Ministry of Finance and Corporate Relations
Honourable Paul Ramsey, Minister
This electronic version is for informational purposes only.
The printed version remains the official version.
Report B: FISCAL REVIEW AND OUTLOOK
PROVINCIAL CAPITAL ASSETS
Much has been written about the accumulation of provincial debt. However, what is often omitted is a recognition of the capital assets underlying much of this debt. This topic box discusses the value of provincial assets.
The provincial government and its Crown corporations and agencies borrow funds to finance operations and capital projects. Borrowing for operations is required when revenues fall short of expenditures and to meet other cash requirements, such as loans and investments. Borrowing also finances the building of schools, hospitals, long-term care facilities, roads, dams and other forms of provincial infrastructure. These investments provide essential services today, and will also benefit generations of British Columbians in the future.
The need for capital infrastructure in British Columbia is substantial. Maintaining the existing asset base, replacing ageing infrastructure, and meeting the needs of a changing population all require capital spending. Infrastructure also supports economic activity in the province.
The following chart provides a breakdown of the various uses of accumulated net debt. Roughly $22 billion or almost 70 per cent of total provincial net debt (excluding the warehouse borrowing program) reflects investments in capital assets.
There are various ways to calculate the value of provincial assets, and each method yields a different conclusion. The table at the end of this topic box presents four conventional ways of assessing the value of assets: historical cost, net book value, replacement cost and net debt outstanding. Market valuations are difficult to establish as true market conditions usually do not apply to many Crown assets.
Historical cost represents the actual amount of money spent to acquire provincial assets. This value is estimated to be $45 billion at March 31, 2000.
Net book value this method presents the historical cost of assets, net of accumulated depreciation expenses. The net book value of assets is presented annually in the Public Accounts. A preliminary estimate for the net book value of provincial assets as of March 31, 2000 is $29 billion.
Replacement cost while net book value provides an historical perspective of asset costs, the replacement cost method estimates how much it would cost today to acquire the same assets under current economic conditions. There is no one method for determining replacement cost values, and a number of techniques have been used to arrive at the estimates shown in the table (e.g. using insured values). Based on these estimates, it could cost $140 billion to replace existing provincial assets at today's typical construction costs.
Net debt outstanding represents the amount of funds borrowed by the government and its Crown corporations and agencies, net of accounting adjustments and accumulated sinking funds set aside for debt repayment. At March 31, 2000, total provincial net debt is forecast to be $34 billion. The amounts presented in the table include debt incurred to finance operations as well as to acquire capital assets. As noted earlier, $22 billion of total provincial net debt reflects investments in capital assets.
Asset Valuation Methods Comparison
The information presented in this topic box is based on various assumptions. The table is intended to illustrate the different valuations that could result depending on the assumptions and valuation method used. Clearly, the value of assets is higher under the replacement cost method simply because the cost of replacing assets is much larger at today's prices, while replacement cost does not reflect the deterioration of ageing facilities.
The table shows that total provincial net debt outstanding, excluding operational debt and the warehouse borrowing program, is lower than the value of the assets. This is because much of the debt associated with older assets has been retired while the productive capability of the asset continues.
It should be recognized that the estimates used in the table are, by their nature, very approximate. Other valuation techniques and assumptions could have been used, such as using statistical data to remove the effect of inflation over the years, but these more sophisticated methods would have been impractical for the added precision achieved.
Even with more precise valuation methods, the analysis would show that:
Major Provincial Assets and Net
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