- Governance Evaluation: Debt & Reserves Management -

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Governance Evaluation: Debt & Reserves Management

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Submitted to:

Treasury Evaluation Steering Committee
Finance Canada & The Bank of Canada
March 25, 2004


This study was commissioned by the Treasury Evaluation Committee and responds to three objectives:

1.  Assess how the governance of Debt and Reserves Management has evolved over the past five years;

2.  Develop a framework for the evaluation of Debt and Reserves Management governance;

3.  Test the effectiveness of the governance framework by using it to evaluate current governance structure, practices and policies. In doing so, conclusions and recommendations are to be provided on current governance practices.

The management of Canada's national debt is the responsibility of Finance Canada. This responsibility is shared with the fiscal agent, the Bank of Canada.The partnership between Finance Canada and the Bank of Canada is fundamental to how Canada manages its debt and reserves. Therefore, references throughout this report made to "Debt and Reserves Management" indicate the joint activities of both institutions.

This summary report is supported by a 60 Page working document, available from Finance Canada.


Study methodology included the following main elements:

It is important to note that governance system for Debt and Reserves Management was changed in late 2003. The data for this evaluation was gathered in January and February 2004.

Objective One:

Governance Practices Over The Past Five Years


Information on governance changes was derived from three main sources.

It is worth noting some inherent challenges in evaluating past governance practices. First, while there is a draft document that describes the current governance regime, there is no clear documentation about former governance systems, or its evolution over time. Second, staff turnover and the passage of time have diminished clear recollections. Third, current staff is focused mostly on the present system of governance, and in particular the changes that occurred in 2003.

Participant Views

Before commenting on specific governance reforms initiated over the past five years it is important to note that participants generally believe that Canada has been consistently well served by Debt and Reserves Management.

Staff view the involvement of both the Bank and Finance as a key success factor in delivering a well functioning debt market that fully meets Canada's treasury needs at a relatively low cost.

Over the past few years changes have been made in the structure of debt and management of risk. The auction system and collateralization were cited as key operational improvements. More recently the focus of debt management has shifted from providing sources of funds to maintaining effective liquid markets. Recent governance changes were thought to enhance operations that were widely reported to have achieved a high standard of excellence.

Over the past few years the Bank of Canada has substantially increased its investment on meeting its Fiscal Agent responsibilities. As a "pillar" of the Bank's operations, Funds Management has been receiving significant new investments in systems and staff. Some participants noted that the Bank did not always give the same priority and attention to debt management that it does today.

As the Bank increased its investment and capabilities, it began pressing Finance for more operational independence. It continues to support this position by improving performance reporting and enhancing risk management capacity.

While the Bank's operational role in debt and reserves is well established, the Bank's staff appreciates other benefits their involvement brings in terms of market and staff knowledge. They believe that they can increasingly support Finance with this knowledge by offering policy advice when asked to do so.

Most participants cited the changes to the decision-making structure in 2003 as the key governance development over the past five years. Governance reforms touched on three principal areas. First was clarification of the roles and responsibilities between Finance and the Bank. This was thought to result in greater delegation of operational authority to the Bank. Second was the establishment of a number of committees to support decision-making and enhance communication. Third was the engagement of senior officials in strategy development and stewardship through the new Funds Management Committee.

Some participants thought these recent governance changes were "modest", calling them a "simple codification of established practices". While not convinced that a fundamental reform has taken place, they nonetheless believe the changes were positive as documentation was improved and procedures established that could reduce some of the risk associated with staff turnover.

Some at the Bank expressed concern over the willingness of Finance to follow through with delegation of authority to the Bank saying "the proof will be in the pudding". Most Finance and Bank staff acknowledge that time is required for the new governance system to mature.

Some at the Bank expressed concerns about the clarity of the objectives for funds management. They suggested that Finance should provide explicit rationale for all aspects of funds management policy. This would give the Bank additional insight that would help them with planning and priority setting. One example that was cited was the rationale for the level of government reserves.

The activities of the Risk Management Unit have generally fallen short of the expectations of the Risk Management Committee over the past number of years. Staff turnover, lack of a clear mandate and difficulty in finding staff with the necessary skills were cited as issues. Most participants are confident that recent reforms, and a recent staffing change, will address these deficiencies.

While the external Treasury Evaluation program has produced many useful reports, most participants thought expanding both the scope and budget of the program should strengthen this area. In addition, the independence of the program should be enhanced.

While issues respecting results and performance measurement have been under study for some time, a clear system for analysis has been elusive. This is the reality for all countries that were consulted in this study. Even the Auditor General, who identified performance measurement as one of three areas needing attention in the 2000 Report, could offer no specific proposals. Many participants commented on the difficulty of "benchmarking the benchmark". Despite the challenge, improvements in performance evaluation have been continuous, some of which can be seen in the 2003 Debt Management Report. The Bank reports that it expects to make significant advances in this area in 2004.

