Proceedings of the Standing Senate Committee on
Aboriginal Peoples
Issue 11 - Evidence - February 17, 2015
OTTAWA, Tuesday, February 17, 2015
The Standing Senate Committee on Aboriginal Peoples met this day at 9:33 a.m. to study challenges relating to First Nations infrastructure on reserves.
Senator Dennis Glen Patterson (Chair) in the chair.
[English]
The Chair: Good morning everyone. I would like to welcome all honourable senators and members of the public who are watching this meeting of the Standing Senate Committee on Aboriginal Peoples either here in the room, via CPAC or the web. I am Dennis Patterson from Nunavut. I have the privilege of chairing the Standing Senate Committee on Aboriginal Peoples.
Our mandate is to examine legislation and matters relating to the Aboriginal peoples of Canada generally. This morning we are hearing testimony on a specific order of reference authorizing us to examine and report on the challenges and potential solutions relating to infrastructure on reserves, including housing, community infrastructure, innovative opportunities for financing and more effective collaborative strategies.
We have completed our hearings on housing and are now focusing our study on infrastructure.
Today I'm pleased that we will hear from two witnesses. The first is Mr. Scott Serson, former Deputy Minister, Aboriginal Affairs and Northern Development Canada. Sir, I guess it was Indian and Northern Affairs Canada in your day. The second is Ms. Julie Cafley, Vice-President, Public Policy Forum. Before proceeding to the testimony, I would like to go around the table and ask the members of the committee to introduce themselves.
Senator Watt: Charlie Watt, Kuujjuaq.
Senator Beyak: Senator Lynn Beyak from Ontario.
Senator Raine: Nancy Greene Raine from B.C.
Senator Tannas: Scott Tannas from Alberta.
The Chair: Colleagues, I know you will help me in welcoming our guest, for the first hour, Mr. Scott Serson. He's appearing as an individual. He brings with him a wealth of experience from various employments, not the least of which was his tenure as Deputy Minister of Indian and Northern Affairs Canada as it was known then. Mr. Serson, we look forward to your presentation, which will be followed by questions from the senators. Please proceed.
Robert Scott Serson, former Deputy Minister, Aboriginal Affairs and Northern Development Canada, as an individual: Thank you Mr. Chairman, good morning. I want to begin by thanking the Standing Senate Committee on Aboriginal Peoples for inviting me here to speak on the challenges related to First Nations infrastructure on reserve. I would also like to begin by acknowledging that we're on the traditional territory of the Algonquin people.
Today, I will focus on one First Nation infrastructure challenge in particular which is federal funding. Specifically, I want to discuss the 2 per cent cap that has been applied over the past 18 years to federal transfers to First Nations for basic services and the impact of that cap on infrastructure funding.
On the Aboriginal Affairs website there is a backgrounder: "Aboriginal Affairs and Northern Development Canada's Financial Picture (2014-2015).'' In that backgrounder, one will find the following statement:
The cost of basic services is driven by a young and growing population. In fact, in 2011, almost half (46%) of Aboriginal people were less than 25 years of age compared with almost one-third (29%) of non-Aboriginal people. This creates a growing demand for basic services with overall population/price increases of 3 to 4 per cent per year for the department.
Since 1997-1998, funding for essential programs and services provided by the department have been subject to a two per cent escalator
So that's a good initial statement of the challenge except that it doesn't acknowledge the significant investments some provinces have made in various service areas over the last 18 years. That's important because that same backgrounder points out that much of the department's funding:
. . . ensures that Aboriginal people have access to basic services comparable to those provided to other Canadians through provincial, municipal and territorial governments. These services include education, housing, community infrastructure (water and sewage systems), social support services, and other benefits.
In a November 2006 draft report on cost drivers, the Aboriginal Affairs department noted that during the 2 per cent expenditure growth era, and at that point they were talking about 1997-98 to 2004-05, there had been a shift of $415 million from capital, facilities operations and maintenance, and housing to fund child and family services, elementary and secondary education and other areas. This indicates the magnitude of internal reallocation that had taken place up to nine fiscal years ago.
You may have noticed that last year there were a number of news reports based on an Aboriginal Affairs department draft presentation entitled "Cost Drivers and Pressures — The Case for New Escalators'' dated June 2013. Cindy Blackstock of the First Nations Child & Family Caring Society of Canada obtained this presentation under access to information. This presentation notes again that: Price and volume pressures, including population growth and provincial rates continue to grow faster than 2 per cent.
It goes on to state that: Significant reallocations from infrastructure to other programs have occurred over the last six years. Aboriginal Affairs has reallocated approximately $505 million in infrastructure dollars to social, education and other programs to try and fill the shortfalls in these areas.
So from these two reports we know that nearly $1 billion has been reallocated from infrastructure related funding over the last 18 years. The presentation goes on state that this ongoing reallocation is putting pressure on an already strained infrastructure budget and has still not been enough to adequately meet the needs of social and education programs.
I'll note two additional points. First, the department acknowledges that it receives targeted funds, but points out that "targeted funding does not address core program pressures, for example price and volume pressures.''
Second, the department acknowledges that the "infrastructure project cycle is four to five years, requiring planning and dedicated funding to achieve.'' The planning may be taking place, but clearly dedicated funding has not been there for 18 years.
The Auditor General of Canada has noted this problem of reallocation. The November 2013 fall report, chapter 6, entitled Emergency Management on Reserves, contained the following:
Aboriginal Affairs and Northern Development Canada established the Emergency Management Assistance Program to support First Nations on reserves in managing emergencies. The Department knows that the program's annual budget of about $19 million is not sufficient and it has had to fund the program by reallocating money from other sources. According to the Department, during the period from the start of the program in the 2004-05 fiscal year to the 2012-13 fiscal year, approximately $64 million of additional funding was provided from internal reallocations, particularly from the Capital Facilities and Maintenance Program . . . According to Department officials, the capital program is also underfunded, and reallocation of funds to other programs results in delays or cancellation of community infrastructure projects.
With so many dollars being reallocated from infrastructure funding to make up for the shortfall in monies for basic services, there are precious few funds available for those First Nations that don't have significant own-source revenues to advance economic opportunities, and to build necessary infrastructure to support modern and sustainable community economies for their citizens. Adding to this challenge is the inability of many First Nations to access investment funds that are available to non-indigenous governments and corporate entities.
