Proceedings of the Standing Senate Committee on
National Finance
Issue No. 80 - Evidence - November 21, 2018 (evening meeting)
OTTAWA, Wednesday, November 21, 2018
The Standing Senate Committee on National Finance met this day at 6:45 p.m. to study such issues as may arise from time to time relating to federal estimates generally, including the public accounts, reports of the Auditor General and government finance (topic: Public Accounts of Canada 2018).
Senator Percy Mockler (Chair) in the chair.
[English]
The Chair: My name is Percy Mockler, senator from New Brunswick and chair of the committee. I wish to welcome all of those who are with us in the room and viewers across the country who may be watching on television or online.
[Translation]
As a reminder to those watching, the committee hearings are open to the public and also available online at sen.canada.ca.
Now I would like to ask the senators to introduce themselves, starting on my left.
Senator Forest: Good evening. Éric Forest, senator from the Gulf region of Quebec.
Senator Pratte: Good evening. André Pratte from Quebec.
Senator Moncion: Good evening. Lucie Moncion from Ontario.
[English]
Senator M. Deacon: Senator Marty Deacon, Ontario.
Senator Marshall: Senator Elizabeth Marshall, Newfoundland and Labrador.
Senator Eaton: Nicky Eaton, Ontario.
The Chair: I would now like to recognize the clerk of the committee, Gaëtane Lemay, and our two analysts, Alex Smith and Shaowei Pu, who team up to support the work of the Standing Senate Committee on National Finance.
Honourable senators and members of the viewing public, the mandate of the National Finance Committee is to examine matters relating to federal estimates generally as well as government finance, and that includes the public accounts.
Today we are holding a meeting on the Public Accounts of Canada 2018, which outline the government’s financial performance during the 2017-18 fiscal year and its financial position as of March 31, 2018. They were tabled in the Senate of Canada on October 23, 2018.
[Translation]
For the first part of the meeting this evening, we have officials from two organizations.
[English]
First, from the Office of the Auditor General of Canada, we welcome Mr. Terrance DeJong, Assistant Auditor General; Karen Hogan, Principal; and Ms. Renée Pichard, Principal.
Second, from the Office of the Comptroller General, which reports to the Treasury Board of Canada Secretariat, we have Ms. Janique Caron, Assistant Comptroller General, Financial Management Sector; and Ms. Diane Peressini, Executive Director, Government Accounting Policy and Reporting.
Welcome to all witnesses for being here this evening and thank you for accepting our invitation. I have been informed by the clerk that Mr. DeJong will be the first to speak, followed by Ms. Caron.
[Translation]
Mr. DeJong, the floor is yours.
[English]
Terrance DeJong, Assistant Auditor General, Office of the Auditor General of Canada: Mr. Chair, thank you for this opportunity to discuss our audit of the consolidated financial statements of the Government of Canada for the 2017-18 fiscal year. With me is Karen Hogan, the principal responsible for the audit. I am also accompanied today by Renée Pichard, the principal responsible for our recently tabled Commentary on the 2017-2018 Financial Audits which reports on our financial audits of federal organizations.
The government’s consolidated financial statements are one of the government’s key accountability documents. For the fiscal year ended 31 March 2018, the government had a deficit of about $19 billion and a net debt of $759 billion. Net debt is the amount by which the government’s liabilities exceed the value of its financial assets.
[Translation]
Our independent auditor’s report — or audit opinion — is on page 48 of Volume I of the Public Accounts of Canada. We found that the statements conformed to generally accepted accounting principles for the public sector in all material respects, which means that you can rely on the information they contain.
Not many national governments receive a clean audit opinion on its financial statements. The Government of Canada should be proud to have accomplished this every year for the past 20 years.
[English]
This year, our audit of the government’s financial statements took us more than 60,000 hours, which is longer than it takes to complete seven performance audits. This financial audit matters because it supports parliamentary oversight of the government, promotes transparency and encourages good financial management.
Our commentary on financial audits includes three observations that resulted from our audit of the government’s consolidated financial statements.
[Translation]
Our commentary report is not an audit report. It highlights the results of all of the financial audits we conducted and provides commentary on the results. Our intention is to provide parliamentarians with useful and easy-to-find information on our financial audits.
Our three observations on the government’s 2017-18 financial statements involve pay administration, discount rates for management estimates, and National Defence’s inventory management.
I will briefly address each of these matters.
[English]
The first is pay administration. Again this year, we found deficiencies in the government’s internal controls for pay expenses, which meant we had to carry out detailed tests of the $25 billion in salaries and benefits processed through the Phoenix pay system.
We looked at about 16,000 pay transactions across 47 departments. We found that 62 per cent of the employees in our sample were paid incorrectly at least once during the year. The government underpaid some employees and overpaid some employees. We estimated $369 million in underpayments and $246 million in overpayments.
Despite the significant number of individual pay errors, they did not result in a financially significant error in the government’s total reported pay expenses. This was because overpayments and underpayments partially offset each other and because the government recorded year-end accounting adjustments to improve the accuracy of its pay expenses. These adjustments changed only the reported pay expenses in the consolidated financial statements. The government did not correct the underlying problems, nor did it correct the pay errors that continue to affect thousands of employees.
The second item in our observations is positive, as it resolves an issue we raised in the previous two years. During the 2017-18 fiscal year, the government completed its review of the discount rates used to estimate its long-term liabilities. The review was rigorous and addressed an important issue. The most significant impact of changing how discount rates are determined was on the valuation of public sector unfunded pension liabilities. This change resulted in an increase of those liabilities of $19.6 billion compared with prior years. In our view, this better reflects the value of what it will cost the government to meet its pension promises.
We are pleased to note that the balances from last year’s financial statements were adjusted. This makes it easier to compare results from year to year. The details of the change are shown in note 2 of the audited financial statements.
[Translation]
The third matter in our observations involves the recording and valuation of National Defence’s approximately $6 billion of inventory.We have brought this matter to the attention of Parliament in each of the past 15 years. We are pleased with the department’s actions in the past year. We expect further progress in the coming years as National Defence completes the steps necessary to improve its inventory management practices.
In addition to our observations on the government’s consolidated financial statements, our commentary report discusses other issues that I would like to highlight today.
First, based on our discussions with National Defence, we expect the department to make progress in resolving the accounting issues associated with its reserve force pension plan in the next couple of years. Second, we note that the government made some improvements to its financial statement discussion and analysis. We will continue to work with the government on ways it can enhance that financial information. We also believe we can help the government to streamline other information it includes in the Public Accounts of Canada to make it easier to understand.
[English]
Third, the government has more than 30 significant IT projects planned or under way. These projects represent risk for the government, since federal organizations rely on these complex IT systems to deliver services to Canadians. The government must monitor the progress of these projects and test and assess the systems prior to conversion.
Finally, our commentary report discusses the information that supports parliamentary approval of government spending. Approximately two thirds of government spending is not voted on by Parliament through the Main Estimates process because it was authorized through other legislation in the past. Parliamentarians need to understand the nature of these amounts.
Every year there is a difference of several billion dollars between the amounts presented in the budget and those in the Main Estimates. This year the difference amounted to $62.5 billion. We believe that the majority of this amount should be included as statutory expenditures in the Main Estimates.
[Translation]
Mr. Chair, I would like to thank the Comptroller General, his staff, and the staff of the many departments, agencies, and Crown corporations involved in preparing the government’s consolidated financial statements. We appreciate their effort, cooperation, and help. I would also like to sincerely thank our staff for the dedication and long hours they put into completing our financial audits.
This concludes my opening remarks. We would be pleased to answer the committee’s questions.
The Chair: Thank you very much, Mr. DeJong.
I will now give the floor to Janique Caron.
[English]
Janique Caron, Assistant Comptroller General, Financial Management Sector, Treasury Board of Canada Secretariat: Thank you, chair and members of the committee. I am pleased to be here today. I would like to take this opportunity to discuss the Public Accounts of Canada for 2017-18. I am joined by my colleague from the Treasury Board of Canada Secretariat, Diane Peressini, executive director of government accounting policy and reporting.
[Translation]
Mr. Chair, the public accounts include the audited consolidated financial statements for the 2017-18 fiscal year, which ended March 31, 2018, and other unaudited financial information. They are part of a series of reports to Parliament and Canadians prepared by the Receiver General’s office on behalf of the government.
[English]
They outline how the government spent the money it received from Parliament and how it produced revenues.
The public accounts are comprised of three volumes. We see them here. Volume I contains the audited consolidated financial statements of the Government of Canada and the notes to the financial statements, the financial statement discussion and analysis and the independent audit report of the Auditor General. For the first time this year, the observations of the Auditor General are no longer presented in Volume I. They now form part of the Commentary on the 2017-2018 Financial Audits, which was tabled in Parliament on October 19, 2018.
