Capital Asset Management Framework: 12. Financing

12.1 Traditional Financing

Capital assets procured using traditional methods are financed by the Province in one of two ways:

  1. Prepaid capital advances (PCAs) are used to fund the government's contributions to education, health and public-transit infrastructure
  2. The Fiscal Agency Loan program is used to fund all other taxpayer-supported Crown capital requirements

Both traditional financing methods are discussed in greater detail below.

12.1.1 Prepaid Capital Advances (PCAs)

PCAs are issued to eligible agencies (as defined in section 56.1 of the Financial Administration Act) for the acquisition of tangible capital assets to support provincially- funded programs. To qualify for a PCA, the agency must have a claim on the asset to ensure its continued use for provincially-funded public programs.

Monies are advanced through an Electronic Fund Transfer and financed with direct government debt, which is classified by capital purpose.

PCAs are recorded on the province’s financial statements as a deferred expense and amortized over the asset’s life. The value of a PCA must never exceed the unamortized value of the tangible capital asset it was used to acquire.

As part of the PCA process, agencies may be issued Certificates of Approval (COAs) for specific projects. This gives them the authority they need to receive funds, and to draw down those funds to an established project limit.

Agencies that use the COA system should establish internal policies and procedures for its administration. These policies and procedures should accommodate local agencies’ approval requirements, if applicable, particularly in cases where legislation requires the agencies to pass bylaws before undertaking capital expenditures.

12.1.2 Fiscal Agency Loan Program

Most public-sector agency borrowing for capital needs is done through the Fiscal Agency Loan program, under which the Province borrows directly in the financial markets and re- lends funds to agencies on matching terms.  The program uses the Province’s strong credit rating, and its ability to borrow at lower interest rates, to provide lower-cost financing.

In most cases, responsibility for borrowing and financing costs rests with the agency. The exception is in certain cases where the Province pays for all or part of the debt service costs.

If the fiscal agency loan is recoverable from future government appropriations, the loan is treated, for accounting purposes, as a prepaid capital advance (i.e. a deferred expense amortized over the asset’s life).

Given competing program demands, fiscal agency loans may not be appropriate for self- supporting projects, or projects projected to become self-supporting. Agencies leading these projects may be directed to obtain non-government guaranteed financing.

12.2 Alternative Financing

Alternative financing refers to the use of innovative and cost-effective funding approaches that do not add to the Province’s debt and proceed without recourse to, or guarantees from, the Province.

It is one component of alternative procurement (which is discussed in detail in Section 8.4) and may deliver benefits such as:

  • mitigation and transfer of project financial risks
  • reduction of demand for tax-payer-supported debt
  • protection of the Province’s credit rating, and
  • accelerated delivery of capital projects

Alternative financing can take various forms. Commonly-used methods include:

Capital and operating leases: These allow the lessee to use an asset for a period of time, with or without full recourse to the Province in the event of default.  The lease types differ primarily in their allocation of risk. In an operating lease, the lessor retains most of the risks (and rewards) of ownership. In a capital lease, substantially all the risks and rewards are transferred to the lessee.

Bonds, debentures and other securities: These may be issued directly by agencies to financial institutions and the capital markets. They are issued with recourse limited only to the project or the sponsoring agency.

These methods of alternative financing could be used in any of the following forms of alternative procurement:

  • Partnerships, including P3s and partnerships between public-sector agencies
  • Self-supporting projects that rely on user fees or other non-taxpayer-supported revenues to recover debt service payments, operating and capital-maintenance costs
  • Internal payback projects, which generate sufficient savings to fully cover debt service costs, and
  • General-purpose projects of non-consolidated institutions, with no increase in annual government grant or subsidy payments

Agencies are required to consult with the Provincial Treasury, Ministry of Finance, prior to embarking on alternative financing initiatives.  The Provincial Treasury can provide:

  • financial advisory services (e.g. support in developing business cases, deal structures, financial projections, discount rates, debt and funding models), and
  • financing/funding transaction services (e.g. support in engaging financial advisors, placement agents, credit rating agencies, capital markets and financial institutions)

These services support a co-ordinated, streamlined approach that allows:

  • competitive engagement
  • effective liaison among financial service providers, investors, government and clients, and
  • leverage of the relationship to help ensure lowest-cost service delivery

12.3 Classification of Debt Under the Fiscal Planning Framework

Under the Province’s Fiscal Planning Framework, the debt of public-sector agencies is classified in three categories:

  • taxpayer-supported
  • self-supporting, and
  • off-credit

Each of these categories is discussed below, along with the criteria Treasury Board uses to determine the different classifications.  These criteria parallel those applied by a major U.S. credit rating agency.

