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12 janvier 2000
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Public Accounts -- Wed., Jan. 12, 2000

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8:00 A.M.


Mr. Russell MacKinnon

MR. CHAIRMAN: Welcome back. I hope the year 2000 will be as prosperous as last year. Today we have with us the Auditor General, Mr. Roy Salmon, who is going to give us a briefing on his report for the fiscal year 1999. Before we start, I guess we can introduce Mr. Salmon. With him - we can go down the line - if you would like to introduce yourself and your title.

MR. CLAUDE CARTER: Deputy Auditor General.

MR. ALAN HORGAN: Assistant Auditor General.

MS. ELAINE MORASH: Assistant Auditor General.

MR. CHAIRMAN: Okay, so with that we will ask our Auditor General to start off, make some introductory remarks and perhaps walk us through the report.

MR. ROY SALMON: Thank you very much, Mr. Chairman, and good morning members of the Public Accounts Committee. We are pleased to be here this morning and to provide you with an overview of the 1999 report, to highlight what we consider to be the significant issues identified as a result of audit work conducted in 1999, and to answer any and all questions that you posed to us, to the best of our ability.

Just a few brief introductory comments - and what I would like to do is outline how we intend to proceed - 1999 was a strenuous year, I would suggest, for the office. You will all recall that in 1998 amendments were passed, by yourselves in the Legislature, to the Auditor General Act which resulted in significant changes to the activities and responsibilities of the office. These amendments are consistent with recommendations that I have been making for a number of years so I strongly support what the Legislature did.


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First of all, a deadline of December 31st was established for the tabling of my annual report, as opposed to an open-ended requirement that I table my report on some day following the day that the Public Accounts were tabled. Previous to those amendments, the Auditor General Act amendments were made to the Provincial Finance Act which required that the Public Accounts be tabled by December 31st rather than March 31st of the following year. So we were faced with an earlier deadline both in 1998 and in 1999 for the tabling of my report.

Secondly, and probably more significantly, I was established as the auditor of record of the financial statements of the Province of Nova Scotia. So we were faced with, for the first time, engaging in a significant new responsibility to audit the financial statements for the year ended March 31, 1999. That was then complicated by the decision of the government to change its accounting policies and to bring Nova Scotia's accounting policies into a state of consistency with Generally Accepted Accounting Principles followed by all other jurisdictions across this country. So we were faced with a new responsibility to do an audit of these financial statements. We were faced with working with the Department of Finance on establishing these new accounting policies and that required significant resource demands on my office as well as on the Department of Finance.

Thirdly, because of the change in government and the defeat of the budget in June 1999, we were faced with doing not one but two reviews of the revenue estimates because there were two budgets. So the office was under severe strain but we believe we did the job and the results are in this annual report.

If we could move to the next slide, I just want to give you an overview of what is in the report and what we propose to do this morning is divide our presentation into what amounts to three sections following my comments in which each of my three colleagues will take you through the audits that they were responsible for, starting with Claude, then moving to Alan and the ones that his team is responsible for, and closing with Elaine who will, after turning the slides for the first two, move back to a chair and I guess Alan will take over for her presentation.

We will start with the government-wide issues and Claude will go into more detail on the issues of the financial statements and the revenue estimates. Then we will move through the departmental audits that we did on the Departments of Education, Finance, Health, Housing and Municipal Affairs, Transportation and Public Works; some comments on Crown Agencies and Corporations; and some less significant other audit observations. Claude will deal with our own accountability report on the activities of the office. The report also contains some appendices; we won't spend time on those.

That is our plan for this morning and I would propose that if you could, hold your questions until the end of each section. So when Claude has finished his presentation, he can entertain questions on anything that he has covered; then we can move on to Alan's chapters,

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do the same thing; and close with Elaine and hers. So if that is acceptable to you, Mr. Chairman, and members, I will now turn it over to Claude to begin with the government-wide issues.

MR. CHAIRMAN: Mr. Carter.

MR. CARTER: Mr. Chairman, members of the committee, I will be discussing, as per the handout that you have been provided, the material in Chapters 2, 3, 6, 12, 13 and 14 of the report. First, the purpose of Chapter 2, just to begin with - and this has been a fairly standard chapter each year for the last five or six years anyway - is to touch upon the topic of accountability information and reporting at a government-wide or entity-wide level.

This year's chapter is, among other things, a continuation of an update and a continuation of some comments as they relate to a number of key aspects with respect to accountability information and reporting. The chapter is in four basic sections or observational areas. It comments on the government's planning and accountability framework - I will give you some background on that in a minute - and brief comments on the results of our review of revenue estimates for the 1999-2000 fiscal period. As Mr. Salmon indicated, we did that review a second time this year as a result of the original 1999-2000 budget being defeated.

Some comments on the provincial financial statements, the results of our work, first audit of the province's financial statements, then I will look briefly at some issues that are carried forward to March 31, 2000. Then I will touch upon some other matters that for a lack of a better place we have included in Chapter 2; alone they didn't warrant separate chapters so we put them in as part of Chapter 2.

The planning and accountability framework, as background for members who aren't familiar with it, flowed from decisions made in the early 1990's to move to an integrated planning and budgeting process. The integration of planning and budgeting within government had been an issue for a number of years, and significant efforts were taken in the early 1990's through to the mid-1990's to integrate the budgeting and the planning process within government, and as part of that as an extension to a broader planning and accountability framework for government.

The primary deliverables or documents flowing from that planning and accountability framework were Government By Design, which is the planning document, and the reporting document called Nova Scotia Counts. Government By Design provided a summary of departmental business plans to the House of Assembly each year. Nova Scotia Counts was the reporting document against that plan.

Clearly with the change in government, one of the questions that we had during 1999 was, what is the status and the plans with respect to the planning and accountability framework? The indication that we have gotten, certainly the indication that the current

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government has provided in the material that they have made public, is that there is a continued commitment, a strong commitment to accountability and the provision of accountability and performance information to the House of Assembly.

We see that as positive and while planning information may not end up being called Government By Design, we would presume, consistent with what is going on in other jurisdictions, that information would be provided to the House on the business plans, goals, outcomes of departments and agencies. As well, there would be a reporting back to the House on the results against those plans.

