Assemblée Législative de la Nouvelle-Écosse

La Chambre s'est ajournée le
26 octobre 2017

Public Accounts -- Wednesday, March 6, 1996

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HALIFAX, WEDNESDAY, MARCH 6, 1996

STANDING COMMITTEE ON PUBLIC ACCOUNTS

8:30 A.M.

CHAIRMAN

Mr. John Leefe

DEPUTY CHAIRMAN

Mrs. Francene Cosman

MR. CHAIRMAN: We will get underway I think. Ladies and gentlemen, I would like to welcome you to the Public Accounts Committee hearing this morning. The matter under consideration is the management of debt. We have as our witnesses representatives from the Nova Scotia Department of Finance, Mr. Bert Loveless, the Deputy Minister, who is well known to all members of the committee; Mr. Rick McAloney, Executive Director, Investment, Pension and Treasury Services, a man very important to each and every one of us; and Mr. Doug Stratton, Director, Liability Management and Treasury. Gentlemen, welcome.

We had a good briefing session with the Auditor General with respect to this matter. I think we are well ginned up and have what I hope will be some interesting and provocative questions for you and I think, probably, some accolades to pass out as well.

Normally we start our deliberations, as Mr. Loveless will know, with an overview by the witness. Mr. Loveless the floor is yours.

MR. BERT LOVELESS: Thank you, Mr. Chairman. I just want to give a few opening comments and then we will get into the interesting part, which will be the dialogue back and forth. Just to summarize a little bit of what has happened in the debt management, and this goes back and I am just going to go back a couple of years, one of the things that became apparent when I took over as Deputy Minister of Finance, there were a couple of things, one is the high level of debt and really the only way to address that problem is to get the budget in balance and stop adding to that debt load. I think that is the only sure way to ultimately reduce your debt charges. There are other things you can do to minimize the cost over the short term but over the long term, the only way to absolutely reduce debt risk is to get rid of the debt.

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A couple of things that were apparent in our debt management portfolio; one was that I felt that there was a lack of expertise in the Department of Finance to properly manage the debt. We are aggressively pursuing, adding to the staff levels in Finance in the debt management area. We have added Rick McAloney, whose credentials are unquestionable and also Doug Stratton, we managed to bring in from Alberta, from the Alberta Treasury Finance, he comes very well recommended and has done an excellent job. We are now looking for another position to basically focus on our derivatives and some of our swap management. Hopefully, we will get that position in place within the next couple of months.

Just to go back a little bit, there are a couple of things about our portfolio. Basically, the approach in the government prior to my taking office was simply that we would get fairly long-term debt and put it away and not particularly worry about it until it matured. We had a very long portfolio. So one of the first things that I undertook was to reduce the duration of our portfolio, I guess that is the first time we started into the world of derivatives. They were very simple derivatives in the true sense and that was to take some of our debt and swap it into floating interest rates to reduce the duration and achieve some saving on the interest rates. As it turned out, most of those swaps have been favourable and we have benefitted immensely from those.

Over the long term, history will tell you that short-term rates over the long trend normally outperform long-term rates and they are normally lower. The problem with short-term rates is the volatility and trying to manage that volatility as interest rates move up and down, whereas long-term rates are much more stable. So I guess we gave up a little bit of the stability in favour of volatility in an attempt to reduce the cost.

The other area that, I guess when I took over, we were very concerned with was, again, foreign exchange exposure. I did make a couple of recommendations and I think you are all aware of them; to increase that exposure over the short term. We did do a couple of large transactions very early within the first year to increase that exposure. But, again, the risk was very well calculated, very well weighed. Again, I think those, as they have turned out and as we expected, have been favourable.

Our goal is to continue. I think you have to sort of match your debt management strategy with your fiscal strategy. As we move to a fully balanced budget and not incurring debt, then I think at that point we also have to make sure that we have greater certainty as we go forward in trying to project long term the debt impact. We basically would like to move away from our foreign exchange exposure and in the last 12 months have taken very drastic action to reduce that debt exposure. That will continue. Right now the Canadian dollar is still in our estimation undervalued relatively to some of the other currencies. We feel that there will be significant opportunity in the next three to five years to reduce that exposure considerably.

I guess the other issue when we are trying to manage debt is where we view interest rates going both in Canada and in foreign markets. Our view right now is that Canada, over the medium term, three to five years, will offer fairly attractive interest rates. As the Canadian Government gets its fiscal house in order and provides some assurance to foreign investors, who invest in Canada, that they are tackling the problem in a very serious way, it will produce confidence in Canada and should increase the value of the Canadian dollar, which will drive down and keep interest rates fairly stable. So, we think there is an opportunity here, over the next number of years, to reduce that exposure considerably and that will be our goal in going forward.

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I guess I do not want to add too much to that. I think that sort of summarizes it. Our policy is very simple. Let's not add any more debt. I think we have addressed that. Let us manage our debt in a more scientific way and more calculated way. Let us not take undue risks but, then again, let us not be too passive and give up opportunities to save money for Nova Scotia taxpayers. So, there is a multitude.

There are a couple of things that I have been trying to do and we have not gotten it in place yet, but we are working diligently towards that, is to get a debt management policy: a well-written document that defines our policy; where we want to go in debt management; some of the structures around that; and some of the approval processes. I know there are some issues with the Auditor General with respect to sign-off basically on decisions and transactions. For the most part, they are made by the deputy minister and the minister. Normally, the approval of Cabinet is after the fact. Even though they are briefed, it is almost impossible, once you cut a deal with some underwriters, to go back on that deal. So, it is more or less a rubber-stamp. I think it is all done aboveboard, but I think there is probably an issue there with respect to how do you ensure that that mandate is properly carried out. I think there is an issue there with respect to our debt management policy and our legal authorities. As of yet, I do not think it has been a major issue, but that is not to say that we should not try to improve it.

The other major issue is derivatives and I just want to make sure everyone understands, we do not trade derivatives in a very active way. We use derivatives and, basically, similar to what we could do with any debt instrument, we use derivatives to change the position of our portfolios, the foreign exchange exposure, and to change the duration of our portfolio by swapping to different durations. Those basically are it, but we do not start adding to the risks. Those are one-off transactions and we do not leverage them. I guess my view is, again, we should have a derivative policy for the government that is well-articulated, endorsed by the government as an official policy that the Department of Finance should adhere to. That derivative policy, again, is in the draft stages. Hopefully, we can get that in place within the next few months.

The issue on the debt is really, when you manage debt and you do transactions, there are a lot of market principles and practices that take place. Many of the decisions that we make are very spontaneous and have to be to capture the timing, because the timing is crucial in any particular transaction. It is impossible to try to make a deal, go back to the Legislature or go back to the Cabinet, cement that deal and come back a week later and find the deal has evaporated. So, there are some issues with that and the derivatives, we are right down to almost a minute of trying to calculate when we should actually do that transaction, whether it be to move currency back to Canada; reduce our exposure; or reduce our floating rate exposure. It is very difficult. So, we need some formula or some practices and some delegation of authority to the people who make those decisions and it has to be well-articulated.

I guess that is really to sum up. We would be happy to answer any questions with respect to our practices; with respect to our foreign exchange exposure and our views on that; and our views generally on the market and also the practices that we are following in the Department of Finance. I will ask my colleagues if they would like to add anything.

MR. CHAIRMAN: Thank you, Mr. Loveless. I was going to say that we have taken note that you, as deputy minister, have focused on the management of debt and have created new senior positions in the department, two which have been filled and the third of which you say you hope to have filled in the next two months. I thought it would be helpful to the

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committee if both Mr. McAloney and Mr. Stratton in turn were able to take a minute or two and tell us just exactly what they are about in the Department of Finance.

MR. RICHARD MCALONEY: If I may, Bert, also asked - to speak to his comments, if I may take 10 seconds?

MR. CHAIRMAN: Certainly.

MR. MCALONEY: First of all, I just want to say I concur with everything Mr. Loveless said. Just to re-emphasize one point, although we acknowledge the Auditor General's valid point that we do need to document our polices much more completely, the process that we currently use for obtaining approval for new debt issuance is consistent with market practice and, as Bert mentioned, the timeliness required. Certainly there are limits as to how broad a group you can include in that decision-making, so, there has to be some degree of delegation of authority for new debt issuance because of the timeliness required.

The other point, again Mr. Loveless already made it, but I think it is important to re-emphasize the word derivatives. The dirty "d" word does scare a lot of people. There have been a lot of scary headlines over the past couple of years. In a minute I will give Mr. Stratton a chance to speak, but it is important to understand. To the best of my knowledge, every single negative headline that dealt with derivatives involved derivatives with a high degree of leveraging. Leveraging is a word which really means there is some multiplier factor at work. So, on the surface it might seem like a certain transaction but in the underlying details, there is a leveraging factor which increases the risks several-fold. In one well-publicized case, there was a 99 times factor. So, the interest rate exposure that you might have thought you had on the surface of the contract was actually 99 times that amount.

MR. CHAIRMAN: That was not the Department of Finance . . .

MR. MCALONEY: It was not and the point, I think, really for you to understand is, although if not yet formally documented, we have a well-understood verbal policy among ourselves that we do not and will not contemplate any form of leveraging in our derivatives. So although, yes, they are derivatives, derivatives encompasses a very broad spectrum of financial instruments and we do not participate in those at all. That is really all I want to add to Mr. Loveless' summary.

Now, I will go on to summarize my role in the Department of Finance. I am responsible for five - well, actually we are amalgamating two so it is soon to be four - divisions, one of which is the Treasury Services division of which Mr. Stratton is the director. So, I spend about one-third of my time on debt management and Treasury matters. The rest of my time is split, about one-third overseeing the investment division where we have about $5 billion of assets, made up primarily of the two pension funds which is the largest, the superannuation and the teachers. There are three other smaller pension plans; also, the sinking funds and debt retirement funds for the debt. There are a couple of hundred, I think, of other miscellaneous trust funds.

