The Nova Scotia Legislature

The House resumed on:
September 21, 2017.

Public Accounts Committee -- Wed., Oct. 17, 2001

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HALIFAX, WEDNESDAY, OCTOBER 17, 2001

STANDING COMMITTEE ON PUBLIC ACCOUNTS

8:00 A.M.

CHAIRMAN

Mr. William Estabrooks

MR. CHAIRMAN: I would like the officials from the Department of Education to notice that the old schoolteacher is 1 minute and 24 seconds late for his first class of the day. It is nice to have another session of Public Accounts to be brought to order. I welcome officials from the Department of Education who are here this morning. I think it would be appropriate if we could do some introductions. My name is Bill Estabrooks, I am the MLA for Timberlea-Prospect, and I have the privilege of being the Chairman of the Public Accounts Committee. If we could begin with my colleague from the NDP, please.

[The committee members introduced themselves.]

MR. CHAIRMAN: Mr. Cochrane, could your people introduce themselves, and I believe you are looking at 15 minutes or so, if that would be appropriate.

MR. DENNIS COCHRANE: Mr. Chairman, with me today, from the Department of Education, on my left is Mike Sweeney, Senior Executive Director of Public Schools, and on my right is Darrell Youden, Senior Executive Director of Corporate Services. Also joining us today is Pauline Doucette from the Department of Justice, obviously they gave advice to the department as we went through this negotiation process, culminating in a contract with Knowledge House.

Mr. Chairman, first of all, we would like to thank you for accepting our minister's offer to appear before the Public Accounts Committee. Certainly, there has been a fair amount of controversy surrounding the Advanced Studies Program, and the relationship between the Department of Education and Knowledge House, and we are pleased to be here today to have an opportunity to speak to the events that led up to the unfortunate postponement of the Advanced Studies Program in the public school system of Nova Scotia.

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This is the third opportunity, I think, we have had to talk about advanced studies with Members of the Legislative Assembly. At one time, both the Liberal caucus and the NDP caucus availed themselves of an opportunity to meet with senior officials of the department and discussed the nature of the particular program. For that reason I won't spend too much time on the intricate details, as to how it worked or what it was intended to do, but we do want to provide some clarity with regard to the particular program.

I guess one of the first questions we would like to answer is, why did we get into an Advanced Studies Program at all? One of the complaints that we constantly get from the public in the Province of Nova Scotia is that we spend a significant amount of money on the special needs students, on that end of our spectrum, and very little resources are devoted to the other end of the spectrum where students are able to deal with a higher level of learning, more complex information and material.

There are two or three programs that we could avail ourselves to. One is the international baccalaureate and we are lucky to have two schools in Nova Scotia that offer that, one in Bridgewater and one in Sydney; however, it is a school and it is a program, and it can only take place in one location. In other words, you could have five schools, but it is only the students in that school that take advantage of that particular program. It is foreign-based; it came from a need years ago to serve diplomats' children. It is an international program. It is an interesting one. It is very expensive, but also very exclusive in that you have to have it in a particular school.

The other program that is readily available is called the advanced placement, which is American-based and it is examination-driven. We do have a few schools that take part in that. It is very popular in Newfoundland and other jurisdictions, but not really here in the Province of Nova Scotia.

We were looking for a suggestion as to how we would deal with students who were able to learn at an advanced level. In 1996, there was a report that said we needed to find some courses to challenge those students. Furthermore, it said that we needed to find a way to challenge those students that would be available across the province; in other words, some kind of a distance-ed opportunity so it wouldn't be just the students who were fortunate enough to go to a school where we had the critical mass to operate such a program.

As a result, the advanced studies idea came forward. It really started back in the year 2000, with a pilot project in Chignecto-Central. Two schools had entered into a program that Knowledge House had approached the district with. It was a fairly successful pilot. It was just a part of this kind of program, but it dealt with the technology, the Web-based collaborative learning model and so on. As a result of that, there was an interest expressed by Chignecto and the department then expressed an interest because we were looking for a program that would be able to be applied across the province. That is why we got into the question of advanced studies.

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One of the other questions might be, where do we get the money? In our Public Accounts records you will only see $100,000 assigned of the province, to go into supporting professional development and teacher activity, getting ready for a pilot project concerning advanced studies. What we did was we applied to the economic development agreement. That agreement was signed in 1998 for the Province of Nova Scotia as an agreement between the Government of Canada and our provincial government. In it there was a section that was designed for software development in the Province of Nova Scotia. The wisdom of the day obviously recognized that there was a problem, and that the software industry in Nova Scotia was somewhat slender and that there would need to be support. They did set aside $2 million in a budget to be used for software development.

Very clearly, the EDA referred to it and said it is to fund a partner in software development. At one time they looked at trying to just put the money out to the software development industry and they found it was quite a slight industry, and that wasn't the real thrust that ACOA and the provincial government wanted to see. So they set aside the $2 million. As a result, we said this is a perfect example of software development in the Province of Nova Scotia, an opportunity to use money that was set aside for that purpose in the EDA to support a very slender industry, but at the same time, should it be successful, would have ongoing results and ramifications for not only the workforce in the Province of Nova Scotia but also our students in the school system. The $1.2 million was applied for under the EDA.

One of the other questions which will undoubtedly come, and it was a question that was raised at the original announcement of the program, and that dealt with the procurement issue. Every time we see in the paper or I read something, it will say the untendered contract or the non-tendered contract. There is some implication that there might be something wrong with that, and I want to address that very quickly. In the Procurement Manual for the Province of Nova Scotia, there are 19 different ways to award a contract. In the procurement, they recognize the fact that there is the opportunity for sole-sourcing. The sole-sourcing enables departments such as ours, or any department, to do a number of things with regard to how we could get into a contract with a particular company. As I said, there are 19 different circumstances under which sole-sourced goods or services can be acquired.

The section that we used in this case - and it relies upon the deputy signing a waiver that we are going to sole-source this as a result of the particulars of the contract, and that is my responsibility and I totally assume that responsibility - was Paragraph 8, Section 8.4 of the Procurement Manual which says, "where, for technical reasons, there is an absence of competition, and the goods or services can be supplied only by a particular supplier and no alternative or substitute exists", and very clearly that was the case in this situation. We are quite aware, in the Department of Education, of other groups and, mind you, everybody could do it now. After it has fallen apart, everybody out there could do it. We were quite aware of the numbers of companies and the people who had the means and the resources to enter into a partnership with the department to develop a very complex and very comprehensive advanced studies program.

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As a result, the relationship was entered into with Knowledge House. It is interesting because in the EDA, they also recognize that we had $2 million and that we were dealing with a sector that was very slim. Very clearly in the EDA it says, "an appropriate tendering process will be followed in all circumstances where more than one supplier of goods and services is believed to be available." The process need not be that used by the federal or provincial government. Well, we did use the process that is used by the provincial government which, of course, recognizes sole-sourcing and again, we had only one supplier of these goods and services. There may be suppliers outside of Canada but one of the things the EDA says is that preference should be given to Atlantic Canadian suppliers or Canadian suppliers. Perhaps Microsoft could have entered into a relationship with the Province of Nova Scotia; quite frankly, we weren't interested in that nor would it meet the qualifications and the criteria set down in the EDA. So those are certainly a couple of the issues.

The other issue will be - and I read all the time, we signed the contract one day and the next day the stock dropped. Well, that would be the exact opposite to what you would normally expect so I suspect the factors at play were much larger than the factors that exist in the Province of Nova Scotia. Certainly on the international market and what we saw subsequent with regard to ITI in the Province of Nova Scotia, there was the whole problem in the dot-com industry and unfortunately, it happened to be somewhat coincidental with our contract. But our contract didn't just start or the discussion didn't just start on the day we signed it.

As I mentioned before, Chignecto-Central was involved in a pilot project with Knowledge House. We entered into discussions with them some time ago and on March 19th we signed a letter of agreement between Knowledge House and the province that indicated we were going to work our way toward signing a contract. In the meantime, Knowledge House was doing a considerable amount of work in order to prepare the program for the pilot, which was to start in September 2001. You just don't open your doors one day of school and start a pilot project without the preparatory work, without the research, without the platform being developed and that work started a number of months ago.

They had engaged seven or eight teachers, actually three from metro, who were brought in to develop the curriculum aspects of it because it is a very complex program. We had professionals that were giving advice and working on the curriculum development and so on. So this was taking place over a period of time but our real indication of a willingness to enter into a contract took place with that letter of agreement on March 19th. From March 19th on to the time the contract was settled, we were negotiating back and forth.

Someone may want to criticize the department for taking the length of time that it did and that may be a question you will want to pose to Knowledge House when they appear before you next week, but we were making sure that we did it right. There were a number of things in the contract that we were concerned about that we wanted to make sure we had in the right area and that the negotiations took some time. We got the EDA approval of the $1.2

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million and the factor we hadn't taken into consideration and we didn't know at the time was that we couldn't get the $1.2 million up front. In other words, it was to be paid for over three years so we had to go back to the government and say to them look, here is how the money will flow but there is a risk to the Department of Education in the interim, should something go wrong.

We also made sure that we negotiated in that contract the residual rights to the platform, to the SmarterTeams software and so on, so that if something did happen we would be able to take what we were left with and develop it if we chose to do so and that is an option that we are still investigating. It was a long process - and we may get some criticism - but I think we did that in order to make sure we had it done properly and we had it done correctly.

The international factors that took place and the events obviously were not of our control. I think one of the problems may have been that some months before Knowledge House listed on the prospectus that they were going to enter into an agreement with us - and that is fair because we had given them a letter of understanding - when the actual contract was signed it wasn't an impact to them because the market had already taken that into consideration so therefore, it was strictly a national problem that probably affected Knowledge House at that time.

Those, I think, are some of the areas you might be concerned with and certainly some of the questions I am sure you have will revolve around those. But I did really want to talk about why Knowledge House, why Advanced Studies, where did we get the money and the timing with regard to the contract, when we signed it and the events that happened from there. Certainly, any questions that you have we will attempt to answer. If there is any information we can give you that you would like, we would be glad to table it. If I am unable to answer your questions after consultation with my colleagues, I will ask them to respond directly.

Mr. Chairman, that concludes our opening comments and we certainly look forward to questions.

MR. CHAIRMAN: Thank you, sir, and thanks for sticking to the suggested guidelines, it is much appreciated. With the consideration of the members, it has been suggested I will be dividing up the time in the usual fashion but that we would take 10 minutes at the conclusion to discuss future witnesses, so I am looking at 9:50 a.m. as a wrap-up time.

Is it agreed?

It is agreed.

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I would like to turn the next 20 minutes over to the member for Halifax Fairview.

MR. GRAHAM STEELE: Mr. Chairman, I would like to start by noting that on May 8th of this year when the announcements were made, ACOA and the province issued a joint news release. Very prominent in those news releases about the deal with Knowledge House were Premier John Hamm and Robert Thibault, the federal Liberal Minister, as well as Hon. Jane Purves, Minister of Education; sort of one, two, three, those were the congratulatory quotations. I find it very interesting that at the time when the champagne was flowing and the handshakes were being made that these people were out front and wanted to get the glory and now that things have kind of fallen apart, you all are left here to answer the questions. So you have my sympathy, I guess, that you have been put out front to answer the questions.

