| The following electronic version is for informational purposes only. The printed version remains the official version. |
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| The following electronic version is for informational purposes only. The printed version remains the official version. |
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Introduction
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 for capital projects finances the building of schools, hospitals, roads and other forms of infrastructure. These investments provide essential services for today and benefit future generations of British Columbians.
The government has met and exceeded the targets established for 1997/98 in the 1997 Financial Management Plan. The deficit will be lower than the $185 million set out in the 1997/98 budget. As of March 31, 1997, the level of taxpayer-supported debt was $110 million lower than forecast, and at March 31, 1998, the level of taxpayer-supported debt is expected to be $781 million lower than forecast. As a result, at March 31, 1998, the province's taxpayer-supported debt-to-GDP ratio is estimated at 20.5 per cent, below the 20.9 per cent target. The province's cost of interest per revenue dollar is forecast to be 7.5 per cent, well below the 9.0 per cent cap.
At March 31, 1998, total provincial debt is estimated at $30.0 billion, an increase of $758 million from March 31, 1997. Taxpayer-supported debt, the portion of debt that is wholly or partially funded by the provincial tax base, will be $21.9 billion, an increase of $706 million from March 31, 1997. Table C2 provides an estimate of changes in provincial debt in 1997/98 and a forecast for 1998/99, while Tables H7 and H8 provide more detailed information on the levels of debt and debt indicators from March 31, 1995, to March 31, 1999.
The annual Debt Statistics Report provides an update on the plan as well as a variety of measures to help understand and assess the province's long-term performance.
Further information on the categories of debt is provided in the topic box.
Financial Management Plan Update
The Financial Management Plan provides a framework for guiding the provincial government's financial performance and debt position. The plan brings together all the elements of the province's financial picture including both government operating and educational capital debt as well as debt arising from capital spending and other requirements for Crown corporations and agencies.
Financial Management Plan Targets
In the 1997/98 budget the government introduced the Financial Management Plan. The objective of this plan was to balance the needs of a growing population for more schools, hospitals, and other debt-supported projects, with the need to keep the province's debt manageable. By linking future increases in debt to the growth in provincial gross domestic product (GDP), the plan ensures that the level of debt remains affordable. The constraints imposed by the Financial Management Plan and its predecessor have helped to reduce the level of capital spending from a high of $1.8 billion in 1991/92 to an expected average of $1.1 billion per year.
As at March 31, 1998, taxpayer-supported debt relative to GDP is expected to be 20.5 per cent, 0.4 per cent lower than the target of 20.9 per cent. The level of debt is expected to be $781 million lower than was forecast in the previous budget. Lower than anticipated capital spending, a lower deficit, and reduced working capital requirements contributed to the lower level of debt.
During 1997, British Columbia's rate of economic growth was slower than anticipated, due in large part to the Asian financial crisis which directly affected provincial exports and lowered inflation. The current estimate for provincial GDP in 1997 is $1.5 billion lower than was anticipated in the 1997/98 budget. This is attributable to both lower economic growth and inflation in 1997/98, and to Statistics Canada's historical revisions to provincial GDP. Despite this, British Columbia will continue to have one of the lowest debt-to-GDP ratios among the provinces in Canada.
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CHART C1 INTERPROVINCIAL COMPARISION OF TAXPAYER-SUPPORTED DEBT [ Click to view larger image of Chart C1 ] |
To address the current period of slower economic growth, the government has modified the Financial Management Plan. While the debt-to-GDP ratio remains a good measure of long-term affordability, the unpredictability of the rate of economic growth makes it prudent for government to retain some flexibility when establishing targets based on GDP. Accordingly, the government has added a three-year target range to guide the management of its debt-to-GDP ratio.
The new target range will ensure that over time the level of debt is linked to the size of the provincial economy and remains affordable. By employing a target range, the government is able, during periods of economic slow-down, to accelerate capital investments to stimulate the economy. Advancing capital projects in times of slower growth can also help to avoid the higher costs of construction in boom periods. This notion of counter-cyclical leverage is actually precluded by the present structure of the Financial Management Plan, which further restricts capital investments and other necessary spending when the economy slows.
The modified Financial Management Plan will allow flexibility for counter-cyclical capital investment planning and minimize the effects of unexpected changes in provincial GDP. The government has set the following targets:
Operating Plan
Provincial government direct debt for operating purposes is incurred to finance deficits in the province's operating account, and to pay for other financing transactions requiring cash, including loans and investments. As at March 31, 1998, government operating debt is estimated to total $11.5 billion, an increase of $422 million from March 31, 1997. This increase was used to finance a lower-than-expected deficit of $169 million in 1997/98 (as compared to the original forecast of $185 million), and other financing requirements such as cash management, loans, and investments, totalling $253 million.
In order to reduce direct debt for operating purposes, the government needs to eliminate its operating deficit and generate surpluses large enough to cover its other financing and working capital requirements. Chart C2 shows that since 1991/92, the government has significantly reduced its operating deficit.
The government is forecasting a deficit of $95 million in 1998/99, down from $169 million in 1997/98. The budget will be balanced in 1999/2000.
In order to minimize annual financing and working capital requirements, the government has begun to identify options to improve its sources of cash and reduce its cash disbursements. These options will include reviews of the collection process for accounts receivable, outstanding fines, and loans to businesses and individuals.
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CHART C2 BRITISH COLUMBIA OPERATING RESULTS SURPLUS/DEFICIT [ Click to view larger image of Chart C2 ] |
Capital Plan
The province builds schools, hospitals, roads and other forms of infrastructure with financing provided through the province's fiscal agency loan program. Financing by this method enables Crown corporations and agencies to benefit from the province's superior credit rating through the lowest cost of debt available. Capital spending leads to an increase in net debt and is offset, to some degree each year, by previous debt that has matured, by sinking fund contributions, and by investment earnings on the sinking funds.