About the other one-third of my time is spent on the other two divisions which have to do with the benefit delivery side of pension plans; again, superannuation and teachers' being the major components. The fourth division is the Pension Regulation Division which is headed up by the superintendent of pensions who regulates all the private pension plans in the province.

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MR. CHAIRMAN: Thank you, Mr. McAloney. Mr. Stratton.

MR. DOUGLAS STRATTON: I am the Director of Liability Management and Treasury Services and I report directly to Rick McAloney. There are basically two portions to my position. The Treasury Services side is banking relationships, dealing with bank accounts and authorities with respect to those, cash forecasting and various duties such as that. The other side of it is the Liability Management side which, in this particular case, refers to debt management and so on. On the debt management side, the responsibilities include issuance of term debt, foreign exchange, risk management, interest rate risk management and also duties surrounding debt and debt management such as settling of issues, settling of cash flows such as coupon payments, dealing with fiscal agents, domestic syndicate, Euro-syndicate, those sorts of duties.

MR. CHAIRMAN: Can that also be described in English? (Laughter)

MR. LOVELESS: He borrows the money.

MR. STRATTON: I borrow the money, yes. It is where the rubber hits the road. It is the people who report to me who actually do the transactions.

MR. CHAIRMAN: Thank you, Mr. Stratton. We will open the floor for questions, Mr. Donahoe, would you like to begin?

MR. TERENCE DONAHOE: Mr. Chairman, I would be curious whether, Bert, you or either of your colleagues might comment as well, first of all, can you give us a sense of how far along you are in the development of the debt management policy documents that you have talked about, where are you with that and when can we expect that you will have what you consider is a final policy document and be ready to say, this is our department's and the government's policy?

MR. LOVELESS: I will just make a few opening comments and then I will pass it over to Doug.

I guess we have been trying to put something together for about 12 months, really, since Mr. Stratton joined us, and he has only been with us a short time. I am not going to make excuses for Mr. Stratton because he can handle that himself, but he has been under a lot of pressure in many areas trying to get our organization in place. I think everybody knows it is quite difficult to get the positions approved and rated and recruited in the public sector, it is a little more difficult than some of us would like. Also, with downsizing, we have been trying to wrestle with that as well. So it has been difficult to move people and free up funds to fund people. So, there are some other issues surrounding that as well.

We have been actively, and we have a number of drafts and a number of examples that we have collected from other jurisdictions. I guess the issue is, we haven't had really sufficient time to sit down and try to put it into a Nova Scotia context. I guess that is where we are at. I will let Doug speak to it. It is still the number one priority on the agenda of the Department of Finance along with the derivatives policy. Those are two policies that I have been trying to get put in place for probably the last six to nine months. So I think we are pursuing it.

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As far as timing, I think timing is one, and I don't want to commit to a date at this point for a number of reasons, one is we have a lot of other activities going in Finance and Finance likes to say we are team and we do draw people off from time to time to get involved in other very important initiatives and we do put a lot of pressure on our employees to do things. I guess my feeling is that even though it is an important issue and an important policy, the department is running extremely well. The people that are there are doing an extremely good job. Therefore, I have confidence that there is nobody at risk here as we pursue these policies and there is no risk, everybody understands the principles under which we operate and follow those principles.

Now, I will ask Doug, I guess, and if he wants to commit to a time, that's fine. I have no problem with it.

MR. STRATTON: The debt policy actually covers a wide variety of areas. I suppose, broken down, I can think of two general areas, that of the debt portfolio, what the debt structure should look like and whether that debt structure makes sense for the Province of Nova Scotia. The other aspect is really a number of issues that would face someone such as myself in managing the debt.

[9:00 a.m.]

On the former, the debt structure really, in a very broad sense, there are two major components to that and the first one would be the foreign exchange risk and the second one would be interest rate risk, very broadly stated. My job has been made easier by the Government By Design document - which maybe we should have talked about a little bit earlier, starting on Page 25 of the Government By Design document - because it is very public in terms of what our debt structure looks like. It is also very public in terms of what our broad objectives are. It does talk about what the policy is for our foreign exchange exposure which states, to go from 70 per cent to 30 per cent.

The second aspect of it is that it talks about the floating rate exposure increasing above 1 per cent.

So those two items give me broad policy framework in which to work and it really does provide me a tremendous amount of guidance.

As far as the debt structure goes, we have done a tremendous amount of work over the past year in working through the mathematics of a debt structure, what makes sense and it is not a trivial exercise and we are very close to finalizing that.

With respect to derivatives in a debt portfolio, we take the portfolio approach if you will. I say that very broadly. In other words, you don't start with what derivatives am I going to execute, you actually start with what does my debt portfolio look like, what are my cash requirements and do derivatives have any aspect, any role in restructuring the portfolio or executing a transaction? If we can get away without executing a derivative transaction then that would be our preference.

There are other aspects to a debt portfolio that are very important and are important for managing the details, which I have to manage and those would include cash forecasting and settlement issues and counterparty risk. But on the debt policy itself, frankly, we are coming at it from two directions: one is a top-down approach and one is a bottom-up approach.

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On the bottom-up, we do indeed have committees in place to manage our debt. We meet weekly to discuss the cash requirements of the province. We have a very detailed cash flow report that goes out daily up to as far as two months, typically it is more a month as your months roll in cycle, and that same cash report goes out monthly for the full fiscal year. It is just rolled into a year and one-quarter as we move to the end of this fiscal year. Beyond that, one just takes a careful look at the maturity schedule and policy of the government. So, that is a weekly meeting and we follow very closely what our cash requirements are and whether we need to term out debt or continue to find a short term or, indeed, as occurred in the month of January, we actually picked up a fair amount of cash, which is just in the normal operations of a government such as this. I think that covers it for now.

MR. LOVELESS: We didn't give a date.

MR. STRATTON: Rick, did you want to add to that? (Laughter)

MR. MCALONEY: What I would like to add is coming back to, I guess, the question probably originated from the Auditor General's observations and coming back to the broader policies on debt management as well as derivatives, when Mr. Loveless mentioned their number one priority, he is right but I think he meant in terms of what you do in your residual time. I think we would all agree that the number one priority is and must be the daily requirements, it is because of Doug and his daily activities that the province stays solvent. That has to be our number one priority. It is really the residual time available for research and policy setting, it is in that framework that these are the number one priority.

To date, as Bert mentioned, we have been adding to our resources and a fair amount of that residual time has been spent on recruiting. It is important that we get our team completed so that we can increase the portion of our time that is available for policy-type issues. So, we just have one position now left to fill in the Treasury Division, so that will free up more time for policy. So more time will be devoted to that going forward in the future.

We are a bit subject to other, as Bert mentioned, special projects that come up but as a soft target, I would propose by the end of this calendar year, hopefully before that, but I would propose that as a target date to have both policies completed.

MR. CHAIRMAN: You are not suggesting - and I know you are not, I am just looking for reassurance - that the province stays afloat on a day-to-day basis?

MR. STRATTON: It is a large operation. We have annual expenditures and revenue in the neighbourhood of $4 billion. A huge effort goes into just managing what we refer to broadly as the Treasury. I was not implying that we are in any greater financial jeopardy . . .

MR. CHAIRMAN: That is exactly what I was looking for.

MR. STRATTON: That is just the nature of operations in any entity and certainly an entity our size. The nature of our business is not like maybe some other areas of government where you can just close the door and set things aside and work on a policy or some special project for two weeks or a month. That is just not the nature of our business. It just doesn't allow that.

MR. CHAIRMAN: The Department of Finance clearly has always had the view that it is more important than the other departments so I understand that . . .

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MR. STRATTON: I don't think I used the words more important but I meant we do have some immediacy in our . . .

MR. CHAIRMAN: At any rate, the question time is Mr. Donahoe's, not mine. I will have my time later.

MR. DONAHOE: Thank you very much, Mr. Chairman, and I appreciate those cynical editorial comments from you. (Laughter)

I don't mean to hector you on the question but, as Bert indicated, Mr. Stratton, I think, when you were speaking, I really did not get an answer and I am not, believe me, looking for an answer that you are going to tell me the plan is done on the blank day of blank and then I am going to come back and say that is stupid or too long or whatever, but I really am quite curious whether you believe it is, considering personnel problems and the need for more residual time or policy and study time, are we looking at a document in the summer? Are we looking at something in the early fall? Can you ballpark at all when you believe you might have a document which you would be prepared to put in front of the public and say, bingo, this is the debt management policy of your government. This is how your dollars are cared for.

MR. LOVELESS: I would suggest that we could put a document in front of the public within 9 months to 12 months. So I would hope by September or October we would have a debt management policy and a derivative policy for the province.

MR. DONAHOE: My supplementary, or follow-up, to that is to ask whether or not you believe it is appropriate or realistic to think in terms of the development of a document which might be enshrined in legislation?

MR. LOVELESS: There may be aspects of it that would impact the legislation and particularly the rationale for how we get approvals. There may have to be more authority delegated, for example, to the Minister of Finance for those ultimate decisions, as far as debt issuance. In most cases, on a very high level, you may have policy issues or legislative issues but normally I would suggest that policies of that type should not be in legislation because markets do shift, economies do move and that policy has to have some fluency to it. So I would suggest the bulk of it would not be entrenched in legislation.

MR. DONAHOE: Okay, I understand that and can certainly appreciate that dealing in the markets in which you deal is a minute-by-minute proposition very often, virtually always. But there is also a greater and greater demand for explanation and accountability. I guess what I am contemplating, or running around in my head, is a process whereby either your policy document, and perhaps more preferably, a piece of legislation, while it might delegate some authority to the minister and the minister's officials to be able to respond on a moment's notice and do what has to be done, that there is a legislative framework which provides the taxpayers of Nova Scotia with a better reporting publication and explanation of what that minister and his or her officials have, in fact, done.

