The Nova Scotia Legislature

The House resumed on:
September 21, 2017.

Public Accounts -- Wed., May 5, 1999

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HALIFAX, WEDNESDAY, MAY 5, 1999

STANDING COMMITTEE ON PUBLIC ACCOUNTS

9:00 A.M.

CHAIRMAN

Mr. Howard Epstein

DEPUTY CHAIRMAN

Mr. Hyland Fraser

MR. CHAIRMAN: Good morning. Today's session of the Standing Committee on Public Accounts is ready to start. We do have a quorum. I remind members that our business today is to look at the relations of the Nova Scotia Gaming Corporation with the Atlantic Lottery Corporation. We issued an invitation to the Nova Scotia Gaming Corporation to appear in front of us and we have present Ms. Dara Gordon, the Vice-Chairman. She and I have spoken, as the committee members will know, with respect to the nature of her presentation and I will remind members that we had a discussion last week about Ms. Gordon's desire not to compromise the negotiating position of the Province of Nova Scotia through any part of today's presentation. In our discussions, we didn't agree on what the limits of confidentiality might be but I expect all members of the committee to use their good discretion in our interactions. We can perhaps discuss any aspects of this as the questions arise.

With that preliminary, I would ask Ms. Gordon to offer us any introductory statement she may have and then we will proceed to questioning by members of the committee. We have a question right off the bat from Mr. MacKinnon.

HON. RUSSELL MACKINNON: Mr. Chairman, I guess I am raising a point of order here with regard to your letter of yesterday. We can deal with it now or we can deal with it after Ms. Gordon's presentation, it is the pleasure of the Chairman.

MR. CHAIRMAN: I am sorry, what is the question?

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MR. MACKINNON: I am raising a point of order with regard to the content of your letter yesterday that I feel would have some impact on today's deliberations. I am just wondering, should we deal with it now or . . .

MR. CHAIRMAN: Why don't you raise it now and we can see whether it is appropriate to deal with it now.

MR. MACKINNON: Okay. Mr. Chairman, I am referring to your letter, of course, of Tuesday, May 4, 1999 to members of the Standing Committee on Public Accounts referring in your second paragraph to Section 60(2)(b) of the Rules and Forms of Procedure of the House of Assembly, obviously vis-à-vis to the purpose of the Public Accounts Committee. Of course, the mandate of the Public Accounts Committee, which is set out in Section 60(2)(b) of the House rules read as follows, just for all members approbation, Section 60(2), "For greater certainty, . . . (b) the Public Accounts Committee is established for the purpose of reviewing the public accounts, the annual report or other report of the Auditor General and any other financial matters respecting the public funds of the Province;". That is the section that you referred to, Mr. Chairman.

As I understand it, the Public Accounts are dealt with in Sections 9 and 10 of the Provincial Finance Act. Under Section 10 of the Provincial Finance Act, the Minister of Finance is required to lay the Public Accounts before the House of Assembly following the close of the fiscal year on March 31st but before the end of the calendar year on December 31st. The Annual Report of the Auditor General is dealt with in Section 9 of the Auditor General Act. The Auditor General is required to lay his Annual Report before the House of Assembly after - and I emphasize after - the close of the fiscal year on March 31st but before the end of the calendar year, December 31st.

Section 9 of the Auditor General Act provides that the Annual Report of the Auditor General forms part of the Public Accounts of the province for the same fiscal period. Therefore, and I believe all will agree, it is not coincidental that the Public Accounts of the province and the Annual Report of the Auditor General are required to be laid before the House of Assembly during the same period. Both the Public Accounts of the province and the Annual Report of the Auditor General are historical or retrospective documents in that they deal with matters within a fiscal year for which the books of the accounts have been closed; the Public Accounts and the Annual Report of the Auditor General, being an accounting and analysis of how public funds were expended during the fiscal year.

The mandate of the Public Accounts Committee is therefore written in the same historical, retrospective context when it refers to the Public Accounts and the Annual Reports of the Auditor General. More simply put, the mandate of the Public Accounts Committee is not a forward-looking mandate granting jurisdiction to inquire into government's policy and planning options, strategies and considerations dealing with the province's finances.

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Mr. Chairman, I would also draw to the attention of the committee members, for those who weren't present last week, the Auditor General's comments on this issue.

The mandate of the Public Accounts Committee also refers to, ". . . any other financial matters respecting the public funds of the Province;", and that is the concern that you raised, Mr. Chairman. The reference to "other" modifies the retrospective nature of this mandate referred to elsewhere therein.

The reference to "public funds" is dealt with in Sections 17 through 29 of the Provincial Finance Act under the heading Public Money. The essence of the concept reflected by these provisions is that public money is money which is received by the Minister of Finance and which has been deposited in the consolidated fund or the appropriate special fund which is identified in Section 17 of the Act. Section 20 then provides that no payment shall be made out of the consolidated fund except under the authority of the Legislature. Those provisions, Mr. Chairman, are consistent with the jurisdiction of the Public Accounts Committee to inquire into whether or not public funds received and accounted for by the province have been properly expended with normal authorization. Inquiring into such matters is retrospective as opposed to forward-looking.

Therefore, the mandate and the jurisdiction of the Public Accounts Committee - and I would also refer to the Terms of Reference and the mandate of the Public Accounts Committee which we dealt with several years ago in the subcommittee consisting of myself, the honourable member for Queens and the honourable member for Sackville-Cobequid and then eventually ratified by the committee and then the House - is confined to reviewing the historical financial data as set out in the Public Accounts of the province and the Annual Report of the Auditor General. It does not - and I emphasize it does not - extend into inquiring into future financial planning of the province, including matters related to the preparation of the budget of the Minister of Finance. To do so would violate the customary security related to the preparation of the budget as a measure to prevent speculation in financial markets, and the economy generally, which could provide an unfair economic advantage to persons in possession of such information.

Mr. Chairman, I think there is sufficient evidence to support that particular position in terms of the security of the budgetary secrecy. I raise those points for the consideration of the committee and if there is disagreement with that, I would certainly be willing to refer that to Legislative Counsel for a legal opinion as to the mandate and the authorization of this particular committee, vis-à-vis this issue that is before us here today, the Public Accounts Committee.

MR. CHAIRMAN: Mr. MacKinnon, thank you very much for raising this. It seems, given the nature of your comments, that we had better deal with this immediately before we proceed. It is clear that the nature of the point of order that the member is raising is one which really goes to the heart of whether the committee ought, today, to be inquiring at all into the

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subject that we had previously agreed to. He frames it in a way we have not previously discussed, at least not discussed in public and certainly didn't discuss at the time when we originally set our agenda. You have all heard the comments of the member. He raises it as a point of order and I think, by implication, suggests at least two possible ways of proceeding: one being to consult the Legislative Counsel for an opinion; the other being, I suppose, to abandon our inquiry entirely. I read that as an implication, I didn't hear him say it directly.

What I propose now to do is invite members of the committee to make their comments and see if a course of action emerges from discussion. Mr. Dexter.

MR. DARRELL DEXTER: Well, let me just begin by saying that that is a lot of work to accomplish not very much, in my view. The legislation and Rules of the House set out a list. It includes in that list the things that this committee can review. It includes, ". . . the public accounts, the annual report or other report of the Auditor General and any other financial matters respecting the public funds of the Province.". Lists by legal convention are inclusive, not exclusive. That is the way that this ought to be viewed.

The fact of the matter is that this is about drawing lines. Where do the powers of the committee to investigate and review the accounts of the province end? If the committee decides, at some point, that it ought to go in some direction, that is up to the committee. It is not a matter that needs to seek a legal opinion. It is not a matter that we should be trying to place in some kind of a twisted historical context that has no actual bearing on the construction of the plain language of the rules.

What Mr. MacKinnon is putting forward, through the document that he was reading from, is an attempt to read down these rules and to make them so narrow as to hamstring this committee and to make it unable to look at a proper examination of the expense of public funds and the proper review of the financial matters of this province.

What we are undertaking now is not to determine anything that has to do with the upcoming budget, in my view. That is not the point of today's exercise. So if there were any legitimacy to the comments made by the minister, they don't apply on any account today. Those are my comments. Thank you.

MR. CHAIRMAN: Are there any other members who wish to comment? Mr. LeBlanc.

MR. NEIL LEBLANC: I don't have a long statement, Mr. Chairman. I do want to say that in the functions of the committee, as you made public in your letter in the Rules and Forms of Procedure of the House of Assembly, it refers to, ". . . any other financial matters respecting the public funds of the Province.". That is a pretty wide spectrum.

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I realize that things, perhaps, in the past have not gone along the way that Mr. MacKinnon has outlined in his correspondence and as he said, in the past. It is a minority government, the concept is different and we are looking at many different facets that perhaps, in the past, the government would not have allowed the Opposition Parties to ask questions on.

I look at this circumstance today and Ms. Gordon is going to be answering some of these questions and I think they are pertinent to what people want us, as a Public Accounts Committee, to be asking. So, I disagree with Mr. MacKinnon's conclusions and I believe that it is appropriate to be asking questions along these lines.

MR. CHAIRMAN: Are there any other members of the committee who wish to comment? Mr. MacKinnon.

MR. MACKINNON: Mr. Chairman, I appreciate the comments of both my colleagues, but as with both my colleagues, I am entitled to my opinion. I tried to follow the rules as they are laid out and that is why we have rules of procedure. That is why we have laws, that we operate within the parameters of those laws, by-laws and regulations. That is why I have asked for the approbation of the committee to seek legislative legal counsel. Otherwise, what is the purpose of having legal counsel if we are not able to draw on such legal opinion when questions of the financial security of what could very well be a budgetary matter, particularly in light of the comments that were made by the Auditor General last week, as you yourself, Mr. Chairman, indicated in your letter to Ms. Gordon.

MR. CHAIRMAN: Here is how I propose to treat the comments of Mr. MacKinnon. He raised this as a point of order; I will, therefore, treat it as a point of order and make a ruling based on his point.

My view is as follows. I understand that the committee made a decision earlier to inquire into the relations between the Nova Scotia Gaming Corporation and Atlantic Loto. The decision to inquire into that matter was not made while directly facing the question of the mandate of the committee. However, the mandate of the committee has now been raised and discussed today.

In that context, Mr. MacKinnon has asked us to interpret our mandate in a way that would invite us to confine our mandate to deal with matters that are retrospective and not forward-looking. I do not believe that the wording of the Rules and Forms of Procedure of the House of Assembly, Section 60(2)(b), is required to be constrained in that fashion. Probably there are some limits. On the other hand, I do not believe that the matter that we are about to look at today contravenes any of those limits. I, therefore, propose that we continue with our procedure today.

Ms. Gordon.

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MS. DARA GORDON: Thank you, Mr. Chairman and members of the committee. I have a few brief opening remarks, if I may, that largely have to do with the withdrawal from ALC and some background that I would like to provide to the committee on that process.

As the committee knows, the Nova Scotia Gaming Corporation was created in February 1995. It was mandated and charged with the business of gaming in the province and its role is to conduct and manage all gaming in the province. It is the only entity legally permitted to do so, otherwise gaming would be illegal under the Criminal Code.

Our relationship with the Atlantic Lottery Corporation pre-dated the existence of the Nova Scotia Gaming Corporation. In fact, the Atlantic Lottery Corporation was first established in 1976. When the Nova Scotia Gaming Corporation was created, in 1995, it became one of four shareholders of the Atlantic Lottery Corporation together with the provinces or the Crown agencies of P.E.I., Newfoundland and New Brunswick. It, in effect, replaced, as shareholder, the minister formerly charged with gaming matters in the province.