A further concern in this whole area is that of transparency, a principle the government seems to be insisting First Nations adhere to. The department makes it clear on its website that federal transfers to First Nations fail to match population growth and inflation, let alone increases in provincial expenditures on basic services. Yet there appears to be little transparency for parliamentarians, First Nations or the Canadian public as to the impact in terms of levels of funding and related levels of service in comparison to provincial levels, nor does there appear to be any transparency with respect to the department's reallocations and the impact of such reallocations on First Nations community infrastructure, including basics like the health and safety risks to the First Nations population.
Finally, there is another important deficit, and that is the trust deficit. When the 2 per cent cap was initially discussed with First Nations leadership, they were told that the purpose of the measure was to help eliminate the deficit of the 1990s. You will understand that I am the deputy minister who helped implement this cap, something I'm ashamed to have been part of. Eighteen years later, First Nations have every reason to believe they were misled. How can we expect them to believe anything they are told by government while the 2 per cent cap continues, especially when they know that provincial governments have been treated entirely differently than First Nation governments since 2004?
In preparing for this appearance, I looked back at the committee's December 2011 report: Reforming First Nations Education: From Crisis to Hope. The committee noted that while funding is seen as a necessary condition to improving the educational outcomes, it is not a sufficient condition. Funding must be accompanied by structural reform. I don't disagree with that, Mr. Chair, but since 2004 the need for structural reform has been used as a rationale for not moving to fair and reasonable escalators for basic transfers of basic services to First Nations.
In your report on infrastructure, I urge the committee to call for an immediate end to the 2 per cent cap and the establishment of a fair and reasonable set of escalators for federal funding for First Nations. I urge you to call upon the government to do this in discussion with the Assembly of First Nations. Those discussions could then turn to how to fill the service gaps that have been created over the last 18 years, and necessary structural reforms.
Infrastructure and every other program and service covered by the cap relate directly to the well-being of First Nations children. To paraphrase the conclusion of your 2011 report, I would say we cannot, and must not, fail another First Nation child.
The Chair: Thank you very much for your presentation, Mr. Serson, and for your candor in admitting to having been part of the government that implemented the 2 per cent cap. I believe that was in the era of Finance Minister Martin, if I'm correct. I wonder if you could tell us a bit about your career. Did you serve under both Liberal and Conservative governments in your time?
Mr. Serson: Yes, I did. I started in 1973. I got into the Aboriginal Affairs area in the early 1980s, so I worked with Prime Minister Mulroney and former Prime Minister Joe Clark on the end of the Meech Lake Accord, through the Charlottetown Accord. I co-chaired the Working Group on Indigenous Peoples Rights during the Charlottetown Accord. I helped to manage the Aboriginal constitutional discussions between 1984 and 1987. I was Deputy Minister of Indian and Northern Affairs from 1995 to 1999.
The Chair: When the 2 per cent cap was put in place, the rationale, as you said, was to eliminate the national deficit or contribute to eliminating the national deficit. Was there a time frame contemplated at that time?
Mr. Serson: No, I don't think there was a particular time frame contemplated, Mr. Chair. However, it was clear in not only the surrounding dialogue about these budgetary measures, but the conversations we had at the time, that these measures were being taken to defeat the deficit. That's what I believe ministers and I told First Nations leaders, and I would say that at the time there were no protests. First Nations leaders understood the threat the deficit was to the economy, to the country, and they accepted the 2 per cent cap as part of doing their part.
I didn't envision — and I'm certain they didn't envision — that 18 years later it would still be in place, particularly since it doesn't even cover the growth in inflation and population growth. I quoted a piece from the Aboriginal Affairs department website where they referred to 3 to 4 per cent growth per year in inflation and population. I think the argument could be made that for many of those 18 years it has been much more than that. Inflation has certainly been running at 2 per cent for quite some time, and with population growth on reserves, some have said for certain periods it has been 2.3 per cent. So this is certainly a significant reduction in the purchasing power of transfers to First Nations.
The Chair: Would it be fair to say, following on my previous question, this has not been a particularly partisan initiative and that it carried on through both parties governing in your time and during these observations you have made?
Mr. Serson: Yes, absolutely. When I speak about this to Canadians, I say this is not a partisan position that I'm taking. It was implemented by one government and it has been sustained by another.
The Chair: You quoted a document that had been retrieved by access to information, if I understood correctly.
Mr. Serson: Yes.
The Chair: It was kind of a plea for help.
Mr. Serson: Yes.
The Chair: About the cost drivers and the need for escalators, and I believe that document originated in your former department. You talked a bit about your own regrets as deputy minister. Would it be fair to say that the department was not the only problem here, that this document may show they tried to draw attention to the issue and get more funds, and I will call it a plea for help, it fell on deaf ears?
Mr. Serson: In fact, Mr. Chair, I know of two efforts like that. The first was around late 2006. The department worked with the Assembly of First Nations to put together a similar presentation for central agencies, possibly for cabinet, First Nations basic services, cost driver project, the Assembly of First Nations was given a full briefing on that. It is very similar to the document that was obtained under access to information, June 2013; so yes, the department has made two efforts to remedy this situation.
The Chair: You're talking about monies being diverted to education and child services and maybe emergency services from the capital and infrastructure monies.
Mr. Serson: Yes.
The Chair: There was a stated government plan to take the 2 per cent escalator away from education funding last year that you would be aware of. I believe that may be the first time that there has been a stated government intention to move away from that 2 per cent escalator, albeit in the education area. Do you have any comments on that initiative? It seems to have failed. Some of the blame seems to have been laid by some at the feet of the AFN. Do you have any comments?
Mr. Serson: I'll make two comments. This is a personal perspective, having worked in the department and having travelled to First Nations communities. In part it echoes a point that this committee made in its report on education. It is fine to focus on education funding, but as some chiefs pointed out to the committee during that testimony, if young people are going to school hungry and coming home to overcrowded homes where they cannot find a place to do their homework and study, then your investment is not going to have its full impact.
My point is that sooner or later the government is going to have to take a holistic view of this funding picture because it's all interrelated. As the Auditor General pointed out in 2011, when she did her status report on First Nations services, there is no legislation governing First Nations services. The standard of First Nations services, this whole area of comparability, she said, is very poorly defined.
