Contractual obligations

Contractual obligations are a 21st century style of debt but the slow-to-adapt accounting profession has trouble agreeing how these should be reported. In the absence of stronger direction, these are typically announced in technical footnotes to annual financial statements.

Most obligations arise from public-private partnerships (P3). Using the model, if it wanted a bridge across a river, government would pay a private partner to build and maintain the crossing in return for regular payments over the life of the asset. The obligation to the P3 provider would not be reported as debt.

Traditionally, for a river crossing, government would borrow money, hire contractors for construction and have the highways ministry arrange for maintenance. Debt incurred to build the bridge would be reported on government balance sheets, included in debt/GDP calculations and retired by payments to the lender.

Retired economist Erik Andersen presented a paper about contractual obligations to the legislative budget committee 2 years running and was met with stony silence from all MLA committee members.

Some are simply disinterested, others see this as a way for them to pretend that public debt is less than it is.

Mr. Andersen has turned attention to the professional body that make rules for accountants in Canada. This is a letter he sent to them:

Chartered Professional Accountants of Canada
277 Wellington St. West, Toronto, Ontario
M5V 3H2
“Contractual Obligations”
Dear Sirs;
For several years, the attempts by me and others to draw politicians into an examination of “contractual obligations”, have failed spectacularly. Their lead in this matter is from accountants who keep the definition of debt very narrow. By report dated February 2017 the BC Auditor General presented “The 2015/16 Public Accounts and Auditor General Findings”(1). Starting on page 37 this report gives a presentation on “Contractual Obligations”. The important words from this report, that all politicians use as their “fig leaf”, are that these obligations are not debt.
Correct me if I am wrong but would what those accountants in the USA use as a definition of the “purpose of accounting” would likely apply in Canada? The AAA states; “Accounting is the process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information. “
These “debt” and “contractual obligations” definitions are used variously depending what is the needed purpose. On page 11 of the BC Comptroller’s report of the same year, it shows the reader the ratio of “Taxpayer-supported debt to GDP” (2). This ratio is an indicator of how indebted the province is compared to its income, measured as GDP. The lower the ratio the higher the quality of the Province’s credit rating; the closer the ratio gets to one the greater the worry of insolvency “Greek style”. This makes it clear that it is a great optic to maximize the use of “Contractual Obligations” to suppress this ratio. In reality, by signing supply contracts the Government it getting a third party to do the borrowing but not escaping the liability.
This one-dimensional definition of a “Contractual Obligation” is not the whole story. Early in this century BC Hydro was ready to sign a contract for electricity from an Independent Power Producer (IPP), to be located at Duke Point on Vancouver Island. This contract provided for a minimum cash payment of $25 million for the term of the contract and was the minimum guaranteed by BC Hydro/Province even if no electricity was ever produced and delivered. This was an example of a financial obligation that was not driven by the production of electricity; it was driven only by the calendar. In that respect it was like a “Bond”, if not exactly like debt. In this case the present value of the guarantee was $500 million while the cost to build according to the IPP was to be $300 million. Those of us who were opposing this project sought and got the right to bring this proposal into a real court of law, upon which the IPP and BC Hydro disappeared. After this episode the Premiere made all IPP contracts secret.
Thinking as a lender/financing party for all IPPs and “Public, Private Partnerships”, the investments to be made are for fixed in place assets. Because they carry a risk of becoming  “stranded assets” the financings must be designed to provide certainty of repayment of loans, even if by a third party contractor. If the public were able to read these contracts then we would know the financial obligations each requires even if not able to deliver any goods or services.
I think the cash guarantees are debt and that is why I am writing today to secure your support for an accounting change in the reporting of these “Contractual Obligations”. To have $100 billion of “Contractual Obligations” relegated to a footnote in the annual report of the Provinces finances, is not only a deliberate strategy to suppress the public’s awareness of their Government’s finances but an insult.
Erik Andersen, Economist

Categories: Debt

18 replies »

  1. In 2010 BC Hydro’s long-term Contractual Obligation to purchase power from IPPs was $20.4 billion.
    See p. 5:
    By 2017 that number grew to $54.6 billion.
    See p. 5:
    That $56 billion is not going towards BC Hydro-owned infrastructure.

    Liked by 1 person

  2. It wasn’t long ago that if the government wanted a roadway built they just went to the local prison and acquired a Chain-Gang.
    The Speaker of the House, Daryl Plecas and Allan Mullen have warden experience.
    BC taxpayers can now rejoice that we will soon have “friends on the inside” as Plecas revealed that “some MLA’s will be going to jail.”
    Will the new “uniform” be blue denim, orange jumpsuits, black and white stripes or yoga sweatpants?

