This guide is designed to assist program managers, financial officers and
other interested parties in selecting the appropriate financial arrangement and
funding option in support of program delivery. Through the use of a conceptual
model, the guide provides an overview of the decision-making process and
examines some key attributes of the more commonly selected financial
arrangements and funding options. This guide originated because departments
expressed a need for a comprehensive source of information on financial
arrangements and funding options. The guide supports the Treasury Board
publication Framework for Alternative Program Delivery.
The various sections contained in this guide are stand-alone units which may
be read in conjunction with various Treasury Board policies identified in the
reference section.
The publication of this guide is timely. Today's environment demands fiscal
responsibility, improved service delivery for clients and increased efficiency
in government operations and program delivery. This guide should assist you in
achieving these objectives.
For further information, direction and advice on this guide, please contact:
Financial Management Policy Division
Financial and Contract Management Sector
Financial and Information Management Branch
Treasury Board Secretariat
L'Esplanade Laurier
8th Floor West Tower
300 Laurier Avenue West
Ottawa (Ontario)
KlA OR5
Fax: (613) 952-9613
Phone: (613) 957-7233
The conceptual model displayed in Figure 1 outlines a top down approach to
determining an appropriate program delivery alternative. Figure 1 is included
for illustrative purposes only; the Framework for Alternative Program Delivery
should be the basis for selecting a program delivery alternative.
Along a continuum, there is a range of program delivery alternatives. For the
purpose of this illustration the alternatives identified are: in-house
government delivery when there is high government involvement; delivery by
parties outside government when an intermediary or third party is used to
further government objectives; delivery when partnerships are the selected mode;
and exclusive private sector delivery when there is little to no government
involvement. The conceptual model displayed in the second part of Figure 1
outlines a top down approach to determining the appropriate financial
arrangement and funding option.
The objective of this guide is to assist you in selecting a
cost-effective financial arrangement and funding option, to support your mandate
and program delivery.
The framework encourages the program manager, finance officer or other
interested parties to begin by asking the following key questions.
- What are my mandate and lines of business?
- Who are my clients?
- What do I want to accomplish?
- What are the expected results or outcomes?
The answers to these questions facilitate the task of selecting the most
appropriate delivery alternative, financial arrangement and then funding option
in support of program objectives.
Your choice of financial arrangement and funding option must be able to
withstand the test of public scrutiny and achieve the best value for the dollars
spent. The following guiding principles influence your selection: parliamentary
control, authority, risk management, accountability, fiscal environment, cost
benefit analysis and disclosure. The section entitled "Principles
Influencing the Choice of Financial Arrangements" briefly examines each
principle.
Once you identify the appropriate program delivery alternative, the next
steps in the selection process are determining the appropriate financial
arrangement and funding option.
A financial arrangement is any arrangement between the government and outside
parties that results in an actual or potential outlay of resources. A financial
arrangement may include eligibility criteria, an agreement stipulating the
obligations of each party, and terms and conditions outlining the minimum
requirements to be incorporated into an agreement. For the purpose of this guide
we will review two different categories of financial arrangements. The first
category examines transfer payments including grants, contributions, repayable
contributions, Alternative Funding Arrangements, Flexible Transfer Payments and
Other Transfer Payments that involve cash outlays. The second category describes
loans, loan guarantees and loan insurance. Only loans represent cash outlays;
loan guarantees and loan insurance represent potential outlays.
Funding options are the alternative sources of funds used to finance
different delivery options. Funding options finance all financial arrangements.
You can obtain funds through traditional appropriations, special revenue
spending authorities (e.g. revolving funds and net voting) or specified purpose
accounts established for specific conditions. Parliament grants spending
authority by passing Appropriation Acts.
There are many different types of financial arrangements and funding options.
This guide only includes those most commonly used. Each of the funding option
and financial arrangement categories support distinct lines of government
business.
This guide uses a hierarchical approach. The first level in the hierarchy
focuses on the selection of an appropriate program delivery alternative (e.g.
government itself, partnership). The choice at this level is largely dependent
on the type of business in which you are involved. The Framework for Alternative
Program Delivery will help you make a good decision. Once you determine the
appropriate program delivery alternative, the second level in the hierarchy
allows you to identify, through a series of statements, a specific financial
arrangement and funding option to support your program delivery needs.
You can indicate which attributes are relevant to your program delivery
objectives by placing a check mark next to those statements. Once you have gone
through the list of attributes, the check marks should steer you to an
appropriate financial arrangement or funding option. Some characteristics will
be common to more than one arrangement or funding option. The purpose of the
matrix is to briefly describe how a specific attribute applies to the specific
arrangement or funding option in that particular category.
We encourage program and financial officers to consult with their Treasury
Board program analyst throughout the selection phase. Continuous and open
communication helps avoid common pitfalls, reduces frustration and ultimately
saves time.
We have included an appendix to help you do additional research on specific
financial arrangements and funding options.
Some basic principles underlie the selection of all financial arrangements
and funding options. These principles influence the decision-making process and
identify the boundaries within which decisions are made. For the purpose of this
document, we have identified seven basic principles.
1. Parliamentary control
Parliamentary control influences the government management framework.
Parliament is the supreme legislative body and authorizes all payments out of
the Consolidated Revenue Fund (CRF) through special Acts or through the passage
of Appropriation Acts. The Appropriation Act specifies the amounts and defines
the purpose for which funds may be used. Unless otherwise provided in the vote
wording, in Appropriation Acts or other legislation, appropriations lapse at
year-end. As well, all revenues and other public moneys must be deposited in the
CRF.
The cornerstone for financial management and accounting for the government
entity is the Financial Administration Act (FAA).
2. Authority
Legislation determines the authority vested in departments and agencies to
carry out their programs and activities. Either departmental Acts set out the
responsibilities of a particular minister or department, or specific legislation
permits the establishment of a particular program to meet a specified need or
service.
General Acts such as section 19 of the FAA provide other legislative means by
which authority can be obtained.
Contracting authorities and policies emanating from the Treasury Board
Secretariat provide non-legislative means by which departments and agencies
receive authority.
If a department wants to charge for a service, a product, a right, a
privilege or the use of departmental facilities and to spend the
revenues received, specific authority for both must be obtained.
3. Risk management
Risk management involves determining the probability, impact, and materiality
of an event happening. The objective of the risk management is to limit or
minimize the damage to and liability of the Crown.
The risk management analysis and assessment process includes the
identification of potential perils, factors and types of risks, including
financial risks, to which departmental assets, program activities and interests
are exposed. Departments must analyze and assess the risks identified, select
safe options, and design and implement cost-effective prevention and
control measures.
4. Accountability
Accountability is the obligation to answer for the exercise of one's
responsibilities. Accountability to Parliament, program clients and ultimately
the Canadian taxpayer is an essential ingredient of the government's management
framework. It means accounting to Parliament on the efficient and effective use
of appropriated resources to achieve program objectives. The aim is to ensure
parliamentarians and the public see that the taxpayers' dollars have been spent
with due regard for probity and prudence and that the intended objectives have
been achieved.
5. Fiscal environment
The fiscal environment is another equally important principle influencing the
decision-making process. Scarcity of resources has forced departments and
agencies to continually re-evaluate their alternatives for program delivery and
funding options to ensure that both are cost-effective. For example, it would
not be cost-efficient to establish a revolving fund if the cost for
administration, costing and accounting systems exceed the revenues raised
through user fees.
6. Cost benefit analysis
Sound cost and qualitative information is critical for decision-making in the
current fiscal situation. To maximize value for money, you can use the Framework
for Alternative Program Delivery to determine the most cost-effective means of
achieving program objectives. Make or Buy? and Making the Organization More
Efficient, from the Stretching the Tax Dollar series, and Guide to the Costing
of Outputs in the Government of Canada are three other management tools
developed by the Treasury Board Secretariat to assist program and financial
officers in achieving greater efficiency and effectiveness in program delivery
(see the General section in the Appendix for complete references).
7. Disclosure
Financial disclosure is an essential principle that is achieved through the
tabling of Part III of the Estimates and the Public Accounts. Disclosure ensures
that the objectives set by Parliament and the government are being realized.
Ministers use Part III of the Estimates to report to Parliament on: their
proposed expenditure plans for the upcoming fiscal year, how resources of the
current fiscal year are expected to be used in carrying out the department's
mandate, and how resources of the past fiscal year were used. The Public
Accounts of Canada, on the other hand, displays actual expenditures incurred
under each appropriation, including specific information about contribution and
grant arrangements.