The second comment is that the initiative on education falls into this whole concern I have with what the 2 per cent cap has done to the trust relationship between the government and First Nations. First Nations were told that this was an initiative to fight the deficit of the 1990s. Eighteen years later we know what a punitive cap it is and yet it is still in place for arguably the poorest people in this country.
So when you look at the education draft bill, and you see that it contains a clause that says that in any given year, in spite of the public commitments, that the Finance Minister and the Minister of Indian and Northern Affairs made to certain levels of funding, when you look at the legislation and you find a clause that says that in any given year the Minister of Finance and the Minister of Indian Affairs can limit those funds, then you might look at that with a lack of trust and ask are we really going to get this funding that we've been promised, or is this clause going to be used on a regular basis?
Senator Tannas: Thank you very much for your testimony. I'm curious if you would recall how many employees you had at Indian Affairs, in your day as deputy minister?
Mr. Serson: I'm getting a little old and my memory isn't that good, but I would put it around 4,800.
Senator Tannas: It's about the same today; so I'm not surprised.
One of the things that we're hearing a lot about is own-source revenue. Can you comment? Have you observed or are you knowledgeable about the testimony that we heard, that own-source revenue generated by those who can generate it — and there are those who can't — but those who can generate it have largely been the saviour in the operating budgets of those First Nations that have it, and that where we have seen significant gaps has been where there is none? Do you want to comment?
Mr. Serson: I don't want to imply that I have any particular knowledge in this. I haven't looked at it, senator, in quite some time. On the face of it, that is what I believe, that there are First Nations that have significant own-source revenue. I don't believe that there are a lot but there are some. Certainly where they have that they can compensate for this transfer of funds from infrastructure funding to cover basic services that the department is doing. They can make up that funding.
Senator Tannas: As the man in charge, if you were faced with the choice to reallocate money the way that it was done, money that was earmarked for one thing and was clearly and quietly moved to another account, would you have done that?
Mr. Serson: That's a tough question. The only thing I can say to that, senator, is that if I knew then what I know now in terms of that 2 per cent cap, I would have gone to justice; I would have fought it as deputy minister. If I had known the damage that it was going to do, I would not have gone along.
Senator Tannas: Wise words. Thank you, sir.
Senator Beyak: Thank you for an excellent presentation, sir.
I wonder if you could help me. We've had several witnesses like you and from First Nation reserves suggest an immediate need for a comprehensive sea-to-sea audit of all First Nation reserves from all sources of government revenues and their own revenues. The reason they say that there are such disparities — some First Nations are thriving while some are still living in squalor after billions of dollars spent by both governments over decades — is that there do not seem to be mechanisms to account for disparities. You have vast knowledge and experience. What would your opinion be of a comprehensive audit over and above the piecemeal reports over the last few years from the Auditor General?
Mr. Serson: If you're asking me if I believe an audit is going to find massive misspending or anything of that sort, I don't believe it. I don't believe it would.
Now, could an assessment be useful in terms of better and more accurate data on flows of funding into communities, the cost of services in those communities and how that balances out? Yes, I think that could be useful, but, you know, the last Auditor General made First Nations programming a priority for her 10-year tenure, and in 2011 she produced that status report. Her key recommendations were related to legislation of services to First Nations, better definition of what those services are or should be so they could be compared to provincial services.
Those are the solutions that I think are more important.
Senator Raine: Thank you very much. It's very good to have you here today so that we can understand from your experience how it all works.
I think, if I'm not mistaken, that over the last 15 years, some of the services that used to be delivered through Aboriginal affairs are now being delivered through agencies like Employment and Social Development Canada, Health Canada and other ministries. I would suspect that it's very difficult to compare apples to apples and oranges to oranges if we go back and say what is being spent today and what had been spent years ago because the way the money is allocated and being spent is quite different. When we were doing the study on education, for example, we could see that the 2 per cent cap was there, but, in fact, there were increases in funding through other agencies, through provinces.
But I think all Canadians are concerned about the outcomes, and it's just not acceptable for people to be living in a situation that is so bad and hopeless. And for the people who live there, I have so much respect for how they survive and how they, as individual people, show such strength.
What we're trying to figure out in the study on housing and infrastructure is how to move forward and how to make it better and work better. One common thing I keep looking at as we go along is who decides on what a house is, what is provided to them, how they are designed and how they are delivered. I'm not sure if you have experience in that particular aspect, but how does it happen that a house can be built on a First Nation reserve in northern Ontario where you step right out of the living room into minus 40 degrees and there is no porch. How can that happen?
Mr. Serson: I don't have any expertise in that area, senator; I apologize, but I don't.
The one thing that I want to comment on from what you said on this issue is how much change we have seen in the delivery of those services because I don't want to leave the impression that successive governments have not invested in First Nations. They have. But the plea that the department keeps coming back to is that when those short-term investments are made to fill a gap or to address a particular problem, they do not come with increases to the O&M budget in terms of price and volume. So I think what the department is trying to say is: Yes, the Canadian public sees us putting new money in the top of the carafe, but they do not realize there is a hole in the bottom in that each year the department is falling behind on basic price and volume.
Senator Raine: I mean, if you're always robbing the infrastructure budget to pay for programs that are underfunded that are absolutely necessary — the house is falling down, but it has not fallen down yet, so we'll take money from that budget — I think there is a systemic problem here and it's a question of how to fix it. From your experience in the department, how would you approach the fix?
Mr. Serson: Well, there is nothing more fundamental. Now, let me make a comparison. We as Canadian citizens get health and social services, Canadian citizens in have-not provinces benefit from equalization, so what has happened in those areas? I admit that in the deficit fight of the 1990s provinces and territories took absolute cuts, not a reduction in growth, but in 2004, the government sat down with the provinces and agreed on significant rates of growth.
If I recall correctly, the Canada Social Transfer was 3 per cent, the Canada Health Transfer has been 6 per cent, and I think this government has projected that 6 per cent into the future. Even in the equalization program, there were immediate increases of close to 9 per cent for two years, and then it was to grow at 3.5 per cent for the next 10 years. That's the way we've treated those programs that help fund the programs and services we receive.
Then you turn to the First Nations, and they were left stuck at 2 per cent. That, senator, it appears to me, is the fundamental place you start, a fair escalator that at least covers inflation and population growth; otherwise, anything else you invest is offset.
