STANDING COMMITTEE ON PUBLIC ACCOUNTS
Mr. John Leefe
MR. CHAIRMAN: I will bring the meeting of the Public Accounts Committee to order and welcome the Auditor General and members of his staff who will make a presentation to us today based on the most recent report of the Auditor General of Nova Scotia.
In advance of inviting the Auditor General to make comments, I wish to inform the committee that Mr. Russell will not be with us this morning. He was delayed and it appears he will not be able to be back in Halifax in time for the meeting.
Secondly, with respect to the report, the photocopier was on the fritz. It is now fixed. Mora is in the process of copying the final draft of the report and she will be going to the various caucus offices next Wednesday for signatures on the signatory page and we then will go to the printer and have our report ready to table with the Clerk as the House is not in session.
John, do you have a question?
MR. JOHN HOLM: Just a comment on next Wednesday. I don't know that I am going to be around on Wednesday. I don't know what your time-frame is but we will have to work something out.
MR. CHAIRMAN: Mora will coordinate that with you, thank you.
MR. GERALD FOGARTY: Mr. Chairman, is anyone else having difficulty hearing?
MR. CHAIRMAN: It is a function of age, I think.
MR. FOGARTY: That is better.
MR. CHAIRMAN: Good. All right, again we welcome the Auditor General. Roy, on behalf of the committee, I invite you to take the floor.
MR. ROY SALMON: Mr. Chairman, it is again a pleasure for myself and my colleagues to appear before you to discuss our annual report and to attempt to respond to your questions. I would like to only spend a few minutes discussing some of the major portions of this year's report and then I will turn it back to you and we will respond to your questions.
1996 was a challenging year for the office. It was necessary for us to revise our plans to respond to two requests for very significant special audits, one of which resulted in a special report. As well, one regularly scheduled audit identified significant issues requiring timely action and a special report on that audit was issued to the responsible minister. I would like to discuss those in more detail in a few minutes.
My mandate under the Auditor General Act calls upon me to report deficiencies. There is no requirement for me to provide positive opinions. This is no different than in any other province. However, like my colleagues in most other provinces, I believe in fair reporting and therefore when we plan and conduct an audit and the results are positive, we do report that.
The 1996 report contains a number of positive comments as well as raising some significant issues. I would like to comment on both. We continue to monitor the government's progress in improving management processes, particularly in the area of planning, budgeting, outcome measurement and accountability reporting. There is no question that progress has been and continues to be made. There is a statement in my report that suggests that Nova Scotia is now in the vanguard, very much a leader, in these areas.
Government By Design and the processes that support it continue to mature thus improving the quality of information that is available to the Legislature, as well as improving decision-making within the system.
The government has committed to improving financial reporting by achieving full compliance with the recommendations of the Public Sector Accounting and Auditing Board of CICA. That includes moving toward fully consolidated financial statements so that we have complete reporting on the financial situation. There was one significant issue in the 1996 financial statements regarding the adoption of what I considered to be an inappropriate
accounting policy that resulted in significant misstatement of financial results for the year. That issue has been extensively debated and I am sure you are familiar with it.
Let me now deal with the results of some specific audits. Governance has been the subject of great interest in both the public and private sectors recently. We conducted a survey of governance practices in Nova Scotia's universities. The survey questionnaire was sent to all 310 board members of Nova Scotia's universities, and we found that the board members believe there are issues regarding relationships between university boards and the government that require clarification. Improving the level of understanding of roles and responsibilities could result in more effective governance, both in the universities and, I would suggest, in other organizations in which we looked at similar issues, particularly, as an example, the regional health boards. Our audit of funding provided for teachers' group insurance plans identified surplus funds for which ownership was unclear. The amounts at issue were substantial and I, therefore, issued a special report to the Minister of Education last November. This resulted in a process of negotiation between government and the NSTU and, just recently, a settlement was announced whereby the government recovered approximately $5 million including interest.
Audits in Health, including the Home Care Program, indicate that progress is being made in implementing health care reform, although issues remain to be addressed in a number of areas, particularly in the establishment of the regional health boards.
Our audit of the Highway No. 104 western alignment project focused on the use of public-private partnering arrangements. This concept provides unique challenges in auditing for value for money and these are discussed in my report. Opportunities to improve accountability and reporting processes with regard to that project, and the corporation, were identified and we did make recommendations along those lines.
We were requested by the Nova Scotia Gaming Corporation to conduct an audit of Atlantic Lottery Corporation. This was done on a joint basis with the Auditor General of New Brunswick and, again, a special report was issued. Although the corporation is generally well run and has effective controls, certain issues involving the agreements among the provinces and the basis for profit allocation were identified. A more equitable allocation of expenses could result in a greater return of profits to Nova Scotia. Our calculation of one basis for more fair allocation would indicate that Nova Scotia would recover approximately $5 million more a year.
As a result of issues raised publicly about Nova Scotia Resources Limited, I was requested to undertake a special audit of its activities. This included the manner in which certain assets were disposed of as well as issues surrounding decisions related to efforts to monetize tax pools which is that company's major asset. The audit identified that appropriate processes were followed and that decisions were made on the basis of reasonable information and expert advice.
Finally, we also conducted an audit of the Federal-Provincial Infrastructure Works Program, which resulted in recommendations for improvements in controls within that program. Implementation of our recommendations should help to achieve better value for money in the second phase of the program.
Mr. Chairman, those are the highlights of my 1996 report; we would now be prepared to respond to questions from members.
MR. CHAIRMAN: Thank you, Roy. Mr. Holm, would you begin the questioning as a member of the Opposition.
MR. HOLM: There are a number of areas I would like to touch on, I guess, briefly, in the few minutes that I have, some of which were covered in your opening statement and certainly have been discussed a great deal in the press and in debates in this House during the spring session.
The first one, if I could - and not wanting to belabour this one - is the whole method of reporting the accounts and deficits and so on, and the method as you pointed out, the crediting or accounting for capital expenditures for one year that were, in fact, going to occur in the subsequent year. I don't think there has ever been any suggestion made - and I don't mean this to be disrespectful - in terms of the counting of the beans, that the total number of beans in the end add up, that what is the total actual debt of the province is accurate according to the information and that there is no attempt to fudge that but it is a matter of how it is being recorded.
Am I correct in this kind of analysis of what the government has done here? Let's say I was running a business and I was thinking about selling my business in a year or two. Obviously, when you are going to be selling your business you are going to want to have the best looking books possible. So what I do is I project this year to spend money that I would actually be spending next year and I would be putting that money into the pot for that, so that when at the end of the next year's budget statements those monies wouldn't appear to come out of that and it would look like I had a better fiscal position, a better financial bottom line in the second year than I really did if I had credited the monies correctly. Is that an accurate kind of comparison?
MR. SALMON: It is a little bit more complex than that. Again, in this particular situation what I am not clear on at this point is whether this is a permanent change in accounting policy or something that has been done on a transitional basis and therefore will only affect two or maybe three years. If it is a permanent change in accounting policy, I would still deem it to be inappropriate because recording commitments in advance of incurring expenditures is not consistent with generally accepted accounting principles. In this case, something was recorded as an expenditure that doesn't meet the definition of an expenditure. But if it is a permanent change and the amounts involved are similar from year to year, then
the financial results would not look any different in subsequent years. Again, that becomes the issue. Are the amounts similar? Commitments, decisions to enter into contracts at certain dates can fluctuate.
The basic issue is that we need to apply generally accepted accounting principles on a consistent basis so that we can compare apples to apples from year to year. In this case, the province did have a stated basis of accounting and they deviated from it, and I deemed that to be inappropriate.
MR. HOLM: That resulted in, as you stated in your report, what appeared to have been, according to the government's books, a $2.8 million surplus, it would be more accurately recorded if it was done by what you would consider to be proper accounting practices as a $48 million deficit?
MR. SALMON: That calculation is based on the forecast for 1996-97; we have not yet seen the financial statements. The impact was, from my perspective, to overstate capital expenditures in 1995-96 by $50 million. It will depend, Mr. Holm, on what the commitments are at the end of 1996-97 and whether those are recorded again as expenditures so that the impact on 1996-97 will be the net of the two.
MR. HOLM: How much time do I have in this first round?
MR. CHAIRMAN: You have 10 or 15 minutes, but I wouldn't want you to go beyond 15 minutes this time.
