Financial Perspective of Measuring Performance of Policy and Delivery October 8, 2009 Gary Wuschnakowski: Director, Business and Resource Planning, Ministry of Energy and Infrastructure

1 1. Purpose Understanding the key financial challenges facing the government is pivotal to achieving program performance and sector sustainability. Provide a framework to better integrate financial considerations and measures into the development more robust policy and improved implementation. Outline 5 key financial “lenses” that can enable you to identify, assess and mitigate the financial risks and establish risk-based financial measures.

2 2. Key Financial/Policy Challenges Economic: managing program expenditure and evaluating performance/alternatives during a global economic recession that has constrained revenues. Stewardship of the Long-term: balancing immediate program funding over infrastructure investments, while understanding the long-term financial legacy of current policy/program decisions. Public Expectations: access to information and heighten public expectations will drive greater transparency and the need to demonstrate effectiveness, efficiency and value-for- money. Core Programs: demographics changes will impact the sustainability of large, “open programs” in the health, social services and education sectors. Broader Public Sector (BPS): changing government’s role as a “social-investor” overseeing BPS management and leveraging performance through agreements that codify expectations. Capital and Investments: Increasing complexity of integrating financing, capital investment and operations planning to ensure efficient and effective delivery of services. Public Reporting: Strengthen public accounting and financial disclosure standards will necessitate more rigorous financial analysis and data supported by attestations of its integrity.

3 3. Example: Vancouver Olympics Capital Projects Challenge: City of Vancouver has taken full financial control of the 2010 Olympics athletes village $1 billion project. Objective: Balancing increasing costs against a drop-dead deadline, without encumbering the city with substantial debt. Key Issues:  Short-term “showcase” event and incurring substantial public debt at a time of falling revenues.  Original Alternative Financing and Procurement (AFP) agreement was supposed to transfer the “risks” of construction and financing to the developer.  With evaporation of “market” credit the construction company has been unable to make payments.  Since September, 2008 the city has covered construction costs through a $100 million loan to the developer.  The city’s takeover could help cut the interest rate from as much as 11.5 per cent to as little as five per cent. Result:  Vancouver has had its triple “A” credit rating downgraded making it more expensive to borrow and fund its established programs.

4 4. An Integrated Financial-Policy Model Policy Decision Policy Decision Financial Analysis Financial Analysis Policy Analysis Policy Analysis Financial & non-financial risks/options Financial & non-financial risks/options Assurance of controls Assurance of controls Forecasts/ fiscal impacts Forecasts/ fiscal impacts Asset Implications Asset Implications Efficiency Effectiveness Value-for-money Program Implementation Risk-based reviews Asset Management Financial Performance and Public reporting Integrity of financial data and reporting Sustainability and Value-for-Money Program Evaluation Consolidated Public Reporting

5 5 Financial Lenses for Developing Policy Value for Money Transparency/ Public Reporting Financial Accountability Financial Risks Fiscal Impacts Efficiency: Inputs over outputs Effectiveness Outputs over outcomes Economy: Cost/benefits against alternatives Efficiency: Inputs over outputs Effectiveness Outputs over outcomes Economy: Cost/benefits against alternatives Financial Transparency Risks Disclosure of financial information consistent with public accounting and financial reporting standards. Financial information is completes, reliable, timely, comparable, relevant, clear and verifiable. Financial Transparency Risks Disclosure of financial information consistent with public accounting and financial reporting standards. Financial information is completes, reliable, timely, comparable, relevant, clear and verifiable. Economic/ Fiscal Impact What are the economic and fiscal implications and risks? How can these risks be mitigated through policy and program design? What are the financial and fiscal “trade-offs” in supporting the decisions? Economic/ Fiscal Impact What are the economic and fiscal implications and risks? How can these risks be mitigated through policy and program design? What are the financial and fiscal “trade-offs” in supporting the decisions? Impairing Future Decisions Impacts on (future) revenues/ assets/ liabilities (e.g. auto sector pensions) Impacts on budgets, the multi- year fiscal/capital plans, transfers/ cash flows and appropriations. Impairing Future Decisions Impacts on (future) revenues/ assets/ liabilities (e.g. auto sector pensions) Impacts on budgets, the multi- year fiscal/capital plans, transfers/ cash flows and appropriations. Public Reporting (consolidation): Ensuring appropriate financial accountability and transparency provisions are incorporated into program delivery and design. Public Reporting (consolidation): Ensuring appropriate financial accountability and transparency provisions are incorporated into program delivery and design.