There are a lot of people to feel sympathetic for here because whenever a company like this goes under a lot of people suffer. There is a list of trade creditors, just ordinary, many of them small businesses, dozens and dozens, pages and pages of people who are owed money and that hurts everybody. There are many employees who went to Knowledge House as an exciting start-up, they are out of a job and many of them are out of pay and are just hoping to get a portion of the money that is owed to them. Of course, there were the educators and the students who had high hopes for the Advanced Studies Program because, let me be very clear from the outset, I don't think anybody denies and certainly I don't deny, that what they were doing was a good idea. But the purpose of this committee is to discuss how public money was spent and the real issue is whether this was an appropriate place to put public money, so that is where I am going to turn my attention now.

Just so it is very clear I would like to ask, is it correct that the total amount of public money paid to Knowledge House, in respect to the Advanced Studies Program, is $1.2 million?

MR. COCHRANE: $1,182,400.

MR. STEELE: And how much of that money is federal money and how much of that money is provincial money?

MR. COCHRANE: All of the $1.18 million came from the EDA and I believe the EDA breakdown is 70/30, 70 federal and 30 provincial. We will be able to and we have submitted invoices for the first year because there was development work that did take place and as I mentioned to you before, they had started considerably earlier than the actual signing of the contract, which isn't unusual. As a result, we have submitted invoices for $453,000 that we would expect to get compensation for so, I believe at the end of the day, the amount of money under the agreement that will be left outstanding is $729,000, if they approve our invoices and we have no reason to believe they won't.

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MR. STEELE: Mr. Cochrane, did I understand you correctly to be saying that the $1.2 million, under the economic development agreement, is actually payable in three instalments and not payable all at once?

MR. COCHRANE: Correct.

MR. STEELE: So where does that leave the province? How much of the province's money is at risk in this deal?

MR. COCHRANE: Assuming that they will meet our invoice and pay it, then we have $729,000 at risk, which is provincial money at this point.

MR. STEELE: Why isn't the province listed as one of Knowledge House's creditors?

MR. COCHRANE: We actually discussed, before Knowledge House went into receivership, whether we could put them in receivership but our amount is a contract with them, it wasn't a question of them owing us money. They had done much of the work - first of all they did $453,000 in the year in question that we certainly felt we could invoice, and much of the other work on the remaining $729,000 was done prior to, so we are not listed as a creditor because technically, they don't owe us money, they owed us a product and we did get some residual of that that was produced up until this time and certainly, we have rights to the software licence, and so on, for the next five years.

MR. STEELE: I would be remiss if I didn't say that it seems fairly short-sighted on the part of the province that in these circumstances the contract wouldn't have been negotiated in such a way that the province had some security - in the legal sense of the word, security, some legal recourse - if, in fact, things didn't turn out well because, otherwise, we have just handed money over to Knowledge House which, as I will get into in a minute, was really just a money pit and not just for the province.

Does the Department of Education have any in-house capacity to check into the financial health of the companies that it is dealing with?

MR. COCHRANE: That's not the business that we are in, obviously. We hear rumours like everyone else but as far as our ability to check, we can exercise some efforts in that regard but that is not what we do.

MR. STEELE: In the news release of September 19th - this was after things had gone bad - the news release says that the government received, " . . . assurances from Knowledge House as recently as Aug. 31 . . .", that it was financially healthy. So my question is, did the Department of Education do anything other than just ask Knowledge House if everything was okay?

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MR. COCHRANE: We certainly wrote to them. I wrote to them on August 30th, prior to the beginning, because we were concerned about starting a project in our school that we may not be able to finish, because our prime responsibility is to our students. We did receive assurances from them that things were in order. We had also asked for their financial statements, which we received in advance of the beginning, at least, of the school year and had assurances from the company. We did check with regard to the board of directors on who was involved and what kind of shares were out there and who were the investors. On more than one occasion we enquired, and there was always a response back that there was a raising of money going on. They did have some assets that they had previously sold when they changed it from Knowledge House to Knowledge Solutions and they also at the very end were looking at selling their share in Silicon Island to invest that money in this particular operation. So they did have some assets out there that were tangible that could have been sold. We were led to believe that they were making an effort to kind of liquidate those assets to put them into Knowledge House.

MR. STEELE: I recognize that I am looking at this through the benefit of hindsight but when you look at the financial information that was available to the public, Knowledge House was a company that was just burning through cash. From public documents we can see that it raised $3.25 million in November 2000. It took $1.2 million from the province in April 2001. Two weeks later, it raised another $2 million from private investors and in August 2001, it said that it needed another $5 million-plus just to keep going.

In particular in the financial statements for the second quarter, there is a discussion that I just want to refer to briefly, and I am going to read it, it is very short - these are the unaudited financial statements. The company talks about the fact that it has gone to the markets for $5 million and that it needs more than that, and then here is what it says, "Should the company be successful in realizing the proceeds of both of these sources of funds . . .", that is going to the markets as well as private placements, ". . . adequate financial resources will be available to fulfill the company's business plan for the next 12 months. If such proposed financings do not occur and other sources of funding are not secured, the company's ability to continue would be in substantial doubt and the going concern assumption detailed in the preceding paragraph will not continue to be appropriate." In very polite accountant's language, that paragraph says this company is in deep trouble. So I wonder why it is that the province appears to have been so taken by surprise when, in fact, the company went under very shortly afterwards.

MR. COCHRANE: Just to correct one of the items of information you gave, we did not give Knowledge House $1.2 million in April. No money was paid from the Department of Education until the actual signing of the contract, which was a bone of contention, I am sure, with Knowledge House because the contract did call for that payment on April 1st, but we weren't satisfied and we weren't in a position with a signed contract and we weren't simply sent any money prior to.

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You're right, you have the option of hindsight. That financial statement and indication was not issued until after the final contract was signed and the money was forwarded to Knowledge House. So we have that information now and you have that information now, but we certainly did not have that information then.

MR. STEELE: This leads to exactly part of the problem with this whole deal and that is that you didn't have it until after you signed the contract. On August 16th the contract with the province was signed and it is very clear that Knowledge House desperately needed that cash just to keep going. The very next day after the contract was signed was when Knowledge House announced publicly that it was going to the market because it needed immediately another $5 million. It was a week later that it issued these financial statements to say that really the company was in deep trouble. So, don't you think that it is at least possible that Knowledge House held off on revealing its financial situation until it had signed the contract with the province and pocketed the province's money?

MR. COCHRANE: I guess that question would be better asked to Knowledge House next week. I had no information as to their inside, obviously, information on the company and how it was operating. We did get all the financial statements and so on prior to that we asked for. None of those indications that you referred to in that document you read were available prior to the contract being signed, they came out after but none of the indications prior to that indicated that and, in fact, I think Deloitte Touche listed them as one of the top 5 out of 50, the Halifax Chamber of Commerce recognized them as an outstanding new business, there were a number of positive things.

We had also dealt with Knowledge House, two successive governments had dealt with Knowledge House since 1998 and never had a significant difficulty from what we can tell in the amounts of contracts that either the previous government or this government have exercised with them. So our track record and our experience with them in the absence of those statements being available at the time, and in the presence of statements that we requested that did not indicate those things, didn't indicate to us that we would be in a position to not deal with them after we had given a letter of understanding, that letter of commitment on March 19th.

MR. STEELE: In your opening statement you used the phrase that it was somewhat coincidental about the timing of all this. I will just leave it as a thought that perhaps it is more than somewhat coincidental that the information that led to the company's downfall was released immediately after the contract was signed with the province.

Did it concern you at all that this company, which had millions of dollars in annual losses, had five senior executives earning over $110,000 a year?

MR. COCHRANE: I certainly had no knowledge of the staff level and the salary of compensation for the company.

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MR. STEELE: That information was in the public domain. If you compare that to the province, for example, with a $5 billion budget, governing nearly 1 million people, 9,000 direct employees, and the province doesn't have five people in that league.

In any event, let's turn to the contract and what the contract actually says, because I do think it is very important, Mr. Cochrane, that, in fact, there is no security in the agreement for the province; that the money was paid over as of August 16th and the company went downhill very quickly after that and there was no way for the province to recover its money, but that's not the only thing that concerns me about the project.

One thing is that the province continues to insist on using the phrase, a "pilot project" but I have read the contract from front to back and there is absolutely no indication in any meaningful sense of the term that this was a pilot project. It was going to be put out in September of this year to a limited number of students but with a very clear understanding that it was going to be put out to many more students in future years. The pilot project was last year in Parrsboro and Advocate. This was a long-term commitment. In fact, Knowledge House, after the agreement was entered into, put $10 million worth of revenue in its financial statements. I mean they certainly didn't consider it to be a pilot project in any meaningful sense of the word. When I say pilot project, I understand that it is being put out for testing and if it works that's great and if it doesn't work, it won't go forward. But this contract isn't for a pilot project, this is for a long-term commitment worth many millions of dollars.

I would like to refer to other sections of the contract just to see if the province had any concerns about some of the terms. I have to say by way of preface that the NDP caucus office applied for this contract under freedom of information on May 15th and we got it only a few days ago.

I want to refer to the Sales and Marketing Obligations. It says that the province is contractually committing itself to providing Knowledge House and its potential other customers with reasonable access to end users. End users are students and teachers. Did it cause the province any concern that it was contracting itself to making students and teachers available for Knowledge House's marketing efforts?

MR. COCHRANE: Just a couple of things to answer. Your question under the Freedom of Information Act was processed and the department supported the release of the contract. According to the procedures, we have to go to the third party and the third party at that particular point objected, but the department was quite willing to make the contract available.

Back to the question of a pilot project. We had field tested, obviously, in Parrsboro and Advocate, the concept and how it worked. The pilot project was really to begin to use it in a limited number of locations so we could see how the students and how the teachers were able to work with the system, work out the bumps and the wrinkles and so on that were

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there. But we had no reason to believe that there was any difficulty with the curriculum because it was the Province of Nova Scotia curriculum, in many cases, under the Atlantic Provinces Education Foundation and developed in partnership with the other three Atlantic Provinces. We didn't have any reason to believe that there was any difficulty, other than trying to make sure we got the software in the right place and that the teachers were able to access it and we provided the proper professional development and so on.

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The last part of your question, we certainly had an interest, and there was an interest as a result of the EDA, that a Nova Scotia company that could develop software would have an opportunity to market it beyond the province's boundaries. That is one of the purposes of the EDA, and that is why the federal government had an interest in the $2 million in software development. We would have control, we would be the gatekeeper, but certainly it is not unusual that people visit our classrooms. We do have experiments, we do have people coming in to visit and to observe. In fact, at the Commonwealth Conference the students from Advocate and Parrsboro were involved in a demonstration with students from Ottawa and Bermuda, that was talking about the technology and showing how it worked. So, that is fairly common in our system.

We currently have a pilot project with regard to Canadian history, and we have no reason to believe that pilot won't be extended throughout the province, but we do want to make sure that we do have the proper information, the proper resources, the proper level of professional development for our teachers before we extend it to everyone. That is a very common procedure in education, not just in the Province of Nova Scotia but throughout the world, probably.