However, the Nova Scotia Gaming Corporation has not seen its relationship with the Atlantic Lottery Corporation as strictly one of shareholder, that is we don't see our relationship limited to one of four shares that we hold in Atlantic Loto. The principal relationship that the Gaming Corporation has with the Atlantic Lottery Corporation is one of agency. They operate two - actually now three - forms of our gaming businesses in Nova Scotia. They operate our video lottery business and they operate our traditional or ticket lottery business.

So, we see our arrangement as an agency or operating arrangement. We are charged with the conduct and manage function under Section 207 of the Criminal Code and we discharge that, in part, through the activities, the hands-on operation if you like, of the Atlantic Lottery Corporation in much the same manner that we carry on or conduct and manage our casino business through our operators, the Sheraton.

In 1996, it became evident to the Nova Scotia Gaming Corporation that the financial formulae related to the sharing of profits had not been updated in some time and may have distorted the profits that Nova Scotia should be receiving from the Atlantic Lottery Corporation.

The matter was raised by the members of the Board of Directors of the Atlantic Lottery Corporation from Nova Scotia; however, again, no support at that level for an internal review.

In December 1996, the Nova Scotia Gaming Corporation requested its auditor, the Auditor General, to conduct a shareholders audit, as we were permitted to do, of the Atlantic Lottery Corporation. That audit covered a number of areas and the Auditor General's office reported the results of that audit in March 1997. Of particular interest to the Gaming

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Corporation were the comments of the Auditor General on the unfairness of the profit allocation formula and the effect of the formula that Nova Scotia was subsidizing other provinces. There were also comments in the Auditor General's Report on management and control issues. As a result, in May 1997, the Gaming Corporation decided to table an amendment with the other three shareholder provinces to amend the profit allocation formula. We have been engaged at various levels and discussions of that amendment from May 1997 through to November 1998.

In November 1998, which was just last fall, an agreement was reached, in principle - it was not in writing - amongst the four provinces, that all provinces agreed to the amendment proposed by Nova Scotia. However, the effect of the amendment proposed by Nova Scotia was to reduce the sharing to Newfoundland by approximately $3.7 million. Consequently, Newfoundland indicated that they would only sign on to the new formula - that was agreed to be fair - provided they received an adjustment from New Brunswick. As a result, the shareholders agreed that Newfoundland and New Brunswick should engage in bilateral discussions to see if they could work out an arrangement that was satisfactory to both.

That process became protracted and on March 9, 1999, the Gaming Corporation gave formal notice of its intention to withdraw if those discussions did not reach some conclusion shortly. On March 29th, it became evident - and we were advised by New Brunswick and Newfoundland - that they could not close the gap. Consequently, we are now proceeding through the process of withdrawal.

Since March 29th, we have been negotiating with the other three shareholders, the terms, the timing and the process of our withdrawal. We have targeted November 30th of this year to withdraw our video lottery business and March 31st of next year, to withdraw the ticket business. We have had a number of meetings with my counterparts of the other three shareholder provinces. We have discussed a wide range of issues, however, we have not reached agreement on any of those. I expect that the negotiating process will continue for at least another month and possibly two.

I had indicated to the Chairman when I was first requested to appear before the committee - and, in particular, the committee's request for the entire business report that we commissioned - that we had released the executive summary of that report, which is an accurate and complete executive summary on the substance and significant issues in the main report. We are greatly concerned, given the critical stage of our negotiations about the release of the entire text of the report, because it is an important tool to us in terms of succeeding at those negotiations and concluding the best deal for Nova Scotia.

[9:30 a.m.]

I would be pleased to, however, answer any general questions. That really is the only area that I feel constrained.

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MR. CHAIRMAN: Ms. Gordon, thank you very much for your introductory comments. Perhaps I could start the questioning, you might just help me understand this. The nature of the relations, I believe you characterized as both a shareholder and an agency relationship. Is that correct?

MS. GORDON: Yes, that is correct.

MR. CHAIRMAN: As a shareholder, Nova Scotia is a 25 per cent shareholder of Atlantic Lottery Corporation.

MS. GORDON: That's correct, we hold one of four shares.

MR. CHAIRMAN: The four provinces own an equal number. Is that right? That is, they all own the same proportion.

MS. GORDON: That's right. Each of the four are equal shareholders.

MR. CHAIRMAN: Did I hear you correctly that you said there were three agency functions that Atlantic Loto performed? One VLTs, one tickets, you didn't name the third.

MS. GORDON: The third is harness racing.

MR. CHAIRMAN: Is anything proposed with respect to withdrawal of the function of harness racing?

MS. GORDON: No, with respect to harness racing, which is actually carried on through a subsidiary of ALC, we propose that that would be unaffected. Our profit arrangements on harness racing were defined last year and we are satisfied that they are fair and reasonable. We are also satisfied that the agency agreement that we put in place at that time accommodates our management and control issues.

MR. CHAIRMAN: Then, perhaps, what I don't understand is the language that refers to withdrawal. It seems to me that there are at least two forms of withdrawal that are possible here. One is withdrawal from being a shareholder in Atlantic Loto, the other would be termination of the agency agreements. Can you tell me which it is that is afoot?

MS. GORDON: Both are. The main one, the one that has been a subject matter of the most focus is the agency relationship, but we would propose to withdraw in both capacities as shareholder and having ALC as our operator.

MR. CHAIRMAN: But leave the harness racing arrangements in place?

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MS. GORDON: Yes, strictly as a contractual operating arrangement, as I say, similar to what we would have in place with any operator of a business.

MR. CHAIRMAN: Okay, I think that sets the groundwork. I will start with Mr. Dexter.

MR. DEXTER: I have what is a really broad and very general question for you. I am old enough to remember Atlantic Canada Plus and maybe that is not even that long ago but I remember their slogan, We're for us. Do you remember that? Anyway, there was a whole list of attempts on a regional basis to try to bring together areas of cooperation where they made sense, whether it was the Maritime Provinces Higher Education Commission, whether it was the Agricultural College, whether it was the police academy and there were a number of these. The theory always was, as I understood it, that as an individual province, many of these things, these resources or institutions that we wanted to build, we weren't big enough to do it alone but if we cooperated, we could undertake these institutions and programs in a way that would meet the needs of all of the people in the region.

It seems to me, just over the last couple of years, at a time when there seems to be a lot of talk about the need for amalgamation and consolidation and the need to streamline and to make these things more efficient, that at the same time that all of that is being pursued, there is, on the other hand, an attempt by this government in a couple of very specific areas, whether it is with respect to the police academy and with respect to the Atlantic Lottery Corporation now, to leave that and to pursue rather than Atlantic Canada Plus, what I would call a policy of splendid isolation.

So, I just wonder, in your analysis and in the patriation alternative discussions, whether or not the impact on that kind of general notion of cooperation was discussed and whether or not you see it as having an impact on the other areas of cooperation or whether it just wasn't considered by the Gaming Corporation as not part of their mandate?

MS. GORDON: Well, perhaps I can address it this way. Our mandate is the business of gaming, in the first instance, and that is what we have focused on. In terms of the business of gaming and whether this makes good business sense to Nova Scotia, it doesn't. So we are losing money, we are subsidizing other provinces and all of our analyses show that we can do as well as, if not better, on our own.

There is a notion afoot that economies of scale would somehow dictate that centralization or the four province effort makes more sense. I am told by our advisers, in this day of technology and rapid growth and development that there has been, that those notions that persisted back in 1976, when you had huge mainframes and a lot of investment in computer and IT, are no longer applicable. The concept of scalability, buying what you need to run your business is very much at play and can be priced very competitively now. So, on

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a strict business point of view, that's our mandate, that is what the Nova Scotia Gaming Corporation is all about. Its board makes those business decisions.

Did we do it in a vacuum? No, we didn't. It was our decision but we did consult and we consulted through our shareholder, the Minister of Finance, on issues such as regional cooperation. Mostly, we did that because our system here in Nova Scotia is quite different from the other three provinces. We are the only ones that just wear one hat. Most of my colleagues at the Atlantic Lottery Corporation table that I deal with are both business people and regulators and they are deputy ministers. There is no distance between them and government. They don't have a board of directors that they report to, as I report to. So, naturally, the political dimensions of this decision were being advocated quite aggressively by these deputy ministers at the Atlantic Loto table and, in particular, that was the nature of the debate between Newfoundland and New Brunswick; Newfoundland suggesting that they, on a regional-benefits basis, don't share fairly and you alluded to the police academy, which, frankly, I don't know a lot of detail about and they alluded to veterinary colleges and health things and New Brunswick countered with roads and God knows what else, and those issues were just not appropriate for the Atlantic Lottery Corporation board of directors on a business basis. But, certainly, in the political sphere, they had to be considered. The persons with whom I was dealing were determined that they be considered. We briefed our shareholder and those discussions did take place, of that I am aware.

I guess what I know as well, is that regional cooperation is intended, as you say, where it makes sense for all. This wasn't a situation where it made sense for Nova Scotia. I think Nova Scotia's position, it was clear at the Atlantic Lottery Corporation table that it made no sense, so unless it could be justified in a larger context, the business decision was certainly the right one. Whether larger review of cooperation and regional benefit issues should be or will be done, of that I don't have any further knowledge, but we did consult to make certain that the way the business decision was being made did not fly in the face of any policy decisions that were being taken at other levels on regional cooperation.

MR. DEXTER: The Gaming Corporation and I guess the Atlantic Lottery Corporation, more specifically, was, by and large, in the business, through video lottery terminals, ticket games, of taking the money of the people of the Atlantic Provinces and essentially recycling it and giving back x amount of it and skimming off x amount for the government; that is, in essence, what happens.

In the past, there was, I think, a view that whatever burden was placed upon people was shared among the provinces. Now, the point of sale for all of this, if I understand this correctly, will just be Nova Scotia. Is that right? You won't continue to sell your product in New Brunswick or in P.E.I. or in Newfoundland.

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MS. GORDON: Well, can I just give a little bit of background on that? Most of our product, 40 per cent of our product, is what is called national product. It is owned and developed by the Interprovincial Lottery Corporation, it is neither ALC's nor ours. The provinces have gotten together and established ILC, so, much of our product, our 6/49 tickets, our Super 7 tickets, they all come from there. Our regional product is a very small component, it is about 9 per cent or 10 per cent of our total sales. That is the product, that, if you like, has a special label or a special connection with Atlantic Loto.

MR. DEXTER: So the other products are sold nationally?

MS. GORDON: Well, most of it is sold nationally, for example, our break-open tickets, they represent about 15 per cent. They are sold across Canada but the particular one that we sell here is sold in other jurisdictions but it does have, at the moment, an ALC logo on it. It can be manufactured at any location. So it is really the regional games, I think, that . . .

MR. DEXTER: Let me kind of rephrase that then. The amount of money that is generated out of the Atlantic Provinces, I think on your figures, exceeds the payouts that you make. You are not in the business of losing money, right? It has been profitable for a number of years.

MS. GORDON: Yes, we have been profitable for a number of years.

MR. DEXTER: I think you would recognize and agree with me that there is an instrument of social policy that is built right into the decision to carry out gaming in the province, in fact, there are references to it in the Act as well and the responsibilities of the Gaming Corporation?

MS. GORDON: Our mandate is to maximize the profits from gaming in a socially responsible manner.

MR. DEXTER: So, when you say that the business case was made for the withdrawal from the Atlantic Lottery Corporation, and I understand that and if you tell me that your figures say from a profit and loss point of view that the best thing to do is to withdraw, I accept that. I guess what I am asking is on the other side of this, on the socially responsible side, what considerations, what factors were considered on that score when the decision to withdraw from the Atlantic Lottery Corporation was made, if any?