MR. HOLM: That topic has had quite a bit of debate and I am sure others will want to come back to it, so I want to hit on something else that has concerned me for many years. You have identified it, I think, as a pretty major problem, and that has to do with the private trade schools and the monitoring and having to set up the criteria, the goals, the shortage of staff and so on. We in this province have many thousands of citizens who are enrolled in private trade schools, who are entering these programs believing they are going to meet set standards because they are registered by the government. Your report quite clearly spells out that, in fact, although they are registered and there are implications even for government bodies in the sense of student loans that are guaranteed, et cetera, and also the seats that are purchased by other government agencies in those schools, that there are pretty major deficiencies.
I can remember being involved in some battles in this House with governments in the past over a couple of particular schools that ended up being shut down as a consequence of some audits that ended up being done. Do you see that as a serious problem, what is going on with the private trade schools? I am not suggesting with these comments that all or most of the private trade schools are anything less than reputable or that their courses are not necessarily the best, but it doesn't appear that we have any way of knowing with regard to
most of those. There aren't set standards that have to be met, there aren't the staff to do the monitoring and follow-ups to find out if, in fact, those who are graduating are gaining employment in the areas for which they are studying.
MR. SALMON: Could I turn that question over to Ms. Morash to deal with. She was responsible for that audit.
MS. ELAINE MORASH: I think the Department of Education would agree that there are some problems in the regulation of private trade schools. They issued a response, and it is on Page 52 of our report, wherein they accepted the fact that there were deficiencies; some of these deficiencies they were in the process of correcting. They had some draft regulations that hadn't yet been approved, that kind of thing, when we were in. They also just reorganized the reporting relationships for that function, so I think there will be some changes happening.
We see some signs that there are some positive things going on with respect to the regulation of private trade schools but, yes, I agree that there is a problem there that stems from historical practices and the proliferation of the numbers of private trade schools over the past several years.
MR. HOLM: My frustration comes from the kinds of observations that are made in the report, where observations and comments were made by some of us 10 or more years ago, that the department certainly was very much aware of. We have many people - some young and some not so young - enrolling in these programs, paying $5,000-plus in tuition to attend them and it is, I think, a growing problem rather than a shrinking one, as evidenced by the increased number of these private trade schools.
Do you intend to do any kind of follow-up audit, in this year's evaluation, to determine what, if anything, has been done by the department; what kind of progress has been made? Training and education is extremely important in this day and age and if the government is going to be registering, that in a sense is putting the good seal of approval by government, either knowingly or unknowingly, on those particular programs and I think, therefore, there is a pretty strong responsibility to ensure that what they are registering or approving does, in fact, meet standards of industry and/or the department.
MS. MORASH: We will be following up on it. Whether it is included in this year's report or in the following year's report, I don't know at this point. But, yes, it is our normal practice to follow up and we see this as being significant enough to warrant follow-up. I know the position of executive director responsible for this area is currently being advertised in the Employment Opportunities, so they are in the process of making some organizational structures to help remedy the situation. We will be following up.
MR. HOLM: Highway No. 104, the whole issue of financing, in your report you point out the different borrowing rates. I can't remember the page number and the exact percentages, but they are quite significant in terms of the rates. In your report you pointed out that, for example, in the case of the Province of Ontario where they have done the public borrowing for their Highway No. 407, I believe it is, that they did not anticipate that that was going to be affecting the long-term borrowing rates.
This is supposedly the highway corporation that is at arm's length or private, although it is a government-owned body and has a board appointed by government. I have some difficulty understanding if, for example, the highway was still going to be built and there were going to be tolls included, but if the corporation responsible for building it was a Crown Corporation like other Crown Corporations and the loan was going to be guaranteed by government but it was going to be paid for by the revenues that would be generated from the tolls, that would appear to be like a separate independent standing business. Certainly I can't believe that anybody who was lending money for this and looking at the records on the thing indicates that there is a possibility that $151 million - if the projections come true - could be returned to the province, that sounds like a profit to me.
Some might call it a tax, but the province could stand to make substantial profits from this tolling system. If that corporation had been set up as a Crown Corporation and therefore had been able to benefit from the preferred rates of government-guaranteed borrowing that would have been available, could that have significantly reduced the overall borrowing costs for the construction of that Highway No. 104?
MR. SALMON: It is a very complex issue. First of all, I believe that that corporation, for all intents and purposes, is a Crown Corporation.
MR. HOLM: But it isn't called one.
MR. SALMON: I realize that, but if you take generally accepted definitions as promulgated by the CICA, when you get to the issue of what should be consolidated in terms of the government-reporting entity for financial statements purposes, the definition is any agency that is owned or controlled. This one is definitely owned and controlled by the government; therefore, it meets the definition of a Crown agency for purposes of preparing consolidated financial statements. Therefore the debt, on a consolidated basis, would be included in the province's debt. So that is one issue and I will maintain that as my opinion.
MR. HOLM: My impression is that that is not supposed to be happening, that those debts are not supposed to be, the way it is set up, included in.
MR. SALMON: That is the government's position.
MR. HOLM: That is right.
MR. SALMON: I disagree with that and say so in my report. Then you get to the issue that the debt is not guaranteed. It is not guaranteed and because it is not, it has a higher interest cost. Whether that debt, if it had been arranged by the province as government debt would have affected the government's credit rating is a debatable question. I have no answer for that. I have been told that it would. What was the amount, $80 million, approximately?
MR. ALAN HORGAN: It accretes to $96 million.
MR. SALMON: It accretes to $96 million. Does $96 million of additional debt on $8 billion affect the province's credit rating? I am not convinced it would but others say it would. So we have that difference of opinion.
MR. HOLM: I am seeing things like the subordinate note interest rate estimated here at 16.8 per cent and I am seeing other interest rates, a secondary bond at again 10.5 per cent; the junior bond at 11.2 per cent whereas the provincial rate, government rate, for those kinds of terms my guess today would be in the 6 per cent to 7 per cent. That is almost double. That is a sizeable chunk of change and Nova Scotians and those who are visitors and the truckers are going to be paying substantially increased portions of that.
MR. SALMON: The argument, Mr. Holm, . . .
MR. CHAIRMAN: A quick answer from you, Mr. Salmon, please, and then we will move on to our next questioner.
MR. SALMON: The additional cost is claimed to be offset by risk transfer and that is the fundamental objective of these public-private partnering arrangements, that the risk is transferred to the private sector and the government does not carry that risk and gives up some cost for doing so.
MR. CHAIRMAN: Thank you, Mr. Salmon. Mrs. Cosman.
MRS. FRANCENE COSMAN: Mr. Chairman, good morning and I would like to pick up on the question as well as the first speaker did, on the question of the reporting of the province's budget and its questioned deficit, whatever you wish to phrase it as. I want to go back to 1992 and note that the deficit in the previous government at that time was $617 million and I recall watching debates at the time in which the then Minister of Finance was unable to forecast accurately what the deficit was going to be. He was out in the order of $200 million or $300 million in his forecast. I recall that as a stellar moment of embarrassment for Nova Scotians to be put in the position of having not only a deficit that was staggering but a Minister of Finance who couldn't forecast what his own figures were going to be. That had a lot to do with an inability to do the job but it also had to do with a lack of processes of
accountability within the department at that time. I think you have noted in your report that we have made really gigantic strides in terms of accountability over the last three or four years through Government By Design and the accountability measures that we have put in place.
I guess what I would like to get some sense of in terms of when we were in that position of owing $617 million, just at that time to provide our services and not taking into account the growing indebtedness on the capital side and the indebtedness of our unfunded liabilities and the indebtedness of our Crown Corporations, how long could we have continued to go to the market place and borrow money to run our programs? At what point would someone, either you or the lending institutions, have blown the whistle on our practices that we were so desperately in debt and so desperately bankrupt? At what time would the money supply have had to stop for the Province of Nova Scotia if we had continued in that fashion?
MR. SALMON: I am not in a position to answer that question. I am an accountant and I concern myself with accounting principles and proper reporting. I don't have the skills that bond rating agencies do or that lenders do in terms of making that kind of a decision. Certainly, this province, like many others, got themselves into serious debt situations and had to get out of them and actions were taken to do so. At what point would somebody blow the whistle and say, we are not going to lend you any more money? I cannot answer that question.
MRS. COSMAN: Well, I can respect that reply to a degree, but you are in the business of giving opinions and you, or your predecessors, must have been commenting at some point in your audited reports that we were on a disaster course. You must have given opinions on the mess on our financial books in 1992. (Interruption)
MR. SALMON: I am reminded by my colleague that my predecessor started reporting on that kind of situation in 1986.
