STANDING COMMITTEE ON PUBLIC ACCOUNTS
Mr. Howard Epstein
MR. CHAIRMAN: I will call to order this meeting of the Standing Committee on Public Accounts. We are meeting today to discuss the special report issued by the Auditor General with respect to the O'Connell Drive Elementary School lease. We have with us, to speak to that, the Auditor General himself, Roy Salmon, accompanied by Elaine Morash of his staff and Mr. Andrew Atherton who will also work with him today.
We have a couple of changes in the committee composition today. Two of the members of the Liberal caucus, I gather, will be joining us but will be late due to their slightly delayed arrival from Yarmouth where they have been participating in the committee meetings on workers' compensation. Joining us today is Eileen O'Connell and also Mr. James Muir. Welcome to you both.
Mr. Salmon, over to you.
MR. ROY SALMON: Thank you, Mr. Chairman. We have a short presentation and then we will be open to questions. Just by way of background with regard to the O'Connell Drive school and the lease which we examined, I just wanted to refresh your memories on the sequence of events. The school was constructed and did open in September of last year. Subsequent to that, on March 12th, the government signed a lease with Nova Learning. This was the first school lease that was signed as a result of the P3 process and as a result of that, in June I received a letter from the Minister of Education and Culture requesting that I examine this lease, particularly with regard to the question of accounting treatment. As you will recall, I and my staff had conducted an audit of the P3 school construction process and reported on that in my last annual report, the 1997 report which was tabled in February.
I would just like to review with you the objectives that we had set for this audit which followed in specific terms from the request that I had received from the minister. The key question was whether or not the treatment for accounting purposes that the government had applied with regard to this lease complied with generally accepted accounting principles. Secondly, we wanted to gain an understanding of the way in which risks had been transferred from government to the consortium, being part of the private sector, within the lease arrangements and whether additional related arrangements also appropriately transferred risks. I wanted to point that out because the CICA, Canadian Institute of Chartered Accountants, guidelines with regard to accounting for leases views risk transfer as the key element in assessing appropriate accounting arrangements, accounting treatment.
In terms of the scope of our audit, I don't have a mandate, nor does any Auditor General in this country have a mandate, to assess and comment upon public policy. Therefore, my report does not address the question of whether schools should be built under P3 arrangements. This government has made a decision that it will construct schools - which is a priority, and I acknowledge that - without adding to the debt of the province. In order to do that, the only possibly way is through acquiring schools under operating lease arrangements because if it ends up being a capital lease, it does add to the debt of the province.
This audit did not specifically include a review of value for money but we do make some comments on the financing and life-cycle costs with regard to this particular school. We did do a review of construction costs and comments on that were included in the annual report for 1997.
In terms of results, it was my opinion, in my report, that the most appropriate classification for this particular lease, based on the concept of risk transfer, would be to treat it as a capital lease, that is that the capital cost would become an expenditure and the liability would be recorded as a debt of the province. However, as a result of some revisions to the original lease that were negotiated and an amended lease was signed in July 1998, this lease does meet the mathematical test established by the CICA that permits it to be classified as an operating lease. So my opinion was that the government's accounting treatment was acceptable given that mathematical test.
One major factor here is that accounting classifications should be only one of many factors taken into account and considered when decisions are made about how to provide and finance schools. It should not be the determining factor. However, as a result of the government's policy decision with regard to debt in the construction of schools, it has become the determining factor.
Finally, in terms of value for money, I do want to point out that the consortium, Nova Learning, was able to obtain financing for this school from a non-taxable pension fund. As a result, the rate of interest on the financing was approximately equal to what the province would have to pay to borrow the money to construct the school. There was no additional financing cost as a result of this transaction.
In terms of capital costs, we did a comparison of the cost of leasing the school to the capital cost of building and owning it, including the debt financing. If the province had followed the traditional method of building and financing schools, the cost would have been $8 million. This process of leasing the school and if the government exercised the option to acquire it at the end of the 20 year lease term, the cost would be $8.3 million. There is a $300,000 additional cost.
In terms of risk transfer, and this was the key issue with regard to the substance over form argument for accounting classification, in this particular case the province maintains the majority of the risks, including the risk of the cost of capital improvements, the operating costs for the school and the costs of technology refreshment. The primary risk that the private sector consortium has assumed is the residual value risk. We view that as being a minimal risk in that over the term of the lease, they will have recovered 88.9 per cent of their investment and at the end of 20 years will have title to the land and building, which the province then has the option of either leasing it on a renewal basis, buying it at fair market value or walking away. The private sector's risk of loss is 11.1 per cent, maximum.
Mr. Chairman, a couple of more points, one more slide. One of the complexities that we had to face here, in reviewing the calculations to determine the accounting classification, was that the monthly payment was allocated between basic rent and other services to be provided by the consortium; essentially, a telecommunications link, because this is a high-tech school. What we learned from that, and I would suggest that the Department of Education and the Department of Finance have also learned this lesson, is that it is very difficult to allocate costs among components when you are entering into a transaction like this, and that that is going to create accounting problems in the future if that process continues.
As a result of the audit and the previous audit, changes have been made to the P3 process for the future. There will be a requirement in future proposals that information will be included to allow an assessment of the extent of risk transfer and the financing arrangements. There also have been organizational changes made, particularly within the Department of Education, that more clearly assigns responsibility for the decision-making process, particularly as it applies to the issue of accounting classification, and that includes, more specifically, involvement of the Department of Finance, who will be providing advice on those issues as these negotiations proceed.
Mr. Chairman, that is our presentation, and we are prepared to answer questions on this audit.
MR. CHAIRMAN: Thank you. Here is how I propose to proceed, of course we have the usual three hours set aside for this. I intend to move through each of the three caucuses on about a one-half hour basis each, initially. That should take up most of the time and give ample opportunity for each of the three caucuses to ask questions, and it should leave, as well, a little bit of time at the end, if we want to go back and do a second round, if any questions occur to any of the members as a result of the questioning of other groups.
Maybe I can just start off by asking you a couple of questions myself. Maybe I will ask you to go back and look at the initial slide you put up that set out the timing in all of this. What you point out there is that this school was actually opened in September 1997, and yet a lease was not actually signed for it until March 1998. I take it this is an unusual set of circumstances, and would it not be normal that a lease would be prepared in advance? Is this just because it was the first experience?
MR. SALMON: In my annual report for 1997 in which we examined the P3 process as it related to school construction, we pointed out that at that time there were eight schools that we were either in the planning stage or under construction, and that indeed four were under construction. Have I got that right? No, it was less than that, there were at least two under construction. Yes. It is unusual.
Our assessment was that there was a recognized priority to build schools, and the process got going to build them while negotiations were going on but not finalized with regard to several. In the case of the school in Sydney, Sherwood Park Junior High, which was the first one that had been opened, negotiations were not successful on that one, and we have ended up, in actual fact, with the province owning that school with no lease arrangements. This one was opened in September, negotiations were continuing, but certainly it is not the best process, and it would appear to me from information we have received that there is now a commitment that leases will be in place before any future schools are constructed.
MR. CHAIRMAN: Would that be before the commencement of construction?
MR. SALMON: Before the commencement of construction, yes.
MR. CHAIRMAN: That would be a normal and desirable process?
MR. SALMON: Yes, very definitely. You certainly are in a restricted bargaining position if the school is constructed and you have not concluded the financing arrangements and a contractual arrangement.
MR. CHAIRMAN: Did you examine the March 12th lease?
MR. SALMON: Yes.
MR. CHAIRMAN: This was intended by the parties at the time, was it not, as a final lease?
MR. SALMON: Yes, it was. It was a signed lease.
MR. CHAIRMAN: It wasn't still marked as draft, it wasn't marked as tentative?
MR. SALMON: No, it was a signed lease. We examined it and our conclusion was that it did not meet the criteria to be classified as an operating lease.
MR. CHAIRMAN: Then why was the lease reopened for discussion and why was the second lease signed?
MR. SALMON: To reach an agreement that would allow the lease to be classified as an operating lease.
MR. CHAIRMAN: Essentially, Mr. Salmon, what you are telling us is that after June 5th when the Minister of Education requested you to do a review of the lease that had been signed in March, you told the Department of Education that the lease in your view should be classified as a capital and not an operating lease and on that basis the department went back and renegotiated the lease, is that correct?
MR. SALMON: That is correct.
MR. CHAIRMAN: So there was no other reason for the department to renegotiate that lease except to bring it into compliance, into the category that the department wanted it to fall in for accounting principles, is that right?
MR. SALMON: That is correct but as a result of that renegotiation they did acquire additional benefits.
MR. CHAIRMAN: And if the partner with whom they negotiated the lease had been unwilling to negotiate, would the province have been able to force any negotiations?