Financial arrangements with third parties have been divided into two
categories. The first category examines transfer payments and the second
category addresses the other types of arrangements.
Transfer payments are transfers of money from the federal government to
individuals, organizations or other levels of government, to further government
policy or program delivery. The federal government does not:
- directly receive any goods or services, as in a purchase or sale
transaction;
- expect to be repaid in the future, as with a loan; or
- expect a financial return, as in an investment made by the private sector.1
This category also includes repayable contributions that are repayable only
if certain conditions are met and contributions that are repayable according to
a fixed schedule, but without interest.
Types of transfer payments
Types of government transfers include contributions, repayable contributions,
Flexible Transfer Payments (FTPs), Alternative Funding Arrangements (AFAs),2
grants and Other Transfer Payments (OTPs). When transfer payments are issued,
the government does not receive goods or services and it does not expect to be
repaid, except if certain conditions are met for repayable contributions or if
there is a fixed schedule of repayments without interest. For operating and
capital expenditures the government must pay 100 per cent, fair market
value, to obtain goods and services. With transfer payments, the government
normally provides less than 100-per-cent financial assistance to recipients.
Funding to a recipient is generally structured to promote some degree
of self-reliance.
Government transfers to recipients are seen as contributions to a public good
thus furthering government objectives. Departments and agencies must ensure that
recipients manage government transfers in a way that supports defined program
objectives and respects responsible financial management practices.
The various arrangements discussed in this chapter are presented along a
continuum to demonstrate the range of flexibility which exists in this category.
Arrangements that require little monitoring and have low administrative costs
are at the high end of the scale. Arrangements exhibiting high flexibility
generally require the recipient to meet minimal conditions or eligibility
criteria. Financial arrangements at the low end of the scale require detailed
terms and conditions and close monitoring of actual expenditures.
High Flexibility
|
OTPs
Grants
AFAs
FTPs
Contributions and
Repayable Contributions |
|
Low Flexibility
|
Other Transfer Payment
An Other Transfer Payment is a transfer payment based on legislation or an
arrangement that normally includes a formula or schedule as one element used to
determine the expenditure amount. However, once a payment is made, the recipient
may redistribute the funds among several categories of expenditure in
the arrangement. Examples of OTPs are transfers to other levels of
government such as Established Program Financing and transfers to the
territorial governments.
Grant
A grant or a class of grants is an unconditional transfer payment where the
government chooses to further policy or program delivery by issuing payments to
individuals or organizations. Eligibility criteria and applications received in
advance of payment provide sufficient assurance that the objectives of payment
will be met, therefore specific conditional agreements with the recipient are
not required (e.g. containing audit clauses or requiring financial claim
documentation). The government must list a grant or a class of grants in the
Estimates but may withhold the grant(s) if eligibility criteria are not met.
Contribution
Unlike OTPs and grants, a contribution is a conditional transfer made when
there is or may be a need to ensure that payments have been used in accordance
with legislative or program requirements. More specifically, contributions are
based on reimbursing a recipient for specific expenditures according to the
terms and conditions set out in the contribution agreement and signed by the
respective parties. Terms and conditions include key elements such as
identification of recipient(s), explanation of how the proposed contribution
furthers program objectives, maximum amount payable, basis and timing of
payment, who has authority to approve, sign and make payment, audit
arrangements, and evaluation criteria to assess the effectiveness of the
contribution program relative to its objectives.
A repayable contribution is a unique type of contribution. Repayable
contributions are contributions all or part of which are repayable if terms and
conditions requiring repayment are met or if a fixed schedule of repayments
without interest is attached. All contributions to business are repayable
subject to certain exemptions. The exemptions as well as the repayment
provisions are outlined in the Repayable Contributions Policy.
Repayable contributions are based on three underlying principles. First,
repayable contributions are expenses. Second, if a business receives a direct
benefit from the government that allows it to earn profits or increase the value
of the business, it should return the investment to the government. Third, when
the government provides direct financial support to high-risk business ventures,
the government should share in the benefits proportional to its share of
the risks.
Alternative Funding Arrangements and Flexible Transfer Payments
Alternative Funding Arrangements (AFAs) and Flexible Transfer Payments (FTPs)
possess characteristics similar to OTPs and contributions. AFAs and FTPs are
like OTPs in that they are based on a formula or fixed costs and as such, the
question of unexpended funds does not arise. The exception is that funds
provided for capital purposes must be spent as such, including funds not spent
at the end of the term of the agreement. Furthermore, AFAs, like OTPs, allow for
program redesign to meet the recipient's needs. That is, once payment is made
the recipient may redistribute the funds among several categories of expenditure
in the arrangement. FTPs, on the other hand, do not allow for program
modification.
AFAs and FTPs are like contributions in that there is a written agreement
setting out the obligations of both parties including provision for audit. AFA
agreements are based on negotiations between the parties and contain minimum
program requirements which are stated more generally than FTP program terms and
conditions. Another feature of the AFA is that agreements are funded on a
multi-year basis and any unexpended balance at the end of each fiscal year, as
well as at the end of the agreement, is not a debt due to the Crown. Although
AFAs are negotiated on a multi-year basis, funding is subject to approval by
Parliament on an annual basis.
FTPs are conditional transfer payments for a specified purpose for which
unexpended balances may be retained by the recipient, provided that the program
terms and conditions have been fulfilled. Any deficit is the responsibility of
the recipient. Through performance reports, and through audited statements where
it may be considered necessary, the recipient must demonstrate that the results
have been achieved as specified in the funding arrangement. FTPs emphasize the
program results, not the reimbursement of actual expenditures.
Use of transfer payment arrangements
Government transfer payment arrangements are appropriate when one or more of
the following conditions are met:
- the departmental mandate allows for the proposed program or activity and
the appropriate authorities are in place to support program objectives (i.e.
grant or contribution authorities);
- the government determines that it would benefit the public in general and
government objectives would be furthered by providing financial assistance.
Normally the government provides less than 100 per cent to support the
activities or projects which benefit third parties;
- the government decides that an outside party (i.e. recipients of financial
assistance - non-profit, volunteer or non-governmental organization) is
better equipped than the government to assist in the delivery of a specific
service or to handle a particular task;
- the government would not receive goods or services as a result of proposed
expenditures;
- specific Acts of Parliament, program legislation, or other government
policies and regulations require the delivery of programs;
- the government supports business assistance programs to promote economic
development rather than subsidies to the private sector;
- it is the most effective and efficient means of supporting specific
program objectives;
- systems and procedures are in place to properly account for the use
of resources (i.e. performance evaluation links dollars spent
to program results and evaluation criteria support the program
approval) and disclose meaningful information to Parliament; or
- reasonable assurance can be given that the proposed transfer would not
result in duplicate financing or "stacking" (i.e. financing of
similar activities by more than one federal government department, other
level of government sources, or other sources external to the government).
If one or more of the above criteria apply, one of the financial arrangements
discussed in Table 1 or 2 may be suitable to achieve results in relation to
specific program objectives.
Attributes of government transfer payment arrangements
The following section presents a list of attributes associated with
government transfer payment arrangements. The matrix is divided into two
sections. Table 1 examines grants, contributions and repayable contributions and
Table 2 examines AFAs, FTPs and OTPs. By identifying those attributes which are
applicable to your circumstances, keeping in mind your mandate, program
objectives and clientele, you should be able to zero in on a suitable delivery
arrangement from several identified options. The matrix describes how an
attribute relates to a specific financial arrangement. If you require further
information on government transfers, please see the Appendix for a list of
references.