Volume II presents the financial operations of the government segregated by ministry. Specifically, it presents the sources of spending authorities, the disposition of funds spent during the year and the lapsed funds.
[Translation]
Volume III presents supplementary information and analyses, such as information required by the Financial Administration Act or what was requested by Parliament in prior years.
[English]
Mr. Chair, I’m happy to say that this is the twentieth consecutive year in which the Auditor General has issued an unmodified or clean opinion for these financial statements. This is a testament to the continuing high quality and accuracy of Canada’s system of financial reporting and the professionalism of the people involved.
[Translation]
It also demonstrates the government’s commitment to the responsible financial management and oversight of taxpayer dollars.
[English]
For the 2017-18 fiscal year, the public accounts show an annual deficit of $19 billion, which was almost the same as last year, as well as an accumulated deficit of $671.3 billion.
The ratio of accumulated deficit to GDP is 31.3 per cent, which is slightly lower than the 32 per cent we saw in the previous fiscal year.
[Translation]
It is worth noting that this year, the government revised its methodology for choosing discount rates to promote consistency in measuring items in the financial statements.
[English]
Discount rates are used to estimate the present value of cash flows that will occur in the future. The revised discount rate was used for a number of liabilities and assets. For the unfunded pension obligations, the use of this new methodology represents a fundamental change in the government’s discounting approach. As a result, it was considered a change in accounting policy and was applied retroactively.
Mr. Chair, these financial statements are the result of a great deal of effort made by many people. They are prepared under the joint direction of the Minister of Finance, the president of the Treasury Board, and the Receiver General for Canada.
[Translation]
I would like to express my gratitude to the Government of Canada’s financial management community for their excellent work in assisting with the preparation of these statements.
[English]
I would also like to express my thanks to the Office of the Auditor General for their ongoing cooperation and help. They put in, as Mr. DeJong mentioned, many hours and collaborated closely with my office to achieve this twentieth clean opinion.
I would like to express my appreciation to my team working on the public accounts this year; it was an exceptional year. We very much appreciate their dedication professionalism and integrity.
Mr. Chair, we would be pleased to answer any questions the committee may have.
The Chair: Thank you, Ms. Caron.
Before we go to questions, I would like to ask Senator Andreychuk and Senator Neufeld to introduce themselves.
Senator Andreychuk: Raynell Andreychuk from Saskatchewan.
Senator Neufeld: Richard Neufeld from British Columbia.
Senator Marshall: My first question relates to the Trans Mountain pipeline, and there’s very little information. I looked and I was expecting to see a note in the financial statements of the government, but there’s not much information there. I’ve been putting some time in trying to find out what’s happening with regard to the Trans Mountain Corporation, and it seems like the information is in several places. There’s some information in the development corporation. I think there is a guarantee issued through Export Development Canada.
My question is for both the comptroller’s office and the Auditor General’s office. While I realize it’s a subsequent event, is there any additional information that you can provide on that investment? Can you also provide an indication as to how it will be presented in next year’s financial statements?
Karen Hogan, Principal, Office of the Auditor General of Canada: The first set of audited financial statements for the Trans Mountain pipeline will be issued after December 31. The first year-end is December 31, 2018. Our audit teams are beginning the work right now, so that will be the recording of the acquisition of the assets for the Trans Mountain pipeline.
The pipeline is a wholly owned subsidiary of Canada Development Investment Corporation, so it will be consolidated into that Crown corporation, and that Crown corporation will then get consolidated into the Government of Canada’s financial statements at March 31, 2019.
Senator Marshall: Why would the transactions relating to Trans Mountain show up in two Crown corporations? The guarantee was issued through Export Development Canada, but then they also have the Trans Mountain Corporation. So it seems like the government is splitting up the transactions; some are going through one Crown corporation and some are going through another Crown corporation.
Ms. Hogan: I can answer part of that and I think Madam Caron can answer the rest.
The acquisition occurred through a Crown corporation, the Trans Mountain Corporation, so that’s where the assets will be. And the financing, the decision was made to put that through the Canada Account and that’s managed by Export Development Canada.
I don’t know if Madam Caron would like to add something.
Senator Marshall: I’m looking for the information, and I find that this is something that happens quite often. I’m trying to find the information in the accounts and in financial statements, but it’s almost like you’re searching for the information. I’ve got those two Crown corporations. I don’t know if there’s something somewhere else. Perhaps you can talk about that.
Ms. Caron: Part of perhaps the difficulty of finding the information now is that it’s in this fiscal year. So as they’re going to prepare their financial statements and close on December 31, CDEV will provide a bit more information. And the Canada Account is on an April to March fiscal year-end, I believe.
Diane Peressini, Executive Director, Government Accounting Policy & Reporting, Office of the Comptroller General, Treasury Board of Canada Secretariat: The Canada Account does an annual account at March 31. But Export Development Canada has a December —
Ms. Caron: So more information would be available as these years close and as the financial statements are disclosed.
Ms. Peressini: There are also quarterly financial reports that would start picking up some of the transactions as they happen.
Senator Marshall: So I would have to check for those.
In the financial statements of the government, it says these will be reflected in the 2019 financials; so it will show up as an investment on the government’s financial statements?
Ms. Peressini: That’s because of the accounting for an apprised Crown corporation. So effectively, we don’t bring them in on a line-by-line basis. We have an investment in CDEV, which is the investment piece, and any profits or losses are picked up through our annual results. So it’s not the direct investment in the pipeline that shows up.
Senator Marshall: I know that you would have to look at the value of the asset next year. If there has to be a writedown of that asset, would that flow through the government’s financial statements?
Ms. Caron: Ultimately because it will be consolidated, yes.
Senator Marshall: It will increase the deficit by the amount of the writedown. Okay. That was my question.
With regard to the Reserve Force Pension Plan, why is it so difficult to resolve the issues there? What’s the problem there? It seems like it has been going on for a number of years. I’ve seen it previously and it’s still there as an issue. What is the problem? It seems like that’s a problem that stands alone. It seems like everything else is okay, but the Reserve Force Pension Plan, there’s a big issue with it. Could one of you please explain that?
Ms. Hogan: The issue over the past few years has been that the Reserve Force has not been able to provide documentation to support the contributions or the amounts owing to Reserve Force members. Without proof of what they’ve earned, it’s hard to establish what you owe them. So we’ve been working with them in order to improve their documentation and come up with information to better estimate what the liability might be.
Senator Marshall: But there must have been original documentation. Was it destroyed?
Ms. Hogan: I think it’s so decentralized because of how spread out across the country the Reserve Force is, and a lot of it was paper documentation that maybe didn’t move from one base to another base. And so there is some issue with that, the fact that it is so long into the past and most of it is missing.
Senator Marshall: Is that something that will be resolved soon?
Ms. Caron: DND is working to rebuild the information essentially, to send copies of government IDs, to confirm the information and to send confirmation. They will prepare those confirmation letters, and it looks like that’s maybe the step to provide the information that can be audited down the road, so there’s hope.
Senator Marshall: Do you think that will be resolved next year, or will we see it again next year?
Ms. Caron: Definitely they’re working toward resolving it next year.
Senator Marshall: Thank you.
You issued the audit report on the Canada Development Investment Corporation. There was some commentary on the Canada Hibernia Holding Corporation management. I represent Newfoundland and Labrador. For the most part the commentary was positive, but you identified one weakness: The corporation did not have sufficient systems and practices to ensure that all of its contractual obligations could be readily identified and monitored. Could somebody explain what that means?
Mr. DeJong: I assume you’re referring to the special examination report of CDEV.
Senator Marshall: Yes, that was just released.
Mr. DeJong: I would have to get back to you on that one in terms of the specifics rather than try to answer that.
Senator Marshall: Could you give me the details? I am interested in the contractual obligations. Is that one or two contractual obligations, or is there a multitude within the contracts? I would appreciate some commentary on that.
Do I have time, or do I go on second round?
The Chair: Second round, Senator Marshall.
Senator Pratte: I’ll try to be as brief as possible, so Senator Marshall can have more time. It’s very interesting.
I have a brief question, and I hope the answers will be clear enough for an ordinary person like me to understand. I’m looking at the problem that apparently was solved with discount rates for pensions. I’m wondering whether you could elaborate on what the problem was, in your view, because you had identified the problem a couple of years ago. What was the problem? Why did they estimate discount rates that were higher than you thought they should be?
Mr. DeJong: I’ll answer the quick part and then defer to Karen who was implicated in finding a solution with the Comptroller General.