MR. SALMON: No.
MR. CHAIRMAN: Because the March lease was a final lease?
MR. SALMON: Correct.
MR. CHAIRMAN: Thank you. I believe Ms. O'Connell has some questions.
MS. EILEEN O'CONNELL: Mr. Chairman, I guess from just reading the whole report, I mean just in very general terms, it sounds like after all that what we got was a lease on a school that cost a bit more and still leaves most of the risk with the province, is that correct?
MR. SALMON: That is correct.
MS. O'CONNELL: If the attempt to convert the lease from capital to operating in these negotiations had been unsuccessful, there would, presumably, have been consequences for the province and the government. Can you talk a little bit about that?
MR. SALMON: Well, the consequences would have been that if it had not been renegotiated, if the March lease had stood, then it would have been, in my opinion, inappropriately classified as an operating lease. The province could have still treated it as an operating lease and suffered the criticism from my office that it was an inappropriate accounting treatment.
If it had been reclassified as a capital lease, then the consequences would have been that the March 31, 1998, financial statements would have reflected an additional capital expenditure of $8 million that would have impacted on the surplus or deficit for the year. By treating it as an operating lease, the expense is recorded against revenues and as part of the surplus or deficit in each of the 20 years as the rent is paid. That is the accounting issue in terms of when the expenditure is recognized. As a capital lease it is recognized in the year the school is constructed. As an operating lease it is reflected as an expenditure as the rent is paid over the 20 year term of the lease.
MS. O'CONNELL: I know you are very clear in your report that it is not your job to make public policy decisions and I understand that, but the ramifications of what you say are interesting. I mean if it had been a capital lease that would have affected public policy, presumably, in the sense that there were 31 schools out to tender. So I guess the next thing I want to ask you is about that large chunk of schools that are in process. Even with operating leases, over the course of time that budget line is going to climb steadily as each school negotiates a lease, if the government is successful in this. That operating cost line is going to inflate, correct, as lease payments accumulate for different schools?
MR. SALMON: There is no question of that, yes, there will be an annual cost under an operating lease scenario for the rent on whatever number of schools are built and financed through these arrangements.
MS. O'CONNELL: And that number will grow as leases are signed?
MR. SALMON: No question.
MS. O'CONNELL: So my question is do you foresee a point where if you like the whole thing goes around to the beginning again in the sense that the budget line for operating leases is so high that either it is unmanageable or it precludes other desperate needs for schools or school additions, or whatever. Could you see a point where that number would get so big that we are back to the starting point?
MR. SALMON: As I understand, what has happened is that the Department of Education has developed a list of priorities for school construction, put forward a construction plan to Priorities and Planning, which has approved that plan. It calls for something like $250 million in capital costs for school construction to be financed on the basis of approximately $25 million a year to cover the lease payments that will be required on those schools.
Now, that as I understand it roughly equates to what has been provided on an annual basis for capital costs which would amount to, in the case of schools equivalent to O'Connell Drive, the construction of three schools a year. So what this public policy decision provides is an opportunity to build more than three schools a year, to build, well, the plan is 31 schools in the short term, to be financed over a 20 year term through operating leases which would equate to the $25 million a year. So what you do is get more schools earlier at the same cost.
MS. O'CONNELL: Which brings me to the current situation at O'Connell Drive as an example of what might occur. It is my understanding that O'Connell Drive is now overcrowded and that the school is not accepting new students from its own catchment area. There is in the community a sense that that school needs an addition already. Now, who would be responsible for the cost of building an addition to O'Connell Drive Elementary School?
MR. SALMON: The Department of Education.
MS. O'CONNELL: Would they be under the obligation to proceed with the company through a P3 process or could they go into a school that has been built and leased to them and add their own addition?
MR. SALMON: That is an interesting question. If the decision was taken by the Department of Education that they needed an addition to that school as opposed to perhaps providing portable classrooms on the site, they would certainly have to renegotiate that with the consortium and enter into a new agreement or an amended lease arrangement for an addition to it.
MS. O'CONNELL: Which then takes us another step and I do not know if this is out of your area that you want to comment about but that raises the question of - well, it raises your initial concern about cost-benefit analysis - what kind of research is going into the needs of the communities and the demographics?
MR. SALMON: That is correct and that sort of analysis should be performed by the Department of Education. Our understanding is from our examinations that there is analysis done but you are always dealing with significant unknowns when you are forecasting what is going to happen in the future. We toured O'Connell Drive Elementary School earlier this year. It is a beautiful school. It is in a new area of residential development. There are a lot of houses being built there and the question is, how well can you forecast what the influx of families and children is going to be?
I guess my only comment would be, it would appear the Department of Education does the best job they can in forecasting. In this case, based on what you are telling me today, in terms of being overcrowded and refusing students, it would appear that their forecasts were not that accurate.
MS. O'CONNELL: Would you agree, and I cannot remember whether you said this and maybe you did, but would you agree then that it might be difficult for consortia to be willing to build for future needs; in other words, to build space that is as yet unused for future needs? I mean would they be reluctant to do that given the higher costs?
MR. SALMON: They would not if the province was willing to pay for it.
MS. O'CONNELL: The changes that were made to this lease had to do to a great extent with the overpricing of technology, correct?
MR. SALMON: Correct.
MS. O'CONNELL: It seems to me this is a really important issue because there has been such a push for technology in schools and so many attempts to get it by hook or by crook, whether through federal funding or through the building of these schools through this method. It seems to me that one of the fatal flaws in this valuation is the constant reduction in technology costs. I heard on the radio yesterday that Acer is going to put out a $200 computer, a $400 computer. Is there any real way to get a grip on the genuine value over time of technology?
MR. SALMON: The difficulty we had in assessing this lease arrangement for the purposes of the accounting treatment was the allocation of the monthly rental costs between the lease for the school facility and the allocation of a portion of that payment to the communications link that was established in the four schools, including this one as the base school.
This is the first high-speed communications link that has been established in a school in Nova Scotia. So we had no good benchmarks to measure this cost allocation against, but we did the best we could by gathering information about communications links in other schools and made the comparisons. That became the issue with the March lease, that we believed that that allocation had been overvalued. As a result of the renegotiation the consortium linked another school and also provided for some additional capital improvements to the school. That allowed us to determine an appropriate value for the communications link in today's dollars.
I agree with you, that over the 20 year term those services are very likely to be provided at a much lower cost but there is no way to determine what that would be. So we believed that the treatment as it ended up was acceptable. The allocation was acceptable.
MS. O'CONNELL: Obsolescence, then, brings us to technology refreshment, right?
MR. SALMON: Yes.
MS. O'CONNELL: And in Paragraph 49 you point out, as we in fact did, that when the contract was first released, the lease and management agreement did not offer provisions for technology refreshment. So I guess I want to know if it is satisfactory to you that the government would enter into an agreement with a private partner for creating a high-tech school that does not include the technology refreshment? I mean that is a risk transfer issue, is it not?
MR. SALMON: Very definitely a risk transfer issue.
MS. O'CONNELL: Yes, and they have kept that risk?
MR. SALMON: And they kept that risk. One could conclude that the province was in a very poor negotiating position because the school had already been built. Essentially, the consortium had the negotiating advantage and the government has recognized that and have indicated to us that this isn't going to happen again, that in the future the lease arrangements will all be negotiated well in advance of any construction start so that the bargaining position will be much more equal.
MS. O'CONNELL: Has there been any sense that the technology refreshment would be the responsibility of the consortium? If you look at it this way, if the government, every three to five years, puts a lot of money into technology refreshment, the equity position is shifting over time, in a sense, isn't it, because more and more of the costs are being borne by the government. So is it possible that as that goes on, at some point it is no longer an operating lease? Do you know what I mean?
MR. SALMON: There are all sorts of possibilities with regard to these arrangements and in terms of what happens in the future. I think what we have to recognize is that each arrangement will be unique. You can't look at O'Connell Drive school as a model. In each case, proponents are going to come forward with various options and proposals and the government is going to be in the position of negotiating each one to get the best bang for your buck, if you like, that they can. In some cases, that will impact on technology refreshment, financing and in other cases it may not. It will depend on the unique circumstances.
MS. O'CONNELL: Which brings us to the Amherst lease, as yet, I presume, unsigned. Is that correct? Has it been signed since July?
MR. SALMON: No, I don't believe it is signed yet.
MS. ELAINE MORASH: The development agreement has been signed and in that development agreement there are some broad terms and conditions that will cover the future lease but the actual lease detail, the signing of the lease will happen further along in the process, but there are some parameters that govern the signing of the lease in the development agreement.
MS. O'CONNELL: You sound, in the report, like you anticipate more of the same kind of difficulties with the Amherst lease in the sense that it is a gross lease. I think you said the difficulty of assigning values to services and so on. Can this get to the point where it is unmanageable?