Transfer payment arrangements - Table 1
|
Key attributes
|
X
|
Grants
|
Contributions
|
Repayable contributions
|
Parliament restricts payment amount, recipient or class of recipient
and sometimes the purpose of the payment. The payment cannot be increased
or redirected to other recipients.
|
|
YES - Because of legislative character, grants cannot be increased or
redirected without the authority of Parliament. If eligibility criteria
are not met, a grant may be withheld.
|
NO - Within the purpose, dollar limits and restrictions prescribed by
Parliament in the vote wording, Treasury Board can authorize new
contributions and changes in amount paid without further parliamentary
approval.
|
NO - Same as contributions.
|
Payment is unconditional and not subject to being accounted for or
audited.
|
|
YES - Payments must simply meet eligibility criteria.
|
NO - Audit required and conditions for payment required to ensure funds
have been used in accordance with legislative or program requirements.
|
NO - Requires an audit and conditions laying out repayment.
|
Specified eligibility criteria and applications received in advance of
payment are sufficient to assure that the objectives of the payment are
met.
|
|
YES
|
NO - Terms and conditions laying out the obligations of the respective
parties to the agreement are required.
|
NO - Terms and conditions laying out the obligations of the respective
parties as well as the condition or trigger for repayment are required.
|
Written agreement between recipient and the donor is required
identifying the terms and conditions governing the payment.
|
|
NO - Generally an application from the recipient is sufficient. Where
there is a class of recipients, terms and conditions are required to
determine eligibility.
|
YES - Terms and conditions required for all contributions.
|
YES - Terms and conditions required for all repayable contributions.
|
Level of risk associated with payment will determine the level of
control. A number of conditions should be included in the agreement.
|
|
NO - Payments are unconditional. Grants may have eligibility or
entitlement criteria and may be restricted to specified purposes or
objectives. However, no control may be exercised over the types of
expenditures for which the grant is used.
|
YES - The greater the need for control over funds, the more detailed
the terms and conditions.
|
YES - Terms and conditions lay out specific guidelines for repayment
terms. There is some flexibility to negotiate specific terms of repayment.
|
Payment is a reimbursement of prescribed costs (i.e. expenditures
incurred and normally paid).
|
|
NO - Payment is unconditional.
|
YES - Only eligible expenditures agreed to are reimbursed.
|
YES - Same as contributions.
|
Written terms and conditions required for audit of eligibility and
performance.
|
|
NO - Payment not dependent upon performance.
|
YES - Terms and conditions required to ensure payments used for
intended purposes.
|
YES - Same as contributions.
|
Treatment of unexpended balance a potential issue.
|
|
NO - Since payment is not dependent on performance, there is no
potential unexpended balance.
|
YES - Overpayments, unexpended balances and disallowed expenditures
must be repaid.
|
YES - Overpayments and payments to a disqualified recipient must be
repaid immediately.
|
Objective is to invest in economic development by contributing
financial assistance to a business enterprise.
|
|
NO - Generally, the objective is to further government policy or
program delivery by issuing payment to certain individuals and
organizations where eligibility criteria provide sufficient assurance that
the objectives of the payment will be met.
|
NO - Objective is to further government policy or program delivery by
issuing payment to certain individuals, companies, limited partnerships,
and not-for-profit organizations.
|
YES - Objective is to orient government business assistance to economic
development investment programs. All contributions to business are
repayable, except for those specifically exempted.
|
Financial assistance to a business enterprise will result in earned
profits and an increase in the value of its assets in the pursuit of
profits. Direct causal linkage must exist.
|
|
NO
|
NO - Except if there is a purchase of capital assets that will increase
the value of assets.
|
YES - If there is a direct link between profits earned and increased
value of the business as a result of the payment, the investment should be
returned to the government. There are some exemptions.
|
Recovery of all or part of funds is necessary according to specified
conditions.
|
|
NO - Payment is unconditional.
|
NO - Except if there has been an overpayment or breach of the terms and
conditions of a contribution or ineligible expenditures.
(Treasury Board's Guide on Financial Administration for Departments
and Agencies of the Government of Canada, Chapter 9.4.6)
|
YES - Payments to business must be repaid according to the Repayable
Contributions Policy. A copy may be obtained from a Treasury Board
analyst.
|
Transfer payment arrangements - Table 2
|
Key attributes
|
X
|
AFAs
|
FTPs
|
OTPs
|
Entitlement to payment is based on formula.
|
|
YES - Formula is negotiated.
|
NO - Entitlement is based on program's results and not on formula.
|
YES - Formula-based, where the applicant must meet pre-established
conditions or specified eligibility criteria. Payment is subject to
continuing eligibility.
|
Written agreement between recipient and the donor identifying the terms
and conditions governing the payment is required.
|
|
YES - Funds may be reallocated between program areas and programs may
be redesigned providing the recipient meets minimum program requirements.
|
YES - Conditional transfer payment requiring the recipient to account
through performance reports that the agreed results have been achieved
(i.e. minimum terms and conditions). Focus is on program results, not on
accounting for actual expenditures.
|
NO - Only where there is a class of recipients are terms and conditions
required to determine eligibility.
|
Degree of flexibility built into an arrangement is a function of the
level of potential risk associated with the third party's ability to
deliver government's objective.
|
|
YES - More flexible than FTPs but not as flexible as OTPs. Under AFAs,
the recipient is the "program manager" with decision-making
authority, responsibility and accountability. Appropriate when the level
of risk is judged to be low.
|
YES - More flexible than contribution arrangements but not as flexible
as AFAs or OTPs. Programs may not be redesigned. Appropriate when the
level of risk is judged to be medium.
|
YES - Most flexible of all. Entitlement to receive payment is regulated
by legislation, regulations or arrangements. Providing eligibility
criteria are met, there is no restriction on how the recipient reallocates
the funds once the payment is made. Eligibility criteria provide
sufficient assurance that objectives of the payment will be met.
|
Recipient of funds may redesign programs and reallocate funds.
|
|
YES - Objective is to allow the recipient to manage, not just
administer, by providing authority to redesign programs in accordance with
their community priorities.
|
NO - Specific program criteria identify the specific program objective.
|
YES - Once payment is made, recipient may reallocate the funds.
|
Transfer of funds is conditional. The recipient must provide an
accounting on how the funds were used.
|
|
YES - Emphasis is on designing programs in accordance with community
priorities keeping in mind minimum program requirements. Annual management
report as well as audited financial statements are required.
|
YES - Emphasis is on specific outputs for a fixed amount of dollars.
The recipient must account through performance reports that the results
have been achieved.
|
NO - Emphasis is on meeting pre-established conditions (where there is
a class of recipients) or eligibility criteria. Payment is based on
continuing eligibility. No additional control may be exercised over the
types of expenditures for which payment is used.
|
Agreement with recipient is multi-year. Funding, however, is provided
on availability of annual appropriations.
|
|
YES - Possible to have agreements up to five years, subject to annual
appropriation availability.
|
NO - Funding is for a single year.
|
YES - Payments may be under statutory authorities with funding
disclosed annually by Parliament.
|
Surplus funds can be spent at the discretion of the recipient.
|
|
YES - Formula-based. Recipient can redesign programs and reallocate
funds between programs based on their priorities. Surpluses can be
retained. The only restriction is that capital surplus must be spent for
capital purposes.
|
YES - Emphasis is on program results (i.e. meeting specific performance
targets) not accounting for actual expenditures. Any surplus or deficit is
the responsibility of the recipient.
|
N/A - Formula-based. Issue of surplus funds does not arise.
|
Audited financial statements a requirement.
|
|
YES - An annual audit is required.
|
YES - Provision for audit must be part of the agreement although it
might not always be requested.
|
NO - Not subject to audit. However, verification of eligibility may be
undertaken after payment has been made.
|
Departments and agencies may decide to support or become involved in large
private sector undertakings. The federal input or support may take the form of
loan financing arrangements, loan guarantees, and loan insurance. While these
private sector initiatives fall within departmental objectives, departments may
not be directly involved in the procurement of goods and services or in the
operation of the facility or organization that is being supported.
The types of arrangements mentioned above may involve other levels of
government, other departments or the private sector in the delivery of
government services. For example, Canada Mortgage and Housing Corporation
provides insurance for loans made by financial institutions to Indian bands. In
all circumstances, a written agreement specifies the respective roles and
responsibilities for each party.
Types of other arrangements
We begin this section with a brief description of different types of
arrangements such as cost-sharing arrangements, joint projects, joint ventures
and megaprojects.
Cost-sharing arrangements are defined as arrangements whereby the parties
involved agree to share specified costs. The federal government will provide
financing for a specific outcome without participating in any other way (e.g.
Canadian Business Centres).
Joint project agreements, on the other hand, are arrangements whereby the
parties involved agree to participate jointly in carrying out a project. The
federal government would share financing of specified outcomes and participate
in other ways such as sharing resources, purchasing goods or services,
and hiring personnel.
Although similar to joint projects, joint ventures differ in that they are
arrangements whereby, in addition to sharing the control and contribution of the
resources, participants also share the profits or losses. In such a case, all
parties are liable for all obligations incurred in carrying out the joint
venture. Legislation must authorize joint ventures in government.
