1995 BUDGET REPORTS

Overview

The provincial government and its Crown corporations and agencies incur debt to finance operations and capital projects.

Borrowing for operations is required when revenues fall short of total expenditures. These borrowings have declined over the past several years due to the government's commitment to deficit elimination.

Borrowing for infrastructure finances the building of schools, hospitals, roads and other social capital. Much like a private company, the province finances the cost of these projects over the useful life of the assets. By doing this, the province matches the project costs with the future benefits to be provided.

In 1994/95, gross borrowing requirements for the government and its Crown corporations and agencies totalled $3.4 billion, down from the budget estimate of $4.1 billion largely due to the provincial government's lower-than-expected deficit. These borrowings were met through long-term borrowings of $5.2 billion, some of which was used to replace $1.8 billion of short-term debt.

In 1995/96, gross borrowing requirements are estimated to total $2.8 billion, significantly lower than in 1994/95.

When analyzing the province's debt and investment quality, international investors and credit rating agencies often focus on the taxpayer-supported portion of provincial debt. Taxpayer-supported debt excludes the self-supporting debt of commercial Crown corporations, such as the British Columbia Hydro and Power Authority and British Columbia Railway Company. These Crown corporations finance their debt from revenue generated from the sale of services at commercial rates.

Taxpayer-supported net debt is expected to increase to $19.5 billion at March 31, 1996, equal to 18.8 per cent of GDP.

Chart E7 in Report E shows that according to Moody's Investors Service, a major bond rating agency, British Columbia has the lowest net public debt to GDP ratio of all provinces at March 31, 1995.

Financing Process

The provincial government and its Crown corporations and agencies incur debt by various financing methods, including:

debt issued by the government for its own purposes;
fiscal agency debt borrowed directly by the government with proceeds re-lent to Crown corporations and agencies; and
debt incurred by Crown corporations and others with a provincial government guarantee as to the payment of principal and interest.

All Crown corporation and agency borrowing is now done through the fiscal agency program. Under this program, the provincial government borrows directly in financial markets and relends the funds to Crown corporations and agencies. Borrowing and financing costs remain the responsibility of the Crown corporation or agency, except in cases where the provincial government provides a contribution to pay for all or part of the debt service costs.

The fiscal agency program provides lower-cost financing to Crown corporations due to the province's strong credit rating (the best of all Canadian provinces) and its ability to borrow at lower interest rates.

In order to provide for the orderly repayment of debt, the provincial government and Crown corporations establish sinking funds for all debt with a term of five or more years. At March 31, 1995, sinking fund investments are expected to total $4.9 billion. Debt with a term of one year or longer will be 60 per cent covered by sinking funds at maturity.

Categories of Debt

Chart D1 provides a breakdown by category of estimated provincial net debt outstanding at March 31, 1996. Further details are provided in Table H7.

[ Chart D1 -- Total Provincial Net Debt at March 31, 1996 ]

The provincial government issues debt for the following purposes.

Provincial government direct debt to fund government operations, including refinancing of maturing debt and other financing transactions.
Commercial Crown corporations, including British Columbia Hydro and Power Authority and British Columbia Railway Company. These corporations are self-supporting as they generate revenue from the sale of services at commercial rates and pay their own operating expenses, including debt service charges. Debt is incurred to finance the construction and maintenance of transmission lines and generating facilities for British Columbia Hydro and Power Authority and rail system and dock facilities for British Columbia Railway Company.
Economic development Crown corporations and agencies, including British Columbia Ferry Corporation, British Columbia Transit and the BC Transportation Financing Authority. Debt is incurred by these corporations to finance ferry terminal and fleet expansions, public transit construction and maintenance projects, and highway construction projects around the province, including the Vancouver Island Highway. Although these corporations and agencies sell services directly to the public, their revenue may not cover their operating expenses. As these corporations provide economic benefits to the province, the government may provide grants or other forms of assistance to them.
Social and government service Crown corporations and agencies incur debt largely to finance construction of hospitals, schools, post-secondary educational institutions and justice facilities. Debt service requirements are met through provincial grants or rental payments and, for hospitals, partly through local property taxes.
Other fiscal agency loans include loans made by the provincial government to other public bodies including universities, colleges and various local governments and improvement districts. These loans are used to finance the construction and maintenance of residence and parking facilities, and sewer and water infrastructure projects. Debt service requirements are met through local property taxes and, for universities and colleges, through revenue raised from residence and parking fees.
Loan guarantees to private sector firms and individuals are provided by the provincial government through various programs. These include student financial assistance, loan guarantees to agricultural producers and guarantees issued under economic development assistance programs. These guarantees do not represent direct obligations of the government except in the event of default by the borrowers who received the guarantee.
Non-guaranteed debt, includes debt of the British Columbia Lottery Corporation, Pacific National Exhibition, Provincial Rental Housing Corporation and the debt assumed by British Columbia Railway Company as a result of its acquisition of Vancouver Wharves Ltd. These corporations generate revenue from the sale of services to cover their debt servicing payments. This category of debt consists primarily of mortgages and are not an obligation of the provincial government.

