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14 février 2001
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Public Accounts Committee -- Wed., Feb. 14, 2001

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8:00 A.M.


Mr. Russell MacKinnon

MR. CHAIRMAN: Good morning, ladies and gentlemen. Welcome to today's Public Accounts Committee meeting. Today with us we have officials from the Department of Finance as well as the Auditor General's office. Our topic today is the Nova Scotia credit rating. In the interest of time and making sure I have everything just right, I will ask the witnesses if they would introduce themselves with their titles and then after that, ask the individual members of the committee to introduce themselves. Then, as Mr. Hogg well knows the format, he can start off with some opening remarks and any other witnesses who chooses to do so. Then we will open up the floor for questioning. So with that, I turn it over to the first witness on my immediate right.

MR. DOUG STRATTON: My name is Doug Stratton, Executive Director - Investments, Pensions and Treasury Services.

MR. WILLIAM HOGG: My name is Bill Hogg, Deputy Minister, Department of Finance.

MR. ROY SPENCE: My name is Roy Spence and I am the Director of Liability Management and Treasury Services.

MR. ROY SALMON: Roy Salmon, Auditor General.

MR. CLAUDE CARTER: Claude Carter, Deputy Auditor General.

[The committee members introduced themselves.]

MR. CHAIRMAN: Thank you. My name is Russell MacKinnon, Cape Breton West. I will be your chairman for today's proceedings. Mr. Hogg.


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MR. HOGG: Thank you, Mr. Chairman. I just have a few opening remarks. It is a pleasure to be back here again after a week. I know that you will have many questions about our debt position and we will try to give you as much background or detailed information as you are interested in. As at March 31, 2000, the province's total consolidated outstanding debt, net of sinking funds, stood at $11.2 billion. This was an increase of $900 million over the previous year. So far during this current fiscal year, we have borrowed just over $1.2 billion, slightly ahead of our cash budget. These borrowings are used to finance government operations and also to refinance old debt as it becomes due.

Our credit rating has an important impact on our ability to borrow and on the cost of our borrowings. Our ratings are conducted by three major rating agencies: the Dominion Bond Rating Service, which is based in Canada; Standard and Poor's; and Moody's. All of our ratings have remained stable for several years. Up until last year, there was a fourth bond-rating agency which has since been merged with Standard and Poor's. That rating agency was known as the Canadian Bond Rating Service. It has been merged with Standard and Poor's.

Ratings are important because the higher your rating the easier it is to sell your bonds. The lower the rating the more you must pay in interest in order to attract investors. In some cases, if your rating is too low, some investors will not invest regardless of the price or the interest return. I should point out that Nova Scotia has the second lowest credit rating of all provinces in Canada. Ratings are also important for hedging activities and in hedging foreign currency exposure. Our foreign exposure is currently around 33 per cent of our current debt. This will be reduced to 20 per cent by the end of 2004-05. This year we expect to pay more than $900 million in debt servicing costs. That is just the interest on the debt. It does not pay any of the principal on the debt.

With those few opening comments, we would be pleased to take any questions.

[8:03 a.m. Mr. Brooke Taylor took the Chair.]

MR. CHAIRMAN: Thank you, Mr. Hogg. Are there any other comments from our witnesses before we begin with questions? No. I guess this week, then, it is the Liberals turn and we will begin with Mr. MacKinnon.

MR. RUSSELL MACKINNON: Gentlemen, welcome back to the Public Accounts Committee. Mr. Hogg, as you were making your opening remarks, you indicated the province borrowed $1.2 billion just to cover the operating bills and day-to-day activities, yet you state that the province will pay $900 million this year toward interest payments on the debt. So, in effect, am I to interpret that the difference of about $300 million would leave the province short on its ability by over $900 million? In other words, we are still going further in the hole, irrespective of what actions we seem to be taking.

MR. HOGG: We are continuing to increase our level of debt but the way that you described it, it might be more helpful to take a little broader view of it in the sense that debt servicing costs are like any other government expenditure so you have revenues coming in,

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about $5 billion in revenues coming into the province. The province spends about $5.2 billion in expenses, including the $900 million. So we have a shortfall of $200 million to $300 million per the current budget.

MR. MACKINNON: At present trends, do you expect that $900 million to increase or decrease based on activities that have taken place over the last three to four years?

MR. HOGG: In the near term, the amount will increase.

MR. MACKINNON: By approximately how much?

MR. HOGG: There are two factors that determine the size of the debt servicing cost. One is how much you have to borrow, which is determined by, in part, the provincial deficit but also the proportion of the expenditures that require cash. Not all of the expenditures require an actual cash outlay. Some of them are accrual or accounting entries. So the first variable is the amount of money you have to borrow and the second variable is the interest rate or the cost of borrowing. If our requirements for funds continues to increase, which it does, even with the current plan of having a balanced budget in two years' time, we will still need to borrow money to fund the current operations of government because there is cash that is required to operate the province, such as the loan boards require cash that they lend to others and the interest rate is dependent on the market. I can't give you much in the way of projections other than what is in Government By Design. It tries to predict what the level of debt would be going out so you would have to apply an interest rate to that.

MR. MACKINNON: Well, let's focus on this balancing of the books in two years' time. If I interpret your comments correctly, what you are saying is, if we borrowed a lot of money today and put it on the debt, we could balance the books, our operating budget could be balanced by just borrowing more money. Is that not correct?

MR. HOGG: No, it is similar to your . . .

MR. MACKINNON: Well, the interest payments are going to continue to rise so we have to borrow more money because we don't have the revenues. If we went and borrowed $1 billion tomorrow, we could actually have a surplus. We would have a higher debt but our operating deficit would be zero. We would have a surplus.

MR. HOGG: No, there are two different kinds . . .

MR. MACKINNON: Is that correct?

MR. HOGG: No, that is not right.

MR. MACKINNON: Wait now, I am getting mixed signals here. You are saying no and the colleague to your right is saying yes. Which is it?

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MR. HOGG: The answer is no. There are two different factors. The first is your operations. If you think of it in terms of a household budget perspective, your operations are your salary that you make plus the cost of operating your household. The other thing to keep in mind is your cash requirements. So if you also look at your household situation, you might get a cash advance on your Visa or credit card but that doesn't really represent income. You owe that money so you are no further ahead by the fact that you have $100 in your pocket, you now owe someone $100.

MR. MACKINNON: You have a greater debt.

MR. HOGG: Exactly.

MR. MACKINNON: But you are able to balance your books at the end of the day because you borrowed more money.

MR. HOGG: You can balance your bank account.

MR. MACKINNON: That's right and that is really what I am saying.

MR. HOGG: So your bank account, which is separate from the estimates, the estimates are presented on income/expense basis which is different from your cash requirements.

MR. MACKINNON: Okay, let's focus on that side since obviously we are going to be paying more in interest payments in two years' time. So that means we are going to have a greater debt in two years' time which will obviously have an impact on our credit rating in two years' time. Some of the revenue projections that the government put out over the last several years, in 1999, actually, the revenues were $123 million over what the government estimated. Last year it was $105 million more than was estimated. So far in this current fiscal year, 2000-01, I think it is approximately $36 million or $37 million higher than was estimated. Indications seem to be either the government is off in its math or it is perhaps deliberately underestimating the amount of the revenues so that in two years' time it will look that they are doing a great job. Would that be a fair criticism? What would account for the government being off by such large numbers?

MR. HOGG: We are talking strictly about revenues which are not directly related to debt service costs but there is a relationship. The experience in Nova Scotia is not unlike virtually all of the other provinces, including the federal government. The main determinant of the size of the revenues is the growth in the economy and by all accounts, at least up until recently, the economy has grown much more significantly than any of the governments had projected, including Nova Scotia. In the case of the federal government - these numbers are off the top of my head - I believe their estimates, their budget, was based on a projection of 3.5 per cent growth in GDP and the actual growth was more in the order of 5 per cent. In the case of Alberta, their income more related to petroleum prices but their first quarter update, just four months after the fiscal year started, they increased their revenue estimate by more than $5 billion which was more than 20 per cent of their total revenues. Similarly in B.C. and Ontario.

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The estimate of revenues primarily hinges on your estimate of GDP growth. If you have that estimate incorrect and there are a number of experts that give various opinions on where it should be, then your revenues will vary depending on what the actual GDP growth is.

MR. HOGG: And our credit rating agencies, they would know all this.

MR. HOGG: Yes.

MR. MACKINNON: Even before we changed the process by which we do our accounting, everything is on the books now, so to speak, including all the unfunded liabilities, the cost of Sydney Steel and so on and so forth. That is all included in the bottom line whereas in previous budgetary processes they weren't but is it not correct that the bonding agencies would still have and consider all of this additional information when they would provide a rating to the province, whether we had it on our books or not for public consumption?

MR. HOGG: Yes, they tried to bring in all reliable sources of information that they can gather because it is a service that they provide to the investors and investors rely on the rating that they place on the various entities that borrow money. So they look for as much . . .

MR. MACKINNON: They would have known the true cost of the liability of Sydney Steel last year and the year before and the year before that.