In this document, a megaproject describes projects such as the Hibernia
energy project. "Mega" refers to the magnitude of the project. These
types of projects are important in scope (e.g. large dollar value, implication
of various sectors, high risk factor). These projects fall under the Treasury
Board policy entitled Management of Government Interests in Private Sector
Initiatives. This policy applies to all departmental involvement in private
sector or other outside initiatives that are unique, important and not
undertaken within the context of an ongoing program. The objective of the policy
is to ensure that the interests of the federal government are managed within a
framework approved by the sponsoring minister and, where required, by the
Treasury Board. A management framework must be in place before any binding
commitments with financial implications are entered into on behalf of the
federal government. Accordingly, these types of initiatives are to
be managed:
- in relation to clearly articulated objectives;
- under a well-defined accountability framework for achieving
objectives;
- in a manner sensitive to risk complexity and economical use of resources;
and
- under explicit performance monitoring and evaluation requirements.3
These types of initiatives and the specific management framework accompanying
them should not be confused with major Crown projects (MCPs). In the case of
MCPs the federal government has direct management responsibility and ownership.
Other policy frameworks, such as Treasury Board contracting authorities and
the policy on grants and contributions, are used to manage and deliver other
types of arrangements. Legislative authorities, the FAA and departmental
authorities apply to loans, loan guarantees and loan insurance. Since we
discuss grants and contributions in other sections of this guide, this
section focuses on loans, loan guarantees and loan insurance.
Loans represent financial claims by the government resulting from payments
out of the Consolidated Revenue Fund (CRF) which are unconditionally repayable,
normally with interest, according to a predetermined repayment schedule, and
usually long-term. A loan is an asset and a repayable contribution is an
expenditure.
A loan guarantee is a guarantee provided by the government to a lender, a
bank, a credit union or others providing credit or funding to a borrower. If the
borrower defaults, the government assumes the responsibility for the loan
subject to the terms and conditions of an agreement. The government may seize
the assets from the borrower and sell them to effect recovery if its claim for
securities was registered. Seizing and selling the assets requires special
legislation. Government is responsible for the administration costs relating to
seizure and sale of assets it holds as securities. Because the government
guarantee reduces the lender's risk, the borrower is generally able to obtain
funds at a lower interest rate or negotiate a loan that might not otherwise be
obtainable.
When government administers a loan insurance program (e.g. Canada Mortgage
and Housing Corporation programs), premiums are collected and deposited to the
CRF (e.g. two per cent of the amount of the loan equals a premium). When the
loan is in default and a payment must be made to a lender, the payment in
satisfaction of the claim is issued out of a statutory vote. In the case of loan
insurance, the lender must liquidate the assets and only where the net proceeds
do not cover the loss may it claim the balance from government.
Use of other arrangements
One of the other arrangements may be appropriate when one or more of the
following conditions are met:
- the departmental mandate allows for these types of activities and the
appropriate program and statutory authorities are in place to support
these activities;
- federal support for a project is essential for it to proceed and
would generate major economic benefits and opportunities for the public
good (i.e. longer-term industrial and regional development);
- the size and complexity of the project is such that neither the public nor
the private sector has the resources or the expertise to undertake the
project alone;
- the project, although economically viable, is high cost, capital intensive
and return on investment may be minimal and realized only over the
long term;
- the private sector, including the banking community, is willing to share
an acceptable percentage of the risk;
- a sound financial business plan and economic analysis clearly demonstrate
that the project's expected cash flow will cover repayment of the debt,
interest and operating costs, and yield a satisfactory rate of return;
- the government's interests are preserved and the approved project
objectives are met if high risk, visible projects are managed within a
special regime;
- when entering into ongoing business dealings with other jurisdictions or
the private sector that involve significant degrees of risk (e.g. joint
ventures or private sector undertakings within or in conjunction with a
federally owned facility) and when the private sector equity sponsors are
supplying a substantial portion of the funds required from their own
resources;
- significant acquisitions of financial assets are made to further a
government program objective (e.g. taking an equity position in an otherwise
privately owned company to foster the exploitation of a natural resource);
- it is the most effective and efficient means of supporting the specific
program objectives identified; and
- the appropriate systems and processes are in place to ensure
accountability for the specific results against stated objectives (i.e.
performance measurement and evaluation where the criteria for evaluation are
clearly defined).
Attributes of other arrangements
You can use most financial arrangements discussed in this guide to deliver
"other"-type agreements. However, since we covered grants,
contributions and repayable contributions in the previous chapter, we will
not reiterate them here. The matrix in this section deals only with loans and
loan guarantees. The loan insurance arrangement has been left out of this
matrix as it is similar to the loan guarantees except for the conditions under
which the securities are liquidated.
Other arrangements - Table 3
|
Key attributes
|
X
|
Loans
|
Loan guarantees
|
The transaction will result in an immediate cash outflow.
|
|
YES - The transaction results in a cash outflow.
|
NO - This transaction represents a potential liability and cash outflow
for the government.
|
The transaction will result in a financial claim by the government
against an outside third party.
|
|
YES - The loan is repayable generally with interest according to a
predetermined schedule.
|
NO - A payment will be made to the lender only in the case of a default
by the borrower and a claim by the lender. This will result in the
government's setting up a claim to the borrower.
|
Private sector lenders are willing to share in the risk.
|
|
NO - Risk is generally the responsibility of the government as it is
the lender.
|
YES - Objective is to ensure lenders bear some of the loss associated
with default. The government's negotiated agreement should call for
lenders to bear at least 15 per cent of the net loss.
|
The proposed transaction is unconditionally repayable according to an
agreed to payment schedule.
|
|
YES - A loan is always considered recoverable. Generally, loan
repayments should carry market rates of interest.
|
NO - The government, as the guarantor of the loan, has an obligation to
pay the lenders only in cases of default. Terms and conditions of the loan
guarantee agreement apply.
|
The transaction will result in a government payment to a lender in the
event of default by the borrower of a loan guaranteed by government.
|
|
NO - The loan is made directly to a recipient who is judged to be
reasonably self-sufficient and where certainty of repayment is high.
|
YES - The federal government gives assurance to private lenders that it
will assume responsibility for the loan in the event of default. Terms and
conditions of the loan guarantee agreement apply.
|
To allow for potential defaults, a fixed charge to the departmental
budget is set at 25 per cent, or other appropriate rate depending on the
risk assessment.
|
|
YES - Risk assessment is made to determine the percentage.
|
YES - A non-refundable sum equal to 25 per cent of the amount
guaranteed is charged to the department for all ad hoc
loan guarantees.
|
The objective is to confer a benefit to a recipient.
|
|
NO - Partly. A benefit is conferred to the recipient but the loan is
expected to be repaid in full, including interest.
|
YES - Under a loan guarantee, the recipient benefits from a lower
interest rate because the government acts as guarantor in case of default
and thus reduces the lender's risk.
|
Specific parliamentary authority required.
|
|
YES - Loans can only be made under authority of departmental
legislation or under the authority of a loan vote.
|
YES - Parliamentary authority is required to guarantee a loan,
generally obtained through separate program legislation. According to
section 29.(2) of the FAA, specific loan guarantees may be authorized
through an Appropriation Act when such guarantees can be listed in
the Estimates.
|
Sponsoring ministers must seek, with the concurrence of the Minister of
Finance, a Cabinet mandate to negotiate any loan or loan guarantee prior
to making any commitments.
|
|
YES - Prior concurrence must be obtained before entering into
negotiations.
|
YES - Same as loan.
|
Detailed terms and conditions have been approved by the Minister of
Finance.
|
|
YES - Mandatory
|
YES - Mandatory.
|
Transaction has an impact on the government's financial position (i.e.
surplus or deficit).
|
|
MAYBE - Through an annual evaluation of the loans and anticipated
losses on these, the surplus or deficit will be affected
|
MAYBE - Through an annual evaluation of the loan guarantees and
anticipated default losses on these, the surplus or deficit will
be affected.
|
If your mandate and business activities lead you to this category, the
following list of attributes will help you to differentiate between loans and
loan guarantees. The objective is to identify those attributes that best suit
your program objectives. To find out more details on these types of
arrangements, please see the Appendix for a list of references. It is essential
to involve your Treasury Board analyst as early as possible in the discussion of
any proposed financial arrangement.
This section of the guide reviews the different funding options available to
support program delivery alternatives. These funding options include traditional
appropriations, special spending authorities (e.g. revolving funds and net
voting), and specified purpose accounts.
The first part of this section includes a discussion of traditional
appropriations with special emphasis on operating budgets, major capital and
separately controlled budgets; and reviews administrative arrangements such as
other government departments' (OGDs) suspense accounts, carry forwards, frozen
allotments, the disposal of surplus Crown assets and bartering (i.e. exchange of
non-monetary assets). The second part establishes the main characteristics of
revolving funds and of net voting types of authority. The third part briefly
explains when it is appropriate to receive and deposit money in a specified
purpose account and then pay it out of the Consolidated Revenue Fund.