Within the standards that are allowed under the public sector, there is a fair bit of discretion. What they were doing in the past was allowed under the standards, but we concluded, essentially, it was the upper maximum level that you could justify under those standards.
The other thing is they tended to be based more on historical rates rather than what the rate really was as of the end of the period. Using rates that were observable in the marketplace seemed to be a bit more objective than using something that was more based on history.
In terms of the specifics, I’ll ask Karen to finish up.
Ms. Hogan: I don’t have much to add other than that higher discount rates usually result in lower liability. It’s always a concern when you audit a management estimate. You want to challenge it. As Terry said, we just felt the rate was at the higher end of an acceptable range — acceptable, verging on a little too high. You want to look at market rates at the reporting date, so you always want to take it back to March 31, look at what is going on and at industry practice. The methodology used now is much more in line with all of those, and we believe it results in a better estimate of the liability.
Senator Pratte: Do you have any indication that the reason for their choice of discount rates was to underestimate the liabilities, or did they have simply good reasons that you disagreed with?
Ms. Hogan: Historically, the way of determining it made sense, but as the market changed, it was time to revisit it. That’s what you do every reporting period. Management needs to look at their significant estimates and see if it’s time to revise the methodology used to come up with them. It was just time to get to the discount rates.
Senator Pratte: Thank you.
Senator Eaton: I want to talk to you about defence. You were talking about different National Defence things in your remarks, Mr. DeJong. Apparently, National Defence has problems implementing its long-term plan to address challenges in valuing and recording its inventory, but the implementation will require time and effort. What is the problem? It has been going on for years. What is it? Is it mechanical things? Is it operational?
Mr. DeJong: Essentially, it’s the accuracy of the inventory records in terms of the quantities and prices of the inventory that they have. Many of those items are very old, so some of these issues —
Senator Eaton: So they haven’t written them down, in other words, over the years.
Mr. DeJong: In some cases it is written down. In some cases, it’s the actual accuracy of the original input. There have been many different types of issues.
Senator Eaton: When they bought something in the past, they just didn’t say, “Okay, there are 10 bullets at X amount of dollars”?
Mr. DeJong: In some cases, the price might have been incorrectly put into the system. In some cases, the incorrect quantity might have been put into the system. There is a number of causes.
In terms of National Defence’s response, approximately two years ago, they put forward a plan that, in our view, was actually quite comprehensive. It’s going to take a long time to sort this one out, so I don’t expect that our comments about National Defence inventory will be going away anytime soon. However, they are certainly delivering on what they promised to achieve in year one and year two of that plan. Ammunition in particular, which was one of the areas where we had a lot of errors in the past, is significantly more accurate than it was in the past.
We are encouraged by the progress, but we’re realistic about the size of the challenge.
Senator Eaton: In the Auditor General’s report on fighter jets released yesterday, you found that adding used fighters to an already aging fleet doesn’t really help Canada’s combat capability, that Canada is potentially not able to meet its commitments to both NORAD and NATO at the same time, and that the interim fighter jet purchase would not change that. Can you expand a bit on that?
Mr. DeJong: Regarding that particular audit, those questions would have to be directed to the audit team responsible.
Senator Eaton: In other words, you don’t want to answer them. I’m sure you know exactly what it’s about.
Mr. DeJong: Personally, no, actually I don’t know. We are organized such that I’m more on the financial audit side and have limited involvement in the performance audit practice. I’m reluctant to put words in their mouth that might not be accurate.
Senator Eaton: I’ll go to another question. We have trouble getting answers from DND, so I was hoping you could enlighten us somewhat.
Mr. DeJong: It does raise an interesting question that probably illustrates the difficulties of the inventory question. When you buy fighter jets, that situation often comes with all the spare parts and all the other things that come along with it. It’s not just adding in one fighter jet; it’s adding in all of those parts, deciding what those —
Senator Eaton: And it’s a used fighter jet.
Mr. DeJong: And used parts, determining the appropriate valuation to put on all of those things.
It is a complicated process, but I am not party to the performance audit.
Senator Eaton: In your presentation, every year there is a difference of several billions of dollars between the amounts presented in the budget and those in the Main Estimates. This year, the difference amounted to $62.5 billion. Is that an aggregate amount, or is it just that there is a difference of $62.5 billion this year?
Mr. DeJong: It’s more of a continuing problem. That’s the amount from this year. But I think Renée —
Senator Eaton: So that’s the amount this year? It’s not added up from other years?
Renée Pichard, Principal, Office of the Auditor General of Canada: No, it’s an aggregate amount presented each year. This is the value as of the date of the Main Estimates.
[Translation]
Senator Moncion: I would like to continue with the answer you just gave to Senator Eaton and talk about the $62.5 billion. I imagine you know why budgets are prepared in this way. Normally, the budget is prepared according to the needs for the coming year and should not result in additional expenditures to the tune of $62.5 billion. I’m not sure whether it’s done deliberately or whether this practice has been around forever and is being perpetuated.
Ms. Pichard: The challenge is to present those amounts in the supplementary estimates. Most of the $62 billion is related to two items, which are listed in the report: employment insurance benefits and the child tax credit. Those two amounts, for no apparent reason, are presented as a difference. However, they are statutory expenditures. Those amounts were pre-approved under previous legislation.
To improve the clarity of the supplementary estimates, we believe those amounts should be presented based on their description in the statutory expenditures category. The idea is to improve the clarity of the information presented in the supplementary estimates.
Senator Moncion: Why aren’t they?
Ms. Caron: We welcome the Auditor General’s suggestion on that. The Main Estimates allow parliamentarians to vote on the parliamentary appropriations to be adopted. Since statutory appropriations are not subject to approval on an annual basis, the focus is on the parliamentary appropriations to be adopted.
Information about the child tax credit and employment insurance benefits is also included in other sources. We are prepared to consider the possibility of consolidating information more effectively.
Senator Moncion: In both your reports, you talk about an accumulated deficit of $671.3 billion. Mr. DeJong is talking about a $759 billion deficit. Which one is correct?
Ms. Caron: Both.
Senator Moncion: I prefer the $671 billion figure.
Ms. Caron: The financial statements show two amounts. The $671 billion figure represents the final position, the equivalent of the government’s bottom line. It is the difference between all of the liabilities and the financial and tangible assets. The amount that Mr. DeJong mentioned excludes the tangible assets. It shows only the total of the liabilities and the financial assets.
Senator Moncion: When we look at the documents produced by the Parliamentary Budget Officer, we see that the deficit is much higher. If we take away the assets, we get an amount of about $700 billion. You are talking about other assets. I was looking at this information last week. The current combined deficit of the other entities, including CMHC, comes to $1,071 billion. Once you take away the assets, you get to your figure, more or less.
Ms. Caron: I do not know whether he is talking about the liabilities. The total liabilities are around $1,157 billion. When you consider the financial assets of approximately $400 billion, which are valid and included in the balance sheet, you get to a net debt of $758 billion. You also have to consider tangible assets, associated with providing services, which come to $671 billion. That reflects all the Crown corporations put together. So that’s the position as of March 31.
I am not familiar with the Parliamentary Budget Officer’s document, but I could follow up on it.
Senator Moncion: Fine. Thank you.
Senator Forest: In the French version of Mr. DeJong’s document, it mentions errors in pay in the order of $369 billion in underpayments and $246 billion in overpayments. I imagine that has to be millions, not billions, of dollars. At least, I hope so.
Ms. Hogan: Yes, it is millions of dollars.
Senator Forest: My question is about pension plans. You say that the change increases the liabilities by $19.6 billion over previous estimates, so that the government can honour its promises. If we stopped capitalizing the pension funds today, with the deficit increased to $19.6 billion, am I to understand that we could, as of today, honour the promises made to employees under these pension plans?
Ms. Hogan: With pension plans, the accounting terminology is not the same.
There is a difference between an estimate of pension funds in accounting terms and an estimate on a funding basis.
Senator Forest: Right, the actuarial valuation.
Ms. Hogan: Exactly. What you see here is the actuarial valuation for the financial statements. It has no impact on whether the pension funds have enough money to pay all the benefits to their members.
[English]
You have to know there is a difference between a funding valuation or the solvency of the pension plan versus the accounting valuation. This changed the accounting valuation, so the estimate, as of March 31, of what you believe all the future cash flows will be in to today’s dollars. It didn’t impact whether or not there is enough money or how the payments will be paid. It’s an accounting estimate for financial statement purposes.
[Translation]
Senator Forest: When we say honouring the promises in terms of pensions, it means that, with what we would capitalize from the $19.6 billion, we would be able to honour the promises as of today. If the government shut its doors today, we could still honour all the promises by calculating that liability.
Ms. Hogan: Today? It is actually March 31, 2018.