Senator Watt: Thank you for your presentation. I think it's important to hear from a person who has background information, probably accompanied with a certain amount of recommendations you would like to make.
Let me see if I can try to flesh you out to be precise in terms of what we need to do as committee members when we finally finish our work and when the recommendations have to be put together. We are working on that now bit by bit.
First, I would like to say that I hear you, I understand and I see the predicament. Who are the people in your department who make the final decisions when allocations must be made, knowing very well that there is no other money to cap that when you run out of funds? Who are those people? Is that the Department of Indian Affairs under direction of the deputy minister? Is it a political or administrative problem? What are we dealing with here?
Mr. Serson: Well, I can only refer to the way I did those things, senator. Reallocations of that significance I think would first come forward through the responsible ADMs to the management committee of the department where they would make that decision. Certainly I think the minister would be briefed on reallocations of those magnitudes with the implications. In my day, I would have wanted to brief the minister.
Once the estimates are through and you have your amount, you're dealing with that within the department, unless there is some real crisis that you feel you have to go back to central agencies on.
Senator Watt: My next question in relation to that is that, in some way, the Assembly of First Nations has been engaged in the discussions during decision making. Are they involved?
Mr. Serson: Well, I don't know whether they are involved today. I do know that in my day, I believe in 1996, senator, we had responded to the RCAP report. You will recall the minister of the day characterized the relationship that she wanted to have with indigenous peoples as partnership. So we began to work more closely on issues like that to try to explain to them our fiscal situation and the implications. I don't want to imply there was joint decision making at the time, but at least there was an informed dialogue about decisions and their consequences.
I know that was sustained because on this cost drivers report from 2006, I was an adviser to the National Chief of the Assembly of First Nations at the time. This is a presentation that the department prepared for the Assembly of First Nations, telling them that these are the kinds of cost pressures that we're experiencing, and we intend to take this presentation forward within government to see if we can bring an end to the 2 per cent cap and get some additional money for some of the gaps that had been created in services to First Nations in comparison to services to provincial and territorial citizens.
Senator Watt: Where does the individual community base fit into the Assembly of First Nations and the Department of Indian Affairs? Do they have proper coordination amongst themselves to be able to identify their actual needs and that it may have implications on other needs? Is there any working relationship or partnership? I would just like to get a better idea of how it works.
Mr. Serson: I'm looking back many years in terms of my experience, even with the Assembly of First Nations. I don't know about the situation today, but in the days that I was working with National Chief Phil Fontaine, the resources of the assembly were pretty constrained even then. I don't think they had the capacity to do a full level of coordination on something like infrastructure needs. They were certainly at assemblies hearing about the needs from chiefs, and they were rolling those into broad priorities, which the National Chief would then pursue with the government. I know that he did take on the issue of poor housing during his tenure.
Within the department, from what I read these days in their evaluations, it sounds like they are using some kind of inventory of infrastructure needs rolled up from regional levels to decide on priorities and reallocations.
Senator Watt: Does that information normally get to the deputy minister's level?
Mr. Serson: I think that would depend on the deputy minister, whether he would look at the comprehensive list or would agree that this was the amount that was needed for reallocation; therefore, this is what is left and these are the broad categories that will be funded. I just don't know how specifically a deputy minister would look at that.
Senator Watt: Would you be able to tell me clearly where the buck stops? Where does the authority end and where does it begin at the administrative level? I'm not talking about the political level, just strictly administrative.
Mr. Serson: At the administrative level, the buck stops with the deputy minister in terms of the budget that he gets. At the administrative level with respect to the 2 per cent cap, the buck stops with Finance and Treasury Board officials who brief on whether that cap should continue to exist.
Senator Watt: I guess there is a certain amount of flexibility provided to assistant deputy ministers but not the deputy minister; is that right? That would be his role, to work with his own people who are underneath him and who have to deal with day-to-day administration and when decisions have to be made.
Mr. Serson: Absolutely.
Senator Watt: When that happens, do you feel his mandate is a little too powerful in terms of being able to make a decision without going to you or to the First Nations? What is your feeling on this? What do we need to correct here in terms of approach?
Mr. Serson: Well, I can't comment on the specific question within the department these days, senator, because I just don't know. I have no idea.
My point is that the 2 per cent cap should end, new and fair escalators should be established, and that definitely should be done in discussion with the Assembly of First Nations.
I don't imagine those would be negotiations. I do believe that discussions should take place so that the Assembly of First Nations are fully aware of the factors that have gone into the decision making that has created those new escalators that are going to be so essential to them.
Senator Watt: Let me use one example that I know of. There are still people today who were flooded a few years back in Manitoba and, from what I hear, are still staying in hotels. When a crisis like that comes about, you do not have reserve funds for those particular purposes. Does the department have to be involved in terms of decisions of whether money that is allocated for educational, health, housing or infrastructure purposes is all of a sudden needed that particular year? How do you deal with that or do you deal with it at all? Up to now, as far as what I understand, people who were victims of the flood are still victims today. Quite a few years have already passed. I think you know this one very well.
Mr. Serson: I know generally of the situation, but I can't answer your questions, senator. It's just been too long that I've been away from the department and I have not focused on it specifically.
Senator Watt: Would it be correct for me to say that there is some further arrangement, further scrutiny, to be done by the department in terms of decision making, especially in the area of allocating funds without knowing whether there will actually be money or some alternative solutions which will be found to the other problems?
Mr. Serson: You seem to be implying that —
Senator Watt: I'm looking for an answer.
Mr. Serson: No, but you're implying that public servants are somehow manipulating things in a certain way.
Senator Watt: Not necessarily.
Mr. Serson: I can't speak to that.
Senator Watt: I'm not talking about that.
Mr. Serson: If you're asking me if the policies in this area are inadequate then I say to you, definitely. The Auditor General said in 2011 that we need education, we need legislation, and we need service standards — clear service standards — so that you are not having this kind of conversation. In overseeing the department, you can look at whether the services are comparable to services in a particular province. Those are the arguments that she made.
Senator Watt: That's what I wanted to hear from you. Thank you.
Mr. Serson: It's all there in the 2011 status report, senator.
The Chair: I want to intervene on that. Mr. Serson, you're suggesting that legislation should spell out levels of funding endorsing the Auditor General's recommendations. But I put this to you: Doesn't Parliament always have the discretion to determine funding appropriations on an annual basis? Would this not run up against that well-known principle?