I think it is important to put it all in context, in that from our point of view if the members of the House are in fact to be able to - and this committee more specifically - hold government to account for its performance, such performance information, in terms of both the plans and results, is important and needs to be provided to the members, obviously in a form that is easily manageable and workable. Just as another comment, this is an issue that is significant and predominant in other jurisdictions as well. Nova Scotia is in a fairly good position relative to other jurisdictions, and if the planning and accountability framework in whatever form it is carried forward continues, Nova Scotia will continue to demonstrate leadership with regard to that aspect.

The revenue estimates work was reported, reports were released with the budget addresses in early June and October. Again this year, in both cases we were able to provide unqualified review reports and we were satisfied that the revenue estimates that were provided to the House were supported and consistent with the assumptions that the government and staff had used to develop those revenue estimates.

The provincial financial statements were released publicly in early December 1999 - that is for the year ended March 31, 1999 - and as Mr. Salmon has indicated, this being the first year of us doing the work, it offered us some unique and interesting challenges, not the least of which is the decision by the new government to change the basis of accounting, which is something that we had strongly supported for some time, what we saw as a move towards a more appropriate basis of accounting, which is Generally Accepted Accounting Principles.

That decision to move to Generally Accepted Accounting Principles, or GAAP if you like, as a basis of accounting actually removed a number of long-standing concerns that this office has had with respect to the completeness and adequacy of the province's financial statements and financial reporting. I guess to put it in context, we see Generally Accepted Accounting Principles as a benefit both to the readers of the financial statements and to government. Generally Accepted Accounting Principles are the standards and recommendations put forth by the Canadian Institute of Chartered Accountants that are applied by most of the jurisdictions and entities within this country. It provides an authoritative foundation or source from which government can both choose and defend its decisions for accounting policies and practices.

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Further, in our mind, the use of Generally Accepted Accounting Principles along with our short form auditor's report on the province's financial statements allows the members of the Legislative Assembly and other interested parties to focus more on what is being reported rather than how it is being reported. From our point of view that is one significant benefit. We all know that there has been a lot of discussion in the House and in the media over the last number of years about how things are reported and whether it is an appropriate basis. As long as the financial statements and financial information is presented to this House and the public in accordance with Generally Accepted Accounting Principles, in our mind the focus should now be on what is being reported.

We acknowledge the improvements and the move to Generally Accepted Accounting Principles and, as the government has indicated, there are some issues that couldn't be dealt with as part of the March 31, 1999 financial statement preparations, and those are to be dealt with in March 31, 2000 financial statements to the extent possible. They will be subject to further work by the Department of Finance and our office, but they include topics like accounting for pension costs and obligations, accounting for long-term disability plan costs and deficiencies, other post-employment benefit costs and obligations, tangible capital assets, and longer term or more complex is the accounting for environmental site clean-up costs and obligations.

In addition to that, there are some statement presentation and note disclosure considerations that we will be talking to Finance about to consider further improvements to how the statements are presented and the note descriptions are presented to make them that much more understandable and informative to the readers.

In terms of other matters, very quickly touching on those emerging issues, we just wanted to make the point that Generally Accepted Accounting Principles and Accounting Standards are not static, they are somewhat dynamic in the sense that there are always a certain number of issues that are under study or under re-study by the accounting profession in Canada and internationally as well, and there are issues like tangible capital assets that are under review, pension cost and obligations are under review, foreign exchange accounting is under review. So those types of things will have an impact years down the road in terms of how things are accounted for by the province.

We certainly have a commitment from Finance and a commitment by our office to work together to ensure that the province is on top of those emerging issues, and that as soon as possible they can be appropriately taken into account, both from a budgeting point of view and from a financial reporting point of view.

The comments on the Nova Scotia Gaming Corporation, we just felt it appropriate to highlight the fact that there is a long-standing dispute between the Gaming Corporation and the casino operator as it relates to the treatment of GST and HST, and that matter is currently

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going to arbitration and what is at stake approximately to the year ending March 31, 2000 is approximately $25 million.

The other point that we wanted to make on the Gaming Corporation is that during the audit of the Gaming Corporation's March 31, 1999 financial statements, we observed that while the casino operator had retained what it felt it was due as a result of the HST/GST dispute in the casino bank accounts, towards the end of 1998-99 the casino operator entered into a transaction with its parent company and invested $10 million of those held back funds in its parent company at an interest rate. In our view that transaction should have been subject to prior approval by the Nova Scotia Gaming Corporation's management and board. Subsequently to year-end when the matter was discussed with the casino operator those funds were returned to the casino bank account sometime in June 1999.

The corporate financial management system is an update of items reported in a prior year and just an update in terms of where the government stands in terms of dealing with the many recommendations that were made or put forward for consideration as a result of an independent review and assessment of the new corporate financial management system. From our point of view, the major point that we are making is that we recognize the Department of Finance and government have taken efforts over the last number of years to try to address those recommendations and we obviously support and suggest that they continue to do that to the extent appropriate. Our major point, though, is that a significant amount of money was invested in this system and what government needs to consider is what is its strategy to ensure that it realizes the maximum benefit from that new corporate financial management system.

The provincial data centre services are, as you may recall or you may not know, back in the early 1990's, what used to be the provincial data centre was outsourced to - at the time it was called Systemhouse and I think it is now called EHS Systemhouse - and we included in Chapter 2 some information on a security review performed by an independent audit firm of that provincial data centre services. We felt that since there are significant systems being processed at that data centre for the government that it would be appropriate for this House to receive some summary information on the result of that assignment.

With respect to procurement policies and reporting. Our comments there are just again, and this is a carry on from what was reported on in the 1998 report, an indication that the procurement branch of the Department of Finance does prepare a report of the results of its monitoring and audit of the compliance with the procurement policies and provide that to the Priorities and Planning Committee. So that is done on an annual basis and I guess the 1997 year was the first year.

