2013 Spring Report of the Auditor General of Canada Chapter 10—Advance Funding—P3 Canada Fund

2013 Spring Report of the Auditor General of Canada

Chapter 10—Advance Funding—P3 Canada Fund

Main Points

Introduction

Focus of the audit

Observations and Recommendations

PPP Canada receives funding in advance of disbursement needs
Funding in advance is projected to continue growing in future years
Entities have not quantified the financing costs of the current funding arrangement
Funding in advance has a cost to the government

Conclusion

About the Audit

Appendix—List of recommendations

Exhibits:

10.1—Examples of public-private partnership initiatives funded by the P3 Canada Fund

10.2—Funding paid out for the P3 Canada Fund is greater than PPP Canada’s disbursement needs

10.3—The government is borrowing at a higher rate than PPP Canada’s investment returns

 

Performance audit reports

This report presents the results of a performance audit conducted by the Office of the Auditor General of Canada under the authority of the Auditor General Act.

A performance audit is an independent, objective, and systematic assessment of how well government is managing its activities, responsibilities, and resources. Audit topics are selected based on their significance. While the Office may comment on policy implementation in a performance audit, it does not comment on the merits of a policy.

Performance audits are planned, performed, and reported in accordance with professional auditing standards and Office policies. They are conducted by qualified auditors who

Performance audits contribute to a public service that is ethical and effective and a government that is accountable to Parliament and Canadians.

Main Points

What we examined

PPP Canada is a Crown corporation created in February 2008. The Corporation is wholly funded by the government and reports to Parliament through the Minister of Finance. It manages the $1.2 billion P3 Canada Fund on behalf of the federal government. The Fund provides funding to infrastructure projects procured by other levels of governments through public-private partnerships (P3).

Each year, PPP Canada makes a special request to receive P3 funding ahead of its disbursement needs. Government officials indicate that PPP Canada, as a non-agent of the Crown when administering the P3 Canada Fund, cannot bind the government by its actions and must therefore have cash in hand to commit funds.

We examined the amounts provided to PPP Canada to fund P3 projects, when these funds were disbursed, and the related financing costs.

Audit work for this chapter was completed on 1 March 2013. More details about the conduct of the audit are in About the Audit at the end of this chapter.

Why it’s important

The Treasury Board Directive on the Use of the Consolidated Revenue Fund for Crown Corporations prevents the disbursement of funding in advance of short-term needs to minimize the impact on the government borrowing levels. However, PPP Canada has received yearly exemptions such that it has received P3 funding ahead of its disbursement needs. As a result, the Corporation had accumulated about $670 million in short-term investments as of 30 September 2012.

What we found

The entities have responded. The entities agree with our recommendations. Their detailed responses follow the recommendations in the chapter.

Introduction

10.1 PPP Canada is a Crown corporation created in February 2008 that reports to Parliament through the Minister of Finance. It is wholly funded by the federal government. Its mandate is to improve the delivery of public infrastructure by achieving better value, timeliness, and accountability to taxpayers, through public-private partnerships (P3).

10.2 PPP Canada assesses and advises on the execution of federal P3 projects and manages the $1.2 billion P3 Canada Fund, which provides funding to eligible infrastructure projects procured by other levels of government through public-private partnerships. PPP Canada is a non-agent of the Crown when administering the Fund. Use of the Fund is governed by terms and conditions approved by the Treasury Board.

10.3 As a Crown corporation, PPP Canada must annually prepare a corporate plan, which presents its operating and capital budgets for the coming year. The corporate plan also includes PPP Canada’s projected funding commitments to eligible P3 projects for the coming year and P3 disbursements to eligible recipients for the next five years.

10.4 PPP Canada receives funding from Parliament for the P3 fund based on a five-year payment schedule that was determined when the Corporation became operational in the 2008–09 fiscal year. Under the agreements signed to date, in most cases the Corporation makes payments to P3 recipients after a construction project is completed; this can be four to five years after a project was approved for funding. Exhibit 10.1 provides some context to understand the types of projects and costs funded.