MS. GORDON: Well, now you are travelling into the management and control area. I was not wishing to get into that in any great detail but perhaps I could answer it this way. Our Nova Scotia gaming regime, as I mentioned, is quite different from that in the other three provinces. In fact, we are the only province that has legislation that requires social responsibility; that requires constant and continuous study of the socio-economic effects; that

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has a regulatory and enforcement agency, which we have through the Alcohol and Gaming Authority, a substantial one. One of the ongoing difficulties with Atlantic Lottery was the requirement that we were imposing upon them to comply with Nova Scotia law and Nova Scotia policy direction. That was out of step with what was going on in the other three provinces.

It is a reason, it is not the main reason for us taking back the control of our gaming business so that we can ensure, perhaps more promptly, that we deal with legislative and policy issues impacting Nova Scotians in a more responsive and direct manner.

MR. DEXTER: This is my last question before I pass it on. I just wanted to make sure that I heard you correctly. What you are saying is that one of the net benefits of the withdrawal from the Atlantic Lottery Corporation is that we can now expect a more socially responsible gaming regime in the province?

MS. GORDON: I think that would be an unfair characterization. I think what I was saying is that we will be able to respond in a quicker fashion and in a manner that is in keeping just with Nova Scotia's requirements.

MR. DEXTER: I think that is what I said. Thank you.

MR. CHAIRMAN: Mr. LeBlanc.

MR. LEBLANC: I would like to get into a few of the comments that you made. It was in the review of the report that you mentioned that the executive summary has been released, that is the report that the Gaming Corporation had commissioned. In that, a few things came out, and I believe there was some mention by the minister in the House - whether it was yourself or himself, I am not sure - about the fact that the initial capital additions that the Gaming Corporation would require to get into this, I believe it was $17 million. Is that correct?

MS. GORDON: It depends, actually, on the business model that we choose. If we go with outsourcing then there is no capital investment or very nominal of about $1 million to $2 million. If we go with in-house, that is, actually running the operation ourselves, then we estimate that it will be in the range of $17 million.

MR. LEBLANC: In talking about the maximum one, and I understand what you are saying if it is outsourced that it wouldn't be that much, what would the $17 million encompass? Perhaps you could just clarify that for the committee.

MS. GORDON: The $17 million would be, in the case of our ticket lottery business, our central system and the telecommunications equipment to communicate with our retailers throughout the province and much the same in connection with the video lottery business; the

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breakdown is about $6 million for the video lottery business and $11 million for the ticket lottery business.

MR. LEBLANC: Is it $6 million for the machines or $6 million just for the ability to . . .

MS. GORDON: For the central system and the communication links, the software and . . .

MR. LEBLANC: The VLTs that are in the province, are those already a function of the Nova Scotia Gaming Corporation, the capital acquisition of it, or is it the Lottery Corporation that put the money up for that?

MS. GORDON: All of the equipment that Atlantic Lottery has, whether it is in Nova Scotia or centralized in Moncton, has all been paid for with Nova Scotia's dollars; 40 cents of every dollar has been, in effect, withheld from Nova Scotia to finance those acquisitions.

MR. LEBLANC: So, basically, that is already your equity? The machines would be the equity of Nova Scotia as it stands now?

MS. GORDON: Mr. Chairman, this is an area that I think is very much on the table in terms of our discussions . . .

MR. LEBLANC: Okay, I am just trying to understand. If that is something being negotiated, then just say so. I have no problem in doing that. I am trying to get an understanding of it.

MR. CHAIRMAN: I think Mr. LeBlanc's suggestion is that if something is under negotiations, being disputed, I think you could probably say that.

MR. LEBLANC: Can you tell us, out of curiosity, what it costs to operate the Atlantic Lottery Corporation? Now, that is something that is public knowledge, so maybe you could give us an understanding. You are talking about, as one of the options, setting it up on your own and we currently have a process in place that is the Atlantic Lottery Corporation, so I am not getting into hallowed ground on this one. Can you tell us a little bit of how much it costs to operate the Atlantic Lottery Corporation?

MS. GORDON: I don't have the number off . . .

MR. LEBLANC: Well, I am talking general. The Auditor General has some information.

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MR. ROY SALMON: In 1997, the operating expenses totalled approximately $55 million, that's operating expenses.

MR. LEBLANC: That would include pay-outs and everything . . .

MR. SALMON: No, it does not include pay-outs. It's the cost of marketing, sales and promotion, the finance function within the organization, corporate services. It's the overhead. If you want to talk pay-outs . . .

MR. LEBLANC: No, I would rather stay on the other one. I think that is more appropriate.

MR. SALMON: . . . you are into hundreds of millions of dollars.

MR. LEBLANC: That begs the question as to whether or not this is viable for Nova Scotia, which is part of the reason we have asked you to be here today. We are trying to understand whether or not this is in the best interest of Nova Scotia because we are looking at the scale. You were talking about efficiencies of scale in your opening comments, that things are different today than they were before because of computerization, the fact that things can be done on a smaller scale and perhaps gain control, and we are also alarmed that perhaps this may not be the best business decision as we go forward.

It's my understanding that the Gaming Corporation in 1995-96 hired Ernst & Young to do a report as to whether or not it would be in the best interest of the province to privatize it or to bring it into Nova Scotia. Are you aware of that report?

MS. GORDON: Yes.

MR. LEBLANC: Was that report made public? That was during the years I was away. I will leave it at that, I was away.

MR. MACKINNON: On sabbatical.

MR. LEBLANC: On sabbatical, that's right. Perhaps you could just inform the committee as to what happened on that. Was that a public document or was it something that was kept in-house?

MS. GORDON: That document has contents similar to the report that was recently commissioned. It was the subject of a freedom of information application and Mr. Fardy ruled that portions of it should be released and those were released.

MR. LEBLANC: So, part of it wasn't. Is that right?

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MS. GORDON: That's right.

MR. LEBLANC: Were the recommendations released on that one?

MS. GORDON: No.

MR. LEBLANC: Can you tell me who did the report this time? Was it Ernst & Young again?

MS. GORDON: No, we retained a group by the name of Transformation Consulting Group, TCG. They are out of Vancouver, British Columbia. They have the lottery expertise that we were looking for.

MR. LEBLANC: I am not trying to be derogatory, why wouldn't you have hired a local company rather than outsourcing to someone across the country. You are saying that the expertise was not present here within the Atlantic Provinces to do this report?

MS. GORDON: No, we had a competitive process, the best evaluation committee and the best skill set.

MR. LEBLANC: Was it an open process or was it an invitational process?

MS. GORDON: It was by invitation. We worked for about one month to try to locate firms that were capable of providing the expertise. We identified five and, as a result of that, we short-listed to three and interviewed three.

MR. LEBLANC: Do you have any problems releasing who the five, that you invited to do this report, would be?

MS. GORDON: No. I can tell you now, if you like.

MR. LEBLANC: Perhaps you could, sure.

MS. GORDON: PricewaterhouseCoopers, Grant Thornton, a group by the name of QLot out of Sweden, Transformation Consulting Group and Deloitte & Touche.

MR. LEBLANC: You didn't ask Ernst & Young?

MS. GORDON: No, we didn't and the reason for that is Ernst & Young are the auditors for the Sheraton. As you may be aware, we have arbitration outstanding with Sheraton with respect to the HST/GST issue and Ernst & Young are advising Sheraton on that issue. So, we felt we couldn't and that they wouldn't in any event.

[Page 16]

MR. LEBLANC: That's reasonable. You made some mention of the fact that the other provinces were being represented by deputy ministers and you had the luxury, or the different approach, that you had a board of directors and that you are looking at this strictly from a business decision. Is that a fair statement? I don't want to put words in your mouth, but you made the statement. Perhaps you could either agree or disagree with what I have said.

MS. GORDON: No, that is not a fair statement. We were looking at it based upon the factors we were told to consider under the Gaming Control Act. Our mandate is defined by the Gaming Control Act. So, we describe ourselves as principally the business side, but as I pointed out to Mr. Dexter, we have to look at social responsibility and other issues as well.

MR. LEBLANC: Let me ask you this question then. Your concern as to whether or not there are interprovincial agreements in other fields - whether they be health, the veterinary college, the Atlantic Police Academy, the IWK Hospital - those really are not part of your concern, as it stands, because of your social responsibility in regard to gaming. Is that accurate?

MS. GORDON: I think that is right, that the Act pretty clearly defines our mandate and separates our mandate from political or other policy issues.

MR. LEBLANC: So, the problem I see is that you have a very narrow scope in regard to gaming, the social responsibilities to gaming, the maximization of profit with regard to the social aspect of it. The problem is - and I refer back to what my other colleagues have said - that if we start getting too parochial in this, all of our agreements with other aspects of our society - whether they be health or education - may very well be threatened if we become very isolated in our thought process. So, that is the concern that a lot of us have as to whether or not we are setting ourselves up to have more of these and whether or not the Atlantic Provinces won't have those functions.

How much time do I have, Mr. Chairman?

MR. CHAIRMAN: Another 10 minutes.

MR. LEBLANC: I can't talk for another 10 minutes, but anyway, I have a few questions. You are indicating that you feel that you can do the processes here locally in a cost-effective manner. Obviously, that is what your executive report is saying. Is that correct?

MS. GORDON: Yes.

MR. LEBLANC: I didn't get a copy of that executive report. I have read it in the newspapers and I see the chairman says that he has it. Is it coming?

[Page 17]

MR. CHAIRMAN: Yes. What has happened is I realized, as we started today's proceedings, that indeed this executive summary had not been distributed to members of the committee. I hadn't seen it and I don't believe anyone else had. So, I have obtained copies through the Committees Office and they should be circulated shortly.

MR. LEBLANC: I was going to ask some questions in regard to it. Since I haven't seen it, I think perhaps I will leave my questioning now and come back after I have a chance to read it, if that is appropriate, Mr. Chairman.

MR. CHAIRMAN: That is just fine.

Mr. Fage.

MR. ERNEST FAGE: Good morning, Ms. Gordon. I have some general questions, but we will have another round of questions, will we not, Mr. Chairman?

MR. CHAIRMAN: Yes.

MR. FAGE: Maybe if Ms. Gordon doesn't mind, I will go to a few specific questions where this time period is shorter and we will talk general questions later from my perspective.

Specific questions that I have some concerns about, you raised the situation with the break-open tickets. Is it true that they are manufactured in Newfoundland, that they supply them to the Atlantic Lottery Corporation?

MS. GORDON: That is the main manufacturing facility, in St. John's, Newfoundland.

MR. FAGE: In Nova Scotia, a number of retailers have expressed to me their concern, over the last number of months, that there have been no break-open tickets available to them. I understand they are the highest return to those retailers, something in the order of 12.5 per cent. Is there a problem with the break-open tickets, currently, why they were withdrawn from the market, as I understand it, from these people in Nova Scotia?

MS. GORDON: Yes, that is right. You are correct. They do pay a higher commission rate than our other product, significantly higher, and the product was withdrawn from the market on January 29th of this year because it had been compromised by players.

MR. FAGE: So Nova Scotia, P.E.I. and New Brunswick are contending there is a problem with the tickets currently. That is why they haven't been reinstated?

MS. GORDON: Yes, that is right. We all feel that the product that we offer needs to be fair and integrity is an important issue in the lottery business and until we are satisfied that it is both fair and meets the integrity requirements, we don't feel it can be offered.