Traditional appropriations are the most common funding mechanism used to
support program delivery. Traditional appropriations may be used when the
service is being delivered by the government itself, through financial
arrangements to third parties or in partnership agreements (e.g. transfer
payments). All departments and agencies receive either complete or partial
funding through appropriations.
Traditional appropriations are used for activities that have large fixed
costs or fixed and variable costs with predictable demand. Appropriation Acts
reflect the principle that Parliament provides funding for specific purposes;
therefore, these funds cannot be used for any other purpose nor can they be
transferred between votes without parliamentary approval.
Budgetary framework
Operating and Capital Budgets
Operating and capital budgets consist of personnel, other operating and
maintenance (O&M) and capital resources. These types of resources are
required when the federal government directly delivers programs (e.g. the Coast
Guard, the federal court system, the operation of health facilities for
Aboriginal people and veterans). Operating and capital expenditures normally
support non-discretionary activities such as public policy-making, other
activities that are viewed as a "pure" public good (e.g. national
defence), and discretionary government management activities required to support
program objectives (e.g. corporate activities such as finance, personnel,
administration and informatics).
The key difference between operating and capital and government transfers
lies in the type or nature of the expenditure being incurred. Operating and
capital expenditures generally involve the acquisition of goods or services at
fair market value for use in government programs. The government must pay 100
per cent of their value to obtain the goods or services. More specifically,
"operating expenditures" (i.e. operating and maintenance and salaries)
is a category of expenditure identifying mainly the activities of government for
which the benefits are short-term or immediate. "Major capital" means
durable, tangible or intangible assets that have a useful or economic life of
more than one year.
With government transfers, the government financially supports the activities
of outside organizations. The government directly benefits from the results of
the expenditures. These transfers have no profit motive.
Operating budgets are designed to provide managers with more flexibility to
achieve intended results by creating one budget which includes salaries and
wages, other operating expenditures and minor capital. The flexibility arises by
allowing managers to determine the best mix of inputs (e.g. salaries, O&M
and minor capital). A 20-per-cent transfer price recognizes and compensates the
additional personnel costs (i.e. employee benefits) that result from the
transfer of a non-salary allocation to a salary allocation. The transfer of a
salary allocation to a non-salary allocation results in a 20-per-cent premium.
"Separately controlled" refers to specific components of operating
resources that are excluded from the operating budget framework because of their
non-discretionary nature, volatility, and exceptional size (e.g. a
quasi-statutory program such as non-insured health services).
Finally, "controlled capital" refers to expenditures that are for
major program infrastructure that provides benefits for many years. Departmental
capital budgets equal to or greater than $5 million require the use of a
separate parliamentary capital vote.
Use of budgetary framework components
Operating and capital resources are generally appropriate when one or more of
the following conditions are met:
- the departmental mandate allows for the proposed activities and those
activities support established program objectives;
- the program is of a mandatory nature (i.e. provides a "pure"
public good such as national defence) and is delivered directly by the
federal government. These programs may consist of non-discretionary (e.g.
policy-making) or discretionary activities;
- the proposed expenditures will result in the department or agency being
the direct recipient of goods or services required to support established
program objectives;
- work is performed in-house because it is the most cost-effective means of
program delivery (i.e. the knowledge, expertise, resources or facilities
required are already available);
- work is contracted out to an agent of the Crown because it is the more
cost-effective means of program delivery (i.e. the knowledge, expertise or
facilities are not available in-house);
- the purpose of the expenditures is to support corporate services such as
personnel, finance, informatics, administration and communication; and
- the objective is to acquire major capital assets such as lands, buildings
and engineering structures and works as well as minor capital assets
required to support established program objectives (e.g. office furniture,
computers).
Attributes of budgetary framework components
The following section presents a list of attributes associated with operating
and capital resources. Not all of the statements listed in this section will be
applicable to your circumstances. The matrix briefly describes how the different
attributes apply to the specific budgetary components. Additional information on
operating and capital resources can be found in the Appendix.
Operating and capital budgetary components - Table 4
|
Key attributes
|
X
|
Operating budget
|
Separately controlled
|
Controlled capital
|
Objective is to acquire goods and services in support of program
objectives.
|
|
YES - Goods and services are obtained for fair market value for
immediate consumption. The government must pay 100 per cent. This will
include a profit element.
|
YES - Same as operating budget.
|
YES - Objective is to acquire durable tangible or intangible assets
that preserve over the long term the infrastructure of the government. The
government must pay 100 per cent. This will include a profit element.
|
Objective is to attain the most efficient mix of inputs (e.g. salaries,
other operating and minor capital) to achieve planned results.
|
|
YES - Rationale behind operating budgets is to gain efficiencies by
allowing managers to determine the best mix of inputs (e.g. salaries,
O&M, minor capital).
|
NO - Objective of using separately controlled allotment is to protect
funds which are material and non-discretionary in nature. For this reason,
unauthorized reallocations to accommodate changing priorities would not be
appropriate.
|
NO - Major capital investment is managed separately so as to preserve
government infrastructure. The segregation of controlled capital reflects
a deliberate decision to limit the reallocation of capital dollars to
other purposes.
|
Purpose of minor capital expenditures is to obtain furnishings,
machinery and equipment that are generally low in value, required to carry
out day-to-day operations but do not need to be controlled separately.
|
|
YES - Except for those departments where minor capital resides in a
capital vote. In such cases, these acquisitions are to be charged to the
separate notional sub-allotment for minor capital.
|
NO - Separately controlled resources should not be reallocated to the
operating budget for minor capital acquisitions. These resources must be
used for their intended purpose.
|
NO - Generally, controlled capital is devoted to the acquisition of
major program infrastructure. Minor capital should be identified in a
separate notional sub-allotment when major and minor capital are in the
same vote.
|
Resources can be reallocated on an ongoing basis.
|
|
YES - Components of the operating budget can be reallocated to other
components within the operating budget to achieve program objectives.
|
NO - Resources have been earmarked for specific purposes and are not
interchangeable. This is outside of the operating budget. Treasury Board
approval is required for changes.
|
NO - Resources have been earmarked for infrastructure purposes and are
not interchangeable. This is outside of the operating budget.
Parliamentary approval is required to change the purpose.
|
Transfers between the components of an operating budget are subject to
a transfer price (i.e. premium or cost). This is to recognize and
compensate for personnel costs that are not allocated within a manager's
budget (i.e. employee benefits, such as those set out in the Public
Service Superannuation Act).
|
|
YES - Managers are responsible for determining the best mix of inputs.
To purchase salary dollars a premium of 20 per cent will be added.
|
NO - Transfer price is not applicable because separately controlled
budgets are outside the operating budget regime (i.e. funds not
interchangeable).
|
NO - Transfer price is not applicable because controlled capital
budgets are outside the operating budget regime (i.e. funds not
interchangeable).
|
Objective is to invest in program infrastructure by acquiring lands,
buildings, engineering structures and works to support program objectives.
|
|
NO - Operating budget funds can be used to acquire minor capital assets
only where authority exists to do so (i.e. no separate capital vote
exists).
|
NO - These funds are non-discretionary and cannot be used for other
purposes.
|
YES - If investment in capital infrastructure leads to achievement of
program objectives. Funds for infrastructure are generally held in a
separately controlled capital vote.
|
Major alterations, modifications or renovations to capital assets are
required to support program objectives. Changes must be beyond the limits
established for the department and extend the useful life or change the
performance or capability of the above-mentioned assets.
|
|
NO - Operating budget funds can be used to acquire minor capital assets
only where authority exists to do so (i.e. no separate capital vote
exists).
|
NO - Funds are earmarked for specific purposes. Treasury Board approval
is required to use these funds.
|
YES - Providing expenditure activities fall within the approved mandate
of the department and agency.
|
Activities are of a non-discretionary nature, volatile or exceptional
in size and variability in expenditure profile, requiring special
treatment (e.g. quasi-statutory programs).
|
|
NO - Resources included as part of the operating budget are generally
discretionary and managers have the flexibility to determine the best mix
of inputs.
|
YES - Resources are earmarked separately because of their
non-discretionary nature.
|
YES - Infrastructure resources are non-discretionary and are to be used
for their intended purposes.
|
Administrative arrangements are available to facilitate the handling of
miscellaneous transactions within the Government of Canada. We include this
section to inform departments, agencies and others of the different ways to
handle unique situations. The more common administrative arrangements included
here are: other government departments' suspense accounts, disposal of surplus
Crown assets, carry forwards, frozen allotments and non-monetary transactions
(i.e. bartering).
