise, so the wholly owned enterprise, which is where most of the source of the other revenues will come from. This will be in direct competition to what FNFA is doing. We haven't had any of our customers paid out by FNFA yet. There is indication some will be. We're a bit surprised that some of the ones that we're seeing, maybe in discussion with FNFA, are some of the ones we have to do the most management with.
We respect the rights of First Nations government. We respect First Nations governments. Our owners are 80 per cent Aboriginal groups, but we also respect the fact they have to work with their commercial bank to keep an ongoing management of their debt, and that's not unlike any other situation. Commercial enterprises and federal governments have to deal with bondholders regularly to ensure the relationship fits. We do that with our customers. This will compete directly with us.
The Chair: Mr. Martell, I'm very glad you had the opportunity to explain what you're doing in this area and clarify my misperception. Thank you.
On behalf of the committee, I would like to thank you very much again for making yourself available and giving us some constructive criticism of the bill. It has been very useful. On behalf of the committee, I thank you again.
Mr. Martell: It was a pleasure.
The Chair: Colleagues, we now will hear from our final panel. We have, from Aboriginal Affairs and Northern Development Canada, Allan Clarke, Director General, Policy and Coordination Branch; and Eiad El Fateh, Policy Analyst, Policy Development Directorate. Joining them at the table from the Department of Justice Canada is Jeffrey Clark, Counsel.
Thank you for being here today. I understand, Mr. Clarke, you are going to open, please.
Allan Clarke, Director General, Policy and Coordination Branch, Aboriginal Affairs and Northern Development Canada: Thank you very much. Today I'm here to speak about proposed changes to the First Nations Fiscal Management Act. The act is an opt-in legislation that was passed with all-party support in 2005 and came into force in 2006. It provides First Nations with fiscal powers, similar to other orders of local government, in the areas of real property taxation, financial management and access to capital.
The act provides for a number of elements. The first is a rigorous commercial and residential property taxation system, financial management laws to insure that revenue is prudently managed, and access to capital markets to fund major projects by issuing bonds, similar to the pooled borrowing systems available to municipalities and provinces such as British Columbia, Alberta and Ontario.
In the nine years since the act has come into force, there has been considerable success. To date, 158 First Nations have opted into the act, with 82 exercising property taxation jurisdiction. The financial performance of 52 First Nations has been certified by the First Nations Financial Management Board, and 14 have raised $90 million from capital markets through the regime's initial bond issue in June 2014.
This funding is enabling First Nations to invest in infrastructure, such as housing, and other projects in their communities. The next bond is anticipated to be issued later this year, for approximately $100 million. Subsequent bonds are expected to be issued in subsequent years.
While the act has enjoyed great success, our proposed administrative improvements will further increase the effectiveness of the regime. The proposed changes would result in three broad categories of administrative improvements.
First, the changes would streamline the process to add First Nations to the act and remove perceived disincentives to participation. For example, the act currently requires an order-in-council process to add a First Nation to the schedule of the act. To expedite this process, clause 177(2) of this division would change this requirement to a ministerial order.
Second, the changes would reduce red tape and align the regime with provincial standards. For example, the changes would reduce the minimum public notice period for property taxation laws from 60 to 30 days to better align with provincial standards.
Third, the changes would enhance investor confidence by clarifying the mandates of the institutions and the obligations of First Nations under the act. For example, changes would clarify the First Nations Financial Management Board's power to revoke a First Nation certification if it fails to adhere to the board's standards. All three of the institutions created under the act, the First Nations Tax Commission, the First Nations Financial Management Board and the First Nations Finance Authority support the proposed improvements.
Over the past year, a working group of officials from the department and the institutions has been reviewing and developing proposals to take to our minister, and these proposed improvements represent the result of this work.
The three institutions have appeared a number of times before the Standing Senate Committee on Aboriginal Peoples as well as the Standing Committee on Aboriginal Affairs and Northern Development and have advocated for these changes.
The amendments are also supported by a broad range of other stakeholders, such as the National Aboriginal Economic Development Board, the First Nations Tax Administrators Association, the Canadian Property Tax Association and the Canadian Energy Pipeline Association, which have all indicated their support.
In terms of our anticipated tangible benefits, the proposed improvements to the act would help promote First Nations' self-sufficiency and accelerate economic development on reserve, resulting in tangible, measurable benefits. Because of these changes, we expect the number of First Nations participating in the act to rise by 50 per cent over the next five years to over 230 participants. This would greatly extend the tools and benefits of the act to a broader range of First Nations across the country.
We expect annual tax revenues collected under the regime to nearly double from $42 million to $70 million.
Finally, we anticipate that the current $240 million in certified borrowing room under the act would grow to $1 billion. This would represent a significant step to offsetting demand for federal transfers to support capital projects in First Nations. In total, the proposed changes would increase the number of First Nations making use of the regime and exercising greater fiscal independence.
The Chair: Thank you very much, Mr. Clarke.
Maybe I will open. The amendments before us today, which are in the budget implementation act, resulted from a legislative review done in 2012, I believe, but you went beyond that report and engaged with the key stakeholders.