MR. SALMON: Where it is?
MS. O'CONNELL: Where it is absolutely, in accounting terms, unmanageable. This attempting to put values on things and more specifically, do you anticipate, then, more problems with the Amherst lease and more questions?
MR. SALMON: I believe that we are dealing with a very complex subject and, as I indicated a few moments ago, there will be unique features and characteristics to each lease agreement that will make these judgements difficult. In professional judgement, it is just that, professional judgement and there is room for differences of opinion. The biggest concern I have is that I am going to be expected to look at every one of these lease arrangements and if that is the expectation and does happen, my office won't be doing anything else but examining school leases.
MS. O'CONNELL: So just refresh my memory. The P3 secretariat that the minister spoke about in the spring, that will have people from your department, will it?
MR. SALMON: No, that is not my role.
MS. O'CONNELL: It will have Finance people?
MR. SALMON: Finance, Education, Justice, and Transportation and Public Works.
MS. O'CONNELL: Okay, and is that secretariat up and running, do we know? Maybe that is not a fair question.
MR. SALMON: Elaine, can you . . .
MS. MORASH: There has been a slight change in what was proposed. It is now a branch of the Department of Education. I believe the name is capital projects branch and its focus will be slightly broader than just P3. It will be dealing with all capital projects that the Department of Education is undertaking, regardless of whether they are P3s or whether they are traditionally-owned schools. So, yes, there is something new that is running at the Department of Educations but it is a little bit different than the P3 secretariat that we referred to when the report was written.
MS. O'CONNELL: So then your role would be to review each one after that process.
MR. SALMON: That is correct. Our intention would be to focus on the organization's structure, its mandate, how it is operating, the processes it puts in place to manage the leasing arrangements, which would permit us to do that and test it by examining some leases but not all and to provide to this Legislature comments on how well that is working.
MS. O'CONNELL: Am I heading close to the end of my time, Mr. Chairman?
MR. CHAIRMAN: There are six minutes remaining and this might be the opportune moment for me to mention that the Clerk of the Committee reminded me just a few moments ago that I incorrectly stated the total amount of time for this meeting at the beginning. It is a two hour meeting that we scheduled, not a three hour meeting, but can still stick with the half hour. There are still six minutes to run if you wish to use it.
MS. O'CONNELL: I would happy to cede to somebody else if it would be appropriate. I can always possibly come back with a couple of other questions later.
MR. CHAIRMAN: We will get the chance to come back, I think, briefly at the end.
MS. O'CONNELL: Okay, well, I would be happy to give the floor to someone else.
MR. CHAIRMAN: Maybe I will take just one minute of that, then, and just follow up on the points I made before. I just want to clarify the questions I asked you from before, Mr. Salmon. I take it what you have indicated is that on March 12th, when the lease was signed, this was a capital and not an operating lease?
MR. SALMON: In my opinion. In the opinion of the Department of Education, based on their allocation of payments between the rent and the telecommunications link, based on their allocation, it was their opinion that it was an operating lease. The problem I had was I disagreed with that allocation of values and therefore considered it to be a capital lease.
MR. CHAIRMAN: All right. That was the main point I wanted to get at. At the time the lease was signed, that was the view of the Department of Education.
MR. SALMON: Yes.
MR. CHAIRMAN: Was this based on their internal audit function? Is that how they arrived at that conclusion?
MR. SALMON: No, it was based on their finance group's assessment and they are responsible for these kinds of calculations and determination of cost allocation and accounting treatment. So it was their Executive Director of Finance.
MR. CHAIRMAN: I am afraid I don't know this person or their qualifications. Was the Department of Education conclusion based on the professional advice from an auditor?
MR. SALMON: I believe so, yes, from a public accounting firm.
MR. CHAIRMAN: But this is advice that you disagree with?
MR. SALMON: Yes.
MR. CHAIRMAN: At any point in the process, that is to say when you first indicated to the department that in your view the lease signed in March was a capital and not an operating lease, did the department change its view?
MR. SALMON: Well, they renegotiated the lease so I presume they changed their view, yes.
MR. CHAIRMAN: There was never any explicit acknowledgement that their view had changed, apart from that.
MR. SALMON: They acknowledged that there was a basis for my conclusion.
MR. CHAIRMAN: So they took the view that reasonable auditors might differ on this. Is that what they are saying?
MR. SALMON: Again, it is a matter of professional judgement. In this case, there was a difference of opinion in terms of professional judgement but I swayed them, I guess.
MR. CHAIRMAN: Do you know when they first moved to renegotiate the lease?
MR. SALMON: Occurred?
MR. CHAIRMAN: Well, they had signed a lease in March. It was renegotiated and signed in a different format by the middle of July. When did the department begin to move to renegotiate that lease?
MR. SALMON: Around the beginning of July.
MR. CHAIRMAN: Okay, thank you. I will move now to the PC caucus. Mr. LeBlanc.
MR. NEIL LEBLANC: Mr. Chairman, I was listening with interest that he says a difference of opinion between accountants. I think the Chairman has some legal background and I guess that probably corresponds with lawyers, you ask different lawyers, you get different opinions. In all fairness though, usually the CICA is very precise on how you classify different leases, the only problem is that this gets into public policy, and it appears that different provinces have different policies on how things are being classified. Perhaps you could just clarify, I guess in a sense, what the provinces are doing in regards to this. Is this a common occurrence across Canada, how these types of leases are being classified, whether they are operating or whether they were capital?
MR. SALMON: Let me just back up a little bit on that one, because the CICA guidelines on classification of leases as operating leases has been a problem for the accounting profession for some time, particularly in the private sector. It goes to the very basic issue that it becomes a substance over form argument. And the substance of the CICA guidelines are that there has to be an appropriate transfer of risk to the lessor in order for a lease to be classified as an operating lease. What has happened is that the guidelines have been interpreted as a mathematical test, and based on a mathematical test, leases are being classified as operating leases.
That is true generally. It has been acknowledged by the CICA as a problem, and they have launched a project to do some research to improve the guidance so that we don't get into this substance-over-form argument, because clearly in this case, from a substance point of view as I have pointed out in my report, this is a capital lease. But it meets the mathematical test, and the mathematical test has become the rule and therefore it became acceptable to classify it as an operating lease. The problem exists in many jurisdictions.
MR. LEBLANC: Let me ask a question in regards to value for money and I notice in this one here that your analysis showed that if the province bought the school at the end of the 20 years, it would cost $8.3 million versus $8 million if they did it themselves. So there is an extra $300,000, which is roughly a 4 per cent cost to the province over and above the situation if they had built it themselves.
I notice in your comments that you also said that you don't direct public policy. When you did the review, basically it was along the lines of analyzing this project based within the parameters of the lease that they signed. You looked at the lease and said, well, since this is the cost and this is how it is financed, this is how it is done, and if we had owned it, this is what the cost is.
When you are saying that it costs only $300,000 more, isn't it true that really you are limited to giving an evaluation because of the fact that you are using one process only, which is that the government has directed by public policy that they are going to use the P3 schools concept for building schools. So it isn't necessarily a fair comparison to say that it is only $300,000 more, because there could be other ways of building schools which would be cheaper. Isn't that correct?
MR. SALMON: I think that is a fair comment. When we did the audit and reported last year, in the 1997 report, we attempted to make some comparisons of the schools that were under construction or almost completed, particularly Sherwood Park in Sydney, and O'Connell Drive. It made an attempt to compare the costs of those schools to previously constructed schools built in the traditional way. We put some tables in the report that showed comparisons of costs on a square footage basis and on a per student basis. If you examine those, you will find that in both cases, the comparisons are reasonable and the costs are comparable on a per square foot basis and on a per student basis. Even though we were concerned that the process did not include adequate analysis up front, in terms of options, and even though, because of this public policy decision that only operating leases would be considered, that narrowed the government's options, in terms of consideration of risk transfer and other potential contractual arrangements, even considering all of that, the costs are not out of line.
MR. LEBLANC: You say, per square footage costs are comparable?
MR. SALMON: Per square foot and per student.
MR. LEBLANC: Let me ask another question. You talk about the gross lease, I think you mentioned the Amherst school, and Ms. Morash mentioned that there was a development agreement, I think you called it. Could I perhaps have a little more clarification. I think what you are saying is basically it sets the parameters on what the lease will be costed and that perhaps if the government asks for additional things before the project is finalized, that very
well could change the amount of the lease payment. Could you be a little more specific, because I want to know about that.
Also especially about the personnel that work at the school, the contractual arrangements, whether or not the people who work for the union there are going to be taken on the developer, because there have been some questions in regard to some of the employees, as to whether they will contract out or whether they will assume the employees that work with, I think it is, NSGEU or CUPE, I am not sure which of the two, but perhaps you could just elaborate a little bit more.