Senator Forest: There is little chance that the government is going to shut its doors. However we are still capitalizing the $19.6 billion in our accounts.
Ms. Caron: You have to estimate the liabilities that are owed. These are the unfunded liabilities, the ones affecting pensions in the year 2000 and previously. As of 2000, the pension fund has been funded. Assets are set aside to honour the amounts to be paid. In that estimate, the discount rate used in the accounting has changed. That does not change the members’ contributions or their rights to pensions. It does not change the pension plan or the amounts that will be paid out.
Senator Forest: The impact is on the liabilities.
Ms. Caron: From an accounting standpoint, yes.
Senator Forest: We did not capitalize before the year 2000. We considered pension plans as current expenditures.
Ms. Caron: For the amount that was not funded, we did not set assets aside separately. They were run by a council.
Senator Forest: A fund manager.
Ms. Caron: A fund manager, exactly. For the year 2000 and the previous years, the funds to pay those pensions really came from the Consolidated Revenue Fund.
Senator Forest: That was the right thing to do, I feel.
[English]
Senator M. Deacon: Thank you all for being here this evening. As we go through the report, I am interested in looking at the process, the parliamentary approval for government spending. We know that it has to be concise and precise. It’s in section 17 onwards in this report.
From your perspective, can we do better in how we approve, authorize and spend following the annual cycle that we undertake?
Of course, there have been recent changes and improvements made to the annual estimate process, but I am wondering about ways you think that we can improve the parliamentary oversight of government spending.
Ms. Pichard: We noted the Main Estimates reform. We think that they have made significant improvement with the timing of the release of the Main Estimates so they could have a better alignment of the Main Estimates with the budgeted amount.
They created a new mechanism through what is called vote 40 — I don’t know if you’re familiar with that — which is an interim measure they put in place so that the Main Estimates could reflect all of the budgeted amounts.
We haven’t looked beyond what other improvements could be made. We noted that improvement. It is something we will be monitoring, but at this point we haven’t really looked down into the details of those mechanics to validate if there could be further improvement. But that’s definitely an area of focus.
Ms. Hogan: We also noted that the Standing Committee on Government Operations and Estimates had made recommendations that over a number of years parliamentarians should be looking at all the statutory expenditures to ensure that they’re still relevant. We noted that we believe that’s also something that should be taking place because statutory expenditures are not voted on on an annual basis. You want to make sure that they’re still relevant to government operations and the needs of Canadians.
Senator M. Deacon: Thank you.
Senator Andreychuk: My question is for the Auditor General’s office. Again, looking at the Phoenix, you make comments and statements about that, but you go on to say that there are significant projects with information technology components, as opposed to full-blown projects like Phoenix.
They look like they’ve been in progress. They’re not new projects, if I’m correct. Have they run into any problems the likes of Phoenix but on a smaller scale?
I looked at your Exhibit 6, which refers to “commonly used practices in governance and management of information technology projects.” So I read them, and even in my simple way of looking at them, they’re all self-evident. You get the approvals and build a base for it. You have reporting and information going up to managers the first time you have a problem. We’ve already heard the Auditor General say that the people up top didn’t know or weren’t told in a timely fashion, et cetera.
My first question is about the other projects. Did you find the same kind of similarities and that’s why you put in Exhibit 6? Is this the first time you’ve put Exhibit 6 in in any form? If it is, are you going to follow up on that to see if this governance, the business case and the organizational capacity apply to all of Phoenix and IT?
Mr. DeJong: I’ll answer briefly and then pass it over to Renée, who is more involved in this particular area.
These are ongoing projects. We are not aware of problems in these projects of anything of the scale of Phoenix. I think they have ordinary challenges, but I think, from looking at what happened with Phoenix and the lessons of some of the basic controls that might be self-evident that weren’t there, I think this is more of an encouragement to the government to monitor and track those same types of controls on these other projects to make sure that there isn’t another one like Phoenix.
Ms. Pichard: It’s true, it’s the first year we do this. In the course of our financial audit, we need to get a basic understanding of systems and processes that are impacting financial information. Our knowledge of those systems is very basic most of the time, so we’re not able to opine at this point on whether these projects are in good shape or not. But what we wanted to do is at least bring awareness to parliamentarians about the breadth and the scope of those projects in the federal government so that you have information to be able to ask questions or follow up.
Yes, it’s going to be a go-forward practice of our office to monitor those types of projects, and if we see value in this going forward, we can continue to report on it, definitely. But the purpose was not to highlight issues. As I said, we haven’t done enough work and the purpose of our financial audit is not to get in these projects, but we do note them as part of our financial audit.
Senator Andreychuk: So we can look forward to comments again on this Exhibit 6? Hopefully.
Ms. Pichard: Definitely, we will look into that, yes.
Senator Marshall: Where do I go to find the total debt of not just what I call central government but of all the Crown corporations, too? Because the Borrowing Authority Act that was passed I think last year has a limit on the amount that the government can borrow, but included in there is the debt of the Crown corporations. The limit right now is just over $1 trillion. For someone who is interested in tracking it, where do we go to find that figure?
Ms. Caron: In the financial statements, as you can appreciate, we have the consolidated Crown corporations, but for the enterprise Crown corporations, which are very businesslike, we have their net balance. We don’t have their total liabilities and their total assets.
Senator Marshall: But I wanted to track it so I could look at it in comparison to what’s authorized under the Borrowing Authority Act.
Ms. Peressini: If you look at Table 9.5, which is on page 274, you have the borrowings by enterprise Crown corporations, but they’re government enterprises.
Senator Marshall: What volume is that?
Ms. Peressini: Volume I.
Senator Marshall: What’s the amount there now?
Ms. Peressini: It’s $291 billion.
Senator Marshall: That’s for the Crowns, and what would you do, take that and add that to the 671?
Ms. Peressini: To what’s on our financial statements.
Senator Marshall: That’s how it’s done?
Ms. Peressini: Yes.
Senator Marshall: That’s great. Thanks very much for that.
Did you do follow-up work on the Phoenix system? You issued a previous report on it. Did you do additional work so that you could give us some indication on what you think is the long-term prognosis? Is it improving or is it getting worse?
Mr. DeJong: Our office has done two performance audits that have both been reported. Our work primarily is about doing sufficient testing to make sure that we can give an opinion on the financial statements. In our observations last year, we did give a summary of what we believed the error rates were. We did the similar work again this year so that we could do an update on that. That was work that we needed to do to support our opinion, but at the same time we also believed that it was a useful snapshot to have the observations this year, give pretty much the same type of numbers as we had one year before. Using the terminology from the observations, I think it would be categorized as not better.
Senator Marshall: Not better. I thought you weren’t going to take a position and I was going to say there are multiple pages in your observation. It’s not getting better.
Ms. Hogan: I can tell you the results. Many of the graphs that appeared in the Phoenix pay problem chapter were as a result of the detailed audit work we did to support the 2017 public accounts. That’s why here we were able to reproduce some of the graphs and charts you would have seen in the Phoenix pay problem chapter, because we used our sample from our 2018 detailed audit work. It does look very similar to Phoenix pay problems because we tried to give you that comparison year over year.
Senator Marshall: Because you devoted so many pages in the observations, it left the impression that it wasn’t getting better. That’s why I asked that question.
Ms. Hogan: We found 62 per cent of people in our sample had errors in their pay this year, and that was the same percentage as last year.
Ms. Caron: If I may add, one of the key changes that Public Services and Procurement Canada implemented toward the end of last fiscal year was to implement a pod approach to the pay, and that was probably implemented too late to show results in the audit. So we’re hopeful that the results in 2018-19 will show an improvement.
Senator Marshall: Is there enough work done on the pods? Because when we did our review they only had one pod implemented.
Ms. Caron: Right. There were three departments, I think.
Senator Marshall: So are there not pods implemented now for you to get the feeling that it’s improving, or is it too early?
Ms. Caron: Signals are that it’s improving. The pods are in 24 departments, and the plan is to roll out the pods gradually towards the middle of 2019. But the signal is that it is improving the number of tickets. We will see whether this will translate into a greater level of accuracy in terms of pay. In terms of reducing the tickets and the queue, it is showing improvements.
Senator Marshall: For your commentary on the statutory — you had mentioned this before. I looked on the Government of Canada website, and they list all the statutory items. I was surprised about how many there are when they’re itemized; there are quite a few.
I would like to hear from both of you. What would you suggest we do? What kind of review should we be doing on statutory items? Because it’s more than 50 per cent of expenditures now. As the Finance Committee, what should we be doing to review those?
Ms. Caron: Take a look at them, analyze trends as departments to perhaps provide an analysis of the trends. Perhaps look at results as well, whether these are achieving the results that are intended.