MR. HOGG: They would factor that into their bond rating and you would see in their publication . . .

MR. MACKINNON: The same as they would on, let's say, workers' compensation, the unfunded liability on any pension funds?

MR. HOGG: I am not sure about workers' compensation. It depends upon . . .

MR. MACKINNON: Any loan guarantees, all that would have been factored in whether we had in on our books or not. The bonding agencies would know this.

MR. HOGG: Yes.

MR. MACKINNON: With regard to Sydney Steel, I notice that the government keeps changing its figures on this extraordinary expense. It seems to be going up a bit every time they put a forecast out. From your perspective, what is your rationale as to why the government has increased the cost of this extraordinary expense?

MR. HOGG: The only increase I am familiar with, or the two numbers that I am familiar with, is either the third or fourth quarter forecast update for the year ended March 31, 2000, I believe had a number for Sydney Steel of $378 million. When the financial statements for 2000 were released, the actual number was $475 million.

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MR. MACKINNON: Yes, so it went up.

MR. HOGG: That was primarily two items, the loss or the write-off of the remaining value that the province carried Sysco on its books and the operating losses up until the point that the agreement was signed by Duferco. In the Public Accounts in Note 3, it has a tabulation of that entire $475 million.

MR. MACKINNON: The government describes that as an extraordinary expense. Is that not correct?

MR. HOGG: We are getting into some very trivial accounting descriptions but it is called an unusual item as opposed to an extraordinary item.

MR. MACKINNON: Well, if it is unusual it would be rather extraordinary if it wasn't expected.

MR. HOGG: Not to accountants, unfortunately.

MR. MACKINNON: I am paraphrasing the minister. He has described it as an extraordinary expense which would mean that it is booked on all at once but yet I notice that the government hasn't spent that $475 million.

MR. HOGG: No, the $475 million is a mixture of actual cash expenditures but a large bulk of it is what is known as a provision for losses or provisions for costs.

MR. MACKINNON: We know what it is for but why would it be booked 100 per cent in this fiscal year if it is not going to be expended? There is no indication that it will within the next 30 days because we have a little better than four or five weeks before the end of the fiscal year. It seems rather irregular, doesn't it?

MR. HOGG: No, it is in line with . . .

MR. MACKINNON: So it is common to book $475 million, even though you don't spend it?

MR. HOGG: In this instance, yes, because it recognizes that in the case of Sydney Steel, or any other major operation that you have decided to stop, or you have a contract for the sale of, or there is no future ongoing operation of that entity, then you have to provide for all of the costs that you will incur to entirely wrap up that operation, even though you may not spend it for two years, three years, or four years or more . . .

MR. MACKINNON: Don't we have to pay interest payments on that?

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MR. HOGG: Not until we borrow the money; that money has not been borrowed, the entire amount of that $475 million. It will only be borrowed when the payments start to be made.

MR. MACKINNON: So are you saying we will have to borrow $1.2 billion, plus another $475 million, just to cover that expense?

MR. HOGG: If you spent the entire $475 million all in one fiscal year.

MR. MACKINNON: So it is down as a deficit but it is not really a deficit?

MR. HOGG: Again, it comes back to . . .

MR. MACKINNON: How you spin things out.

MR. HOGG: No, two separate items. One is your income and expenses for the year and your cash bank account.

MR. MACKINNON: What you are saying is we have booked it as an expense but we have no money because we . . .

MR. HOGG: We have to borrow the money, that is correct.

MR. MACKINNON: Because we haven't spent it?

MR. HOGG: Yes. Another point and I don't want to take up too much of your time but just very quickly - to try to explain the difference between income expense and your bank account. You could very easily have a situation in private life where someone has a relatively high income but may be very deeply in debt. So if you look at solely their income, everything looks fine but you can look at their bank account and it is disastrous. You can also have the reverse situation where someone has a low income but is very frugal and has paid down their debts.

MR. MACKINNON: We could also have a case where people try to make it look like they are in better shape than they actually are, or in worse shape than they actually are?

MR. HOGG: Yes.

MR. MACKINNON: You agree, okay. Now let's look at NSRL. Would that be considered an extraordinary revenue?

MR. HOGG: It would be considered an unusual item because it is the sale of a major business, or a major . . .

MR. MACKINNON: Not something that would happen every day?

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MR. HOGG: Exactly.

MR. MACKINNON: So my understanding is after expenses we are looking at approximately a $140 million profit?

MR. HOGG: I am not sure of the exact number but it would be again on the sale of NSRL, that is the proceeds would exceed the carrying value of the province's books.

MR. MACKINNON: Would the extraordinary revenue be booked on the books?

MR. HOGG: The gain on sale would be recorded, similar to how Sydney Steel was recorded, except this would be a positive entry instead of a negative one.

MR. MACKINNON: So if we don't spend that money at Sydney Steel, let's say even in the next fiscal year, would that figure still be carried over again?

MR. HOGG: No, the Sydney Steel number . . .

MR. MACKINNON: Okay, so there we have a rather unusual situation, don't we? We could book on the $140 million-plus and take off the $475 million or $450 million or whatever is left and not spend it, you could balance your books, couldn't you?

MR. HOGG: No . . .

MR. MACKINNON: Just on those numbers, if we have an operating deficit of over $636 million, you get $475 million and then you get $140 million, we are getting pretty close to the magic figure. If your revenues are underestimated, you can balance your books in this fiscal year.

MR. HOGG: No, that is not correct. The thing to keep in mind . . .

MR. MACKINNON: What is wrong with that math? You have already indicated you are taking the liability of Sydney Steel off the books as a possibility. So that reduces the total expense to government. There is a possibility of putting $140 million revenue on and you have already indicated you have underestimated your revenues, clearly over the last two years, and there are strong indications that the revenues will be much higher, you are not going to have a deficit if you just deal with those issues and everything else is equal. The debt will continue to grow, interest charges will continue to rise but you will have a balanced budget?

MR. HOGG: No. The thing to keep in mind is that on Sydney Steel and NSRL, they will both be described as unusual items. That means that they happen only once or extremely rarely and that you cannot count on it happening year after year. The way that you describe the situation would hold true if we had assets to sell every year to generate $140 million in revenue but we don't have those assets. The only ongoing revenue that we have is the normal operating revenue.

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So what happens in the case of Sydney Steel is that it all happens within the 12 months that end March 31, 2000 and that is entirely swept aside and you start the next 12 months. In this case, if NSRL was recorded it would be a gain on the sale which would be the opposite direction but then the next year, March 31, 2002, there would be no NSRL, no Sysco, probably no other unusual item.

MR. MACKINNON: I know my time has pretty well expired but very quickly, it would be very easy for the government to come up with another projection of an extraordinary revenue or extraordinary expense, based on this principle. Is that not correct?

MR. HOGG: Only if it had an asset that it was engaged in selling.

MR. CHAIRMAN: The honourable member's time and the Liberal caucus' time has expired. We will move along to the NDP. Mr. Dexter.

[8:25 a.m. Mr. Russell MacKinnon resumed the Chair.]

MR. DARRELL DEXTER: I just have a few questions then I will hand it over to my colleague. Certainly, as a person who has watched the financial situation of the province unfold over my adult life, it has always been a bit of a mystery to me. I know that economics is often almost treated as an applied science, but it seems to me at some point in time it gets into philosophy at its best. This level of theoretical economics doesn't seem to instil a lot of confidence in people with projections. We see them year after year and they seem to bear no relation to what the experts are saying is going to happen or if they do bear some relationship, it is on a hit-and-miss basis at best. I guess that is because the performance of the markets remains a mystery to even those people who are supposed to know what is going on.

I wanted to follow up on a couple of things and one was something we have addressed with the Auditor General at previous meetings and that was the whole question of the assets of government and whether or not they are valued and whether or not the bond-rating agencies consider any of the property, any of the things that government owns - is there intellectual property that belongs to the government, are these things valued and taken into account when the credit rating is determined?

MR. HOGG: I was just looking to my colleagues to see whether they could give more precise information, based on their discussions with the bond-rating agencies, but generally they do not value some of the assets you listed, intellectual property, land holdings. They only look to the revenue that can be generated from those or in some extreme cases what the proceeds to the province would be if it was to sell it. They don't do any valuation of the road base in the province, for example, they only look to see how the road base might help or deter economic development and they get into the projections, as you mentioned earlier.

[8:30 a.m.]

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MR. DEXTER: I can certainly understand that assets of the province would fall into a number of different categories but it seems to be somewhat odd that all of those would be lumped into a category where their only value is their ability to generate additional revenue. You used the example of personal finances before; I think if I went to a financial institution to borrow money, I know one of the first things they would do is look at what your asset base is and what your so-called net worth is and it is based on what your assets are, but with the provinces that . . .

MR. HOGG: That is probably the difference between a personal situation, a business situation and a government situation that, in terms of collateral, bond-rating agencies don't normally look to collateral as the way to settle the debt because the government is not going to sell its road system, who would buy it? I am not making a judgemental comment . . .

MR. DEXTER: Have you been to Ontario lately because highway systems, in fact, have been sold and are operated . . .