6 6. Balanced Scorecard Initiatives Targets Measures Objectives Financial “To succeed financially, how should we appear to our stakeholders?” Initiatives Targets Measures Objectives Internal Business Process “To satisfy our stakeholders and clients, what business processes must we excel at?” Initiatives Targets Measures Objectives Learning and Innovation “To achieve our vision, how will we sustain our ability to change and improve?” Initiatives Targets Measures Objectives Client / Stakeholder “To achieve our vision, what are the key client outputs and outcomes? What does quality service mean?” Vision & Strategy

7 7. Looking forward Integrating financial risks and measures is critical in evaluating policy, programs and ensuring sector sustainability. Only by balancing and “weighting” efficiency, effectiveness and value-for-money measures can a full picture of program’s performance be established. Increasing financial reporting requirements and the complex relationships between capital, financing and operational require an integration of these considerations into policy decisions. Forward looking policy that seeks horizontal sectoral solutions cannot be divorced from robust financial, business and capital investment decisions.

8 8. Contacts Gary Wuschnakowski Director, Business and Resource Planning, Ministry of Energy and Infrastructure (416) Murray Lindo Director, Financial Management and Control Policy, Ministry of Finance (416) Simon Trevarthen Manager, Financial Management Policies, Ministry of Finance (416)

9 Appendix A: Key Financial Measures CategoryMeasure Debt Management: success in maintaining a sustainable debt loan Net Debt: the difference between the Province’s total liabilities and financial assets. Total Debt: the Province’s total borrowings outstanding without taking into consideration any of the Province’s assets Liquidity: assess your ability to pay your bills as they come due Current Ratio = Current Assets divided by Current Liabilities Working Capital = Current Assets – Current Liabilities Profitability: measures how well the business is able to generate a profit (assess competitiveness or supporting Ontario business) Operating Profit Margin Ratio = (Net Income + Interest Expense) divided by Gross Sales Return on Assets = (Net Income + Interest Expense) divided by Total Assets Net Income = Revenues – Expenses Solvency: determines how much you are relying on debt to finance the business Debt to Equity Ratio = Total Liabilities divided by Equity Debt to Asset Ratio = Total Liabilities divided by Total Assets Capital Budgeting: help make decisions about investments or projects that are under consideration Capitalization Ratio = Long-term debt divided by (Long-term debt + Equity) Net Present Value = the sum of net cash flow divided by (1 + discount rate) t where t is the time of the cash flow

10 Example: Government support for the Auto Sector Challenge: Balancing socio-economic imperative to save manufacturing jobs against the public policy and accountability requirements. Objective: Provide ailing automobile companies a credit bridge through difficult times. Key Issues:  Supporting the auto sector is multi-jurisdictional issue. Loan agreements cannot be made in vacuum and must take into account all aspects of the various governments’ initiatives.  Managing the risk of longer-term investments in an industry with weak consumer demand and volatile stock markets.  Ensuring public money is spent appropriately and contributes to wider public policy goals, such as more environmentally friendly cars.  Making sure public loans are repaid and that government exposure is based on the associated risks.

11 Example 3: Alternative Financing Arrangements Challenge: Ontario has an infrastructure deficit estimated at more than $100 billion. Objective: Alternative Financing and Procurement (AFP) represents an opportunity to leverage private-sector project management expertise and financing to help bridge the infrastructural deficit. Key Issues:  Public policy considerations in the government’s construction, management and ownership of assets.  The higher private-sector financing rates must be balanced against construction risks (i.e. cost overruns) transferred to the private partners.  Long-term AFPs that include design, build and asset management components, require performance criteria to ensure value-for-money throughout the asset’s life-cycle.  The openness and transparency of the alternative financing process are critical to ensure the highest return on investments and public accountability.  Differing financing rates methodologies impact the recognised value of the assets. Using a project costing model will increase financing costs, while a internal discounted rate will decrease financing costs and change the asset’s value.