Conclusions and Recommendations:

Governance Practices Over the Past Five Years

The governance system that has been in place over the past five years has consistently met standards of good governance. Input from those interviewed, the work of the Auditor General, and a review of internal documentation did not reveal any fundamental weaknesses. In addition, the governance system has benefited from a number of substantive improvements over the past five years.

Recent governance reforms have been designed to respond to most of the key issues that were identified by study participants. However, because of limited experience with the new system, it is too early to tell the degree of success that will be achieved.

The period of implementation for the new governance system needs to be carefully managed and monitored to ensure the objectives for the governance reforms are achieved.

Clarity and transparency will help staff understand and accept the recent governance changes. Consequently, it is important that all staff have a clear understanding of their roles and responsibilities under the new system. To this end, the draft publication "Treasury Management Governance Framework" should be completed and made available to internal and external users. Adequate documentation will also help inform new staff about operational arrangements and provide institutional memory.

As experience is gained with the new system it will be important to provide more detail about objectives, responsibilities, authorities and operational procedures for each of the various committees.

Objective Two:

Develop a Governance Evaluation Framework


The work to develop an evaluation framework began by studying various public sector and private sector governance guidelines. A key source was the Treasury Board Secretariat Management Accountability Framework, which consists of 10 essential elements along with a series of indicators and associated measures. Government managers have been encouraged by the TBS to use the Management Accountability Framework as an assessment tool to determine organizational health. Other sources that informed our work include governance guidelines for Crown Corporations, various reports from the Auditor General of Canada, and IMF/World Bank guidelines on public sector debt management.

The framework evolved as a working document, which was presented on numerous occasions to the Treasury Evaluation Working Group. This was done to ensure the framework appropriately addressed the unique characteristics and issues of Debt and Reserves Management.

The framework is organized into the five main areas of governance and about 60 specific issues.

Proposed Governance Framework

Stewardship and oversight refers to the responsibilities and actions taken at the highest level by the Minister and senior officials to ensure Canada's debt and reserves are effectively managed in compliance with the laws of Canada and with appropriate oversight.

The management of Canada's debt and reserves are guided by a strategy and a plan. The strategy is high-level and is oriented towards achieving established goals. The plan is the more detailed program and methods worked out in advance to accomplish the objectives.

Risk management refers to the process by which potential changes in certain economic variables do not cause an adverse financial outcome. It also refers to the systems and procedures that ensure the accuracy of work performed to reduce the chances of an error, omission or misdeed.

The organizational structure refers to the internal arrangements that work together to achieve objectives. At the highest level this includes the clear assignment of responsibility and authority. Operationally, it includes procedures, review mechanisms, succession plans, training and the conduct of staff.

Results and performance measurement refers to the process through which the effectiveness of staff and the performance of the organization as a whole are evaluated relative to objectives, plans and their peers.

Conclusion: Governance Evaluation Framework

The evaluation framework was "test-driven" in interviews and a survey with current and former staff at the Bank and Finance. All participants indicated that the framework was complete and provided an appropriate basis on which to evaluate the governance of Debt and Reserves Management.

The survey developed in this study is an effective and efficient instrument to gather data from those knowledgeable about Debt and Reserves Management operations.

In-depth insight is best obtained from personal interviews. Input from those outside of operations is best obtained through personal interviews.

One area of the governance not considered in this study is the oversight role exercised by the Parliament of Canada, most likely through the Public Accounts Committee. Participants thought that beyond the Minister of Finance, most Parliamentarians have little interest in reviewing Debt and Reserve Management activities and results. Nonetheless, consideration should be given to including the Clerk and members of this Committee in a subsequent review of governance. This should include an assessment of how the needs of Parliamentarians can best be met.

Objective Three:

Evaluation of Current Governance System


Input for the evaluation of the current state of governance was obtained through a survey and interviews with current staff members at Finance and the Bank; and through interviews with market dealers and international managers of government debt.

Survey Results

In the survey, participants were asked to rate their extent of agreement or disagreement with 58 statements within five areas of governance. A high score on the four-point scale indicated a positive governance attribute.

The average result for all 58 questions was 3.1 out of 4. Every question received a rating above the mid-point of 2.5, indicating that participants saw no particular area of weakness. The issues receiving the lowest scores were for external evaluations, ministerial and senior official involvement in strategy and planning, and succession planning.

The survey was used to identify areas of strength and weakness on which participants could elaborate in the open-ended questions and in the interviews.