MS. MORASH: We haven't audited the agreements that have been signed on the Amherst school. We have a copy of them, and I don't have them with me today. In terms of any specific provisions, for example employees, I would have to look at it again to refresh my memory. The agreements are quite significant, there is a binder that is probably one and one-half inches thick that includes all of the details of the agreements that have been signed. I don't have the answer with respect to specific provisions today, but I could answer that question or you could ask somebody from the Department of Education, if I was given the opportunity to look at the documents again.
In terms of what the development agreement says about the lease, what it does is give some indication of a maximum lease payment per month. It gives a basic legal form for the lease with blanks where the actual amounts will be inserted when the time comes. Yes, there is a framework, parameters, however you want to describe that, but there isn't a signed lease document at this point, but the terms and conditions have been basically agreed to as part of this very thick development agreement.
MR. LEBLANC: If I could just push on that a bit more. You are saying such things as financing costs, that is included in that, the government is aware of what the financing costs will be?
MS. MORASH: That is correct. There have been some basic parameters that have been agreed to and the final lease will come further down the road.
MR. LEBLANC: Other than that, have other things such as exactly who is responsible for, whether it is maintenance, whether it is janitorial, on and on, those are very clear? I am just pushing, expanding.
MS. MORASH: It is a gross lease in that the consortium is responsible for most or, in fact, just about all I guess, I don't have the lease in front of me. Looking at it, there was much more significant risk transfer, that it is a gross lease, and the consortium is responsible for many of the areas that they are not responsible for in O'Connell Drive. It is a significant change from the O'Connell Drive lease.
MR. LEBLANC: What happens, I guess in a sense, every lease that we have seen up until now or we have heard about, because we have only seen a few of them or heard about a few of them, they all seem to be different, so obviously, this seems to be evolving, and I tend to think that the government is listening to the criticism. It is amazing, when you get into a minority government how you suddenly become reborn. I guess in a sense, I am asking myself as to whether (Interruption) I won't drag myself into that one.
Is there starting to become a standardized lease as to where they are going and that we can, as politicians or as Opposition groups, offer either praise or criticism as to what is going on, or is it still evolving with every lease that is going on? How close are we to the other leases of other schools that are being signed? I guess I am asking a broad question, but perhaps you could just enlighten us.
MR. SALMON: I would suggest it is evolving. I think what we have to recognize is that it is not just the government that is learning, it is the proponents out there, the various organizations in the private sector who see this as an opportunity to probably make some money, but also to get involved in this. They are becoming very innovative in terms of how they are putting forward proposals and how they are seeing ways to assume risks based on appropriate rewards. So the government is being faced with a variety of proposals coming forward that have different characteristics that either make them attractive or don't make them attractive and those have to be considered. So I would suggest we are not going to evolve to anything that could be considered as a standard-type of lease arrangement.
MR. LEBLANC: What about the Nova Scotia content or components of the building of the schools? Have you looked at whether or not this is - because of the magnitude of some of the bids that they have put out, I think some of them were eight schools, I don't know how big they were, 12 . . .
MR. SALMON: Yes, they were bundled.
MR. LEBLANC: It begs the question as to whether a lot of small to medium-sized Nova Scotia companies, which have been very efficient, very competitive in the past, as to whether or not they are going to be able to compete or whether or not this will, perhaps, bring about more outside companies into Nova Scotia? I guess I am looking at it as Nova Scotia first, especially with the building of schools. Can you offer any comments as to what is occurring out there?
MR. SALMON: Well, my understanding is that there are in place procurement policies, both regional and national, that govern these sorts of arrangements, that particular jurisdictions do require that the financing arrangements and the suppliers are regional.
I will let Elaine deal with it.
MS. MORASH: The province has entered into procurement agreements that, I forget what the terminology is, but the national procurement agreement and the Atlantic procurement agreement, which you may be familiar with from your days as minister, and those, in fact, mandate open competition, that you can't discriminate against people who bid from other jurisdictions and you have to allow free and open competition. So I guess that is the environment that we are in.
MR. LEBLANC: That is exactly the point I wanted to make. What really concerns me, if I could, Mr. Chairman, is the magnitude of the size and the fact you have to achieve certain financing costs to make this competitive, as you mentioned in your opening comments that these people had received funding from a non-taxable investment group which made it comparable to the province, begs the question as to whether some of these companies in Nova Scotia will have access to that if they are just small to medium-sized companies?
I am more concerned that the concept will, perhaps, preclude some Nova Scotia companies from bidding on it rather than, perhaps, a larger group which may be based in New Brunswick or even Upper Canada. I am not trying to discriminate against any other companies but I have noted, in my experience as minister, that whether it be New Brunswick, or so forth come up with very many innovative ways to ensure that local groups as much as possible have fair competition or perhaps an edge in getting those contracts.
MR. SALMON: Certainly, that is a concern but I think we should recognize that this first one, for O'Connell Drive, is a small company and it is local, Nova Learning. It is based here in Halifax. They won the competition. Certainly, we have seen in other arrangements that are under consideration the involvement of international and national companies, large companies, becoming part of the consortia that are coming forward with proposals. So, hopefully, we are going to end up with some reasonable balance.
MR. LEBLANC: I don't question that the first one was a local company. It was one school and it was basically a wide-open contract. Who wouldn't enter into an agreement where you do not sign the contract until after you have built the school? You would have to be a complete idiot not to want to have that deal. So I tend to think that perhaps, Mr. Chairman, that is the wrong example for the Auditor General to use, that the local company won that one, because it was almost like a wish list for people lining up for this one.
I would like to go back to the value for money, if I could. Mr. Chairman, do I have quite a bit of time left?
MR. CHAIRMAN: Yes, you do, 15 minutes.
MR. LEBLANC: It goes back to the fact that you mentioned there was a plan envisioned by the government to, I think you mentioned 31 schools for $250 million. I think it was actually more than 31 schools perhaps. I am not sure if that is the number that was right. And I go back to the Horton school, whereby you see everything that could go wrong in a school in the sense of cost overruns, or cost projections for what you envision a school will be and what it ends up being. I speak as perhaps a member who comes from a small rural riding that is concerned that I guess, in a sense, we have a reasonably equitable sharing of new facilities across the province, not only for the structures themselves but for access to technological advantages such as computers, and I am sure as the years go by the marvels of technology will expand. There will be things that we have not even thought of that will be available.
I guess when I look at the Horton school and I see the magnitude of the facility and I ask myself if we are looking to build - what is the word I want to use here? - monuments or engineering marvels, or architectural marvels where an architect can say, look, that is the one I built and look at the curves and look at the majestic things of it. I guess I go back to where we come up with something that is reasonable, that we are building bricks and mortar which is comfortable, which is functional, and we get away from leaving our mark on the landscape of Nova Scotia, that we have accomplished something so beautiful. I am not an architect speaking here but I guess I am concerned for the education and the well-being of our students that we have sufficient facilities to go around.
When I look at how the designs are coming up as to who is at the wheel, and you are saying that the costs are in line with what has been there before, but it begs the question that if we are going to have enough funds to go around, whether we should be reviewing as to what is reasonable in school construction, that we have something that is environmentally friendly within the confines of that school but that is much more functional than what we have seen in Horton. I have to ask the question because the costs overruns from what they started and what they ended up is just, you know, I just do not see that there is some fairness in the system.
MR. SALMON: We have not done an audit of the Horton school. I do not know whether or not there were cost overruns. I have never seen the school. I agree that there should be a process in place that ensures value for money and that we enter into arrangements to build schools that are of least cost and functional. That process should be in place in the Department of Education with this new secretariat and we certainly will be examining on an ongoing basis whether that process is serving the best interests of the people of Nova Scotia and this Legislature.
MR. LEBLANC: I just want to say, you know, I am giving my own personal opinion. We are just getting away from it. I have had opportunities to visit the one in Wolfville and it is just amazing, the size of it, and you get into auditoriums and it goes on and on. It just begs the question of fairness, if you look at the O'Connell Drive Elementary School whereby you
are already into an overcrowding and you look at perhaps any urban setting that you have, many parents will want to have their children go to the new school. So right off the bat when you build a new school, people who perhaps did not go there in that area before will probably drive a little further or walk a little further to go to that school. So there are a lot of demands and I guess, in a sense, it is just a question of fairness all around. I had a question there and it slipped my mind.
MR. SALMON: Could I ask Ms. Morash to just comment on the estimates for the Horton school?
MR. LEBLANC: Sure, yes.