Types of administrative arrangements
Other government departments' (OGDs) suspense accounts
An OGD suspense account is maintained by the administering department as well
as by the home department. The home department uses the account to account for
advances it provided to the administering department. The administering
department will undertake expenditures, and will then account for the advance to
the home department. The home department will report the charges to its
appropriation vote. Section 3 of every Appropriation Act requires that amounts
to be paid or applied be in accordance with the terms and conditions of the
vote. The administering department must bring the balance of its OGD suspense
account to zero at year end.
Disposal of surplus Crown assets
The implementation of amendments to the Surplus Crown Assets Act approved by
Treasury Board on February 24, 1993 revised the treatment of surplus Crown
assets. These amendments streamline the process for returning receipts to
departments by providing statutory authority for departments to spend an amount
equal to the proceeds from the sale of surplus Crown assets subject to the terms
and conditions approved by Treasury Board. Amounts obtained from the sale may be
applied towards disposal expenses, operating and capital expenditures only and
may not be used for transfer payments. The objective of the process is to allow
departments, using traditional appropriations and revenue spending authorities,
to receive additional funds to replace their assets.
Carry forwards
Carry forward policies allow departments to carry forward funds to the
following fiscal year. The most common carry forwards are the capital carry
forward and the operating budget carry forward. The capital carry forward is
generally based on five per cent of the Main Estimates capital budget (i.e.
major capital) to a maximum of $75 million. The operating budget carry forward
is five per cent of the Main Estimates operating budget. This sets the upper
limit amount. The computation starts with the actual lapse that appears in the
Public Accounts adjusted to exclude items such as lapses directed by the
Treasury Board and lapses associated with the transfer price.
Frozen allotment
An allotment is a division of an appropriation. Treasury Board has the
authority, under the Financial Administration Act, to divide appropriations into
categories for control purposes. Funds in a frozen allotment are not available
for expenditures and must lapse unless otherwise directed by Treasury Board.
Frozen allotments can be used in a variety of situations. For example, transfers
from O&M to salaries requires the creation of this type of allotment within
a department to capture the 20 per cent required to cover employee benefits.
Other examples:
- the Treasury Board may include resources in the Estimates for a specific
purpose, subject to the fulfilment of stated conditions. Until the
conditions are satisfied, funds are allocated to a separate frozen
allotment; and
- the Treasury Board may transfer specific program funds to a frozen
allotment as a result of specified expenditure reductions or in order to
provide funding for a special purpose in another program, including
Supplementary Estimates authority for another organization.
Non-monetary transactions (bartering)
Bartering or non-monetary transactions are exchanges of non-monetary assets,
liabilities or services for other non-monetary assets, liabilities or services.
A non-monetary transaction can also occur as part of a larger transaction
containing both monetary and non-monetary considerations.
Bartering can be a viable way of obtaining goods and services. The key points
to consider when contemplating a non-monetary transaction include:
- assurance that the transaction is economically justifiable. The government
as a whole should never be worse off as a result of choosing a non-monetary
transaction over its monetary equivalent;
- assurance that you have the required authority. The authority required for
a non-monetary transaction is the same as would be required for a monetary
transaction of similar value and risk; and
- assurance that you are adhering to other government policies. For example,
the disposal policy governs the sale of surplus Crown assets.
The Policy on Accounting for Non-Monetary Transactions requires that
departments record the fair value of a transaction, that is the value of the
non-monetary assets, liabilities or services being exchanged, as if it were a
monetary transaction, if it exceeds a threshold of $100,000. This means that the
value received from a non-monetary transaction is generally recorded as an
expenditure against the appropriation and the value given up is credited to the
CRF as non-tax revenue (i.e. cannot be spent by the department). Departments,
therefore, must ensure that there is a sufficient amount of appropriation
against which such a transaction can be charged.
Use of administrative arrangements
Administrative arrangements are generally used when the following conditions
or circumstances exist:
- departmental mandate allows for the proposed activities and those
activities support the established objectives of the program;
- Treasury Board requires that departments or agencies set aside (i.e.
freeze) a fixed amount of their budget to meet specified obligations;
- one department is administering another department's program;
- departments or agencies wish to obtain from the Treasury Board Secretariat
approvals for carry forward of funds;
- departments and agencies decide to sell surplus Crown assets; and
- it is the most effective and efficient way of supporting program
objectives.
Attributes of administrative arrangements
The following matrix is divided into two sections and examines the key
differences among the different administrative arrangements with the exception
of non-monetary assets. Table 5 examines other government departments (OGDs) and
surplus Crown assets while Table 6 reviews carry forwards and frozen allotments.
If additional information is required, please see the Appendix.
Administrative arrangements - Table 5
|
Key attributes
|
X
|
Other government departments' suspense account
|
Surplus Crown assets
|
Purpose of the account is to administer funds that fall under the
mandate of another government department.
|
|
YES - An OGD suspense account must be used if you are delivering
another department's program. The department administering the program has
been transferred funds up to the agreed amount.
|
NO - The purpose of a surplus Crown asset account is to provide
departments statutory authority to spend an amount equivalent to the
proceeds from the sale of surplus Crown assets.
|
Proposed activity falls outside your department or agency's mandate and
therefore, expenditures cannot be charged against your departmental vote.
|
|
YES - The department with the mandate will be charged the expenditures
through the suspense account.
|
NO - Operating and capital expenditures are charged to an account set
up for departments by Public Works and Government Services Canada.
|
The administering department must bring the suspense account to zero at
year-end. The unexpended balance will be returned to the home department.
|
|
YES - The administering department must advise the home department
(i.e. department with the mandate for the program) of unexpended funds as
soon as possible so that appropriate action can be taken to decommit the
funds and reallocate them to other priorities.
|
NO - In principle, departments should use their spending authority in
the fiscal year in which the revenues were generated. If there is an
unused portion of these revenues, it may be carried forward and used in
the subsequent fiscal year only subject to the terms and conditions laid
out by the Treasury Board Secretariat.
|
Funds in the account create a financial obligation or liability for the
government.
|
|
NO - Funds received in an OGD account create an obligation on the
administering department to fulfil its part of the agreement.
|
NO - No financial liability is created. Funds from disposal are treated
as non-tax revenue and deposited in an account called Proceeds from
Disposal. Expenditures are recorded against a non-lapsing authority
budgetary account.
|
Administrative arrangements - Table 6
|
Key attributes
|
X
|
Carry forward
|
Frozen allotment
|
Departments and agencies are authorized to carry forward to the
following year eligible lapsing funds from the operating budget.
|
|
YES - To promote efficient use of resources departments have authority
to carry forward up to five per cent of unspent operating budget funds.
This encourages managers to purchase goods and services "just in
time," that is, when they are needed.
|
N/A
|
Capital and contribution resources relating to specific projects that
remain unspent at year end for reasons that are beyond the control of
managers can also be carried forward.
|
|
YES - Subject to criteria laid out by Treasury Board, departments may
request Treasury Board authority to carry forward capital or contribution
funds.
|
YES - Subject to criteria laid out by Treasury Board, departments may
request Treasury Board authority to carry forward capital or contribution
funds.
|
Treasury Board directs that resources be set aside in the current year
for use by another government department or agency, to meet budget
reductions of government, or other centrally driven direction.
|
|
N/A
|
YES - Funds must be set aside in a departmental frozen allotment. These
funds will allow the distribution of supplementary funds to other
departments or government agencies.
|
Funds are approved in the Main Estimates but cannot be spent until
certain conditions are fulfilled.
|
|
N/A
|
YES - These funds are set up in a frozen Treasury Board allotment.
These will not be released until the specified conditions are satisfied.
|
In unique situations where non-tax revenue is credited to the
Consolidated Revenue Fund and no authority to spend the revenues exists,
departments may negotiate special arrangements for Treasury Board to
release some earmarked resources.
|
|
N/A
|
YES - Under certain circumstances, Treasury Board may agree to set up
funds in a frozen allotment and release them when they receive from the
department a confirmation in writing that the equivalent amount of non-tax
revenue has been deposited to the Consolidated Revenue Fund.
|
Revenue spending authorities are appropriate for activities designed to break
even and activities that are partially but not completely self-supporting.
Revolving funds and net voting fall into this category.