MRS. COSMAN: So, in the business of opinion-making, had we continued the way we were going, you don't have an opinion at what time somebody would have said, there is no more money that we can loan you because you are in the basement, you can't afford to pay these deficits off, you are not paying down your fixed debt, you are in a mess Nova Scotia and if you don't do something strategic to fix it, you are really in big trouble?
MR. SALMON: Well, I could answer that in a number of ways. Perhaps they were saying that in 1992, I don't know. Perhaps they waited until 1993 and maybe that is why the new government started taking the action they did. I am not in the position to give you an expert opinion on how bond rating agencies or investors make decisions on whether or not to lend money. I am not in that business, Mrs. Cosman.
MRS. COSMAN: Let's just then shift gears for a moment. Was last year the first time that the Province of Nova Scotia did not borrow money to finance its day-to-day programs?
MR. SALMON: It's very close to that. The financial situation for 1996-97 appears to have been one of relative break even which would suggest that new money did not have to be borrowed. Money had to be borrowed to refinance old debt that had to be paid back. So, there was borrowing. I haven't seen financial statements for the year ended March 1997 so I don't know, as a fact, what the results for the year were. It has been indicated to me that it was relatively a break-even year which would suggest that no new money had to be borrowed.
MRS. COSMAN: So, if no new money had to be borrowed, doesn't that suggest that we were in a position of a balanced book?
MR. SALMON: If you take the two years combined 1995-96 and 1996-97, and depending on what was done with regard to recording capital commitments at the end of 1997 which I don't know, taken in total, the results would indicate that debt did not grow.
MRS. COSMAN: And that is a good thing?
MR. SALMON: If from the point of view of an economist you believe that that is a good thing, then it is a good thing. There are many economists who suggest running deficits, from time to time, is a good thing. That is a policy decision and I don't comment on policy decisions.
MRS. COSMAN: But I think you do comment on policy decisions because the government made a policy decision that it was going to book its deficits, or its debts, or its capital spending, or its operating whatevers, I mean that was the crux of the whole debate that we have had over the last five months. You made a comment on a policy decision.
MR. SALMON: On an accounting policy decision, not on a program policy decision and there is a very clear distinction.
MRS. COSMAN: Well, I am just picking up on your words. You don't comment on policy decisions.
MR. SALMON: On program policy decisions regarding whether or not to run deficits.
MRS. COSMAN: I would like to move into the area of something else, but to do with the same subject. The fact that we use an external auditor to look at the Department of Finance, I don't know how much time it would take from your department to do the same job. Do you have an estimate on that, if you were doing the audit on the Department of Finance what that would take up of your year to do?
MR. SALMON: When the previous government made the decision and announced the decision that they were going to change the structure and give me the mandate to audit the financial statements of the province - and I would point out that that is more than just the Department of Finance, it is coordinated by the Department of Finance but it is the government - at that time the publicly stated fees to the public accounting firm were in the neighbourhood of $200,000 a year. I had reached an agreement with the previous government that if my resources were increased by one-half of that, that is $100,000, that I would not hire more staff, I would contract for the resources and do the work with those resources. I still believe that that would be necessary, that something in the order of $75,000 to $100,000 in funds, that would allow me to contract for the additional staff I would need that I could do it.
MRS. COSMAN: So, if we could follow along on that concept that you and your department would be in a position of contracting and you, say, contracted Deloitte & Touche to do the audit that they did and they came back to you and said that according to their audit, the province had a balanced budget, would you then have had to rewrite their audit because you are in a dispute, in a sense, of what they, as external auditors, have said? So, say you had contracted them and they came back to you and said what they said, would you then be in a position to have to force them to rewrite their opinion, or what would you do?
MR. SALMON: I would certainly be into a discussion with them if I disagreed with their opinion. The issue is not who does the work, the issue is who receives the audit opinion and I have maintained that from day one on this issue. In this situation, you have the Minister of Finance responsible for the financial statements being the recipient and the client for the audit.
MRS. COSMAN: Yes, and I know that. My question was, what would you do if you had contracted Deloitte & Touche, and I cannot say their name properly unfortunately, to do this audit and they had come back to you exactly as they had come back to the Minister of Finance and given an opinion that said the books were balanced and we were in a surplus position? You don't agree with the way they did it so we are now to the position of having an argument between two accountants.
MR. SALMON: Yes. (Interruption) That is an issue that I would have to address with that firm who were working for me. The ultimate opinion would be mine. If I disagreed with them, we would have to resolve it. I would also remind you that if we were in that arrangement that I would be more involved in the planning of the audit, the setting of the criteria that would lead to an opinion. It is unlikely that we would end up in that kind of a disagreement.
MRS. COSMAN: Because you would be in control of the answers.
MR. SALMON: Yes.
MRS. COSMAN: When these accounting firms make a determination as to whether there is a surplus or a deficit and, in this case, the external auditors say there is a surplus, do you know what judgments went into that, that the external auditors would have come to that conclusion?
MR. SALMON: I am somewhat uncomfortable with your wording. The decision as to how to portray the financial position of the province is made by the Department of Finance, the minister and the deputy minister are responsible for those financial statements. The responsibility of the auditor is to give an opinion as to whether or not that presentation is fair, not an opinion as to whether or not there is a balanced budget. In this particular case, the accounting firm determined that through note disclosure this particular decision on changing the accounting policy was appropriately disclosed and that knowledgeable readers, as they state in their response that is in my report, could make the appropriate adjustments. That suggests to me that they concluded that all the information was there and that people could make appropriate adjustments.
I have never seen a statement where they have said that there was a balanced budget. They have said that the financial statements present fairly and that people can make the appropriate adjustments. Maybe you should ask them what that means.
MRS. COSMAN: Well, I think the only ones who could make any kind of an appropriate reading on any of these reports would be another accountant. I mean for the average Nova Scotian, for the average MLA, for the average Joe Blow or Sally whoever, these things are horrible to read and for someone to be able to make appropriate adjustments is no piece of cake.
MR. SALMON: That is why my opinion was that what was done was inappropriate, because people are not capable, the man in the street is not capable of making those adjustments, therefore, the final surplus or deficit number that is shown in the financial statements should be as accurate as possible. In this case, I believed that it was not as accurate as possible.
MR. CHAIRMAN: And it is time for the Chair to make an adjustment and go to Mr. Carruthers.
MR. ROBERT CARRUTHERS: Mr. Chairman, first of all, I just want to say to Mr. Salmon, I enjoyed working with you and your staff this year. I found this committee worked well, under the capable leadership of our Chairman and Vice-Chairman. I think overall the work that has been done together has been very productive.
I appreciated your report. I thought your report was well written. But it is somewhat disappointing to me that no matter how many times you will report both to us and in public, and preface your comments as you have today with your opinion that significant improvements have been made in our accounting and in our disclosure in Nova Scotia over recent years, you even used the term, a leader in that regard, no matter how many times you say that, no matter how many times you put it in writing, no matter how many times you say it in your report when we question the Auditor General, like my friend for the New Democratic Party, he immediately goes to the one or two comments where there may be some criticisms. So I can't resist saying that, that I appreciate the real, true nature of your report. For instance, your criticisms are constructive. You help us with regard to universities; the teachers group insurance plan; private-partnering, which is a new concept and an exciting concept; and the Atlantic Lottery. However, there are always some points in your report that indicate the government can do better and I appreciate that.
A couple of things strike me. In your report you ask somewhat of a rhetorical question, that if previous governments had provided quality information on plans and performances, the same perhaps that this government provides, we would have had to face our fiscal challenges earlier. I am summarizing somewhat but that seemed to be the nature of your report. If these financial disclosures had been made 10 or 15 or 20 years ago, what likelihood would there have been that the government of the day would be more fiscally responsible? What's your opinion on that?
MR. SALMON: Again, that is so much in the hands of the people who are in power and make decisions. Better information, certainly should lead to better decisions. That's about as far as I can go in responding. This province, like many others, has suffered from a lack of good information going out to the public and, particularly, to the Legislature where decisions are supposed to be made. But that is as far as I can go, Mr. Carruthers, in answering that question.
MR. CARRUTHERS: Well, that's fine because I think in your report you posed it as a question.
MR. SALMON: Yes.
MR. CARRUTHERS: But when one asks a rhetorical question like that, it somewhat begs that there would have been some leaning that the government would be more responsible. Would that be fair to say?
MR. SALMON: Yes.