    Taxpayers will finally get a return on their investment. Until then, be prepared to puke, P3 into a bucket and watch the pigs dine at the trough. The BC Liberals have years of experience at stone-walling, an expert document-burying team, Cabinet members that hold liquor, casino laundry workers and an opioid pharmacy with absolute triple delete accountability.

    Just like Christy’s imaginary $100 million Prosperity Fund, the former illusionist Finance Minister can make the BC Hydro deferred debt just disappear.
    Maybe the NDP and Greens will agree to build another Dam just to provide enough power for an electric chair.

    Liked by 1 person

  3. Art, its Canada, we don’t do the death penalty. Now a nice long trial would make me happy though. Put these people under the stress those of us in the public are under.

    Doesn’t matter what they call it, if an arm of the government or the government at some point has to come up with cash, then we have a debt. The MSM has never been that good about telling the public about all this debt, but you can bet, they will use it at some future time to blame the NDP. If the NDP wants to ensure that doesn’t happen, they might want to start making it clear what B.C. Hydro and other government entities own, because I can just see the head lines in a couple of years, NDP DEBT IS $60BILLION. time to return government to those who know how to handle business. Don’t think it can’t happen. we still have more media talking about the fast ferries than we do about the corruption in this province. In my opinion, the little we do see/hear is because the B.C. Lieberals are currently out of office. Come the next election, expect all of the discussion to go away.

    All Wilkinson talked about in the Nanaimo election was party renewal and how Harris was part of that. The media aped all. Wilkinson and Weaver sure as hell didn’t want to talk about the debt described in this article or the corruption. It was considered “negative” and the media was happy to repeat the NDP ran a negative campaign, so the sooner the NDP puts this out there to tar the B.C. Lieberals, the better it will be for the NDP or the media and B. C. Lieberals will tar them with it.

    Liked by 1 person

  4. @ Art

    Art , Art, Art. the Libs are way ahead of you AND they’ve learned how not to waste electricity!

    A win win for the greenie voters.

    Post-it Notes baby! Thats where the information is………

    Liked by 1 person

  5. I’m just wondering if some of our former and present Liberal MLA’s are quietly packing their bags, sorting out their affairs and just one day, close the door, walk away and end up in some distant jurisdiction that has weak extradition laws with Canada. I’m sure people like Mike de Jong and Rich (the Fatman) Coleman could have more than a few tales to tell.

    Liked by 1 person

  6. The Auditor General’s report to which Erik refers contained this explanation:
    “Public Sector Accounting Standards define contractual obligations as ‘obligations of a government to others that will become liabilities in the future when the terms of those contracts or agreements are met.’

    In financial statements, there is an important distinction between a liability, which is a current obligation, and a contractual obligation, which is a future obligation. Until a transaction or event occurs under a contract or agreement, a government does not have a liability. The contractual obligations note discloses information about the unperformed portion of government’s agreements and contracts.

    One of the common misconceptions we hear is that contractual obligations are the same as debt. This is simply not true.

    Debt is money that government has already borrowed and must repay in the future. Debt can also include obligations for a capital lease (for example, a vehicle or piece of equipment that has already been obtained, but financed by the lessor) or an asset built for government but financed through a public-private partnership.”
    So according to her there is an important distinction between contractual obligations, which must be paid in the future, and debt, which must be repaid in the future. The difference according to her reasoning seems to lie in whether the government currently has the deliverable in hand.

    I submit that if the contractual obligations are such that the government has an inescapable legal obligation to take future delivery, it is a distinction without a difference.


  7. We all know it’s a mess. And I think we can do much better. I wish we – our society – was organized enough to head in that direction. The people who run our society run our society and they quite like just how things are. So it’s up to us. Yikes.


  8. Speaking of Contractual Obligations…

    Skill Testing Question: Can you name the last year when Canada had control over its debt? How soon after that year did Canada’s debt begin to skyrocket?

    No idea?

    Me neither. Not a clue. Until I read two columns by an American, Ellen Brown, in the Asia Times on Line.

    The year Canadian politicians decided to abandoned Reality in favour of being throttled by permanent Debt Penury? 1973.

    The debt avalanche? It has continued growing in severity and causalties ever since Canada agreed to a demand that our government and 9 other participants stop borrowing money from their central banks, and instead borrow – at the cost of interest compounded for decades – from our private banking system.

    Why are our banks so profitable while the country’s infrastructure is left to fall apart? To whom do we now owe so much debt?

    How is volunteering to subject a country to bankruptcy more beneficial than harmful? .