MR. DOUG STRATTON: You have to remember the objective of the bond-rating agencies is to rate the particular instruments, they are technically rating long-term debt instruments when we talk about the rating. The long-term debt instruments are general obligation bonds, there are no assets pledged to those bonds. They are pari passu, meaning they rank equally with all other debt obligations and they are called general obligation bonds. However, what you pointed out in Ontario, they did, however, have bonds that had particular assets behind them. In Nova Scotia we have the Halifax-Dartmouth Bridge Commission that has the toll revenue bond, so the revenues of the tolls are pledged against the bonds and there is also Highway No. 104.

MR. DEXTER: Where does the Bridge Commission's debt sit?


MR. DEXTER: That debt sits separately, that is not on the books of the province though, right?

MR. STRATTON: The debt of the Halifax-Dartmouth Bridge Commission would be on the financial statements of the Halifax-Dartmouth Bridge Commission. It would be part of the consolidated entity though.

MR. DEXTER: There are two more questions I want to ask and one is a bit of a follow-up on the questions asked by the chairman and that has to do with Sydney Steel. I think we have heard over and over again about the $3 billion that the government says has been poured into Sydney Steel over the lifetime of that. What I wanted to know, I guess, is it a fact that this has accrued identifiably on the debt of the province?

MR. HOGG: The $3 billion number, the first I recall seeing it was in a newspaper article and I don't know how they actually calculated it. I think it was an accumulation of all

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of the grants that had been made or the payments that had been made to Sysco since its inception. I have never seen a calculation of where that $3 billion came from.

MR. DEXTER: That is not something that came from your office?

MR. HOGG: Not that I am aware of. Someone may have added up the grants and whatnot to Sysco.

MR. ROY SPENCE: I think that was in the Halifax-Chronicle Herald in August 1998 and it took from 1968 to August 1998, all of the various payments made on behalf of Sysco and then brought them forward by inflation.

MR. DEXTER: So, for example, it wouldn't account for any income that would have come out of Sydney Steel over that period of time accrued to the government, it would be the equivalent of only adding up the losses and not looking at income from income tax that was paid by the employees or municipal taxes or anything else that would be a revenue to the province?

MR. SPENCE: It was just on the expenditure side by both the federal and provincial governments.

MR. DEXTER: I was just trying to understand that so I think that at least explains it to me. There was one other item I wanted to deal with. Very recently you would have seen in the papers that there is a new fee being charged by the province, by way of a user fee, on the Emergency Measures Organization. It is a charge going on telephone bills, it will be 43 cents, the government estimates it will bring in some $3.2 million a year in revenue.

The supplementary estimates say that they are going to spend about $677,000 of that to actually operate the system. The minister in justifying the 43 cent charge said, we are going to do some upgrades and it is going to bring it to $1.4 million, still leaving some $1.8 million a year. What he said about that was we are going to set that aside in a separate account and it will only be used for the Emergency Measures Organization. What I was trying to figure out was whether or not that actually happens? When revenue comes in does the cash actually get taken out and put in a separate account and left somewhere? Does that really happen?

MR. HOGG: On the cash side it does happen, it is rare but in the financial statements there is about $7 billion held in trust accounts. An arrangement, the way you described, the funds would go into a trust account. The actual reporting of the expenses is not quite as simple. It is not simply how much goes into that trust account, it would be accounted for on the estimates as to how much revenue was generated and how much was spent. All of those expenditures in cash would come out of that trust account but I believe the way they would be accounted for on the Public Accounts is the entire revenues coming in would be recorded as revenue and the entire amount of expenses going out would be a cost.

In some years, you would have a loss because you would be spending more than what you take in. In other years you could have again, if you just take those two items, where you

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would be bringing more revenue in than we are spending, but the ideal would be that over the life or a reasonable period of time, it would balance out that the revenues would equal the expenses.

MR. DEXTER: That seems somewhat confusing to me.

MR. HOGG: I apologize.

MR. DEXTER: You are bringing in the revenue, you are accounting for all of it in your budget and you are deducting the expenses. Are you saying that internally part of that revenue has been taken and put into a separate account somewhere? You are calling it a trust account. My recollection of trust accounts from my business is it is an entirely separate account, held separately and that money is not dealt with other than to pay the expenses that accrue on that particular line item?

MR. HOGG: That is correct but for accounting purposes, in determining your surplus or deficit for the year, it is important that you - and Mr. Salmon may or may not want to comment on this - include all of the revenues and all of the expenses that you had available. If that 43 cents - and I don't know the legal wording of that - was collected in such a way that it says this is a trust account and it can only be used for that, as opposed to an internal government policy that says that is how we are going to finance it, if there is a strict legal contract that says you must do it, then it would be truly a trust account and you would do it on a cash basis. If it is an internal government policy that they have decided we want to match these costs with those revenues, then for accounting purposes the actual cash that went in and out wouldn't matter, it is the revenues. I know I am not making this very plain but the . . .

MR. DEXTER: No, I understand. What I was going to ask in follow-up was doesn't that skew your bottom line, because then what is showing is revenue that you really can't use to meet your obligations, except the limited expense of the actual service that that revenue comes in for.

MR. HOGG: If it is a true legal trust that is correct, but the way that governments and auditors have looked at the situation is that if it is an internal policy that government has, then at some point the government could change that policy. The reason that it is done this way is to prevent an artificial manipulation to say that we took money in but it is not really revenue because we didn't spend that much. That is about as plain as I can make it.


MR. JOHN HOLM: In the couple of minutes I have left there are a number of issues I wanted to address. First of all the bond-rating agencies and going back to those from the very beginning. Obviously, it has been a few months since the bond-rating agencies have come out with their latest ratings. When they do that, however, they do their own analysis and those analyses would be provided to the Department of Finance, is that correct?

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MR. HOGG: They don't do anything . . .

MR. HOLM: They don't just take your information as provided to them, they do an analysis of that information and of other things as well?

MR. HOGG: That is correct. They don't necessarily provide us with a whole lot more information than what they provide their investors. They ask us some pointed questions but the detailed working papers that they have, they don't share that with us. They do their own analysis based on a whole range of information that they gather.

MR. HOLM: I guess my first question is, would you provide to this committee the analysis - it may not be the detailed analysis with all of the technical stuff that they do but - that they do on our bond ratings and provide that to the committee?

MR. HOGG: The analysis that they do . . .

MR. HOLM: And provide to the government.

MR. HOGG: . . . is pretty much what they report through their services.

MR. HOLM: They provide you nothing more than they release publicly?

MR. HOGG: No, that is the extent of the information they provide us. When I said their working papers, they don't share those with us.

MR. HOLM: Going back, if I can, to a few other things. You pointed out, for example, that we borrowed $1.2 billion this year and of course, some of that is to pay or retire debts that are coming due. You also started off by saying there was an $11.2 billion debt at the beginning of the fiscal year. So some of that $1.2 billion replaced some of that $11.2 billion that was already on the books. Where do we stand as of February 14, 2001, or the last date upon which you have a number? What is our total debt, currently? As close as you can come to it, I'm not looking for the exact figure.

MR. HOGG: It would be, as I mentioned, $11.2 billion was the results at March 31, 2000.

MR. HOLM: But you can't add the $1.2 billion on top of that because that paid off some of the existing debt and I would guess that you probably got a lower interest rate on some of your newer borrowings and some of those that you retired?

MR. HOGG: Yes, in rough numbers the $11.2 billion is more like $12 billion now, hitting up on $12 billion, but those are pretty rough numbers.

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MR. HOLM: So we have approximately $12 billion. Of that, how much is actual debt that we are paying interest on and how much of it is accounting, like the clean-up costs for Sysco that were booked?

MR. HOGG: Those amounts are actual debt. In fact . . .

MR. HOLM: We are paying interest on approximately $12 billion?

MR. HOGG: Yes.

MR. HOLM: Just touching on Sysco again just for a brief moment, because my colleague raises the notion of the $3 billion portion that is attributed to the debt and you don't know where that number comes from. So really what you are saying is that that is an unsubstantiated number from the Department of Finance's point of view?

MR. HOGG: We didn't substantiate it, I don't know that it is unsubstantiated but we didn't provide the $3 billion, it was someone's calculation of, as Roy explained, all of the outpayments . . .

MR. HOLM: So it could be a political calculation?

MR. HOGG: I just saw it in the paper.

MR. HOLM: You can't comment on that, okay, we will blame it all on the newspaper. Where did the figure for the clean-up come from?

MR. HOGG: The Department of Transportation and Public Works had an engineering study done of the site and the engineering report contained cost estimates of what the clean-up would cost. That is the amount that found its way into the $475 million.

MR. HOLM: Is that supposedly the total cost of the clean-up or what is projected to be the provincial share?

MR. HOGG: It is the provincial share and it is an engineering estimate of what the cost would be based on the clean-up cost of similar sites.

MR. HOLM: It is a pretty low figure based on other estimates and so on that I certainly have heard.

MR. HOGG: First of all it is the provincial share only . . .

MR. HOLM: I appreciate that.