MR. STEELE: Under the contract the province also commits itself contractually to advocating the merits of the program to colleagues in public education across Canada. Was it of any concern to you at all that you were contractually binding the province to try to sell this product to your colleagues across Canada?

MR. COCHRANE: Obviously any sale takes a willing buyer and a willing seller, and most educators, I guess, make sure that it meets their needs as they enter into purchases. But, no, we share best practices all the time. Quite frankly, provinces are quite boastful about projects that they have that work. We have had a number of things. I guess I can use the P3 as an example; whether it works or not, I guess, is another question. We have had people from all over inquiring as to that kind of a relationship, how did it work and what is the delivery date, all those kinds of things. If we have information, we share it. That is something common amongst people in education and other fields. We had no qualms about the fact that if this was a product that worked - and we had no reason to believe it wouldn't be - that once it was developed we would certainly share that information with our colleagues elsewhere.

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MR. STEELE: But do you know what the difference is, it is one thing to tell your colleagues about things in your province that work well, it is quite another thing to contractually bind yourself to promote a private company's product whether it works or not. There is nothing here that says that you promote it only if you want to, only as you decide, it says that you are contractually binding yourself - let me read the next paragraph - to make " . . . joint sales calls with . . .", Knowledge House. Is it of any concern to you that the Department of Education was binding itself contractually to make joint sales calls?

MR. COCHRANE: I suspect we should read the whole clause, Mr. Member. It says, in Section19(2), "The Customer shall use commercially reasonable efforts to support the Supplier's sales and marketing efforts in relation to the Licensed Program, at times and in a manner considered appropriate by both parties." We are one of them. The second clause that you are referring to, and you only read part of it, says, "making joint sales calls with the Supplier when and where both parties consider it appropriate;"

At no time did we give away the Department of Education's right to choose or not choose to support any marketing efforts. We were a partner, we had an opportunity to say we are not interested in going on that venture, that is not something we want to do. Mr. Member, it is all there, and yes we did say we would attempt to market the product, but only when we felt it was appropriate and in a manner that we felt was appropriate.

MR. CHAIRMAN: Excuse me, Mr. Steele, I would remind you that you have one minute.

MR. STEELE: I do appreciate the fact that you read the whole paragraph, but I am afraid that it just doesn't mean that the province has the right to refuse to do this. You have the right to set certain conditions about how it is done, but you are contractually binding yourself to do it. It may be that you can choose certain circumstances under which you will do it.

In the next paragraph the province is contractually binding itself to "assist in preparing promotional materials that include teachers and students participating in the Advanced Studies Initiative . . ." You look at that and what the province is doing is, isn't it moving from being the promoter and protector of the education system in Nova Scotia to being a sales agency? You are committing yourself, not in any circumstances of Knowledge House's choosing, to market, promote and sell the product, including - and it says it right here - using teachers and students.

MR. CHAIRMAN: Mr. Steele, thank you. Mr. Cochrane, would you like to reply to that, please.

MR. COCHRANE: Yes. I would also like to read the rest of that section because it refers to doing that, " . . . individually or jointly with the Supplier, at major educational

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conferences;" I relate back to what we said earlier, that we often share best practices with other educators throughout the country. Thank goodness they do the same for us, because we are always kind of going to one another trying to find a better way to serve our students. Yes, we did say we would involve our people. It would certainly be an opportunity for students and teachers, should we deem it appropriate, but certainly at a major educational conference, they may be situations our teachers would never get to go to anyway, so they would be able to take part, as we did with regard to the Commonwealth Conference. That was a real opportunity and experience for some of our students who were able to take part in that. We would have the ultimate decision as to whether or not it was agreeable to both parties.

MR. CHAIRMAN: For the next 20 minutes the honourable member for Richmond is leading off.

MR. MICHEL SAMSON: Thank you, Mr. Deputy Minister, for your concise answers. Mr. Deputy Minister, you made the decision to go through the alternative procurement procedure, did you not?

MR. COCHRANE: Yes.

MR. SAMSON: You would have filled out one of these forms, I take it, which is the standard form used by the Department of Transportation and Public Works, Procurement Branch, which requires you to say the procedure undertaken, value, bids received, award made, supporting reasons, and it says approval by deputy minister and signed. Would you have filled one of these out?

MR. COCHRANE: I should have, yes.

MR. SAMSON: You should have. Do you have a copy of that?

MR. COCHRANE: If I did I will. I will attempt to find that.

MR. SAMSON: When did you make the pitch to Cabinet to support your proposal to have Knowledge House receive money without going through the regular bidding process?

MR. COCHRANE: March 7, 2001, there was a memo to Cabinet that was presented at that time. It was re-submitted on April 10, 2001, and that was a clarification with regard to funding. The final presentation to Cabinet, which was a clarification as to the flow of money under the EDA, took place on August 15, 2001.

MR. SAMSON: So this matter went before Cabinet on at least three occasions?

MR. COCHRANE: Yes.

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MR. SAMSON: When you first made that submission on March 7, 2001, was the minister aware that you were submitting this through the alternative procurement procedure?

In that I mean Minister Purves.

MR. COCHRANE: I will have to read over the memo to Cabinet. I guess I can't speak of what the minister was aware of, but certainly that was the procedure that we had followed. I will have to see if there was a reference in the particular Cabinet document.

MR. SAMSON: Would you have discussed this with the minister?

MR. COCHRANE: Certainly the fact that we were dealing with Knowledge House and Dalhousie University, it would be made known to everyone in Cabinet, and the department certainly talked very regularly about Dal and Knowledge House. The Cabinet documentation does say that we would be authorized to enter into a partnership with Knowledge House and Dalhousie University.

MR. SAMSON: And it was clear to the minister at that time that you were using the alternative procurement procedure in securing this funding with Knowledge House?

MR. COCHRANE: I guess I can't speak of what she knew, but certainly that was the procedure we were using, yes.

MR. SAMSON: From your recollection, was the minister at that Cabinet meeting?

MR. COCHRANE: Yes. Very seldom do we go without our minister present, so I assume she was there; I didn't look at the attendance sheet.

MR. SAMSON: Would it be safe to say you assume she was there for all three of the Cabinet meetings where you made presentations, March 7th, April 10th and August 15th?

MR. COCHRANE: I would think so.

MR. SAMSON: Would you agree with me, Mr. Deputy Minister, that when you do go through the alternative procurement procedure that there is an additional responsibility on government to make sure that the actual company that is being dealt with is able to carry out the task being asked of them. Would you agree that it is fair to say that there is a higher level of duty here to make sure this can actually be carried out?

MR. COCHRANE: We would have to satisfy ourselves that yes, they had the potential and the means to deliver the product. It is always a little more difficult with intellectual property than it is with - we will deal with Gage and buy a textbook, for example, it is much more tangible but intellectual property is a little more difficult to deal with. But we

[Page 15]

had reason to believe - given the past history of Knowledge House and the relationship with the department and government - that they would be able to deliver.

MR. SAMSON: Other than the past history and your dealings with Knowledge House, at the time before the March 7th presentation to Cabinet, what investigation would you have made into the financial status of Knowledge House?

MR. COCHRANE: We certainly wouldn't have gone and looked up their financial viability or their asset sheet any more than we would with Gage or Ven-Rez when we purchased from them and we often do sole-sourcing with companies like Ven-Rez and some computer companies because we do buy programs and we like to have some consistency in our system. In those cases we wouldn't do it and in this case there was no reason, given the fact that over the previous four years, $17 million worth of work had been done by two successive governments with Knowledge House.

MR. SAMSON: Are you aware, Mr. Deputy Minister, that the contract being proposed was for a period of five years from March 20, 2001 through to July 31, 2006?

MR. COCHRANE: Yes.

MR. SAMSON: Were you also aware that under the terms of the agreement, other than the $1.2 million coming through from the federal-provincial agreement, Knowledge House was expected to raise on its own, $6 million additional dollars?

MR. COCHRANE: Yes.

MR. SAMSON: As a result of that would you not think you would want to make sure the company was in a financial position to actually be able to carry out the five year contract and secure an additional $6 million of public funding?

MR. COCHRANE: One of the debates that took a length of time to get the contract signed was whose responsibility it was to go out and raise that money and that certainly is not a function of the Department of Education. We indicated that we would support their applications. Certainly, we had reason to believe the funds that were available under the AIP program would be readily available to this kind of particular development. I think the issue of the federal government's support for the concept and the work that the previous member alluded to, would indicate to us that there was a good chance that certainly they would be successful in acquiring that kind of funding.

MR. SAMSON: I'm glad you mentioned that. Other than a good chance, did you have anything else in writing, any verbal commitments or anything else from funding agencies, either at provincial or federal levels, that they had any intention of providing Knowledge House with an additional $6 million?

[Page 16]

MR. COCHRANE: The process the federal government had brought forward with regard to the AIP or AIF - I guess it seems to have two names - indicated that the deadline was September 27th, that applications had to be in. Certainly, you wouldn't get a pre-indication from any federal or provincial agency of money that would be forthcoming, other than the fact that here are the criteria and if your project meets the criteria then obviously you are in competition with a number of others for that particular amount of money. I think one of the things that the federal government was hopeful of was that AIF would be able to support software industries and development of products and so on in Atlantic Canada and in this case, particularly in Nova Scotia.

MR. SAMSON: Would you agree with me, Mr. Deputy Minister, that what you call a letter of agreement that was signed March 19th by the minister, that the letter at the time it was signed required the province and the federal government to contribute $1.2 million up front to Knowledge House and at that time Knowledge House would have to secure an additional $6 million?

MR. COCHRANE: Yes, and the contract was signed by me, not the minister.

MR. SAMSON: Exactly. On March 19th did either yourself or Minister Purves have any written, verbal or any other concrete assurances from either level of government that Knowledge House would be able to secure $6 million additional, as required, in order for the program to take place over the term of the contract?

MR. COCHRANE: Certainly nothing written and no indication from a federal government department that yes, we are going to approve this before the application was submitted; that doesn't happen.

MR. SAMSON: So other than the feeling that there was a good chance, you had nothing more to go on than that?

MR. COCHRANE: No.

MR. SAMSON: Through the chronology, on June 28th Knowledge House announced in a press release that it lost $6.5 million in the year 2000. Did that in any way cause you any concern?

MR. COCHRANE: I can't say I was particularly aware of their announcement in that regard and I don't doubt they did but I guess in many cases we see the balance sheets of companies where we see indications of losses and there are many tax implications of that. I can't honestly say I was aware on June 28th that they said that. Had I been, I would probably be somewhat concerned but at the same time, I don't know their intricate financial details.

[Page 17]

MR. SAMSON: Not wanting to be facetious or anything but, Mr. Deputy Minister, in your regular run of the day do you, usually, either yourself read or get the news clippings from either the Halifax Herald or The Daily News?

MR. COCHRANE: Yes.

MR. SAMSON: On June 28, 2001 of The Daily News there was a headline, Software firm upbeat despite its $6.5m loss, written by Stephen Bornais. Would you have had the opportunity to see that article?

MR. COCHRANE: I would have had the opportunity; I don't recall that I did but I do read the papers regularly, yes.