MR. CARRUTHERS: When all is said and done, we talk about different accounting principles and, of course, I agree with my colleague that a country lawyer might find it pretty difficult to follow some of these numbers and I am sure that the average Joe finds it much
more difficult, but you are aware that Deloitte & Touche thinks that the surplus for 1996-97 is now in the range of about $8 million. I am not sure if you are aware of those figures that seem to be touted about, I have just heard them, I am not sure if they are totally accurate. For instance, the Dominion Bond Rating Agency calculates the surplus at about $21 million. Now, these would be based not on a forecast but on some of the hard numbers that are coming in. Do you have any comment on that?
MR. SALMON: I have not seen those numbers. I am not aware of whether Deloitte & Touche has finalized its audit for this year. I don't know for sure what accounting policies are being applied in 1996-97 so I really can't comment. We are in the process of following up on those issues at the present time.
MR. CARRUTHERS: I think you pointed out that the earlier numbers we were looking at were based on forecasts and there is always some variance there. Do you have any idea how the Dominion Bond Rating Agency would calculate these things? Are you privy to any of their methodologies, for instance, would they be normally following generally accepted accounting principles?
MR. SALMON: My understanding, and this goes back about two years when at a meeting of all of the Legislative Auditors, we had a presentation from a representative of Standard and Poor's, which is another one of the bond rating agencies, and they start their calculations on the basis of the financial statements and they indicated at that point that they felt that it made it easier for them if generally accepted accounting principles were followed, so it gave them a consistent basis to start from. But they certainly make calculations and a great deal of what they do is related to economic forecasts, indicators of employment and unemployment, growth in the GDP, all of those factors that take them beyond just the financial statements in establishing a rating for a particular jurisdiction.
MR. CARRUTHERS: So there is always some mystery left yet.
MR. SALMON: Yes.
MR. CARRUTHERS: I guess, when all is said and done, which way we put it, and there is always some conjecture here, generally speaking right now, today, is it your opinion that we, the government and the people of Nova Scotia owe less money or that we owe more money than we did, let's say, the last time you checked.
MR. SALMON: The last time I checked. As I indicated to the previous question from Ms. Cosman, my understanding is that debt has not grown in the last year so we owe about the same but debt is a factor of other matters and if the economy is growing, then debt as a percentage of the economy, has probably improved.
MR. CARRUTHERS: Yes, that is the kind of thinking that I use and once again, it is not in this great huge scale but if I check my personal business or my personal debt and I see that 10 years ago I made so much money and I had so many assets and they equalled 10 and I owed 5, well if a couple of years later or five years later I check and I see that now I own 11 or I am making 11 in income and I still owe 5, one might say well, gee your debt is still the same as it was, you haven't got it down but I feel a lot better because now I have 11 and I only owe 5 and I used to have 10 and I used to owe 5. Does that make sense?
MR. SALMON: Yes.
MR. CARRUTHERS: And if we get through all the mumble jumble, isn't that sort of what we are saying here?
MR. SALMON: I think we are dealing with an issue that goes beyond my mandate in terms of the state of the province's finances but I think anybody, the man in the street, has got to say Nova Scotia is better off now than it was last year or the year before or the year before that.
MR. CARRUTHERS: That is great. That is really what the man in the street wants to know, I think. I don't think we can be any clearer than that when we are dealing with - there is some conjecture in all of this.
Just moving a bit, I suppose I am getting kind of close to my time, but I find this concept of private-public partnering exciting, I mean myself because I have always been of the view that the private sector tends to build things and run things just a touch better than the government does, although I shouldn't say that too loud, I suppose, in this building. But nevertheless, that has been my view. Do you see this concept, because it is only in its first steps, we just started it, how is it going?
MR. SALMON: I think we are learning. I think the government is learning. The private sector is learning how to apply it. There are some principles that have to be established and are being established that need to be put in place so that the focus is on, as I indicated to Mr. Holm, the issue of risk transfer is dealt with appropriately and the accounting issues are dealt with appropriately and the funding is dealt with appropriately. So we are learning but it is an exciting concept.
Just as an aside on this one, we, three of us, were invited by the Deputy Minister of Finance to go up to Sydney last Wednesday - that is why we couldn't meet last week - to see the new junior high school that has been built based on that concept. That is exciting, really exciting. I think we have to be careful as we move into this whole area of public-private partnering but it has opportunities and they have to be managed.
MR. CARRUTHERS: Well, that is great and I guess the caution is not to jump before you look. I think that is, once again, what your department is for. I certainly, as a member of the committee, appreciate those comments. Those are my questions.
MADAM CHAIRMAN: I note that Gerry Fogarty is the next questioner.
MR. FOGARTY: Thank you, Madam Chairman. Mr. Salmon, I was a little bit surprised in your opening statement when you said there is no requirement, as Auditor General, to provide positive opinions but as a member of this committee for four years, I must say that to be fair, to be honest about this, you have always stressed what you have felt was good in the record of the government and their redirection, and their form, the different methods that were being taken. So you say it is not within the mandate but then again you have gone out of your way to highlight the positive accomplishments of the government, right?
MR. SALMON: I don't know that I would say I have gone out of my way. The practice we follow is that we select an area for audit, we set criteria and objectives for that audit and we report the results. If the results are positive, we report them and that is in particular specific areas or when we look at issues from a more general, broader perspective. Some of the Auditors General in other jurisdictions don't do that. They will set the objectives for an audit, set the criteria and go in and do an audit and if they don't find anything wrong, they stop and they don't report. Their focus is totally on reporting deficiencies. That is the case in two or three jurisdictions and this is a debate that goes on but if you read the Auditor General Act for this province and all other provinces, and at the federal level, my mandate is to report to you what has gone wrong and only that. There is no requirement in the legislation for me to tell you what is going well, but we do so anyway.
MR. FOGARTY: Okay, well then continuing in that vein of the record of other provinces, how do we hear Nova Scotia compared to other jurisdictions on getting spending under control?
MR. SALMON: It is very hard to compare but as I have indicated in the report this year and last year, in terms of the broad concept of accountability and planning and budgeting processes and providing information to the Legislature, Nova Scotia has come significant steps in the last several years and is in the vanguard. Some of the western provinces might be slightly ahead but Nova Scotia is right up there.
MR. FOGARTY: In your report, it seems to me you ask a somewhat rhetorical question; I am paraphrasing now, but the effect of the question is, if previous governments had provided the quality information on plans and performance that this government provides, would we have started to face our fiscal challenges earlier? So, if there had been better disclosure and accountability at the financial level for 10 years or 15 years back, is it more likely that the government of the day would have been more fiscally responsible?
MR. SALMON: I continue to believe that good information, accurate information available in the public domain creates an environment in which better decision-making should take place.
MR. FOGARTY: Okay. If I might just move back again to this whole business of accountants and the role of the Auditor General and the job that the Auditor General might do with the audit of a given department. Looking back now, I am trying to call to mind the opinions that were expressed when Deloitte & Touche came in with a finding that there was a surplus of a couple of million dollars and you, of course, expressed your disagreement with that. Then we heard a moment ago, Mr. Carruthers asked you if you were aware of the fact that Deloitte & Touche is now thinking the surplus for 1996-97 could be in the range of $8 million and then we have the Dominion Bond Rating Agency calculating the surplus to be $21 million. We are getting numbers being thrown around here and it gets a little confusing.
So my question is, I think that begs the question, is it possible for two or three groups of accountants to come up with different estimates of a deficit or a surplus depending on how they look at the issues and the judgments made and their methods of accounting and their process?
MR. SALMON: I have to repeat what I said earlier. The role of an auditor is to give an opinion as to whether or not a set of financial statements present fairly, not to give an opinion that the deficit is x dollars. There is a subtle difference there. I don't know what the numbers are that are being talked about today with regard to the year ended March 1997. I haven't seen them. Accounting is an art, not a science and yes, you can come up with different numbers applying the art. The differences should not be material.
MR. FOGARTY: And when you come up with those differences, that is not to suggest that any one process or method is better than another? Is that fair?
MR. SALMON: That is fair within a set of generally accepted accounting principles.
MR. FOGARTY: Did Deloitte & Touche depart from generally accepted accounting principles?
MR. SALMON: No, the province did; the government did and Deloitte & Touche chose to give an opinion that that was properly disclosed.
MR. FOGARTY: Well, I think of the words of an old song, you say tomato, I say tomato, let's call the whole thing off.
MR. SALMON: Except that we are dealing with apples and oranges. (Laughter)
MR. FOGARTY: Oh, I see, tomato, tomato, apple, orange.