Mr. Serson: I think that's probably true, senator. But when you're sitting on the First Nations side of the table and you see the government bring in legislation every five years to renew the Canada Health and Social Transfer and attach funds to that legislation, you know that it's going to be a lot more difficult politically to modify that level of commitment than it is to change the level of a grant and contribution program buried in the estimates.
The Chair: Thank you. Senator Tannas.
Senator Tannas: Thank you. Again, I want to tap into your knowledge and recollections of your days in the leadership. When you were at the helm, what was the interaction like between the department and First Nations governments? Twenty years ago, how much of your department's funds were being directly transferred to First Nations for their use and spending? What was under their control? What percentage would have been essentially a flow through in your department?
Mr. Serson: Well, I would think the vast majority were, senator. In the mid to late 1980s, the government devolved the vast majority of the administration of programs and services to First Nations governments. Now, a flow through of funding, as you know these are grants and contribution programs. The Auditor General has made various comments about these programs over the years. One of the things that the last Auditor General was very concerned about was the reporting burden that the number of grants and contributions programs put on First Nations governments. So it is flow through. But there are policies and the department controls the policies. The department obtains the reports. I want to give you that context.
Senator Tannas: One of the things that we heard in our travels was that, to the extent that many of the struggling First Nations governments had any kind of discretion over their capital budgets, they were doing the same thing. So the decisions that were being made, as we hear from you and from others at AANDC around reallocation, were also being compounded for the particularly vulnerable or strapped First Nations governments as well.
Mr. Serson: Absolutely. The department, in its most recent presentation that I've referred to, does acknowledge the fact that it is compounding the problem that they have in terms of infrastructure, yes.
Senator Tannas: Thank you.
Senator Raine: I want to go back to your experience when the so-called cap was implemented. It's referred to as an escalation percentage.
Mr. Serson: A cap on the escalator, yes.
Senator Raine: Normally programs escalate, go up or increase at the rate of inflation plus population?
Mr. Serson: Well, it depends, senator, on the nature of the program. The government can bring in some short-term programs where they say, here is the allocation for the next five years or three years. They don't include any price and volume increases after that because they feel that they have budgeted for the program and taken those factors into account.
It's where you have long-term programs like those that are delivered by the Department of Aboriginal Affairs, where you need to regularly account for inflation, population increases and, in the case of First Nations where there is a commitment to comparability, the kinds of investments that particular provinces are making. Because, as I say, the commitment has been that First Nations services should be comparable to services in that particular region.
Senator Raine: I want to get it clear. What year did the cap come in?
Mr. Serson: What did I say, 1997-98?
Senator Raine: At that point, even though everyone knew costs were going to go up and more money would be needed, as a short-term measure to help defeat the deficit, First Nations accepted a 2 per cent cap knowing that would create hardship?
Mr. Serson: Yes.
Senator Raine: And never expecting it to remain in place, which in effect is punitive?
Mr. Serson: Exactly.
Senator Raine: Normally, some programs would have a built-in or designed escalator for different reasons and some would be a fixed program, fixed amounts?
Mr. Serson: Yes.
Senator Raine: At this point we are playing catch-up so maybe we need to write a line in the sand saying going forward there's no more 2 per cent cap, and to re-address the deficits in the infrastructure, we need additional money?
Mr. Serson: Absolutely.
Senator Raine: We shouldn't look at any kind of percentage increase. We should properly budget going forward and have funding available to catch up with the infrastructure. Would that be the way to budget it? It's not a question of just removing the cap.
Mr. Serson: No, I think you and I are thinking along the same lines now. My only qualifier is that I think the cap has to be replaced with reasonable escalators immediately.
Senator Raine: Yes, exactly.
Mr. Serson: Then you can sit down and say, okay, what are the gaps being created in infrastructure and all these other areas? I freely admit that the government has invested significant money over the last five or six years, but we really need to have a look at what kind of an impact that has had given that it's going in on top of the programs that haven't been getting price and volume for very many years.
Senator Raine: Thank you very much.
The Chair: Maybe I would like to wrap up. On the question of reallocation of capital, departments have the right to do that now within their budgets. It may not be right, it may not have a good effect, but it is certainly not an improper practice. So I'm wondering, do you have some recommendations on how we may prevent this from happening?
You've recommended legislative service levels. What about the capital side? We had one document that showed an internal departmental evaluation we were made aware of — with the capital and some facilities maintenance program in 2010 — and it said that regional officials emphasized the importance of targeted funding within the CFM program because targeted programs ensure that the funding cannot be diverted.
Could you tell us what a targeted program is, and is that a way of stopping this practice, please?
Mr. Serson: Again, you're testing my knowledge here, senator, because it is current stuff, but I think by targeted programs they're talking about the investments that have been made in terms of things like waste water, water and sewer. I looked at this at one point recently and found that, for instance, this government, while it was dealing with the deficit, didn't ignore First Nations. It made a number of targeted investments to try and help things but they were for two or three years, and weren't being sustained beyond that.
On your question about preventing the reallocation of funds, I don't imagine that public servants are doing this without extremely serious consideration. My expertise and my memory may be a little bit fuzzy here, but the way I understand it, Mr. Chair, is that when you have primary and secondary education, or social assistance programming for First Nations, we used to refer to that as "quasi-statutory.'' There was no federal statute for that, but in the provinces these are legally required services, so reallocation from infrastructure is happening because you are trying to make sure that those quasi-statutory programs remain comparable to the programs offered in the province. Infrastructure doesn't fall into that category, so you feel a freedom to move money from there to make sure you have that quasi-statutory comparability.
If adequate funding is provided to basic services through a fair and reasonable escalator on those services, then the need for reallocation of infrastructure funding will disappear. That's how I would like to see it solved.
The Chair: Thank you very much, Mr. Serson.
Colleagues, I would like to suggest that we move right into the next witness, from Canada's Public Policy Forum. I understand Mr. Serson is willing to remain in the room this morning so we can thank him at the end of this meeting. While we're exchanging chairs, I would like to recognize Senator Enverga from Toronto, Ontario, and Senator Ngo from Ottawa, Ontario. Welcome to the committee.