MR. LOVELESS: I would suggest that there will be broad parameters in legislation. For example, we may want to legislate the foreign exchange exposure and I think that has been alluded to in Shaping the Future. So, within a range, we may want to legislate certain limits that we will not take on, for example, more than x percentage of floating debt and those kinds of very high level parameters but it has to be flexible enough and enough range within there to not hamstring the operations of the department.

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MR. DONAHOE: You made reference along the way to having a policy to reduce the foreign debt exposure and yet I think I am right in understanding that the percentage of the debt required to be retired in foreign currency, in fact, increased in 1995 over that which was on the books in 1994. Am I correct in that understanding?

MR. LOVELESS: That is correct. You are absolutely correct.

MR. DONAHOE: And you, Bert, alluded to the fact, I think I heard you say, that you started with the policy that we would move away as much as we could . . .

MR. LOVELESS: Long term.

MR. DONAHOE: . . . from foreign debt and then some of the earliest things that you were involved with upon becoming deputy were to embark upon more foreign debt. Can you give us a sense of how that came about and what the rationale was or is?

MR. LOVELESS: Okay, I guess there are two issues here. It is from a concept of managing risk, and also where we are at in our fiscal situation. At the time those decisions were made, I would say our backs were against the wall from a fiscal standpoint. We had some very difficult meetings with the rating agencies and we were in a situation where we had to - I won't say we were aggressive to try and reduce costs - but the bottom line is assessed those opportunities and there were two of them; one we did a U.S. $500 million issue and we also did a very large yen issue and those were two that I guess we want to single out as where we increased our exposure. At the time we made those decisions, basically it was an assessment of risk and we went through an assessment of where the Canadian dollar was relative to the U.S. currency, what the interest rate spreads were and what the cost of servicing that debt going forward would be. Based on those scenarios and the very calculated risk over time, we considered those very favourable issues. As it turned out, I would suggest we were right. Okay?

Now I don't want to say we were lucky, we weren't lucky. Those were simply calculated risks. In the particular case of the yen, the Canadian dollar was at a very low. The yen was at an extreme high. The interest rates were 300 to 400 basis points lower in yen denominated issue and also at that point in time we made a decision to swap it to floating which also added another interest rate advantage and when we calculated where the Canadian dollar would have to go relative to the yen, the yen had to appreciate in the range of 50 per cent to 65 per cent over the life of that issue before we would actually end up costing taxpayers money. The likelihood of that happening, in our estimation, was extremely remote. Also, taking into account that the interest savings approximated on both of those savings combined, the interest savings on an annual basis were in the neighbourhood of $50-plus million that reduced our debt-servicing cost. We took on that risk.

Our view, and I think views change because fiscal conditions change, as we go forward, and as we balance the budget, and as we continue to balance the budget in the years ahead, the direction that we take will probably be to more stable, more predictable debt-servicing costs, so that we can reduce that volatility. When you are running a $600 million deficit, $100 million swing one way or the other doesn't have a lot of impact; when you are running right close to the line at zero and you don't want to go over, a $100 million swing does have a significant impact. So as we go forward, we want to manage volatility in a more even way. That's the bottom line.

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Those deals were done very calculatedly and we measured risk and we knew that we were taking on more foreign exchange exposure, which was against our fundamental principles but we did them because we felt they were excellent deals for the Province of Nova Scotia, at the time. It is as simple as that.

MR. DONAHOE: Do I have 30 seconds?

MR. CHAIRMAN: You will have to move away fairly quickly.

MR. LOVELESS: Oh yes, just one point, the U.S. one, we actually have swapped back now because the interest rates came in our favour, the foreign exchange came in our favour and we swapped it back and made a fairly comfortable profit on that.

MR. DONAHOE: Very quickly if you can, my time is just about done. In 1994 there was no so-called Public Debt Retirement Fund. Am I correct?

MR. LOVELESS: That is right.

MR. DONAHOE: And in 1995 such a fund was established?

MR. LOVELESS: Yes.

MR. DONAHOE: My understanding is that there is $0.5 billion or $449 million there. Can you tell us the source of those funds?

MR. LOVELESS: The source of those funds, those funds were created by borrowing money. That fund was established to give us a little flexibility in our debt management. When interest rates are low and very attractive and our view is and we see an issue that is going to come due in a year or two down the road and we have insufficient funds to retire that issue, we wanted the ability to be able to pre-borrow; call it a war chest, call it what you may, it was a vehicle to take advantage of market opportunities and do issues and put it away in debt retirement funds for subsequent retirement debt that we knew in the near future would be coming up. So that is why that fund was established.

MR. CHAIRMAN: Mr. Mitchell and then Mr. Holm.

MR. ALAN MITCHELL: I have great respect for the challenge that is in front of you. I think for Nova Scotia we have for our size a particularly high debt. We have a large proportion of that disposed in foreign currency. I would be interested in how you rate that as to what other provinces might face. It is my feeling that the challenge before you is probably greater than maybe some other provinces have because of debt size versus our province and the amount of foreign exposure we have.

MR. LOVELESS: Yes, I would rate Nova Scotia right at the top of the list as far as the issue of debt and issue of foreign exchange.

MR. MITCHELL: Also, just about all the senior people in your department are new, I believe, at least since 1993. You have had a fairly new staff that has been put in place including yourself.

MR. LOVELESS: Yes.

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MR. MITCHELL: I think maybe it is important to note that the situation that you inherited that most of that debt was in place at that time, that a large portion of that which is in foreign exchange was invested in foreign exchange at that time and when you took charge of your responsibilities there was, at that time, no effective debt management plan at all. Is that correct?

MR. LOVELESS: I don't want to say there was no effective debt management policy. I guess the comment I would make is that I did not necessarily agree with that policy. The policy was, and their decision was, that they preferred more stability in the debt management cost to some extent at the expense of increasing that cost. It comes back to the argument. The trend was to take on long-term debt and hold it and mature it and basically did not use derivatives or did not try to manage the duration of the portfolio. So that was the policy and maybe it was fine for its time but it is not a policy that we could live with based on the challenges that we had.

MR. MITCHELL: The point I just want to make is that you now have a new challenge to try to manage this debt to lower the cost to the province and also to make sure that risk is properly managed.

MR. LOVELESS: Yes.

MR. MITCHELL: Maybe you might just talk a little bit about the debt management plan or the needs of it. You talk about increased use of derivatives and you talk about the fact that things come up very quickly and you have to act very quickly to take advantage of them, there is no time, really, to go to Cabinet and have this discussed and get approval. My understanding is that the importance of a debt management plan is that the parameters in which you are going to make decisions are set out so that you are accountable to the policy and it is not fly by the seat of your pants. So that is basically the importance of a debt management plan.

MR. LOVELESS: That's right.

MR. MITCHELL: As I understand it, it is far more complex today because you are dealing with questions of derivatives and foreign exchange swaps and everything else.

MR. LOVELESS: Just on the debt management policy, I mean, we have been working very closely with a couple of outside, UBS is one in particular that we have been working with to try to model an optimum portfolio for Nova Scotia and Doug has been doing a lot of work on that. I am fairly well versed in financial markets but when Doug and his colleagues get together and they brief me on how their strategy is going and optimum debt levels and historic trends and duration of debt and the frontier and that kind of terminology, I do get a little bit boggled. But we are working very closely and Doug is very active.

One of the things about debt management policy, and that is why it is not so simple, is that where we are exposed we have five different currencies that we deal with and also we have an export component of our economy and what is a reasonable level of foreign exchange exposure for the province. We are working with financial models and some of the best in the world. Most of this is gratis, they are helping us through this process to try to optimize what is a good portfolio for Nova Scotia and how much risk we can afford to take. So those are the things in the background that will hopefully drive a good policy as we go forward.

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It is a lot of work and there are a lot of challenges but I think we are optimistic. I think we made the first big step and that is not to start adding more debt. So I think that is the key to reducing debt costs.

MR. MITCHELL: You have one new person that you want to place with the department. I know you have very demanding day-to-day requirements as well as the need to develop the policy, which takes priority, but is the addition of the new staff person going to help as far as maybe freeing up some time to concentrate a bit more on the policy and make sure you get that out?

MR. LOVELESS: Right now, Doug is handling basically all of our risk management, all of our derivative strategies and that responsibility will be passed to the new person and hopefully that will free up time to get on with some of the policy issues and some of the more strategic planning of where we want to go with our debt management. So I think there is an opportunity as we move forward and get another person in place, and this is also a fairly senior person.

MR. STRATTON: I started in January of last year and there were three positions that needed to be filled. There was a Manager of Debt Servicing, a Manager of Cash Management. The Manager of Debt Servicing was filled by an internal candidate who is doing an excellent job. The Manager of Cash Management was filled by a woman who has been with the province and particularly this area for a number of years, I think five years doing this job and so she was promoted to the manager position and she just does an excellent job. That position is the position that handles the money side, that's the very short-term issuance of debt and investing surpluses from time to time. Because she was promoted that opened up another position and we were able to hire a person as of January 1996; he started, he came in from Montreal, actually, and he has an excellent resume and is doing a very fine job, a young fellow. So those are three positions. So this is the fourth position in one year that we have had to fill and that competition closed two weeks ago, or maybe one and one-half weeks ago, and we are just in the process of short-listing the candidates. Just for your information, we have 20 to 25 candidates and we have 3 or 5 who will not be appropriate to interview. So, we hope . . .

MR. CHAIRMAN: For the record, that position is?

MR. STRATTON: That position is manager, I think we call it, quantitive analysis and derivative instruments, if I have that correct. Basically, the person who had managed the derivatives and the technical aspects of calculating structured transactions and what not.