MR. SAMSON: So more than likely there was a good chance you would have seen the fact that a company you had signed a contract with not long ago just announced they lost $6.5 million?

MR. COCHRANE: That was prior to the signing of the contract, yes.

MR. SAMSON: But it was after the March 19th letter of agreement?

MR. COCHRANE: Yes, that's right.

MR. SAMSON: Where you had committed to the $1.2 million?

MR. COCHRANE: Yes.

MR. SAMSON: On March 19th when you signed that, did you have any intention of not going through with signing the final agreement?

MR. COCHRANE: No, it was a letter of agreement and obviously amongst parties it is the basis for an agreement that you are going to work towards. It gave the basic elements of the agreement. Some of the period of time that we took was because we disagreed on some of the actual wording in the contract and in those negotiations we certainly got advice from the Department of Justice.

MR. SAMSON: You signed what we have been told is a more detailed contract on August 16th with Knowledge House - in fact I apologize again when I say you, I mean the Department of Education or more specifically, Minister Purves signed a more detailed contract on August 16th. Could you tell me where that contract is and why we don't have it?

MR. COCHRANE: It was submitted in the documents to the clerk. The contract with Knowledge House?

[Page 18]

MR. SAMSON: Yes.

MR. COCHRANE: Definitely.

MR. SAMSON: Well, if it is submitted, I have the March 19th contract but I am not aware of any other contracts being put here.

MR. COCHRANE: We definitely tabled it, sir.

MR. SAMSON: Okay. So on August 16th the contract you signed was dated March 19th?

MR. COCHRANE: I will have to look at the actual signature page but I think the contract would be dated the date it was signed, but let's check. Yes, it was made as of March but signed in August, yes.

MR. SAMSON: At that point in time, $1.2 million was transferred to Knowledge House, was it?

MR. COCHRANE: $1.2 million for round figures.

MR. SAMSON: Was that money put in trust?

MR. COCHRANE: No.

MR. SAMSON: Why not?

MR. COCHRANE: Because it was an amount that was called for in the contract. We recognized that much of the work has been done in advance of the beginning of the pilot in our schools and the work had been done. The contract did call for that money to be paid actually on April 1st and at the end of the day it was paid August 16th or whatever, once the contract was executed.

MR. SAMSON: On August 16th when Minister Purves signed over $1.2 million, what security did the Province of Nova Scotia have for the investment that was being made to Knowledge House?

MR. COCHRANE: We did spend considerable time in the negotiation process making sure that we had access to the intellectual property. Again, this is not the same as having textbooks and buying them from Gage, it is a development. The software has value, the licence has value, the work that had been done up until that time, there was one complete module, another module was 90 per cent complete and the other six modules, the framework had been put in place for them. So we made sure should something go wrong that all that

[Page 19]

would rest with the province and we do have access now and rights to those properties. Again, it is intellectual property and it is development, so there isn't a tangible, physical asset but we got all there was, I guess, that was available in this kind of a negotiation process.

MR. SAMSON: I will get back to that later on. On August 17th, were you aware that Knowledge House hired IBK Capital Corporation to raise $5 million in private funding?

MR. COCHRANE: Yes.

MR. SAMSON: Why would they need $5 million in private funding? Were you aware?

MR. COCHRANE: I guess I wouldn't have any personal knowledge as to why they wanted it. Certainly, they were continuing to develop the product, as it was ongoing. Although we paid them $1.18 million, they were still continuing to develop the product. They had employees, teachers particularly, that were on staff, software developers and so on, who were on staff, IT people, who presumably would be working on the project beyond what $1.2 million would have paid for, because a lot of that work had been done previously.

MR. SAMSON: So while you, yourself, Mr. Deputy Minister, may not have been aware, obviously, from what one of your staff members has told you, staff in your department were aware of some of the financial dealing of Knowledge House and where they would use $5 million? So you had some knowledge . . .

MR. COCHRANE: I was aware that they were looking for $5 million to raise in the private sector, yes.

MR. SAMSON: Now, that $5 million is above the $6 million they planned on raising through federal and provincial funds to be able to carry out the Advanced Studies Program, isn't it?

MR. COCHRANE: My sense of it would be that they would continue to develop the product and they would need money on an ongoing basis when they generated the other funds that were available under AIP because that wasn't going to be awarded until December and subsequently January. They would need money to keep them going in the meantime until they were able to access federal funds or other program funds.

MR. SAMSON: Did you have any communications with them at this time to discuss whether they were still in a financial position to be able to carry out the rest of the contract in light of the fact they had signed a contract to try to get another $5 million? Did you have any discussions with them at that point in time?

MR. COCHRANE: I didn't have any direct discussions, no.

[Page 20]

MR. SAMSON: Are you aware of any of your senior staff people having any discussions with Knowledge House at this time?

MR. COCHRANE: At that time, which would be June?

MR. SAMSON: No, this would be August 17th, the day after the minister signed the contract?

MR. COCHRANE: They made us aware - so it wouldn't be, obviously, a misconstruing of what they were doing - that they were going to the market looking for $5 million to be raised privately.

MR. SAMSON: Were you also aware that on August 17th, the day after the minister signed the contract, that Knowledge House's stock took a serious collapse?

MR. COCHRANE: We were.

MR. SAMSON: During the discussion on August 17th, other than the $5 million they were discussing, did they also discuss with you the fact that their stock had taken a serious collapse?

MR. COCHRANE: There were some discussions, not with me personally, but there were some discussions with the department as to some of the activity that might have been going on that did cause their stock to drop. Again, it is their interpretation of events that took place.

MR. SAMSON: At this point in time, Mr. Deputy, did you still have confidence that Knowledge House would be able to carry out the contract as signed by the minister?

MR. COCHRANE: We were worried.

MR. SAMSON: You were worried?

MR. COCHRANE: Yes.

MR. SAMSON: What actions did you take, other than speaking with Knowledge House?

MR. COCHRANE: We did document a request to Knowledge House to make sure that they were in a situation to give us some assurance that they were going to be able to continue to develop the project before we actually opened the doors at schools and had 83 kids in five different schools take part. I think we have probably tabled the letter that they wrote back to us giving us an assurance that they were in a position to do that. But we did

[Page 21]

ask that to make sure and to give ourselves a comfort level before. One of the things that you always have to do in education is that when you go into a project you want to make sure that you can get every assurance that you are going to be able to deliver the product. Had they been able to get into December, we would have had the four modules for this particular year done, but before we started it we wanted to get some assurance, at least a comfort level, that they were able to deliver and we got that from them.

MR. SAMSON: Did you ask any of the provincial auditors or any outside agency to do some investigation on your behalf?

MR. COCHRANE: No, we didn't ask for a review at that time. I think we sent all the contracts to the Auditor General's Office but that's all.

MR. SAMSON: Do you have a copy of the letter received from Knowledge House or the correspondence stating their written assurances of their financial viability?

MR. COCHRANE: Yes, we do.

MR. SAMSON: If you could table those.

MR. COCHRANE: Gladly.

MR. SAMSON: Mr. Deputy Minister, were you also aware that on August 24, 2001, Knowledge House announced second quarter results, which was a loss of $2.8 million to Knowledge House?

MR. COCHRANE: August?

MR. SAMSON: August 24th.

MR. COCHRANE: Yes, as I indicated to the previous member, their financial statements didn't come out until after the contract was signed.

MR. SAMSON: At that point, did you have any discussion with Knowledge House once you found out that information?

MR. COCHRANE: I think my letter was dated August 29th or 30th that I wrote to them asking for some assurance, so it would follow that announcement and subsequent discussions.

MR. CHAIRMAN: Mr. Samson, one minute.

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MR. SAMSON: Thank you, Mr. Chairman. Were you aware that on August 25, 2001, Mr. Dan Potter, the Chairman of Knowledge House resigned as the Chairman of Nova Scotia Business Incorporated?

MR. COCHRANE: I wasn't aware that day but I was aware the next day that it happened.

MR. SAMSON: On August 23rd, were you aware that Knowledge House had advised, at the request of the Toronto Stock Exchange, to comment on their stock tumble, where they said in their release, "The company was not aware of any corresponding material change in the operations of the company."?

MR. COCHRANE: I know that there had been an enquiry made by the Stock Exchange. As far as their answer, I am not familiar with what it would have been.

MR. SAMSON: So you knew on August 24th that they had lost $2.8 million, their stock was in very serious condition, the minister publicly stated that she wanted to make sure that the program could be carried out and that it would not come to an end in the middle of the school year. Can you explain why you would have only written to Knowledge House on August 29th, a mere number of days before the school year was about to begin?

MR. COCHRANE: We were looking at the series of events and we felt that we did need some assurance before we opened. The letter was sent just before the opening of school and just shortly after these announcements came. I guess, if we had written on August 25th or August 26th, it wouldn't have made much difference in the answer but we were looking for some assurance from them that we would be able to enter into our classrooms with some comfort level that we would continue it. Unfortunately, the information that we got never came to fruition and we had an unfortunate demise of the program.

MR. CHAIRMAN: Mr. Samson, perhaps we will get back to you later. Thank you, Mr. Deputy Minister. I would like to turn the next 20 minutes over to the government caucus. Mr. DeWolfe, I believe is leading off.

MR. JAMES DEWOLFE: Thank you, Mr. Chairman, and welcome deputy and your staff. We are very pleased that you are willing to come here to discuss this matter today. I wonder if we could just take a journey back and talk a little bit about Knowledge House as a supplier and the relationship the government has had over the long period with this company. I understand, indeed, there was a relationship and, perhaps, you could talk about that a little for us, just so that we have an understanding of the dealings that Knowledge House has had with government in the past. When I talk about government, I talk about this government and the previous government and so on.

[Page 23]

MR. COCHRANE: The volume of business that Knowledge House had done with the province, they did approximately $6 million worth of work in the year 2000-01 and $10 million in 1999-2000. Back in 1997, there were $625,000 worth of arrangements or contracts with them, in 1998, there were $299,000. So over the four year period, in advance of signing this agreement, there had been $17.5 million worth of work between the Province of Nova Scotia and Knowledge House. So I guess the relationship was one that many times there had been a contract and many times the contract had been fulfilled and the products delivered. So . . .

MR. DEWOLFE: They did, indeed, fulfill their commitments to the province in all those agreements in the past?

MR. COCHRANE: Yes, there was never a difficulty with regard to them supplying and living up to the commitments of the contracts.

MR. DEWOLFE: Isn't that interesting. I understand that three out of the five Advanced Studies classes have chosen to continue working in a collaborative environment. I am wondering what role the department and the government will play in that. Is the government planning to work with the school boards to keep this program alive or where are we going with that?

MR. COCHRANE: In the five different locations that came forward, I believe three of them have taken some efforts to keep the students together as a group, the other two would have been given notice early enough to integrate them back into the regular classroom schedule in the high school - semestered or non-semestered - system.

[9:00 a.m.]

Of the three that are continuing, we are providing support for them. They received, obviously, the professional development in advance of the program starting, and we had also given a number of resources, computers, materials and so on, to them. Three of the schools needed an extra allocation of human resource, a partial FTE. Just recently we approved two 0.25 FTEs for two schools and a 0.5 FTE for another. The department is trying to go through this transition and support the teachers and the kids. I think, as a result of it being postponed there was some sadness, and I think the teachers said, look, I think we can keep this going if the kids are willing and the department is supportive, and that is what is happening.