Exhibit 10.1—Examples of public-private partnership initiatives funded by the P3 Canada Fund

As of 30 September 2012, PPP Canada had issued four rounds of calls for proposals, had received 270 applications for funding under the P3 Canada Fund, and had awarded a total of $343 million in funding to 12 projects. Examples of funded projects are included in the following table.

Project name Location Type of project Amount of funding from the P3 Canada Fund
Chief Peguis Trail Extension—first project to reach substantial completion Winnipeg, Manitoba Local road infrastructure $25 million
GO Transit East Rail Maintenance Facility Whitby, Ontario Public transit infrastructure $94.8 million
Iqaluit International Airport Improvement Project Iqaluit, Nunavut Regional and local airport infrastructure $77.3 million
Focus of the audit

10.5 The audit focused on the amounts provided to PPP Canada to fund projects undertaken by public-private partnerships, the timing of their disbursement, and the related financing costs. The audit did not consider PPP Canada’s costs associated with managing its P3 Canada Fund investments. More details on the audit objective, scope, approach, and criteria are in About the Audit at the end of this chapter.

Observations and Recommendations

PPP Canada receives funding in advance of disbursement needs

10.6 The Treasury Board Directive on the Use of the Consolidated Revenue Fund for Crown Corporations prevents the disbursement of funding in advance or in excess of short-term needs; this minimizes the impact that the drawdown of funds has on the use of government resources or borrowing levels. Under its corporate plan, PPP Canada annually requests from the Treasury Board an exemption from the drawdown requirements of the directive. The exemption allows PPP Canada to receive funding for the P3 Canada Fund in advance of its disbursement needs. From the beginning of the 2008–09 fiscal year to 30 September 2012, the Corporation received $683 million of the $1.2 billion approved for the P3 Canada Fund, and it disbursed $23 million for P3 projects (Exhibit 10.2).

Exhibit 10.2—Funding paid out for the P3 Canada Fund is greater than PPP Canada’s disbursement needs

Line graph showing the cumulative funding and disbursements for the P3 Canada Fund

[Exhibit 10.2—text version]

Notes:

Cumulative funding is determined based on PPP Canada’s audited financial statements and corporate plans.

Cumulative disbursements are based on PPP Canada’s audited financial statements, as well as signed agreements as of 30 September 2012.

10.7 According to government officials, the rationale for the current funding arrangement is that the Corporation, as a non-agent when administering the P3 Canada Fund, cannot bind the Crown by its actions, and consequently must receive its P3 funding before it commits to P3 projects. This provides some certainty to the Corporation that it will be able to deliver its funding commitments. Government officials note that having the cash on hand is essential to the successful delivery of the P3 Canada Fund: with P3 projects, the private sector and business partners regard the assets of the Corporation as an indication of its ability to fulfill its funding commitments.

10.8 PPP Canada invests the P3 funding it receives in advance of its disbursement needs according to its investment policy, which was approved by the Treasury Board. On 30 September 2012, PPP Canada had about $670 million in short-term investments, including cash, money market securities, and other securities.

Funding in advance is projected to continue growing in future years

10.9 As of 30 September 2012, PPP Canada had entered into agreements with other levels of government to fund P3 projects for a total of about $343 million. Another $280 million of projects had been approved by the Corporation’s Board of Directors or the Minister of Finance, but funding agreements had yet to be put in place.

10.10 We reviewed PPP Canada documents, such as corporate plans and P3 agreements, to see the amount of funding the Corporation received and when it would disburse the funds. We found that of the total of $623 million for approved projects, only $83 million is likely to be disbursed by the end of the 2013–14 fiscal year. In the interim, PPP Canada is expected to receive the rest of the $1.2 billion approved for the P3 Canada Fund. The difference between funding received and disbursements will therefore continue to grow over the 2012–13 and 2013–14 fiscal years based on the agreements in place as of 30 September 2012 (Exhibit 10.2).