[Page 18]

MR. FAGE: So that is currently why the revamped ticket is not back on the market here in Nova Scotia?

MS. GORDON: That is correct.

MR. FAGE: Well, if that is the case, you are telling me that Newfoundland has a ticket on the market that is compromised because they are selling them in Newfoundland. That is an extremely serious set of circumstances if Nova Scotia is contending a ticket and the lottery business is compromised and Newfoundland is selling that ticket to their citizens. How do you come to those types of disagreements in the Atlantic Lottery Corporation?

MS. GORDON: I guess I am not commenting on Newfoundland's decision but I would point out that none of P.E.I., New Brunswick or Nova Scotia have returned the product to the market.

MR. FAGE: Okay. The set of circumstances seems extremely strange, though, that you are contending the ticket is compromised. The retailer in Nova Scotia is missing the business. Three provinces are upset with Newfoundland, I am told, because your side arrangement, as you said, can't be cut with New Brunswick. They are selling a ticket that they are certifying to their public that is safe and everything is fair and above board. You have said here at committee today that that ticket is compromised? That is pretty strong grounds for questions out there in the gambling public to the certifiable safety of a break-open ticket.

MS. GORDON: Well, that is the information that has been provided to the public, as well, that we have disclosed the reason that the ticket was removed from the market. Here, in Nova Scotia, it is a little bit different than P.E.I. and New Brunswick, as I described before. From a business perspective, we not only have to be satisfied that the product can be returned to the market, but we also have to satisfy our regulator and their focus is very much on fairness and integrity issues. There is no regulator in the case of New Brunswick, P.E.I. or Newfoundland.

MR. FAGE: I think it is an issue that certainly bears some scrutiny if one province has said it is fine, it is certifiable. We have been purchasing tickets here in Nova Scotia from Newfoundland and they have been supplying them. Our retailers are missing it and again we have one province contending that they may not be on the up and up and you have another province saying they are. The whole thing looks very questionable, is what I would contend.

MS. GORDON: We are not satisfied that the product meets our fairness and integrity standards. That is where we are.

MR. FAGE: So can you initiate an investigation through the Atlantic Lottery Corporation because of your concerns that those would be in the market place and being manufactured at this point and cleared up one way or the other?

[Page 19]

MS. GORDON: First of all, two things if I might, just before I answer that question. We are required to and have been reporting to the Gaming Authority here in Nova Scotia throughout the duration of this incident since January 29th. I also want to point out, you suggested that we are unhappy with Newfoundland because of their position on an inability to resolve the formula. It is a bit of a collateral issue, but we are not unhappy with Newfoundland any more than we are unhappy with New Brunswick. They were unable to resolve things between them. I just wanted to make that point. The reasons they have are, no doubt, satisfactory to them. We really don't have a position on whether they are doing the right thing or the wrong thing. It just didn't allow us to stay in and it wasn't getting resolved.

Coming back to the fairness and integrity issue, this a very important concern of the Gaming Corporation. We are very concerned about retailers in this province who have not had this product available to them for some time. We have had several internal and external investigations under way into the fairness and integrity of the product and we are doing our utmost to try to get fair product back into the market as soon as possible.

MR. FAGE: I apologize if I was misconstruing in any way. I meant exactly what you had echoed to us that New Brunswick and Newfoundland were responsible for resolving that issue, that it was an issue that, as you had said, the one that forced you to recommend to the minister and the minister to recommend to us, in the House, and all Nova Scotians, that he was planning on withdrawing from the Atlantic Lottery Corporation on that very issue, that you had come to terms in November. It was New Brunswick and Newfoundland.

On the second issue, though, I really can't emphasize how great a concern it is to all citizens out there - and you have articulated that you have concerns - that the break-open ticket is not suitably in the market place; de facto, with that concern, you are really saying that Newfoundland has a ticket in the market place in their province that may not fairly represent an unbiased and free draw with no encumbrance on it. That is an extremely serious situation that one province is contending that yes, it is on the up and up and another province, by withholding it, is saying, no, it is not.

MS. GORDON: I don't want to parse words but I think what I did want to make clear is we have established a certain level of fairness and integrity that must be achieved and confirmed by independence. That doesn't mean necessarily that the product that is being offered right now in Newfoundland wouldn't achieve those standards if put to those tests. But we have asked, in the case of Nova Scotia, P.E.I. and New Brunswick, that before we reintroduce that product into the market, we want to be satisfied that it meets and adheres to those standards.

MR. CHAIRMAN: Mr. Fage, we have just reached the 20 minute limit.

[Page 20]

MR. SALMON: Mr. Fage, I think it is critical that you understand that gaming in Nova Scotia is Nova Scotia's business and the point you are making about break-open tickets is just one example of differences between provinces in terms of their view of what is socially responsible. You can look at video lottery. Nova Scotia made the decision that video lottery terminals would only be located in licensed establishments. In New Brunswick, they are in grocery stores. That is a different perspective on what is socially responsible and I would suggest to you that the problem with the break-open tickets is Newfoundland's problem, not Nova Scotia's problem, in terms of fairness.

MR. CHAIRMAN: Mr. Fage, I will get back to you.

I have a suggestion. We have just received the executive summary of the repatriation alternative assessment dated February 1999. This is a document members of the committee will not have seen before, I don't believe. I am going to suggest that we actually just take a five minute break so members can absorb this and then we will continue with the questioning. Is that agreeable to members of the committee? I would really like to limit it just to five minutes so people can have a quick read at this and we don't lose the morning. Is that acceptable, if we just take that five minutes? Is that okay? Fine. We will be on break for five minutes. Thank you.

[10:09 a.m. The committee recessed.]

[10:17 a.m. The committee reconvened.]

MR. CHAIRMAN: We are now reconvened. I will continue with the questioning and invite Mr. MacKinnon.

MR. MACKINNON: Mr. Chairman, I will turn it over to my colleague, Mr. Fraser.

MR. CHAIRMAN: Mr. Fraser.

MR. HYLAND FRASER: Thank you, Mr. Chairman. Good morning, Ms. Gordon. You indicated in your remarks when you started that the Atlantic Lottery Corporation, or the four stakeholders were not able to close the gap of that $4.5 million. What did you mean by that and how long did negotiations go on before . . .

MS. GORDON: Well, we put our proposal to amend on the table in May 1997. At that time, the amendment that we proposed - the unfairness had started in 1991 when our video lottery business began. There were inequities but that magnified the unfairness because, really, the profit formula should have been reviewed at that time. When we put our proposal on the table, which really was a request, that the costs associated with sales in a particular province, be they video lottery sales or ticket lottery sales, be charged back, if you like, to

[Page 21]

that province. The net effect is, from your sales in your province, you would pay your expenses and the bottom line would be your profit.

One area that caused some concern was that some expenses were hard to earmark to a particular province. Our original formula that we put on the table in May 1997 said that those expenses - and they were roughly around $17 million in total - should be shared equally amongst the four provinces; our rationale being, everyone votes equal, we are all equal partners here, so everyone should share equally.

Well, that was a subject of some debate because the effect of that in the case of Prince Edward Island was, really, they would wind up paying the Atlantic Lottery Corporation instead of receiving anything from it. Eventually, everyone gave a little and by November 1998, as I said, we had reached a compromise that everyone could agree to on the profit allocation. What was on the table then was just as I have described, except instead of the $17 million being split in four equal shares, we would recognize Prince Edward Island's lack of critical mass. They would bear 10 per cent of that amount and the remainder would be split equally three ways.

Through the piece, everyone had given a little, including Nova Scotia. We had originally asked for an adjustment back to 1991 when the inequity first developed. We agreed that we would only go back as far as 1997.

In November, everyone had agreed, in principle, but Newfoundland, as I said, was most affected by this modification because they were being subsidized to the greatest degree by us. They wished to have an adjustment for the plant - if you like, for lack of a better term - in Moncton, and all the value and benefit that was attributed there to New Brunswick. That is how these New Brunswick-Newfoundland discussions developed.

Frankly, in March, I personally was quite optimistic that they would close the gap, that surely, they would not leave us with no option but to withdraw in the face of a $2 million gap. That was not the case, as I say; it was complicated by issues that Mr. Dexter has referred to, at political levels. In the result, there was no compromise reached and as we had said, we gave notice of our intention to withdraw.

MR. FRASER: So Nova Scotians were subsidizing the revenues of the other provinces to a certain extent, Newfoundland the most, perhaps, if I heard your comments properly?

MS. GORDON: Yes, that is fair. Of the $4 million to $4.5 million that we estimate we were subsidizing, $3.7 million of it, roughly, was going to Newfoundland.

MR. FRASER: They were looking for special consideration from New Brunswick to cover that because New Brunswick had the home base of the Atlantic Lottery Corporation?

[Page 22]

MS. GORDON: They agreed we were right, that we were wrongly subsidizing them, in other words, that shouldn't be, it wasn't fair, but they felt that on a larger, on a broader perspective, New Brunswick was getting all the jobs and all the spending and that they should be compensated in some manner for that.

MR. FRASER: Did you also say that we would withdraw completely from the Atlantic Lottery Corporation, except for the harness racing, our 25 per cent interest?

MS. GORDON: Yes, in other words, we will resign, if you like, as a shareholder and terminate our agency relationship with them for the video lottery and ticket business but we will leave in place the harness racing.

MR. FRASER: Right. So I guess it would not be of any interest to us, one way or the other, what new corporation is set up. In the long and the short of it, the other three provinces are going to be short $4.5 million - give or take - a year that we were subsidizing now and no matter what happens, they are going to be out of that. I presume that they should know that. I guess they must.

MS. GORDON: Yes, I think that is right. It is interesting though, really now, in the result, what will occur with Nova Scotia having withdrawn, there was a press release issued by the other three shareholders that the formula is going to remain the same which, if it does, really means that New Brunswick, as the next largest shareholder, will be contributing through the formula an amount, I think, which was in excess of what had been offered in an effort to close that $1 million and $3 million gap. I must say, that is speculation on my part because I don't know the exact numbers.

MR. FRASER: That is interesting. I am going to change a little bit. I want to ask you if you can comment on the gaming laws in Nova Scotia and how they differ from the other Atlantic Provinces.

MS. GORDON: They are quite different and that has been a part of the struggle with the Atlantic Lottery Corporation. Indeed, the Auditor General, in his report, commented upon these management and control issues.

As a shareholder with 1 of 4 votes, we really don't have the power to cause ALC to do anything ALC doesn't wish to do. So, consequently, unless it was a matter of law that had to be done, we really had to persuade our colleagues that it was the appropriate thing to do. Because our legislation is so much more sophisticated than theirs, we do have a lot more legal and regulatory things and a lot more just practical and sensible things that we ought to be doing that we were having some difficulty causing the Atlantic Lottery Corporation to do. I attribute that to the different gaming regimes because, even here in Nova Scotia in 1995, it took us some time to come up the learning curve and understand that the regulation of

[Page 23]

gaming is separate, it is autonomous. They have tremendous power to shut us down, take us out of the market, and we need to comply with the laws and the regulations.

My colleagues at the ALC table are both regulators and business people so if they perceive there to be a problem with the regulations in particular, a solution for them is just to change it, whereas for us, we are faced with compliance and a process that is really quite substantially different.

So the gaming regime, similarly on the business side, we being charged with the business of gaming, are insulated to a certain extent from policy and political aspects or dimensions of those decisions. That is not to say we can't be directed or told what to do. That provision is there but the board of directors is charged with the management of the business of gaming and that is within sort of narrowly-defined parameters, again, unlike our colleagues in New Brunswick, Newfoundland and P.E.I., each of whom reports and responds to political ministers on a day-to-day basis.