Our point on this one is that it would make sense for that type of reporting or some form of reporting on the results of the procurement activities to be provided to the House of Assembly. We are not aware if that is currently in the works or planned or not. There is a document that is being generated that is available and staff at the Department of Finance is

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continuing to work on refining the format and presentation of that report to the Priorities and Planning Committee on an annual basis.

With respect to the Supplements to the Public Accounts, our point, really, there is twofold. One is that the Supplement to the Public Accounts usually has generated a fair amount of interest by members of the House and other interested parties. Our comment there is that the thresholds that are used in the preparation of that report were established years ago and from our point of view are quite low and as a result that document is fairly detailed. The other limitation to it, I guess, and we see the volume and the size of it as a limitation but we also see the fact that it only includes information on departments and agencies that use the central financial systems of government, it doesn't include compensation information on all Crown entities and agencies.

Our major recommendation that we are making again this year is that government consider reviewing the provision of that information and consider using something like the guidelines that are used by security regulators and stock exchanges for publicly traded companies where something like the five highest paid executives in an entity, that information needs to be made public as part of their annual report. That's out there again for consideration.

Moving on to Chapter 3, although the report was released very close to the December 31st date, we felt it was appropriate to provide some very succinct and hopefully summary, meaningful information on terms of what government accomplished during 1999 in its preparations for the turn of the century. What we reported was that based on what we saw and the information that was available to us and to others, for the most part, on the government's Internet site, significant progress had been made by departments and agencies in terms of remediation efforts, as well as preparation of business continuity plans.

I think the other point that we made that is worth considering for a number of reasons is that preparations for the Year 2000 or the Y2K issue was a significant corporate project. It provided government and departments an opportunity to do things on a collaborative basis that they might not have otherwise been able to do.

One of the things that we think should be done is a post-implementation review and assessment of that process to determine what lessons we have learned from this type of a corporate initiative, not that we are going to expect to be around for the next turn of the century. But looking at, what have we learned from this? What can we garner or what are the benefits? What are the things that we would do differently if we had this type of a corporate issue as it relates to technology?

Moving on to Chapter 6, Liability and Risk Management. In 1994, we first reported on a review of government debt management practices and liability and risk management includes debt management. We followed that review up in 1995 and then again in 1997 we

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had some comments on debt management. The chapter in the 1999 report is a result of a decision made by our office and the Department of Finance to co-sponsor a review, by an external firm with liability and risk management specialists, of the certain aspects of the Department of Finance's liability and risk management function.

The audit work was tendered and the successful proponent did the work in March and April, 1999, with support from staff, from our office as well as the Department of Finance, and the report was drafted and reviewed over the summer and finally released in late November. What we included in Chapter 6 is a highlighting of some of the key comments and material from the executive summary of that consultant's report.

There are a number of recommendations in the report for consideration by government and the Department of Finance for improving how they manage and control the liability and risk aspects of the province's debt and debt-related activities. A number of them are noted by the consultants as being things that should be dealt with on a more immediate basis and others are noted as being items that can be dealt with in due course. That report obviously is and has been available to the Department of Finance and they, presumably, are considering it as part of their ongoing planning and prioritization and so forth.

From our point of view, what that report reaffirmed to us is that not only is the size of the provincial debt something that warrants a high level of interest and reporting to this House but the complexities of the whole issue of liability and risk management are such that it warrants additional reporting and consideration by government, by this House, by this committee outside the Department of Finance. Certainly, as we have acknowledged in prior years the fact that Government By Design includes a debt management plan is something that is positive and it does provide a summary level basis of this House and interested parties considering how government is managing the debt and so forth.

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The other thing I guess I would be remiss not to mention is the report did make reference to the fact that the Department of Finance's liability and risk management activities are managed by a small number of qualified and experienced staff. That is acknowledged in the report and it is certainly something that we support. The risks there are that because of the staff and the work that is required on a day-to-day basis their ability to find time to deal with improvements and so forth, you know, finding the time to deal with change when you are dealing with the day-to-day management of a debt portfolio that the province has is a challenge.

The other thing is that you have got key people and you have got to deal with succession planning. If you lose two or three key people, you are in a fairly significant bind and certainly when you look back historically to how long it has taken to replace some of the

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key people at Finance in the debt management area, we are not talking months. Some of them took years to replace.

Moving onto Chapter 12, Chapters 12 and 13 quickly are annual chapters that we include each year, we are required to include each year actually under the Auditor General Act. The first one, Chapter 12, deals with additional appropriations and we just note that there was in total for the fiscal period 1998-99 $422 million of additional appropriations. Of that only $1.8 million was actually approved prior to March 31, 1999, and $259 million of that $422 million relates to changes in accounting policies. There were no special warrants approved applicable to the 1998-99 year.

Our concern with the additional appropriations is not new. We believe that government and the House need to consider mechanisms to ensure that approval of additional spending authority happens before expenditures occur. Without that the effective control of the House overspending is reduced. You really don't have any mechanisms once the money is spent to say we don't authorize you to spend those additional funds. That has been a longstanding concern of this office and there are obvious challenges in terms of how to implement changes like that. One of the things that we have had on our list for some time is to do a study or a review of how other jurisdictions provide spending authority to the governments and how they manage supplementary estimates and authorities.

The Cash and Other Losses chapter is, again under the Auditor General Act we are required to report to the House any losses that are identified or reported to us. This chapter is a compilation report. It provides a summary of the losses that were reported to us. It isn't necessarily a list of every loss that occurred during the year. It is the list of those that were reported to us or identified by us during our audit work. Of the ones that are listed there in the chapter, based on the information available to us, there were none that we felt we should go out and do specific additional work on at this time. The internal audit group of the Department of Finance is responsible for reviewing each of the individual losses reported and we would review the results of their work as part of our review of losses next year.

The last chapter, Chapter 14, deals with the report on the office. We have put a chapter on the office in the reports for the last five or six years. Some of it is somewhat repetitive from year to year in terms of our mission, our strategic goals and objectives and core business functions. We do provide in sections on performance and priorities a point form summary of what we see as some of the key performance acknowledgements by the office and then our priorities for the future, in a very general way.

