Quarterly Financial Report for the quarter ended December 31, 2016

1. Introduction

This Quarterly Financial Report (QFR) should be read in conjunction with the Main Estimates, Supplementary Estimates and previous Quarterly Financial Reports. It has been prepared by management as required under section 65.1 of the Financial Administration Act and in the form and manner prescribed by Treasury Board Accounting Standard 1.3. It has not been subject to an external audit or review.

1.1 Raison d'être

Public Works and Government Services Canada (PWGSC) was established effective June 20, 1996, under the Department of Public Works and Government Services Act. As of November 4, 2015, PWGSC operates as Public Services and Procurement Canada (PSPC). PSPC plays an important role in the day-to-day operations of the Government of Canada. It supports federal departments and agencies in the achievement of their mandated objectives as their central purchasing agent, real property manager, linguistic authority, treasurer, accountant, pay and pension administrator, and common service provider. The Department's vision is to excel in government operations, and its strategic outcome and mission is to deliver high-quality, central programs and services that ensure sound stewardship on behalf of Canadians and meet the program needs of federal institutions.

Further details on PSPC's authority, mandate and programs can be found in the Archived—2016 to 2017 Report on Plans and Priorities.

1.2 Basis of presentation

This quarterly report has been prepared by management using an expenditure basis of accounting. The accompanying Table 1—Statement of authorities (unaudited) includes PSPC's spending authorities granted by Parliament and those used by the Department in keeping with the Main Estimates and Supplementary Estimates for the fiscal year ending March 31, 2017. This quarterly report has been prepared using a special purpose financial reporting framework designed to meet financial information needs with respect to the use of spending authorities.

The authority of Parliament is required before monies can be spent by the government. Approvals are given in the form of annually approved limits through appropriation acts or through legislation in the form of statutory spending authority for specific purposes.

PSPC uses the accrual method of accounting to prepare and present its annual Consolidated Departmental Financial Statements (DFS) that are published in the Departmental Performance Report. However, the spending authorities voted by Parliament remain on an expenditure basis. The main difference between the QFR and the DFS is the timing of when revenues and expenses are recognized. The QFR reports revenues only when the money is received and expenses only when the money is paid out. The DFS reports revenues when they are earned and expenses when they are incurred. In the latter case, revenues are recorded even if cash has not been received and expenses are incurred even if cash has not yet been paid out.

1.3 Public Services and Procurement Canada's financial structure

PSPC provides services for many government departments, agencies and Crown corporations through a variety of funding mechanisms. These include budgetary authorities that are comprised of voted and statutory authorities, as well as non-budgetary authorities. The voted budgetary authorities include operating expenditures, vote-netted revenues and capital expenditures, while the statutory authorities are comprised mainly of revolving funds, employee benefit plans and payments in lieu of taxes (PILT). The non-budgetary authorities consist primarily of the Seized Property Working Capital Account (see description below).

PSPC's complex financial structure may result in significant fluctuations in authorities on a quarterly basis, due to timing differences that are resolved by year end. These are summarized as follows:

• for the most part, PSPC delivers its services on a cost-recovery basis, generating revenues via Revolving Fund ("the Funds") organizations and programs within the operating vote. These organizations and programs are mainly designed to provide services for other government organizations, and are expected to recover the cost of their operations through revenues. However, the costs incurred by the Funds are usually disbursed prior to invoicing the client, which generally occurs upon completion of a project or after services are rendered, and thus revenues may be collected in a subsequent quarter
• PSPC manages a variety of real property projects that progress through phases from planning to funding and from procurement to construction. Historical trends have shown that expenditures against these projects are not incurred evenly throughout the year; thus, quarter-to-quarter fluctuations are normal. Such projects include the Alaska highway in British Columbia and the Yukon, and the new Champlain bridge in Montréal, Quebec
• PILT issued by PSPC are funded through a statutory vote and paid on behalf of other participating federal departments. The Government of Canada voluntarily pays a fair share of the costs of local government, from which it is exempt, to municipalities and other taxation authorities having jurisdiction to levy and collect real property taxes in locations where federal lands and buildings are situated. Payments are subsequently recovered from the participating departments and recorded as statutory grants in the Public Accounts of Canada. Timing fluctuations can occur between payments and recoveries
• PSPC also manages seized property for the Government of Canada pursuant to the Seized Property Management Act. The financial management of this activity is undertaken through the non-budgetary Seized Property Working Capital Account. Charged to this account are expenditures and advances made to maintain and manage any seized or restrained property. PSPC recovers its costs from this account once the property owner loses the right to the property and it is disposed of