Colleagues, I'm pleased to welcome our next witness, Ms. Julie Cafley, Vice-President, Public Policy Forum, which describes itself as an independent not-for-profit organization dedicated to improving the quality of government in Canada through enhanced dialogue among the public, private and voluntary sectors.
We look forward to hearing from you. You can expect some follow-up questions from senators. Please go ahead.
Julie Cafley, Vice-President, Public Policy Forum: Good morning. I would like to acknowledge being on the traditional territory of the Algonquin people and thank you for welcoming me this morning. For the past several years the Public Policy Forum, which is a strictly non-profit and non-partisan organization, has been looking at the whole question of Aboriginal participation in the resource sector in terms of economic development opportunities.
This morning I've been asked to speak on behalf of our project — we're at its midpoint, only halfway through the project — looking at First Nations' access to capital for major infrastructure and resource development opportunities.
I have four different sections to my presentation this morning, looking at the context and the opportunities. I believe many of you have a copy of our background report, Getting Together — First Nations and Capital Markets, which I sent in advance of the session this morning.
I'll provide a brief overview on some of the barriers, some of the solutions in terms of international best practices or best practices that have been used within Canada, as well as some of the preliminary recommendations that are coming out of our dialogue. A lot of what we do includes our leadership level round tables focusing on breaking down the barriers between leaders from different sectors, having First Nations and Inuit leaders at the table with private sector leaders, governments from different levels and non-profit organizations.
The access to capital project looks at many different dimensions from access to commercial financing, public financing, and also the larger and broader and very important issue of financial literacy and financial management. We work in collaboration with a lot of our partners, including some of the recommendations that came out of the National Aboriginal Economic Development Board, and they have all contributed to our work.
Initially, our last piece of work focused on Aboriginal participation in the resource sector, and there are many challenges that were discussed within that project. One was the need for knowledge transfer and transferring of information. There's no cookie-cutter approach, and there are lots of good things that are happening and positive best practices, but information does not seem to be shared. Also, there is the importance of increasing the number of Aboriginal entrepreneurs so that they are very hands-on and engaged in the work of these resource projects; the important question in terms of human capital and increasing the numbers in terms of Aboriginal participation in these projects, community capacity issues; and finally the issues of access to capital and financial literacy.
In terms of access to funding, we're looking at many large private sector projects, tens of millions of dollars and more. Oil, gas, mining, pipeline and transport are a few examples.
In terms of a gap, there seems to be a gap of $43.3 billion, and the latest numbers we have here date back to 2003; so it's probably much more significant today. First Nations and Inuit entrepreneurs receive 1 per cent of one tenth of the $1.84 trillion investments in the Canadian economy. As I mentioned, this is dated back to 2003. We need to place First Nations entrepreneurs on the same financial footing as others in our country.
So in terms of the context, there are many opportunities for investors. We're looking at $315 billion in major resource projects that are near or close to Aboriginal communities. There are 1,200 communities within 200 kilometres, or there are 220 mines and 3,000 exploration projects in Canada alone.
Some positive examples include collaboration in Saskatchewan between the First Nations and Encanto Potash. The First Nations have a 5 per cent equity stake plus royalties in this project. Also the First Nations Bank of Canada, which was collaboration between TD Bank and Saskatchewan Indian Equity Foundation that now has a loan portfolio of $245 million.
Lac Seul in northwestern Ontario has a 9.9 per cent stake in AurCrest Gold, and there are other examples in terms of Osoyoos Indian Band in B.C., La Ronge in Saskatchewan, and Membertou in Nova Scotia, where there is full engagement by the First Nations communities. Another example is Inuvialuit, where the Inuvialuit Investment Corporation has $343 million investment portfolio.
Just as with the Aboriginal youth population in Canada, there are a growing number of youth Aboriginal entrepreneurs. They are younger than their counterparts, and they're growing twice as fast as non-Aboriginal entrepreneurs.
In terms of government support, it is much higher than mainstream Canada. The private sector accounts for only 40 per cent of capital investment versus 95 per cent in the overall Canadian economy, so that's eight times higher.
In terms of the barriers that are impeding large-scale investment, we're looking at a situation where it's still quite paternalistic. The environment is uncertain and overall quite ineffective.
From a legal perspective, obviously the Indian Act is the biggest barrier to economic prosperity, and in terms of access to capital more particularly. From the economic perspective, we're looking at unfamiliarity with credit and equity markets. In regard to inadequate credit information, bands are sometimes treated by big banks as being risky clients rather than creditworthy public sector entities.
There is limited taxation power for First Nations. How can you raise debt if you don't have revenue? A high dependence on the resource sector which can be volatile, an overall lack of financial literacy and financial management and a great need for financial expertise within the communities, a lack of understanding from the perspective of outside investors, a context which is relatively unfamiliar in terms of the economies, customs, et cetera. Finally finding buyers is not easy for the private investors.
As we've already talked about today, obviously the social barriers as well, the poor educational outcomes on reserves, the limited infrastructure on reserve. We're looking at an $8 billion shortfall, as well as a sense of reluctance and the lack of trust in working with outside partners.
We've tried to highlight some solutions that are working and some positive best practices. Some of the examples include the First Nations Regeneration Fund in B.C. that's focused on energy projects; Indigenous Business Australia, which is a Crown corporation that has been created to help enable Aboriginal entrepreneurship; the Ontario Aboriginal Loan Guarantee for energy projects as well; the Indian Business Corporation in collaboration with AltaGas in Alberta, which created a $500,000 loan to fund on-reserve business.
There are three levels of partnerships we've seen: Fully subsidized Aboriginal financial institutions, along with government grants and contributions; and an idea would be to create a government-funded venture capital fund; assisted financing where government provides incentives to private-sector lenders and investors in the form of guarantees; loan loss reserves or tax incentives; and finally fully pledged commercial funding where there's no government support. A positive best practice here would be the First Nations Financial Authority where there is a $90 million public bond issue with 14 bands working together.
Overall there's a need for bold action. There are many challenges facing First Nations entrepreneurs and businesses who want to gain access to capital. There are legislative restrictions, inflexible policies and programs for allocating funds, high costs, long wait times for applications, and concerns about reputational risk.
The success stories and the examples of resilience from participants that have been at our round tables to date demonstrate that investing in First Nations communities and businesses generate social benefits and enhanced financial capacity. This helps build communities that are more self-reliant and sustainable. This can produce benefits for banks, investment firms and pension funds as they help establish a solid reputation upon which communities can grow.