MR. DEWOLFE: Knowledge House developed this pilot and this program. Is it my understanding that it is ours to use at this point?

MR. COCHRANE: We certainly can pick it up from where it is and develop it. We have had some discussions with the universities particularly. In fact, as we were trying to find a way, from the time that Knowledge House gave us notice to when the minister finally said,

[Page 24]

look, we have to pull the pilot because we are worried about it going too long without some future, we had three universities that were quite willing to enter into a partnership with us and put money on the table. Interestingly enough, the NSTU, which was a rather interesting relationship, had said that they were quite willing to be partners and would consider putting money on the table. We had preliminary discussions with HRDC and ACOA, and we have some groundwork done.

We are still looking at the potential of developing this through one of the universities, with the co-operation of other universities, the union, HRDC, ACOA and the province, but at this point, because there is a question as to the bankruptcy and the receivership and so on we haven't pursued that.

MR. DEWOLFE: Mr. Cochrane, it is not unusual for the government to work with private partners, and I am just wondering which private partners your department in particular has worked with recently?

MR. COCHRANE: It is interesting because as we speak there is one we just entered into with the province. Folkus Atlantic made a presentation to the department with regard to social studies software. We have gotten feedback on that in the development phase, and under the alternative procurement we are going to make a purchase of lab packs, called the Peopling of Atlantic Canada, including teachers' guides and CDs. This deals with the Mi'kmaq population of Nova Scotia. Nobody else produces this. It is a good product.We said, look, it is a good one to do a sole-sourcing because there aren't a lot of people developing software in this particular field. We did enter into a contractual obligation with them to provide that.

Every day we deal with all kinds of private sector - I made reference earlier, in our Canadian history pilot, the company that we are dealing with is Gage. Gage has textbooks and resources that we are working with in our classrooms on a pilot basis. We obviously have contractual relationships for three companies for 39 schools under the P3 concept. That was, of course, a major one and not without some amount of attention. It is very common. We deal with millions of dollars to suppliers every year.

We have, interestingly enough, the Atlantic Provinces Education Foundation, I know when we were dealing with developing French textbooks, we got stuck with a company that went down. The four provinces had made the deal with a company, and there are very few companies in that field as well, and unfortunately they disappeared in the midst of the process, and we did have to find another supplier. We had made some payments that we were not able to recoup as a result of the bankruptcy process. I guess with the volume we deal with and as much as you try to make sure that it is going to be a credible group that can deliver, it does happen.

MR. DEWOLFE: Mr. Cochrane, is it true that Knowledge House was named New Business of the Year by the Halifax Chamber of Commerce?

[Page 25]

MR. COCHRANE: Yes. I gather it was for 2000 or 2001, but the chamber did announce that.

MR. DEWOLFE: That was a positive step there in the decision to work with Knowledge House. Knowledge House ranked in the top 101 companies in Atlantic Canada.

MR. COCHRANE: Yes.

MR. DEWOLFE: Was that a factor in signing contracts?

MR. COCHRANE: Certainly they had, I guess, a reputation. Probably the biggest factor was the past business that we had dealt with, in their case, $17 million of contracts over four years, all of which had been fulfilled, and had no reason to believe that they wouldn't have due diligence in every effort to deliver the product. I guess some of the accolades are things that they like to put on their letterhead, but we were mainly concerned with the track record that we had with them in being able to deliver, on a contractual basis, products to the province.

MR. DEWOLFE: The Advanced Studies Program, how does the curriculum link with the new technology, and how are we going to keep on track with that at this point? Where are we going with it?

MR. COCHRANE: Certainly the concept was a good one, and I think, as one of the previous speakers referred to, there was no debate amongst teachers and students and parents that it was a good project and a good product. We would like to try to take the intellectual property that we got as a result of the contract, in the unfortunate inability of the company to fulfill, and attempt to develop it, primarily for Nova Scotia students but if we could recoup something from selling it to our colleagues around the world, we would do that. We are looking at that, and we will continue to pursue that option.

Certainly Dalhousie University was playing an instrumental role in developing this with Knowledge House. They had offered to recognize the two years of students' activity at the advanced studies, recognizing first year credit. When that first came to my attention I was a little concerned that, well, are we making a deal with one university, but I can assure that once Dalhousie recognizes the first year credit everybody else will as well because no one is going to miss the chance to get these students in their institutions.

We are going to continue to develop that. The Mount, Acadia and Dal have all indicated an interest. They see, I think, some international application, that if they could get students in high schools around the world taking this then it would be logical to come to Nova Scotia to our university. We do have some programs that do support international student recruitment. There are a number of things that I think would be beneficial for our students primarily but also for our universities in a secondary way.

[Page 26]

MR. DEWOLFE: You indicated earlier that this program was only offered by Knowledge House. Was it your learned opinion that no other Advanced Studies Program was available from another supplier?

MR. COCHRANE: Definitely not. There are higher-level programs, as I referred to earlier, the IB and the AP programs, neither one of which is based in Atlantic Canada nor in Canada, although there is an office in Victoria dealing with AP. There was no other software company that we felt had the potential to be able to develop a program this complex. We have a number of software companies that are doing projects for us. One at the time came out and said, well, we could do this. We were quite familiar with the work that they were doing in the Digby Regional High School, and had no reason to believe that they could handle one of this complexity or this magnitude and would be able to generate the resources that they were going to have to generate as a private sector operator to complement the $1.2 million that was available from the EDA agreement.

We were quite comfortable this was the only company, certainly in Atlantic Canada and in Nova Scotia, that was going to be able to take a project of this size and develop it. Certainly the preliminary work they did indicated that it was a top-notch product and well developed.

MR. DEWOLFE: It was a company that this government and the previous government felt comfortable in dealing with over the long term.

MR. COCHRANE: Definitely.

MR. DEWOLFE: Interesting. Thank you. I would like to pass to my colleague, the member for Sackville-Beaver Bank.

MR. CHAIRMAN: The honourable member for Sackville-Beaver Bank.

MR. BARRY BARNET: Mr. Cochrane, let me begin by saying that it is my belief that hindsight would be a wonderful thing in this particular circumstance. I know there are a lot of things in life that we would like to have an opportunity to have some foresight to see what the inevitable outcomes will be. Some might suggest that the department should have a deck of tarot cards or a psychic on staff when entering into agreements like this in order to help them and guide them into the future, but I believe the most appropriate way is to perform all due diligence.

My first question to you, Mr. Cochrane, is, do you believe the department performed all due diligence with respect to protecting the interests of Nova Scotians, first and foremost financially and from the perspective of the students to deliver this program?

MR. COCHRANE: Yes, I do.

[Page 27]

MR. BARNET: With respect to the previous relationship with Knowledge House, you indicated to this committee that in previous years Knowledge House had a business relationship with the Province of Nova Scotia, previous governments as well, in your department and I suspect in other departments, as I have read and learned in the paper, particularly with the Department of Economic Development through Silicon Island and other ventures, but my question is with respect to the Department of Education. The previous business arrangements that were entered into with Knowledge House, how were they procured and were any of those agreements or business relationships on a sole-source basis, similar to this one?

MR. COCHRANE: That's an interesting question. I would think so. I would have to go back and look at the contracts. Certainly, when I think of some of the projects that they have been involved in, they would be. There was a great deal of involvement with Knowledge House in the P3 process, they were providing services to the P3 partners. I presume in those cases there would be an opportunity under the procurement procedures that they would use that it would allow it to be sole-sourced as well. I would have to check that, but I think that a number of them would have been, because they were providing a unique service in many areas.

MR. BARNET: My next question is with respect to Knowledge House themselves. I wonder if the department is aware whether or not Knowledge House had customers other than the Province of Nova Scotia and if there are current sources of business that Knowledge House was using to help grow their business or were we their only source of business with this regard?

MR. COCHRANE: Certainly the Department of Education wasn't their only source. I am only marginally familiar with Silicon Island, but there are a number of companies that deal with Knowledge House there as, I think, a service provider but also a landlord. As I mentioned earlier, the P3 companies, a number of them had a relationship with Knowledge House to make provision for certain technical support and so on for the computer systems that are in our schools.

MR. BARNET: I guess probably the foremost concern of this committee, aside from the financial impact on the Province of Nova Scotia, is the impact the students are going to have. Certainly, I would suspect the concern of government as well as the Opposition Parties, what is it that the department is doing to try to provide to those students some form of salvage or hope that a program like this or this particular program will be offered in the future?

MR. COCHRANE: As I said with the three particular schools, they have chosen to remain together as a group of students working on the similar kind of projects. The teachers bring with them, as a result of the professional development activities that went into preparing them to deal with the Advanced Studies Program, more expertise now than they would have

[Page 28]

had before in dealing with this kind of a project. That's been done. We have encouraged it, the boards have encouraged it and rather than taking what would be a small number of students for a regular high school class and absorbing them into the system, we have been able to, with support from the department and the boards, maintain those smaller classes to deal with these students and their teachers for this year. Certainly then we will be looking and discussing with them what we might do in a relationship next year. It is not the Advanced Studies Program, per se, but it is certainly these students working with their teachers to develop a higher level of learning and with more complex materials and so on.

MR. BARNET: One of the, I guess, key concerns is that the assets of Knowledge House are primarily IP, intellectual property, and that there is with any bankruptcy or closure of business, I guess, normally some tangible assets that can be sold and/or liquidated. Is there any way the intellectual property that has been developed through Knowledge House can be developed further to provide some value to the province? Is there anything that we can do through the Department of Education to pick up the ball on this one and move forward with it?

MR. COCHRANE: If we choose to enter into partnerships with the universities that I referred to and even the Teachers Union, we can continue to develop the property. We own the software, we own the SmarterTeams concept and so on, and we have access to the licence. That was, as I mentioned to the member for Richmond, what was available for us to get should there be a problem with the contract being fulfilled and we certainly have the rights to those.

One of the interesting options that we might have is if we continue to develop it, and universities have indicated some interest as I said before, we still are able to then apply to the EDA for the money as we continue to develop it. We have had some discussions with HRDC and an involvement and an interest that the federal government might have, because we have several agreements dealing with development of IT resources. So, if we did choose to develop it in another relationship and a partnership, we, as the applicant, would still be able to go back in year two and year three and submit our invoices to the EDA and possibly get recompensated or compensated for that. That's something that we will certainly look at with our partners.

The second part of your question deals with what we could sell. Certainly, depending upon the outcome of the bankruptcy procedure or the receivership, there is the possibility that if we develop this that we then could take it and sell it beyond our borders but there is an issue of the long-term ownership of the licence and that is something that will be determined in the receivership process.

What we got was the licence for five years for the SmarterTeams concept. We have the conceptual framework for all the eight modules; the framework is there so you have to put the curriculum in place. We have a completed module and the second module is 90 per

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cent complete. We also got the codes that you need to apply to the licence and the software and so on to give us access. That is all there was to get. I wish there had been a building. I wish there had been something that we could have taken but when you are dealing with intellectual property it is, indeed, just that.