Mr. Chairman, that is the end of my presentation. I am prepared to try to address any questions that members may have.

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MR. CHAIRMAN: Thank you, Claude. Perhaps what we will do just for clarification because we have two more presentations and they are rather lengthy, the two big ones yet to come, we could open up for, let's say five minutes for each caucus, unless the caucuses just want to hear the other two presentations and then we will appropriate the time accordingly to each caucus at the end. We will keep going then? Is that fine? Yes, John.

MR. JOHN HOLM: Just a couple of short snappers. I also was interested in your comments about the liability risk management. Were you implying that maybe there is a little bit of an understaffing, or suggesting that there might be understaffing in that division, given the fact that certainly they have to deal with the day-to-day plus also have time allocations to deal with things; are you suggesting that there should be, I don't know if you would call it an identification and sort of an apprenticeship type of program, built within Finance somewhere to bring people along so that there will be others who would be able to step in should some of the senior people carrying those responsibilities, for one reason or another, leave the government's employ?

MR. SALMON: Let me start off and then Claude can supplement. I have a general concern of the strength of the Finance function right across government, and it relates to the fact that compensation is not adequate. We are losing good people to the private sector on a regular basis, and retaining good staff is an issue. So it is broader than just the liability and risk management area. Claude alluded that it is a small staff and we are at risk of losing people for that very reason. Building in succession planning is a key element of trying to deal with that, but there are risks associated with the whole situation. Claude, do you want to comment further?

MR. CARTER: Let's put it this way. Our understanding is that the challenge is if you want to implement improvements in systems and processes you need to consider what are the changes, what are the improvements that need to be addressed, how important are they, and how long are you prepared to wait for them. Many of the issues that are still facing the liability and risk management group at Finance are ones that we identified in 1994. I don't want to be critical of the staff there because I believe they are doing an amazing job in very challenging times. So the answer is, the decision that has got to be made is, what level of control do you want in place over the management of liability and risk activities in government and how long are you prepared to wait to put those changes in place.

MR. HOLM: I appreciate that and certainly, Mr. Salmon, your comments about compensation. If I could, a quick follow-up with that. Have you done any kind of a comparison, official or unofficial, in terms of any information on the kind of compensation that would be available through the private sector to those individuals with that kind of responsibility? Also, how helpful would a wage roll-back or a wage freeze be? Would that not also have the effect of driving many more of those very key people into the private sector and put the government at greater risk?

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MR. SALMON: We haven't done any specific comparisons of wage levels, but I can tell you that very good people have left this government to go to the private sector and doubled their salaries.

MR. HOLM: Was there an increase in that trend when wage roll-backs and freezes were imposed? Did that have any kind of an effect?

MR. SALMON: Well, I mean, we are talking about a wage roll-back that occurred in 1993-94. There have been no increases. I mean, that roll-back was reinstated, the 3 per cent, but there have been no increases in salary levels or compensation since that time. People have been frozen for five years. That is not the situation in the private sector and it is not the situation in other governments.

MR. CHAIRMAN: Dr. Smith.

DR. JAMES SMITH: A question on Chapter 2, Mr. Carter. You mentioned environmental clean-up being part of the Generally Accepted Accounting Principles. When you look at an issue like Sysco, and something of that nature comes to be sold to the private sector, do you see taking the environmental liabilities in with those accounting principles? Where does that liability show as we move towards more of a consolidated debt? Or Mr. Salmon, whoever wishes to comment. Does that start to appear on the debt of the liabilities of the province?

MR. CARTER: I think that is an important question because there are environmental sites other than Sysco that government has some responsibility for. It is a matter that is subject to some discussion and interpretation. Our understanding of the basic principle is that once you have a reasonable estimate of what it is going to cost to clean up or to deal with an environmental issue, that should be recognized on your financial statements.

Until there is a reasonable estimate, you do make reference to the fact that there are environmental sites that you have a responsibility for in the notes of the financial statements. Once you have an estimate as to what it is going to cost, you do, in fact, set it up as a liability on the statements.

Again, it is one of these issues - I talked about emerging issues. It is a matter that is of continuing review and study within the accounting profession. There are, obviously, significant ramifications.

DR. SMITH: Yes, thank you very much. I think this is significant. We have heard figures starting as a low of $600 million, maybe over $1 billion, in Sysco, alone, at the time of sale, is the reason I mentioned Sysco, particularly. Thank you very much, Mr. Chairman.

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MR. CHAIRMAN: Does anybody from the Progressive Conservative caucus, in a sense of fairness, have one or two short snappers? We are going to limit it to less than five minutes. Mr. Langille.

MR. WILLIAM LANGILLE: I would just like to ask a question on the hold-back of the casino on the HST. It is $25 million and they invested $10 million. That was the parent company. Then that was given back to the casino, is that correct?

MR. SALMON: What we have to recognize here is that the Sheraton is the government's agent running the casino. The funds that flow through in that casino are managed by the Sheraton but it is public money. It is the government's money.

The Sheraton took the decision that because there was this dispute, that they would not, as the agent, turn the money under dispute over to the government. They were holding it in a bank account in their name but it was the government's money.

They decided, without getting the authority of the Gaming Corporation, to loan $10 million to their parent company. We identified that as an issue, we raised it and they paid it back into the bank account that they were holding as the agent.

MR. LANGILLE: What about the interest incurred, did that also go back in?

MR. CARTER: Yes, it did.

MR. CHAIRMAN: Mr. Morse.

MR. DAVID MORSE: To Claude. Picking up on Dr. Smith's comment, which was an interesting one about the environmental remediation cost of Sysco, and I do understand that he is pointing out it is because of the sale of the plant, but in essence what we are doing is we are starting to recognize all future work that needs to be done in the province. Just where do you cut this off? I think we have something like $3 billion or $10 billion worth of highway work that has been identified by the Department of Transportation, and I can tell you that there are a few schools out there that actually have environmental problems.

Do we start putting these in the Public Accounts? There are some old jails, the health care system, and I am sure it would be easy to come up with a total that would be enough to knock you off your chair. Just at what point do you draw the line in recognizing these in the Public Accounts? It is almost like making up a big work order for the next 100 years.