Entities have not quantified the financing costs of the current funding arrangement

10.11 In 2009, when PPP Canada became operational, it raised with the Treasury Board of Canada Secretariat and Department of Finance Canada officials the misalignment between the funding it was to receive under the five-year payment schedule and its expected disbursements over subsequent years. Government officials provided us with documentation that showed that the three entities discussed different options for the Corporation to have access to funding in a way that would enable it to commit funds and attract P3 projects. The three entities examined factors such as operational, legal, and accountability considerations, but they did not quantify the financing costs associated with providing funding in advance—that is, the difference between the interest paid by the government to borrow funds and the interest earned by PPP Canada on its advance funding.

Funding in advance has a cost to the government

10.12 As part of this audit, we estimated the financing cost of the current funding arrangement. For this purpose we examined public documents, including Bank of Canada statistics and PPP Canada’s financial statements. With regard to funding provided to PPP Canada in advance of its disbursement needs, we estimate that $1.6 million in financing costs would have been avoided if advance payments had not been made for the P3 Canada Fund from the fiscal year 2009–10 to 2011–12.

10.13 The challenge in estimating the financing cost is to determine the borrowing rate that should be used. The government does not track its borrowings against specific funding requirements. Therefore the specific borrowing terms, including interest costs, cannot be associated with the payments made to PPP Canada.

10.14 As a result of discussions with the Office of the Auditor General, the Department of Finance Canada estimated financing costs for the 2011–12 fiscal year. To do this, the Department used the average rate of short-term borrowings (that is, for a year or less). It did this because, in the Department’s view, the requirements for funding PPP Canada are minimal in the context of the government’s total annual borrowings and, accordingly, the requirements would be met through the short-term debt that is issued on an ongoing basis by the government to address variations in liquidity requirements (that is, through treasury bills). Using this approach, the Department found that the government’s borrowing rate would be slightly less than PPP Canada’s rate of return on its investments, and the result was savings to the government for the 2011–12 fiscal year.

10.15 Our opinion is based on the fact that the government’s borrowing decisions are made not according to specific funding requirements but rather in keeping with the government’s overall borrowing requirements and objectives, such as raising stable and low-cost funding. Accordingly, it is not possible to identify which part of the government’s total borrowing portfolio is being used to fund PPP Canada. Therefore, we consider that the weighted average interest rate of total new borrowings issued during the fiscal year (that is, a mix of short- and long-term borrowings) best represents the government’s borrowing rate in this case. Under this approach, the government’s borrowing rate was higher than PPP Canada’s rate of return on its investments for the 2009–10 and 2010–11 fiscal years, resulting in a financing cost to government in those years. The two rates were almost the same in the 2011–12 fiscal year (Exhibit 10.3).

Exhibit 10.3—The government is borrowing at a higher rate than PPP Canada’s investment returns

Line graph showing PPP Canada’s investment returns alongside the interest rate on government debt

[Exhibit 10.3—text version]

Notes:

We calculated the weighted average interest rate based on Bank of Canada statistics.

We calculated investment returns based on PPP Canada’s audited financial statements.

10.16 It is our view that the current funding arrangement needs to be reviewed for the following reasons:

10.17 In our view, there are approaches that would minimize government exposure to financing costs, while allowing PPP Canada to continue to commit to funding P3 projects, including the following:

10.18 PPP Canada, the Department of Finance Canada and the Treasury Board of Canada Secretariat considered the last two possibilities in their discussion in 2009. According to government officials, these potential solutions were rejected because they were unduly complex and administratively burdensome, or they were inconsistent with government decisions regarding the status of the Corporation as a non-agent of the Crown.

10.19 Recommendation. Along with PPP Canada, the Department of Finance Canada should examine the current funding arrangement of the P3 Canada Fund, taking into account the financing costs to government.

The Department’s response. Agreed. The Department has examined the current funding arrangement of the P3 Canada Fund in the context of this audit and found that there has been no unequivocal evidence of a related financing cost. Associating specific borrowing terms to a particular spending item can only be done on a hypothetical basis, for analytical purposes, given that the government does not track borrowings in a given year against specific funding requirements. Such analysis should take into account how the government actually manages its borrowing activities. The drawdown of PPP Canada’s appropriations is relatively small in the context of the overall borrowing requirements of the government. It is reasonable to assume that no specific adjustment is made to the plans to issue bonds in a given year to account for this drawdown, particularly given that it is difficult to predict when the payment will be made in a given fiscal year. Instead, the government would meet this requirement via short-term debt that is being issued continuously to address variations in liquidity requirements, that is, through treasury bills.