MR. BARNET: How much time do I have left?

MR. CHAIRMAN: I was just going to interrupt, Mr. Barnet. You have one minute.

MR. BARNET: If I could ask briefly, what role would the creditors have to play with respect to the use or the ownership of this intellectual property? Obviously, they have a vested interest in this as well. I am going to ask my second question too at the same time, so you can try both answers. Has Knowledge House actually filed bankruptcy or have they actually been forced into bankruptcy? There is some question as to whether or not they simply ceased to operate or if they are a bankrupt company. Can you inform us of that?

MR. COCHRANE: The first question, the creditors, the asset that we own is not something they could get for five years. So, presumably, most of the creditors would not be people that would be interested in five years out looking at what we currently have use of for the next five years. We might be and our partners might be. That's the first question.

The second question, they have gone into voluntary trusteeship. They originally announced that they were just ceasing to operate. Then I understand that the president of the company has voluntarily put it into trusteeship. The trustee is Matthew Harris with Ernst & Young.

MR. CHAIRMAN: Thank you, Mr. Barnet. We will go around with the remaining time of 10 minutes to each caucus, which will allow the deputy a couple of minutes of wrap-up. So the next 10 minutes goes to a member of the NDP caucus.

MR. STEELE: Mr. Chairman, I would like to start with just a couple of short snappers. I don't believe - and I may be mistaken - anywhere in the material have we been provided with a letter of understanding dated March 19th. Would you be prepared to table that if we don't, in fact, have it already?

MR. COCHRANE: I believe, Mr. Member, it was in the package, but if it wasn't we will certainly . . .

MR. STEELE: It may be but I haven't seen it.

MR. COCHRANE: We will certainly provide that.

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MR. STEELE: I think my friends from the Liberals say they haven't seen it either. A second question, I wonder if you could tell us precisely whose budget did this money come from; did it come from Education or Economic Development or where in the provincial budget did this money come from?

MR. COCHRANE: As I mentioned earlier, the only budgeted amount that we had in our department was $100,000 to deal with the professional development and training for our teachers. The rest of it was forwarded; in a budgetary process it is an account receivable and we paid it out, which quite often happens, and on the books it is a receivable. So we would have paid the $1.18 million and we would get the $453,000 if they accept our invoices this year and then on our books would be an account payable for the other two years of that. So it is an accounting procedure by which we pay it, although it wasn't budgeted in our account, it is not shown as a deficit unless you have reason to believe you are not going to get your invoices honoured which we have reason to believe now for year two and year three.

MR. STEELE: That accounting procedure is being done within the Department of Education budget, is that correct?

MR. COCHRANE: Yes.

MR. STEELE: I would like to move on to this question of procurement, which I think is an important one. If I understand you correctly, Mr. Cochrane, you are suggesting that the reason this was not put out for competitive tender is because no alternative or substitute existed and there is an exception for that in the procurement policy. But there is an important point here that I think is being missed or glossed over and that is that the product wasn't finished, there was no product from Knowledge House. The Advanced Studies Program, as you have just said, consists of eight modules and one was finished. You don't have a product you can go out and sell to somebody else. If you want any students to finish this program, if you want to sell it to anybody else, you are going to have to go out and find the money to finish the other seven modules because only one out of eight was finished.

I wonder if you were aware, Mr. Cochrane, maybe you were, that inside Knowledge House employees were working furiously, were working very long hours right up to the end, to try to finish the second module to stay ahead of the students who were working on the first module. I mean this was a product that was very much in development and that what the province bought on March 19th was an idea, let's make no mistake about that, it was an idea that was bought. So I wonder if you could comment on this idea and the fact that since you bought an idea there was no alternative or substitute that justified going through the competitive tendering process because let's be very clear, the product was not finished, it was far from finished.

MR. COCHRANE: And in the procurement procedure, as I mentioned, there are 19 ways to sole-source. One of the ways and the one I didn't mention to you, is dealing with

[Page 31]

Section 8.9 and that deals exactly with what you have raised and that is exactly why it is there, because it was a product in development. Let me read to you Paragraph 8, Section 8.9, "the procurement of a good or service to be developed in the course of and for a particular contract for research, experiment, study, or original development . . ." So it exactly fit that criteria as well, so there were two criteria listed under the alternate procurement procedure by the Province of Nova Scotia that I used to do this as a sole-source.

You are exactly right, it was a product in development, we entered into a partnership, which the EDA very, very clearly outlines is an option, that the money was there to enter into a partnership to develop software. So it fit the criteria perfectly for the EDA, it fit the criteria perfectly for the procurement procedure and quite frankly, the concept fit the needs that we had for our students in the Province of Nova Scotia. The problem was, unfortunately, the company was not able to deliver.

MR. STEELE: Why was the Department of Education in so much of a hurry?

MR. COCHRANE: We looked at it because it was piloted up in Advocate, or a portion of it - and that is not the whole thing because obviously, it wasn't developed and it was only a five week pilot - we knew we needed eight modules over two years. Module one would have got us into the middle of October. Module two, which was 90 per cent developed when - and you are right, people were working around the clock to stay ahead of the students and many teachers do that, by the way - what happened, module two would have got us to the change of semester, which would be mid-January and then modules three and four would have gotten us to the end of Grade 11 and then we would have, in the meantime, continued to work to stay ahead of the students. I guess ideally we would have liked to sit back and have all eight modules sitting there before we started it but a lot of money would have had to be forwarded to do that.

It was a work in progress, it was the way that we started it and it was probably the only way - other than some huge international conglomerate that might have enough money to develop all eight modules and sit them on a shelf, but there aren't a lot of huge international conglomerates who are interested in coming to Nova Scotia and adapting our curriculum because there is limited sale for our curriculum elsewhere, although we do sell a bit of it.

MR. STEELE: I am getting a bit of a mixed message from the Department of Education - from you and the minister - and I will tell you what it is, that this in some way seems to resemble to me somebody who walks into a car dealership but they don't actually see the car they are going to buy. What the salesperson does is they have what they say is a car with a cloth over it and they lift the front of the cloth to reveal the bumper and the headlights and by golly, they are the most beautiful headlights and bumper anyone has ever seen and then the salesperson drops the cloth and says, do you want to buy the car? And the customer says, sure, I'll buy the car. But at the end of the day, after the customer has paid

[Page 32]

over the money and the cloth is whipped away, you have a beautiful bumper and headlights and you have a drawing of the rest of the car.

The message I am getting from you this morning is that there is the possibility of taking this intellectual property, which we now own, and moving forward with it. But your minister is on the record as saying that is not going to happen and I will read you the quote, it is just one sentence. It says, "We just can't come up with the money to finance this for two years on our own, even with that help.", and she is talking about the universities and the Teachers Union. "It was better to stop it now, rather than in six months or even a year." So what is the answer, is this a dead duck or not?

MR. COCHRANE: Let me go back to your analogy about the car. We had the chance to test drive the car. We had the project in Advocate and Parrsboro with regard to the technology and we tried it and it worked. The only part of the car that was then missing was the curriculum, which we own, which is ours, which was going to be applied to that chassis, so to speak. So it is not quite the same analogy of pulling it up. We had the chance to drive it, we saw that the technology would deliver what we wanted to deliver to our students. What we wanted to deliver to our students was our curriculum, which we have test driven many times and generations have taken part in that curriculum in the Province of Nova Scotia. So your analogy, although it is interesting, is probably not quite accurate in this case but nonetheless, I can understand looking at it from that perspective.

MR. STEELE: Let me then move away from . . .

MR. COCHRANE: Well, let me answer the second part of the question with regard to the minister's statement, please. What the minister was stating was that we were unable in that short period of time, as hard as we tried, to put together all of the factors that we needed to guarantee that we would be able to get into a relationship with our other partners - Dal, the Mount, Acadia, NSTU, HRDC and everyone else - in order to get a guarantee that we could get it developed in time. What she did, quite rightfully, was cancelled the pilot before the students got too far into it and they would not be able to be absorbed back into the regular schedule, should the school board and the school choose to do that. So it was a question of not being able to put the resources in place at that time to make the guarantee. We will still look in the long run, not for this group of students unfortunately but, perhaps subsequent groups, if we can get the development of the technology and the curriculum in place. We would certainly consider that.

MR. STEELE: Let me move from metaphors to reality then. In my constituency schools are in desperate need of maintenance dollars, classes aren't getting any smaller, special needs kids aren't getting the attention they need and the parents and students of my constituency are about to go through the very painful process of deciding which neighbourhood schools to shut down in order to save a few tens of thousands of dollars, and in this environment the Department of Education appears to me, or I should say the minister,

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to have been very careless with a great deal of money that could have been put to better use and that is why I am so concerned.

MR. CHAIRMAN: Mr. Steele, thank you. Mr. Cochrane, would you care to reply to that comment?

MR. COCHRANE: And it is a fair comment. We watch every dollar and where we spend it and I think I would be the last deputy that anybody would accuse of frittering away money. This is an unfortunate circumstance and it wasn't the way we wanted it to come out, but we watch every dollar. I try to relate our dollars to teachers and FTEs and when someone says it is $1 million, that is 20 and we are conscious of that all of the time and trying to make sure we don't maintain buildings, run programs, or have things that are of no value to our system.

In this case it was a risk. The existence of the EDA indicates that it is a risk, that the previous government and the federal government agreed that software development in Nova Scotia was important and yes it is a risk and that was why the feds were involved, that is why there was money on the table. I think that in this case we tried hard to deal with all of the sector, all of the spectrum of our students and we are trying to find ways to deal with the more advanced students, to challenge them, to keep them in the system and make them move on to university and get them to work and live and contribute to Nova Scotia. It was a risk, it didn't work and everyone, particularly the minister, feels very badly about that and we are going to try to resurrect what we can.

You know if someone said, did you see this coming, if I could observe the market I would have dumped my Nortel shares the day before, you know, but these things happen and it is unfortunate. We are dealing with a risky sector, the intellectual property and the development of intellectual property is a risky sector, there is no question. I suspect we wouldn't do it again but certainly, as far as taking that product and trying to develop it, we would because the rewards to our system and to our students is significant and we can't spend all of our money in one section. We have to look at the broad spectrum of our students and attempt to challenge them all. It is not like this money would be spent on a roof otherwise because we do have an obligation to challenge our students and intellectually stimulate them.

MR. CHAIRMAN: Mr. Samson, you have 10 minutes.

MR. SAMSON: Mr. Deputy Minister, you agreed you were aware of what was happening with Knowledge House, the public proclamations of the problems they were having. Was Minister Purves aware of this?

MR. COCHRANE: I don't know, member.

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MR. SAMSON: Did you have discussions with her during this time when the different dates arrived, the stories in The Daily News, the $2.8 million loss, Dan Potter resigning, the Toronto Stock Exchange asking, would you have had discussions with the minister on these items?

MR. COCHRANE: I certainly don't recollect that, no.

MR. SAMSON: During this time did the minister at any time request of you or senior staff to get detailed financial information from Knowledge House before proceeding with the Advanced Studies Program for the academic year 2001-02?

[9:30 a.m.]

MR. COCHRANE: Certainly, she would have been aware that we would have some information, and she would be aware, I presume, of what is available out there in the public sector. We weren't asked to compile a financial profile of the viability or lack of viability of Knowledge House, no.

