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Capital Financing and Debt Management

Provincial capital plan

Provincial capital spending funds assets that are important to the province and its citizens, including schools, hospitals, medical equipment, university lecture halls, residences, government buildings, court houses, roads, bridges, dams and transmission lines.

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Capital is costly to build, operate and maintain. Furthermore, while surpluses help finance capital spending, borrowing is also required to fully finance the provincial capital spending program. Careful planning and budgeting is important so government can build new capital, and update existing capital, while leaving the province’s finances in good order for future generations.

In order to ensure value for British Columbians from capital spending and to promote efficiency in the allocation of capital funding, the government has promoted public-private partnerships and is reviewing how it manages capital grants to service delivery agencies, including the SUCH sector (schools, universities, colleges and health organizations). Development of these processes will result in improvements to how capital and capital funding are reported.

Prudent management

The relationship between capital spending and debt requires the province to establish an accountability measure that ensures the capital plan will meet the needs of the province, while at the same time keeping debt affordable for current and future citizens. The government is committed to maintaining a downward trend in the taxpayer-supported debt to GDP ratio, using a three-year moving average, which is a key measure used by financial analysts, investors, and bond rating agencies to assess whether a province can sustain its level of borrowing.

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The key planning and accountability measure used by the provincial government for capital financing and debt management is debt allocations for each sector of taxpayer-supported debt: health, K–12, postsecondary, transportation and other. Capital plans are then prioritized within the available financing to ensure program requirements are met on a timely basis. Also, debt allocations encourage sectors to seek out the most efficient means of financing their capital requirements. Use of sector debt allocations will help ensure that overall government debt targets are met, while allowing for flexibility within sectors.

Table 1.

Public Private Partnerships

Over the past 5 years, British Columbia has emerged as a leader in North America in the use of public-private partnerships (P3s) to deliver public-use infrastructure. P3s are a relatively new procurement method that transfers capital project risks from government to the private sector through fixed price agreements, guaranteed delivery dates, long-term warranties and guarantees of performance. Payments to the P3 concessionaire are subject to meeting performance standards, and usually include penalty provisions for non-performance.

Under a public-private partnership contract, a concessionaire constructs a specified capital asset, and operates and maintains it for a term specified by the contract. In return, the provincial government either pays the concessionaire an annual unitary service payment, or allows the concessionaire to charge a toll to users of the asset. The payments, or the tolls, cover both the cost of the capital asset plus the ongoing operating expenses over the term of the contract.

When government began entering into P3 contracts, there was little in the way of pre-existing guidelines specific to P3 accounting. While the total contract amount was known, it was based on a unitary payment for service based on performance that combined the provision of a capital asset with ongoing operation of the asset. For accounting and reporting purposes, it was unclear as to how much of the contract amount should be allocated to capital cost and how much toward operating expense.

Original reporting on the capital cost of these projects focussed on construction costs as the means of allocating the contract amount between capital cost and operating expense. The P3 accounting guidelines recently developed by the Office of the Comptroller General in accordance with generally accepted accounting principles, clarified that the costs allocated to capital for these projects must also include interest during construction and project management costs.

The application of P3 accounting guidelines has resulted in a restatement of the cost allocation between capital cost and operating expense for existing P3 contracts. Most projects have seen an increase in the allocation to capital cost, with a corresponding decrease to operating expense, as is shown in the table below.

Under P3 accounting, the capital cost is presented as an asset on the provincial government’s balance sheet that is offset by an equivalent liability, or debt, to pay for the capital cost. However, a feature of the unitary service payment is that it provides for the retirement of the liability/debt by the end of the contract. This feature reduces the build up of debt as new capital is constructed.

The application of P3 accounting guidelines does not affect the total contract amount or the amount of the annual service payment to the concessionaire. Nor does it impact the estimated benefits to the public of the P3 agreement in comparison to alternate or more traditional procurement methods.

Table 2.

Capital Funding

Capital funding provided to service delivery agencies in the SUCH (schools, universities, colleges and health organizations) and transportation (BC Transit and RTP 2000 Ltd.) sectors is currently accounted for in the consolidated revenue fund (CRF) as prepaid capital advances (PCAs). PCAs were created as a means of reporting all the assets acquired with public money and, prior to the full consolidation of the SUCH entities in the Public Accounts, were disclosed as capital assets on the government’s balance sheet. Consolidation of the SUCH sector eliminated the presentation of PCAs in the Public Accounts; however, they remain as a CRF financing transaction in the annual Estimates.

In order to promote more transparent disclosure of all the funding provided to the SUCH and transportation sectors, and to improve efficiency in managing capital funding to service delivery agencies in these sectors, government is reviewing whether to record capital funding provided to SUCH and transportation service delivery agencies as “grants restricted for capital purposes” (restricted capital grants), rather than the current practice of recording these advances as PCAs. Under this option, capital funding would no longer be reported as a financing transaction, but as part of the grants to agencies.

The amortization of the PCA assets that was previously charged to the appropriations for the Ministries of Advanced Education, Education, Health, and Transportation (the ministries) would be eliminated as would all existing PCA balances in the CRF. As well, debt service costs would be centralized in the Management of Public Funds and Debt (MOPD) Vote, rather than being allocated to the ministries’ votes. Total debt servicing costs would remain the same and this classification is consistent with the presentation in the Public Accounts.

The proposed changes would clarify the total capital and operating funding provided to SUCH and transportation sector service delivery agencies by disclosing the total grants (operating and capital) in one place, the ministry vote. The change would improve cash and debt management processes by allowing debt to be managed on a consolidated basis; streamline operations; improve accountability; and facilitate simpler, more efficient debt service cost management. The ministries would no longer be required to track, allocate and budget for debt servicing costs that they have limited ability to control.

The change from issuing PCAs to issuing restricted capital grants impacts only the CRF. In the Public Accounts, PCAs are currently eliminated on consolidation of the SUCH agencies to avoid double counting of expense, and the new restricted capital grants would receive the same accounting treatment. While individual ministry appropriations may decrease, there would be no impact on total funding received by school districts, universities, colleges, health authorities, or transit programs, nor does it change how the agencies may use the funding they receive. As well, total expense would remain the same.

These proposed changes have not been reflected in the 2008/09 Estimates and the 2008/09-2010/11 Budget and Fiscal Plan as government is in the initial stages of discussing the changes with the SUCH and transportation sectors and developing conversion procedures.

An illustrative example of the impact of these changes on the funding for educational programs and the appropriation for the Ministry of Education in the 2008/09 Estimates is provided below. The changes would have a similar impact on the ministries of Advanced Education, Health, and Transportation.

The change in how capital funding is managed would have no impact on total debt, as the funding for either PCAs or restricted capital grants would come from the CRF. Regardless of how the appropriations are structured, the borrowing requirements are the same.

Table 3.

Continued monitoring and prudence

The capital planning and management regime will continue to evolve to ensure that government’s fiscal and operational objectives are met, including delivering provincial assets while keeping debt affordable.

At the same time, recognizing that rising construction costs are currently a concern, the province has included a capital contingency averaging 5 per cent of total taxpayer-supported capital spending in its three-year capital plan as a prudent planning measure.

This contingency is in addition to the contingencies included in individual project budgets.

The combination of constant improvement to capital procurement and funding management processes, the use of debt allocations as a key accountability measure and prioritization of capital projects within those allocations, and the provision for unusual circumstances through capital contingencies will ensure the robustness and affordability of the province’s capital plan.

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