Senator Marshall: Okay.
Ms. Hogan: In our commentary report, I’ll refer you to the top of page 20 where we comment on the recommendation that the Standing Committee on Government Operations and Estimates made. We believe that is a good place to start to cyclically review all statutory expenditures. As you say, there’s a long list. You’re not going to tackle them all in one year.
Senator Marshall: But it’s something that we, as the Finance Committee could do.
My last question is with respect to looking for financial information in government records. I must say that I find it very difficult when I’m looking for information, and Trans Mountain is just an example. Is there somebody we can have appear before our committee to give us an overview of where we can go for financial information? I mean, for the total debt, that was great, and I actually do look at the public accounts but that’s really far in. Do you have any suggestions as to whether we should be getting somebody in to explain how the public accounts are laid out? Who would do that? As the Finance Committee, what would you suggest to hone our skills with regard to government financial information?
Ms. Hogan: Well, I can tell you that both our office and the Comptroller General’s office have done that for the last three years annually with the Public Accounts Committee in an in camera meeting before we have the public hearing. The Comptroller General’s office explains the three volumes, and we provide advice on what to look at, where to read and where to ask questions. I can speak on our behalf and say we would be willing to help you.
Ms. Caron: If you want a deeper dive —
Senator Marshall: Mr. Chair, could the steering committee consider that? I would be very interested in that, and I’m sure some of my colleagues would as well.
The Chair: I can assure you, Senator Marshall, that it will be brought to the steering committee.
Senator Marshall: And looked upon favourably. Thank you.
[Translation]
Senator Forest: I have a quick and easy question. What do you think about the way in which the government went about announcing the write-off of a debt as big as Chrysler’s? They managed to slip it in between two lines. What do you think about that way of going about it?
Ms. Hogan: In accounting terms, the government decided that it was never going to recover the loan in 2009-10, when the loan was made. It was factored into the public accounts. The expenditure was accounted for in 2010, though the government did not think it would be able to recover the money from the loan. In 2018, it was written off in order to remove the loan from the books. So, for us, it has been properly accounted for between 2010 and today.
Senator Forest: In terms of the perception, could there not have been a more transparent way to indicate that the non-recovery and the write-off had been anticipated?
Ms. Hogan: The process appeared in the financial statements. As to transparency and communication, perhaps Ms. Caron could give you an answer.
Ms. Caron: The information was disclosed in the financial statements. I think you have guests appearing later who could testify to that.
Senator Forest: Yes, because I have other questions.
Ms. Caron: I’m sure you do. However, the Canada Account contained information indicating that the loan was issued, but that there was also a provision. In the public accounts, the information is consolidated. One line addresses provisions against loans. The assessment is conducted every year. When a loan is issued, the organization determines whether it will be able to recover the loan. Sometimes, the organization still wants to retain the power to recover the money loaned. Therefore, the very transparent disclosure of the fact that there’s a provision in other situations, for example, may undermine the government’s power to recover the money. However, in this case, in the Government of Canada’s accounts, a note stated that an amount was provided.
Senator Forest: The provision was labelled. It wasn’t consolidated into a more comprehensive provision for bad debts. It was labelled as part of that loan.
Ms. Caron: It was indeed disclosed in the financial statements.
Senator Forest: Okay. Thank you.
The Chair: Thank you. I want to thank the witnesses from the Office of the Auditor General of Canada and the Treasury Board of Canada Secretariat.
[English]
Thank you very much. You certainly brought a lot of information to our committee, and you have also given us more clarity on the transactions.
For the second part of our meeting this evening, we have invited organizations that may or may not have been involved in the financial assistance to Chrysler Canada and GM Canada during the worldwide economic downturn in 2008. It is not clear. We know that an important portion of the loans has been written off during the fiscal year 2017-18 and we would like to shed clarity on this particular issue.
[Translation]
This evening, we’re joined by Paul Halucha, Senior Assistant Deputy Minister, Industry Sector.
[English]
And Mr. Charles Vincent, Director General, Automotive, Transportation and Digital Technology Branch.
From Export Development Canada, we have Mr. David Bhamjee, Vice-President, Corporate Communications and Public Affairs.
From Global Affairs, a real regular, we have Mr. Arun Thangaraj, who is Assistant Deputy Minister and Chief Financial Officer, Corporate Planning, Finance and Information Technology; and Ms. Chris Moran, Director General, Trade Portfolio Strategy and Coordination.
Finally, from the Department of Finance, we have Soren Halverson, Associate Assistant Deputy Minister, Economic Development and Corporate Finance.
To you all, thank you for accepting our invitation and recognizing that we want to bring clarity on particular issues linked directly to your responsibilities in your departments.
That said, I have been informed that the Department of Innovation, Finance Canada and Export Development Canada do not have any comments or opening remarks. Therefore, for the record, we will ask Mr. Thangaraj to make his opening remarks, and we will then proceed with questions to all of you.
Arun Thangaraj, Assistant Deputy Minister and Chief Financial Officer, Corporate Planning, Finance and Information Technology, Global Affairs Canada: Thank you, Mr. Chair. It’s always a pleasure to be here. There is one statement. It’s a short straw, short guy kind of thing, but we thought it was a lot more efficient if there was just one opening statement. We did collaborate on these remarks, so it does reflect the position of all departments.
[Translation]
In 2008, the automotive industry in Canada and the United States experienced major financial difficulties. General Motors and Chrysler Canada needed financial assistance to restructure their operations. The Government of Canada and the Government of Ontario, in addition to the governments of the United States, agreed to provide the financial assistance.
[English]
The financial assistance extended to Chrysler Canada included a loan for US$1.16 billion made under the Canada Account. This loan was authorized by the Minister of International Trade with the concurrence of the Minister of Finance in April of 2009. The ministerial authorization for this loan included a provision for a possible write-off. The Canada Account is managed by Export Development Canada on behalf of the Government of Canada. The Canada Account allows the government to provide support to exporters when such support would otherwise exceed the financial or risk capacity of EDC on its own corporate account.
While the Canada Account is administered by EDC, the source for funds for transactions undertaken under the Canada Account is the Consolidated Revenue Fund. From an accounting perspective, Global Affairs Canada supports Export Development Canada with the consolidated reporting for the Government of Canada given the fact that EDC reports to the Minister of International Trade.
[Translation]
Chrysler declared bankruptcy in 2009. When it was restructured, the company was split into two separate entities. These entities were the new Chrysler, which remains in operation and was purchased by Fiat, and old Chrysler, which discontinued its operations. In 2009, when the loan was issued to old Chrysler, there was no expectation of recovery. This was reflected in the accounting treatment of the loan and the public statements made at the time. It was reconfirmed in a report prepared by Industry Canada in 2014. Pursuant to the Debt Write-off Regulations, the write-off of the loan issued to old Chrysler was considered only once the bankruptcy proceedings had been completed.
On March 1, 2016, EDC received confirmation that all the bankruptcy proceedings related to old Chrysler had been completed and that old Chrysler’s liquidation trust had been dissolved, in addition to another repayment expected from old Chrysler. Once the dissolution of old Chrysler’s liquidation trust had been confirmed, EDC took the necessary administrative measures to write off the loans. The write-off is an accounting adjustment that removes the loan from the Government of Canada’s books. These measures were taken pursuant to the Debt Write-off Regulations.
[English]
The expenses associated with extending this loan were recorded by the government in the 2009-10 fiscal year, and there were no incremental expenses associated with the accounting adjustments made in March 2018.
Thank you, Mr. Chairman. My colleagues and I will be pleased to answer any questions you may have.
The Chair: Thank you. We will go to questions now.
[Translation]
Senator Forest: What were the terms of the loan granted to old Chrysler, and why was the money loaned to old Chrysler when it was known from the outset that the money wouldn’t be repaid? I don’t understand the logic. Were there any terms? Was there any interest? Were there any guarantees related to the loan?
David Bhamjee, Vice-President, Corporate Communications and Public Affairs, Export Development Canada: Thank you for the question. I’ll answer in English.
[English]
As you know, the loan was issued during the financial crisis. As my colleague indicated, it was a loan done by both the Government of Ontario and the Government of Canada, similar to actions that were taken in the United States. While I won’t speak for the policy-makers at the time, given the financial situation and the material impact on employment, the decision was made to issue a loan with the full understanding that there was a strong likelihood the loan would not be repaid; hence, the provisioning or allowance for the loan almost immediately after it had been issued.
That’s probably about the extent of my knowledge on that, just given the time that has passed, but I think there was a full understanding going in that this would likely wind up in the situation that it is in.