Further information on the province's capital plan is provided in the topic box.
Financing Plan
Borrowing Process
Almost all Crown corporation and agency borrowing is done through the fiscal agency loan 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. This fiscal agency program provides lower-cost financing to Crown corporations due to the province's strong credit rating and its ability to borrow at lower interest rates.
To address concerns raised by the Auditor General in his review of the government's financial statements, the government will be changing the way that it finances and records capital expenditures for educational facilities. These include schools and post-secondary institutions (similar changes are being considered for health facilities and regional transit). Beginning in 1998/99, the government will replace existing fiscal agency loans to schools and post-secondary institutions with pre-paid capital advances that will allow the government to amortize the cost of capital assets over their useful life. These changes do not affect the amounts of total provincial or taxpayer-supported debt. Tables C2 and H7 reflect these changes and provide historical figures for comparison purposes.
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CHART C3 DEBT OUTSTANDING BY SOURCE [ Click to view larger image of Chart C3 ] |
Sources of Funds
Funding has come from a variety of sources, including public financial markets in Canada, the United States, Europe and Asia, the Canada Pension Plan Investment Fund, private institutional lenders and provincial trusteed funds. Chart C3 shows the 10-year shift in the source of funds from private placements, such as the provincial trusteed funds and Canada Pension Plan (CPP), towards public markets, particularly in Canada and Europe, including BC Savings Bonds and issues under the Canadian and Euro medium-term note (MTN) programs.
Diversification of borrowing sources is a key factor in lowering financing costs and maintaining investor interest in and demand for British Columbia bonds and notes. A broad investor base is important given increased competition for funding.
Review of 1997/98
In 1997/98, gross financing for the government and its Crown corporations and agencies totalled $4.3 billion. However, total provincial net debt is expected to increase by $758 million since some new borrowing was used to repay debt maturities, including several issues which were called, and the defeasance of some school and hospital district debt.
Taxpayer-supported debt will increase by $706 million in 1997/98, including a $422-million increase in government operating debt and a $284-million increase in the debt of other taxpayer-supported Crown corporations and agencies.
The increase in direct operating debt is due in large part to the protection of health care and education programs during a year of slow economic growth, particularly in the forest sector.
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CHART C4 1997/98 BORROWING ACTIVITY [ Click to view larger image of Chart C4 ] |
The province raised about 57 per cent of its 1997/98 financial requirements from international sources including issuance in the Euro Canadian, Euro U.S., French franc, and Japanese yen markets (see Chart C4). To hedge against any foreign currency risk, these financings were fully converted to Canadian dollar liabilities. International financings generated savings to the province, compared to the domestic market, of $3 million annually. In the last half of the year, the domestic market emerged as a cost-effective funding source and responded well to the province's public bond and medium-term note programs, as well as the annual BC Savings Bond offering.
In 1997/98, the province took advantage of low short-term interest rates by increasing the floating rate debt exposure of the government operating and capital financing debt portfolios from 24 per cent to about 40 per cent. The province did not add any unhedged U.S. dollar debt to its portfolio, largely because of the sizeable interest cost differential in favour of Canada over the U.S. and assessment of the related foreign exchange risks.
1998/99 Financing Plan
Table C2 and Chart C5 outlines the 1998/99 financing plan for the government and its Crown corporations and agencies.
In 1998/99, the provincial government and its Crown corporations and agencies expect financial requirements totalling $5.4 billion, including $3.9 billion for net maturities (including BC Savings Bonds) and almost $500 million for sinking fund contributions. Most debt issues with maturities of greater than five years are required to have sinking funds to provide for the orderly repayment of debt.
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CHART C5 CHANGE IN TOTAL PROVINCIAL DEBT [ Click to view larger image of Chart C5 ] |
Provincial net debt is estimated to total $31.2 billion at March 31, 1999, an increase of $1.2 billion from March 31, 1998, while taxpayer-supported net debt will total $22.9 billion, an increase of $1.1 billion.
Self-supporting debt is expected to increase by $187 million to total $8.3 billion at March 31, 1999. The British Columbia Hydro and Power Authority will use cash balances and new lower-cost debt to retire high interest-rate debt issues.
The 1998/99 requirements will be met through new borrowing in the domestic and international markets. With an expectation that interest rates on long term debt will remain relatively low, the government's strategy in 1998/99 will be to lower the floating rate exposure and lock-in these favourable interest rates.
Other Financing Initiatives
The government continues to explore new and innovative ways of meeting the growing demand for public infrastructure that do not depend on taxpayer support, as well as ways to make the most productive use of funds that must be borrowed. This includes better use of existing facilities, partnerships with the private sector and the sale of non-essential assets.
The government will continue to rely on advice from an external panel of representatives from the business, labour, and academic communities on the use of public-private partnerships for the development of public infrastructure in the province. The panel recently assisted with the drafting and publication of The Best Practices Guide to Public-Private Partnerships, which provides step-by-step advice to interested parties throughout the planning, approval, and implementation stages of a public-private partnership.
There are several major projects currently underway that could benefit from partnerships with the private sector including:
The government is proceeding with a restructuring of BC Transit, including the transfer of planning and governance for transit services in the Lower Mainland to the Greater Vancouver Regional District. This initiative will allow greater local control over the future expansion of transit in this rapidly growing region.
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CONTENTS FOR BUDGET ’98: REPORTS |  | ||
| CONTENTS FOR BUDGET ’98 |
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BC Ministry of Finance and Corporate Relations |
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