MR. HOGG: . . . and secondly, the actual method of remediating the site that is actually determined, has different cost characteristics depending on how you do it. It could be much more

[Page 15]

expensive but this is a reasonable estimate but it doesn't allow for any extraordinary preferences in how the remediation is carried out.

MR. HOLM: Touching very quickly on NSRL, the $65 million portion of the sale which deals with the licences, is that subject to the ROFR, the part that is being sold to PanCanadian for the licences that they are buying?


MR. HOLM: In terms of the other assets that are being sold for the $355 million, when was the independent assessment done to determine the value of those assets? I know that there was one done some time ago, prior to the huge jumps in the prices of natural gas.

MR. HOGG: The $355 million was the amount that was bid and it wasn't an evaluation carried out by NSRL.

MR. HOLM: No, but the province had had an evaluation of those, what was the evaluation?

MR. HOGG: I believe the evaluation was first carried out in May 2000 and updated when some of the more final bids were received, late in 2000.

MR. CHAIRMAN: That concludes the NDP portion. I will now turn it over to the Progressive Conservative caucus and we will start off with Mr. Barnet.

MR. BARRY BARNET: Mr. Chairman, first of all I want to point out, I guess, everyone in this room is aware of this but it is obviously something that we sometimes take a little bit for granted and that is when you take our possible $12 billion debt and you divide it into the population of Nova Scotia, we end up with a debt, per person, whether you are one year old or 101 years old, of $12,000. It is somewhat disappointing to know that as new children are being born in Nova Scotia they are being saddled immediately with their share of this debt for $12,000. I don't think there is a single person, elected or otherwise in this province, who believes that is the right approach, that government should allow that to happen.

One of the areas of discussion that interested me was the area of whether or not the GAAP, the principles behind that of applying the liability of Sysco, reflect the principles of GAAP. My question to you is, is that the case?

MR. HOGG: Yes, Sysco was recorded as an unusual item because it was the discontinuance of a business operation and Generally Accepted Accounting Principles say two things in that regard: one is estimate all of your costs related to a business operation that you are going to cease; and secondly, since it is a significant one-time item, show it separately so that it is clearly disclosed.

[Page 16]

MR. BARNET: Based on that answer, I assume that the same thing applies with the assets of Nova Scotia Resources Limited?

MR. HOGG: That's correct. The same rationale would apply.

MR. BARNET: How do other provinces in Canada apply these types of one-time, or booked assets and booked liabilities? Do they use the same process?

MR. HOGG: I will say a couple of things first. I will try to be modest. With the assistance of the Auditor General's Office, I think that we are quite advanced in our accounting methods. The Auditor General can add, if he likes.

[Page 17]

The accounting practices are not necessarily uniform across Canada. Most of the ones that I have seen would account for it the way that we have but I do know of one transaction that was handled differently; that is, it was handled as a transaction within the debt numbers as opposed to being included in the deficit for the year.

MR. BARNET: I guess I want to shift gears a little bit. It is with respect to the decision of the government to move forward towards eliminating its debt, or I should say, deficit. There has been a great deal of discussion. We know that some provinces in this country have gone a long way and have done that. Nova Scotia lags behind others. We heard here today that we are the second-lowest rated province from the bond-rating agencies. My first question is, is that as a result of us not dealing with the financial circumstances that we find ourselves in?

MR. HOGG: A number of factors but that is a primary one. I believe that as of the present day, Nova Scotia is the only provincial - plus the federal government - the only jurisdiction that has a deficit. Every other province is in a surplus situation.

MR. BARNET: Well, with respect to issues surrounding the timing of eliminating our deficit situation, I know that there have been articles - and I want to refer to one that is in our package. It is an article in Business Voice. It actually spells out a number of concerns that the province would face over the next couple of years. This was done in 1999.

Of the nine points that it raises, the final point is the fact that the headline is, Time is Running Out. Obviously, our economy is not going to continue to be as robust as it has been in the last number of years. There are people - economists - who are saying, predicting that there is a downturn imminent, if not, we are presently in a downturn in North America. There are issues surrounding our ability to recover from this financial situation in a downturn economy.

The article indicates, the author says that - and I will paraphrase - it is important that the province rein in its financial situation because in the event of a downturn in the economy, it may be impossible and may never, ever happen. Is that the opinion of the Department of Finance and do you believe the economists are right, in the event of a downturn it would be nearly impossible for us to resolve this issue?

MR. HOGG: The way that you have described the article, I think, is generally correct. If the economy was to decline, two immediate factors come into play. The first is, revenues don't grow as quickly or - I think there has only been one case where they didn't grow at all but they don't grow as quickly.

[Page 18]

The second item is that the expenditure growth far exceeds any growth that there would be in revenues. In particular, expenditures related to income assistance would increase if the economy and employment was to be not as robust as it is now or not grow at the same rate. So there are those two competing forces that would put pressure on the finances.

MR. BARNET: In essence, that is what this article says. I will read it, actually, for members of the committee. "If our government cannot balance its budget in good times, when the recession cycle hits, Nova Scotia may not be able to run a deficit or access any additional credit. The mathematical reality is that program spending will have to be cut during a recession, just when it's needed the most." Essentially, your comments support what this article is saying or what that particular paraphrase says.

My next point. There was a great deal of discussion in 1999 surrounding the health transition fund. I want to bring to the committee's attention, and to your attention, an article that appeared in the Mail Star, July 29, 1999, an interesting day. What it says - the headline is, Credit Agency didn't like health fund. One of the paragraphs in the article says, The credit agency said that if the province had passed the budget, the rating outlook for Nova Scotia's long- and short-term debt would have been revised from stable to negative." I am not sure which agency this was. The Canadian Bond Rating Agency issued the warning and it was the day after the last provincial election.

My question is that, considering the fact that we have $12 billion in debt and the cost for the interest alone is $900 million annually, if that were to have come true, if, in fact, the budget had have been passed, the health transition fund were to have been left in place and an additional $600 million borrowed, and the prediction of the Canadian Bond Rating Agency were to have come true, how much would that affect us in Nova Scotia if, in fact, we went from a stable to a negative situation, in terms of the interest that we pay?

MR. HOGG: I'm not going to be able to quantify that. It would have two impacts. One is that it would increase our cost of borrowing, and secondly, it would be harder to sell our bonds because the rating that is applied to it would not encourage as many investors. I don't know if Doug or Roy would want to hazard a guess as to what the cost might be but there is not always a direct relationship between your rating of A-plus - it doesn't necessarily mean x per cent or a change in x per cent in interest.

MR. STRATTON: It is certainly a difficult number to quantify. If you look at credit spreads - in other words, our cost of borrowing above, let's say, the Canadian benchmark, it doesn't always relate directly to the - it is just not a one-to-one correspondence between rating and spread. However, generally speaking, the lower your rating, the higher your spread but it is not always one to one.

[Page 19]

The issue, as well, is, as your rating goes down, less investors - not only, they are actually, potentially, precluded from buying your bonds because in their investment policy it might say, you know, one will only buy a certain percentage of a certain level of bonds, say, triple B high. As you move into that category it limits the amount that those investors will buy so they will back off and buy less, potentially even buying none of the bonds because you have moved out of their range, entirely. The same could be said as you move up. As you move up, your investing base increases.

The other aspect of credit rating that might be worth mentioning is access to use of the derivatives. Derivatives are important in the sense that they allow us to hedge risk in the debt portfolio. As your rating declines, your access to quality derivatives reduces as well.

MR. BARNET: Well, I guess, thankfully, we don't have to look at that particular situation, and it was hypothetical and didn't happen.

My concern, I guess, and the concern of Nova Scotians, would have been the fact that, here we sit today, the second-lowest rated province in this country. Obviously, like any market place, it is competitive business that we compete with all of the other provinces for investors on our borrowed money and if we are in a lower position from a competitive point of view, obviously they are going to invest in the Ontario market and other markets that, quite frankly, are higher rated and the outlook is better.

I am going to share my time with my colleague to the left. The issue of borrowed money (Interruption) Yes, he's not often to the left, either, yes. (Laughter) The issue with borrowed money, debt and deficit in Nova Scotia, has been something that people talk about but seldom understand. One of the things that I have discovered since being elected is that there are a lot of Nova Scotians who believe that the right position to be in is deficit-free and, eventually, maybe, debt-free. I don't know if that will ever happen.

[9:00 a.m.]

From a purely reality perspective, Mr. Hogg, do you believe that the position the government is currently taking and the direction we are heading is the most appropriate direction for the Province of Nova Scotia?

MR. HOGG: I think from a financial point of view, it is a prudent thing to do. Continuing to have deficits is just not sustainable into the future. I think the real challenge is, how do you balance carrying out government's responsibilities with having a healthy financial situation? I do think reducing the deficit is essential before you can even think about reducing the debt.

MR. BARNET: Mr. Chairman, I will pass the reins on to Mr. Taylor.

MR. CHAIRMAN: Mr. Taylor.

[Page 20]

MR. BROOKE TAYLOR: Thank you, Mr. Chairman, and happy Valentine's Day, Mr. Chairman. That's quite a natty looking tie you have on today. It might be a Taylor tartan for all I would know. (Laughter)

Mr. Chairman, if I could, through you to our witnesses, I am wondering could somebody enlighten us, on this side, what our approximate debt was in 1993?