Interview Results

Almost all participants agreed that the current governance framework is well designed. Recent reforms are expected to have a positive impact on stewardship and oversight. A key feature of recent governance reforms is the on-going engagement of senior officials at Finance and the Bank on the Funds Management Committee. Because only one meeting of the FMC has been held to date, most participants thought more experience with the committee was needed to determine if senior officials would become meaningfully engaged. Time is also required to work out the details in allocating responsibility among the various committees, including the delegation of decision-making authority.

Those leading strategy and planning have historically been operational staff. It is expected that the new Funds Management Committee will result in senior officials being more directly and systematically engaged on these issues. Participants hoped that the agenda for the FMC will focus on issues of long-term strategic interest.

The active involvement of two institutions on Debt and Reserves Management issues was thought to strengthen analysis and provide important oversight on operations. Having two institutions involved means there are two avenues to address issues and concerns, with two institutions having direct access to the Minister. This can act as a "check and balance" on all aspects of operations.

Some suggested that the strategy and planning process could be more deliberate, systematic and comprehensive. While analysis and internal work in support of recommendations was rated as strong, the thinking around various alternatives is frequently not presented. Staff is encouraged to include option papers, which might stimulate internal and external debate.

Most participants commented that the government's overall risk tolerance is extremely low. As a consequence the need for an elaborate risk management system and strategy, as might be seen at a chartered bank, is largely mitigated. Many participants noted that the capacity and quality of risk management analysis has been improving.

A number of participants observed that the Risk Management Committee only examines "treasury risk" related to government debt and reserves and does not review the government's overall financial risk. Clarification on this point around government was considered desirable.

Changes that recently gave the Risk Committee more independence were considered important. The ability of the Risk Committee to send reports to the FMC and Minister is a key element of its independence. Some suggested adding a true "outsider" to the Committee could strengthen the independence of the Risk Management Committee. The meetings would also be more open and candid if the number of permanent attendees at meetings was limited.

Finance wants assurance that the risk office at the Bank of Canada is adequately focused on debt and reserve issues. There is some concern that if the unit starts to examine other risk issues for the Bank that it might lose its primary focus on debt and reserve issues. That is why Finance wants to continue to have its representative co-chair of the Risk Management Committee.

The relationship between Finance and the Bank was described as professional, highly effective and continually improving. One participant used the term "creative tension" to describe Bank/Finance interaction. There are inherent challenges related to having staff from different institutions work closely together on similar issues, such as staff performance appraisals and planning under different year-ends.

Most participants identified staff retention and recruitment as a perpetual organizational issue. Public service human resource practices and remuneration scales do not compare well with private sector alternatives, particularly for highly qualified risk managers and traders. Debt managers have responded to this challenge by hiring individuals directly from universities who can be trained in treasury management. Those with public service and public policy bias were the ones least likely to migrate to the private sector.

Some Bank staff are anxious that delegated authority be respected, while some at Finance want accountability systems to mature before they become less engaged on operational issues. Some Bank staff were of the view that long-established practices of Finance staff will be difficult to change.

Although not included as a topic in the survey, many participants raised the issue of the Government of Canada managing the debt of Crown Corporations. The benefits were thought to be lower borrowing costs, improved risk management practices, reduced operating costs for crowns, enhanced neutrality for government in money markets and greater liquidity. It was acknowledged that Crowns would strongly resist such a change and that reform would only follow political intervention.

The majority view was that an independent debt management office would not be appropriate for Canada. The prime benefit of the Canadian system was the positioning inside government and the ability to integrate with the budgetary process. Some suggested that Debt Management offices in other countries are only "superficially" independent, with the only possible benefit being the ability to operate outside of government pay scales. A minority thought the idea of a Debt Management Office should be explored. The prime benefit would be a clear focus on debt management and flexibility in human resource practices.

The predominant view was that while an external advisory committee would be "nice to have" the problems operating such a committee, specifically confidentiality and composition, would overwhelm any possible benefit. A minority of participants supported forming an advisory committee, provided it focused on strategic issues. Some suggested tapping the Investment Dealers Association Capital Markets Committee for advice, while others thought Treasurers from Crown corporations and retired public servants could be called upon for advice.

In regards to external advice, the current consultation process was thought to be open, complete and effective. Participants noted the general lack of interest on public debt and reserve issues from the Canadian academic community. Some suggestions were offered on how to stimulate interest such as staff interchange, hosting of conferences, mentoring of university professors and support for research publications.

There is a diverse and changing stream of variables that affect debt management performance. The prevailing view was that it would be difficult, if not impossible, to develop a consistent performance measurement system. Most thought that a series of quantitative and qualitative indicators should be used.

New elements in the 2004 Debt Management Report, and a special project within the Bank, are seen as positive steps in developing a performance measurement framework. The need for more work in this area was acknowledged. Some suggestions were made on how performance evaluation might be improved, which include conducting an ex-post review on strategy and establishing a more formal system of making comparisons with other countries.