Well, if I might, Mr. Chairman, one other question. This brings us back to the overall financial position of the province compared to five years ago and I think you alluded to it a moment ago that we are better off. Certainly you can't avoid the general financial condition of the province today that we are better off than we were five years ago.
MR. SALMON: There is no doubt about that. That is not the issue from my point of view. It is reporting how well we are doing on an appropriate basis. Deloitte & Touche did not give an opinion that there was a surplus because the opinion they gave was on the year ended March 1996. They have not issued an opinion on the year ended March 1997 which is the year that is purported to have a surplus. Their opinion was on the financial statements for March 1996 when the deficit was $200 million and I am suggesting that that was overstated by $50 million.
MR. FOGARTY: But 1996-97, I have been given to understand that Deloitte & Touche now thinks that the surplus for 1996-97 is in the range of $8 million and you said that was news to you?
MR. SALMON: That is news to me, yes.
MR. FOGARTY: Okay, thank you.
MR. SALMON: Those financial statements have not been issued. They have not been finalized and I have not seen them.
MR. CHAIRMAN: Thank you, Mr. Fogarty. I have a few questions that I would like to pose to the Auditor General or staff if any staff should choose to respond to them. One of the areas that you investigated, or you and your staff investigated, is the Public Prosecution Service. The results of that review are found on Page 191 to Page 196 of your report. I suppose more of an editorial comment than anything else, it strikes me as more than passing strange that the agency of government which is responsible for applying the law has, in fact, broken the law by not meeting the legislative requirement that it file an annual report with the House of Assembly. You have raised this issue in the report. I wonder how the Public Prosecution Service has responded to this shortcoming.
MR. SALMON: My understanding is that they are in the process of preparing a report. Perhaps I could ask Mr. Horgan to elaborate on that.
MR. HORGAN: We were told during the audit that the director does have plans to produce a report. When asked what period this report would cover, he indicated it would cover the period September 1, 1993 to March 31, 1997. So it would cover the whole period
since the last report was issued and he indicated that he would endeavour to have the report issued as soon as practical or possible after the March 31, 1997 date.
MR. CHAIRMAN: So this would be Mr. Pitzul, who is the Director of the Public Prosecution Service?
MR. HORGAN: Yes.
MR. CHAIRMAN: He is responsible for playing out a key role with respect to the administration and delivery of justice in Nova Scotia and the upholding of the law and he, it would appear then in a rather offhanded way, is saying, well, when I get around to it, I will meet the requirements of the law and file my report in my own good time. Until I have time to do that, then the Legislature and the people of Nova Scotia can just wait until I feel like complying with the law. That is essentially the view that he expressed.
MR. HORGAN: When we asked the director what his plans were, he indicated and stressed to us that he was appointed in the fall of 1995 so he had not been there for the whole period in which there is an absence of report. I believe it was his intention to get some time to orient himself to the office before he committed himself to producing a report but you would have to discuss the matter with him to determine what his reasons were for the timing of a future report.
MR. SALMON: I should point out, Mr. Chairman, that this is a widespread problem and we have reported on that in several reports over the last number of years. The process of preparing annual reports by departments and agencies and submitting them to this Legislature is just not working. Most annual reports are very late. The content of them is less than satisfactory, in my opinion, and this Legislature is not getting the information it needs. In terms of performance, it is getting certainly far better information now on plans through Government By Design but in terms of annual reports, there are significant deficiencies across the system.
MR. CHAIRMAN: I can't help but wonder if Mr. Pitzul does his Christmas shopping on December 26th since dates don't seem to be particularly important to him, at least in respect to reporting to the people of the province through the House.
You also make reference to the Public Prosecution Service not yet having developed a comprehensive electronic system for assisting case management. Have there been any further improvements with respect to moving in this direction since you made your report? Are you aware of any changes?
MR. SALMON: I don't believe we have done any follow-up at this point. No, we have not.
MR. CHAIRMAN: Would the lack of this comprehensive electronic case management system have an impact on the ability of the Public Prosecution Service to administer justice with respect to its responsibilities to any significant degree?
MR. SALMON: Could I ask Mr. Horgan to respond to that?
MR. CHAIRMAN: Certainly.
MR. HORGAN: My response to that would be very similar to Mr. Salmon's response earlier and that is the better information you have and the more timely it is, should foster an environment in which better decisions are made, decisions about administration and the operation. So we should provide a better environment for good administration.
MR. CHAIRMAN: All right, there is a reference here to the Department of Health audit you did on the $64.1 million that was transferred into the Department of Health, announced in August 1996. The observation made here by the Auditor General is that to date, that is to the date of the issuance of the annual report to the Legislature, an Order in Council approving that additional appropriation had not been issued but that the department planned to seek an OIC in spring 1997. That is roughly one-half year after the fact.
The first question, for the record, has such an OIC been passed by Cabinet? Secondly, in your opinion, is the hiatus between the decision having been taken by Cabinet and the passing of an OIC timely or do we need tighter controls with respect to those kinds of accounting activities?
MR. SALMON: I will ask Ms. Morash to deal with the first question, but in terms of the second, we have over the years raised this issue of timely approval of additional appropriations. The process is such that it leaves Executive Council and the Legislature with no choice. The money has already been spent. It becomes a rubber-stamp exercise. That is not effective control. Now, processes within departments to improve the ability to forecast what is going on and seek approval on a timely basis, those processes are being developed and are getting better. So, I would hope that more effective control will be possible in the future. I will turn to Ms. Morash to answer the first question.
MS. MORASH: To the best of my knowledge, the OIC has not been issued.
MR. CHAIRMAN: So, we now are almost one year beyond the additional appropriation without the appropriate legal document having been signed off with respect to Order in Council approval for the appropriation?
MS. MORASH: That is correct. The minister made the announcement in August 1996.
MR. CHAIRMAN: In the view of the Office of the Auditor General, is that excusable? I have sat in the Cabinet Room. I know how long it takes to write an Order in Council. It's not one that requires an inordinate amount of time.
MRS. COSMAN: Because you wrote so many. (Laughter)
MR. SALMON: It becomes an academic question. The money has been spent, but I would suggest that it would be appropriate to get the paperwork in order.
MR. CHAIRMAN: Mrs. O'Connor.
MRS. LILA O'CONNOR: I'd like to follow up a little bit on what Gerry Fogarty said. I am not an accountant. I certainly have my own way of ending up doing things, but I find that I am usually on. If I am going to the bank for a loan and I would like to borrow some money and they are asking me my assets, I am taking the money that is in my savings account as part of my assets as well as the money that is my checking account, that is my total asset. So, the bank will consider that. It is my understanding that this agreement you have is the money that was put away, or I will back up a little on that. Then I decide I want to buy something that cost more than I can afford to pay for and I decide that I am going to save some. That is the money that is in my savings account. So, when I go to buy, I have part of the money there.
Now the disagreement, as I understand it, that you have is the money that was put away, the $8 million, for victims of abuse; that is what we are counting as part of our money that we have and you disagree with that, and money for capital projects, though the government has put some of it away, but hasn't spent it, and that is part of the concern that we don't agree on?
MR. SALMON: We have no disagreement with the recording of a liability and an expenditure for claims from victims of abuse, because in terms of generally accepted accounting principles the action that resulted in that potential cost has already taken place. The abuse occurred in prior years. Now we are recognizing that we have a responsibility as a government to deal with that.
In terms of the capital projects, however, we are recording as an expenditure and as a liability events that will occur in the future: highways that will be constructed, schools that will be built. That is not an expenditure in 1995-96 when you are going to build the schools or the highways in 1996-97 and that is the basis of the disagreement.
We should attempt, through accounting, to record expenditures in the year in which they have an economic impact. An economic impact doesn't occur until you make the expenditure, build the highway or build the school. So, we have misstated, in 1995-96, the economic impact of government expenditures and we have misstated the extent to which we
have liabilities, debts. You don't record as a liability, when you go to the bank, a promise you have made to buy groceries next year.
MRS. O'CONNOR: Oh, well, maybe. You are right on the grocery part. (Laughter) Yes, you are right. It is not a fixed asset, but it is an expense. I would like to ask another question. The government has made a number of cuts, do you think that we have gone deep enough; should we have made deeper cuts, or are we right on?
MR. SALMON: That is a policy question, Mrs. O'Connor. I can't answer it.
MRS. O'CONNOR: You are not answering policy questions?
MR. SALMON: Well, decisions on whether to run surpluses or deficits are policy decisions and I can't comment on them.