The issue of risk is both for the investors and the First Nations communities. Bank and investment firms have a lack of access to equity as a result of the Indian Act, which creates risk in terms of a lack of security. Other participants pointed to Aboriginal financial institutions that have the ability to repossess assets on behalf of banks and could be used as intermediaries to help reduce the risk.
Investing in the Aboriginal financial institution network is a means for banks and major investors to safely gain access to this emerging market. The economic impact of AFIs is based on an estimated $41 million in program and project funding in 2012.
For First Nations businesses and communities, you're looking at fluctuating interest rates, complex balance sheets and funding requirements, long processing wait times and unfavourable loan conditions.
There are just a few and growing numbers of P3s that are examples of private-public partnerships in Canada to date. One example is the Kokish River Hydroelectric Project, and another that's in development is the Atlantic waste and water project proposal in Atlantic Canada.
An international best practice that was raised in our round tables looked at the Infrastructure (Financial Assistance) Act, which was created in the U.K. One option for improving First Nations' access to capital markets would be a federal government guarantee on specific types of borrowing. For example, infrastructure projects to help First Nations gain equity state in large resource developments.
One model that could be used is the U.K.'s Infrastructure (Financial Assistance) Act, which was passed in 2012 and took effect in 2013. It was designed to avoid delays in critical U.K. infrastructure projects caused by adverse credit conditions. It authorizes the government to provide sovereign guarantee up to 40 billion pounds to support infrastructure investments. The guarantee means that the government lends its blue chip credit rating to a project's commercial sponsor. The scheme is open to major infrastructure in sectors such as energy, transport, communications, waste and housing; so that they are seen as growth-boosting products that will help support the local and national economy.
More than half of the first crop of projects under consideration for guarantees is in the energy sector, and a guarantee is provided to support $1 billion of borrowing for an extension of London's underground northern line. Housing also qualifies for support.
I'll go over a couple of the key recommendations, and with all of our reports, we always focus on recommendations not only for government but also for all parties who are engaged. For First Nations, the recommendations are the following: looking at understanding financial requirements of investing firms so that they can develop effective mechanisms to engage in relationships successfully; exploring partnerships with pension funds, specifically those interested in socially responsible investments; identifying business models and cases that showcase successful projects and partnerships; recognizing successes and sharing them amongst communities; transferring of knowledge to help build business acumen; and developing educational opportunities, specifically in the area of finances.
For the finance sector, the recommendations are as follows: improving access to capital for Aboriginal financial institutions; working to better understand the legislative framework for working with First Nations; focusing on solutions to overcoming barriers rather than being deterred by legal complexities; creating equity partnerships as a way to help leverage revenue streams from large-scale investments; and providing a central source of information that identifies sources of capital, both national and regional, and outlines partnership/investment requirements.
For governments, the recommendations are the following: re-examining the loan guarantee programs to increase flexibility while decreasing the red tape; considering taxation sharing programs to increase revenue streams for on- reserve communities; providing information on how to structure financial agreements, engage in negotiations and plan for long-term sustainable economic development; and considering the sovereign guarantee to back loans for First Nations.
As I mentioned, this project is not yet complete, and I will forward to the committee the copy of our final report, which will be out in May after a final round table we're having in April. Rather than focusing on what's broken, we chose to bring players together to focus on how we can increase collaboration and partnerships, but as was mentioned this morning, I like the use of the trust deficit. Obviously, there's a great deal of mistrust and poor communication amongst many of the key players in these discussions. There's a growing recognition that First Nations communities are self-governing with immense untapped potential to contribute to the Canadian economy. By focusing on the recommendations above, obviously, there's not a cookie-cutter approach; however, there are some best practices that do need to be shared.
Thank you.
The Chair: Thank you very much, Ms. Cafley. I wonder if I might start by referring to your recommendation that the federal government consider using its sovereign guarantee to back loans for First Nations. We've heard this recommended by the First Nations Financial Management Board as a great assistance to levering non-government funds, especially on infrastructure projects. Could you provide details on how federal guarantees on borrowing could be implemented in Canada? How would this be done?
Ms. Cafley: I think the U.K. model that I outlined provides a good best practice and a template in terms of how it works. Obviously, there need to be parameters set in terms of the type of projects and the amount of support that will be backed. However, the U.K. infrastructure model provides a good approach for that, and I could provide further information to the committee about that.
The Chair: Thank you.
Senator Enverga: Thank you for the presentation. In some discussion documents that I have read, the PPF suggested that the First Nations Management Board encourage more bands to submit themselves to the board's certification process. Can you explain that to me a little more? If all the bands submit, will they be qualified for that?
Ms. Cafley: I think it does require a certain level of financial literacy and financial management. I think that it helps support the idea that sometimes outside sources are needed to help support different bands in these processes. However, it provides a different level of accreditation in terms of sound business practice. I know we discussed earlier the idea of the audit, but there might be a more positive way to encourage that solid transparency and open accounting.
Senator Enverga: Is there any pushback as to why not all the First Nations are going into this?
Ms. Cafley: It's a question of capacity, quite honestly. We were shocked in terms of our first level of round tables at the lack of information sharing and knowledge transfer happening between communities, and whether that be with impact benefit agreements or whatever else it might be, a real strong need to connect between communities. That helps contribute a lot in the area of trust because there's obviously a resistance to seek knowledge from anyone. But amongst communities, there's a great deal of opportunity in terms of more important sharing, and that would be a good way of doing it.
Senator Enverga: What communities would most likely benefit from this?
Ms. Cafley: We were talking before about the issues that exist in terms of education and social conditions. These are obviously communities that are much healthier and have an opportunity. For many communities in Canada, as we all know, this isn't even an option. These are communities that have been working at this for a long time. It's an elite number of communities that are able to enter in equal partnerships with a lot of these mining operations or energy operations, and it is a small number of communities, obviously.
Senator Enverga: When you say "elite,'' how many First Nations would that be?
Ms. Cafley: I wouldn't be able to suggest a percentage, but the ones doing this well are well known, for example, the ones I named in my presentation. Membertou is an excellent example as well as Osoyoos in B.C. The communities around Fort McMurray have been doing this for a long time.