MR. FRASER: Those differences, what kind of effect have they had on the Atlantic Lottery Corporation? Because you bring different perspective to the table than the other three provinces, what effect does that have? Is it hard to work in that atmosphere?

MS. GORDON: It is hard to have one of four votes and try to cause the corporate direction to change. It has been terribly frustrating, I am sure, for management at the Atlantic Lottery Corporation, as well, who, until 1995, when the Gaming Corporation became involved, in their minds, but really until our new, modern gaming legislation came into place, the four provinces had been very consistent in approach and in gaming regime and everyone was sort of marching along together in the same direction. Nova Scotia, with modernization of its legislation and the creation of the Alcohol and Gaming Authority, brought a whole series of laws and regulations to ALC that management at ALC had a hard time coping with and, of course, that continues even today, that the direction, the needs of Nova Scotia are different from the needs of the other three provinces. But we have progressed and worked out an arrangement which is satisfactory but it will be, certainly from their perspective and from ours, a great deal easier to be able to administer things directly and ensure compliance as required here in Nova Scotia.

MR. FRASER: You have described the Gaming Corporation's relationship with the Atlantic Lottery Corporation as mainly an agency or an operating relationship. Can you explain that further?

MS. GORDON: A lot of people, you see, think of the Atlantic Lottery Corporation as a company that is owned by the four shareholder provinces and even at the Atlantic Lottery Corporation, most people think of it in terms of a shareholder arrangement. We have 1 of 4 votes. We don't find that very productive to us being able to conduct and manage gaming in

[Page 24]

Nova Scotia. In fact, if we were limited to one of four votes, we would have an awfully difficult time pushing the corporate agenda in the direction it needs to go for Nova Scotia.

[10:30 a.m.]

Really, the fundamental relationship is one of agency. In fact, that is the only thing that is permitted by the Criminal Code which is an agency arrangement. Although the agency arrangement that was originally described in 1976, when ALC was established and better defined through 1980s and into 1991, is better than being simply a shareholder, it is not very adequately defined. They are very short, one-page agreements. There remains some room for improvement there.

MR. FRASER: How do things work in terms of the Gaming Corporation's reporting to the Alcohol and Gaming Authority for matters related to the Atlantic Lottery Corporation?

MS. GORDON: Well, that, too, has been a process over the past few years. The Alcohol and Gaming Authority, it was our impression when they were initially established, that they focused the first year or two of their mandate, it seemed to us, at least, on our casino operator. They have quite extensive powers related to the regulation of casinos.

It is only in the latter years - I think in their Annual Report last year, they indicated that their focus would now turn to the Atlantic Lottery Corporation which really is, far and away, the most significant portion of our business.

To a certain extent, their powers with respect to the lottery and video lottery business are not as well defined as they are with respect to the casino business. We have had to work with them to accommodate their concerns and have a practical working arrangement.

The long and the short of it is that the Alcohol and Gaming Authority largely monitors fairness and integrity issues related to our ALC business and they do that through us. We are the ones that have to conduct and manage that business so that if something goes wrong, they come to us. We, in turn, go to the Atlantic Lottery Corporation, as our operator, for an explanation or whatever. From the Gaming Authority's point of view - or even from ours - we are the principal agency that they regulate here in the province.

MR. FRASER: How does the Gaming Corporation manage the Atlantic Lottery Corporation's activities as operator?

MS. GORDON: The agency agreement that I referred to or the main role that we have with them is not very well defined. We have been trying over the past few years to develop the tools that would enable us to better manage the business.

[Page 25]

For us, it is a significant business on a net profit basis. We derive well over $100 million. It is tough to adequately manage that business, in keeping with the requirements of the Criminal Code, at quarterly board of director meetings. We do not feel that we can comply with our statutory obligations in that manner.

We have developed a management protocol where our staff at the Gaming Corporation, whose job is to review and monitor ALC's performance against approved business plans and budgets, meet with management or their counterparts, if you like, at ALC to measure progress against budget and plan, discuss and analyse variances and make adjustments to the business plan, as necessary, on a go-forward basis. That has really been our main tool.

The board - and as I am a member at the board level - has tended to try to deal, as a board properly should, with strategic and policy issues but that is difficult to deal with, with operations at that level.

MR. FRASER: Can you explain the roles and responsibilities of the Interprovincial Lottery Corporation?

MS. GORDON: Well, the Interprovincial Lottery Corporation is - Mr. Dexter, I think, referred to that - the agency that some time ago, many years ago, in fact, the lottery corporations across Canada recognized that a national lottery would be able to offer higher prizes and thus generate greater revenues.

The Interprovincial Lottery Corporation was established and is owned by the 10 shareholder provinces. It owns the 6/49 product, the Super 7 product. It markets that product through regional marketing organizations such as the Atlantic Lottery Corporation. It has the obligation to develop, maintain, analyse, make sure that that national product is attaining sales and monitoring the expense and costs associated with it. It is unaffected by our decision to operate our own ticket and lottery businesses.

MR. FRASER: Will the repatriation of the lottery ticket and VLT businesses affect the responsible gaming initiative that was announced last year?

MS. GORDON: Well, no, I think it is going to help in many ways. I described earlier that, from Nova Scotia, we believed for some time that we had to be proactive in taking steps to promote responsible play with our video lottery terminals here in Nova Scotia. That was one of those areas where our views were not shared by the other three provinces. The pace at which a VLT responsible gaming plan was developing was not satisfactory to us.

As you know, in the spring of last year, we went on our own and developed our VLT responsible gaming initiative and we are well advanced on that now. That is a step that we have taken and only Nova Scotia has taken. It has created some controversy at the Atlantic

[Page 26]

Lottery Corporation, that we have embarked on this endeavour on our own. With a withdrawal from the Atlantic Lottery Corporation, of course, this will give us more control and more room to manoeuvre on that.

On the other hand, I should add that our first corporate priority this year is to repatriate our video lottery and our ticket lottery business on time and on budget. If that means that there may need to be a month or two deferral of aspects of that plan, because it is a multi-step plan, then that may be so. We are trying to monitor that as we flesh out our critical path on our repatriation.

MR. CHAIRMAN: We are ready for the second round now. Perhaps, Ms. Gordon, if I can start on this, maybe you can just help me understand a couple of points. Did I understand you to say earlier that it is now the Nova Scotia Gaming Corporation, itself, which is the shareholder in the Atlantic Lottery Corporation?

MS. GORDON: Yes, that is correct.

MR. CHAIRMAN: The scenario was set for the potential withdrawal, by reason of Article 17 of the Atlantic Lottery Corporation's by-laws; that is the article that says that, generally, decision making is on a majority basis but with respect to the apportionment of profits, it has to be unanimous agreement. That is really the problem, isn't it?

MS. GORDON: Yes, that is one of the main provisions. That is correct.

MR. CHAIRMAN: That is why it was not possible to deal with it by majority vote, for example, inside the Atlantic Lottery Corporation.

MS. GORDON: That is correct.

MR. CHAIRMAN: The Nova Scotia Gaming Corporation hired a consultant company to give it some advice with respect to the problem of diminished profits.

MS. GORDON: Yes.

MR. CHAIRMAN: That is the repatriation alternative assessment. You have paid money for this report and are relying on it, is that right?

MS. GORDON: That's right.

MR. CHAIRMAN: Maybe you can just help me understand. This report must have really considered three possible scenarios: one would be, staying in the Atlantic Lottery Corporation but being short $4 million or $5 million every year, in terms of fairness; the other would be, Nova Scotia taking over administration of, essentially, the bulk of gaming activities

[Page 27]

and doing it itself; and the third possibility would be to either stay in or go back to the Atlantic Lottery Corporation, if all the participating provinces were to agree unanimously on a different apportionment of the profits that satisfied Nova Scotia.

MS. GORDON: Yes.

MR. CHAIRMAN: Those are the three possible scenarios. I think we understand the number of dollars involved in the first and third scenarios. What I think we don't understand, really, are the number of dollars net to Nova Scotia in the middle scenario. Does that emerge from this report? In reading the executive summary, it is not clear to me just what advantage there is to Nova Scotia. Is this on Page 3, the tables on Page 3?

MS. GORDON: No. The one that you just described, Table 3 is the existing arrangement which is where we are being short-changed.

MR. CHAIRMAN: Yes, and there is the in-house model and the outsource.

MS. GORDON: In-house and outsource are just variations of the model where we would bring back the ticket lottery and the video lottery business.

MR. CHAIRMAN: These are two variations on the scenario number two that I described which is repatriate.

MS. GORDON: That is right, yes.

MR. CHAIRMAN: So the financial advantage to Nova Scotia that is envisaged here is the difference between $123.062 million and $127.823 million. Is that right, under the in-house model?

MS. GORDON: That is right. On an in-house model, if we operated ourselves, we would make $4.8 million more.

MR. CHAIRMAN: Has the board of the Nova Scotia Gaming Corporation actually passed a resolution to withdraw from the Atlantic Lottery Corporation?

MS. GORDON: The board has passed a resolution to issue a notice of intention to withdraw on specified dates.

MR. CHAIRMAN: When did the board decide that?

MS. GORDON: I don't have that available but it would be - well it is a recurring theme at the board level, but it certainly would have been last dealt with, in the early part of March, when the formal notices were drafted and approved at the board level.

[Page 28]

MR. CHAIRMAN: Last dealt with.

MS. GORDON: It was March 9th on which we issued our notice of intention to withdraw if the matter wasn't resolved shortly, which was really code for March 29th and it wasn't resolved by March 29th.

MR. CHAIRMAN: Fine. Has the board of the Nova Scotia Gaming Corporation made any decision with respect to whether it prefers the in-house or the outsourcing model?

MS. GORDON: No. No final decision has been taken on that. We are looking at both. Our first decision is with respect to VL and it is favouring the in-house model on VL.

MR. CHAIRMAN: As we read the consultants' report, it seems that really there is no difference in terms of dollars net to the province between the existing arrangements, however unsatisfactory they might be and the outsourcing mode. Isn't that really the case?

MS. GORDON: That is correct.

MR. CHAIRMAN: So really the financial advantage to Nova Scotia seems to be in the in-house model.

MS. GORDON: Yes, that is right but we asked that our consultant look at both. One of our reasons for that is we were uncertain about our timing and whether we would be fast-tracking or proceeding at a measured pace. An in-house model is not likely to be doable on a fast track.

MR. CHAIRMAN: Would it be the case that once withdrawal were established, that on a business-case basis, it wouldn't be very attractive to go back to the Atlantic Lottery Corporation, would it? Or would there be significant hurdles in overcoming? You would have to dismantle something, wouldn't you?

MS. GORDON: Well, we haven't eliminated that possibility. In fact, I believe that there will be some sort of ongoing arrangement with the Atlantic Lottery Corporation coming back to the regional tickets that we discussed earlier which are roughly about 10 per cent of our business. There is every indication that the other three Atlantic Provinces will want us to jointly market those with them and I believe we would be receptive to that.

We have also talked about activities that we will tender and that ALC may very well bid on but would need to be dealt with on a competitive basis and they would be strictly supplier.

MR. CHAIRMAN: Okay, I think that does it for now for me. Mr. Dexter.

[Page 29]

MR. DEXTER: I think most of what you had indicated to us earlier is what is contained, essentially, in this report. So I am not sure that I have a great deal more to ask you in relation to this. I just want to clarify a couple of things. You had said earlier that in terms of revenues to the province, that this was about $100 million a year?

MS. GORDON: No, it is in excess. We make about $120 million in all between the video lottery and the ticket lottery business.