Revenue spending mechanisms are appropriate for activities having a stable
mandate, identifiable client groups, and operations financed in whole or in part
from user fees or other sources of revenue internal or external to the
government. When used appropriately, these types of financial arrangements
encourage increased cost effectiveness, optimal resource utilization,
responsiveness to clients' needs and good business practices.
Authority to charge fees does not authorize the spending of the resulting
revenues. All revenues must be deposited into the Consolidated Revenue Fund.
Those departments wishing to spend their revenues must have specific authority
from Parliament to do so.
Types of revenue spending authorities
Revolving Funds
A revolving fund is a continuous authorization by Parliament to make payments
out of the CRF to sustain operations. Users fund this type of operation almost
completely and it is considered self-sufficient, for the most part. Parliament
must give authority to establish and operate a revolving fund through a special
act of Parliament or an Appropriation Act.
Net Voting
Net voting is an alternative means of funding selected programs or activities
wherein Parliament authorizes a department to apply revenues towards costs
directly incurred for specific activities and votes the net financial
requirements for a fiscal year at a time (i.e. estimated total expenditures
minus estimated revenues). Under net voting, users finance only part of the cost
of a program while other sources of government revenue finance the remainder.
Consequently, a net voting operation is normally only partly self-sufficient.5
An Appropriation Act, under a special Act or included in a departmental Act,
provides net voting authority. The authority for a net voting operation must be
approved each year through the vote wording in an Appropriation Act.
Use of revenue spending authorities
You should consider revenue spending mechanisms when the following general
criteria apply:
- the departmental mandate allows for these activities and the
implementation and maintenance of a revenue generating or spending type
of arrangement would support the established objectives of the program;
- government goods and services are being provided primarily for the benefit
of specific user groups (i.e. rights and privileges are excluded because
neither a revolving fund nor net voting is appropriate as there is generally
no direct relationship between costs and revenues);
- charging appropriate user fees is the most equitable approach. It does not
undermine competition nor does it impose undue hardship on users relative to
other similar groups. External user charges introduce supply and demand
discipline on the specific users, generally resulting in more efficient
program delivery;
- the department or agency has the legal authority to charge and the legal
authority to spend the revenues collected;
- there is an identifiable user group willing to pay for the services (i.e.
there is a market for the goods and services);
- a link can be drawn between expenditures incurred to produce goods and
services and revenue produced through the sale of these goods and services.
This will ensure that revenues are spent on intended activities and that
there is no cross-subsidization of other activities;
- charging user fees would not compromise regulatory objectives, broader
public policy objectives or core functions in a department or agency;
- systems and procedures are in place to properly account for and disclose
meaningful performance information (i.e. evaluating and measuring
results);
- the size of the operation is large enough to warrant the investment in
this type of operation (i.e. materiality); and
- it is the most effective and efficient means of supporting the specific
program objectives of the department or agency.
If your business activities meet all or most of these criteria, please read
on to determine if your product lines are best suited to a revolving fund or a
net voting type of funding mechanism.
Attributes of revenue spending authorities
Table 7 presents a list of key attributes. Review the list of attributes and
identify those which are or may be applicable to your circumstances. This
process should help you to select the appropriate mechanism to meet your program
objectives as articulated in your mandate. The matrix will describe briefly how
each attribute relates to the different funding mechanisms in this category. To
find out more details on either revolving funds or net voting, please see the
Appendix for a list of additional references. Involve your Treasury Board
program analyst as early as possible if you are contemplating using a revenue
spending type of funding mechanism.
Revenue spending arrangements - Table 7
|
Key attributes
|
X
|
Revolving fund
|
Net voting
|
Authority to charge fees is required.
|
|
YES - Obtained through departmental legislation, program legislation,
section 19 of the FAA or ministerial authority to contract.
|
YES - Same as revolving fund.
|
Authority to spend revenues is required.
|
|
YES - Authority established under departmental or program legislation,
section 29.1(2)(b) of the FAA, the Revolving Fund Act or through an
Appropriation Act. Generally retain all revenues but might have to turn
over excessive profits to Consolidated Revenue Fund.
|
YES - Currently can generally spend up to 125 per cent of estimated
revenues; additional revenues go into a frozen allotment that the
organization can apply to have released. Revenues are applied against
directly related expenditures made in the fiscal year.
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Authority to spend revenues is in effect until it is amended or
cancelled.
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YES - It represents a non-lapsing authority.
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NO - It represents a lapsing authority.
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Large, devolved branch of a host department providing client-oriented
services often of a commercial and optional nature.
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YES - Operation must be sufficiently large to warrant the cost of
setting up a revolving fund. Operations must be distinct.
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NO - Scale of operation is less important than is the case for
revolving funds. Operations must be distinct.
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Objective is to fund fluctuating demands from user groups for goods and
services where demand is highly variable.
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YES - Demand for services is extremely variable.
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NO - Departments can respond to small and moderate fluctuation in
demand.
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Goal is self-sufficiency or near self-sufficiency.
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YES - Completely or almost completely
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NO - Partly. Expected to operate within its net voted authority.
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Fixed level of activity.
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NO - Operation is expected to be self-sufficient and break even over
time, usually five years.
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YES - Normally a well established core of activity funded through
appropriations.
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Multi-year focus for matching revenue with related expenditures (i.e.
flexibility is required to deal with changes in level and timing of
receipts, expenditures and to recover the cost of high dollar value
capital assets).
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YES - Because demand for services is extremely variable, expenditures
do not necessarily fall in the same fiscal year as revenues.
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NO - Amounts expended for operational expenditures should be recorded
as budgetary expenditures in the fiscal year in which they occur. Amounts
received in respect of a net-voted service are credited to the
appropriation in the year of receipt to offset related expenditures for
that year. The difference is the net annual amount expended.
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Goal is to obtain sufficient revenues in a fiscal year to offset all
operating expenditures from directly related activities during that fiscal
year.
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NO - Goal is to cover all expenditures (e.g. operating, capital and
investment) and break even within three to five years.
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YES - Objective is to match revenues and expenditures in a fiscal
year.
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All costs of operation, including overhead and all non-cash items such
as depreciation for capital items can be fully recovered from external and
internal clients.
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YES - Generally up to full cost recovery.
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YES - Internal and external clients are generally charged full cost or
appropriate fee. An internal client is charged the incremental costs only
for a one- time comprehensive project.
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Charging external users appropriate rates.
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YES - Usually full cost for goods and services. Generally, rights and
privileges are excluded as there is no direct link between costs and
revenues.
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YES - Same as revolving fund.
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Accrual and cost accounting systems are in place to cost and record the
transactions.
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YES - Accrual accounting, including capitalization of assets, is
required. Must reconcile with modified cash accounting for reporting
purposes. Cost accounting system is required.
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NO - Modified cash accounting. Cost accounting system is required.
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Interest charge applied to the use of government funds.
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YES - The authority essentially represents a line of credit against the
CRF. When expenditures exceed revenues collected, a monthly interest
charge is levied on the fund.
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NO
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Departments and agencies receive, for various reasons, moneys that must be
separately accounted for in the Accounts of Canada. In some cases, the enabling
legislation requires that revenues be earmarked, and that related payments and
expenditures be charged against such revenues. In other cases, departments and
agencies receive money for a specific purpose that is recorded as a liability of
the Government of Canada because it constitutes a financial obligation of the
government.
Given the special nature of these funds, accounts are opened in the general
ledger to ensure that they are used only for the purpose for which they were
received. These accounts, entitled specified purpose accounts, allow managers to
better control and manage these funds. Whatever the source of special purpose
moneys, such moneys are public funds.
The following reasons require the establishment of a specified purpose
account.
- Trust Accounts are established for funds administered by the Government of
Canada.
- The Government of Canada receives funds in advance from external
entities involved in cost-sharing, joint project and partnership
arrangements.
- The Government of Canada receives funds as conditional contributions,
gifts, bequests and donations. Where the object of expenditure is clear and
specific, the government must only use or spend these funds for the stated
purpose.
- The Government of Canada receives funds when it administers a program or a
portion of one on behalf of a province.
- The Government of Canada receives funds as an award made to the Crown and
the court has stipulated that the moneys must be used for specific purposes.
All requests to open a specified purpose account must be submitted to and
satisfy the requirements of the Receiver General. Unless specifically provided
by statute, the Minister of Finance must approve the payment of interest on
funds held in a specified purpose account.
The crediting of interest to the account, when applicable, must comply with
legislative provisions and with instructions set by the Department of Finance.