MRS. O'CONNOR: The government has started to send out quarterly reports so that everybody knows exactly what we have done for the past quarter. Do you have a comment on the quarterly report? Do you find that it explains itself well enough - it is right on - or do you think it could be more definite?
MR. SALMON: Well, I don't audit them. I believe quarterly reporting of the financial situation conceptually is a good thing. It is better information. It is more information out there on a timely basis, so people are more aware of how things are going. Whether they are accurate or not is not something I can pass judgement on. It appears that they are prepared with due diligence by staff within the Department of Finance. They make every effort to put out reasonable information.
MRS. O'CONNOR: Would you say that in the last four years, well, since this government has come into power and they put out a four year plan, that this government has made the public more aware of what is going on than it has before?
MR. SALMON: I have said in my report that the quality of information that has been published over the last several years has continually improved. We are in a leadership role in this country in terms of what is being put out there, particularly in terms of the Government By Design document and, this year, with the tabling in the House of business plans for the Crown agencies. There is better information out there and if people read it, they will be better informed.
MR. CHAIRMAN: Keith Colwell.
MR. KEITH COLWELL: I have two or three questions. One thing that disturbed me a little bit when you were making your comments earlier, was you said accounting is an art and not a science. That really disturbs me. I hate to think of somebody with a paintbrush
making random selections of numbers they are going to use and the way they are going to put them together might be right for this person but not right for the next person.
MR. CHAIRMAN: More like paint by numbers.
MR. COLWELL: Yes, paint by numbers may be a better description of it, and that really disturbs me. I have not been associated with government that long, but I know when a banker looks at the financial statement it is pretty straightforward. They are looking for very direct ratios, they are looking for very direct things, and there is no art in that. It is straight science. It is addition and subtraction. Basically an accountant, in my view, in most cases and particularly in the Auditor General's thing - correct me if I am wrong on this - really reports history. That is all you do. You look at the numbers, how they were used, all different types of things, depending on what your mandate is at the particular time, but it is really a science and not an art.
You report on the numbers that were presented to you, you investigate if those numbers were accurate and the procedures to put those numbers in place, so I have a little bit of a problem with that. Maybe you could describe it a little bit more to me? I think maybe that is the crux of some of the difficulties I am seeing with the things you are saying, where you have no comment on this but you have comment on that. It is sort of a bit wishy-washy here.
MR. SALMON: First let's distinguish between accounting and auditing; they are quite different. They are associated, but the art of doing an audit and giving an opinion is different than being an accountant and developing a set of financial statements. When you are preparing a set of financial statements, a great deal of judgement goes into the determination of the numbers. There is a significant need to make estimates, and that is an art and not a science. If you are estimating how much you are going to have to pay in claims for victims of abuse, you are making an estimate of what people are going to come forward and claim and how much you are going to have to pay. That is a question of making estimates, which is an art not a science. You cannot do it scientifically. You use judgement.
You consider parameters, that those claims are going to fall into the $4,000 to $6,000 range each, type of thing. You know approximately how many claims you are going to get, so you estimate that overall it is going to be $30 million when you add them all up. That is a process of estimation. You have loans that you have made to businesses and some of those businesses aren't doing very well, so you have to estimate how much you will recover because you may not recover all of it. You make an estimate of your potential loss and you take that into account in putting the numbers together in your financial statements. That is what makes it an art, because you cannot do it scientifically. Does that help you?
MR. COLWELL: Not really, because I am still convinced it is a science. Even when you are doing the estimates and everything else you are talking about, it is based on principles in the past. It is based on records in the past; it is based on history with different things. If you look at a series of businesses and how well they were screened to start with, the financial situation and economic climate in the area at the time, you can make very scientific judgements on that. If it comes down to an art and I have an auditor that is using art instead of science, I think I would fire him, quite frankly, because I don't think I would be in business very long.
Besides that, just something I wanted to have clarified - and I am no clearer on it now than I was then - about Crown Corporations. You indicated that in some of these deals put together by the province - joint ventures and arrangements with private businesses and things - did I hear you correctly, when one of the other members asked you, about how it should have been a Crown Corporation rather than a partnership?
MR. SALMON: No, the issue here is the Highway No. 104 Western Alignment Corporation. Legislation was passed to establish that corporation, and very specifically in the legislation it was stated that it was not a Crown agency. My opinion is that given the definitions of Crown agencies established through generally accepted accounting principles, that corporation is owned and controlled by the government and, therefore, meets the definition for accounting purposes . . .
[Mrs. Francene Cosman assumed the Chair.]
MR. COLWELL: Well, that's an art you said.
MR. SALMON: Yes.
MR. COLWELL: So, that is a difference of opinion with different accounts.
MR. SALMON: Yes.
MR. COLWELL: Interesting. In general, Crown Corporations, from what I have seen in the media and since I have been elected and everything else, typically aren't very efficient, quite honestly. I will use a case in point - I think it is a bad case, but I will use it anyway - Nova Scotia Power Corporation, which was a serious drain on the taxpayers. Ever since it has been turned over to a private organization, it has become a lot more efficient and is paying its shareholders dividends, and there is a big debate over that. It still concerns me, but it indicates that the private sector is more efficient at running things than typically government is. Would you share that view, in your opinion?
MR. SALMON: That is the commonly held view, that governments and bureaucracies, because of red tape and the fishbowl mentality that exists very often, appear to be less efficient. There are governments that have become more efficient in recent years and are operating similar to private sector organizations. There are private sector organizations that are inefficient as well; generally they go bankrupt.
MR. COLWELL: That's right and that is where the Province of Nova Scotia, I believe, was headed in 1993, even though you won't give us an opinion on that. It is important, I feel, and I think you have identified that we have more accountability and more reportability in government. For the benefit of all Nova Scotians, I think that is important and, indeed, for all of us who work with the government and all the taxpayers in the province. I am asking for your opinion again, is the Province of Nova Scotia moving in the right direction now in that? I know we have a long way to go and it is a relatively new concept for government to really be accountable rather than just a big hole that you pour money into.
MR. SALMON: Certainly with the improvements that have been made in processes and the improvements that have been made in the publication of information, the province is going in the right direction, yes. But, again, on the fiscal side, in terms of whether or not balancing the budget is the right direction, that is for the economists, not for an auditor, to pass judgement on.
MR. COLWELL: That isn't the question I asked you though. I asked you if we are going in the right direction for more accountability?
MR. SALMON: I tried to answer that in the first part. Yes.
MR. COLWELL: On the second part that I didn't ask you the question on, that you were answering anyway, I always think a balanced budget is a lot better because if you are not paying interest out to Americans and Germans and Japanese and everyone else with zero impact on Nova Scotia's economy - actually a negative impact - I think it is very positive. So, if you move towards a balanced budget - and that is just my opinion now; that is not science - it is important to go in that direction, because if we had the $1 billion to spend that was blown away in interest every year, we could pave every highway in this province in five years and do all kinds of good things for Nova Scotians which is unfortunate we don't have that opportunity.
Perhaps if the Auditor General's Office would have been more critical 10 years or 15 years ago, as was already brought up here, I think maybe we might not be in the mess we are today. I am quite frankly glad to see the Auditor General's Office moving towards more accountability in government. I think it is very important.
The other thing I have to ask you is on this matter of the auditing firm. Again you talk about science and the art of accounting but yet when you talk about the firm that is hired by the province to do an outside audit - and I think that is always healthy, personally, because you get different views from different people; maybe that is the science part of things, to get this thing all put together - you seem to have a great deal of difficulty with that. My opinion, and this is just my opinion, not that it counts a whole lot here, but my opinion appears that if that outside firm was working for you, you wouldn't have any kind of problem with the answers you get. However, if the government does it, you have problems with it.
It comes down to the point that it appears that any auditing firm, or the science part of the auditing firm, you lay out very strict criteria on how you are going to do an audit and what you are looking for and the areas you want to highlight. Now perhaps the government wants to highlight some things that will make it more efficient and more accountable on the things they are doing on a daily basis, knowing full well that the Auditor General's Department is doing their job and also checking things that perhaps they are not concentrating on at that time. So it gives us a double-check, really, on what is going on, gives us an opportunity to make the improvements on several fronts. Would you agree or disagree with that, yes or no?
MR. SALMON: There are . . .
MR. COLWELL: Yes or no.
MADAM CHAIRMAN: I think he wants a yes or a no answer, if it can be provided.
MR. SALMON: Yes.
[Mr. John Leefe resumed the Chair.]