MR. MITCHELL: You mentioned that you made the decision to float several issues in foreign currency that you just described. In doing that, did you make use of derivatives to add additional protection to the province, in some or all of them?

MR. LOVELESS: Just in the end one. At the time we did the issue, we swapped the largest percentage of that. I think it was around 65 per cent to floating rates in Japan at the time, and that was a derivative swap. In the interim, we used a derivative to bring to the FRN which was a U.S. issue that we did back to Canada, and we used a derivative to swap that back. I guess we have right now probably 10 to 12 outstanding derivatives in the ledgers. The bulk of those are from fixed to floating to bring down the duration of our portfolio and take advantage of lower interest rates on the short-term end of the market as we go forward.

[Page 13]

MR. MITCHELL: With some trepidation, I am going to ask you to maybe explain a little bit about derivatives. I understand that they cover a whole score of things from futures to options and swaps. If you take one, you mentioned that you swapped the Japanese yen, or there is the U.S. Is this an option that you negotiate with the lender or this something that you buy from independent, just exactly how that works and also the advantages? My understanding, for example, that the reason you are in foreign currency is because it has lower interest rates. The swap arrangement, whatever, costs you a few points, but adds protection. Maybe you just might go through that, simply if you can.

MR. LOVELESS: Simply, it is very simple. I would ask Doug to do it but I do not think he can do it simple. (Laughter) Okay, Rick, can you do just simple? Keep it real simple.

MR. MCALONEY: First of all, the word derivative just means a financial contract where one or more of the values are derived from something else. I think they may probably have originated more in the commodities market where you might have a financial contract where the actual exchange of cash flows, at predetermined dates, might have been based on an index for pork bellies or commodity type things for which the values are well-known. They are public values that are not disputed. So, it is a very . . .

MR. CHAIRMAN: As legislators, we prefer not to refer to pork, as an example. (Laughter)

MR. MCALONEY: Wheat futures. But, seriously, it is that broad. It really is any financial contract where you have to look elsewhere to some publicly listed value to determine some of the cash flows. Actually some people, lately, jokingly say a derivative is anything that you have lost money on if you read the financial papers.

MR. LOVELESS: Can I just add to that. I think I can probably make this very simple. When we did the end deal, and we call that derivatives and we did a simple swap, we went to a counter-party which, in that particular case, was the Bank of Japan. Was it? The Industrial Bank of . . .

Well, let me just explain. I will forget the counter-party.

MR. CHAIRMAN: Somewhere in the Far East.

MR. LOVELESS: Somewhere in the Far East. Anyway, we went to a counter-party and asked them to basically exchange streams of payments and that is all we did. So, what happens there is when we swapped that, we say, listen, you pay us the fixed rate of interest and we will pay you the floating rate of interest. So, we make an agreement. Where we make the gain or loss is simply the spread between the fixed term. In that particular case, one was a 10 year and one was a 5 year, I think, relative to the terms. So, we say, you pay us fixed, we will pay you floating and whoever wins on that call is the one who makes money. At that point in time, our view floating rates would go lower and, therefore, as they go lower than our costs going out are based on that floating rate and someone pays us the fixed rate. What happens, that counter-party does a reverse transaction with somebody else who want to take another bet the other way. So, that is how derivatives get created and there are usually two people and the person in the middle makes the call. So, it is just very simple. I do not know if that is simple, but I think that is as simple as I can make it.

[Page 14]

[9:30 a.m.]

AN HON. MEMBER: It is sort of like going down to the casino.

MR. LOVELESS: Well, no, no, no.

MR. MITCHELL: My next question on that, I guess, is that in the use of derivatives hedging, or whatever, through to speculating, it is I guess sometimes a thin line. For example, if I had enough money I might sell a contract to the province that I would call or option, or whatever it is, and I would take the risk and I would speculate and the province might buy that to protect their interest. I guess what I am saying is that from hedging, from what you are doing, to speculating there is a straight line and some place you cross the line until you get to where you are speculating. I am just wondering where that line is? I think that is where the debt management policy is very important to specify what things are acceptable and are within the proper management of risk, and what things go beyond the pale and become speculation.

MR. LOVELESS: I guess the advantages of the derivatives, and I think this is key, is to manage our portfolio, we can change our risk of our portfolio very easily and very quickly. So, if it is our view that floating rates are going down, we may put on derivatives that increase our exposure to floating rates because we will benefit from that. If our view is that interest rates are going up, we can use derivatives to, again, change our portfolio and take on more longer term interest rate exposure. That is the advantage of using derivatives, but that is not leveraged. We could do the same thing by basically going out and borrowing all floating rates. I think the use of derivatives allows us a lot of flexibility and it has a very important part in managing our debt portfolio.

MR. STRATTON: I would add to that that derivatives are essential to managing a debt portfolio. If you can think of an asset portfolio, if you do not like the bond you own you can sell it. But with respect to an issuer, we issue a Yankee issue, a U.S. dollar pay fixed coupon piece of debt, and with very limited circumstances, we can buy that back. But once it is out there, we have the promise to pay. So, the way we reshape our portfolio as times change is through the use of derivatives or the Public Debt Retirement Fund is also helpful. So we have these tools and we use them to help us reshape the portfolio.

MR. MITCHELL: In my last question, I would just like to talk about the Public Debt Retirement Fund. Mr. Donahoe asked a bit about that. There was a fairly large issue that you used to retire some existing debt and the balance went into the Public Debt Retirement Fund. Just to give us some perspective on that, you already talked about that the purpose is to provide money to retire an issue that you expect to be coming up in the future with a higher interest rate and, presumably, the interest rates when that is due may not be as lucrative as they were at the time you made the borrowing.

Can you give us an idea of the rate that you are paying for the issue that was floated to put the money into the Public Debt Retirement Fund, and it is presumably invested, the rate that you are receiving from the money that is invested and the rate of the debt issue which you might hope to retire in a year or so? Now, you may not be able to be exactly specific on that, but I would like to have some feel for how that is working.

MR. LOVELESS: We established that fund back actually when we did the end deal and the FRN. So, those were the two deals that we actually borrowed the money. Rick just passed me the details on those particular issues. Our effective rate of interest on the end issue, I guess

[Page 15]

we have a couple of them but a consolidated rate of interest would be around 2.5 per cent, if you add the two issues together, because those were two separate issues, it may be a little lower than that, maybe 2.5 per cent is a little high, probably around 2 per cent. Those funds are invested in relatively short-term, one to two year, notes and probably around 7.5 per cent or 8 per cent interest rate range.

MR. MITCHELL: So we are paying about 2.5 per cent and we have it invested for about 7.5 per cent?

MR. LOVELESS: That's right. Those would retire issues. We would use some of it, for example, we retired one of the Alberta Heritage Fund issues just recently. We have a couple of more issues coming up over the next couple of years.

MR. MITCHELL: Approximately at what interest rate are the ones that you will be retiring or did retire?

MR. LOVELESS: The Alberta was around 11 per cent or over 11 per cent. Now, you have to remember, most of the ones that we retire are at a fairly high level, they were taken on a number of years ago. I mean, we still have coupons on our books at 16.75 per cent, so some of these are fairly old issues and most of them, the interest rates are not very attractive when compared to today's market. So most of the issues that we would retire we would get an interest gain. I think I can sum up by saying that.

The other advantage of the debt retirement fund, and it is one that shouldn't be overlooked, there are times when you don't want to go to the market. One never knows what is going to happen in financial markets and in Canada it is even a little more precarious. So I think as a policy going forward, it is prudent to have a certain amount of funds put aside to get you through times when maybe, with the market conditions, you wouldn't want to be in the market. So that is also the advantage of that fund. That fund will not be exhausted for about another three or four years and our intent is to continue to add to that fund. I would like to try to keep it in the neighbourhood of $400 million to $500 million for the simple reason that there may be a period of time, a year or two, when we don't want to borrow or go to the markets. So it also gives us a little flexibility in that regard. We all know what happens when we start talking about referendums and separation, what happens to the market. So that is the other issue.

MR. MITCHELL: Thank you. I will pass.

MR. CHAIRMAN: Mr. Holm.

MR. JOHN HOLM: Mr. Chairman, I say honestly to the three of you that I don't envy you your job. A couple of questions if I might and first of all in terms of the debt management and how you do it with regard to the derivatives. It sounds very much to me in a lot of ways that whether you win or whether you lose is going to be dependent upon whether you are a good trader or whether you are in and out at the right time. Is that reasonable to say? For example, you talked about the ability to swap or to trade these. You talked about the one particular issue where we took the floating rate because we gambled that that would go down, having somebody else pay us a fixed rate and we have to have the ability to assess in a very timely manner, to be able to get in and to get out, to offload one and swap it for another at the most appropriate time or in the long term the potential is always there if it is not managed properly that what could be a short-term win could end up being a long-term loss.

[Page 16]

MR. LOVELESS: Maybe just a couple of comments. I have difficulty with the word gamble, because these are not gambles, believe me. There are a couple of things that you have to realize, that first of all, the people that are making the decisions and the people I rely on have been involved in financial markets for some time. Also we get a lot of advice from experts in the field, we don't take any of these decisions lightly. When we made a decision and it is not rocket science to figure out that if you were to invest in short term over the long term, if you were to say, okay, I want to be in all floating and history will tell you that over the long term you will save money. Every model you put up will demonstrate that. What you give up is if interest rates were to peak up to 20 per cent in the short term, then you will have to be able to manage, that volatility is extreme. So there is a decision you would have to make as to how much exposure you want to have with the floating.

