Provincial Capital Investment and Debt Management Strategy

Provincial capital plan

Provincial capital spending funds assets that are important to the province and its citizens, including schools, hospitals, medical equipment, university lecture halls, residences, government buildings, court houses, roads, bridges, dams and transmission lines.

Capital is costly to build, operate and maintain, but it is long-lived and delivers benefits across generations. Today's British Columbians are reaping the benefits of capital investments made by their parents and grandparents. Careful planning and budgeting is important so government can build new capital, and update existing capital, so that the province is left in good order for future generations.

Financing capital spending

Capital spending can be financed through a combination of:

• operating surpluses;
• cash balances;
• cost-sharing with partners (such as federal or municipal governments);
• partnerships with the private sector (public-private partnerships); and/or
• borrowing, or debt-financing.

The higher than expected surpluses over the past few years have allowed the province to make significant investments in infrastructure without adding to provincial debt. For example, the $3.06 billion surplus in 2005/06 and the $2.85 billion surplus in 2006/07 helped finance the following projects:

• $1.61 billion spending on post-secondary facilities including the University of Victoria's Engineering and Computer Science Building, and the North Cariboo Community Campus in Quesnel;
• $0.65 billion in spending in the K–12 school system including Pacific Heights Elementary school in Surrey, and L'Ecole Victor Brodeur in Esquimalt;
• $1.70 billion for health facilities and equipment including cancer treatment vaults at the BC Cancer Agency's Vancouver Centre, and the Mental Health Building for Children at BC Children's and Women's Hospitals; and
• $1.60 billion for roads and bridges including the Cariboo connector program, Kicking Horse Canyon Phase I, and the Yoho bridge.

With smaller surpluses forecast over the next three years, debt-financing is required to fund the provincial capital spending program, thus the level of capital spending has a significant impact on the amount of provincial debt.

Affordability — Debt strategy

The relationship between capital spending and debt requires the province to establish a capital plan that will meet the needs of the province, while at the same time keeping debt affordable for current and future citizens.

The government is committed to maintain a downward trend in the taxpayer-supported debt to GDP ratio, using a three-year moving average. A declining ratio means that debt will not grow faster than the economy, so that future generations will not be left with a debt burden that they cannot afford.

The ratio of taxpayer-supported debt to GDP is a key measure used by financial analysts and investors to assess a province's ability to repay debt and is a key measure monitored by the bond rating agencies.

Prudent management

Government's prudent approach to debt management was recognized when Moody's Investors Service upgraded BC's credit rating to Aaa, the highest possible rating. In making its decision Moody's cited a well structured fiscal plan, leading to a reduced debt burden and the expectation of further improvements in the province's debt ratio over the medium term.

In Budget 2007 the taxpayer-supported debt to GDP ratio is forecast to decline from 14.8 per cent in 2006/07 to 14.1 per cent by 2009/10.

Ensuring that affordability measures are met

Successful implementation of the provincial capital and debt strategy requires prudent budgeting, careful planning and management, and accountability for meeting debt targets. The provincial debt strategy and capital plan outlined in Budget 2007 provides prudent budgeting as well as accountability mechanisms to help ensure debt targets are met.

The capital planning and management regime will continue to evolve to ensure that government's fiscal and operational objectives are met, including delivering provincial assets within the debt targets.

Debt allocations

A key planning and accountability measure is debt allocations for each sector; health, K–12, post-secondary, transportation and other taxpayer-supported debt. Use of sector debt allocations will help ensure that overall government debt targets are met, while also reflecting the needs of various sectors and allowing for flexibility between sectors.

Capital Contingency

Recognizing the rising construction costs are currently a concern, the province has included a capital contingency averaging 9.5 per cent of total taxpayer-supported capital spending in its three-year capital plan as a prudent planning measure. This contingency is in addition to the contingencies included in individual project budgets. In addition to covering risks from higher than expected cost inflation on projects including the VCCEP, the capital contingency reserves room for priority health care projects in Victoria, Kelowna, Vernon and Fort St. John, as additional review and approval processes proceed. Should the full contingency not be required in any year, taxpayer-supported debt will be lower than forecast.

Ensuring Value for Money

Provincial policy now requires that public private partnerships (P3s) are the "base case" where the province will be contributing more than $20 million to the capital cost of a project. The focus of the policy is to ensure that there is a rigorous examination of options in the planning stage, to ensure that provincial capital investments provide the best value for money for taxpayers.

The new standard applies to all ministries and to service delivery agencies within the government reporting entity.

The new standard also applies to local government capital projects where the province is contributing more than $20 million to the capital cost.

Although a P3 is considered the base case, other procurement options may still be supported based on a value for money analysis. Not all projects will be delivered as P3s, as not all projects lend themselves to a partnership approach.