MR. SALMON: That's a difficult question to answer because if you went back through the numbers, we were on different accounting policies then. We didn't have complete consolidated financial statements so it is a difficult number for us to come up with.

MR. TAYLOR: Well, Mr. Chairman, if I might, I did suggest the approximate debt and I was hoping, with all the expertise we have across the way, we could come up with an approximate figure, surely.

MR. HOGG: In the order of $9 billion. We didn't bring the 1993 statements with us but that is from the Dominion Bond Rating publication, where they show the debt of all provinces and back in 1993-94, the debt was $9.4 billion.

MR. TAYLOR: Okay. Perhaps, Mr. Chairman, Mr. Hogg could tell us what the debt was in 1999, at the approach of the 1999-2000 fiscal year.

MR. HOGG: To make sure that we don't mix things around, still using the DBRS numbers for March 31, 2000, $11.3 billion.

MR. TAYLOR: Mr. Chairman, $11.3 billion it seems quite obvious, to me at least, that when other provinces were struggling with their debt and deficit, that we here in Nova Scotia, in fact, were not making much progress. In fact, we were regressing, as far as I am concerned. We were increasing our debt (Interruption). Well, perhaps my colleague to the left is right, we still are. In fact, this government is very concerned about that.

Again, it is apparent to anybody that follows the number crunching, that the chickens of yesteryears are coming home to roost. It is quite disturbing to note that so far this year we have borrowed - I think Mr. Hogg indicated - $1.2 billion. These borrowings are used to finance government operations and to refinance the old debt, is that correct?

MR. HOGG: That is correct.

MR. TAYLOR: Okay, I was just curious. If we are spending nearly $910 million to service that $11.2, $11.3, or $12 billion debt, what are the ordinary revenues, the fixed, so to speak, revenues of the Province of Nova Scotia?

MR. HOGG: It would be approximately $5 billion. Just a little shy of $5 billion.

[Page 21]

MR. TAYLOR: So we are spending nearly one-fifth of this province's income to service the debt?

MR. HOGG: Yes.

MR. TAYLOR: Okay. Just based on that, I'm a little bit concerned and baffled how, by borrowing money - and you have indicated we have had to, so far, this year, borrow $1.2 billion. When we get to a balanced budget, is it anticipated that the revenues, those ordinary revenues that accrue to the province, will be able to keep us in a balanced budget and maybe surplus position? Obviously we will still have to look after the debt, I recognize that, but are we going to be then free from borrowing to operate in the current fiscal year of the time?

MR. HOGG: There are three main requirements as to why you borrow, in summary. The first is to retire debt that comes due. We will always have to do that so we will always have to borrow to retire old debt issues that mature, so we will always have that. The second item is the results of the operations for the year. If you have a surplus, then that doesn't require you to borrow. If you have a deficit, that does require you to borrow. The third item is the transactions that require cash such as the loan boards, they have to get that money someplace and they get it from the Department of Finance who gets it by borrowing on the market.

Those three items are, in general, what drive the requirements to borrow. Those requirements will continue into the foreseeable future until the surplus is of such a size that it provides the cash to reduce those additional borrowings and at some long date in the future it starts to actually reduce the debt.

MR. CHAIRMAN: Okay, you have eight seconds.

MR. TAYLOR: I was just curious. We hear a lot, Mr. Chairman, from time to time about a new economy or new revenues. It is a difficult task, obviously, to balance the budget and provide the services that people expect. Is there any opportunity from anybody's perspective on the other side to grow new revenues or increase existing revenues?

MR. HOGG: There are some opportunities to grow revenues, but the area where revenues can grow is fairly small, in the sense that most government revenues come, generally, from taxes.

The prevailing practice across all the provinces is to be reducing taxes. That avenue which governments have used for many years is not really available because when you increase your taxes, you make the province less competitive, companies don't want to locate here, people don't want to move here if they are paying more in taxes. The opportunity for additional revenues would come from new industries, new businesses and that sort of thing, but the traditional sources are not what they were some years ago.

[9:08 a.m. Mr. Brooke Taylor took the Chair.]

[Page 22]

MR. SALMON: I just wanted to add a comment here, in terms of a provincial government's - and, particularly, a province like Nova Scotia's - ability to control its fiscal situation. We have to recognize that the bulk of revenues - at least 50 per cent - come from the federal government to the province. That is not controllable by the province. The decisions are made at the federal level with regard to that.

What the province can control on the revenue side is the provincial source revenues which are, essentially, sales taxes and provincial taxes. That is governed by rates and that has an impact on the economy and on taxpayers.

Where the province has real control is on the expenditure side. When you look at expenditures in Nova Scotia, there are three main areas: health care, education and debt charges. With the demands that people make in the area of health care and education, that is a tough sell.

When you talk about balancing the budget, you have to do more than balance. You have got to create surpluses if you are going to pay down your debt and, therefore, reduce your interest charges. I mean, it's step by step. Produce surpluses, pay down the debt, reduce interest charges, making more money available out of revenues for the other program expenditures in terms of the services you want to provide to the taxpayers.

MR. CHAIRMAN: Thank you, Mr. Salmon. That wraps up the first phase of questions and answers. Perhaps we would allocate 15 minutes to each caucus and begin with Dr. Smith, with the Liberal caucus.

DR. JAMES SMITH: Thank you, Mr. Chairman. I enter into these questions with some trepidation. As an ordinary Nova Scotian trying to figure out why you have some debt booked and it is really not there, it has not been borrowed yet, that is on the deficit for the year, then you have income coming in - maybe NSRL, or something - and that is not really taken as a revenue so it gets very confusing.

What the Auditor General just said, in putting in perspective where our spending is - and he did rightly mention about 50 per cent of the revenue coming in from the feds. Who was it, the Atlantic Provinces Economic Council indicated that their calculations would indicate that $636 million will come in extra transfers from the feds over the next five years.

[Page 23]

If you add HST, income tax and, perhaps, NSRL, or whatever, over the next five years we are looking at, maybe, an increase of $1 billion, or so. I don't know if that is a fair comment. My point being that, so far, this is a government that was going to fix health care for $46 million, internal savings of administration. I would wonder if the panel, the witnesses, this morning felt that was doable or if there is any evidence that that has happened.

I want to touch on health care a little bit because I know, as the Auditor General has pointed out, it is one of the big three and it must give the Department of Finance some concerns.We saw Pharmacare come forward with a $22 million, really, mistake, some would say, to justify increasing the cost to seniors in Pharmacare in the province.

Has there been some cost benefit analysis done on the Department of Health? The honourable member on the government side mentioned our Health Investment Fund. It was really $600 million over three years that was to go into health care; that was $250 million, $250 million and $100 million over those three years. We have seen the government pretty well put that much into health care.

We are not seeing cost cutting and we have increased revenues for the province. So when you look at health care, I know you were involved with the Pharmacare Program and we saw the results of that. Are you doing another analysis on some of the cost benefits of what is going on in health care? Is there an ongoing monitoring of that system? That seems to be the system that, so far, seems to be more money being put in at the end of the year and not really keeping that commitment to fix health care for $46 million.

MR. HOGG: We work very closely with the Health Department. Obviously, they look at it from a policy point of view, as well as a financial point of view. Our concern is mainly financial. The Health budget is $1.7 billion so when you apply that to the revenues of $5 billion and, as the Auditor General pointed out, the fixed interest costs of $900 million, you are pretty much over 50 per cent of the revenues taken up by those two items.

We spend a fair amount of time with the Department of Health on their cost estimates because it makes up such a large portion of the provincial spending and takes such a large portion of the revenues.

DR. SMITH: I think what people find - where there is no evidence of real cost-cutting by this government but, yet, we are seeing clawbacks in the health care system, I think that is confusing and I guess it does show some of the difficulties of getting a handle on health care right across this country. I know my colleague wants to mention a few things. I don't want to dwell on health too long.

The restructuring fund was projected, I think - the $446 million from 1999 to 2004. Could the deputy minister indicate how this restructuring fund will save money? At the start of a government you tend to get reviews of programs. We have seen that. It is a large sum. It is almost a half billion dollars of money and the restructuring - I think around $80 million, the first year.

[Page 24]

Could the deputy minister comment on that and how this will, in fact, help the finances of the province to get back in shape, how it will save money and try to get some area where some of the members are asking this morning how we actually get into a balanced state and catch up with the rest of the country.

MR. HOGG: There are three main categories of expenditures that come out of the restructuring cost amount. The first is wage increases that are under negotiation. Rather than apply those anticipated settlement costs to departments at the beginning of the year, there is an estimate made on a global basis and estimated within that restructuring cost amount. So that is one number, a fairly large number.

The second amounts that are in restructuring is the cost of severance payments or what is known as transitional support payments. This is fairly common in organizations that go through a number of changes that there is a central fund that pays the severance cost to help individuals transition from a job within the entity to new employment.

The third area of cost within restructuring is the costs of studies or analyses that government might need to undertake to study whether a particular course of action is worthwhile or not.