Source of Funds

Funds borrowed by the province have come from a variety of sources, including public financial markets, the Canada Pension Plan Investment Fund (CPP), private institutional lenders and provincial trusteed funds. Chart D2 shows that since 1985, borrowing sources have shifted away from private placements toward public bond issues.

[ Chart D2 -- Outstanding Debt by Source ]

To date, most of the province's funds have been obtained through medium and long-term debt issues in public markets in Canada, the United States and Europe. To a lesser extent, private placements in North America, Europe and Japan have also been important. In all cases, the province's obligations are either payable in or converted to Canadian or U.S. dollars.

The province continues to actively diversify its borrowing sources to cultivate strong domestic and international investor demand for British Columbia debt securities; strong demand helps minimize financing costs for the province. A broad investor base is also important given increased competition for funding and the need for multiple funding sources in the face of sometimes difficult and volatile capital markets.

Review of 1994/95

At March 31, 1995, total provincial debt reached $26.9 billion, an increase of $983 million from the previous year. Taxpayer-supported debt increased $821 million as a $75 million decline in government direct debt was offset by increases in other categories (see Table D1). The increase in taxpayer-supported debt was due to capital spending on a number of projects, including:

construction of facilities at the University of Northern British Columbia in Prince George;
upgrade of the ferry terminal at Swartz Bay, north of Victoria;
the Vancouver Island Highway construction project;
upgrades to highways in the Lower Mainland and Interior;
Prince George Regional Correctional Centre and various courthouse facilities; and
construction of schools and health facilities necessary to keep up with the demands of a growing population.

During 1994/95, commercial debt increased $165 million due to capital expenditures of British Columbia Hydro and Power Authority and the redemption of preferred shares by British Columbia Railway Company. B.C. Hydro capital projects in 1994/95 included a 500-kilowatt transmission line from Williston to Kelly Lake, the Burrard thermal upgrade project and additional investments in the Power Smart program.

1995/96 Financing Plan

Table D1 outlines the 1995/96 financing plan for the government and its Crown corporations and agencies. Further details on provincial net debt are provided in Table H7.

During 1995/96, gross borrowing of the provincial government and its Crown corporations and agencies of $2.8 billion will be partly offset by retirement provisions of $1.8 billion. As a result, total provincial debt is expected to rise to $27.9 billion at March 31, 1996, an increase of $956 million from 1994/95.

Taxpayer-supported debt is expected to increase $727 million or 3.9 per cent to total $19.5 billion at March 31, 1996. This includes a $414 million reduction in government direct debt offset by increases in other taxpayer-supported categories.

Major capital projects in 1995/96 include:

construction of buildings at Malaspina University-College in Nanaimo;
new BC Cancer Agency clinics in Victoria and Kelowna;
expansion of Cariboo Memorial Hospital in Williams Lake and Dunrovin Lodge for seniors in Quesnel;
purchase of 75 additional buses and 25 natural-gas-powered buses for the Vancouver Regional Transit System; and
a number of public educational facilities in the Lower Mainland and other high growth areas of the province.

Commercial debt is expected to increase $234 million or 2.9 per cent to total $8.3 billion at March 31, 1996.

For information on debt management activities, see Report E -- Debt Management Plan.