MR. DEXTER: I notice that from the financial projections and on Page 3 where it looks like essentially, under the existing arrangement, there would be about $123 million in net revenue which would come to the province. In some regards, at least with respect to the in-house model, that rises to $127 million based on the analysis that has been done. I assume that you would say that one of the other benefits of doing this is that on the expense side, the expenses that were coming out, would now be expenses that would be spent in Nova Scotia, employing Nova Scotians and that that, although, it is an expense to the corporation it is still essentially a benefit to the province.

MS. GORDON: Yes, that's right, we did undertake that work, Mr. Dexter. We had a local consulting economist firm look at the economic benefits as well. They concluded that the annual economic benefits would be in the order of $5.6 million to the province.

MR. DEXTER: So over and above the $4 million extra in net revenue, this is . . .

MS. GORDON: An extra benefit to the province, at large.

MR. DEXTER: The only point I wanted to make on this and I understand that there are perhaps two separate things being done here. This report when it looks at the activities that are going to be undertaken in the project, there are five activities that are included in the project, and none of them deals with the social responsibility question. Now, I assume it would be fair to say that that wasn't the purpose of this part of the report and that the corporation would be dealing with those as a separate responsibility of the corporation as opposed to the responsibility of the consultant? Not to put words in your mouth.

MS. GORDON: I know that you would like me to agree but TCG, the people who did the report, it wasn't their job to evaluate what was socially responsible and what wasn't, but they did address the management and control issue and that has been the toughest issue for us in terms of moving forward with our responsible gaming initiatives. That is really in fairly neutral language what underlies those remarks in the consultant report.

MR. DEXTER: That is not contained in this summary though. I mean that is something that you are saying . . .

[Page 30]

MS. GORDON: Well, if you look at Page 1, at the bottom of Paragraph A there, it talks about, "Further to the issue of fair distribution of profit, NSGC has also voiced concerns over shareholders' management and control of ALC's operations.". Then it goes on to talk about the regulatory regimes. I think it also addresses it further along here, on Page 2, Paragraph C1, "It will also be able to significantly improve its control over operations through . . . under properly structured operating agreements and management processes.".

MR. DEXTER: Well, you are right, it is fairly neutral language. It is difficult to get that out of that.

MS. GORDON: Yes, but it is part of the difficulty that we have experienced as quite a different and modern gaming regime in an area where we are only one of four. That's what those references are to.

MR. DEXTER: I think that probably legislators in this House understand the dynamic of having a minority of votes in a large organization probably as well as anyone. Those are essentially all my questions.

MR. CHAIRMAN: That's fine. Back to Mr. LeBlanc or is it Mr. Fage.

MR. LEBLANC: I will ask a few questions, if I could, please. I just wanted to make sure that I understand what percentage of the business in Nova Scotia goes between VLTs, what goes between national programs like 6/49 and what is made on a local basis. You said that before but it was a little vague and maybe if you could just enlighten me, I would appreciate having that information.

MS. GORDON: Okay, I think I jotted those numbers down. Page 3 does have some of that information. We talk about our games in five categories. The national category, which is administered by the Interprovincial Lottery Corporation, ILC, is 38 per cent of our total ticket lottery business, not our total business.

MR. LEBLANC: These are gross revenues?

MS. GORDON: They are on a net sales basis. Our instant product, which people will be familiar with Crossword, the Scratch 'n Win ticket.

MR. LEBLANC: Bingo and all that stuff.

MS. GORDON: Yes, that is also 38 per cent. Our break-open product represents 12 per cent. None of those, we feel, is at risk or impacted in any way by our withdrawal. Our regional product is 9 per cent. That is the TAG on the Super 7, Pik 4 is another Atlantic game and there is even a game called Atlantic Choice. That represents about 9 per cent of our sales. Pro-Line, which is the sports game, is 3 per cent. If anything is affected by the withdrawal,

[Page 31]

it would be these and as I have said, the other Atlantic Provinces want to share on the marketing and distribution of this product.

MR. LEBLANC: Where do the VLTs come into this?

MS. GORDON: This was just ticket lottery products. Our video lottery sales, it is not fair to compare them on a net sale basis, we generally compare them on a net profit basis. Our video lottery business is two times that of our ticket lottery business, on a net profit basis, $80 million versus roughly $40 million.

MR. LEBLANC: So you are saying that VLTs are basically two-thirds of your net profits?

MS. GORDON: Yes.

MR. LEBLANC: Of the lottery sales, you are saying a large proportion of them are geared up in the sense of being a national program rather than local development, is that correct?

MS. GORDON: Either national or accessible to us through places other than ALC.

MR. LEBLANC: In other words, you could perhaps approach Ontario, which has a program, and I am just using that as an example.

MS. GORDON: For example, or we could buy our break-opens direct from the plant in Newfoundland if we wanted to.

MR. LEBLANC: I heard they are still running there. Can you enlighten something for the committee, since you are here? We had a discussion the other day in the Community Services Committee in regard to the VLTs. It is my understanding that there are new machines coming, new programs. I heard the Minister of Finance saying that we are going to have entertainment rather than gambling. It appeared that there are new games which are multi-games, not so much as the two or three that are there now. Can you tell us a little bit about that? I would like to know about, perhaps you could enlighten the committee.

MS. GORDON: Sure, that's part of our responsible gaming initiative. It is a four part program. The first part of that program was to upgrade our pretty much antique video lottery machines, to upgrade the technical platforms to give us the capacity to bring in some of the changes that are being recommended to promote responsible gaming and address problem gaming. What kinds of changes? Access to a timer so people will know how long they have been playing, automatic or forced time-outs after a certain period of play. Problem gambling tests or surveys to help the user determine if they are playing responsibly or not; tools to provide resource and reference material.

[Page 32]

MR. LEBLANC: Can I just go back one second. The third thing you talked about, it was a survey, is the machine surveying the player when he is playing or is that something you would do through a consultant? I wasn't really sure.

MS. GORDON: What I am talking about is when a player approaches a machine one of the options they might have is to look at the material on the machine that talks about responsible play or problem gambling.

MR. LEBLANC: Like a cigarette package.

MS. GORDON: It would be more comprehensive than that. There are two Canadian outfits actually who have started to develop this material. Saskatchewan has had quite a degree of success with it.

Also, we want to slow the pace of play and one of the ways to do that is to introduce a skill element, the possibility of an interactive requirement so that people have to make decisions, they can't simply hold the button down. We also want to focus on entertainment. I was surprised as many but most people play for the entertainment value and we want to encourage and enhance that.

So that is step one of our responsible gaming initiative and that is largely what we are doing with the upgrading of our video lottery machines. We are also engaged in a mandatory retailer education and training initiative for our video lottery retailers and their employees so that they can be more helpful to players that want to look for assistance.

MR. LEBLANC: I am just trying to pick up on what you are talking about here. So, basically, you are trying to modernize your machines so that you have more options with them. Has this order gone out already? Are these machines in the process of being acquired as we speak or is that still in the planning? Perhaps you can enlighten the committee.

MS. GORDON: We issued a request for proposals in December. Essentially, it was a solution-based request. We didn't spec what we wanted. We asked the industry to provide the kinds of machines that would encourage responsible play. That process closed in March. We have had three responses. We have made no decision as yet. It is going through the evaluation process. The intention was to field test some of these machines provided by manufacturers here in Nova Scotia. We have retained independent problem gambling experts to help us assess whether the proposals that the manufacturers have made do indeed achieve the objective of responsible play. That process is scheduled, unless it's moved as a result of the repatriation, to take place in July and August of this year so that we would be in a position possibly, in October or November, to begin to make contract decisions.

[Page 33]

MR. LEBLANC: My colleague was bringing up a very good point, whether or not you have looked at the possibility of a Nova Scotia manufacturer. I am not sure that is feasible or not; it begs the question as to whether or not that is something that you have encompassed with your proposal? I am always looking at opportunities for Nova Scotia employment. Is that something that you are looking at, or basically you haven't thought of it as of yet or is something that you might contemplate?

MS. GORDON: We haven't given any special preference to either Nova Scotian or Atlantic Canadian bidders, but it is interesting that some of the well-qualified international firms in this area are based in Atlantic Canada.

MR. LEBLANC: So, you are saying that some of the machines that you bought in the past are manufactured in Nova Scotia?

MS. GORDON: None have ever been manufactured in Nova Scotia; in Moncton, they have been.

MR. LEBLANC: On the machines that you are contemplating proposals for now, is it the intention of the Gaming Corporation to make them user-friendly in the sense that they would accept bills. As they are now, of course, you have to pump the loonies or toonies, I am not sure, into the machines. Perhaps you can enlighten us as to whether or not your intention is to make them whereby they would accept bills. I think they do so at the Sheraton here.

MS. GORDON: No, there is no intention one way or the other with respect to bills. Our evaluation process is described in our RFP and 40 per cent of the value is given for how well the proponent deals with responsible play. So, I really don't know the proposals well enough. The evaluation committee is dealing with those. To know for sure that, for example, any have proposed bill accepters and if they do propose bills accepters, they are going to have to demonstrate how that is compatible with responsible play. You may also know that we don't have the ability here in Nova Scotia to introduce bill accepters by a simple decision of the Gaming Corporation, we require the consent of the Alcohol & Gaming Authority to introduce bill accepters on video lottery machines here in Nova Scotia. So, they too would need to be satisfied.

[11:00 a.m.]

MR. LEBLANC: Basically, the bottom line is that you haven't yet decided as to whether or not that will be part of the proposal. That is something you are still considering?

MS. GORDON: Yes, that is an option that might come forward over the next few months.

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MR. LEBLANC: I have a question here. Looking at the proposal, the executive summary that you tabled with the committee today, I noticed you have 70 employees with the Nova Scotia Gaming Corporation. Is that correct?

MS. GORDON: How many?

MR. LEBLANC: Seventy according to the . . .

MS. GORDON: No, no.

MR. LEBLANC: Well, I am taking a look at Page 4, Section 3 and it talks about if you bring in video lotteries and ticket lotteries, if you do it in-house, the total would be 169 jobs. You have currently 70 jobs. That is what you saying here. That would be a net gain of 99.

MS. GORDON: You will see the breakdown earlier on. We have 12 people at the Gaming Corporation and the Atlantic Lottery Corporation has 58.

MR. LEBLANC: Over and above, okay.

MS. GORDON: These are sales reps or technical people.

MR. LEBLANC: That is what I want to know. I want to talk a little bit about the fact of how you are planning on controlling costs. Do your estimates come before the House of Assembly for the Gaming Corporation?

MS. GORDON: Well, we are a Crown Corporation. So, we report in keeping with the Crown Corporation process, which I think means they do.

MR. SALMON: In terms of the estimates and the budget, the only item that would appear would be the forecast net profit of $120 million. So, it would be in the estimates net.

MR. LEBLANC: So basically - and my colleague is going to be following me on this after - the situation is that for your detailed budget as to control of costs, and so forth, is not brought before the House? You are basically brought in as a net result?

MS. GORDON: Well, I am not sure.

MR. LEBLANC: Oh, I am pretty sure you are.

MS. GORDON: I can say this, the complete business plan and budget is filed with the House, but I am not sure about the other.

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MR. SALMON: The business plan would be available to the House for consideration, if the House chose to examine it.