Using this methodology, we found that a small amount of hypothetical financing costs of less than $500,000 in the 2010–11 fiscal year was more than offset by a small amount of hypothetical financing surplus of less than $1 million in fiscal 2011–12. The Department notes that the Office of the Auditor General, using its own methodology to estimate net financing costs, has also found that there has been no net financing cost to the government during the period subject to the audit, between April 2011 and September 2012.

The government established PPP Canada as a non-agent of the Crown for the purpose of delivering the P3 Canada Fund. The Corporation cannot bind the Crown by its actions; it should, therefore, have funding on hand to be able to make funding commitments toward P3 projects. The Department of Finance Canada will, however, monitor the returns that PPP Canada generates on its advance funding and the hypothetical borrowing cost associated with the drawdowns of the appropriations for the P3 Canada Fund. Should significant net financing costs arise, the Department will explore alternative funding arrangements as appropriate.

The Corporation’s response. Agreed. PPP Canada will meet with the Department of Finance Canada, at its request, to discuss options to the current funding arrangement.

10.20 Recommendation. The Treasury Board of Canada Secretariat, in consultation with the Department of Finance Canada, should confirm that financing costs are taken into account in cases where Crown corporations seek an exemption to the Treasury Board Directive on the Use of the Consolidated Revenue Fund for Crown Corporations in order to receive funding in advance of disbursement needs.

The Secretariat’s response. Agreed. The Treasury Board of Canada Secretariat, in consultation with the Department of Finance Canada, will review the Treasury Board Directive on the Use of the Consolidated Revenue Fund for Crown Corporations to determine whether changes need to be made to clarify that financing costs are to be taken into account when a Crown corporation seeks an exemption to this Directive to obtain funds in advance of disbursement needs. Any necessary adjustments to the Directive will be brought forward to the appropriate authority by 31 March 2014.

The Department’s response. Agreed.

Conclusion

10.21 PPP Canada receives its funding long before it needs to make disbursements. The advance funding is expected to grow over the next two fiscal years. Apart from the estimate provided by the Department of Finance Canada for this audit, the financing cost of the current funding arrangement had not been quantified.

10.22 We concluded that the funding in advance has had a financing cost for the government, which remains exposed to future financing costs. The current funding arrangement ought to be reviewed since, in our view, there are solutions that would minimize the government’s exposure to risk related to financing costs.

About the Audit

All of the audit work in this chapter was conducted in accordance with the standards for assurance engagements set by The Canadian Institute of Chartered Accountants. While the Office adopts these standards as the minimum requirement for our audits, we also draw upon the standards and practices of other disciplines.

As part of our regular audit process, we obtained management’s confirmation that the findings reported in this chapter are factually based. The Department of Finance Canada would not confirm that the chapter presents audit findings that are factually based. In the Department’s view, the finding that there has been a net financing cost to the government of providing funding in advance to PPP Canada is not substantiated by the observations in the chapter (refer to the Department’s response to the recommendation at paragraph 10.19).

Objective

The objective of the audit was to determine whether there is a net financing cost to the government related to funding provided to PPP Canada for the P3 Canada Fund in advance of the Corporation’s disbursement needs.

Scope and approach

We examined the P3 funding provided to PPP Canada in advance of its disbursement needs and the related financing costs. We did not consider PPP Canada’s costs associated with managing its P3 Canada Fund investments. The audit involved PPP Canada as manager of the P3 Canada Fund, as well as the Department of Finance Canada and the Treasury Board of Canada Secretariat, given their roles in the approval of P3 funding.

Criterion

Criterion Sources
To determine whether there is a net financing cost to the government related to the P3 funding provided to PPP Canada in advance of its disbursement needs, we used the following criterion:

Government has provided P3 funding to PPP Canada with due regard for economy.