TABLE D1
GOVERNMENT, CROWN CORPORATION AND AGENCY FINANCING PLAN

                                                                          Forecast                          1995/96              Forecast
                                            Net Debt       1994/95        Net Debt       --------------Transactions-----------   Net Debt
                                            Outstanding    Net            Outstanding                                            Outstanding
                                            at March 31,   Debt           at March 31,  New           Retirement    Net          at March 31,
                                            1994           Change         1995          Borrowing(1)  Provision(2)  Change       1996
                                           ---------------------------------------------($ millions)----------------------------------------
PURPOSES:
    Provincial Government Direct........... 10,257.1          (75.0)      10,182.1         696.6       1,110.6        (414.0)      9,768.1
                                            --------       --------       --------      --------       -------      --------      --------
    Crown Corporations and Agencies:
    Commercial.............................  7,904.2          164.7        8,068.9         495.0         260.7         234.3       8,303.2
    Economic Development...................  1,881.9          305.6        2,187.5         649.7          76.3         573.4       2,760.9
    Social and Government Service.........   4,878.9          597.0        5,475.9         940.4         312.2         628.2       6,104.1
                                            --------       --------       --------      --------      --------      --------      --------
                                            14,665.0        1,067.3       15,732.3       2,085.1         649.2       1,435.9      17,168.2
    Other Fiscal Agency Loans..............    479.1           19.2          498.3           0.2          55.6         (55.4)        442.9
                                            --------       --------       --------      --------      --------      --------      --------
                                            15,144.1        1,086.5       16,230.6       2,085.3         704.8       1,380.5      17,611.1
                                            --------       --------       --------      --------      --------      --------      --------
    Less Amounts Held as Investments/Cash
        for Relending by the Consolidated
        Revenue Fund and Crown Corporations
        and Agenices.......................     29.6            7.7           37.3            --         (11.9)         11.9          49.2
                                            --------       --------       --------      --------      --------      --------      --------
GOVERNMENT, CROWN CORPORATION AND AGENCY
    DEBT TOTAL............................. 25,371.6        1,003.8       26,375.4       2,781.9       1,827.3         954.6      27,330.0
    Other Guarantees(3)....................    425.5          (18.5)         407.0            --          (4.5)(4)       4.5         411.5
                                            --------       --------       --------      --------      --------      --------      --------
TOTAL DIRECT AND GUARANTEED DEBT........... 25,797.1          985.3       26,782.4       2,781.9       1,822.8         959.1      27,741.5
    Non-Guaranteed Debt(5).................    119.6           (2.5)         117.1            --           2.9          (2.9)        114.2
                                            --------       --------       --------      --------      --------      --------      --------
TOTAL PROVINCIAL DEBT...................... 25,916.7          982.8       26,899.5       2,781.9       1,825.7         956.2      27,855.7
                                            ========       ========       ========      ========      ========      ========      ========
TAXPAYER-SUPPORTED DEBT(6)................. 17,891.1          821.4       18,802.5       2,286.9       1,560.3         726.6      19,529.1
                                            ========       ========       ========      ========      ========      ========      ========

(1) Gross new long-term borrowing plus net change in short-term debt.
(2) Sinking fund contributions, sinking fund interest earnings and net maturities of long-term debt (after deduction of sinking fund balances
    for maturing issues).
(3) Includes student assistance loans, loan guarantees to agricultural producers and guarantees issued under economic development assistance
    programs and the British Columbia mortgage assistance program. Includes loan guarantee provisions.
(4) Other guarantees do not represent direct obligations of the government except in the event of default by the borrowers who received the
    guarantee. There is no actual borrowing requirement until a default occurs. A net increase in the government's potential liability is
    expected because new guarantees issued will more than offset expiring ones.
(5) Includes debt of British Columbia Lottery Corporation, British Columbia Railway Company (Vancouver Wharves Ltd.), the Pacific National
    Exhibition and Provincial Rental Housing Corporation that is not guaranteed by the provincial government. Although not a direct obligation
    of the provincial government, this debt is included as part of total provincial debt because it is incurred by a government body.
(6) Excludes guaranteed and fiscal agency debt of commercial Crown corporations and agencies, and non-guaranteed debt of British Columbia
    Lottery Corporation and British Columbia Railway Company (Vancouver Wharves Ltd.).

Budget '95 (Province of B.C.)

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