[Translation]
Senator Forest: When the loan was issued, I imagine that some documents were attached to the loan, given its size. Was there any interest? Were there any guarantees related to the loan, or was it a blank cheque?
[English]
Mr. Bhamjee: The loan was issued and interest did accrue on the loan. Through the accounting and the public accounts, both the principal amount and the allowance for it, as well as the interest, were accounted for through the process. So it was structured not as a grant or a giveaway, as you suggest.
In terms of the possibility for repayment or recouping, as my colleague indicated, once Chrysler entered into bankruptcy protection, a trust was set up such that the trustees could determine whether any of the remains assets of the old Chrysler could be liquidated to allow for some recouping of the amount. It was only when it was determined that was not possible toward early 2016 that the liquidation trust was wound down. After that, the process began to declare the loan as a write-off and have that be presented in the public accounts.
[Translation]
Senator Forest: The loan was issued when old Chrysler was already being handled pursuant to the Bankruptcy and Insolvency Act. Old Chrysler wasn’t placed under the protection of the act after receiving the loan.
[English]
Mr. Bhamjee: My understanding is that the loan was largely intended to be similar to the United States to allow Chrysler to continue operations during the period it was under protection — to allow, then, for a smooth exit.
Charles Vincent, Director General, Automotive, Transportation and Digital Technology Branch, Innovation, Science and Economic Development Canada: Perhaps I can add a few points that might help clarify the situation.
First, it’s important to keep in mind that the loan made to the old Chrysler was part of the larger set of financing provided to Chrysler, both old and new. There were covenants attached to the funding, in particular with the new Chrysler associated with things like capital expenditures, production in Canada, and research and development. In that context, the overall financial package had a series of covenants associated with it.
The funding that was put into the old Chrysler, as I understand it, was designed mostly to ensure the proper wind-down of the old Chrysler through the bankruptcy process.
The other point that is important to understand is that Canada was providing a proportional amount as part of a joint effort with the United States. The amount put into the old Chrysler was the proportional amount of what Canada put in relative with the United States together. That was a joint decision taken between Canada, Ontario and the United States as to what funding was required into the old company in order to manage the organized wind-down of the old company and then into the new company to ensure that the restructuring would give it the best chance of succeeding going forward.
[Translation]
Senator Forest: In fact, it’s a much more comprehensive package. When we try to determine the motivation for allocating a loan of over $2 billion to old Chrysler, in the end, we discover that the goal was a smoother bankruptcy process. What was the positive trade-off?
[English]
Mr. Vincent: As my colleague said, I don’t want to speak for the policymakers or the deal-makers at the time, because I didn’t have direct insight into that at the time. As you said, there are many factors that go into trying to decide what assets stay in an old company and what assets go into the new company to ensure the new company has the best opportunity to succeed going forward. My understanding of the situation at the time was that was the decision made to try and ensure that the old company had the assets in it that were needed for its orderly wind-down and that the new company was then in a position to succeed and meet the covenants that were applied against that part of the financial package.
[Translation]
Senator Forest: In the end, the loan was issued to ensure that old Chrysler could close up shop properly and prepare the way for the new Chrysler to access a financially “clean” space.
[English]
Mr. Vincent: The one aspect of that narrative to which I would add is that the old Chrysler obviously had a series of obligations that had to be met over time: closing down some of the plants at that time and dealing with some of the other assets it had to deal with. There were expenses and other things that would have had to be dealt with in what I would call the organized closing down of the old company.
[Translation]
Senator Forest: Nine years later, in hindsight, when you look at the money invested, it was a significant contribution to the economy, particularly for the automotive sector. Would you make the same financial arrangement again?
[English]
Mr. Vincent: I don’t want to second-guess decisions made at that time. I would highlight that of the $2.9 billion provided to Chrysler at that time, $2.1 billion was recovered, so about 72 to 74 per cent of that funding was recovered. From that standpoint, my guess is that it’s probably a higher percentage than most people were assuming at the time, but I wouldn’t want to try to second guess the decisions made at that time.
[Translation]
Senator Forest: The past must guide our future actions. It may be worthwhile to review this operation.
Senator Moncion: You knew from the outset that the loan would need to be written off your books, so you accounted for it that way. Why didn’t you establish it as a subsidy or a loan? You probably conducted an economic study to review the effects or counter-effects of failing to fund the operation and what this represented in terms of loss. Surely some calculations were carried out somewhere to indicate that the decision wasn’t made lightly. There was the whole issue of public perception, which was probably taken into consideration, since this company wasn’t the only company that had financial issues. There was also the issue of the asset-backed commercial paper. The government didn’t want to get involved in this matter. I wanted to have an idea of the whole project, because when we look at the project on its own, it’s as if Chrysler received a gift.
[English]
Paul Halucha, Senior Assistant Deputy Minister, Industry Sector, Innovation, Science and Economic Development Canada: I’ll take a stab at an answer and then Charles can add to it.
Obviously, the auto sector is a significant component of the manufacturing sector in Ontario. One of the points you made was around small versus large enterprises. I think it’s key to recognize that Chrysler, GM and the other OEMs are anchor firms in ecosystems that have a large multiplier and large number of small companies. So a lot of the supply chain that participates in the production all depend on those large companies being there.
At the time, the two firms accounted for about 55 per cent of the production of cars in Canada, so it would not have been an insignificant impact. We would have lost two of the largest and most important OEMs. They are heavy producers of research and development. As I mentioned, they are anchor companies. We would have seen a bigger impact in terms of the indirect effects. I think that in the department at the time, that was one of the things we were conscious of. It would not have been just those two companies that would have been impacted; this would have affected all of the suppliers in those supply chains.
Those supply chains are also part of the other OEMs. So the economic rationale for them remaining in Ontario to provide parts to Ford, to Toyota, to Honda would also have been undermined. The economic impacts were going to be significantly larger. That was a critical factor that led into the decision to provide support.
As well, it’s easy to forget how quickly things were happening. I was chief of staff to the deputy minister of the department at the time, and he and the associate deputy played a significant role in terms of the policy design and development of the effort. I remember how quickly things were happening in New York, Toronto and around the world. We weren’t only focused on the auto sector at the time, so things with something like the Business Development Bank of Canada, there was a large effort to ensure that they provided liquidity and injected it into the economy as well. It was a full-court press in terms of economic instruments.
You will remember that the federal budget that followed a few months later was a large stimulus budget to provide counter-cyclical financing. As I noted, it was all hands on deck, but certainly a lot of attention was paid to the auto sector because of the critical nature of the sector in the Ontario economy and in the manufacturing base of Canada.
Mr. Vincent: The only other thing I would add to that, as we talked about earlier, this decision was taken both in a global and a North American context. And as Paul said, there was a real risk of these plants closing if they weren’t supported, even more so if you consider the context if the Americans decided to support their industry and there were restructuring decisions made around what plants to keep open, what plants to close. There wouldn’t have been anybody at the table protecting Canadian interests and the interests of Canadian plants. From that standpoint, it was a critical element of ensuring that Canada was also at the table, playing its proportional share in ensuring that Canadian interests were being taken care of.
Senator Moncion: Because it was made as a loan, public perception is that we are going to recover this loan or at some point will be possibilities to recover. There was no possibility here that the recovery would happen. So why wasn’t it outright done that way? Why didn’t the public know about this? It is not an unusual way of doing business because I understand why it was done this way, but because we are so keen on public perception, where did that factor in here?
Mr. Bhamjee: I’ll start and then maybe others can jump in. Not knowing fully the decision to use Export Development Canada and the Canada Account versus other options, once the decision was made to use the Canada Account, it couldn’t be structured any other way other than a loan.
Senator Moncion: Okay.
Mr. Bhamjee: EDC doesn’t have the power to be able to provide grants. There wasn’t the opportunity through the Canada Account to do more of an equity-based investment; it had to be a general loan. Therefore, it had to be accounted as such with the appropriate positioning in terms of an allowance being made, interest being charged, et cetera.
Whether other vehicles were available to the Government of Canada, I’m not certain what the decision was at that time. I would argue that often in the case of EDC, there is a bit of an expediency argument because it can move quickly to be able to do that. As my colleagues indicated, given the circumstances at the time, there was a need for governments on both sides of the border to act quickly.
Soren Halverson, Associate Assistant Deputy Minister, Economic Development and Corporate Finance Branch, Department of Finance Canada: I have two comments. The first is on the public expectations point.
I think at the time, the government of the day was pretty clear in communicating expectations that it didn’t expect to see back money that was being provided, irrespective of the forum through which that funding was being provided. So I believe there was an attempt on the part of that government to be pretty transparent on that front.