I wonder if you could tell us a bit more about that engagement. You referred to a working group of officials from the department and the institutions. What did they do that the legislative review didn't do? Could you elaborate on that consultation process?
Mr. Clarke: We started from the legislative review that was conducted in 2012, and we didn't go beyond that legislative review. What we did was look at the recommendations that came out of that review and disaggregated them amongst those that we thought were truly administrative in nature that would improve how the regime operated, reduce some of the red tape and unnecessary delays associated with the regime.
We looked also at changes that would have a greater impact on the pith and substance of the regime or perhaps the mandate of the institution or the scale and scope of the regime. We set those aside for further work because they require probably more deliberation, examination and engagement.
But we feel as though the changes proposed in the budget implementation bill fit within the existing mandates of the institutions and the objectives of the regime, so they're more administrative in nature.
The Chair: Thank you.
Senator Raine: Thank you for being here today. You talked about access to capital markets to fund major projects being one of the goals of issuing these bonds, similar to the pooled borrowing systems available to municipalities in provinces such as B.C., Alberta and Ontario. I wonder if you could just give us a briefing: Are there any differences with regard to the pooling of borrowing by the First Nations Finance Authority and, for instance, the Municipal Finance Authority of British Columbia?
Mr. Clarke: When the regime was created and developed up to 2005, it used the Municipal Finance Authority of BC as a model. In fact, the people responsible for building the regime relied a lot on that model and were inspired by how it worked. One of the major differences between this regime and provincial regimes is that this is strictly an opt-in regime. Whereas in provincial jurisdictions there is a requirement that all municipalities become part of the borrowing pool, in this, again, it is up to individual First Nations to elect to enter the regime. That's a significant difference and probably the key difference, I think, between the First Nations Fiscal Management Act regime and those that are available to municipalities and provincial systems. In terms of how it works and the safeguards that are associated with it, they are quite similar.
Senator Raine: We have just heard, for instance, that own-source revenue or other revenue being differentiated from taxation-type revenue would be a good thing. Do you have any comment on that?
Mr. Clarke: While the regime is similar to what you would find in provincial systems, there is a big distinction between what First Nations earn as local governments and what municipalities earn as revenues. So the amount of property taxation is a lot smaller for First Nations than it would be for municipalities that rely primarily on property taxation and other types of fees for revenue. In the case of First Nations, while the actual amount of property taxation is relatively low compared to other local governments, they also benefit from a stable stream of revenues in other areas as well. For instance, First Nations have access to revenue streams from long-term federal, provincial and municipal agreements, long-term power-of-purchasing agreements with provincial energy corporations, revenue sharing agreements with respect to resource or gaming activities, long-term leases and contracts and interest income from long-term deposits of community monies, as well as income derived from economic development activity related to resource access, exploitation of parks or marinas and other types of infrastructure and some First Nation Crown corporation-type entities. So there is a big difference between the types of own-source revenues available to First Nations and the types of other revenues that would be available to municipalities.
Senator Raine: Are you confident that the validity of these other revenues would be properly analyzed by the bond purchasers?
Mr. Clarke: A number of safeguards are built into the system. I just want to be careful because I don't want to respond too directly to what Mr. Martell was saying. It's not quite accurate to say that all other sources of revenues would be part of this regime. He mentioned revenues earned in a convenience store. That would not be part of this regime. That would not be part of the types of revenues that this regime would be looking at. This regime would be looking at revenues from very stable sources of other revenues. For instance, you would be securitizing things like a long-term power purchase agreement from a provincial power authority. One could be comparing apples and oranges here because you're not looking at the whole breadth of other sources of revenues. You are looking at very defined structures that are predictable, long-term and stable.
You also have a number of safeguards in the regime, like certification by the Financial Management Board that ensures that First Nations meet certain standards when it comes to financial systems and performance. You're building in safeguards around the ability of First Nations to manage their revenues and their finances. You also have the fact that the First Nations Finance Authority — and you heard from the institution this morning — also has to have relationships with capital markets and credit rating agencies that ensure the stability and the viability of the source of revenues that they're borrowing against.
Senator Raine: Thank you.
The Chair: On that, we did hear this morning that rating agencies, in looking at loans through the First Nations financial management authority, have apparently reported in their ratings that there is a likelihood that the government will be behind these loans in the event of default, that the government funds the first Nations Tax Commission and the financial management authority, that it's federal legislation that creates these institutions, et cetera. Yet, the representatives from the board and the authority and the Tax Commission said, "No, no. These are not guaranteed loans by the minister or the department. These are our authority independent of government." Would you have any comments on the extent to which the Government of Canada, directly or indirectly, is backing these kinds of loans?
Mr. Clarke: First, I'd just like to clarify. There is no additional liability for the Government of Canada in terms of issuing these loans. You're right that the liability rests with the First Nations that are borrowing under the regime.