MS. MORASH: I just wanted to add one point with respect to Horton. Although we have not done any detailed work on it, in our 1997 report we did do a little bit of reporting of estimated costs for Horton and what our work showed us was that the cost estimates were actually going down as construction progressed as opposed to going up. I am referring to Page 97. It is Exhibit 8.3 of our 1997 report which is in the binders that you were given for today.
What we were told was that the original estimate was in the vicinity of $27 million and as of December 2, 1997, it had been revised downward to $25.5 million. That is the only thing that I have to add with respect to those.
MR. LEBLANC: I am very happy that it is only $25.5 million, I am sure I can tell the people of Argyle and they will be very calm with that. Could I just ask another question in regard to the expansion of the schools, and the member for Halifax-Fairview, I think, asked a question in regard to whereby you have expansions and so forth, and it begs the question as to the Amherst school. Have there been provisions in that parameter, that development agreement, whereby if future development is required, that parameters are set as to what process will be taken in order to enter negotiations?
As it stands now, you have this sprawling development in some of the urban centres here and if you have within four or five years requirements for expansion, the province finds itself, again, basically forcing itself upon the developer, and the developer has the contract, so he is in a much better position to get a more favourable deal. Are you aware of whether Amherst has any provisions as such in their contract?
MS. MORASH: I don't recall anything like that in the contract. It may be there, but certainly, I don't recall it.
MR. LEBLANC: Is that something that you as the Auditor General would be concerned with, that you would look at the deficiency in the P3 concept, that perhaps the government should be addressing?
MR. SALMON: We certainly are concerned with examining the planning processes and the forecasting methodologies and the determination of demographics and demographic changes that lead to a decision on what size school to build and the provisions for expansion if necessary. Yes, we would take that into consideration, if we were auditing both the process and a specific transaction.
MR. LEBLANC: One last question that I would like to ask. You mentioned in your last slide, and I was trying to understand that a bit more, that changes made to the P3 process for the future, the proposals, risk transfer, and financing and organizational changes. Could you just reiterate that one more time, please?
MR. SALMON: It has been recognized as a result of these early attempts to enter into arrangements that it is necessary that the government require proponents to be more specific in their proposals with regard to the extent to which they will assume risks, which risks they will assume, and at what cost to the government, so that as we go forward in this process, we end up with situations where there is more risk transfer to the private sector, to the lessor, so that it becomes in much more substance, an operating lease.
MR. LEBLANC: If I could perhaps understand what you are saying, I notice that perhaps, to our own detriment, we as government often delay maintenance to buildings because we are trying to balance the budget, but in real terms, what we are doing is we are costing the province more money, because we are deferring costs that should be done, which results in the deterioration of the facilities, which in turn costs us more to repair in the future. Under these contracts, who is responsible for, let's say the roof has problems, and so forth, is that the lessor or is that the lessee that would have the costs to repair that?
MR. SALMON: Again, it depends on the terms and conditions within the lease arrangement. In the case of O'Connell Drive, those risks have been assumed by the province. In the case of Amherst, where it is a gross lease, those risks are being assumed by the private sector. That is why I made the point earlier, each one is unique, and it has to focus on who is assuming the risks, and what the reward is for assuming that risk.
MR. LEBLANC: How many schools are in the process right now of negotiations and so forth? Do we have a handle on this?
MR. SALMON: In our February report, at that time there were eight at the planning or construction stage, of which two had been completed. And since then, requests for proposals have gone out for bundles, which I believe totals 31 schools. Those proposals are being considered.
MR. LEBLANC: One last question before I turn to my colleague. The Amherst lease, is that something that is public as it is now? You say you have a copy of it. I have had some questions in regards to the union aspect of it, the employees who are concerned about where
we are going on this, and of course, a lot of the employees are concerned with this whole P3 concept as to whether they remain on or whether it goes to be contracted out.
I think they deserve answers as to where it is going. They have asked me what is going on with Amherst. You mentioned you did have a copy of it, and my ears perked when you said that. Is that something that is public, or is that something that has been released as of yet, is it something that is available to the members of the committee? Perhaps you could clarify that.
MS. MORASH: I don't know the answer to that. I know that on the Department of Education's website, there are some leases and development agreements there, for example, the one for O'Connell Drive is there, and the one for Hants East is on their website, but the one for Amherst is not. I am not sure. You would have to ask the Department of Education.
MR. JAMES MUIR: Four or five quick questions, I guess. Going back to the Porters Lake school, you had reviewed that lease and made a determination that fell into the capital as opposed to an operating lease. A month later, the Department of Education had negotiated some changes to the lease, and therefore had met the accounting criteria for being classified as an operating lease. I know it was one of the first negotiated, but it would seem to me that if these changes were made that quickly then it may not have been a very good lease for the Department of Education in the first place. Would you care to comment on that? Because the changes added things, that is what I am looking at.
MR. SALMON: The changes added minor things, I would suggest to you. You are talking about a school that cost $8 million to build, and the change resulted in an additional capital improvement of $50,000, and resulted in a communications link to one more school, four had already been provided and a fifth was added, which changed the allocation of the monthly payments in a way that met the criteria. To the extent of commenting on whether or not it was a good deal, we have tried to make the comparisons in the report that would indicate that it was reasonable.
MR. MUIR: Thank you. Secondly, you just mentioned that you were concerned about the process in the Department of Education, or at least it is going to be a concern of yours, and a lot of the questions about these P3 things, and my colleague from Argyle mentioned this - I have lost my train of thought. It will come to me in a minute. Let me go to another question. The question of overbuilding is something that kind of bothers me, again my colleague from Argyle mentioned that. One of the things that I understand in the process and how these things are going is, you are going to a community quite often, and the community has a wish list.
MR. SALMON: Yes.
MR. MUIR: And sometimes these schools, I think are going to be turned into community facilities as well as what we would perhaps normally see just as a routine school function. I understand that if the community wishes to do this, they are going to have to assume some of the financial responsibility for this.
Getting into some of these Taj Mahal things, perhaps Horton falls into that category. Have you taken a look at the arrangements or the processes that are going to go on between the Department of Education and the community groups for the division of costs when they are taking community input and these schools are being designed on a community basis as well as on just a straight educational basis?
MR. SALMON: The only lease that we have examined in detail is the O'Connell Drive one and we have reported on that. We have had what I would describe as superficial reviews of some of the other arrangements that are being considered and contemplated and we are aware that in several of them, and this comes back to the issue again of no standard form of lease arrangement, that municipalities on behalf of the people of the jurisdiction are getting involved, in some cases making a contribution to the capital costs to acquire facilities that would serve their needs over and above the traditional school needs.
Each of those has to be assessed on its merits and whether the arrangements result in good value for the taxpayers, both of the municipality and of the province generally. My concern and where we will be focusing our attention is on the processes that exist within this new organization in the Department of Education, that it exercises its mandate, does the appropriate evaluations and assessments, the appropriate analysis of risks and benefits, and so on, that that process is in place and working properly.
MR. CHAIRMAN: Excuse me, I will get back to you, Mr. Muir, but I have to move to Mr. MacKinnon now. We will get back to you again. Go ahead.
HON. RUSSELL MACKINNON: Mr. Salmon, through you, Mr. Chairman, you indicated that the O'Connell Drive Elementary School lease should not be used as a benchmark to measure the success or the failure of the P3 concept. I cannot help but think about Henry Ford when he first built the Model T and then if you were to fast forward and you see the aerodynamic Crown Victorias completely computerized, I wonder if he could foresee that is really what he was getting into. What comfort level do you have on the P3 concept?
MR. SALMON: What comfort level do I have? I think we have to recognize that the public policy decision to build schools without adding to the debt of the province results in only one option, that is an operating lease. It is the only way that you can accomplish those objectives. That narrows the province's options when they get into negotiations. It restricts the scope of arrangements that can be made. That is doable and I think that the analysis we
have done to date would indicate that although there may be some additional costs they are not extreme additional costs.
I believe that government, particularly the officials in the Department of Education and the Department of Finance and the Department of Transportation and Public Works, have learned a significant amount from these early arrangements in that processes are being put in place that will lead to improvements. I have a reasonable degree of comfort that that is going to happen.
MR. MACKINNON: Are you telling the committee members and, indeed, the people of Nova Scotia here today that the government is actually doing a better job as it goes along? It is not getting worse. It is getting better.
MR. SALMON: It is certainly not getting worse.
MR. MACKINNON: Well, if it were getting worse, I guess we would be back to increasing the debt and probably, instead of having to pay $833 million in interest payments on our debt, it might be $1.6 billion. So we do not want to go back in time, we want to go ahead.
MR. SALMON: I think, Mr. MacKinnon, we have to recognize that we are using a narrow definition of debt. That is the debt that is shown on the balance sheet. There is still a commitment to make lease payments for 20 years and that is the next thing to a debt.