MR. SAMSON: During all of this, at no time did Jane Purves as the Minister of Education request you or senior staff to get more detailed information than what we have before us today?

MR. COCHRANE: Not that I recollect.

MR. SAMSON: There was an August 26th memo from Dan Potter to yourself. We don't have a copy of that, I don't know if you can get your staff to send us that. Further to that, you have the letter of August 31, 2001, and if I could read that letter for you, Mr. Deputy Minister, it says: Dear Mr. Cochrane:

"Thank you for your letter dated August 30, 2001. Further to our memo to you earlier this week, we have been working very hard to secure appropriate financing to continue to meet our operating needs. We have been successful in this regard in the last several days."

Other than those two lines, did you have any other concrete financial information on which to justify proceeding with the Advanced Studies Program with Knowledge House?

MR. COCHRANE: The assurance that was given to us was certainly information that we wouldn't have had otherwise. We were pleased with that. I reiterate that the financial reports and so on weren't issued until after the contract was signed. That would be a good question for Knowledge House in your subsequent investigation. The assurance that we got indicated that the company was attempting to generate additional funds and so on that they would put into the program.

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MR. SAMSON: This August 31st letter, as far as you are concerned, Mr. Deputy Minister, and I would assume this goes for the minister also, was sufficient assurance for you to put the 83 students and the staff in the five schools throughout this province at risk that this program would not be completed. You felt this was enough assurance?

MR. COCHRANE: It was the assurance we were looking for. It was dealing with the financial question. The academic questions were posed by us, because we wanted to make sure, should we proceed, and we felt that given that assurance and the willingness and the interest of the students and the teachers that we would proceed.

MR. SAMSON: Looking back on this, Mr. Deputy Minister, would you say that the memo of August 26th and the memo of August 31st were misrepresentations by Knowledge House to you, as to the state of their finances?

MR. COCHRANE: Well, subsequent events showed that wasn't the case. I presume, at the time, when they were written that there was a reason to believe, by the president, that he was going to be able to orchestrate some financing. I was aware that there was an arrangement being discussed in Cape Breton, with ECBC, about the sale of Silicon Island, and that that money was going to be directed toward the viability of Knowledge House. Subsequently, I guess those questions would probably be better posed of Mr. Potter.

MR. SAMSON: But that was the agreement you are talking about, with ECBC, would be about the same good chance as what you referred to when you signed the letter of agreement on March 19th, that there was a good chance they would get money. Is it safe to say that at that time you felt there was a good chance, and you had nothing more than that?

MR. COCHRANE: They certainly indicated to us that they felt it was going to be something that was going to enable them to access resources.

MR. SAMSON: Again, by August 31st, did you request from Mr. Potter or anyone at Knowledge House more detailed financial information prior to going forward with the Advanced Studies Program?

MR. COCHRANE: We didn't have to request it at that point, it was publicly available to us. The indications were that their applications were in order, they were getting ready to go forward with the application to AIP. I guess they had reason to believe that they were meeting all the criteria and had a good chance of being awarded that. But, again, as I mentioned earlier, it is unusual for the federal and provincial governments to give a pre-indication of someone's acceptance.

MR. SAMSON: Would you give a student loan to a student if they said there was a good chance they would give you the financial information on their parents and the necessary

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information you need for a student loan, would you actually award them a student loan if they said I have a good chance that I will actually give you that information at some point in time?

MR. COCHRANE: No, but we get the information whether it is good information or not, Mr. Member, I don't know. In fact, the default rate would indicate that it is not, but we do ask for certain information and when we get it we do process it.

MR. SAMSON: I guess the point in this case is the students in this province are held to a higher standard than Knowledge House, apparently, with the $1.2 million contract. Mr. Deputy Minister, if you could go back, would you have suggested to the minister to sign that contract on August 16th, if you had known that then?

MR. COCHRANE: The relevant date on the document is March 19th. It is interesting, because I have thought about that a lot. As we were getting near the final stages of this, making sure that we did provide for what we would get as intellectual property should something go wrong, we debated that some. It is interesting because we signed a letter of understanding and agreement on March 19th, you can look at the stock and it was considerably different in the IT world, the .com world was in a different situation. It is interesting because had we not gone through to fruition and after Knowledge House had put out their documentation, which is their business not mine, I suspect we would be back before this committee and you would be asking me why the Department of Education didn't honour its commitments on March 19th and this good Nova Scotia company went down the tubes and 70 people are unemployed.

It was a question of, the commitment was made prior to all the instances and all the circumstances that happened. We had some legal obligations, money had been spent by the company under a letter of agreement and understanding. It was that proverbial rock and a hard place. You look at it and say, well, if I don't sign, we are going to be taken to court and we are going to be sued or we are going to be blamed for the demise of the company; if we do sign, we always take on the risk of any company that we might deal with, particularly in a soft industry such as this. It wasn't something we didn't think about a lot.

MR. SAMSON: Why would the minister, on September 16th, publicly state that she wished the contract was never signed? She says, in retrospect, obviously so, at the time it didn't seem so. Why would she say she wished it was never signed, and yet you are not of the same opinion?

MR. COCHRANE: I wish, perhaps, in hindsight that we hadn't entered into a letter of understanding and agreement on March 19th, which caused the contract to be negotiated. Hindsight is great. In this case, we had some concern. I am not surprised, given the grief that it has caused the minister and to some of our students, that we all wish it would have been otherwise.

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MR. SAMSON: Mr. Deputy Minister, in almost every single contract signed there is always an escape clause to allow you to get back your investment. Why, in this case, did you sign a contract which expressly provided that there would be no refund of the $1.2 million?

MR. COCHRANE: Because much of the work for the $1.2 million had been done. We got, in our hands, the right to get all the product that was produced that that $1.2 million paid for up to that time of production. Module one, module two, the framework and the software, the SmarterTeams licence and so on is ours. That is all there was, Mr. Member. There was no asset, tangible. Like I said, I wish there had been a building. At this point we got all that there was.

MR. SAMSON: As a wrap-up question, basically a contract, a letter of agreement, was signed on March 19th in the hopes that there was a good chance that financing would be secured. There was nothing on paper, there was nothing on record. The department knew very well of the financial problems of this company, the minister should have been aware, yet no requests were made for detailed financial information. Clearly, in the contract it is questionable, the product you have now, whether that is even something that you can do anything with because in the contract it prohibits any third party coming in to work with the department using anything that Knowledge House has developed.

In light of that, in light of Mr. Dan Potter, Chairman of Knowledge House, his relationship with the Tory Government, his position as Chairman of Nova Scotia Business Inc., in light of all of that, his personal relationship with the minister, would you say that all of that combined clouded the minister's judgment in signing the contract in the first place with Knowledge House?

MR. COCHRANE: I can't speak to what the minister thought but I can tell you very clearly, all of that had absolutely nothing to do with the department's relationship with Knowledge House in attempting to develop the Advanced Studies Program for students. Our intentions were honourable, our goal was a good one, but unfortunately the outcome wasn't successful, but none of that had anything to do with our desire to get a program developed in Nova Scotia for our students. We weren't lobbied as a department, I met Mr. Potter two or three times. We were interested in the professional services that Knowledge House was known for and that they could provide which would be used for the benefit of our students.

MR. CHAIRMAN: Thank you, Mr. Samson.

Mr. Carey.

MR. JON CAREY: Mr. Chairman, I just have a few short questions. Prior to the payment being made, what was the year of the last statement you people had received or looked at from the company?

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MR. COCHRANE: We had the first-quarter statement for 2001.

MR. CAREY: So, the actual last statement that would have been audited or maybe an unaudited statement would have been 2000?

MR. COCHRANE: Yes, I presume there would be an audited statement at that time that would be public record and we would have access to.

MR. CAREY: From the statement you received, were they audited statements or unaudited?

MR. COCHRANE: December 2000 for the year was audited.

MR. CAREY: It was an audited statement?

MR. COCHRANE: Yes.

MR. CAREY: The other question that I would like some broadening on, I guess, is you say the EDA was a partner and were there other partners involved with the province in this total package?

MR. COCHRANE: Yes, the other partner was Dalhousie University who had entered into an agreement with Knowledge House to do research, to do assessment, and obviously to give recognition for the successful completion of the students in the two year program. So there are really three partners, two of which were somewhat public.

MR. CAREY: But actual financial responsibility or input would have been federally and provincially only?

MR. COCHRANE: At that point federal-provincial and I presume private, depending on what they were trying to orchestrate in their call for raising funds, but certainly federal-provincial. I don't believe Dal had a financial contribution but they certainly had service in kind that they were providing through their senior staff .

MR. CAREY: I guess what I am trying to arrive at is responsibility for monitoring payments and so on. Once the EDA or the federal department that was helping - and am I correct in saying they were paying 70 per cent of it?

MR. COCHRANE: Yes.

MR. CAREY: Did they just turn this over and the department had the responsibility of monitoring the funding or did they monitor it as well or what happens there?

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MR. COCHRANE: The EDA outlines a procedure by which they can get involved in watching where the money has gone and so on. In this case it was not unique, but what would happen is we were the applicant for the $1.2 million and then we would submit the invoices for the work that was done. The federal government would get a very clear invoice of the kind of work that was done to complete the particular project or to work on the project, so we would get that as a result of our relationship with Knowledge House. We then would submit for reimbursement under the EDA. This is a fairly common procedure and it was meant to take place over three years.

MR. CAREY: So I guess really they had no responsibility to monitor the actual financial status of Knowledge House?

MR. COCHRANE: No.

MR. CAREY: Not being familiar with the contract and Mr. Samson indicated that the contract says that what you really have is a five year agreement to the material, but you do not have the right to get an outside company to complete it, is that the correct interpretation of the contract?

MR. COCHRANE: I have some correspondence where we have given notice to Knowledge House that they have defaulted and therefore what are we going to be able to take back; it relates to the termination of the agreement. I asked for a certain amount of information and so on that we wanted from them and the indication to them was that they would be providing that material. We can determine what kind of relationship it might be. A third party, it certainly won't be a private operation, but there could be a relationship that we are the developer with the support of Dalhousie University or Acadia or Saint Mary's, or

whoever. We will be able to put together, if we want, a consortium, but we would be the partner in that case.

MR. CAREY: My final question would be, have you had an opportunity - I realize there have been pressures and time has been short - you basically have two modules completed - well, 1.9. You have the chassis, to use Mr. Steele's analogy, so you have to put our curriculum in it. To complete that is there an estimate of what it would cost if you were to, for example, hire some of the people or whatever who were working for the former company?

MR. COCHRANE: Yes, and I believe in the very quick days we were trying to put something together it was something in the area of $2.4 million that because we wouldn't be working in the marketing aspect of it, we wouldn't work the aspect of profitability into it, obviously, but taking what we had and developing it with some of our own resources and our own teachers that we would rely on, I think the area was like $2.4 million over two years which would give us all of the eight modules and that is the kind of project we are looking at. That was a much different magnitude than what they were doing because all the

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development costs and so on had been absorbed by the $1.2 million, or as a loss to Knowledge House.

MR. CAREY: Thank you very much.