We made a decision to increase our exposure to floating and that is why we did the swap, so it was a long-term strategy. Most of those swaps we have not traded, those things have been on the books now for two years. We haven't traded them, we are not trying to time the market but we will take a view and we have a range, 20 per cent to 35 per cent or thereabouts, 20 per cent to 30 per cent on our floating rate, if we think we are in a major market cycle and major meaning a long-term trend for the next three to five years, we will change our focus. That to me is prudent management not gambling.

We are not making bets on a day-to-day basis, but we are trying to position our portfolio for strategic benefit and strategic gain for, basically, everybody in the province. We are paid to make those kinds of decisions and for the most part, as I said, we don't take those decisions lightly and we get a lot of expert advice, not only internally but externally, before we make any major move in our portfolio. So they are not gambles, believe me.

MR. HOLM: I appreciate what you are saying. I am not taking exception to it and I am not trying to in any way draw into question the expertise of the members of your staff or the advice that you get. I guess what I am really thinking about, as much as anything else, is the ability of the staff, with all of the work that they have to do in terms of, as you have said quite well, the managing of the day-to-day affairs, for example, of cash flow requirements and so on, and also then having the time within staff to be able to be doing the longer term planning and assessment that goes along with it. I guess my concern and I am not trying to call into question the abilities of the individuals but more about the manpower requirements and whether there is sufficient expertise available, not because of quality but because of quantity, to be doing both?

MR. LOVELESS: I would say and I think Rick made a very good point, I think things suffer that you would like to get done and that is spending a lot of time on trying to draft a very articulate policy, trying to spend time on those kinds of things that are very important but they probably don't impact one iota, whether we do a good job or not. That is my belief. I think it is important that we have policies and I think it is important they be defined but everybody understands and both Rick and Doug and everybody who works in Finance understand what our policies are. We spend our time doing the job that we are paid for. If a few things like crafting a policy have to fall to the back a little bit and slip on that then I make no excuses. I think the minister understands that. I think so far I am comfortable that on a day-to-day basis the debt management portfolio is being managed extremely well and I can go to sleep at night knowing that it is managed very well. I think we will build up the expertise and we are doing that.

[Page 17]

We have a lot of good people that we are in contact with every day. Doug spends a lot of his time and Rick spends a lot of his time and I spend a lot of my time trying to get views on the markets, trying to get views on where things are going, trying to get views on the economics of Canada and other countries. So it is not only the expertise within our own shop that we draw upon, it is the expertise and the friends and the associates that we have in, basically, the financial community, basically globally. We can call someone in London or we can call someone in Japan if we need advice on where the economy is going or what the view is on interest rates. So it is not an isolated case where we have one person in a corner that crafts all this. This is a very global kind of market and we have those contacts and we rely on them. Part of doing a good job is to rely on that expertise. So I think we do have the resources.

MR. STRATTON: I would add to that, also, that my division also leverages off the expertise in other areas of the Department of Finance. For example, in investor relations, which is a very important aspect of what we do, basically, the process of telling investors where the deficit is expected to be and what type of debt we have and the policies and that sort of thing. We have been able to use the statistics department, it does an excellent job in describing the economy of the province. They are the home page for the province and for the Department of Finance that does an excellent job and allows market practitioners to draw information, putting together documents such as Government By Design. I wrote certain aspects of the debt portion but I didn't have to put the whole document together. So we leverage off those skills in other areas of the department. So it works very well.

MR. HOLM: What is our foreign exposure now versus what it was a year ago?

MR. STRATTON: It has dropped about 10 per cent.

MR. LOVELESS: It depends on what number you use, yes.

MR. STRATTON: It has dropped 10 per cent. Since March 31, 1995 to March 31, 1996, it has dropped approximately 10 per cent. The bulk of that movement was from one currency swap. That was the U.S. dollar floating rate note, $500 million issue that was discussed earlier. That had been swapped into Canadian dollars . . .

MR. HOLM: But it had gone up and then gone back down again.

MR. STRATTON: How do you mean gone up?

MR. HOLM: Well, a few minutes ago, in response to a question from Mr. Donahoe, I believe the response was that the foreign exposure was higher in 1995 and, as a result of that very same transaction, if my memory serves me correctly, so that pushed it back up again and then it came back down. I haven't heard the figure. Are we at 60 per cent, are we at 70 per cent, or 50 per cent? Where are we now, any idea?

MR. STRATTON: It is 54 per cent to 56 per cent.

MR. HOLM: Earlier, you talked about, within the department, I guess, dealing with leverage - actually I can't remember who made the comment - that we have well understood policies verbally and that everybody understands the principles about what we are doing. I guess what I don't understand, then, if that is the case, is there anything on paper, even an interim policy that is to be followed? We have Government By Design and we have the statements by government that it is to reduce the foreign exposure, that seems to be a

[Page 18]

principle or a policy that would be well understood. That is the general direction in which we are going but there are obviously - and I am not saying that they are not the right decisions, but there are obviously - situations where those understood policies can be varied in accordance with the decisions or views, assessment at the time. I am having some difficulty understanding how it operates if we have understood policies but then again those policies, obviously, or it would appear to me, are able to be varied in accordance with what is determined on the very short term if an opportunity arises. I don't know where the line is. How do you determine, how does a department determine and how does somebody hold the minister accountable, or the government accountable, if we cross over that line in terms of a risk?

MR. LOVELESS: First of all, our policy, and I guess it is one of timing, I am not sure what came first, and I am sort of a little clouded in what came first, the policy or the decisions to increase our exposure or that came after we have already made the decision to increase exposure but regardless, our policy and our trend is, I think, to reduce foreign exchange exposure. That is a long-term policy and I think the term we use is over the medium term and the medium term we use is five to seven years. The FRN was done in April 1994 to go to 30 per cent. I guess my point is, I am not sure what came first. I think the issues were done before we actually articulated the policy and I think they sort of conflicted at that point in time. I think our policy is clear in that we will reduce and we are committed to reduce foreign exchange exposure and I don't think we have compromised that position. My view is we have not compromised that position.

Actually, if you go back, and we went back and I asked Doug, we had 56 per cent or 60 per cent exposure back 25 years or 30 years ago. The principle in Nova Scotia over decades of debt management has been to borrow in foreign markets and if you go back and look at history, we have not moved a lot from that trend.

MR. HOLM: And we have seen where that has gotten us in the long run.

MR. LOVELESS: A lot of that debt is historic debt that is very difficult to do anything about. So that has been the sort of trend over the years and it will take a while to move that portfolio back to some level which we consider reasonable, 20 per cent to 25 per cent, thereabouts. We don't know what the number is. It will be interesting to see what the general feeling is out there in the public, whether 20 per cent is the right number because we do not really know what that number should be. We, hopefully, will work on it.

MR. STRATTON: We have, however, done a lot of work on estimating what that number should be, the percentage of foreign currency exposure in a debt portfolio in a province such as Nova Scotia. One has to look at the debt portfolio in context with what the Province of Nova Scotia or the Province of Alberta or B.C. is like. That is a very important part of the analysis. We have actually done a lot of work on that and it is that type of analysis that has been done over the last year that really does drive debt policy, the very top policies, you know, the ones that we are talking about today. A person in my position, of course there are other things, some details that I have to work on that are important.

MR. MCALONEY: Coming back to your question of trying to understand how it all works, I fear we may have left you with the wrong impression. It sounds like we just jumped in, rolled up our sleeves and said we do not have time to plan or think, we are just going to do the day-to-day things. Nothing could be further from the truth. We did plan and we set policies - admittedly the parameters are fairly broad now. Basically, we came in, we were very short staffed, Bert was new in his position and I was brought on. All of the senior

[Page 19]

positions that reported to me were all vacant. So we were very short of staff. We set approximate policies, if you will, that we are going to come back and refine now. But I remind you, it is better to be approximately right than exactly wrong.

When Bert became deputy minister, it was 100 per cent long-term debt. There was no floating rate component whatsoever. As Bert said, historical analysis, at least, for what that is worth, will tell you it is a no-brainer. There should be some component of floating rate debt. We did not know, and we have not yet completed our research to the point where we can formally present a document for public scrutiny as to what the exact percentage is. We intend to get there and we will, as soon as resources allow. On the other hand, we did set broad parameters - again, Doug referred to Government By Design. I think the range in there is 15 per cent to 35 per cent. While we were going from zero, as long as we were moving in the right direction, we did have a policy that we were going by. Admittedly, yes, the parameters were fairly broad, but we were moving in that direction. Likewise with foreign exposure, we don't know if 20 per cent or 30 per cent is the exact amount. Nothing but hindsight will ever tell you what the exact amount should have been, but we know that it is approximately right and we are managing within those parameters now. So we do have policies and plans and we are sticking to them.

In terms of formal authority, we are a small enough team - basically the key decision makers are the three of us here - and anything that is done that will change the overall risk profile is done with, at the minimum, verbal approval. There are also written approvals in the file, but we always have verbal approval and lots of discussions and planning among the three of us. So, we do not yet have a formal written policy to the point where we would like to present it to the public and it is available for the Auditor General to audit. We are managing the day-to-day affairs within a general framework and policies.

MR. HOLM: I appreciate that. Just if I could go back to the debt retirement fund for a moment, and I understand the logic and the rationale and what it is all intended for - at least I think do - but I am interested in terms of what kind of legislative restrictions are on that fund to ensure that that fund cannot be used for any other purpose, devious or otherwise, other than that for which it is intended. For example, if a government should decide that they wish to proceed with a particular project and there weren't enough funds available in the general revenues of the province to do it and they decide they don't want to increase the debt of the province or to go to the markets to borrow at that particular time, what are the restrictions that would prevent the government from, one way or the other, drawing down funds from that, saying they are going towards the debt cost and actually having the debt that is being repaid being used to fund whatever project happens to be in vogue at that particular time?

MR. MCALONEY: Your reference was to the Public Debt Retirement Fund?

MR. HOLM: Yes.