The second piece is that this was not a Canadian deal only. It was a deal that was very much made with a company that had a North American presence, and it had the U.S. Treasury as a significant counterparty. I think if you go and look at the commercial arrangements that were established, there is parallelism in terms of the support provided by the Canadian government, along with the U.S. government, both at the debtor in possession stage and then at the exit financing stage. So you just had parallel lending arrangements. For us to have provided grant funding at that time would have created complexities and inconsistencies in the way the support was delivered.
Senator Moncion: You understand during that financial crisis that other industries had problems and the government didn’t come forward for these industries. It’s just a comment.
Do I have time for two more questions?
The Chair: Yes.
Senator Moncion: How much of this decision was numbered? How much financial impact analysis was done on this decision? I understand the urgency of the situation, but how much of it was numbered, reported?
Mr. Vincent: There was a fair amount of analysis within the Government of Canada, as you can appreciate. A task team was put together across departments. It was spending a fair amount of time trying to understand the broader impact on the overall economy of the possible closure of various plants within Canada.
In addition, a number of experts were hired externally to provide advice and expertise that may not have been readily available. If my memory serves, from the point where the crisis in the automotive industry struck in November and December, through to the actual bankruptcy in May-June, it was very tight time frame. A lot of analysis and expertise was brought to bear in a fairly concise period of time to ensure that was put in place, including questions around pension liabilities and all sorts of different avenues that were required for the restructuring of the organization.
I have seen a number of studies and understand that a fair amount of analysis was done, and I was very impressed, having not been there at the time, with the analysis that I saw afterwards.
Mr. Halucha: I want to note that ISED, which was Industry Canada at the time, has an automotive and transportation industries branch. That’s the branch that Charles leads now, so we have a standing centre of expertise in the department that follows the sector quite closely. We had an existing capability, as we do on sectors like aerospace, defence, marine and on the manufacturing and digital industries, which are part of Charles’ group as well.
I would also note that there were very close links established with the industry, not only the heads of the OEMs, but the major parts producers in Canada and labour representation. We had a Team Canada approach on the recent NAFTA negotiations. We definitely had a Team Canada approach on this one. The companies provided a significant amount of information, including their cash flow projections; so it was a very rigorous process.
Senator Moncion: My last question is about public perception today. We have heard on the news about the writing off of these loans. Very little explanation is provided, but these loans were fully funded as a liability that would be coming. It’s not explained as something that was fully funded from the start or that the loan would be written off at some point. It’s just that something was done eight to 10 years ago, and then you come today and it looks bad with this government because of the little information being provided. Part of the questioning today is because of what is happening today and the information that people don’t have. Is there a way to correct the information that is being provided to the public today?
Mr. Bhamjee: The allowance for the loan was fully reported on from year one. I think that was the question that was just finished off with the previous set of witnesses. From a transparency perspective, there was never any attempt —
Senator Moncion: For an accountant, I agree.
Mr. Bhamjee: I think, as my colleague from Finance said, the government was also clear at the time that this was money that they didn’t expect to see repaid. But from an accounting perspective, it was accounted for the way it should be on an annual basis.
Mr. Halverson: I would point to the report that Industry Canada produced — was it 2015 or 2014? — which provided a full assessment from initiation to closure of the support provided to Chrysler. There was nothing left to say on Chrysler after what was reported in that document.
Perhaps this committee is an opportunity to clarify, for the record, that what we’re looking at is a technical accounting measure and has really no bearing either on the fiscal track or in any calculation of ultimate recoveries of the loan.
Senator Moncion: I understand that. It’s just that that’s not what came out in the newspapers. What we heard from the news people was that it was a write-off of $2.6 billion, but no explanation that accompanies it. If you’re not an accountant and don’t look at the books, then the information being provided to the public is that there was a write-off for $2.6 billion; but that’s not your fault.
Senator Andreychuk: Some of the monies were recoverable. What was the initial loan or grant, whatever you want to call it, and the recoverable? We knew what was given out and we know what is written off, but that’s not the full picture; there is something in between.
If memory serves me correctly, you mentioned labour, the ancillary jobs that were in question and how it affected families, but also called “car dealerships.” It was overwhelming said across Canada that it would be a loss in every community, which is a little different than some of the other subsidies or loans that we have questioned. “Why are you preferring this industry and not this one?” Governments have to justify that.
This one seemed to have more of it. I sat in Saskatchewan saying, “Okay, so this is an Ontario issue,” until I got hit with people coming and saying that it’s going to affect them because the spin-off on automotive goes everywhere.
Can you tell me how much was recovered?
Mr. Vincent: As Soren highlighted, in 2014 the department issued a public accounting of the funding. From that report the total amount dispersed to Chrysler, both old and new, was $2.9 billion. The total amount recovered was $2.1 billion, so about 72 per cent of the funding to Chrysler that was recovered.
Senator Andreychuk: That’s the point that Senator Moncion is making. I didn’t hear that. I heard the write-off. I think the job is maybe not with the public but with the press to get to understand that the write-off is a technical thing and that that isn’t money lost, that some of it was recovered; so there would be the actual loss.
On the basis of transparency, people should know that it wasn’t, because we may find ourselves in a severe recession again and another government, whether it’s this one or the next one, having to grapple with it. That’s not pie in the sky. That will probably happen at some point, and we should have all the facts on the table.
Mr. Bhamjee: So from Export Development Canada’s perspective, maybe I can have as a takeaway, working with my colleagues at Finance and Global Affairs, there is the accounting of Canada Account, which we’re quite comfortable with. The feedback we’re getting is that there are more effective ways than to communicate in a more digestible way for our non-accountants how the business is being conducted and the broader story. That is something we can take back for ourselves.
Senator Andreychuk: Certainly the headline was about the complete write-off.
Second, EDC is going to be reviewed by Parliament or should be reviewed by Parliament. I don’t know if that has started yet. You said it was the only vehicle that could be used. Is there some contemplation of looking at EDC and other vehicles for a more modern take?
Mr. Bhamjee: The EDC legislative review is under way right now. Senator Andreychuk, I think you were on the Senate committee last time that had conducted that review in 2008-09.
One of the areas under the terms of reference that the reviewer has been tasked with does include the Canada Account. It’s quite possible, through that exercise, that the feedback and findings provided to Global Affairs Canada and Finance could, in theory, speak to the use of the Canada Account and whether it’s the most appropriate vehicle or whether others would be best suited.
The review more broadly is to look at the role that EDC plays in supporting Canadian companies but also as part of the broader ecosystem that Canada has available to it, to be able to best position companies to take advantage of trade opportunities around the world. This could well come up.
Chris Moran, Director General, Trade Portfolio Strategy and Coordination, Global Affairs Canada: The legislative review started in the spring, and we anticipate delivering a report by this spring. I would be pleased to provide the clerk with information on the legislative review, timelines, and the terms of reference. It is covering, as David said, the full aspect of the EDC operations and governance, and that includes the Canada Account.
Senator Andreychuk: There are other issues with EDC working overseas and money left on the table and other places needing support, so I think the whole structuring of EDC needs to be looked at. Thank you.
Senator M. Deacon: I feel that previous senators have asked about 95 per cent of my questions, which is great. The one thing that I wonder — and it has been partially addressed in pockets — is whether any lessons have been learned moving forward that haven’t been shared thus far this evening, from your different perspectives.
The Chair: We’ll ask for a Team Canada approach and answer.
Mr. Vincent: In the spirit of Team Canada, the department, much like we did in 2014, gave a full accounting of the financing. In 2015-16, we also published a lessons learned report, recognizing that, as was said earlier, we hope we don’t face something like this again, but it’s always possible that we might. What did we learn from what was a very intense experience and how can we carry that forward? That is published on the government’s website and is certainly available for everybody to go through.
I think it highlighted a couple of things. One was the very interdepartmental and even intergovernmental nature of an exercise like this, whether it’s the group that you see in front of you, whether it’s working with the Government of Ontario, which is very much part of this team, and working with the U.S. Treasury and folks down in the United States.
I think that was a very critical point. We not only brought together teams at a working level, but even up through the deputy minister structure. A deputy ministers committee met on a regular basis and had representations from all the different organizations so the decisions could be made quickly and in a timely manner, taking into account the different perspectives.
I think that ability to bring a team and the expertise together was probably the most important thing when you consider the tight timelines and the complicated nature of all the different work that was being done at the time.
The other thing that was very important was that we got some very early and clear guidance from senior management at the deputy minister level and at the political level as to the real objectives and what would define success. I think that was an important understanding. For example, we talked about the concept of proportionality and the role that Canada plays in the North American context. Those types of principles were what helped guide the teams in those early days to make sure that, as those negotiations and discussions were going on, all members of the team had an understanding of the principles. Having those very early discussions and ensuring everybody had a very good understanding of what the government was looking for, and the definition of success, was another important element that would come forward within that.