MR. MACKINNON: Well, I guess we will look at it from that perspective in terms of operating versus capital. Is it not correct to suggest that the history of governments has always been that they secured an outside audit opinion, whether it be P3 or any major type of capital project like this, if they wanted to be sure that they were going to say it is operating or capital governments always secured outside auditing opinions, the history, and what has transpired over the last year and even the last session of the Legislature, through that piece of legislation, making yourself the official auditor for the province, has been quite a change from past practice?
MR. SALMON: Yes.
MR. MACKINNON: I guess I am leading up to the fact that essentially the government did everything that it normally would have done to make sure it met the acid test by securing a professional auditing firm, Deloitte & Touche, to ensure that they were doing things right and essentially we had two professional opinions that differed.
MR. SALMON: I would suggest to you that it has not been traditional on individual transactions to seek independent audit opinions and in the case of these particular transactions they were not obtaining an audit opinion, they were obtaining advice as to whether given the
conditions that were being put in place, the arrangements that were being put in place, whether that met the test of the accounting guidelines. That is not normal in ongoing government operations or in any private sector operations generally.
MR. MACKINNON: But this is an entirely new concept, is it not?
MR. SALMON: P3?
MR. MACKINNON: New technology, new way for construction and so on.
MR. SALMON: Yes, and so the government has engaged consultants of various types, legal, accounting and so on, to give them advice as to the arrangements they were entering into.
MR. MACKINNON: So I guess what I am suggesting is the government played it safe, getting good professional advice?
MR. SALMON: I think that is a fair comment, yes.
MR. MACKINNON: Yes. The issue with regard to O'Connell Drive, you have suggested not to use it as a benchmark and so on but even the worst case scenario, the bottom line is it has met the acid test, both of the external and now your department. That is the bottom line.
MR. SALMON: In terms of being an operating lease?
MR. MACKINNON: Yes.
MR. SALMON: It has met the mathematical test. I would not call that the acid test.
MR. MACKINNON: Well, it depends upon how you want to define acid too.
MR. SALMON: Yes.
MR. MACKINNON: Those are all the questions I have. I know my colleague from the NDP caucus has some questions and I must apologize, my two colleagues are still in transit. I guess we still have some traffic problems in Nova Scotia so they are a little slow (Interruption) So I will defer my time to make allowance for the Official Opposition.
MR. CHAIRMAN: Thank you very much, Mr. MacKinnon. Back to the NDP caucus, are there any questions there? Mr. Dexter.
MR. DARRELL DEXTER: Mr. Salmon, I suppose you know that we have been fairly critical of this arrangement over many months and critical for good reason. We were critical that the government decided to go this route and I guess we are more somewhat astounded that the Third Party decided to support this approach to budgeting because that is essentially what they have done.
What you have told us today is that the government, after the fact, went back and manipulated this lease in order to allow it to fall within the generally accepted principles; after the fact, after it was originally signed, after the request from the minister came forward, that's what they did, they went back and manipulated this lease in order to sweep it under the rug and the rug, in this case, is the generally accepted accounting principles. That's what happened, right?
MR. SALMON: I wouldn't use the word manipulated, they renegotiated.
MR. DEXTER: Well, what's the distinction? (Interruptions)
SOME HON. MEMBERS: You are a lawyer you should know that.
MR. DEXTER: Exactly, and it is hard. At some point in time you have to call a spade a spade. This is nothing more than the most vigorous kind of abuse of accounting principles that we have seen in a long time.
MR. CHAIRMAN: No heckling of lawyers allowed.
MR. DEXTER: You, yourself - go to Paragraph 52 and this is where you - essentially give the government a warning that, "This . . . should not be used as a model for an operating lease for other schools or infrastructure because the amount of risk remaining with the private sector in this case is not sufficient to justify classification of similar future leases as operating leases.". Well, why this one then? Why this one? You say, don't do this again. They used to have a rule, they used to call it the dog's one bite rule, where if a dog bit you once and you said, okay, but if it happens again then you just took him out and shot him. Is that what you are doing here, you are saying, we are going to give you a warning here?
MR. SALMON: What I am attempting to convey is that the best practice is to deal with the substance-over-form issue.
MR. DEXTER: Exactly.
MR. SALMON: And that in this case, the government has not. But it has become generally accepted practice in this country to apply the mathematical test and if you can meet the mathematical test, it is acceptable. It is not the best but it is acceptable.
MR. DEXTER: In substance, this is a capital lease?
MR. SALMON: Yes, it is.
MR. DEXTER: I was intrigued and I was trying to sort out this hiving off of the technology transfer because this, in my view, is part of this manipulation of the figures in order to, and in fact, that is what gets it down to 88.9 per cent.
MR. SALMON: That's right.
MR. DEXTER: If you don't hive that out, then it is clearly a capital lease even on the mathematical test?
MR. SALMON: Correct.
MR. DEXTER: You say in here that at some point in time there is a purchase of this service from a cable company that is actually involved in the consortium.
MR. SALMON: Yes.
MR. DEXTER: This is a collateral benefit to the contractor?
MR. SALMON: Yes.
MR. DEXTER: One of the owners of this consortium gets that collateral benefit?
MR. SALMON: The school gets the . . .
MR. DEXTER: Well, no, they are the ones who are being paid for it, the cable company, right?
MR. SALMON: Yes.
MR. DEXTER: Now, there was a value of $7,300 assigned, what was the actual cost?
MR. SALMON: $500 a month.
MR. DEXTER: Yet what is assigned to it is $5,500.
MR. SALMON: That's correct.
MR. DEXTER: That is paying rather a lot, isn't it, for a $500 cost item?
MR. SALMON: But I think we have to recognize that this was an experiment by the provider. This was an opportunity to do something that had not been done before and therefore it would appear that the cost was significantly discounted.
MR. DEXTER: But what you are doing is you are taking $5,000 in profit, which is accruing to the consortium and you are transferring that profit out of the lease and onto communications. I find it is hard to believe that is an acceptable practice.
MR. SALMON: This is back to the issue that we raised, the practice of allocating costs becomes very complex and difficult to assess. We attempted to make comparisons of the $5,500 to the comparable costs of communication links in other schools, and it really became a matter of comparing apples and oranges, because this is a high-speed communications link that doesn't exist in any other school facility. There are other communications links, but they are not comparable in terms of speed. The costs of those were roughly equivalent to the $5,500 for five schools.
MR. DEXTER: Perhaps this is simplistic, but essentially the government is paying $5,500 for a service that cost the consortium $500?
MR. SALMON: That is correct.
MR. DEXTER: The other thing about this, once that allocation is made and it is moved off book from the lease itself, it then doesn't appear, or does it, in the operating lease? It just sits out there by itself.
MR. SALMON: It is part of the operating, the arrangement within the operating lease is to make that payment.
MR. DEXTER: That is my question, because in your report you talk about, and maybe you have no way to check this, the Halifax Regional School Board has indicated that based on budget projections, this is Paragraph 48, ". . . the operating cost is 'about 20 cents less than the $3.75 per square foot cost . . .". Now I guess there are a couple of questions about that. Does this communications transfer that has been hived off the lease itself then get moved into this part of the operating lease?
MR. SALMON: No.
MR. DEXTER: Now if it were a telephone line, it would be in the operating lease. Right? It would be an expense.
MR. SALMON: Yes.
MR. DEXTER: It is not appearing in that lease, and it is not appearing in the operating lease, it is just being allowed to hang out there on its own, and being paid for separately.
MR. SALMON: No, it is not being paid for separately. It is a portion of the operating lease.
MR. DEXTER: But for accounting purposes, it is being allocated separately.
MR. SALMON: For accounting purposes, it is being allocated separately.
MR. DEXTER: In a sense, if it is not put in the operating costs, then the operating costs that are being projected really aren't an accurate reflection of what the operating costs are. If the communications is operating, and it is fundamentally operating, isn't it? It is used up day by day.
MS. MORASH: I understand where you are coming from, except that Paragraph 48 makes reference to the average for Halifax County schools, and the other Halifax County schools do not have a comparable connection. They are connected with low-speed telephone-based lines, and we have a high-speed cable connection here. That is why they are not included in this comparison with the average for Halifax County schools. It was a decision to put high-speed lines in the school.
MR. DEXTER: But that is really a distinction without a difference, isn't it? The reality is, they chose to do that. If they choose to do that, then their operating costs go up. That is a decision that is made. It doesn't mean it should be hived off into some other category. Shouldn't it just be included?
MS. MORASH: It depends on what comparison you are making. Here they are comparing the costs of operation excluding cable connections, that is things like janitorial services and lights and heat, and all of those kinds of things with the other Halifax County schools, and they have indicated that the comparison is favourable.
MR. SALMON: And it should be pointed out that those schools that have communication links are paying something equivalent to the $5,500.