2. Highlights of fiscal quarter and fiscal year to date results

2.1 Significant changes to authorities

When compared to the same quarter of the previous year, year to date PSPC's authorities available for use increased by $290.1 million ($3,142.3 million in the fiscal year ended March 31, 2016; $3,432.4 million in the fiscal year ending March 31, 2017), as reflected in Table 1—Statement of authorities (unaudited). Major reasons for the increase are outlined below.

Groupings can change between quarters owing to materiality of initiatives.

Amounts may not balance with other public documents because of rounding.

Year to date net increase of $290.1 million can be explained by:

Real property program integrity—increase of $277.8 million

Over the years, the Real property program budget has been redirected to cover operating costs (for example rent and utilities) rather than necessary maintenance and repairs. The Real property program integrity initiative addresses this situation, but also implements large-scale recapitalization projects, such as engineering assets (for example Alexandra bridge and Timiskaming dam).

Management of ongoing pay operations—increase of $50.0 million

In February 2016, a new pay system was implemented to replace the 40-year-old pay system, carrying a backlog of unprocessed pay requests upon the transition. PSPC developed an action plan to ensure that all employees are paid for what they have earned. Additional funding was then received to implement necessary measures in the current fiscal year to ensure the management of ongoing pay operations and to meet service delivery standards.

Parliamentary precinct rehabilitation—increase of $35.6 million

Work to preserve Parliament buildings as heritage assets and national symbols is ongoing. In the current fiscal year, the focus is on: the West Block, which includes the construction of the courtyard infill, the north court structure and the rehabilitation of the roof and exterior masonry; building a new underground Visitor Welcome Centre to improve visitor's experience and enhance security; and the Senate Interim Accommodation with focus on the exterior heritage masonry rehabilitation and the excavation and foundations of the east addition.

Thirty meter telescope—decrease of $10.0 million

The thirty meter telescope (TMT) is an international project that will build one of the world's largest and most advanced astronomical observatories in Hawaii. As part of Budget 2015, the Government of Canada committed to providing $243.5 million over 10 years to support Canada's participation in the construction and commissioning of the TMT. Last fiscal year, PSPC's funding for the contribution to the TMT was adjusted in the fourth quarter, in comparison to the beginning of the current fiscal year.

Federal contaminated sites action plan, phase II—decrease of $17.8 million

Led by the Federal Contaminated Sites Action Plan Secretariat, housed at Environment and Climate Change Canada, work on this initiative is transitioning from phase II to phase III. The purpose of the program is to lower environmental and human health risks, benefit local communities, and reduce the burden of future environmental liability for all Canadians.

Deficit reduction action plan—decrease of $47.9 million

In accordance with Budget 2012, PSPC achieved additional savings in the current fiscal year through its Space standards modernization and Space recapture initiatives. PSPC continues to work with departments to optimize surplus space in a manner that ensures best value to Canadians, while also introducing a more modern workplace (Workplace 2.0).

Other—increase of $2.4 million

This net increase of $2.4 million is the result of miscellaneous funding variances, relating mainly to the increase of the Employee benefit plans rate from 16.8% the previous fiscal year to 17.2% in the current fiscal year, as directed by the Treasury Board Secretariat (TBS).

2.2 Significant changes in year-to-date net expenditures

As presented in Table 2—Departmental budgetary expenditures by standard object (unaudited), year to date total net budgetary expenditures have increased by $350.5 million compared to the same quarter of the previous year ($2,040.6 million in the previous fiscal year; $2,391.1 million in the current fiscal year).