MR. MCALONEY: I am just looking through the material that the Auditor General had provided you. He has an excerpt there, Section 62A(2) of the Provincial Finance Act, which says, "The Governor in Council may, from time to time, direct the Minister to (a) pay into . . .; (b) pay out the Public Debt Retirement Fund such sum or sums as the Governor in Council deems necessary to pay and retire debentures or other securities of the Province.".

MR. HOLM: So it could only be used for that?

[Page 20]

MR. MCALONEY: Yes.

MR. CHAIRMAN: Very quickly, John, if you could, please.

MR. HOLM: Okay. Just following on that general thrust, as part of the debt retirement program, we are getting figures off of the books and we are hearing an awful lot about public/private partnering now and schools being built, highways being built by the private sector who, of course, will then be leasing those back to the province which will show up in our operating costs. The debts will not show up on our books but on somebody else's books. What kind of analysis has been done by the department and is such an analysis available that gives a comparison in terms of the actual cost to the taxpayers of deferring the cost to somebody else's books for their capital costs versus the long-term operating costs that are going to have to be picked up by the province to pay for their interest, et cetera?

MR. LOVELESS: Is there any particular project that you . . .

MR. HOLM: Well, we have schools that are going to be built by the private sector - another one was just announced the other day - we have proposal calls and we have Highway No. 104. This seems to be the direction we are going. I don't claim to be any kind of expert but the government can borrow for less than the private sector and if government is running effectively and efficiently, they should be able to develop these projects, I would think, as cost-effectively as the private sector. So, therefore, I don't understand where the long-term savings are going to be, other than the fact it won't look like it is provincial debt.

[10:00 a.m.]

MR. CHAIRMAN: As quickly as possible, please.

MR. LOVELESS: The biggest one, I guess, on the books is Highway No. 104 and that is a major project. The Department of Finance has been heavily involved; I have been on the selection committee and the final contract negotiations, as well as we have had a staff person working very closely at the detailed level on all of the financial implications.

I guess the decision on Highway No. 104, and I think there are a couple of decisions and a couple of things that happen in any of these projects and one of them is risk transfer, and we are reasonably close to bringing that to a close. With Highway No. 104, there is considerable risk transfer to the private sector, both the construction of the highway, and this is one of the first roads where we actually said to the consortium, you design it, you build it, you get all of the environmental permits, you do it and you give us a final price. If you run over, that's your cost and that comes out of your profit margin. That is one thing. So they have taken all of the construction risk.

When you give risks to anybody, they are going to want more money and in the particular case of Highway No. 104, the actual financing is more costly and more expensive than what we could do ourselves. But the bottom line is that the decision was made that that risk should be in the private sector and, I would argue that even taking in the additional cost over the long haul of the project, we will probably save money. I think that is the whole premise that this is built on, that there is a risk transfer to the private sector. If everything went according to plan, they will benefit. But if there are things that deviate from their plan, then it is their costs. So from that standpoint, there is a transfer of risk and when you transfer risk, you have to pay a small premium, or in some cases a very large premium depending on the extent of the risk.

[Page 21]

MR. CHAIRMAN: I think we had better stop because I want to get on to other questions.

MR. LOVELESS: So that is really the rationale and every project is separate and every project has to be looked at as an individual project.

MR. CHAIRMAN: We have spent quite a bit of time with the first three questioners and I would ask members if they would try to focus in so that, perhaps, we could get a few more people in between now and 10:34 a.m., which would give us our full two hours.

The next person I have on my list is Mr. Fogarty.

MR. GERALD FOGARTY: Mr. Chairman, I would like to summarize, if I may, just what I have heard here this morning on this whole subject of debt management policy. Is it fair to say that such a policy is not yet in place and has not been put in place, and/or legislative changes, because there is a certain concern or, indeed, conviction within the Department of Finance that the element of flexibility must be retained in any said policy? Am I correct in hearing some of the examples that Mr. Loveless gave as to the way the department seized an opportunity that presented itself on the international money markets - one example was to borrow money to pay off another debt at a higher rate of interest - in other words, is it fair to say that that is the major reason why flexibility must be a large component of any future policy changes that would be made?

MR. LOVELESS: Yes and no. We must ensure that we don't have policies and legislation that would be so restrictive that it would be costing us money, costing taxpayers money. I agree there has to be a certain degree of flexibility and it is difficult to know where that balance is at this point. I don't think there is any government in this country that has legislation - and I am pretty confident of this; I shouldn't say it emphatically - I don't think anyone has policies, for example, that say your floating interest rate range is between 25 per cent and 35 per cent; you can't go 20 per cent foreign exchange exposure, and so on; and you can never borrow in Deutschmarks or French francs. Traditionally, those kinds of policies haven't existed, so I think we would probably be somewhat in the front.

If we bring in a piece of legislation that says, here is the debt management Act of the province, I think we would probably be the leaders in that respect. If we do that, I think we have to be very careful that we don't take away the good management practices that we all need to do a job. So there has to be a balance and that is all we are suggesting. The main reason, I guess, why we haven't brought in a piece of legislation is that I am not sure it should be a piece of legislation. It may be better as a formal government policy that is endorsed by Cabinet and is publicly known. But maybe it should not be in legislation and I don't think the minister has made that decision and I haven't made any recommendation to the minister with respect to that issue.

MR. FOGARTY: If I may, Mr. Chairman, get back to this area of public/private partnering, specifically with construction of new schools. I have been told that on the surface it would appear that the onus is removed from government if the private sector is going to come into the picture and assume that initial capital construction cost and then, of course, that new facility could be leased back to the province. But I am also told that a difficulty is that there is no up-front money, that this newly constructed school of $6 million or $8 million would still be a liability on the books of the province. Is that correct so far? Is that a major factor in this whole business of public/private partnering?

[Page 22]

MR. LOVELESS: I would say, no, it is not supposed to be a factor in private/public partnering. It is one that Finance would never endorse if that was the only benefit. I think the Minister of Finance would also echo those comments. If the only benefit is to move the debt off the province to the private sector, then it probably doesn't accomplish anything.

With Highway No. 104, I think there are other reasons; with the schools, there are other reasons. The school is to try to design a model that the private sector can build, that they can showcase to the world and, hopefully, export that technology. So we are trying, to a large extent, to move some of that activity back to the private sector.

I was involved in Highway No. 104 and I think when you have to go to Ontario to get someone to comment on a road design because we have nobody in Nova Scotia in the private sector, except in the Department of Transportation, that can design a road, one has to wonder if we have done it right. I would suggest the same is true in many industries.

There are a lot of things that the government does and a lot things where government has the expertise and you cannot leverage that expertise in the government. So we need more capabilities in the private sector and we need to strengthen the private sector and I think we can leverage taxpayers' dollars to strengthen the private sector. That is the main reason for private/public partnering and the only valid reason.

MR. FOGARTY: It is not to make it easier for government to get on with projects that are much needed, but because the debt is still so heavy it cannot be done?

MR. LOVELESS: Well, they complement each other. You can make things happen, you can build a strong private sector, you can complement the government initiatives and government agenda and they all go very well in the same direction. But in my opinion, and I would never support it and I know the minister, if it is just to get the debt off the books of the province with no long-term benefit in the private sector, then it doesn't make a lot of sense. But it is a way to get projects going by using private sector money and to strengthen the private sector. I would hope as we go forward, and private/public partnering, at this point, we haven't developed it and we haven't even endorsed a final policy on that issue.

MR. FOGARTY: So when we hear it is the way of the future, that is just assuming too much?

MR. LOVELESS: It is one minor way to help build the economy in Nova Scotia. It is one way for provinces to try to get their fiscal house in order. It is only one part of a very big agenda. But it has a place under the right conditions.

MR. FOGARTY: Thank you.

MR. CHAIRMAN: Mrs. Cosman.

MRS. FRANCENE COSMAN: One of the joys of being almost last is that all of the important questions get asked first and then I am left with the little dribbles and drobbles, but I will do my best on an important subject. I guess one of the most difficult things for politicians is having to say no on a regular basis because people hate you when you say no and they love you when you say yes and you give them what they want. I am asked frequently, are we in a better position now than we were in 1993 - and I know the answer to that is yes, in terms of trying to deal with our deficits. I am asked frequently if we would have been better off to have slipped into bankruptcy, period - as New Zealand - and tried to climb out

[Page 23]

of that quagmire. I don't necessarily know the answer to that but I am interested, overall, in the percentage of the revenue that we pay into the sinking fund and the percentage we pay in the interest on the debt and where that has changed over the last three years. I assume we are doing better than we were in 1992 or 1993. I am interested in some of the discussions we heard this morning about the risk of where we move from actively hedging into actively speculating, and what are the protections in a policy basis to make sure that when we are hedging where we are, we are not just moving over into the business of speculating. What are the protections that we have built in for accountability in our policies, in that area? There was discussion about the change in our foreign currency debt increasing and nobody mentioned the fact that the volatility in the Canadian dollar changed that percentage quite drastically over the last 12 to 18 months. So, those are some of the loose ends that I was trying to pick up on in terms of the previous questions. Bert, I do not know if you want to have a stab at that or not.

MR. LOVELESS: I think I have three questions here. I do not know the exact number, but I think what happened on the interest rates, as a percentage of our revenues, and I will use that as a model, they probably continued to go up at least for 1993, 1994 and 1995. They probably started to come down a little bit as we go forward. You have to remember in 1993, I think, we had to borrow around $700 million to fund the operations of government and that number continued again. So, in the last few years, we still continued to borrow. Even last year, we still had to borrow approximately $150-odd million. This year we are in, we are going to have to borrow $150 million to fund operations of government. So, our borrowing has not stopped. The only time it will stop will be next year.