    “Between 1939 and 1974, the [Canadian] government actually did borrow from its own central bank.  That made its debt effectively interest-free, since the government owned the bank and got the benefit of the interest.  According to figures supplied by Jack Biddell, a former government accountant, the federal debt remained very low, relatively flat, and quite sustainable during those years.  (See his chart below.)  The government successfully funded major public projects simply on the credit of the nation, including the production of aircraft during and after World War II, education benefits for returning soldiers, family allowances, old age pensions, the Trans-Canada Highway, the St. Lawrence Seaway project, and universal health care for all Canadians.”

    “The debt shot up only after 1974.  That was when the Basel Committee was established by the central-bank Governors of the Group of Ten countries of the Bank for International Settlements (BIS), which included Canada.   A key objective of the Committee was to maintain “monetary and financial stability.”  To achieve that goal, the Committee discouraged borrowing from a nation’s own central bank interest-free, and encouraged borrowing instead from private creditors, all in the name of “maintaining the stability of the currency.””

    Her article is dated 2012. Aside from some BC people at The Watershed Sentinel no one it seems has read anything about Ellen Brown, or ever wants to discuss what she wrote.

    Over 70 I’ve lived through decades when miraculous growth shifted a backward British Colony into a society few countries have ever matched. We built infrastructure, built a social safety net, funded hopspitals, universities, granted affordable housing to returning WW2 vets, and offered further affordable funding through CMHC, in fact created lots of benefits – until the economic brakes were jammed in 1974.

    Why didn’t a Great Depression and the costs of WW2 push us toward crippling debt before 1974? How was it possible that we accomplished more then than is imaginable now?

    Under the heading “Canada’s Social Prosperity – following the creation of the Bank of Canada, in 1935” take note of what was accomplished….

    (If interested, it’s best to visit the page. The list of accomplishments is far too long to display here.)

    Who among our contemporaries has tried to correct this pathologically destructive mistake? That you can read that here….

    P3’s are all we can expect contemporary governments to allow? And they only make the debt levels worse?.



  9. “WHAT IS Odious Debt?

    Odious debt, also known as illegitimate debt, is when a country’s government misappropriates money it has borrowed from another country.

    A nation’s debt is considered odious debt when government leaders use borrowed funds in ways that do not benefit its citizens, and to the contrary, often oppress them. Some legal scholars argue that, for moral reasons, these debts should not have to be repaid. Many believe countries doing the lending must have known, or should have known, of the oppressive conditions upon offering the credit.”


    This sounds pretty odious:

    “VICTORIA — B.C. Hydro is losing billions of dollars because it was forced by the (former) provincial government to sign contracts with private power producers for the wrong type of power at exorbitant rates, according to a new report.”


  10. I think we are witnessing a new lowest level on the bar. We are promised and guaranteed by our current politicians that they will end corruption and be transparent.
    Suddenly, money laundering investigations becomes a taboo topic that is just too big to be transparent.
    Now, we are paying or an over budget Site C Dam that should never have been constructed. Contractors include SNC – Lavalin ( Quebec company with a long list of corruption charges) with a Liberal MP quitting, hiding with “No Comment” protection and a Chinese consortium company.
    As taxpayers, we now get to pay General Electric for the mom and pop run of the river projects around $16 Billion’s worthas GE bought the contracts. We also are nightly buying cheap fossil fuel electricity from Alberta as they are producing too much electricity that they can’t store.
    It appears we are supporting huge construction, who are supporting unethical politicians. The construction companies are given a slap, they resign with pensions then pop up at another project. The politicians the. Get full pensions after six years by cheating and stealing from the public purse.
    What happened to all the Green Energy projects … solar power, wind, tidal, geothermal.
    I’d like to see the next mega project to be a Federal Prison with hard labour for corrupt politicians…instead of pensions, let them do prison time. We pay, either way.


  11. This is what the BC Liberal energy plans did:

    1. Greatly overstate future power demand in BC from BC Hydro. This means a lot of new power was needed.

    2. Forbid BC Hydro from building new power plants (except Site C). All that new power was to come from IPPs in BC.

    3. Force BC Hydro to be ‘self-sufficient’ for power, meaning no imports of power, even if it is cheap and renewable hydro power from Washington State.

    4. Prevent BC Hydro from using the existing Burrard Thermal as a source of electricity, supposedly due to CO2 emissions, although exporting LNG is somehow considered ok.

    5. Remove BCUC oversight from new IPP power purchases, and the Site C dam.

    Note how all this benefits the IPPs in BC. The $10 billion Site C dam was needed to provide back up capacity to all the $billions worth of intermittent IPP power.

    John Perkins describes this kind of rip-off in “Confessions of an Economic Hit Man.”


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