As I mentioned, there are a number of safeguards to protect the integrity of that lending, and I mentioned some of the work of the institutions. There are also a number of other structures, like the debt reserve fund established by the First Nations. It is seeded by participating First Nations, and, in the event of default, it can be drawn upon to repay an investor should non-payment occur. There is also a credit enhancements fund, which was a further safeguard that was funded by the federal government. That would be replenished in the event that it had to be used to pay debts, and that would be replenished by the borrowing pool members. There is also an intervention authority. In the event of a default, the Financial Management Board has intervention powers similar to those of a trustee in bankruptcy that allow it to control the revenue streams of a defaulting First Nation. So there are a number of different mechanisms already in place to ensure that the integrity of the regime will persist, and there is no further liability placed on the federal government.
It is a federal statute, obviously, but that does not mean the federal government is liable for bad debts associated with the regime.
Senator Lovelace Nicholas: Welcome here this morning.
The First Nations Fiscal Management Act approves of this amendment. Keith Martell, First Nations Bank of Canada, was implying that this was going to fail. So my question is, are First Nations the only groups that have to go through all of this to borrow money for their ventures?
Mr. Clarke: This regime is modelled on the same regime that exists for municipalities. It was modelled explicitly on the Municipal Finance Authority of British Columbia, so it has many of the same safeguards that you would find in provincial regimes of this nature.
Essentially, First Nations don't necessarily have all the tools that municipal governments have. Most First Nations exist under the Indian Act, and the Indian Act does not assert jurisdiction in certain areas that are important for, among other things, economic development.
So this legislation created a regime that allows First Nations to assert jurisdiction in areas of property taxation and fiscal management, and it also provides a vehicle to raise money in the capital markets. It's basically providing an option for First Nations to operate in the capital markets like other local governments do, and it's modelled very much on the same type of regimes available in provincial jurisdictions.
The Chair: I think it would be fair to say that Mr. Martell thought there was a risk of failure with this legislation. Thank you.
Senator Moore: Thank you, witnesses, for being here.
Mr. Clarke, I want to ask you about the meaningful results of the act portion of your presentation. In the second bullet you say that 158 First Nations have opted into the act and that the financial performance of 52 has been certified by the First Nations Financial Management Board.
I thought that once a First Nation indicated it wanted to participate and opt in that its affairs were put in order and they were certified. I thought that all 158 were certified, so I'm surprised to hear that only 52 of them have been. And you say that 14 have raised the $90 million on the first bond issue in June of last year. I thought the money was raised on the strength of all 158 First Nations who had opted into the program.
Does the First Nations Finance Authority report to your department each year so that you will know the use of those debenture funds? I'd like to know what the breakdown was in the use of those funds between refinancing existing debt and new infrastructure or economic projects. We didn't hear about any refinancing when I asked the question of Mr. Daniels. He mentioned a few new economic projects and infrastructure, but I didn't hear him mention anything about refinancing existing debt or how much of the $90 million was used for that. Do you have those details?
Mr. Clarke: I have some details that I can share with you. In answer to your first point, in order to be part of the regime, 158 First Nations have to indicate their desire to be scheduled to the act. This begins the process of full entry into the various elements of the regime.
Some people join the regime so that they can have access to the powers for property taxation, so they may not want to be part of the borrowing pool currently but maybe they will be in the future. The certification by the First Nations Financial Management Board is critical to being part of the borrowing pool. Of these 158, 52 have already been certified by the First Nations Financial Management Board, and others are in the process of being certified. There is kind of a growth. They're not turning the corner and becoming certified; it takes some time.
Senator Moore: Right. Let's talk about the upcoming debenture proposed for $100 million. The maximum number of First Nations that could participate in that would be 52. In the past, I don't know what the total was at that time, but only 14 said they wanted to do it.
Did they say only you 14 have the strength among the 52 of you to do it? Who decides that? Is it the rating authorities? Is it the management board? Do you people help in that?
Mr. Clarke: No, we don't. Basically, these three institutions operate quite independently from government. They are shared governance models in the case of the First Nations Financial Management Board and the First Nations Tax Commission, but the First Nations Finance Authority is basically managed and controlled by the borrowing pool members themselves.
We have no involvement in how the First Nations Finance Authority puts together and issues bonds, but they do it like other bond issuers in the marketplace.
Senator Moore: Do you have an answer to my question about the distribution of the $90 million to refinance existing debt and new projects or infrastructure projects?
Mr. Clarke: Yes, I can go through a list of a number of different projects that were part of that $90 million debenture.
Senator Moore: Maybe you can submit that, but do you have the ratio? Is it 50-50? Can you give us that and then send the details to the clerk?
Mr. Clarke: I will submit the details, but it looks as though less than half of the money was for refinancing, probably closer to maybe a quarter, just from these numbers.
Senator Moore: Thank you very much.
The Chair: Colleagues, seeing no more questions, I'd like to thank the witnesses for appearing outside the usual order on this legislation, at the end of our panel. You may be excused.
Colleagues, I would ask you to remain for a five-minute or less in-camera meeting before we break. So if I could have your indulgence and if we could clear the room, is it agreed that staff may remain?
Hon. Senators: Agreed.
The Chair: Staff will remain. We'll go in camera shortly.
(The committee continued in camera.)