Our interest rate, as a percentage, has probably come down; we have not stopped borrowing, it is because things have moved in our favour. Exchange rates and the Canadian dollar have improved about 3 per cent which is not a major improvement since last March, but it has improved a little bit. The end has improved considerably in our favour. So, we have made some significant gains in our total debt which we display on our balance sheet in the currency of the issue in Canadian dollar equivalents at March 31st and, I think the number is around $500 million, will be a positive variance for this particular year we are in. So, those things help. As an ongoing interest percentage, the goal there is if you do not borrow any more money and as things improve, then that percentage hopefully will, in the future, continue to go down. That is sort of where we at on that issue.

The second question which is (Interruption) yes, do you want to pick that up?

MR. STRATTON: I think the second question was hedging versus speculation which is a very good question. We have tried to address that in Government By Design by talking about the risks inherent in the portfolio on an all-in basis, I should say the debt portfolio. On Page 31 of the debt management plan, it shows the sensitivities to changes in debt servicing costs given changes in selected financial variables. In other words, if the Canadian dollar went up or down one cent, what would be the change in the debt servicing costs?

Those were put in for basically two reasons. One is that one could look at our assumptions that are also laid out in the debt management plan on Page 29 and say that we don't agree with those assumptions or we do agree with those assumptions, whichever it might be, and then adjust the debt servicing costs given those volatility numbers. The second reason is that it does give us a sense of how speculative or how maybe unspeculative - I am not sure if there is such a word - is the debt portfolio. So it does give us rather good insight into what the debt portfolio looks like and how volatile it is relative to changes in interest rates or

[Page 24]

changes in currencies. So we tried to address that hedging versus speculation question in that manner.

MR. LOVELESS: Is that crystal clear to you?

MRS. COSMAN: As clear as he made it. (Laughter)

MR. STRATTON: And the final question.

MR. LOVELESS: I think I got the one and three and I left you for the middle; this was on the foreign exchange.

MRS. COSMAN: I think the other questions I was going to ask have already been covered off by previous people. I have them all written out here and it looks like they have been covered off. Thank you.

MR. KEITH COLWELL: I really liked your first comments that the best way to service a debt is to not have a debt. That is just good business practice any time you can put it in place. One thing that has always concerned me, I mean, there has been a political will in the past in the province to spend, spend, spend, really no restrictions on that and thank goodness that is coming to a grinding halt and getting back to the real world. But if we look at the debt service charges in the province and it takes a significant amount of our cash flow to cover those debt service charges and the debt retirement costs, on top of that again, then if you add in all the costs and the network you have had to put together in your department to manage this, which again is a tremendous cost to the taxpayers, did you ever look at exactly how much this is costing the Province of Nova Scotia to handle all of this? I think it is a pretty scary number.

MR. LOVELESS: I guess if we look at two things, the debt charges are down to about $900 million, I think they peaked at $975 million or somewhere around there, $980 million. That doesn't pay one cent off. The numbers that we use, to pay off our debt over 20 years, if we were to put away approximately $160 million a year so we could add that $160 million that would pay it off for approximately 20 years and get us out of debt in 20 years if we could put away $160 million. So those are the bulk of the costs.

Actually it is, and I don't want to say it is trivial, but if you add in the staff in the Department of Finance, I mean, the blip that it would make would be fairly insignificant. (Laughter)

MR. MCALONEY: I think the interest on the debt is about 23 cents out of every dollar. If you add in the overhead of staff costs it would be like 23.000 something.

MR. CHAIRMAN: You only get what you pay for. (Laughter)

MR. MCALONEY: That's right. (Interruption) We would be happy to work on a percentage basis.

MR. COLWELL: So basically it is a tremendous burden on the taxpayers of the Province of Nova Scotia having to handle this and we would be much wiser if we would have had the foresight in the past to not generate this huge debt and actually put our money into the programs and the services that the province should be providing and help some economic growth.

[Page 25]

The other thing I like about what you are doing, is that you are working on a team approach to this, and I think that is very important, to get this situation under control and indeed reverse it and hopefully some day in the province, get a very small long-term debt. Then we could spend the money where we need to.

There is one question that always comes up to me and I know there are some reasons for this and maybe you can enlighten me a little bit, why can't Nova Scotians buy the debt?

MR. MCALONEY: That comes up from time to time and if we can borrow from the experience of our counterparts in other provinces who have been forced into this, most of them will say that in their experience it is a much more costly way of borrowing than other capital market instruments that we are currently using. I have had this debate with people, usually people who would stand to make significant commissions from distributing these type of products but they say, but it would incent local people to save more. If that is a fact then I would say, okay, my raw numbers aren't the final story, I personally refute that argument, I don't believe that the savings rate of Nova Scotians is restricted by lack of financial products in the Nova Scotia market place to borrow.

So if I thought introducing a Nova Scotia savings bond program or whatever name you want to attach to it would induce Nova Scotians to save more, then I would go back I guess and re-examine my numbers and say, yes, there are external factors. But for the most part certainly every other province that we talked to, Doug and I get together with our counterparts once a year and would you say, Doug, probably the biggest bee in their bonnet is the fact they are forced into doing these things locally? They hated it and most say it is by far their most expensive source of financing.

MR. STRATTON: I guess I would add to that is that public debt issues like our domestic 10 year this year was available to buy by individuals across the country. Also individuals buy these issues indirectly via their pension funds. So the size of the debt that we have to deal with isn't really very much of an institutional type of sales effort.

MR. CHAIRMAN: Okay, I am going to exercise my prerogative as Chairman and jump in for a few moments. With respect to public/private partnering, let's assume that government enters into a contract with a private partner to build a school and some time during the course of that construction phase the private partner goes bankrupt. Is the province exposed at all with respect to a situation of that nature?

MR. LOVELESS: I think it depends on the agreement but normally, no. What would have to happen in that particular case the consortium, whoever built that school, would have to find another partner or another player to bail him out. But we have no direct guarantee to pay off the debt of the consortium. Now, if you want to argue we have a moral obligation and all those kinds of things but I think those are separate issues but we have no legal obligation.

MR. CHAIRMAN: KPMG is the province's internal auditor, is that correct?

MR. LOVELESS: No, Deloitte & Touche are.

MR. CHAIRMAN: Presumably you have a very close relationship with them.

MR. LOVELESS: Yes.

MR. CHAIRMAN: You also have used KPMG from time to time for other . . .

[Page 26]

MR. LOVELESS: Deloitte & Touche.

MR. CHAIRMAN: Haven't you used KPMG at all? Have you a relationship with them?

MR. LOVELESS: No, we don't have an ongoing relationship.

MR. CHAIRMAN: Had you had, from time to time, a relationship?

MR. LOVELESS: I guess from time to time we probably have used most of the major CA firms on occasion.

MR. CHAIRMAN: We all read a little document which I thought was kind of interesting on derivatives that, in fact, KPMG puts out. They recommend in the private sector and I wonder if this could be applied to the public sector and if so, if you have given any consideration to it, to creating a risk management committee which would include Ministers of the Crown who would, generally speaking, be comparable to directors of corporations and the senior management people, I would assume, both in and outside the Department of Finance - all the expertise in government doesn't reside in the Department of Finance or at least that is my view, you may not agree with that (Laughter) - but they also go further and recommend that outsiders, without definition, be invited to participate in such a risk management committee. Have you given any consideration to that kind of model with respect to government?

MR. LOVELESS: No, we have not. We have now on our investment side, an investment advisory committee. Most of the representation on that committee is because they have a vested interest. So, the teachers' pension plan, the superannuation plan, some of our own advisors are there.

On the debt management, which I think is what we are talking about more so, I would not be adverse to having an advisory committee to help formulate high level policies with respect to debt. I do not think it hurts to do that. I guess if a committee got down to detailed management, I probably would take exception to that because I do not think you can manage by committee. But I think to formulate policy to try to discuss some of the risk parameters of our debt portfolio, I would have no difficulties moving in that direction. But it has not been discussed.

MR. CHAIRMAN: Bert, many governments across Canada, and in other jurisdictions as well, are endeavouring to move away from deficit budgeting and to reducing debt. You alluded to this, I think, and I would like you to enlarge on it very briefly, if you can. To what extent is there cross-fertilization between governments, perhaps nationally or perhaps internationally, with respect to Nova Scotia in seeking out ways in which we can approach resolving those two issues without, in isolation, simply reinventing wheels that have already been invented somewhere else?

MR. LOVELESS: I will pass that to Rick because I think both those items have probably been on the agenda of the treasurers across the country over the years. I would suspect derivatives would have been discussed. I am not sure of any province which actually has a derivatives policy.

MR. MCALONEY: First of all in terms of sharing of ideas, as I mentioned, we do get together once a year. It is relatively new for me.

[Page 27]

MR. CHAIRMAN: Who is we? You have got to help us out here.

MR. MCALONEY: Doug and his counterparts from across the country, the people responsible for debt management in each of the 10 provinces. I think, Doug, your involvement has been about the last two years and the same with me because I am relatively new to this area. But at least for the last two years, we have had the benefit of two day meetings with our counterparts across Canada; a wide range of issues discussed; very open discussions and it is very helpful.

In terms of borrowing ideas from others as opposed to trying to reinvent the wheel, certainly we are forced to do that given our limited resources. In terms of our policy formulation, as I say, this stage we are at, we have done some work and we have gathered a lot of resource material. We just have not had the time to research thoroughly and write up a formal policy.

MR. CHAIRMAN: So, just to close off my section, there is not a formal mechanism in place to do this on an ongoing basis. It is a time to time exercise.

MR. MCALONEY: There is a formal mechanism once a year. The rest is ad hoc . . .

MR. CHAIRMAN: The other 363 days a year, something else happens?

MR. MCALONEY: Well, we make contact. We meet our counterparts and we are free to pick up the phone and call them and we do.

MR. CHAIRMAN: It is pretty ad hoc then?