MR. CHAIRMAN: Mr. Langille.

MR. WILLIAM LANGILLE: I guess we all know about the stock market in the high-tech sector and the way it has been nose-diving. In particular, Knowledge House did this but it also, like you mentioned, Nortel, like I say, COM DEV, Microform, you know you can go on and on. So I want to make it clear that because the stock nose-dives it sends up warning signals but, however, it is not the end in a lot of cases. Mr. Sweeney, what is your position with the Department of Education?

MR. MIKE SWEENEY: Senior Executive Director of the Public Schools Branch.

MR. LANGILLE: You received a promotion last year?

MR. SWEENEY: It would have been about a year ago now, yes.

MR. LANGILLE: And what was your part in the contract for Knowledge House, what part did you play?

MR. SWEENEY: I became very active in the contract negotiations during the past month of June. Prior to that much of it had been carried by the then Executive Director of the English Programs section, who took another job on April 1st.

MR. LANGILLE: Now I want to talk about lobbying for a short period. How much time do I have left, Mr. Chairman?

MR. CHAIRMAN: You have two minutes.

MR. LANGILLE: A former Cabinet Minister, I read in the paper, is owed $15,000 by Knowledge House; Richie Mann, a former Cabinet Minister - I believe he was the member for Richmond - of the former Liberal Government. Did he ever lobby the Department of Education on behalf of Knowledge House? I will direct that to Mr. Sweeney and then to the deputy.

MR. SWEENEY: No, sir.

MR. COCHRANE: No.

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MR. LANGILLE: So you have no knowledge - and that's not a pun - of him lobbying. That's good. I personally feel sorry for the students who took part in this pilot program. Is there any way we are going to get them back on track?

MR. COCHRANE: Certainly, the 83 we started with, the majority in the three schools will still be getting some special educational opportunities because they were originally in the pilot and we have made that possible to continue. The others would be absorbed back into the regular timetable of the system. I guess the good news in that regard is that they all had a minimal exposure to it, some kids are going to get to continue, the others have gone - and luckily it was only a week or so after school started and the minister took that decision very wisely, because she wanted to make sure that they weren't so far down the road that they would not be able to be reabsorbed. The majority of them - and I don't know what the numbers would be in those three particular schools - will still be getting another opportunity, different than what they would normally have gotten had they not taken part.

MR. CHAIRMAN: Mr. Cochrane, perhaps if you would, we encourage you and all witnesses, would you like to make some wrap-up, concluding comments at this time.

MR. COCHRANE: Yes, Mr. Chairman. We wanted to come here today because, quite frankly, we think that the objectives were good, the program is the right kind of program for some of the demands we have on our system. One of the things that the minister and the department share is that sometimes we don't provide enough stimulation for some of the students who are at a higher level of understanding and want to challenge themselves. I think the objectives were good and they were positive. It is a fair criticism, did you know or what did you think was going to happen. That is not the prime responsibility of the Department of Education. If we were all market analysts we would all be somewhere else analyzing the market and making a lot of money.

At the same time, we were looking at the educational objectives with a company that had an excellent track record since 1998 in providing services, and for that reason we continued to develop it. It is certainly unfortunate, and we feel bad about the fact, that yes the money is gone and we would like to find a way to keep the program going so that we can actually invoice and get that money back. We will investigate that.

At the end of the day, we believe that kind of project is one that is positive for Nova Scotia. If we could develop that in Nova Scotia, we would have several advantages, one of which is the software industry, but the most important of which is our students would have an opportunity to receive our curriculum in a different way, in a different pedagogy that would be associated with that, and I think that is a positive thing.

There are no guarantees in our business or your business, and we would have liked and hoped that this wouldn't have happened to that company. I am sure everyone around the table would like to make sure that it didn't happen to that company because 70 people are out

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of work, and we have lost a resource in the Province of Nova Scotia that we had some hope for, and the chamber and Deloitte & Touche and everyone else had some promise.

We certainly are pleased to have a chance to explain the procedure and the situation. The relevant date is really March 19th, when we signed a letter of agreement. I think the honourable gentlemen and women in this House would expect us to live up to our commitments. We tried, given the circumstances, to get all the guarantees we possibly could. We tried to make sure that the intellectual property resided with us and that we could work with that. The unfortunate thing is that, yes, some students went through a process that isn't going to give them what they hoped to get. We tried to compensate that as much as we could by the boards and the teachers working with those students in three of the five locations, and we will continue to work with that.

When you are dealing with intellectual property and trying to develop something in an area where there is not a huge track record of success in developing these kinds of things, there is risk. I guess our option is to not put anything at risk and deny the students an opportunity to take advantage of a unique program. We have learned a number of things from this. We will certainly make every effort to try to resurrect the program and recoup the taxpayers' investment. I do appreciate the opportunity to be here and the questions that the members have asked us. Thank you.

MR. CHAIRMAN: Thank you, Mr. Cochrane, and thank you to your staff for being present. We are going to move on to a few items of business, but we can take a quick recess as you leave the Chamber at this time.

[9:55 a.m. The committee recessed.]

[9:57 a.m. The committee reconvened.]

MR. CHAIRMAN: I will reconvene the committee at this time. I am aware of the fact that we always say that we are going to have 10 minutes left for business, I stick to the time limits but then the answers come through a little bit longer. However, a couple of moments of business of some consequence here. Mora and I have been talking about this. We have at this stage no commitment that next Wednesday, October 24th, that anyone from Knowledge House would appear. We should look at a plan B, if I can put it in that way, due to the fact, of course, that staff does need time to prepare, as they do so dutifully for us. At this stage we would like to talk about plan A and Knowledge House but also let's consider plan B.

Mora, what is your direction or can you bring to the committee's attention the direction that you gave the Chairman?

MS. MORA STEVENS ( Legislative Committee Coordinator): I will be in touch with Mr. Potter this afternoon, or as soon as this meeting finishes. Currently, he had not decided

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as to whether he was voluntarily coming. It was a standard letter that was issued to him saying that he was being voluntarily asked to appear before the Public Accounts Committee; however, the committee does have the power to call him, if they so choose. He was quoted the Rules of the House. That, of course, would be up to the committee. I do not have a refusal from him as of yet, the decision just has not been made. I am sure he has been watching this morning, so I will know that hopefully when I get back to my office and I can let the committee members know. So that is where that meeting stands right now.

MR. CHAIRMAN: Would anybody like to comment? Mr. Steele.

MR. STEELE: Yes, I would like to comment. It is my understanding that Mr. Potter has said neither yes or no. I do think that it would be the respectful thing to do to give him an opportunity to say voluntarily whether he agrees to appear or not and I am quite happy to do that. However, there has to be a time limit. The invitation to him went out, I believe, a few weeks ago and we can't give him forever to make up his mind. Now, here's the dilemma that I am in, or I should say the whole committee is in, that if we don't get a positive answer for him next week, the committee meeting will presumably be postponed, so there will be no opportunity for the committee to get together to decide whether to issue a subpoena to him or not. So I guess what I am looking for is some direction maybe from the Chairman and some input from the members on the government caucus about whether there might be a future opportunity for us to decide as a committee whether it is appropriate to issue a subpoena to Mr. Potter if he doesn't answer within a prescribed length of time.

MR. CHAIRMAN: Mr. Steele, there is full intention to have a meeting next week. However, Mr. DeWolfe, could you respond perhaps to Mr. Steele's question but I also noticed that you were on the speaker list.

MR. DEWOLFE: I agree and we could have a meeting with the Auditor General next week to get a briefing on the situation.

MS. ELAINE MORASH: As far as I know, the Auditor General will not be in town on Wednesday, he will be in Regina for a conference on Monday and Tuesday and I think he is just coming back on Wednesday but I could check that when I get back to my office.

MR. DEWOLFE: Why don't we leave it in the hands of the Chairman to work with the Committees Office and Mora to finalize plans for next week or perhaps we could skip next week if that is their decision but we will leave it in their good hands?

MR. CHAIRMAN: I thank you, Ms. Morash; Elaine Morash is here representing the Auditor General as the assistant. Regarding Mr. DeWolfe's suggestion, Mr. Steele.

MR. STEELE: I just want to clarify this because the wording that Mr. DeWolfe just used concerns me because he talked about the possibility of skipping next week. I guess the

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point I am trying to make is that if Mr. Potter does not answer, we need an opportunity to meet as a committee to decide whether to subpoena him or not. I am happy to do that but I am the only one here who represents a city constituency, it is easy for me to get here. Perhaps one alternative is to have a motion today to say that we will give Mr. Potter a week to answer but if he doesn't answer by this time next Wednesday that the Chairman is directed to issue a subpoena to him.

[10:00 a.m.]

MR. CHAIRMAN: Before I entertain that as a motion, I would like to recognize Mr. DeWolfe.

MR. DEWOLFE: Yes, I would suggest that we could deal with that issue today or we could deal with it next week. We could meet for, say, an hour and we could discuss our agenda and perhaps deal with that issue. Hopefully we will have a response from Mr. Potter by that time.

MR. CHAIRMAN: It was my intention as the Chairman to have a meeting next week, either in the business session, as has been suggested by Mr. DeWolfe, or better still to have Mr. Potter be able to appear. At this stage, I see your hand again and I recognize you, Mr. Steele.

MR. STEELE: I was simply going to say that what Mr. DeWolfe is suggesting is quite reasonable and I am quite happy to accept that. So the clear understanding is that we will have a meeting next week, even if we don't have an affirmative answer from Mr. Potter. That is all I was after really.

MR. CHAIRMAN: Is it agreed?

It is agreed.

Is there any further business? There is a piece of correspondence which I want to bring to the committee's attention where, again, the Minister of Education has shown the initiative to suggest a future witness. Hopefully all members are aware of the list that has been submitted by the various caucuses and I think we could have some unanimity next week when we look at the fact that Health and our November sessions could fit in nicely there. However, that might be looking a little bit in advance. Any response to the correspondence from the Minister of Education or my comments about November being Health month, if that is appropriate, for this committee? Mr. DeWolfe.

MR. DEWOLFE: Well, it does appear that we are prepared to go ahead on the health issues. I would suggest that Mora initiate some of those meetings and we could move forward in November on those issues.

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MR. STEELE: That again seems quite reasonable, as we all expect from the member for Pictou East. The list that the government caucus is agreeing to, at the top of each caucus' list that they are agreeing to is a health issue. I am certainly agreeable to doing that. The Minister of Education can be thanked for her suggestion but I wouldn't want to put it in priority to the other things that the caucuses have already put forward. So I am just wondering if Mr. DeWolfe and the government caucus are agreeable to having the Committees Coordinator start arranging meetings on those topics that are at the top of the list.

MR. DEWOLFE: Mr. Chairman, indeed, I think we can delve into these matters at more length perhaps next week if we are having a business session.

MR. CHAIRMAN: That's plan B. We would prefer plan A, as you are aware. Ms. Stevens has confirmed that she will be in contact with our respective caucuses as soon as possible today to confirm one way or the other about whether Mr. Potter would appear next week. That's the best we can do at this situation.

Is there any further business? Then I call for an adjournment.

We are adjourned.

[The committee adjourned at 10:05 a.m.]