  • Auditor General Act
  • Financial Administration Act
  • Directive on the Use of the Consolidated Revenue Fund for Crown Corporations, Treasury Board

Management reviewed and accepted the suitability of the criterion used in the audit.

Period covered by the audit

The audit covered the period from 1 April 2011 to 30 September 2012. For a proper understanding of the current context and key decisions on which current operations are based, the audit also required a review and consideration of documentation, information, and decisions outside this period. Audit work for the chapter was completed on 1 March 2013.

Audit team

Assistant Auditor General: Sylvain Ricard
Principal: Lucie Cardinal
Project Director: Shawn Audette

Kitty (Hoi Ki) Wong

For information, please contact Communications at 613-995-3708 or 1-888-761-5953 (toll-free).

Appendix—List of recommendations

The following is a list of recommendations found in Chapter 10. The number in front of the recommendation indicates the paragraph where it appears in the chapter. The numbers in parentheses indicate the paragraphs where the topic is discussed.

Recommendation Response

10.19 Along with PPP Canada, the Department of Finance Canada should examine the current funding arrangement of the P3 Canada Fund, taking into account the financing costs to government. (10.6–10.18)

The Department’s response. Agreed. The Department has examined the current funding arrangement of the P3 Canada Fund in the context of this audit and found that there has been no unequivocal evidence of a related financing cost. Associating specific borrowing terms to a particular spending item can only be done on a hypothetical basis, for analytical purposes, given that the government does not track borrowings in a given year against specific funding requirements. Such analysis should take into account how the government actually manages its borrowing activities. The drawdown of PPP Canada’s appropriations is relatively small in the context of the overall borrowing requirements of the government. It is reasonable to assume that no specific adjustment is made to the plans to issue bonds in a given year to account for this drawdown, particularly given that it is difficult to predict when the payment will be made in a given fiscal year. Instead, the government would meet this requirement via short-term debt that is being issued continuously to address variations in liquidity requirements, that is, through treasury bills.

Using this methodology, we found that a small amount of hypothetical financing costs of less than $500,000 in the 2010–11 fiscal year was more than offset by a small amount of hypothetical financing surplus of less than $1 million in fiscal 2011–12. The Department notes that the Office of the Auditor General, using its own methodology to estimate net financing costs, has also found that there has been no net financing cost to the government during the period subject to the audit, between April 2011 and September 2012.

The government established PPP Canada as a non-agent of the Crown for the purpose of delivering the P3 Canada Fund. The Corporation cannot bind the Crown by its actions; it should, therefore, have funding on hand to be able to make funding commitments toward P3 projects. The Department of Finance Canada will, however, monitor the returns that PPP Canada generates on its advance funding and the hypothetical borrowing cost associated with the drawdowns of the appropriations for the P3 Canada Fund. Should significant net financing costs arise, the Department will explore alternative funding arrangements as appropriate.

The Corporation’s response. Agreed. PPP Canada will meet with the Department of Finance Canada, at its request, to discuss options to the current funding arrangement.

10.20 The Treasury Board of Canada Secretariat, in consultation with the Department of Finance Canada, should confirm that financing costs are taken into account in cases where Crown corporations seek an exemption to the Treasury Board Directive on the Use of the Consolidated Revenue Fund for Crown Corporations in order to receive funding in advance of disbursement needs. (10.6–10.18)

The Secretariat’s response. Agreed. The Treasury Board of Canada Secretariat, in consultation with the Department of Finance Canada, will review the Treasury Board Directive on the Use of the Consolidated Revenue Fund for Crown Corporations to determine whether changes need to be made to clarify that financing costs are to be taken into account when a Crown corporation seeks an exemption to this Directive to obtain funds in advance of disbursement needs. Any necessary adjustments to the Directive will be brought forward to the appropriate authority by 31 March 2014.

The Department’s response. Agreed.

 


Definitions:

Non-agent of the Crown—Crown corporations can be either agents or non-agents of the Crown. The government is normally not liable for actions taken by non-agent corporations. (Return)

Drawdown—The process whereby funds approved by Parliament are paid from the Consolidated Revenue Fund to a Crown corporation to cover its spending. (Return)

 

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