MR. COLWELL: Thank you. So you suggest some changes not really in the accounting policies, auditing policies, accounting policies - it sort of all gets mixed up here because for a little while we talked about, and some of our colleagues asked for opinions on things and you had no opinion on this thing but you had an opinion on this part and that concerns me a little bit. You told us, if I recall, and my memory isn't very good, it is quite short, that in your opinion, we were talking about the joint venture with the province, or whatever you want to call it with the Highway No. 104 alignment, was your opinion at that point when you were asked here, would it cost the taxpayers more to borrow the money the way they did it than the way it was and you gave us an opinion that it would be but when you were asked for an opinion on some other things in the same area, you couldn't give an opinion. Could you explain that to me?
I just can't understand why you can give a very distinct opinion in one place, when all these experts have said this is probably best for the province or whatever, whoever they are and whatever they base it on, probably some of the art in it, but anyway. Then you come along and say, well, I am comfortable with that but this is something very similar but I can't give you an opinion on it.
MR. CHAIRMAN: We will have this reply and then we will let Mr. MacAskill.
MR. SALMON: I am clear as to what you are referring to. I will not give an opinion on anything that is program policy. I will not give an opinion as to whether it is a good idea to build that highway, whether that highway is necessary.
MR. COLWELL: That is not what I asked you. I asked you very directly. You made . . .
MR. CHAIRMAN: Order, please.
MR. COLWELL: . . . an opinion on the fact that, or in your opinion, the Highway No. 104 alignment possibly would cost the taxpayers more money if it would have been this way or that way, whichever way you described at the time. However, later on when you were asked an opinion on the financial situation of the province, if it would have been better or worse or the bond rating agencies, your answer was bond rating agencies can tell you that, I can't. So on one side you are telling us one thing, on the other side you can't answer us.
MR. SALMON: That is correct.
MR. CHAIRMAN: Okay, we will go on to Mr. MacAskill.
MR. KENNETH MACASKILL: I only have the one question, Mr. Salmon, and it is with regard to Highway No. 104 and the difference between the private-public partnering and the government. I think you said that you didn't know whether the $94 million was significant or insignificant to the government. Could you explain that, how you would consider $94 million, that you didn't know if it was significant or insignificant to the deficit or the debt? That is what I am a little confused over.
MR. SALMON: The argument that was put forward to us, the position that was put forward to us during the course of our audit was that if the province had gone out directly to borrow the money to finance that highway, that it could have had an impact on the credit rating of the province which would have increased interest costs on the province's debt. What I have said in my report is that I wonder whether that is valid when we are dealing with $90 million of additional debt on top of $8 billion. Would bond rating agencies change the credit rating if you were going to increase $8 billion of debt to $8.1 billion? That is a question of whether or not it is significant.
MR. CHAIRMAN: Mr. Holm.
MR. HOLM: Mr. Chairman, I apologize, because when I started out I didn't compliment the Auditor General and his staff for the cooperation that has been shown with members of this committee over the past year. I, as a member of this committee, do really want to express my appreciation for that assistance and cooperation and sometimes it takes some considerable effort to get through - and I use myself here - my head some of the intricacies of the things, not being an accountant or familiar with a lot of the details, so I appreciate everybody's patience.
I just want to, and I am not getting into a dispute about what are or what aren't the correct figures anymore. I just want to make one observation and ask if this is correct, or a couple of observations. First, the Auditor General works for the House of Assembly, not for the government. Therefore the Auditor General is independent of any individual government or minister and could only be removed from that position by the Legislature, according to the legislation. Is that correct?
MR. SALMON: That is correct.
MR. HOLM: The accounting firms that are employed by the government, and I am not suggesting by this that they aren't doing a reputable job, but they do not work for the House of Assembly, they work directly for the government in power and particularly the minister to whom they report and they gain their job by a contract that is awarded to them by the government. So in other words they report to the minister or the government in power at the particular time.
MR. SALMON: That is correct.
MR. HOLM: Therefore, the independence in reality, as well as perceived, and this has nothing to do with the reputation of anybody involved, but the reality is that the Auditor General and the Auditor General's Office is far more independent in terms of their abilities to report on policies, accounting practices I should say, not public policies but on accounting practices and that kind of issue.
MR. SALMON: That would by my opinion.
MR. HOLM: I share it. Thank you. I want to just leave that and I want to go back to Highway No. 104 again. I am talking about risk transfers and certainly there is this whole issue or dispute between obviously the Auditor General's viewpoint and that of the government in terms of whether or not it is or isn't really, by definition, a Crown Corporation. We are talking about risk transfer and that is why it is being contracted out, so to speak. This private-public partnering in terms of finances for which we are paying, I would suggest, quite a premium in the interest rates versus the government rate.
In your report, 11.25, Page 128, you point out, "In our view, the liabilities are non- recourse to the Province's consolidated fund. However, since the bond holders do have recourse to HWAC, and HWAC is owned and controlled by the Province, from the perspective of the Province's reporting entity . . .", then the liabilities of that group would be the liabilities of the province. Does that therefore mean, in reality, even though we say that something is so, the province in your opinion would be liable for any financial shortfalls should they occur or any difficulty if it should occur on that highway?
MR. SALMON: The claim that has been made is that legally the government has no liability. From a governmental point of view, if something happened, and we have to keep in mind that this corporation is not building the highway.
MR. HOLM: No.
MR. SALMON: All it is there for is to raise the funds through an issue of debt debentures and that is to be repaid out of the toll revenue. If something happened with regard to toll revenue, if it was indicated that it was not sufficient to repay that debt, could the government morally absolve itself of that debt from a public policy perspective? There may be no legal obligation. The government has consistently for years said it has had no legal obligation with regard to the debt of the Workers' Compensation Board in much the same manner, but from a public policy perspective, could the government walk away from that $90 million of debt? I can't answer that question but I have serious doubts that it could.
MR. HOLM: Correct. I would share that and in addition to that, of course, there is at least $55 million or more worth of public funds that is going into it plus it is a key part of the infrastructure or it is going to be to get in and out of the province. So I guess what I am trying to weigh here is the, I call it a shell game and some of my friends on the government benches don't particularly like that but I still stand by that, that it is a shell game that is going to be extremely expensive for Nova Scotians in the long term.
Another concern that I have is the whole issue of accountability and reporting. In your report you, again, pointed out that well, summarizing and paraphrasing and correct me if I am wrong on this, but when you tried to see things that all you saw were memos and you were told that the minister is being kept well apprised in terms of what is going on in verbal briefings. As you correctly pointed out, the Highway 104 Western Alignment Corporation is really just a money borrowing body, so presumably you can do the auditing of that body. But this whole project, there seems to be a tremendous lack of accountability and an inability to get at the best costs and so on. I just find that this is in such a vacuum and there is such a tremendous amount of money. Leave aside the whole issue or the philosophical arguments of whether we should or shouldn't have tolls, I am trying to compare apples with apples, I am trying to look at if, in fact, the highway was being built the same way with tolls being charged by government versus this private consortium that is building the roads, if the government
was therefore borrowing the money at the government rates, how fast could that road be paid off?
Also the fact that in here, as you point out, there is the potential if their projections are reached that the government will make $151 million. That is a sizeable chunk of change. Now, of course, it could be less than if toll revenues are lower, it could also be substantially more if the usage is actually higher than projected. So that maybe is a middle range. I can't believe for a minute that the companies that are building this and lending the money think that they are putting that kind of money into a very risky operation.
So I am wondering maybe if you could just comment on a couple of those observations and including in that the whole issue of accountability and, as you pointed out in your report, it is not adequate and the department doesn't even keep a record of expenses in one spot of where we are at.
MR. SALMON: Again, a couple of issues here. This is one of the first initiatives in public-private partnering in this province and we are learning as we go. There are definitely accountability issues that we have recommended should be addressed.
MR. HOLM: Any progress?
MR. SALMON: Again, we haven't been back. We haven't had a response to those recommendations. I believe they are being considered. Certainly, at the central agency level, Finance, Priorities and Planning, they are taking major steps to establish a framework for these arrangements, establish and document the processes and the concepts. I understand that they are soon to announce the appointment of someone who will lead the overall task force. (Interruption) It has been announced? Yes, it has been announced and I don't have the name. But that is centred in the Economic Renewal Agency. It is moving forward. There are definitely issues to be addressed.