MR. LEBLANC: I am sure we probably will this year. The reason I asked the question is that it's trying to control costs, and we have sometimes an organization that is sort of outside the arm of government, a Crown Corporation. I look at other aspects of government that are growing at an alarming rate. I look at, for a good one, Occupational Health and Safety which is growing by leaps and bounds, millions of dollars every year. I think it started at about $1.5 million a few years ago, it is up to $6 million or $7 million. Maybe the Minister of Labour can comment on it. A lot of times my biggest concern is that we don't create a hierarchy or bureaucracy and those are the kinds of concerns that I have. Obviously, a lot of times where we are getting into creating another form of ALC that we don't go basically overboard.

MS. GORDON: Well, if I could just respond to one thing. An advantage that you won't see in the repatriation is that the Gaming Corporation does file a detailed business plan and budget in the Crown Corporation process. I am not sure where it goes once it is filed here, but ALC has never done that. So, the costs incurred by ALC in respect of the Nova Scotia business is not available, certainly on a budget basis. In fact, even in the financial statements that are reported, part of the concerns the Auditor General addressed were the comprehensiveness of the reporting. So, with the new process, it will provide further information to address those issues.

MR. CHAIRMAN: Mr. Fage.

MR. FAGE: Ms. Gordon, just back to one of Neil's questions there that I would like a little explanation on. In regard to the situation with requests for offers on the new VLT machines, would we be looking at a situation in this province that we are talking, if they were replaced, in excess of $30 million capital investment?

MS. GORDON: The numbers are in a range that could be as high as that. What we have asked our suppliers to provide us with are innovative financing arrangements and they have responded to that. So, we don't anticipate needing to make a capital outlay of that order.

MR. FAGE: Who would request that the Nova Scotia Gaming Corporation put out an FOI when the House of Assembly in the last year of the sitting put a moratorium on VLT machines in this province? That moratorium is still in effect, as I understand it, to examine the effects of video gambling and which way the province should proceed.

The House has not lifted that moratorium. I have seen nothing that would suggest in the last year that change. Who would instruct the Nova Scotia Gaming Corporation to look at investing in more addictive machines than they currently have when, possibly, the $30

[Page 36]

million capital investment might not even be the way the House decides to go? Who would instruct you to do that?

MS. GORDON: Well, we are not looking at more addictive machines, first of all. We are looking at machines that promote responsible play. The mandate of the Nova Scotia Gaming Corporation is defined by the Gaming Control Act, so any business decision pertaining to the Gaming Corporation is made by its board of directors. As part of our annual business plan, that was filed last year at this time, we outlined our plan to advance our responsible gaming initiative and an important component of that was the upgrading of our equipment. Does that answer your question? No one instructed us.

MR. FAGE: So the board of directors instructed you to proceed with FOIs, then, on acquiring prices and financial arrangements on replacing the VLTs, is that what you are saying?

MS. GORDON: It is the board of directors' mandate to do that, that's right.

MR. FAGE: Okay. No requests from any government ministers or government departments to investigate that whatsoever?

MS. GORDON: No requests for us to look into it? No. It was an initiative of the Gaming Corporation to advance our responsible gaming initiative.

MR. FAGE: Okay, thank you. In another related question on returns dealing with the moratorium, the number of machines allocated to native reserves, have they increased since the moratorium has been put in place?

MS. GORDON: The moratorium does not affect First Nations gaming. The First Nations gaming is regulated by local band gaming commissions on each of the First Nations reserves. The province has a contract that has a maximum amount for each of the reserves in the province. In total, it comes to about 800 machines. Approximately 400 are presently in operation. Whether that is an increase over June or whether there are other increases authorized, that would be a decision of the local band gaming commissions.

MR. FAGE: Okay. Would they deal with you, yourself, and the Nova Scotia Gaming Corporation when they would request additional machines?

MS. GORDON: Our only arrangement with the First Nations is that we lease machines to the First Nations, assuming that they are within their quota.

MR. FAGE: Okay. The negotiations with First Nations on the amount of lease payment, is that standardized? The 5 per cent is the only hard, fast rule that is return for the lease payment on all situations on all the different reserves?

[Page 37]

MS. GORDON: Well, the agreements were entered into over a period of time through 1995, 1996, 1997, the original agreements. They had a variety of rates. All but two of the First Nations that have machines have now entered into a second generation agreement where the rate is fixed at $56 per week, per video lottery machine.

MR. FAGE: Okay.

MS. GORDON: The remaining two - one of which is Wagmatcook - their machines are not currently operating. The other is still operating under an agreement that will expire shortly.

MR. FAGE: So they have altered from the original 5 per cent and gone for a fixed fee per machine?

MS. GORDON: Well, there was a range, actually. There were some at 5 per cent, some at 8 per cent, some at 11 per cent and they have all gone to $56 per machine.

MR. FAGE: In regard to the Nova Scotia Gaming Corporation, it is virtually a promotional arm of the gaming industry with a social conscience, as I have heard here today. Is that an accurate description for what the Nova Scotia Gaming Corporation really does?

MS. GORDON: I wouldn't agree with that. I guess our mandate is in our business plan and we understand that if the province has made the policy decision to be in gaming, then our mandate is to operate that gaming in a business-like fashion that maximizes - and these words come from the legislation - the revenues to the province in a socially responsible manner.

MR. CHAIRMAN: Back to the Liberal caucus and it is Mr. Fraser.

MR. FRASER: I am going to go back to the Atlantic Lottery Corporation. I was wondering if you could explain to us, the Auditor General did some explaining of the unfairness of the profit allocation formula last week when we were briefed prior to today's meeting. I was just wondering if you could go into that in some detail on how that is unfair with Nova Scotia? I don't think Nova Scotians understand what is unfair about it.

MS. GORDON: Well, in a nutshell, what really is happening is Nova Scotia has 39 per cent of the sales of Atlantic Lotto, but we are paying 41 per cent of the expenses of Atlantic Lotto and we should only be paying 37 per cent, because it is cheaper for us to do business in Nova Scotia, relatively speaking, than the other provinces. That's the bottom line.

Some of the illustrations that help is the way the profit is divvied up right now. It is divided based on net sales, which is the top line, so if you divide it based on net sales, the implicit assumption is that the expenses are incurred in the same manner as net sales. Well,

[Page 38]

that is not the case. The break-open product is a really good illustration because it has a commission rate of 12.5 per cent and it is tremendously popular in Newfoundland. So all the Newfoundland retailers are getting 12.5 per cent commission on what is a very popular product and we are paying 40 per cent of that because that happens to be our net sales, so we are paying dollars to Newfoundland retailers.

Another illustration is the telecommunications costs. People often think that what I am referring to is the cost to get to Newfoundland, the geographic factor, but that's not it. Within Newfoundland, the cost of telecommunication services are substantially higher than they are in the other three Maritime Provinces. We are paying and subsidizing Newfoundland for that. So those are two illustrations of the effect of the current formula, how costs that everyone clearly agrees should be charged back to Newfoundland are actually being paid by Nova Scotia.

MR. FRASER: Would this not have been thought of when the rules and regulations were established initially or is it that history has come up with something different and then we are locked in, not able to make the adjustment?

MS. GORDON: Well, probably it is a bit of both. When the organization was started in 1976, who could have predicted that break-open would be so popular in Newfoundland. I guess, my personal view would be that the fundamental flaw is that there isn't a reopening clause where every year or every second year someone independent has to come in and check and make sure that the formula works well and in the best interest of all the parties including Nova Scotia. We don't have that. The problem was exacerbated in 1991 when we did get into the video lottery business, because the accounting for that business - and I don't want to get too detailed - was incremental, so it bore no relationship to what the costs were in relation to the VLTs. Our formula, as I say, would have corrected all of that and everyone agreed that it was reasonable.

MR. FRASER: The decision that was made to eventually withdraw, when was that process initiated? I don't want to get into anything confidential, but the decision to do that was based on the Auditor General's findings, among other things. How did that . . .

MS. GORDON: It was May 1997 when we put this proposal on the table. It took until the fall of 1998, so that is almost 16 or 17 months of some frustration to get to the point where everyone agreed in principle, but for the adjustment that was contemplated between New Brunswick and Newfoundland. It was, I guess, the thought of all the shareholders that that could be resolved relatively quickly. But November passed, December passed, January passed and nothing was happening; meanwhile, we are losing money at the rate of $400,000 a month, so it was in no one's interest to expedite this.

[Page 39]

We proposed that there be a date by which people had to bring the matter to closure or we would need to move on. We didn't like to say that until we were prepared to execute if there was no agreement. We were ready in February and we made it clear in early March exactly what our intentions were and they didn't resolve things. Following the meeting on March 29th, we did what we said we would do.

The other thing is that, of course, once we embarked on a thorough review of the repatriation, it began to have more upsides than downsides. In March, we had to use other things to rationalize staying in the ALC, because we weren't now just dealing with numbers pulled out of the air. We talked to suppliers, we have gotten quotes, and we know what our costs are going to be. We were looking at returning the industry home in a manner that was at least as attractive as remaining in Moncton. We had an upside in there related to efficiency arguments that we haven't even addressed yet. So, just assuming that we take the operation from Moncton as it is, sharpen the pencils with our suppliers and bring it home, we are going to do better. So, when you added the management and control issues and the other things we were then struggling with, it makes an awful lot of business sense.

MR. FRASER: So you are sort of negotiating two things right now: one is to leave and the other is to set up at home. Is that what is going on at the moment?

MS. GORDON: Yes, we have two hats that we are wearing on leaving. We have to, in effect, sell back our share to ALC. One of the questions is, how much do we sell it for? The way that the agreement works is whatever we sell it for has to come out of the remaining three shareholders' pockets, so naturally there is some debate on that subject. Then we have to terminate this agency arrangement. Of course, what needs to be discussed there is, which of our assets do they hold as agent for us and which are common assets of the body corporate? That is what we are working through now.

MR. FRASER: I notice in the executive summary, we have in-house and outsourced, I am just wondering what types of arrangements are made in the outsourcing portion of the results?

MS. GORDON: The outsourcing, as I say, we haven't made a final decision, whether we will in-house or outsource, but frankly, we are leaning towards in-house for the first of our business, which is the video lottery business. Outsourcing would involve contracting out to suppliers some of our business operations, but not to the extent that we have contracted to Atlantic Lotto. It would be more on a supply basis, possibly a repair basis but we have looked at a variety of options. In fact, it is that one where we would even contemplate outsourcing some tasks to Atlantic Lotto.

MR. FRASER: So it could be a combination of both?

MS. GORDON: It could be, yes.

[Page 40]

MR. FRASER: The study indicates that there is a fairly large benefit to Nova Scotians. I am just wondering, it is shown in the study, a $5 million to $6 million benefit plus maybe a $4.5 million saving that we are not getting now which could be a $10 million-plus net benefit to the province. What types of jobs are involved here on this 100-plus jobs?

MS. GORDON: Well, there is a range of jobs. Most of the jobs are in the technical area, but not all. The business breaks down into marketing, retail management or servicing of the retailers, and then IT, the technology component. Then, of course, there are all the support functions: administration, human resources and so on. A good number of the jobs are in the IT area. They are skilled, leading-edge jobs right now. That is the industry to be in.

MR. FRASER: How many Nova Scotians are working now, or do you know, in the Atlantic Lottery Corporation, let's say who may travel from the northern part of the province to Moncton; any idea?

MS. GORDON: I am not sure. In Nova Scotia, we have 65 at the moment; 7 of whom are in the harness racing industry and they are all based in Truro. That is the main operation. The other 58, of course, are all resident in the province, but the number who might live in Amherst and commute, I am not sure.

MR. FRASER: Any idea what - I suppose I could do a division here - sort of payroll or what pay scale they are at? Do you know?

MS. GORDON: No. There would be a range. The jobs at the Atlantic Lottery Corporation, the pay ranges are established through annual or biannual reviews of comparable industries and government sector jobs. So, I would say that they are in keeping generally with both the public and private sector in Atlantic Canada.