12.3.1 Taxpayer-Supported Debt

Taxpayer-supported debt includes:

Direct government debt, which funds government operations and capital advances for education, health care and public transit infrastructure.

Fiscal agency and government guaranteed loans to social and government-services agencies, which finance construction of justice facilities, government and other accommodation requirements.

Fiscal agency and government guaranteed loans to economic development agencies, which finance ferry terminal and fleet expansions, and certain public transit and highway construction projects.

Other fiscal agency loans, which finance the construction and maintenance of post- secondary residences, parking facilities and other ancillary services. These projects are supported by user fees which are not sufficient to fully recover all debt service requirements, operating and capital-maintenance costs. Loans are also provided to local improvement districts to finance infrastructure.

Loan guarantees, which are provided to private-sector firms and individuals by the government through various programs. The government obligation is contingent upon default of the primary debtor.

Non-guaranteed debt, which may be incurred directly by a taxpayer-supported agency, excluding non-consolidated institutions such as schools and health organizations.

12.3.2 Self-Supporting Debt

The debt incurred for a capital project may be designated as self-supporting when it meets the following two conditions:

  • User fees and/or other non taxpayer-supported revenue must fully cover all debt service, operating and capital-maintenance costs. At minimum, this requires positive net income (after deducting depreciation) and a debt service coverage ratio of one-to- one (“fully self-supporting performance”). The debt service ratio is calculated as a ration of annual cash flow to annual principal, interest and lease payments
  • Five-year financial projections must show that fully self-supporting performance is sustainable. Treasury Board may further require that fully self-supporting performance be achieved for up to three consecutive fiscal years prior to such designation

Self-supporting debt includes:

  • debt held by commercial Crown corporations that do not receive grants or subsidies to pay debt service, operating or capital-maintenance costs
  • fiscal agency loans to, and any other government-guaranteed debt of, non- consolidated institutions for the purposes of financing self-supporting ancillary service projects such student residences or parking lots, and
  • financing through the warehouse borrowing program, which takes advantage of capital market opportunities to borrow money before it is actually required. Proceeds from the borrowing are invested pending eventual lending to public-sector agencies

12.3.3 Off-Credit Financing

Off-credit financing refers to borrowing and other types of financing that do not appear in either the taxpayer-supported or self-supporting debt categories. Examples include:

  • operating leases as designated by the lessee’s auditor, whether or not they are government guaranteed
  • the debt of internal payback projects sponsored by a non-consolidated institution provided that:
  1. the institution remains non-consolidated
  2. the debt recourse is limited to the project and/or the non-consolidated institution;
  3. there are no dedicated grants or subsidy payments from the government to the non-consolidated institution for servicing the debt (i.e. principal and interest)
  4. grants or subsidy payments from the government to the non-consolidated institution are not incrementally augmented to accommodate debt servicing for the project, and
  5. cost savings generated by the project fully cover debt servicing, starting on the completion date (as evidenced by five-year financial projections and pro-forma statements)
  • the debt of self-supporting projects sponsored by non-consolidated institutions, provided the institutions remain non-consolidated and the debt recourse is limited to the project and/or the institution, and
  • the debt of general purpose projects sponsored by a non-consolidated institution where debt service costs are fully covered by non tax-supported sources – provided that:
  1. the agency remains non-consolidated
  2. the debt recourse is limited to the non tax-supported sources and/or the non- consolidated institution
  3. there are no dedicated grants or subsidy payments from the government to the non-consolidated institution for servicing the debt (i.e. principal and interest)
  4. grants or subsidy payments from the government to the non-consolidated institution are not incrementally augmented to accommodate debt servicing for the project, and
  5. the historical performance of non tax-supported sources and five-year financial projections substantiate a sustaining source of funds which may be increased by the agency, as required, to fully pay debt service costs without affecting the government’s annual capital, operating grant or subsidy payments for the period during which the debt is outstanding

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