The last piece that I would highlight is we did take a fair amount of time at the end to do a lessons learned exercise. It’s easy, I think, in the heat of the moment to quickly move through things. But we took the time to reflect afterwards and understand and document those processes to make sure that as we were doing everything, including the reporting and the pieces that needed to come after as part of the loans through EDC and elsewhere, and through the management and organization, capturing the lessons learned was in itself an important lesson that we needed to bring forward.
Senator M. Deacon: Thank you for that.
The other piece is that in hindsight, of course, there may be more of a tone of concern or even negative energy in 2018 about what had to happen a long time ago. The part I’m wondering about is that at the time and in your learning, there were positive reasons why this was done. If you were looking or even talking across sectors, what might you say was, at the time, the very best reason we’re doing this, the very best outcome or the very best part of it? I think we sometimes lose that context when we look back and ask, “What the heck?”
Mr. Vincent: From my perspective, the point Paul made earlier to me about ecosystems and the broad impact of this to me still echoes and resonates today as the most important piece. I work regularly with the suppliers right across Canada, with a particular focus on Ontario and the auto industry. I hear quite regularly that that industry and those small suppliers would not have survived if we had allowed these companies to go bankrupt and the government had not stepped in and participated with the U.S. as part of this restructuring.
Even 10 years later, meeting with people who went through that time period, there’s a very strong impression that that time period left with them. There was a real existential threat facing them.
I spent the last year doing a fair amount of work around the NAFTA negotiations, which was probably the next existential threat for this industry in some ways. They would regularly harken back to the role that government and industry played together to understand the real implications and ramifications and how important the actions taken at the time were to ensuring not only that those businesses survived but also that the people who worked for those industries had jobs through that crisis and continuing on.
Mr. Bhamjee: Perhaps I could add to a point Paul made earlier. I think this is perhaps what you’re speaking to, senator. We’re talking about one specific action that was taken at what was essentially a very historic period of time when you think about what was happening in the global economy.
As Paul mentioned earlier, what was done for the automotive sector across two companies and the supply chain was complemented by business credit availability which was done to ensure liquidity more broadly in the economy at the time. As someone who worked at Export Development Canada, we were a part of that, as was the Business Development Bank of Canada. There was capitalization that was put into both organizations. There was extension of borrowing authorities and contingent liabilities to make sure credit could flow. There was, in the case of EDC, additional flexibility to allow them to lend in Canada in a way they wouldn’t normally be able to do.
There were a number of things put in place at the time, but 10 years on we’re looking at a particular thing because it’s a line item.
A takeaway is when we talk about this, even if the question happens to be in relation to the specific line item, we want to make sure anyone asking has the benefit of that perspective. It looks one way when you only think about one thing, but when you take it as a totality of actions that were taken by government, it gives you a very different perspective.
Senator M. Deacon: Thank you.
Senator Neufeld: Thank you very much, folks, for being here and explaining this issue to us. I just want to add to that.
I was here at the time this process was taking place. It was one of the worst recessions we’d faced for a long time. I don’t think our government was saying they could structure this loan somehow so some other government in the future is going to take responsibility for it. That would have been the furthest thing from anybody’s mind that was in the House of Commons at that time. What was in the minds of those people was protecting the jobs and the people and the industry for the future.
It wasn’t just in Ontario, it was all across Canada. My God, if you had let those car companies go by the wayside, all the things that you folks have told us would have happened. Then we would wonder who would have been in trouble and who would have been talked to. We know who the government was at the time.
Somebody said that they’re taking the heat for something, but let tell you, they were in the House of Commons actually agreeing. Nobody at that time was saying, “We shouldn’t do this.” Everybody was saying that we have to protect those jobs and protect that economy because if we don’t, all of those things you folks have told us would have come to pass.
It wasn’t an easy decision, not by a long shot, but the decision not to do anything would have been disastrous. What would have taken place would have been absolutely unbelievable. You would have seen Ontario empty out pretty quickly with all the jobs, and all the places across Canada, and we wouldn’t have had any bargaining power with the U.S. to actually keep some of the assets going in Canada.
I think it’s easy to forget and pick apart 10 years later what had to be done in a short period of time at the time it took place. So I commend all of you folks who were working on helping to actually keep those people employed and keep the economy of Canada going as best it could. And the government of the day managed to do that. So if there’s any credit to be given, it should be given there.
I’m not an accountant by any stretch of the imagination. I know when you add one and one, you get two. I have a question, though, but it’s the only question I have because I think you’ve laid it out fine. I don’t think there’s any need to expand much more on it. When you say the loan was $2.9 billion and the recovery was $2.1 billion, that leaves $800 million. I don’t know if there’s interest in there or something that accounts for some of those dollars. Maybe that would help a little bit, because you did talk about an interest charge. I don’t know what that was or how much it amounted to, but it would really help me if you could tell me that.
Do you have an idea of the number of jobs and investment that would have been lost at that time? I’m not asking for absolute numbers but a broad number of jobs and investment that would have been lost had the government of the day not done this. As far as I remember, no party in the House of Commons said, “No, don’t do this.” Everybody was on board or it probably wouldn’t have happened.
Mr. Vincent: On the first question, the summary that we published highlighted both the loans to the old Chrysler and the new Chrysler, so that 2.9 number puts those together. The repayments then received were both principal payments and interest payments. As somebody noted earlier, there was a small amount of equity in the deal as well that recovered about $132 million. When you put those together, you have the loan to the old company at $1.3 billion plus the interest. Somebody mentioned the number $2.6 billion that was written off. That was a combination of that loan plus the interest that had accrued. The 2.9 versus the 2.1, that basically accounts for the interest, the exchange rates and other things and leaves you with the final accounting of where it was.
Senator Neufeld: So tell me what the number is for the interest that you received.
Mr. Vincent: The interest payments received were $300 million, according to this table.
Senator Neufeld: All right.
Mr. Vincent: With respect to the jobs, a number of different studies were done at the time. One ascribed that if the Oshawa plant had closed just by itself, the total job implications within the economy would have been roughly 52,000. If the two companies were allowed to collapse, another study had the total number of jobs lost at over 100,000.
Today, I would highlight for you that the automotive industry accounts for approximately 130,000 direct jobs and over half a million direct and indirect jobs together. From that standpoint, if the industry in Canada had collapsed, I think that’s the magnitude you are looking at.
Senator Neufeld: Does that include the ancillary jobs such as parts suppliers and the supply chain?
Mr. Vincent: It does, yes. That includes both direct and indirect jobs, including the supply chain, dealerships and others who are associated with the industry.
Senator Neufeld: If all of those jobs had left, and most of them in Ontario, there would have been a very big sucking of jobs in Ontario that wouldn’t have been nice.
Mr. Vincent: Yes.
Senator Neufeld: I’m happy that somebody did something so we have something at the end of the day and not just stand by and let it collapse.
Mr. Halucha: I would like to add one more element to this, which are the jobs of the future. We’re seeing the car of the future, which has a lot more digital technologies. It’s connected; it’s using artificial intelligence.
Another reason that action took place in 2008-09 is that the companies do the research and development where they have production, so if you lose the production, you lose the research and development. This car of the future is bringing a whole new set of companies into the ecosystem and into the supply chain. We have a lot of strength in Canada around that in artificial intelligence, in Toronto, Montreal, Edmonton and other parts of the country.
We have an opportunity because of those actions that took place 10 years ago to safeguard that. A lot of research and development is taking place and a lot of new companies are going to be, we hope, part of the centre of growth for the car of the future, and that will take place in Canada. Had we not acted 10 years ago, that kind of future would not be here now. For example, when BlackBerry made some of their reductions and stopped making the smartphone, the entire engineering team that was working on their latest device was hired by the Ford Motor Company. That kind of absorption in the economy was a remarkable thing to see. We would not have seen that had the plants not be here to continue to anchor that ecosystem.
Senator Neufeld: Thank you.
The Chair: Well, any other questions? No.
I have to say that collectively, as professional public servants of Canada, you have exhibited your team approach. I must congratulate you on that because you’ve brought to the file more information, more clarity, and you’ve certainly given us a lot of food for thought. The transcripts will demonstrate to Canadians that our public servants have a mechanism to ensure transparency and accountability in the process.
On behalf of the committee, thank you for your information. If you feel that you want to add to it, please do not hesitate to do so through the clerk as we move forward.
Honourable senators, we will have another meeting tomorrow at 1:45 p.m. in room 160-S, Centre Block. We will finish our study on the Supplementary Estimates (A) with the last four departments appearing.
(The committee adjourned.)