MR. CARTER: I think your point is a good one. The distinction is where you have a legal liability, a legal obligation. If you are in a situation where you can make a decision to do something or not do something, that is quite different than where you have a legal obligation to deal with a particular issue; in this case, environmental sites. Now is government

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obligated to clean up environmental sites? In those cases where they are obligated to clean up environmental sites and they have a reasonable estimate of what it is going to cost to do that - and that is the difficult part, coming up with what is a reasonable estimate - then those should be accounted for because the event has occurred. The environmental site, the damage was done, the obligation was created and you now have a reasonable value for that. Those should be reflected in the accounts.

MR. MORSE: A supplemental, if I may. Then we get situations like the Camp Hill Hospital with the environmental concerns, and I know that in my own area we have a school that has environmental concerns. I suspect that those concerns probably contravene the Occupational Health and Safety Act of the province, so here we go again. It seems like we are starting to book a very large work order for the future because I suspect it would qualify under your definition. It is just an observation, and I think it was a good question that was brought up by Dr. Smith.

MR. CARTER: It is even more complicated than that. This is one of those issues that we, in Finance, have to look at, study and determine how the government, what accounting policies should it adopt with respect to environmental costs and obligations. We are going to have to look at what other jurisdictions are doing and what is happening in the private sector and where accounting standards and recommendations are going. You are right, it can go beyond that. You could have a situation where the government of a province is saying, well, I am going to sign an agreement with the federal government but I can't do that now because what it does is it establishes a value and as soon as I have a value for the clean-up, I have to book it. What we have to do is find a way to account for those things that doesn't make business decisions be run by accounting.

MR. CHAIRMAN: Okay, I believe we will move on to our next section. Mr. Alan Horgan, if you wish to proceed.

MR. HORGAN: Mr. Chairman, I am responsible for three chapters in the 1999 annual report: Chapter 9 which addresses real property management, which is a function of the Department of Transportation and Public Works; Chapter 10 which addresses snow and ice control, another function of the Department of Transportation and Public Works; and Chapter 11, entitled Review of Financial Statement and Management Letters, which is a summary of the results of financial statement audits done by our office and done by private sector auditors of government agencies and Crown Corporations.

I have prepared slides for Chapters 9 and 10. I did not prepare a slide for Chapter 11 because I felt there was nothing significant enough in that chapter to include in this presentation, but feel free to ask any questions on any material in Chapter 11 if you wish.

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Starting with Chapter 9, which deals with real property management, this was an audit in the Department of Transportation and Public Works. It was pretty much a value for money audit. The scope of the audit dealt with the economy and efficiency of how the department fulfils the government space requirements for offices and other buildings that it requires to operate. As well, the audit reviewed the property management function, maintenance and the monitoring of a property owned by government to see if it is managed in an economical and efficient manner.

The principal findings of that audit are as follows. First, we noted that responsibility for the property management function of the province is not defined as clearly as we would have hoped. Responsibility for property management is laid out in the Public Service Act and it gives pretty much all responsibility to the Department of Transportation and Public Works for managing property. However, we noted that as many as 11 other departments do some property management for their own properties; as well it was very unclear who is responsible for property management with respect to Crown Corporations. In general practice, the Department of Transportation and Public Works does not involve itself in the property management for Crown Corporations.

We noted that planning for the property management function is not as comprehensive as we would hope. This was due, in part, to an absence of critical information necessary for planning for property management. Information which would be very helpful to the department in its planning includes information on the future space needs for government and we found that the department was rarely informed of changes in other departments which would call for the Department of Transportation and Public Works to find additional property or to make changes in space used by other departments. As well, we found the department did not have comprehensive records on what property belongs to government. Having additional information in these two areas would enable them to do more comprehensive planning.

We also observed that the department has made progress in reducing costs with respect to the space used by government. One of the principal manners in which it has accomplished this is by reducing the space standards and those are the guidelines that government departments must follow in laying out the office space that they will use. The department has prepared a draft policy on tele-working, which has some potential. However, we observed and recommended to the department that they need to perform more analysis on the ratio of owned space to leased space by government. Currently, the government leases much more space than it actually owns and in a time of increasing market rates for rent, a case may be made now that it would be more economical for government to own more buildings rather than to lease to fulfil its needs.

Next slide. We observed due regard for economy and efficiency in the department's leasing practices. This was based on a review of the policies that the department has for leasing, as well as based on a sample of leasing transactions that we examined. However, we

[Page 15]

do report in this chapter on two leases that did not follow normal government procedure. One was a lease in Sydney where we observed above market rates and a commitment for space for which government has not yet defined a use. As well, we report on a lease concerning the World Trade and Convention Centre where the Department of Economic Development is paying above market rental rate to the World Trade and Convention Centre and we concluded that the higher rent rate represents a subsidy from government to that Crown Corporation.

In addition, we found due regard for economy and efficiency by the department with respect to the sale of surplus property. As you may suspect, there is not a lot of activity in this regard. At this time there is not a lot of property being sold. However, based on a review of the policies that the department follows and a sample of disposal transactions we observed due regard for economy and efficiency.

We also noted that it certainly appears that the department has insufficient funds for preventive maintenance on government property. Accordingly the department does not have a formal preventive maintenance system. The department generally just receives enough money to handle very critical repair needs and every year there are many projects identified of a preventive nature that the department would like to address. However the funds are not there. We have suggested in our report that not addressing preventive maintenance may cost the government more in the long run as preventive maintenance may, in the long run, reduce operating costs and head off some very major repairs that could be more costly in later years.

Finally for this audit, we observed that property insurance on government buildings is tendered each year and insurance is acquired on a replacement value basis. That is our observation for Chapter 9.

Chapter 10, which beings on Page 165, addresses an audit of the Snow and Ice Control Division of the Department of Transportation and Public Works. Again this was a value for money audit principally and the scope of that audit was to review the economy and efficiency of the snow and ice control operations. As well, we reviewed certain issues relating to the arrangements between the Department of Transportation and Public Works and the Truckers Association of Nova Scotia, generally referred to as the 80/20 rule.