DR. SMITH: Thanks very much. So that would add up to $446 million, projected over that 1999 to 2004.

We talked about the credit rating. Would they look at - if they are inclined to, maybe, dismiss the increased revenues, because as was mentioned earlier already in committee this morning that, really, everyone across the country has been experiencing that. Is the emphasis then, maybe, put on the cost-cutting measures that a province is introducing and the effectiveness of this? I would just try to allude to my opinion of this, to date, of this government. I am just wondering, is that an overriding factor?

MR. HOGG: The bond-rating agencies are very concerned about the control of expenditures. They are concerned about the level of expenditures but they are just as concerned about the ability of any government to control the costs or have the actual results come in close to what the estimates were. That is a very big part of what they do, is trying to determine, where are the risks in the expenditure side of the budget.

At the same time, they are interested in the revenue side; not so much in the dollar numbers of revenue but in the general, economic climate in the province, what the prospects hold in the future for continuing or for growth in revenues. They almost always come back to expenditure control as a very key part of how they rate provinces.

DR. SMITH: That is my question. I just want to comment at the end. I know there is a feeling that all the accounting procedures have changed and everything is sort of out in the open and on the books. I think that is commendable and I think that is a blueprint to success that we had that I would like to table for the committee before I leave today. I notice it wasn't in our

[Page 25]

handouts today and I would like to table that. I think it does outline the plan the previous government had for that and maybe Mr. Barnet particularly might want to use it for reading on the weekend.

But it is still there, Mr. Chairman, that if $100 million is spent on roads this year, there would be an asset of $100 million being spent, they still could book only $5 million that year. There was some impression that everything was going to be automatically open and everything on the table. There is still a lot of deferment of those types of initiatives. I look at roads particularly and I know that was mentioned earlier. I just will end my comments there. I know we are running out of time here.

MR. CHAIRMAN: Thank you, Dr. Smith, for those closing comments and for tabling that document. Mr. MacKinnon, you have approximately four minutes.

MR. MACKINNON: Mr. Hogg, through you, Mr. Chairman, the $446.7 million that was estimated for the cost of restructuring, the minister, in the House, indicated that there was a bit of a comfort level there; in other words, there was extra money set aside for unexpected situations. Realistically, how much of that $446.7 million will be spent on the cost of restructuring, given the fact that he has already gone in and taken $20 million out to put into education?

MR. HOGG: I am not sure that there is a whole lot I could add to my previous answer but the restructuring fund . . .

MR. MACKINNON: Okay, let's maybe for the sake of time simplify. How many jobs have been eliminated so far; approximately 600 or 800?

MR. HOGG: There are 600 . . .

MR. MACKINNON: That is about 50 per cent of the government's target, right? They were talking about 1,200.

MR. HOGG: Yes, the 600 is just within government itself. That doesn't . . .

MR. MACKINNON: Okay, and what is the cost of those 600 jobs to date?

MR. HOGG: I don't have the . . .

MR. MACKINNON: Approximately.

MR. HOGG: I can't recall what the severance costs are but that is 600 positions that have been removed. That is not . . .

[Page 26]

MR. MACKINNON: Would anybody in the department be able to give me an estimate? Mr. Stratton? Mr. Spence? Does anybody know? Nobody knows what the cost is, approximately.

MR. HOGG: These gentlemen are involved on the debt side. They wouldn't necessarily see the severance costs.

MR. MACKINNON: Well, that would be a debt to the province if we have to come up with the money somewhere, would it not?

MR. HOGG: If it is not covered . . .

MR. MACKINNON: So three officials from the Department of Finance can't tell members of this committee how much the elimination of 600 jobs has cost the government.

MR. HOGG: I don't have that information with me . . .

MR. MACKINNON: Can you give an undertaking to the committee that you will provide it?

MR. HOGG: Yes.

MR. MACKINNON: Just going by the minister's public pronouncements, I believe it was less than $100 million. Certainly the total cost would be less, actually substantially less, but if you take all that and add it up, if you extrapolate and double that, you would be talking about $200 million for 1,200 because you get, I would say, $100 million for 600. I know that is probably unfair math but given the fact that I can't get anything from the Department of Finance here today on that, and it is a major line item, I think it is a reasonable assumption. So it looks like we could have upwards of anywhere between $100 million and $200 million hedging in there, in other words a slush fund, as I would interpret it and as referenced on a previous day. It would be very easy to balance the books, given the other factors that I put in. Is that not correct?

MR. HOGG: Not entirely. The large factor that is not included is the cost of anticipated wage settlements. There are a number of collective agreements that are under negotiation this year and the cost of those settlements or the increased wages that result from those settlements are estimated and included in the restructuring costs. That actually takes up the majority of the restructuring fund.

MR. MACKINNON: But certainly, Mr. Hogg, if the minister could go in at a moment's notice because of a little bit of political pressure here in the House and pick up $20 million, he must have some idea of how much his cushion is.

[Page 27]

MR. HOGG: The major amounts, as I say, are primarily wage increases and transitional support programs. The other anticipated spending on restructuring for analysis is something like any other budget amount that you can . . .

MR. MACKINNON: Is there any estimate as to how much the government will save because of it, the restructuring?

MR. HOGG: If I give you the transitional support numbers that you have asked for, that would show what it would cost.

MR. CHAIRMAN: Thank you, Mr. Hogg, and thank you, Mr. MacKinnon. We will add a few seconds onto the NDP's time. I just should point out that the document that was tabled by Mr. MacKinnon's colleague, A Blueprint for Success, is contained in this morning's reference material and we would like to thank Mora Stevens and her staff for always keeping us so well prepared. So it should be duly noted. Who is leading for the NDP? Mr. Holm.

MR. HOLM: Thank you and another tree has paid the price, I guess, for political purposes.

Just a couple of observations. First of all, if I might, I note that many times we hear the government, when they are justifying giving grants whether it be to a bank or some other company like Sobeys or another that is coming in, giving them these grants, they justify it not only on the number of jobs that are specifically going to be created or maintained but they always talk about the spin-off effects and when one or two jobs are created in a particular area, or however many jobs are created, that the spin-off effect is that many other jobs are also created in the economy which, of course, produces great wealth for the province, however, when they cut jobs, they conveniently seem to forget about the spin-off effect. So if you are eliminating a lot of jobs, then that, of course, means that the spin-off factor that had been there with those jobs is also gone as those people who had previously been employed don't have the incomes to spend within their communities. So if the benefits are 2 to 1, to say that, which is a number that has been used before, spin-off benefits are 2 to 1, when new jobs are created, then one would think that the spin-off negative effects would also be 2 to 1 when government or others eliminate jobs.

I want to go back to the NSRL sale, if I could, for a moment. When we are talking about selling assets, first of all, the question I want to ask, if that sale goes through and, as I understand it - correct me if I am wrong - if the government's current partners, their SOEP partners, exercise a ROFR they can't deny the government the right to sell it. They either have to match it or better the offer that is on the table or step aside and let the others buy it. Correct?

MR. HOGG: Correct.

MR. HOLM: Okay. So PanCanadian is off the table. They are buying the licence portion for the $65 million and that can't be ROFR'd. That is a deal that can go through regardless. We are dealing with the $355 million sale portion right now that I am dealing with. That includes our 8.4 per cent and our interest in the Sable project. Now, when we are selling

[Page 28]

those assets, we are selling our revenue stream as well, projected revenue, because when that 8.4 per cent of the gas is sold - I am not talking royalties, I am talking - we get the money for the resource that is sold. Correct?

MR. HOGG: Correct.

MR. HOLM: Okay. That project, conservatively, was estimated to operate for at least 20 years. Correct?

MR. HOGG: Yes.

MR. HOLM: The 8.4 per cent that we are selling, and of course the rigs are going to be jacked up out there, the productions are going to be increasing so that the lines can carry their maximum, that would incur a cost to us to increase production but it would also mean increased revenues. Correct?

[9:30 a.m.]

MR. HOGG: There would be increased capital and operating costs . . .

MR. HOLM: And increased revenues from the sale of the resource.

MR. HOGG: Yes, there are a couple of complications there but generally that is accurate, yes.

MR. HOLM: Yes, you would have increased capital costs, acknowledged, but if you are going to be doubling or almost doubling the production, then you are going to be doubling the amount that it is selling for in terms of the value per unit that day. Correct?

MR. HOGG: If they were to do that, yes.

MR. HOLM: Okay, now, we are selling this resource. The company that is buying - and for the love of me, their name has escaped -

MR. HOGG: Pengrowth.

MR. HOLM: Pengrowth, okay. Am I correct in that they are projecting that their profits will be in excess of over $90 million in the first year?

MR. HOGG: I haven't heard that, no.

MR. HOLM: You haven't?


[Page 29]

MR. HOLM: Those figures have been bantered around. Going back to Nova Scotia Power, how much money did we get accruing to the province from the sale of Nova Scotia Power?

MR. HOGG: I can't answer that question. It was before my time certainly in the central agencies of government. I really don't have any information on that.