Senator Beyak: Thank you very much. That was informative. You brought up right at the start the issues about placing the entrepreneurs at the same financial footing as others in Canada, and I'm worried about education, just as you said. There are only a few communities. Could your round tables discuss that a little more? With the fall of Bill C- 33 and the collaboration between the Prime Minister and former Chief Atleo, I don't know where education is going to go, and there are so many reserves now that just can't teach their kids the basic three Rs, let alone financial management or business expertise. Is there a venue or a forum in your round table where you could bring that forward?
Ms. Cafley: We haven't focused specifically on that. Obviously, we realize the huge need. In our most recent project — I didn't work on it, but I could get more information for the committee — we focused on indigenous participation at the ECD level and the impacts of investing in our under-fives in terms of the impacts that that could have long term. I think that's where we need to begin, at that young age level, so we focused, in terms of education, on early childhood education and development. However, there's a huge need to have further discussion and to have full engagement.
In many ways, we have been quite fortunate because when we've brought people together, for example, on the access to capital project, we worked with the First Nations Financial Management Board, Vancity and RBC as project partners along with the Government of Canada. With all of our projects we have many partners, and it enables a forum where people can come together leaving at the door a lot of the baggage that they often have.
Senator Beyak: Thank you, chair.
The Chair: Thank you. Ms. Cafley, in one of your discussion documents, the Public Policy Forum has written the following:
First Nations will not be able to realize the full potential of their taxing powers — present and future — unless they can overcome their members' widespread aversion to taxation.
Could you describe the types of arrangements in place in First Nations across the country to collect taxes? Tell us what you think could be done to encourage First Nations to collect specifically property taxes.
Ms. Cafley: Absolutely. I think the whole area of taxation is something that First Nations communities are obviously quite averse to, and that's probably in direct relation to the lack of trust they have with government more broadly.
There are some examples, and I don't have them here to cite, but I know we have them available within our reports, positive examples where bands have engaged in tax regimes within their own communities. This has been done through a system of collegial governments, and it has been quite successful. I can pull out some of those case studies and provide them to the committee, if you're interested.
The Chair: I would appreciate if you could do that through the clerk. Thank you.
Senator Enverga: You mentioned quite a few times that the greatest barrier is the Indian Act, and in particular, there is no security.
In your discussions, has there been any pushback from the First Nations that it will diminish their heritage or affect the whole band's security? Has there been any discussion like that?
Ms. Cafley: In all of our discussions there is a strong aversion to the Indian Act and the limitations that it places on First Nations entrepreneurs in terms of accessing capital in particular. I don't know if I've answered your question fully.
Senator Enverga: You must know that we passed a bill to tinker around or maybe remove some of the Indian Act rights. You must know that.
Ms. Cafley: Yes.
Senator Enverga: What is your number one suggestion as to what we should do to make sure the Indian Act is good for the First Nations?
Ms. Cafley: I don't have that prepared right now, but I would actually love that opportunity. I would have to review the act in detail. I wouldn't be able to provide an answer right now.
Senator Enverga: Thank you.
Senator Raine: Thank you very much for being here. You've seen a lot in your roundtables. We've been looking a little bit at public-private partnership possibilities, and it doesn't seem like it's very easy for them to actually work. I'm wondering if the sovereign guarantee could assist in that process.
Ms. Cafley: I think absolutely. Yes, the sovereign guarantee would provide the backstop, essentially, to the First Nations communities to enable them to enter into those partnerships much more easily, so absolutely.
Senator Raine: From your perspective, given that there is a fiduciary duty from the federal government toward First Nations, so we know there will be a flow of revenue, does it make sense, then, to use that guarantee to attract outside capital? We've got a big catch-up job to do in terms of infrastructure.
Ms. Cafley: I think what the sovereign guarantee does is it's more empowering than other more paternalistic measures that existed in the past. It is a way of empowering and leveraging those opportunities, and it provides First Nations with an opportunity to have a stake in those major projects. Absolutely, I think it's a much more positive approach.
Senator Raine: The U.K. model of sovereign guarantee is relatively new. Have they had experience in how it has unlocked that private sector funding?
Ms. Cafley: Yes, it has just begun. We have more of a substudy that we've done specifically on this, which I will send to the committee. It has only been close to 18 months, but up until now it has proven successful.
Senator Raine: I know there have been government guarantees used in Canada before — for instance, I believe in the Churchill Falls financing — so we are not on new ground here. It has been done in Canada, but you're saying the U.K. model seems to have given it a framework that you would call best practice?
Ms. Cafley: Yes, absolutely. There is obviously the Ontario loan guarantee, which I have heard criticisms about. It was set out with good intentions, but it hasn't necessarily been as successful in practice, from what I understand. The U.K. model seems to be more in line in terms of what we would consider best practice, but it is early.
Senator Raine: Thank you very much. That was very helpful.
Senator Tannas: My question is following on this a little bit. I wonder if Mr. Serson could give us his perspective, having prepared budgets and been part of that.
A loan guarantee such as what is being described here, how would that be accounted for? Do you have any sense of that? If we said we're going to solve the infrastructure deficit and post a $5 billion loan guarantee, and by implication, then, future governments will need to help the First Nations find a payment stream to make that all work, otherwise what's the point? Would $5 billion be accounted for in a fiscal year, or would it be if the guarantee was called? Do you have any sense of that? Have you seen this movie before?
Mr. Serson: I should know, senator, having spent a couple of years at Finance, but frankly, I do not remember how they would account for something like that.
Senator Tannas: It's intriguing. Do you agree?
Mr. Serson: Yes. It shouldn't be hard, if the committee is interested, to get an answer to that question.
Senator Tannas: Would you say we could get the answer from Finance?
Mr. Serson: Absolutely.
Senator Tannas: Great. Thank you.
The Chair: Colleagues, I would like to thank both of the witnesses for an informative round.
I will just note before we close that our interim report on housing will be tabled today, and I would encourage all members to speak to it. I think there will be 15 days to do so. Mr. Serson?
Mr. Serson: I just wanted to thank the committee for this opportunity one more time. I have been concerned, as you could hear, about this 2 per cent cap for 18 years. This is the first time I've been invited to a committee for a fulsome discussion of the issue, and I really appreciate that, and I thank you very much.
The Chair: Well, thank you. We appreciate you being here.
(The committee adjourned.)