Our principal findings on this audit are, we noted that operational planning is done on an annual basis. However, we feel it is lacking in longer term and province-wide strategic planning. As well, with regard to planning, we noticed performance standards for snow and ice control are not particularly well developed yet. However the department is working on improving performance standards. We noted a significant reduction in costs by the department in this area due to changes in its organizational structure and in certain operational methods. In fact, the department has reduced snow and ice costs by around $11 million between the period 1992 and 1999. This is approximately a 25 per cent reduction in the cost of this function. The actual cost of the division has decreased even more than that but part of the

[Page 16]

reduction was due to a change in accounting methods, but the department has estimated that about $11 million is due to certain cost-reduction changes.

[9:00 a.m.]

We have recommended that further study is needed in some other cost-reduction alternatives that the department has identified but has not followed through on yet. These include the possibility of barging more salt from the salt supplier to the various Transportation depots rather than using trucking in all cases. There may be more economy available in the owning of certain equipment versus the leasing of it or vice versa. The department has not studied that issue as much in depth as we have suggested that they do.

We noted that the department monitors the economy and efficiency of its snow and ice controls very closely. However we have noted that if they had more, better defined measurable performance standards, the monitoring operation likely would be a little more effective. We observed that goods and services acquired by this division follow the procurement policies of the province and in just about every case involve a competitive process; this is goods and services aside from truckers services which I will address a bit further down.

We noted that recoveries from municipalities for snow and ice services that the department does for various municipalities are billed and collected on a timely basis. The rates charged to municipalities for snow and ice control in 1994 and 1995 were based on a cost study conducted by the department and thus the rates were very much based on the department's cost of performing the services. However the rates subsequently increased without further study. The current rate is approximately $6,000 per kilometre of road maintained and we feel that this rate likely is above the cost that the department incurs in performing this service, but we also note that it is likely less than the costs that a municipality would have to incur in order to do the service for itself. As well, we noted that the department provides snow and ice services to 12 kilometres of private roads as well as to some roads to a landfill and it does not charge for these services.

The next and final five observations all relate to the 80/20 rule, that is the relationship between the department and the Truckers Association of Nova Scotia. We noted that the hiring of trucks for road construction and maintenance by the department does not comply with the spirit of the government procurement policy. We say that because there is no real competition for the supply of these services to the department. The services are provided based on rates set by government.

Accordingly the rates paid to members of the Truckers Association of Nova Scotia are above market rates. We believe that paying above-market rates represents a subsidy to members of the Truckers Association of Nova Scotia. A department study estimates that the government trucker rates add about $4 million to the cost of road construction and

[Page 17]

maintenance each year, though the department has warned us that that is somewhat of an imprecise estimate and that if the 80/20 rule were to be eliminated, the $4 million would not be recouped necessarily in one year, that it may take a while for a competitive process to recover the total additional premium paid for truckers' services.

Now I would like to caution that those three observations that I have just made are pretty much background items. We are not reporting negatively in that regard. We have not and are not concluding that the 80/20 rule is inappropriate or should not exist. That is very much a matter of government policy.

The department has indicated that there are reasons for the 80/20 rule. There are benefits as well as some of the costs that I have just discussed and thus it is not a simple matter of just saying that this only adds to the cost of government. However, the conclusions we are making with regard to the 80/20 rule are that we noted that there was no formal analysis of the benefits and costs of paying these above-market rates. There is not a bad estimate of the monetary costs, but the benefits are quite anecdotal and we thought there could be some economic analysis to support the benefits in order to determine whether the policy does provide value for money.

Finally, we concluded with regard to the 80/20 rule that there is no formal reporting of this subsidy paid to truckers, no formal reporting in the records of the department. The extra cost basically is added to the cost of road construction and maintenance and we thought if there is a general understanding of how much extra is being incurred due to this rule, that perhaps it should show up as a separate account so that people are aware of the amount of the subsidy.

That concludes my presentation on Chapter 10 and for each of my chapters. I would be glad to try to address any questions you may have.

MR. CHAIRMAN: Before I recognize anybody, just perhaps if Ms. Morash could give us some sense of how long her presentation will take?

MS. ELAINE MORASH: My guess would be that it might be half an hour.

MR. CHAIRMAN: Would members of the committee then prefer if we have her presentation and then just divide the time that is remaining equally because we will have a lot of material here for the future. It is entirely up to yourselves.

MR. DARRELL DEXTER: I think we should ask questions on this section now.

MR. CHAIRMAN: Perhaps each caucus five minutes, okay. Mr. Dexter.

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MR. DEXTER: Given the brief amount of time that we have, my question is going to be very direct. I guess I am somewhat fascinated with your report on the Charlotte Street property for obvious reasons. There is a very nice picture today in the paper of the owner of that building with the Prime Minister in a golf cart, I think. This person, you know, is a controversial figure in this province and certainly linked with other allegations in the previous part of this year made by Mr. Xidos. The owner of the building is a person who is reported to vacation with the former Minister of Economic Development. The Minister of Economic Development at the time was the Chairman of the Priorities and Planning Committee. As straightforward as I could be, wasn't this just a plain and simple abuse of taxpayers' money in signing the lease with a friend of the government?

MR. SALMON: I am not prepared to answer that question with just a yes, but I will say that proper process was followed in that the Department of Economic Development went to the Priorities and Planning Committee and got approval to enter into the lease. The Department of Transportation and Public Works, which is normally the department responsible for leasing space, was not involved and did not make the recommendation.

MR. DEXTER: Which is contrary to the usual procedure?

MR. SALMON: That is correct.

MR. DEXTER: So the Minister of Economic Development went to a committee that he chaired in order to get approval for this lease?

MR. SALMON: That is correct.

MR. DEXTER: You pointed to the two reasons that they gave. Are those explanations reasonable? If they are, do they justify the lease?

MR. SALMON: I cannot answer whether those are reasonable, or not. I am not in a position to make that judgement.

MR. DEXTER: Do they justify the lease payment?

MR. SALMON: I would suggest not.