Current Governance System

Conclusions and Recommendations

It is good practice to review governance policies, practices and procedures every year or two. Because of recent governance reforms for Debt and Reserves Management it is recommended that the next review be conducted by the end of 2005.

The success of the Funds Management Committee is critical to the governance of Debt and Reserves Management. Measures should be adopted to maximize the Committee's effectiveness, including limiting the number of people who attend Committee meetings, establishing pre-set meeting dates, and through extensive briefings for newly appointed senior officials.

The benefits of an external advisory committee appear to be marginal and do not outweigh the costs and risks. It is recommended that such a committee not be established.

There is no evidence to suggest that there is a problem warranting the restructuring of Canada's Debt and Reserves Management operations into an independent unit. The benefits of being closely linked with the budgetary and planning process are important and compelling. The only possible reason to establish a separate agency would be staff retention, which other jurisdictions have addressed without having set up a completely new agency of government.

To ensure the adequacy of stakeholder input, an evaluation of the consultation program should be undertaken. Issues to consider include:

The evaluation should examine the consultation activities of the Bank and Finance with a view to developing a fully coordinated and integrated program.

The idea that all Crown corporation debt could be managed on a consolidated basis is intriguing. The economic arguments in favour of such a reform seem clear while the downside is more difficult to ascertain. Given the sensitivity of the matter, an independent assessment of the implications is recommended.

Performance evaluation and results measurement is an area seemingly under constant review and development. The complexity of the issues, multitude of variables, need for the application of judgment, and constantly changing environment makes it almost impossible to formulate a consistent performance evaluation system. While existing performance measures can always be strengthened, consideration should be given to establishing a standing external Performance Evaluation Committee. Such a committee could enhance accountability by examining overall performance, which could include a review of the depth and quality of analysis and an ex post review of strategy. The work of the committee would have a different focus than that of the Treasury Evaluation Committee. In the case of the latter, it typically identifies one or two topics for review each year, typically of a technical nature. The Performance Evaluation Committee would examine the overall effectiveness of Debt Management and Reserves operations and its staff.

The inherent difficulties securing external advice and in performance evaluation makes the work of the Treasury Evaluation Committee all the more important. The number, scope, depth, budgets and profile of this program should be expanded. In addition, the independence of the program should be enhanced. This could be accomplished by adding outsiders to the Committee and by having study authors present their findings directly to the Treasury Evaluation Committee members. It would be appropriate for an outside member to chair the committee.

Public sector debt management is the purview of a small number of people around the world. Canada learns a great deal from its counterparts in other countries, largely at informal meetings. A more systematic approach to this area of knowledge management should be developed. This could include a regular review of published annual reports, establishment of international committees on best practices, publication of Canadian practices at international conferences, and greater use of staff exchanges.

The effectiveness of each treasury management committee requires that the appropriate individuals are in attendance and that discussions be both open and candid. The committees are also important areas of learning, particularly for non-committee staff members that attend and sometimes make presentations to committees. While encouraging staff participation at meetings, it is important that each committee have an opportunity to engage in discussion with only members present. This will allow them to more freely discuss sensitive issues, for example, those that deal with any errors or performance matters. Meeting without other staff present should be a matter of routine at every committee meeting. This issue is particularly important because of the overlap of individuals on different committees.

The Minister of Finance is ultimately responsible to Parliament for Debt and Reserve Management operations. The Minister's stewardship and oversight role can be systematically and adequately discharged through his own inquiries as well his reliance on the organization's structure and systems. All those involved in the organization need to be reminded of the Minister's reliance on their work. This reminder could be included in the Treasury Management Governance document. The elements on which Ministerial responsibility are discharged include:

Key Conclusions and Recommendations

Among the conclusions and recommendations included in this summary report, the following are considered to be the most important:

1.  The governance system is well designed and operating effectively. The active involvement of two institutions strengthens the analytical capacity while providing an important oversight on operations. Recent reforms provide improved oversight, greater focus on strategy and risk management, and provide appropriate delegation to operational staff. It is important that recent reforms to governance system be transparent, understood and fully embraced by all staff.

2.  The design and operation of the governance system should be evaluated at least every two years.

3.  There does not appear to be a business case for establishing an external advisory committee, or reorganizing operations into a quasi-independent debt management office.

4.  The Treasury Evaluation Program should be strengthened by: increasing the budget; expanding the scope of projects; and, enhancing the independence of the Treasury Evaluation Committee. The Committee should consider an evaluation of the consultation program.

5.  Consideration should be given to establishing a standing external Performance Evaluation Committee. The Committee wouldexamine the overall effectiveness of Debt Management and Reserves operations and its staff on an annual basis.

- Governance Evaluation: Debt & Reserves Management -