MR. FRASER: The consultant here also says that other jurisdictions will likely assist. Do you have any idea what these might be and what they can offer?

MS. GORDON: Well, we need to develop policies, financial systems, human resource systems and the industry is quite tightly-knit and are quite helpful to one another. I understand we have reached arrangements with some of the other lotteries to assist us with the needs we have. For example, we might second one or two key individuals for six or eight months to oversee the actual transition, that sort of thing.

MR. FRASER: You mentioned short-term track and long-term track. What do you mean by those?

MS. GORDON: We wanted to be prepared for just about any contingency that results from our negotiations, wherever they might take us. I guess that is all I would like to say on that, if I may.

[Page 41]

MR. FRASER: I will pass it over to Mr. MacKinnon.

MR. CHAIRMAN: Mr. MacKinnon.

MR. MACKINNON: Just a few short questions. First of all, to be fair to all those who are involved in the process that I believe has led us to where we are here today, we go back to 1993-94 when this issue was raised by my colleague, the member for Queens. I believe the Auditor General will remember. He worked very hard to have the Auditor General be able to - and then subsequently my former colleague, the then Minister of Finance, Bernie Boudreau, brought it to the next level - ensure that we were able to secure an audit. That was a very complicated process. I believe fair is fair, we have to give credit where credit is due.

There was a lot of history here that has been recognized and I think the committee owes full appreciation to those various stakeholders - and, as well, to yourself, Ms. Gordon - who have taken up the torch and brought it to the next level at the corporation and the independent assessment that has been done, which I want to draw directly to it. Then, finally, the government, as the chief cook and bottle-washer so to speak, has taken it to the point of making the demands, as Nova Scotians realize - particularly, the Opposition Parties who have demanded the actions - if you will check the record, over a period of time, it is consistent with the demands that have been made, not only by Nova Scotians but, indeed, by the Opposition Parties, that bring us to where we are here today.

In short, this particular report recommends that it is good policy, good finance and good social planning to move - well, perhaps not the social planning because you have indicated that is a government policy issue but on the first two, that we do, indeed, proceed as per the recommendations.

MS. GORDON: Yes, that's right, they are pretty clear that operationally and financially, this makes sense.

MR. MACKINNON: So, essentially, there is nothing left to be said. It is a win-win situation for the government and for the people of Nova Scotia.

Our Opposition colleagues have pointed out in other jurisdictions - depending on how you want to define what is socially acceptable - they have made the case that here, in Nova Scotia, gambling is handled, from their perspective, more socially acceptable or more responsibly than it is in other jurisdictions.

Again, it is good to see that your efforts have been complimented and recognized. I do not see any other issues left on the table with respect to this particular one and I just wanted to give credit where credit is due. The leadership has been provided, at the corporation, government level, the Auditor General and, indeed, our predecessors who have asked to bring it to this juncture in public policy.

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MR. CHAIRMAN: Thank you. I take it you are finished your questions at the moment?

MR. MACKINNON: Yes.

MR. CHAIRMAN: Given the hour, I think what we might do is just have - I know I have just one or two questions I would like to finish up with. Maybe we will have another round of five minutes. I don't know if anyone else even has any other questions. If not, I will afford five minutes to each caucus and then we have some procedural questions.

Ms. Gordon, when I heard your comment on some of the arrangements for the possibility of withdrawal, I think I heard you say that you wanted the other shareholders to pay the costs. In fact, I think we were left with the impression that that might be optional. As I read Article 22 of the Atlantic Lottery Corporation's by-laws, that is mandatory, is it not, that they pay that cost? The open question is how it is valued.

MS. GORDON: That is my view. I share your view.

MR. CHAIRMAN: Okay. I am glad to hear that.

Again, under that article, there is an interesting dispute resolution mechanism, is there not? That is, if the parties cannot agree, the valuation of the assets and, therefore, the amount to be paid, is to be determined by the auditor of the corporation, is that correct - the corporation in this case being Atlantic Lottery Corporation?

MS. GORDON: Yes, that is what it says.

MR. CHAIRMAN: Okay. So you are attempting to negotiate, is that right?

MS. GORDON: Yes.

MR. CHAIRMAN: Okay. It is also clear that in order to effect this, no legislation would be required. Any changes that might take place in the delivery of VLT and ticket gambling services to Nova Scotians could be accomplished through regulatory change, is that right?

MS. GORDON: That's right. The only change which seems to be necessary is to the regulations, where they refer to Atlantic Lottery Corporation, to modify that reference.

MR. CHAIRMAN: Can you tell me who the board members now are for the Nova Scotia Gaming Corporation?

[Page 43]

MS. GORDON: Yes, there are three board members: myself, Robert Cordy and Sean O'Connor.

MR. CHAIRMAN: Now, can you just tell me Mr. O'Connor's position? I thought that he had left the provincial government. Is that not correct?

MS. GORDON: Yes, that's right. He has recently taken up a new position with a private sector firm. I am not sure of the name.

MR. CHAIRMAN: That's fine. This is the same Sean O'Connor who worked for the Department of Finance and who is now . . .

MS. GORDON: Yes, that's right. He resigned, I think, effective the middle of April, something like that, yes.

MR. CHAIRMAN: Right, but his appointment continues on the board?

MS. GORDON: Oh, yes.

MR. CHAIRMAN: That's fine.

MS. GORDON: He continues until the February 15, 2000.

MR. CHAIRMAN: That's just fine.

The other question I had is, does the Gaming Corporation have a procurement policy?

MS. GORDON: Yes, we adhere to the government procurement policy.

MR. CHAIRMAN: Could you help me understand that? In what circumstances would it be required that there be full tendering for services and in what circumstances could there be a directed call for proposals?

[11:30 a.m.]

MS. GORDON: I don't have the policy here. There are exceptions in certain cases, but generally speaking we adhere to the tender process. If you are referring perhaps to our engagement of TCG . . .

MR. CHAIRMAN: No, I was looking forward to any other possibilities that might arise. For example, if the activities were outsourced, what process was . . .

[Page 44]

MS. GORDON: We would intend to do a public tender and the only scenario that I could see is if somehow we are forced into a fast track and need to depart from that process. It is a time factor with that process, would be our only concern. So we intend to adhere to it throughout the piece.

MR. CHAIRMAN: Those were the only wrap-up questions I have. Do any other members have a question? Mr. Dexter.

MR. DEXTER: A very short question, I think you can answer very quickly. In the event that there is a dispute that cannot be resolved internally, the jurisdiction of which province applies?

MR. CHAIRMAN: Meaning which laws, I think.

MS. GORDON: That sounds like a conflict of laws question. There is a short answer.

MR. DEXTER: Many times the agreements say right in them which law applies.

MS. GORDON: It doesn't specify.

MR. DEXTER: Okay. That is all I wanted to know.

MR. CHAIRMAN: Okay, very interesting. Ms. Gordon, I think that is the end of the questions for you this morning. Thank you very much for having appeared. It has been very informative.

Before we leave, I would like to turn to a couple of other matters of business in front of the committee. Perhaps I will ask Mora to pass out copies of a letter to the committee that I have drafted. You will recall that as a follow-up to our investigation into the allegations that Mr. Fiske made last year, that when we finished up I was asked, on behalf of the committee, to attempt to draft some summary recommendations that might reflect the trend of the discussion I heard at the committee.

I have now done that and I now circulate to all members of the committee, draft - I emphasize this, draft - recommendations for the committee members to think about and I wonder if, when the members of the committee get the chance to look them over, we might, at a future meeting, discuss them and see if they will usefully form the basis for some joint recommendations that might come forward from this committee. So first I have Mr. Dexter and then I have Mr. LeBlanc.

MR. DEXTER: Mr. Chairman, I just wanted to bring to the attention of the committee that at the time when this issue last came before us, the decision, as I recollect it, was that whatever report was going to come forward from this committee would consist only

[Page 45]

of recommendations and, in fact, I think I recall the members of the government caucus and the members of the Progressive Conservative caucus saying that they weren't intending to engage in a detailed examination of the evidence that had come before the committee.

MR. MACKINNON: It is not a Ken Starr inquiry.

MR. DEXTER: No, and I accepted that is the decision of those caucuses. The Chairman would know and other members of our caucus would know that I, in fact, have been working on, along with the other members of our caucus, a detailed review of that information and I am nearing the completion of that. I think, for the members of our caucus, we would certainly be willing to accept any information that either of the other caucuses would like to put forward to us for inclusion. If they have an opinion on pieces of evidence or wanted to pass along to us their thoughts on anything, certainly we would be prepared to listen to it and to have a look at it before we release that section of the review.

I just pass that along for the information of the government caucus and for the information of the Progressive Conservative caucus. I would expect that likely at the next meeting of the Public Accounts Committee, I should have that prepared for delivery. Thank you.

MR. CHAIRMAN: All right. It is not unusual to have minority reports. Maybe after the others read it, it will be a majority report. Mr. LeBlanc.

MR. LEBLANC: I will just make a comment. I appreciate the Chairman putting forward draft recommendations and we will be bringing it back to caucus, but if I recall, when we talked at that time about how we would draft recommendations - and I had to look back at the wording - my understanding of it was that a representative from each caucus would sit down and come up with some draft recommendations. I can go back and look at the recommendations that came out but I clearly remember - and correct me if I am wrong - that was a suggestion and I was waiting basically to move along.

I have no problem with the fact that you put draft recommendations. I haven't had a chance to review them, but we will, and we may very well concur with what is being presented. I am just making the comment, for what it was worth, my clear recollection was that that was the way it was going to proceed. It may be a moot point, but for what it is worth. (Interruption) No, the draft recommendations were supposed to be drafted by having all three caucuses have their representative and we may not have agreed or we may have agreed as to some recommendations that came out of it. But for what it is worth.

MR. CHAIRMAN: I have to say I didn't remember and I apologize if I overlooked that. In any event, I have now made an attempt to draft it but I am very happy to meet with representatives of the committee to discuss these drafts. At the moment, they are purely internal to the committee and nothing has happened with them otherwise.

[Page 46]

Are there any other comments from any other members of the committee at this point? If not, I would like to turn to a second procedural matter, which is how the committee now intends to move in terms of its future agenda.

When we last discussed the agenda of the committee, we expressed an intention to try to hear from representatives of the Atlantic Lottery Corporation. First, I will ask Mora if she can tell us how that stands with respect to our invitation to representatives of the Atlantic Lottery Corporation and then we can discuss if we still feel we need to pursue this.

MS. MORA STEVENS (Legislative Committee Coordinator): When I spoke to them I put forward the invitation from the committee and they said they would be consulting their legal advisers. They had been here before on this issue. I couldn't really flesh out for them totally what it was going to be about other than the document that we had discussed. They said they would certainly get back to me and if I could propose a date to them. It was for next week. Since I haven't gotten in touch with them, they were looking at, well, we will need about two weeks' notice. So they have said initially that once the Gaming Corporation came forward and they heard what they had said, then they would review it with their legal staff, of course. But they seem to be open to coming. So it is up to the committee if they want to continue that path.

MR. CHAIRMAN: All right, we will continue and it looks as if we will meet again in about two weeks' time. The Legislature will be in session at that point, so I assume we will meet at 8:00 a.m. (Interruptions) No, is that not right? (Interruptions) It will be May 19th, so it will be the day after the Legislature goes into session, so we will start at 8:00 a.m. on May 19th.

Thank you very much for your assistance today. We stand adjourned.

[The committee adjourned at 11:38 a.m.]