MR. DEXTER: Those are the two questions I had on that particular section. I do have one other question related to this overall section which comes out of the recommendation that you make about looking for office space outside of the downtown core to house government offices, which seems reasonable to me, specifically where they are not directly related to the public and service of the public.

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My question is whether or not you consider going the one step further in whether or not it is reasonable to see departments in areas where they service their core functions more directly. Have you looked at or thought about whether or not there would be cost savings for example, for the Department of Fisheries, to be located in a community where fishing is the primary industry, or some extension of those offices into other communities, where the connection would be more direct? I mean, one assumes that the lease rates in those communities would be lower as well.

MR. SALMON: Alan, do you want to address that?

MR. HORGAN: We did address the issue of, perhaps, having government departments locate more in the periphery of the population centres, specifically Halifax, as you have mentioned. Our initial impression was that that may save some money for government. However, the department was very effective in showing us, based on bids and market surveys, that the rates in the outskirts of Halifax were no less than the ones downtown.

Now, with respect to locating outside the city centres, we did not address that specific issue. We did not ask if they had entertained moving out.

We did hear that when the department made inquiries about moving departments to the outskirts of cities, they received significant hesitance from management of the departments, in that government managers very much wanted to be located together because they saw certain advantages in being downtown, certain advantages of being together, certain advantages of being closer to the House.

That hesitance may very well - and I am only conjecturing - likely apply to moving outside a city.

I am not suggesting that such hesitance would be a reason to do that or not to do that. I guess that is a long way of saying we have not addressed the issue of moving departments outside the city.

MR. CHAIRMAN: Mr. Carey, for Kings West.

MR. JON CAREY: I just had a question on the snow and ice control. It is noted, an $11 million reduction in costs. I just wondered if this was something that showed a consistency across the whole province, if it is regional and how quality was accounted for?

MR. HORGAN: I think we pretty much found that the savings were spread throughout the province. The savings came from a number of areas but the primary one was a reorganization that the department went through, I believe, around 1994, in which it eliminated a number of layers of supervision in all of its snow and ice operations. In that

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reorganization, about 100 positions throughout the province were eliminated. That contributed significantly to the cost reductions.

As well, there were reductions due to the methods used to clear snow and ice. Most of those were the result of using different equipment when they replaced their heavy machinery. In the past, they usually had different machinery for plowing versus salting, and new equipment they acquired was multi-purpose equipment. As well the equipment is more high-tech and more efficient; as well they changed their approach to staffing for snow conditions, where in the past they used to have an on-call situation where they would make sure they had enough staff to handle extreme weather conditions, now they maintain staff on an on-call basis to handle normal winter conditions, with the understanding that likely in an extreme condition they would have enough warning in order to get out and get more staff into equipment.

MR. CAREY: I guess the satisfaction or the . . .

MR. HORGAN: Yes, that was it. The department has certain service levels that they use for maintaining roads, they have three service levels for plowing, three service levels for salting and one for sanding. Those service levels have been in place for many years, probably going back 20 years. The service levels have not changed, however, the achievement of the service levels is somewhat harder to determine because they don't have measurable performance standards, but it did not appear that there was a major change in the types or levels of service provided as a result of the reductions in costs.

MR. CAREY: Just to follow up, how long would it take for your office, for example, to find out if there was a drop in service?

MR. HORGAN: I think it would be very difficult for our office to determine that because what we would need to do is rely on a system of performance reporting. In order to determine the level of quality of snow services, we would need to determine whether they are achieving those service levels, and that would perhaps require the department sending out inspectors or some kind of a follow-up observation system where they could follow up shifts of snowplows to determine what kind of quality, and that does not exist in the department right now.

MR. CAREY: It is sort of an in-house report, is it not?

MR. HORGAN: It would have to be.

MR. CAREY: They sort of monitor themselves.


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MR. CHAIRMAN: Mr. DeWolfe.

MR. JAMES DEWOLFE: Mr. Horgan, during your presentation with regard to the rates paid to the truckers associations and the members of those associations I was somewhat surprised to hear you refer to a subsidy and referring to it as a subsidy and saying that we are paying the members of these associations above the market rates. The reason I find that surprising is that I have had numbers of members of the associations coming to my office expressing concerns that the rates haven't been increased in some time and that they are having great difficulty in keeping up their equipment on the rates that they are being charged, and quite frankly indicating that they are having a very difficult time surviving with these rates. I am wondering what criteria you used to come up with market rates? What would be considered market rates, and how do you come up with that figure?

MR. HORGAN: The way the department came up with the market rates - and we have reviewed their analysis - was they took a look at the rates that were charged to municipalities for work done by truckers for the municipalities, they looked at the rates charged by truckers in other provinces to governments of other provinces; as well, to some extent, they looked at the rates charged by truckers to private industry. In each of those cases, the rates set by government for trucker services are in excess of the other, what you might call, markets or comparable markets out there. We are not commenting on whether the rates are good or bad, we are just suggesting that they are above market, and there are comparators to determine what the market rates are.

MR. DEWOLFE: Surely you are thinking back a year or so ago when the fuel costs were much lower than they are today. Could you tell me when the rates have been increased? When was the last increase for the members of the Truckers Association?

MR. HORGAN: I don't have that information with me.

MR. DEWOLFE: No indeed. Thank you very much.

MR. CHAIRMAN: Perhaps if I could ask for a clarification on one point, Mr. Horgan, that you made with regard to the rates that the province charges municipalities, the $6,000 per kilometre. You said their actual cost was much lower than that but you didn't indicate what it was.

MR. HORGAN: That is right. What I was saying is that in 1994 and 1995, they were charging a lower rate, approximately $3,500 per kilometre and that was based on a costing study. For a year or two after the study, they increased the rate by cost of living index. Then in 1995, they increased the rate to $6,000 per kilometre, however, I did not indicate what the cost is because the department does not know how much the cost has increased, if any.

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We asked why the rate was increased and we did not receive an answer. We asked what their understanding of the costs are. An indication was made to us that the cost likely was not that high, but they didn't indicate what it likely was, they were just estimating. However, they made it very clear to us that if a smaller municipality, say other than Halifax, were to do that same function it would cost them considerably more than $6,000 a kilometre.