MS. MORASH: If they had high-speed cable connections, they would be paying something equivalent to the $5,500, but because they have low-speed connections they are paying a very small amount, in the range of $250 per month per school for a telephone-based connection.
MR. DEXTER: But it is incorporated in their operating costs.
MS. MORASH: That is correct.
MR. SALMON: But not in this comparison.
MR. DEXTER: Well, I think it is. I am not going to beat this too far. One of the other problems I had with that kind of bald statement was that the stock of schools in Halifax County is considerably older, so when you compare the operating costs, one would expect that older schools are going to have higher operating costs. When you compare the operating costs of a new school to older schools, that comparison has some difficulties, doesn't it?
MS. MORASH: What we are doing here is quoting a statement that was made by the Halifax Regional School Board, and I think that if you want detail in terms of operating costs and how they compare, you really have to ask them.
MR. DEXTER: Okay, you can't comment on it, you didn't have a look at it.
MS. MORASH: No.
MR. DEXTER: Thank you, those are my questions.
MR. CHAIRMAN: Over to Mr. Muir.
MR. MUIR: One of the questions that my colleague, the member for Argyle raised was the idea of the expansion of schools, and what is going to happen if the population shifts. I guess you indicated you hadn't really formulated an opinion on that. Are you prepared to comment on that sometime? Would that be a question you might ask, just going back to O'Connell Drive?
MR. SALMON: Again, we come back to the issue of the processes within the Department of Education to forecast demographics, and based on those forecasts, to make decisions on what size schools to build and where. I am certainly prepared in the future to comment on the adequacy of those processes.
MR. MUIR: The other portion of that - I was at a meeting the other night which leads me to ask the question - is that in certain parts of rural Nova Scotia there are a lot of small high schools where the populations are decreasing. In the case where I was, I was out in West Pictou the other night at a public meeting, and what the school board has proposed there is to close the existing high schools and to build two new ones. I know there are other rural areas and I have been to them in other hats that I have worn around the province, and let's say that the population decreased in other parts and the decision was for operating efficiency or whatever you wish, that it would be better if the students were moved to a central location.
I am not talking about education, I am talking about costs here. I am not talking about the wishes of anything else, just straight-on costs. This seems to me to be something that I don't think the Department of Education has addressed, but it is probably something that is going to come up before too long.
MR. SALMON: One of the arguments that has been put forward by the Department of Education for entering into these arrangements, that is lease arrangements with a fixed term, is that they have the option at the end of the 20 year term to walk away, if they are faced with a situation of declining enrolment and don't need the school. They are certainly aware of the changing demographics, declining enrolments and similar issues, and have taken that into account in entering into these arrangements so that they have that flexibility.
MR. MUIR: They have mentioned closing or walking away from the school, not increasing it. Typically if population was going to be moved, it would probably be moved to the building which was the most modern, in the best shape.
My second question, do you think that the Department of Education, the Department of Finance, and I guess the government in general, did adequate planning when they decided to go with these P3 things?
MR. SALMON: In my 1997 report released in February, I raised concerns that there had not been adequate planning with regard to those eight schools. There had not been adequate analysis done to consider the proposals, and there had not been appropriate negotiation and conclusion of arrangements prior to construction. I raised those concerns, the government has acknowledged that, and has taken steps to address it.
MR. MUIR: The Sherwood Park School, where does that sit in the books of the province?
MR. SALMON: It was recorded as a capital expenditure in either 1997 or 1998.
MR. MUIR: It sits there as part of the debt. Is that correct?
MR. SALMON: Yes.
MR. MUIR: Just going back to what you said. One of the suggestions that I have heard tossed about is that in planning for projects like this, whether it is in schools or whether it is for other public buildings that the province might be involved in, is that we should be looking at international standards like the ISO 9000, which really has to do with decision-making process, obtaining feedback so the decisions that are taken are good decisions. What is your feeling on that?
MR. SALMON: My feeling on the process?
MR. MUIR: Moving towards a process like that across the government?
MR. SALMON: I think it should be considered.
MR. MUIR: It should be considered?
MR. SALMON: Yes. I think it is being considered from what I have seen.
MR. MUIR: One last question before I move on, somebody else may wish some time. One of the things that concerns me, and you may have answered the question just a minute ago, is that when they were selecting partners to proceed in this P3 thing, I know in a couple of cases where it seemed to me that people who had presented proposals were rejected out of hand whom I thought probably in terms of their background and experience, and one day or two days later, they sort of - well, the time-frame is probably compressed here so do not take it too literally - did express an interest and it came back very quickly that their interest was not one that was going to be considered. Prior to wearing the hat that I am not now, I would have commented that it may have appeared because of that process that went on that there may have been some other things rather than a consortium's proposal that may have influenced the selection of those that got down to the final of the thing.
MR. SALMON: The government has very clear procurement policies. We have commented on those in the past. There is a process for the consideration of proposals and criteria established. We do an annual audit of the procurement process and we have not found any serious deficiencies in the way that has been done.
MR. CHAIRMAN: Mr. LeBlanc.
MR. LEBLANC: Mr. Chairman, I just want to pick up a little bit on what Mr. Muir just mentioned. I have been, in the past, the Minister of Government Services and I find that when you change the format to a more complex type of evaluation, many of the things are not quantifiable, whereby you will get into qualifications which are judgemental and go on and on. I had some real concerns when we went to the P3 school concept that you could open yourself up to criticisms, whether they be justified or not and that you could find ways to hire people that you would like to have the contract versus the people that you perhaps do not want to have the contract. I think that is a thing that as a government or as members that we have to be very watchful for, to make sure that people who are putting the best proposals forward, whether they be Liberals or Conservatives or New Democrats, or non-partisans, that they be the successful winners because I think value for money is what we are concerned about.
I would like sometimes to be a bug on the wall and listen to the first concepts that came out for this, and O'Connell Drive is a good one when you do not have a contract signed until after the school is built. I often wonder as to how this all worked out but I guess not
being there I can only surmise and I can only hope that perhaps the people in Nova Scotia receive the best value for money.
I heard some members from the second Party, I guess we will go that way, mentioning about the fact that we supported the (Interruption). Well, you can use whatever terminology you want, I will use my own. But the O'Connell Drive school, he was mentioning the fact that we ended up supporting it. I will say that we have been very critical of the O'Connell Drive Elementary School lease and the fact that it was not signed before and that there weren't clear parameters upon it.
I go back to the fact that for yourself, as an auditor, and perhaps the regular auditors of the province, which has changed since this has happened, were probably put in a little bit of a spot as to how it should be accounted for. It goes back to the fact that I think we have to have a more open dialogue in regard to how we are going to deal with this P3 because it is obvious from the results that there have been many mistakes made and this is not a glowing success for the government to be using and I am hoping that the new leases that are being signed, I think it is the Lantz school and the one for Amherst and so forth, will perhaps be better for the government. But I still go back to my point that we have not looked at this, in my opinion, as the best value for the money.
We are still trying to do this because of the way that we account for the leases. We are doing this in this methodology because of the fact that we want to show these as operating leases and not capital leases. I go back to the point that we should be doing it however is cheaper for the people of Nova Scotia and that we are getting the best bang for the buck. I think you have mentioned about 20 times in your presentation today that you do not set public policy but I still have questions and, until we have that open forum, I am still going to have questions as to whether we are getting the best bang for the buck. I know it is hard for you to answer that question but I have said that over and over again and I do not really know what else I can say in that regard.
MR. SALMON: As I said in the report, accounting treatment should not drive decision-making. It appears to me that to date that is what has happened, particularly with this one.
MR. LEBLANC: Appears is a mild word. It has been stated very unequivocally that it is going to be operating because he has this new innovative plan on how to build schools. Well, it is not new. It is just the fact of how he wants to account for it.
I will say one thing that concerns me a little bit about it, and it was made mention of by the member for Truro-Bible Hill, that most of the schools being built today are entering into contractual arrangements with the municipalities, and I think the school board. I think it is one-third the province pays, one-third the municipality pays, and I think it is one-third the school board - I am not really sure of who pays the other third. As I said, you want to have
an expanded gymnasium and you want to have an expanded kitchen so that the school can also serve as a community-based facility. Many of these communities do not have a lot of facilities and the school basically serves as a community centre also, not only as an educational facility.
It kind of begs the question as to whether the fact that you have an independent person running the school, or perhaps in charge of it, whether that will drive up the operational costs when people want to use the schools on weekends and so forth. I look back at my experience and I was always a strong proponent of the concept that we should look at what the community wants and if they are willing to put money into it, then we as a province should be willing to support them. But I am not going to build $1 million facilities and have them close on the weekend because the principal says, well, it is too much headache to have the school open on the weekend. So you have literally a $1 million facility sometimes in some communities not being open because it causes headaches and, you know, I think we should have the best bang for the buck. I am sort of questioning as to whether these contracts, whether or not there are concerns there that we should be looking at, or does the school board still maintain control after the school hours?