Overall, total spending at the end of the third quarter represents 70% of annual planned expenditures for the current fiscal year, compared with 65% at the end of the third quarter of the previous fiscal year.

Year to date net increase of $350.5 million is attributable mainly to the following:

• Repair and maintenance—increase of $165.5 million
  • increase in construction and repair of new and existing federal infrastructure across Canada, including various buildings and assets, on behalf of other government departments
  • increase in repair and maintenance of federal buildings to provide a safe, healthy, and secure workplace
• Acquisition of land, buildings and works—increase of $87.2 million
  • progress of work on the reconstruction of the Grande-Allée armoury in Québec City, Quebec
  • exercise of purchase option for a building in Montréal, Quebec
  • increase in construction and rehabilitation of federal buildings
• Transfer payments—increase of $68.6 million
  • timing differences between when a payment in lieu of taxes (PILT) is issued and when the cost is recovered from other government departments.
• Personnel—increase of $15.2 million
  • increase due to the addition of pension services under the Canadian Forces Superannuation Act (CFSA)
  • increase owing to the Public service pay center in Miramichi, which became fully operational following the completion of the Consolidation of pay services project
  • increase associated with efforts to resolve post implementation issues of the pay system
• Professional and special services—decrease of $14.5 million
  • decrease due mainly to the progress made on several projects that have been completed or are nearing completion
  • timing difference between when the payment for professional and special services is made and when professional and special services costs are recovered from other government departments for which the service is being provided
• Rentals—decrease of $13.3 million
  • timing difference in the billing cycle between previous fiscal year and current fiscal year
• Other expenditures—decrease of $2.7 million
  • the net decrease in other expenditure categories not listed above is the result of decreased activity in various projects
• Revenues netted against expenditures—decrease of $44.5 million
  • decrease attributable to a timing difference in the billing cycle between previous fiscal year and current fiscal year
  • offset by increased business volume associated with various projects on behalf of other government departments

3. Risks and uncertainties

PSPC integrates risk management principles into business planning, decision-making and organizational processes to minimize negative impacts and maximize opportunities across our diverse range of services and operations. Risk management in PSPC is carried out in accordance with the Treasury Board Secretariat framework for the management of risk, the management accountability framework and the PSPC policy on integrated risk management.

The following key risks were identified as having a potential financial impact:

• PSPC's dependency on clients' expenditures:  More than half of PSPC's financial and human resources are tied directly to cost-recovered services and activities. In a context of reduced expenditures on the part of client departments and agencies, there is a risk that PSPC could face unpredictable and reduced business volumes and associated reduced resources. In response to this risk, PSPC continually adjusts to fluctuations in operational demands while maintaining the quality of its services. This includes sustaining rigorous management of revenues, expenditures, forecasting and commitment monitoring and working closely with other departments through the client service network to identify changing requirements and their impacts on the Department
• PSPC's ability to undertake and deliver complex, transformational and interdepartmental major projects and procurements: There are inherent risks in PSPC undertaking and delivering complex, transformational and interdepartmental major projects and procurements on time, within the approved budget and according to scope, which could ultimately have an impact on the Department's service strategy. In order to address these risks, PSPC has implemented disciplined investment and project management processes; established service agreements and service standards with clearly identified responsibilities; ensured sound contract management; engaged early with client departments and other stakeholders; and developed the departmental integrated investment plan (IIP)
• as previously outlined, the Department implemented a new pay system as part of the pay transformation initiative. The implementation was a major undertaking that experienced challenges. The Department is leading a significant effort to address the issues. Progress is continuing as we work closely with all departments and agencies

4. Significant changes to operations, personnel and programs

There were no significant changes to operations, personnel and programs in the third quarter ended December 31, 2016.

Approved by:

Table 1—Statement of authorities (unaudited)

Table 2—Departmental budgetary expenditures by standard object (unaudited)