From an audit perspective it is very difficult in terms of the process. You get proposals from companies to carry out a project and you select the best of those but then you start a negotiation process. It is that negotiation process that we found extremely difficult to audit with regard to Highway No. 104 because you are dealing with issues of risk transfer and compensation. So how do you ever conclude that you have reached the best deal that was possible? It is very, very difficult. We are struggling with that.
MR. HOLM: If I could just continue for a moment.
MR. CARRUTHERS: Mr. Chairman, on a point of order. I know that two or three of the other members wanted follow-up questions and Mr. Holm now in his follow-up has gone for 12 minutes, I wonder if he just might defer so some of the other members might get a chance to ask a follow-up question?
MR. CHAIRMAN: I have allowed 15 minutes for each committee member with their first question. I am not intending to ask a second question because we are squeezed for time. So I am prepared to allow Mr. Holm to go the 15 minutes on the basis that I am not going to ask a question and then we will get on to Mrs. Cosman and then Mr. Carruthers and if there is time left on to others after that.
MR. HOLM: I will just ask one question. I could take a long time on this but I won't, just one. As part of the audit, were you able to look at all the various contracts that have been entered into with the various suppliers, lending institutions and so on? Were you able to determine what penalty, what cost the province would have to pay if the province were to decide at some time in the future that we do not wish to continue this agreement, we wish to cancel the tolls, we want to take it over ourself? Do we know how many tens and tens of millions of dollars the penalties would be that the province would have to pay in order to get out of this?
MR. SALMON: I will answer the first part and ask Mr. Horgan if he could comment on the specifics. We had access to everything we needed. We had access to all of the agreements, all of the documentation. We did have a concern that because of the court case with regard to freedom of information involving Atlantic Highways that we were in danger of putting information into our report that was protected and we had to resolve that. With regard to the specific issue of penalties, I will ask Mr. Horgan if he is able to deal with that.
MR. HORGAN: The best way to respond would be to note that in our report, Chapter 11.17, in the first bullet we discussed some covenants that were part of the contracts. One of the particular covenants reads as follows: "'. . . [if] the construction of the Project is terminated or abandoned by the Province or the Borrower prior to the completion of the Project'", then the government would assume responsibility for the total amount of the bonds.
MR. HOLM: I said I would only ask one question. It goes farther than that in covenants and penalties.
MR. CHAIRMAN: All right, Mrs. Cosman.
MRS. COSMAN: I want to come back to the issue that Lila O'Connor was pursuing earlier, and that is the issue of when the dollars are accounted for on the question of victims of abuse.
I guess, since we have been talking opinions here this morning, and whether opinions are art or science, I disagree with your opinion. I will tell you why. At some point you said that it is good accounting procedure to record expenditures in the year that they have the economic impact. So, on the one hand, you are criticizing the Government of Nova Scotia for recording expenditures in a given year on the cost of capital expenditures that are coming up in the following year, and you are criticizing that. On the other hand, you are saying
absolutely the reverse for victims of abuse because the victims of abuse, that happened in the past so it's okay to record that expenditure in this past year because it is identified, but those dollars have not been expended. You can't have it both ways. We are into an apple and an orange argument again.
So, I just want to state on the record. I don't agree with your opinion on that and I am nobody. I am not an accountant, I am not an Auditor General, but I do have an opinion and maybe it is a bit on the art side and not the science side, but these dollars are not going to be expended until the future. So, I don't see how you can have it both ways. That is my opinion and I don't look for a response on that. I just want to get it on the record that I disagree with your opinion on that matter. I don't think that came out clearly in the debate earlier.
I guess what I would like to try to wrap up with is the question in terms of the efforts of the government to get a balanced budget. We went through a lot of painful processes to get to the point of trying to balance the budget after four years in this government. If we were to balance the books in the way that you deem is the only way, that would have required even deeper cuts in the major expenditure areas of health, education and social services. As you know, we did not cut on the social services side. We are the only government in Canada that actually increased those budgets. So, if we come back to health and education, if we were going to balance the budget, balance the books, in the way you deem as the only way, we would have had to make even deeper cuts into those two major expenditures in the province. How would we have done that?
MR. SALMON: We are dealing with two very separate issues here. One is a planning budgeting issue as to where you spend your money and the second issue is proper accounting and recording expenditures in the proper year, and that is only the second one that I am dealing with. If those expenditures had been recorded in 1996-97 where they belonged, in my opinion, then other decisions would have had to be taken if indeed the objective was a balanced budget.
MRS. COSMAN: What was the importance in 1993 of the government introducing the consolidated summaries in their financial statements? Could you comment on that?
MR. SALMON: The importance, from my perspective, is that was a move towards complying with generally accepted accounting principles for governments. That was the first step. Virtually all other governments focus as their primary financial reports on consolidated financial statements. This province moved to provide consolidated financial summaries as an appendix, as additional information rather than as the primary financial statements. My understanding is that the objective of this government, the Department of Finance in particular, is to move to consolidated financial statements as the primary financial statements. The importance of that is that you get a more complete picture of the province's financial situation.
MR. CHAIRMAN: Mr. Carruthers, feel free to run out the clock.
MR. CARRUTHERS: Mr. Chairman, some of my friends had asked questions regarding Highway No. 104 and you had stated earlier that one of the issues, and I personally took it to be a significant issue, into the decision on using private-public partnership as a methodology of constructing this highway was the transfer of risk. In my view, that is a significant matter. Interest rates and everything else that you deal with in business are always based on risk. If one goes into the bank and he has $1 million worth of assets and he wants to borrow $200 to go down the corner, he doesn't have any problem getting the lowest interest rate in the world. Another fellow goes in, he wants to borrow a whole pile of money, he has never paid off his loans in his life, just check what kind of interest rate he is going to get. Risk is everything.
In this particular case, you commented that there might be some moral policy. Once again, I find it difficult to accept there might be some moral policy reason why the government would have to ignore a default in a contract with a private partner. Personally, I could tell you that I, myself, when a corporate entity enters into a contract with government, while we owe a moral responsibility to the public, if that contract or that corporate entity defaults, you can rest assured where this MLA sits regarding follow-up. There will be no moral responsibility to bail that company out at all.
I don't think you perhaps meant that but I am afraid that that may be the spin that went out there. I personally want to make it clear that the risk factor, in my view, was significant into why bring in the private partner and if that private partner does not live up to its responsibilities, I know this MLA would look very seriously on such a breach.
MR. SALMON: Mr. Carruthers, I think we have to make clear what the structure is here. We have a corporation called the Highway 104 Western Alignment Corporation. It is not the private sector company that is building the highway. That is Atlantic Highways Corporation and the consortium.
MR. CARRUTHERS: I understand.
MR. SALMON: The debt, the money that has been borrowed through debentures, is the debt of Highway 104 Western Alignment Corporation, not a private company.
MR. CARRUTHERS: If the debt is to be reduced by way of toll, and that is one of the contributors to its anticipated debt reduction, whose responsibility is it to ensure that the debt is reduced?
MR. CHAIRMAN: We have one minute to deal with this.
MR. SALMON: Highway 104 Western Alignment Corporation.
MR. CARRUTHERS: All right. Now therefore don't you feel that that corporation has such a responsibility?
MR. SALMON: Yes, it does, but it has no assets other than toll revenue.
MR. CARRUTHERS: In other words, what you are suggesting is if there was a default by any corporate entity, if they have no assets, that by definition the government would have to take over its responsibility?
MR. SALMON: My point is that Highway 104 Western Alignment Corporation is not a private company. It is a government agency.
MR. CARRUTHERS: Well, it is a corporation.
MR. SALMON: A corporate government agency.
MR. CARRUTHERS: It is a corporation.
MR. SALMON: That does nothing but collect toll revenue from Atlantic Highways Corporation and pay off the debt.
MR. CARRUTHERS: Okay, just at risk here because we may be apples and oranges, the bottom line to this is, is it your opinion that there has been a transfer of some risk from the people of Nova Scotia to other entities?
MR. SALMON: Yes.
MR. CARRUTHERS: That is great, thank you.
MR. CHAIRMAN: That is a good place for us to stop. Thank you, Mr. Carruthers. The clock has run out on us this morning and our next meeting will be September 24th which is a briefing session on the Atlantic Lottery Corporation with the Auditor General. On behalf of Mr. Holm and myself, I want to wish our government colleagues a most interesting weekend and we will look forward to chatting with you over the next week to discuss the art of politics which certainly is not a science and on that I am sure we would all agree. I thank you, Mr. Auditor General, and your staff for being with us this morning.
[The committee adjourned at 11:31 a.m.]