MR. SALMON: Can you answer that?
MS. MORASH: There were some specific provisions put into the Amherst development agreement about accessibility of the school after school hours. I cannot recall exactly what they were but there is quite a lengthy section to the agreement that talks exactly about that issue and who is accountable for that, who manages the process and that kind of thing. So it is being addressed as part of the negotiations is the point that I am making.
MR. CHAIRMAN: Actually, I think we should move back to the Liberal Caucus at this point and back to Mr. MacKinnon who has been joined now by his colleagues from Richmond and Guysborough-Port Hawkesbury. Welcome, both of you. Mr. MacKinnon.
MR. MACKINNON: Mr. Salmon, through you, Mr. Chairman, I think I am going back to your initial comments that O'Connell Drive is not to be used as a benchmark to measure the success or the failure of the P3 process, but yet in your report you referred to the O'Connell Drive Elementary School, the O'Connell Drive project, as being an award winner.
MR. SALMON: From an architectural point of view it has won an award.
MR. MACKINNON: Yes, I see. Now, value for dollar, Mr. LeBlanc has suggested the possibility of building these multimillion dollar facilities and then not having them open on the weekend. Well, the reality is that that is happening with those facilities that are not P3.
Recently I had occasion to speak to the CEO of the second largest school board in the province and he was quite excited about the success of the P3 program to the extent that it was going to free up, in his estimation, an additional $2 million in their budget that they could put into the classroom, which is where the dollars really should be spent at maximum benefit. Have you had any opportunity to review the cost-benefit and downside from that perspective, when P3s are being built, the net effect on the other side of the equation?
MR. SALMON: Not specifically, no. We examined this particular school and made comparisons and we examined the Horton school and made comparisons and those were reported in my 1997 Annual Report but that is the extent of the cost benefit.
MR. MACKINNON: That is the extent. You didn't go on measuring?
MR. SALMON: Yes.
MR. CHAIRMAN: Ms. O'Connell.
MS. O'CONNELL: Mr. Chairman, I have been hearing behind the words, almost a plea, perhaps that is too strong, but a sense from you in your report and your comments today, that really there is more to building and operating schools and using them for what they are supposed to be used for than accounting practices, right?
MR. SALMON: No question.
MS. O'CONNELL: The sense that you have been giving me is that the cart is trying to push the horse here and that there are a whole lot of things about schools and education that can't happen or are precluded or are defined by or limited by, in some sense, this narrow view. I guess I want to ask you - and I guess you don't have to be an accountant to answer this - but it seems to me that this whole lease hinges on some re-evaluation of some technology, which is a whole discussion and some of that discussion has gone on today about the difficulties of evaluating technology and so on, but the rest of it hinges on putting a fence around the building. Is that correct, that the other piece was a $50,000 fence?
MR. SALMON: I believe fencing was a major component of the $50,000, yes.
MS. O'CONNELL: So do you ask yourself whether a fence around the playground, in order to make something fit, is the best use of $50,000 for a school?
MR. SALMON: It has not cost the province $50,000. The consortium agreed to add $50,000 in capital improvements, primarily fencing, at no cost to the province.
MS. O'CONNELL: I understand that. Is it possible that if this was being done another way that the use of that $50,000 might be different and it might not involve a fence, it might involve something more directly related to the desperate needs of education in this province? This is the cart and horse thing because it seems to me that as we go through this, this comes up over and over again. Horton high school, if and when it opens, is going to have 100 more students. But it is going to have 2.8 fewer teachers. So I guess I am trying to characterize this concern about preoccupying ourselves with finding operating leases and then precluding a full range of judgements on how the money should be spent in schools. I know that is not really a question but I would love to hear your comments.
MR. SALMON: I believe that the process that is put in place with regard to these arrangements has to take into account the issues that you are raising as well as dealing with questions of accounting treatment. I believe that the processes are there, for the most part, to do that but the issue of accounting treatment seems to be the deciding factor as opposed to these other things having equivalent weight. They have weight, the question is whether or not they have equivalent weight because the accounting treatment issue is driving the final decisions.
MS. O'CONNELL: So you think maybe at the expense of other issues.
MR. SALMON: That is possible. I wouldn't want to conclude that it is happening but it is certainly possible.
MS. O'CONNELL: Thank you.
MR. CHAIRMAN: Mr. Muir.
MR. MUIR: One of the things, Mr. Chairman, it seems to me in the program that the government has embarked upon now is that big is always better. I am not so sure that educationally that can always be justified. The Auditor General indicated that there were decisions being made on non-educational issues and I would be inclined to agree with that.
The other thing that comes down to part of this thing is the Department of Education has a list of proposed capital construction projects. Again, I will go back to my meeting in Pictou County the other night. The gentleman who was vice-chairman of the school board said to the people who were assembled, two schools are on the table as being offered by the government but fixing up the other ones is not. One of the things that maybe the new school construction project in terms of, again, what is educationally best for the young people of this province is that facilities which are good and serve the purpose, they will not be renewed, they will be tossed aside in favour of the P3 thing because it is the idea of P3 that is driving the government as opposed to education.
The other comment that I would make, Mr. Chairman, and I wish I had a chance to verify this a little bit more is with one of the new schools that has been built because of the arrangement it has been put in, it is going to be run sort of as a profit centre. One of the community fund-raising efforts that has been going on in that community for some years, because of a physical change in the location of where the fund-raising would take place, moving it to the school, they are going to try, essentially, to take over that fund-raising from another community venture. Again, it is a P3 school and it is just part of this whole thing, thinking of education. Thank you.
MR. CHAIRMAN: Mr. LeBlanc.
MR. LEBLANC: We are just about out of time, Mr. Chairman, but I would make a comment. I think if anything has come out of this whole hearing today, it is that this is evolving all the time. I think most of the members here have said that. I still think that this is something, just dealing within government, it appears that they are reacting to what the Opposition or to what the opponents of the process have said all along about modifying the lease, as we talked here today. That happened, it is a fact. We looked at the fact that they have changed the format of the lease and they are listening to what people have said about criticism to this concept. I am not saying the concept is all wrong, the problem is I don't know the answers to this thing and policy is driving it rather than whether it is the best way to do it.
But I say, as a statement in closing is that it would be something, I think, a public process whereby it involves perhaps even the Opposition Parties and people within the construction associations and people within the business sector, they could offer some experience and insight as to what the best bang for the buck for the province is and also having somebody from the education sector and offer opinion, have an open forum and let's go on with this. If this is the best way to do it, then we will go on. If it is not, then let's see where we can come up with some options but it seems it has been sheltered and within government rather than having an open forum which is not really the best interest.
MR. CHAIRMAN: Mr. Samson wishes to help us through our last 22 seconds.
MR. MICHEL SAMSON: Just a few quick ones, Mr. Auditor General. I was just curious. Have you had the opportunity to actually visit some of the new P3 schools?
MR. SALMON: We have visited two. We visited Sherwood Park in Sydney last summer, the summer of 1997, and we visited Porters Lake, O'Connell Drive, earlier this spring, I guess it was. So we have toured them and talked to the teachers and the principals and students.
MR. SAMSON: In a technological sense, I guess, how do these schools compare to our more traditional schools that we have had here in this province?
MR. SALMON: I wish I went to school in them.
MR. SAMSON: Okay. I am just curious about what my colleague, the member for Argyle was asking about the consultative process. Under this new P3 system, is it not true that we have had students, teachers and communities involved in the entire process from design to location, to aspects like that? Hasn't that taken place under this P3 system?
MR. SALMON: Certainly with regard to Sherwood Park. That was a clear message that we received from school board officials, principals and teachers there. My understanding is it was a similar process at O'Connell Drive.
MR. SAMSON: So in other words, the community and the players involved with the school had input before the construction and the whole concept of the school?
MR. SALMON: Yes.
MR. CHAIRMAN: We should finish up.
MR. SAMSON: Just one last one.
MR. CHAIRMAN: Very quickly.
MR. SAMSON: As far as you know, was this done in the past?
MR. SALMON: I don't know.
MR. CHAIRMAN: I hear several people saying yes. In any event, there are two points. One, given even the hesitation of the Auditor General about spending all this time auditing P3 leases, we might reasonably anticipate that there might be something in his next annual report that would give us the opportunity to return to this if we wish.
Second, the committee meets again a week from today on Wednesday, September 2nd at 10:00 a.m. and we turn again to the issue of the Gaming Corporation.
We stand adjourned. Thank you.
[The committee adjourned at 12:02 p.m.]