MR. HOLM: Has the Department of Finance done any analysis to look at how the profits made by Nova Scotia Power since its sale compare to the income that we received for - one time - the sale of that asset?


MR. HOLM: I think that if you were to take a look at the profits of Nova Scotia Power, since it has been run in a hard-nosed, business-like fashion, that those profits have been in excess - and I didn't bring the figures out today, but - of $90 million per year and that the revenues that we got, the income, one time, for the sale of it didn't eat up more than a couple of years of that amount of profit. So it works out to be not too bad a deal for the shareholders because government didn't or wasn't prepared to run it in as hard-nosed, business-type fashion.

My concern, and I am going back to Mr. Salmon's comments earlier - we only have several opportunities, I mean - 50 per cent of our revenues, correctly points out comes from the feds. So our major sources of revenue are the sales taxes, are fees, licence fees and that kind of thing and our income taxes. We have to obviously, and I think everybody on this committee would agree that we also have to look very tightly at how we control our expenditures but when we are selling Nova Scotia Resources Limited for that figure of $355 million, we are, in effect, selling our 8.4 per cent interest and the projected revenue stream from that for over 20 years at a time when prices are skyrocketing. They are down slightly now, I acknowledge, but they are still well above where they had been, where the demand is high, where the interest in the offshore has never been greater and we are going to get really $140 million by selling both aspects above what is already on the books in the assets plus we have to deduct $10 million, or thereabouts, the amount that we paid, I think it was in that ballpark figure for the settling of the lawsuit for supposedly breaking the agreement on the pipeline onshore which we gave away when we had 50 per cent ownership or could have had 50 per cent ownership and a guaranteed rate of return for that. Right?

MR. HOGG: Yes.

MR. HOLM: Will you provide us with the analysis that shows that the sale of that resource - a resource which governments have consistently said is a guarantee that Nova Scotians will have even access to our own natural gas. It is also a resource that if government so wants it, it could use, as an economic stimulus for this province, by saying that for companies that are locating here, we will be reducing selling our share of gas at a lower price to attract industries, to create spin-off effects. We are selling that tool as well by giving it up. Can you provide us with the analysis that shows that this is a good deal for Nova Scotians?

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MR. HOGG: At the news conference last week, the minister committed to making that information available and he will do that when the sale is complete.

MR. HOLM: So after the fact we will get a look at this. Will that analysis look at the projected revenues or incomes that would have accrued to the province? I mean if the figures that I saw and heard about in the press are correct, the company that is buying it is really going to be recouping the sale price in a little over four years. Then the revenue stream is going to continue. That is not a bad investment. If I could do that, I would be happy to.

MR. HOGG: There are two comments that I would make. First is that the sale price for NSRL is based on all of the factors that you mentioned. It is based on the future revenues and it is discounted back to the present day. Another way of looking at that is, if someone had an offer of a job that lasted no more than seven years at $50,000 a year or you could take $400,000 in cash today, you would have an interesting choice. Mathematically the numbers are exactly the same because you could invest that $400,000 and draw down $50,000 for 10 years. What is different is the risks involved under each scenario. If you take a lump sum amount of money up front that is guaranteed, that is done. Once you extend it out into the future, there are a number of risks that come to play. You could lose your job, you could get ill and not be able to continue to meet the requirements and all those sorts of things. In the case of NSRL, the risks are bigger and more varied and all the rest of it. So that is how the analysis looks at what is today's value of those revenues discounted for the time value of money.

MR. HOLM: I appreciate that and I appreciate it is also going to save us about $25 million a year in terms of interest payments when that is put toward the debt. If you calculate that forward, that is going to add to, in effect, the net price that we are going to be getting for it today. So let's bring it up by another $75 million or even $100 million. Still the projected revenues are extremely high so I am going to be looking forward with much interest to having an independent analysis done of a very detailed paper that the minister will be providing because I am afraid that we are getting into another Nova Scotia Power situation here and that philosophy maybe in a good nose business sense is driving government's decisions. I am going to turn the last few minutes over to my colleague.

MR. CHAIRMAN: Mr. Dexter.

MR. DEXTER: Mr. Chairman, I just wanted a couple of quick, short snappers here, around the effect that people often look at government as kind of a pyramid scheme, you put money in and you get promises back but what actually comes out the other end is something less than what you were promised. Part of the current government thinking at least as has been expressed publicly is the whole question of tax relief. I guess one question I wanted to ask is if there are reductions in income tax, what does that mean in terms of the government's ability to be able to pay down debt or to balance the books?

MR. HOGG: There would be two offsetting parts to the equation. First is if there is tax relief, obviously less tax revenues coming in which would impair the ability to pay down the debt. Conversely, tax cuts put more money into the economy so the growth and GDP that results

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would bring in revenues on the other side. If those other revenues exceed the loss in taxes, then you are ahead and you make progress in reducing the deficit and eventually reducing the debt.

MR. DEXTER: On that end of the equation the question always is effective tax relief, is it not, how much money is actually put in people's pockets?

MR. HOGG: Yes.

MR. DEXTER: You are familiar with the study that was done by the previous government, I think it was chaired by Mr. Shaw. I believe what it pointed out was something like 55 per cent of people in Nova Scotia make less than $20,000 per year. Do you remember that?

MR. HOGG: Yes.

MR. DEXTER: For those people is a cut in consumption tax more effective tax relief than a cut in income tax?

MR. HOGG: I don't know that it is more effective but depending on how you structure your tax cut. Consumption means it is equal across the board in terms of who would save. If you look at the other end of the spectrum, someone who spends a lot would conversely save a lot.

MR. DEXTER: What I am wondering though is a consumption tax would be a cut in your HST, right?

MR. HOGG: Yes.

MR. DEXTER: So it is coming off every single product that is purchased by an individual. For someone making less than $20,000, they are receiving a benefit every time they make an expenditure.

MR. HOGG: Anyone who spends would receive a benefit, yes.

MR. DEXTER: Whereas on the end of income tax, if you don't pay taxes you are not receiving a benefit.

MR. HOGG: That is correct.

MR. DEXTER: So in terms of effective tax relief for people under $20,000, it is consumption taxes, wouldn't you agree?

MR. HOGG: I agree that it is a very interesting argument. I don't know what the correct answer is. I don't recall the actual numbers in the report - not that it makes a lot of difference - but I thought it was less than $30,000 instead of $20,000 but your point is still valid that there is something lost in tax relief when you get to a lower income level.

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MR. CHAIRMAN: That concludes the NDP segment. I will now turn it over to the PC caucus and will start off with the honourable member for Chester-St. Margaret's.

MR. JOHN CHATAWAY: Mr. Chairman, I think we all appreciate that it is Valentine's Day and your nice red tie is very becoming. It is certainly good to have so many people who are so knowledgeable about this, certainly more than some people, including myself, that is for sure. I realize that about $1 billion a year gets paid by Nova Scotians for debt load and I think many people expect people in the House to do the best they can with this very major expense.

I know that when our government came to power we changed to Generally Accepted Accounting Principles. Maybe, Mr. Chairman, or the Auditor General may comment, what effect does this have on our province's credit rating? Also, maybe you could briefly talk about the housekeeping effects, what has been necessary when we adopted Generally Accepted Accounting Principles, how has that affected our housekeeping, et cetera in that regard?

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MR. HOGG: In terms of the bond rating agencies, it may be in your material but in the analysis done by DBRS, I think we are the only province where DBRS takes our reported number and uses that in all of their calculations. In other words, there was an earlier question about the bond rating agencies knowing about Sysco and knowing about other deficits of school boards and that sort of thing and having to factor it in.

With the bond rating agencies, it makes it easier for them to analyse the province's credit worthiness but I think they also factor in the point of view that the accounts are more open and more inclusive, so that all of the amounts are included. They feel it is important that the Legislature, as well as the investors, know all of the exposures that a province has. I think they are happy because they don't have to do the analysis themselves and they are also more satisfied that the public, and the Legislature, has a fuller view of all of the liabilities that the government has incurred.

On the housekeeping side, there has been an awful lot of staff work required for the changes and a lot of consultation with the Auditor General. It is something that does take a couple of years to get going and there are some provinces that are just getting underway now, so it is a long process.

MR. CHATAWAY: I think it is very important though that this go on in that Nova Scotians want to know how much we are in debt and what we are doing about it. One of our biggest expenses is obviously just to carry money that we borrowed in the past. I think people really want to know that it is being well handled and things like that. In this regard, how are we compared to other provinces, are we making or losing ground in comparison to other provinces?

MR. HOGG: In terms of our accounting methods I think we are very well placed amongst other provinces. Just having good accounting practices doesn't change the numbers. Our credit rating is still the second lowest, our debt level is very high, we still have a deficit - I believe the only deficit in Canada, there may be one other province that has a deficit. On the one hand the improved accounting is helpful, it should lead to better decisions and it is more comprehensive in reporting. However, if it does its job right it reports the current situation and the current situation has a number of negatives in it, the debt levels. It is helpful to know exactly where you are and that is what these changes hopefully accomplish and direct peoples' attention to the task which would be, how do we improve that situation?