MR. MCALONEY: It is ad hoc, yes. But there is a lot of ongoing development. This is still a fairly new area. I understand the federal government has been working on a debt management policy now for a couple of years. It is actually, the way one person put it, it is still in the draft stage. So, I have asked them for a copy of that, but it is still just draft and they have had a lot more resources than us working on it for a couple of years.

MR. CHAIRMAN: We have about five minutes left. Mr. Carruthers wants to leap into the fray.

MR. ROBERT CARRUTHERS: Just a couple of quick questions. Earlier on when we spoke about the risk factor, when we put out issues or purchase, I noted that we talked about the interest rates spreads on a couple of occasions were quite dramatic. I wonder, when we talk about the risk factor in dollar fluctuations, especially with currencies that are fairly stable, like the United States currency, the yen and perhaps the mark, compared to the advantages on a 2 point differential in interest. It strikes me that we use the term exposure to foreign markets as a very dirty word, as we seem to have used derivatives here today and I am not sure that I understand derivatives to be as dirty a word as others. I think it actually can be very beneficial.

[10:30 a.m.]

I wonder how important is a 2 point or 3 point difference in interest that you can borrow on the market when you are borrowing in stable currencies, as opposed to the risk factor and a fluctuation in foreign currency?

[Page 28]

MR. LOVELESS: A difference of 100 basis points in our portfolio is about $100 million savings in debt costs. So when we calculate risk, we are down into the individual points. If we can pick up 5 points or 10 points, which is one-tenth of 1 per cent, we consider that a good thing to do. When you are talking $10 billion worth of debt, 1 basis point makes a difference. So that is kind of the detail that we measure risk at right down to the basis point.

MR. CARRUTHERS: The impression that I get is that if you get 3 or 4 interest rate percentages, that is a significant amount of money and a 2 per cent or 3 per cent fluctuation in the dollar would be insignificant as opposed to say a 3 full percentage point interest rate. Would that be fair?

MR. LOVELESS: Yes, just to give an example, and these were just updated a couple of days ago, the yen deal, which was fairly significant, one of them, the issue we did was $481 million Canadian. The interest savings on that to date is $96 million.

MR. CARRUTHERS: Which is significant. To me, also, I just wanted, in the overall approach that the department is taking, to compare over the last five years. I wonder if you would quickly comment on two things. One, what is your view on the improvement in the department, the basic improvement with regard to our investments, how we have done on them over the last couple of years, as compared to say five years ago, and how you feel the department is progressing in that regard, can the people of Nova Scotia feel safer today than they did before?

Two, when we talk about the public/private partnership, I just was not 100 per cent clear, do you believe taking all things into consideration, that the total cost in these public partnerships, say for instance from the highways and some of these school issues, will be a benefit to the people of Nova Scotia or be detrimental to the people of Nova Scotia? (Interruption) Of course, that is okay even though the Leader of the New Democratic Party likes to laugh at our questions, I must tell you many of his questions I find very entertaining myself. (Laughter)

MR. LOVELESS: Okay, I will deal with the first one, can Nova Scotians sleep better at night, or feel safer. I think we have made a lot of improvements and you talk investments, I assume you mean debt management as opposed to investments. That is another dream I have at night. I think we have a good team in Finance and I would be remiss to say anything else. We have an excellent team in Finance and I don't want to take anything from the team we had before because I think we have had an excellent team in Finance for a lot of years and some of the people who have been in Finance and people I work with, I have been in Finance a long time so I have some ties with those people. So we have had good people for a long time in Finance. We have a different kind of people now and we have a different strategy so I am comfortable with our debt portfolio management.

On the private/public partnering, I think you are going to find we will have winners and we will have losers. I guess my hope is that the number of winners is greater than the number of losers and time will tell. I have been heavily involved in some of the private/public partnering initiatives and not all of them give me the level of comfort that I would like but some of them, I think, are good initiatives and I think we will get better at it as we go along.

MR. DONAHOE: Very quickly, Bert, I am not sure I understood entirely what you said earlier about the privatization or public/private partnering relative to Highway No. 104 because I think I heard you say that by virtue of the fact that the private sector is assuming greater risk, there is a greater price tag and that therefore there is, up front, a greater cost to

[Page 29]

the Nova Scotia taxpayers. Then I think you went on to say that in the long run, or whatever, it will prove to, well, my notes say in the long run it should perhaps save money for the taxpayers. I have two conflicting principles at play here.

MR. LOVELESS: I guess on the actual cost of financing the project, in the private sector the costs are higher. So that is one where you add costs. The other flip side of that is the consortium are taking the construction risk, that is a very difficult stretch of highway and the estimates that they are giving us on their final costs are lower than what the engineers in the Department of Transportation are saying. So there are probably some construction savings which would hopefully offset the higher interest rate. As we go forward, we hope the ledger is on the right side and so far the project looks like it will be on a total life cycle cost basis. So over the life of the project, we will pay more in interest, I would suggest, but we also are taking less risk and we hopefully will have less cost overruns on the construction, which if we built it ourselves, there is a tendency to get into a lot of cost overruns on most projects that we undertake. So, we are hopeful that the private sector can manage that process a little better.

MR. CHAIRMAN: We have time for one more question. We did start a little late. That is not the fault of our witnesses. They happened all to be here on time. They have another engagement to run to. Mr. Donahoe, if you could ask a very quick question do so and then I think we should allow our witnesses to leave.

MR. DONAHOE: Thank you, I can ask it very quickly. For a considerable number of years, there has been sort of an annual rite of spring or rite of some season, somebody starts asking questions about the status and the financial integrity of the superannuation fund but more frequently of the teachers' fund. Can you - in 25 words or less, as they say in the contests - give us your sense of the current fiscal financial integrity of those two plans?

MR. LOVELESS: We have had an exceptional year. I think all financial markets have and this year our returns will probably be in excess of about 17 per cent real rate of return on investment side of the portfolios. The unfunded liability should improve considerably over March 31, 1995. I think we can all be pleased, and I think pensioners and people who participate in those programs can be pleased with how those funds are going. So they are both in better shape. So we are comfortable.

MR. CHAIRMAN: Thank you very much, Mr. Loveless. I would like to thank you, Mr. McAloney and Mr. Stratton for joining with us today. It has been a most interesting session and we will look forward, as a committee, to meeting with you again some time in the not too far distant future.

Anything anybody wishes to bring before the committee? Mr. Carruthers.

MR. CARRUTHERS: Mr. Chairman, I have a concern about how we are allocating the time here. Maybe it is best to discuss that in camera. I just want to put it on notice now that I am quite concerned about how that happened today.

MR. CHAIRMAN: Well, since it was brought up in public, I think we should deal with it in public.

MR. CARRUTHERS: All right, then, I will. The time that was allocated here, as I understood it, we agreed by this committee some time ago that we would not be allocating time based on Parties but based on the total number of members here. In this particular case

[Page 30]

today, we have had one member speak for 28 minutes allocated time, another one for 24 minutes. One of them we came back to them. One of the members here did not speak at all from our Party and we were asked to be very pointed by the Chairman when the last two of us spoke. That is a real problem and I would think that the best, I would recommend, I am not blaming the Chairman or alleging in any way that the Chairman had any bias, I don't mean that, what I do mean is that sometimes it just runs on and it would seem to me the most sensible way of doing this would be take the amount of minutes that are left in the questioning area, divide it by the amount of members that are here and then after that time is used up, if some one doesn't want to speak or some one doesn't use his full time, then we go back to the members that have additional questions. But what is happening here is that there is a real significant difference sometimes between the amount of time that is allocated. I know for myself I tried to be as quick as I could. I know you did also, and basically both of us were very conscious of that. That is kind of unfortunate when 28 minutes gets used by one member.

MR. CHAIRMAN: I certainly will take your observations under consideration. I believe everybody who indicated that they wished to speak had an opportunity to do so. I didn't ask any member other than actually two of those first three to wind up their questioning. I don't think I missed anybody, was there anybody who wanted to have an opportunity to speak who did not?

MR. CARRUTHERS: I did not suggest that.

MR. CHAIRMAN: No, I realize that but for my own information. We managed that.

MR. HOLM: Mr. Chairman, may I just ask a question? I am not a regular member of this committee so I am not familiar with the arrangement that Mr. Carruthers talked about. It has been several years since I have been a regular member of this committee. The arrangements at that time were very different in that there were set Party allocations. So I would be interested to find out actually what was agreed to at that time. I can't say that I would be in agreement with the arrangement if what Mr. Carruthers is describing is actually the agreement of the committee but if that was what was decided, then that is what we all live with. But I would just like some more information on what it was at that time.

MR. CHAIRMAN: Mr. Holm, you are quite right, the way in which the committee has chosen to deliberate is significantly different from the method that was in place in the past. In an effort, insofar as we can, to remove the Party politics from our deliberations, we have moved away from giving structured times to each Party and endeavoured to ensure that as many members as possible have an opportunity to participate in the questioning and bearing in mind, of course, Opposition members will have a particular reason for wanting to be assured that they have an opportunity to participate and very clearly today, for example, that was done, in the view of some perhaps, to a fault.

I believe and I think the committee believes that the way we are now approaching this has resulted in a more methodical, more balanced and a better approach to resolving the kinds of questions we put to our witnesses than had necessarily been the case in the past. So I think Mr. Carruthers has pretty well summed it up.

Any other questions or observations.

[Page 31]

MR. MITCHELL: I just support what the Chairman has said and I think it has worked fairly well. I think there has never been any problem or concern that anybody or any particular Party has been short-changed. I think the feeling was that if we would try to go together as a committee rather than as a group of Parties trying to making political points, that we could do our job better.

MR. CHAIRMAN: All right, we meet again on March 27th.

So we stand adjourned until 9:00 a.m. on March 27th. Thank you.

[The committee adjourned at 10:44 a.m.]