Unless specifically provided by statute, interest is not paid on gifts, bequests
and donations to the Crown, contributions received towards joint undertaking or
cost sharing agreements, or funds that have been earmarked for a specific
purpose.
When authorized by the enabling authority (e.g. legislation, contract,
agreement), administration costs may be charged to specified purpose funds. If
this is not covered in the enabling authority, costs incurred for the
administration of the funds must be charged to the annual operating budget
of the program manager.
Because of the special nature of insurance, pension and death benefits
programs, the related specified purpose accounts will only be established
following legislation.
Due to the rules governing specified purpose accounts, under no circumstances
may a specified purpose account be used to:
- record advance payments from appropriations or other departments and
agencies within the same entity;
- carry forward the unused or undisbursed balance of an appropriation; and
- carry forward "unused" vote-netting or other spending authority
in respect of goods and services that have been provided.
Specified purpose accounts must be established and operated within the scope
of the departmental authorities and in accordance with the Treasury Board Policy
on Specified Purpose Accounts and with the related Receiver General directive.
Transfer payments
Accounting and Control of Expenditures, Chapter 9 (Grants and Contributions,
section 4), Treasury Board Guide on Financial Administration for Departments and
Agencies of the Government of Canada (to be published as Chapter 2-12,
"Comptrollership" volume, Treasury Board Manual).
Public Sector Accounting Statement - No. 7, Accounting for Government
Transfers, Public Sector Accounting and Auditing Committee, Canadian Institute
of Chartered Accountants, November 1990.
Policy on the Application of the Goods and Services Tax in the Departments
and Agencies of the Government of Canada, Chapter 5-8,
"Comptrollership" volume, Treasury Board Manual.
Repayable Contributions Policy (to be published as part of the Policy on
Transfer Payments, Chapter 2-12, "Comptrollership" volume, Treasury
Board Manual).
Alternative Funding Arrangements - Standard Agreement, Department of Indian
and Northern Affairs, January 1994.
Williams, A. "Public Sector Forum: New transfer payment
mechanisms," CMA Magazine, June 1991.
Managing Funding Arrangements - DIAND's Accountability Framework, Department
of Indian and Northern Affairs, 1993.
Transfer Payments - Financial Control of Expenditures - Departmental
Directives, Department of Indian and Northern Affairs, 1992.
Other arrangements
Policy on Recording Receipts and Accounts Receivable, Chapter 3-2,
"Comptrollership" volume, Treasury Board Manual.
Accounting and Control of Revenue and Accounts Receivable, Chapter 10 (Loans
and Advances section 8), Treasury Board Guide on Financial Administration for
Departments and Agencies of the Government of Canada (to be published as Policy
on Loans, Chapter 4-2, and Policy on Advances, Chapter 4-3,
"Comptrollership" volume, Treasury Board Manual).
Policy on Allowances for Valuation of Assets and Liabilities, Chapter 4-6,
"Comptrollership" volume, Treasury Board Manual.
Treatment of Loan Guarantees in the Expenditure Management System, letter
issued by the Minister of Finance, December 1985.
"New requirements for the 1992-1993 Public Accounts following change of
the Accounting Policy for Loan Guarantees, Treasury Board of Canada",
letter issued by the Deputy Comptroller General, Accounting and Costing Policy
Branch Treasury Board of Canada, Secretariat, April 29, 1993.
Department of Finance, Loan Guarantees - Chapter 13, Department of Energy,
Mines and Resources, Energy Megaprojects - Chapter 14, Department of National
Defence (DND), Major Capital Projects Industrial Development Initiatives -
Chapter 16, Major Capital Projects, Project Initiation and Implementation within
DND - Chapter 17, Report of the Auditor General of Canada, 1992.
Traditional appropriations
A Manager's Guide to Operating Budgets, Treasury Board, 1992.
Technical Parameters - Appendix 2 and Operating Budgets, Questions and
Answers - Annex C, 1993-1994 MYOP Technical Instructions, August 1992.
Administrative arrangements
Policy on Specified Purpose Accounts, Chapter 5-7,
"Comptrollership" volume, Treasury Board Manual.
Implementation of amendments to the Surplus Crown Assets Act, Treasury Board
Secretariat, March 1993.
Policy on Account Verification, Chapter 2-5 and Policy on Payment
Requisitioning, Chapter 2-6, "Comptrollership" volume, Treasury Board
Manual.
Policy on Accounting for Non-Monetary Transactions, Chapter 5-13,
"Comptrollership" volume, Treasury Board Manual.
"Treasury Board Submission Guide" volume, Treasury Board Manual,
1991.
Carry-Forward of Capital Funds, Treasury Board Circular 1987-53, November
1987.
Revenue spending authorities
Policy on Special Revenue Spending Authorities, Chapter 5-6,
"Comptrollership" volume, Treasury Board Manual.
Financial Administration Act, Chapter 6-1, "Comptrollership"
volume, Treasury Board Manual.
Respending of Revenues - An Incentive for Improved Efficiency, presentation
by Bernard Ouellet and Norm Everest at the Treasury Board Issues Review Meeting,
February 10, 1993.
Guide to User Fees, Treasury Board, 1992.
Practical Strategies For Implementing User Fees, presentation prepared by the
Expenditure Analysis Division, Program Branch, Treasury Board Secretariat,
January 1992.
Prescribing User Fees and Charges under the FAA, Treasury Board Secretariat
letter, November 1993.
Treasury Board Policy on External User Charges for Goods, Services, Property
Rights and Privileges, 1989.
125-per-cent Rule - Section 14(e), Allotment Control Treasury Board Circular
No. 1985-13, January 31, 1985.
Accounting and Control of Revenue and Accounts Receivable, Chapter 10 (Cost
Recovery, section 4), Treasury Board Guide on Financial Administration for
Departments and Agencies of the Government of Canada.
General
The Manager's Deskbook, Treasury Board of Canada, Fourth Edition, March 1995.
Human Resources Management Accountability Framework (discussion draft paper),
1995.
Framework for Alternative Program Delivery, Treasury Board Secretariat, 1995.
"Partnerships," Optimum - Journal for Public Sector Management,
volume 24-3, Winter 1993.
Guide to the Costing of Outputs in the Government of Canada, Office of the
Comptroller General, 1994.
Make or Buy?, Stretching the Tax Dollar series, Treasury Board Secretariat,
1993.
Making the Organization More Efficient, Stretching the Tax Dollar series,
Treasury Board Secretariat, 1993.
The Federal Government as "Partner": Six Steps to Successful
Collaboration, Stretching the Tax Dollar Series, Treasury Board Secretariat,
1995
Reference Manual on Cash Management for Departments and Agencies, Treasury
Board Secretariat.
Endnotes
1. Public Sector Accounting Statement
7, Canadian Institute of Chartered Accountants, November 1990. [Return]
2. The Department of Indian and
Northern Affairs developed AFAs and FTPs to meet their unique program
objectives. [Return]
3. Management of Government Interests
in Private Sector Initiatives, Chapter 4-1, "Capital Plans, Projects and
Procurement" volume, Treasury Board Manual. (The Appendix of this
chapter describes in more detail the components of the
Management Framework.) [Return]
4. See revised Policy on Special
Revenue Spending Authorities for more details. Also, there are other ways to
obtain authority to spend revenues. One unique authority is that granted to
Departmental Corporations (section 29.1 of the Financial Administration Act).
Another is the retention of royalties and fees from the licensing of Crown-owned
intellectual property. Revenues from these sources are deposited in the
Consolidated Revenue Fund as non-tax revenue and departments and agencies are
authorized by a Treasury Board submission to receive, through Supplementary
Estimates of the following fiscal year, an annual appropriation equal to the
revenues remitted to the Consolidated Revenue Fund in the previous
fiscal year. [Return]
5. A unique feature of net voting is
the application of the 125-per-cent rule. This rule provides added flexibility
by allowing departments and agencies to generally credit up to 125-per-cent of
the revenues forecasted and displayed in the Main Estimates. Revenues in excess
of the 125-per-cent must be placed in a separate frozen allotment. A department
is responsible for any shortfall between the estimated revenues, including the
125-per-cent rule, and the related expenditures. For example, if estimated
expenditures are $100,000 and estimated revenues displayed in the Main Estimates
are $50,000, then the net voted requirement is $50,000 ($100,000 -
$50,000). If revenues increases by 25 per-cent ($50,000 x 1.25 = $62,500)
then expenditures should increase to no more than $112,500 in order to respect
the net voted threshold amount of $50,000 ($112,500 - $62,500). This example
reflects the direct relationship between revenues and expenditures. [Return]
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