MR. JON CAREY: Mr. Chairman, some people would say it took us years to accumulate this debt and what is the big rush to deal with it. Could you explain to the average layperson out there the situation if we don't deal with it and if we allow the debt to climb to $15 billion or $20 billion? Is there an urgency and what are the consequences, particularly to health and education, if we don't do something about it?

MR. HOGG: There are a number of consequences if you don't reduce your deficit in a reasonable fashion. The first is, being able to borrow money, which fuels the operations of government, will become much more difficult. It is not just a question of having to pay more money to borrow those amounts, it is a question of whether or not somebody wants to put their

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money at risk by buying Nova Scotia bonds. When you are borrowing in the range of $1.2 billion to $1.6 billion a year, you need to have a very wide base of eager investors who want to put their money into the province. There is only so much increased interest payments can do to attract investors. It comes down to the security of their investment and if they are not satisfied then they are not going to put their money there. That is an important part of why it is necessary to do it.

The second was referenced earlier by a member to a possible downturn in the economy. We have been very fortunate in the past few years that the economy has grown but if it should decline then not only do you lose revenues but your expenditures can increase.

The last factor I would mention is, in particular, health care costs seem to rise at a much higher rate than revenue could ever rise. If you don't have your spending under control then even the most optimistic revenue projections couldn't keep pace with those

MR. CAREY: A few months ago the province went out and I think they borrowed something in the range of $350 million on a five year plan and the rate, if I recall, was less than 5.7 per cent, which appears to me to be a reasonably good rate. Would the confidence of the business community indicate that we got a good deal and would they have a positive look at what the government is doing, would you say?

MR. HOGG: The rate itself is not always a good measure of how you are doing. As Doug Stratton mentioned before, he talked about spreads and differences between the federal rate. It is similar when you go to the bank for a mortgage, they set a prime rate. In the case of provincial borrowings, it is the federal rate and then your credit worthiness is measured on how much more you have to pay on that prime rate. So as that prime rate goes down, in this case our interest costs were below 6 per cent but that is primarily because of the market, the federal rate going down. How much more we pay on top of that for our rate is the market's value judgement on how secure it is and various other factors.

One indicator of how well the market views the province is, can you borrow $350 million? If you can only borrow $250 million then that is a signal that they are very nervous of the ability of the province to pay back its debts.

MR. CHAIRMAN: Mr. Hendsbee.

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MR. DAVID HENDSBEE: Mr. Chairman, just to carry on with these questions of our indebtedness, over the last number of years the provincial government has been taking the initiative to - I call it - Canadianize or nationalize its indebtedness. How much of our current debt is still in foreign currency?

MR. HOGG: Right now it is 33 per cent.

MR. HENDSBEE: Where was it in the past?

MR. HOGG: I think in 1995 it was 72 per cent. On Page 84.1 of last year's Budget Address, there is a fairly comprehensive graph showing it. In 1995 it was 72 per cent down to a projected 36 per cent in the year 2000.

MR. HENDSBEE: In what foreign currency is it in mainly, is it in U.S. dollars, Japanese yen, or German marks?

MR. HOGG: The majority of it is in U.S. dollars. After that would be Japanese yen, a little bit of Swiss francs and a very small amount of British pounds.

MR. HENDSBEE: So trying to have our indebtedness out of foreign currency is probably more of a rational decision so we don't have the fluctuations of the bond markets and international dollars. In regard to Canadian dollars, has there always been an initiative perhaps that when we go out to write the bonds and stuff there is an opportunity for our own citizens to buy into those bonds instead of the banks? We are losing a lot of investment dollars with people buying RRSPs or bonds and the money is leaving the region. Is there any way that the money could stay within the region and we could be indebted to our own citizens?

MR. HOGG: The consortium that finds the investors and sells the bonds on our behalf includes Nova Scotia dealers, which provides an easier opportunity for Nova Scotians to invest in Nova Scotia Government debt, that is because there is a local firm. Even the national companies, many Nova Scotians deal with them regularly so it is a very simple matter of, I am not here today to sell but we would gladly do that. Contact your broker and he will quite easily put you in touch with how you can acquire Nova Scotia debt if you so choose.

MR. HENDSBEE: But it is not as simple as Canada Savings Bonds? You just go into the bank and make payroll deductions. Is there any way we can simplify the process for our citizens to buy our own provincial bonds?

MR. HOGG: It is not quite as simple as all of that, primarily because the costs of raising money that way are quite exorbitant. At least two provinces started that method and dropped out of it because of the high costs of borrowing, it was just not an effective way of borrowing money; high administration costs, high interest rates and small amounts of money coming in.

MR. HENDSBEE: My last question to you, sir, in regard to our debt in relation to our ratio of GDP, our Gross Domestic Product, how do we compare our provincial ratio to other

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provinces? My second question on that is if the forecast says there should be any economic downturns, be it nationally or internationally in the United States, if their economy should start to slow down, what impact would that have on our economy here with regard to our exporting business and everything else?

MR. HOGG: In terms of debt to GDP, we have the third highest debt to GDP ratio in Canada. The federal government has a very large debt to GDP ratio and Newfoundland is higher than Nova Scotia, so we are the third highest. The amount of debt we have is just over 50 per cent of our Gross Domestic Product.

On the economy and a downturn in the United States, I can't give you a number of the impact that would have other than to say with the introduction of offshore exploration and the Sable project, it provides us with better opportunity to weather an economic storm, if you will, because our economic base is more diverse. If you look back to where we were 10 years ago, the service industry of the economy is much higher than it was before so that the more diversity you have in your economy, the better you are able to withstand a downturn in the economy. With offshore exploration that is required to take place over the next five years, that would help.

MR. CHAIRMAN: That pretty well concludes today's questioning. Just on a point of clarification on the questions asked by both the Liberal caucus and NDP caucus on NSRL. Does that act as a charge against our equalization payments because it is offshore?

MR. HOGG: The gain on the sale does not factor into equalization.

MR. CHAIRMAN: I thank all members of our panel for appearing today, answering questions and being very helpful to all committee members. Next week's Public Accounts Committee meeting has been cancelled because the NDP is having an out of town caucus meeting. The next meeting will be the week after that and we will be dealing with the Auditor General's Report. On February 28th and March 7th dates we will be having the Auditor General with his report.

Also, another housekeeping matter, I believe all members received this notice on the CCAF conference that is coming up. It is one that we generally sent some representation from Public Accounts Committee to and I believe representatives from the Auditor General's office will be in attendance. Generally there are representatives, I know the Liberal caucus and Conservative caucus have sent someone in the past. Personally, I think one representative from each of the three caucuses should attend, if it is the will of the committee that we do send representatives. It is a very productive conference and perhaps, Mr. Auditor General, if you could just make an observation on it whether you think it is a worthwhile investment for the committee?

MR. SALMON: This is an organization that has been active for about 20 years now and has done an extensive amount of research into issues of public sector management, accountability and performance reporting. Their conferences are generally very good. The quality of speakers is always very high. My recollection is that members of this committee who

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have attended in the past have found it beneficial. Certainly, I will have staff attending it this year.

MR. CHAIRMAN: Is it the will of the committee that we send representatives? (Interruption) One from each caucus. Mr. Taylor.

MR. TAYLOR: On behalf of our caucus, we would like to get back to the committee as quickly as possible with a reply. (Interruption) I was just going to point out that on behalf of our caucus we would get back to you, Mr. Chairman, you seem to be taking the lead hand on this, so we will get back to you as quickly as we can.

MR. CHAIRMAN: I believe the conference is March 19th and March 20th, so there would be plenty of time to get the discount rates for any bookings or anything, as far as travel goes and it still has to be approved by the Speaker's Office, of course, that is the process. Mr. Dexter.

MR. DEXTER: I just wanted to raise as well, members all got circulated to them the information on the e- government conference. I think is going at the same time. I don't know if people had a chance to read through the material on it but is was also very fascinating. I understand that Reg Alcott is chairing it. I know I received the information in my name, specifically, and I was going to address with Murray whether or not we were going to be participating.

MR. CHAIRMAN: Is it in Ottawa, as well?

MR. DEXTER: It's in Ottawa and I think it is at the same time.

MR. CHAIRMAN: If it is perhaps that would be a double plus for all members.

MR. DEXTER: Anyway, I just raise that for members.


MR. HOLM: Mr. Chairman, I am just seeking clarification on what we did or didn't decide before. Did we decide as a committee that we will send delegates to the conference? Is that decision to be made at a future time?

MR. CHAIRMAN: Time is a little of the essence here, too, if you want to get the discounts. (Interruption) That is in two weeks time and it would be past, perhaps if the Conservative caucus would notify either myself, John, or Mora.

MR. HOLM: Maybe what we could do, Mr. Chairman, is once the decision is made from the government caucus they could provide that information to you and then maybe the three chairmen, or vice-chairmen or whatever we are could discuss it.

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MR. CHAIRMAN: Generally it was always the chairman and vice-chairman who went before, that sort of thing but given the circumstances, one from each caucus would be appropriate.

The meeting is now adjourned.

[The committee adjourned at 10:03 a.m.]