I must say that this arrangement does not exist for the Halifax Regional Municipality. There is no service exchange with regard to snow clearing between the Department of Transportation and the HRM. This applies basically to smaller municipalities.

MR. CHAIRMAN: Ms. Morash, if you wish to proceed with yours. Bear in mind, all members, we can invite the Auditor General or any of his staff at any time in the future, and it looks like we have lots of material to work with for future witnesses. Today is not the last of any presentation that you deem important.

MS. ELAINE MORASH: There were four audits in the report that my team was responsible for: two in the Education sector, the Nova Scotia Community College audit and a shorter commentary on P3s for school construction; one in the Health sector, which was a broad-scope audit of the Northern Regional Health Board; and one at the Department of Housing and Municipal Affairs, which was an audit of the federal-provincial-municipal infrastructure works program.

I am going to start with the audits in the Education sector first. The first one is the Nova Scotia Community College. I think in order to understand this audit that we did at the Nova Scotia Community College, we have to go back to 1993. On this first slide, I just want to talk a little bit about 1993's audit and what happened in the subsequent period. When we audited the community college for the first time in 1993, it was still a branch of the Department of Education. At that point we had some really significant audit findings, there were very significant deficiencies in the management of the college.

We made an extensive list of recommendations. Those recommendations have all been acted upon, or virtually all of them, by either the government, the Department of Education and Culture, or by the college board. Subsequent to our 1993 audit, as most of you would know, the Nova Scotia Community College was established with a self-governing board so that it now isn't a part of the Department of Education.

In acting on those recommendations there were major consolidations of the campuses. At the time that we did the 1993 audit, there were 18 campuses, there are now 13 campuses with 14 sites. There was a major program review that took place and the programs were updated to reflect current economic conditions and technology in the job market and all those kinds of things. There have been significant changes that have occurred in the community college since 1993.

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One of the major focuses of this audit - next slide - was to try and look at the accountability relationship between the college and the government because that was a major change in the intervening period, because we now had a self-governing board since 1996. There still is a relationship between the government and the community college because the community college gets a significant amount of money from the government. It got $48.2 million for the 1998-99 fiscal year, which constituted 59 per cent of the revenue of the community college. The provincial funding per student works out to be about $7,500 per student for 1999.

Because there is such a significant amount of government money going into the college, one of the things we wanted to see was whether the outcomes from that significant investment, the expected outcomes, had been defined and what we found was that they hadn't been defined anywhere. What does the province expect in terms of accessibility, in terms of enrolment, in terms of the relationship between tuition and total cost of educating a student in a year? So we made a recommendation this time that those expectations should be defined and agreed upon between the two parties, the Department of Education and the Nova Scotia Community College Board.

Another area that we looked at that entered into that accountability relationship was how the funding was set. How was the amount arrived at that was funded by the province? There is no funding formula or funding methodology and we believe that there should be one. The budget process for the budget period since the college has been self-governing has been an extremely painful process on both sides. When we talked to the Department of Education management that was involved in the process and the finance people at the community college, they talked about extended, painful processes mainly because there is no funding methodology, so that is the reason for that recommendation. Similar recommendation, roles and responsibilities for the budget process require clarification.

Next slide. There is a provision in the Community Colleges Act that requires production of an annual report. That report was produced for 1996-97 and 1997-98; it was a combined report for two years and it was completed in November 1998. There is a provision, however, that it should be tabled in the House at a time to be determined by the minister. That report has not yet been tabled. Our comment is that the benefit of the timeliness of the report has now been lost because we are basically a year and one-half after production had been finished, so we are recommending that that report be tabled on a timely basis.

The financial statements for the community college appeared in the 1999 Public Accounts for the first time this year. The college still comes under the province's government reporting entity; that is the relationship is still close enough that it is part of the province's government reporting entity and its financial statements did appear in the 1999 Public Accounts Volume 2 this year.

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The province still owns the land and buildings. The Department of Transportation and Public Works has the title to these properties, and it also provides maintenance services of about $1.5 million annually. The community college did an internal study of its maintenance needs and that study showed that the capital maintenance needs for the buildings are quite significant and that over the next five years they predict that the funding coming from the province for capital maintenance will be $10.4 million short of the maintenance needs of the college buildings.

Other matters that we looked at. The college has a new mission statement. It has a strategic plan that was approved in May 1999 and it is currently being implemented. They have a problem with respect to being able to fill the demand for the programs. They have been accepting less than half of the applicants because they have so many people applying and they have a very limited capacity. There is now a capacity study that is ongoing, and its objective, consultants have come in to look at capacity and how it can be increased to make recommendations on how to increase that capacity. The target is to increase the capacity by 50 per cent in the relatively near future and that report should be coming forward in the relatively near future.

[9:30 a.m.]

The reporting on outcomes needs improvement. What are the college's objectives and how are those objectives being met, and what is happening to the graduates in terms of their participation in the labour market, do they go on to further their education? Those kinds of outcomes need to be better reported.

There have been major improvements in information systems at the college. There are more improvements required. They have recently issued a request for proposals to replace their core administration systems which will be a significant expenditure, something between $5 million and $10 million is the estimated cost on that. So that is a major initiative that will be happening in the next little bit.

Our overall conclusion on the college is that it is now well prepared to meet its mission. It was a very satisfying audit from my perspective. I had been involved in the 1993 one and to come in and see such a huge change in the state of the college between 1993 and 1999 was very satisfying from my perspective, and other people both at the Department of Education and at the college have made that same comment, that it is really nice to see an entity that has progressed so far in such very little time.

The next chapter that I would like to speak to is Chapter 5, which is P3 schools. This is the third or fourth in a series of commentaries that our office has made on P3 schools. Basically this year what we did was to audit the accounting classification of the three leases that had been signed during the 1998-99 fiscal year, and those three leases were Hants East Middle School, Sherwood Park Junior High School in Sydney, and Horton. The government

[Page 25]

had planned to account for these operating leases, that is they had planned to keep the leases off the books, the debt related to the leases. When we looked at all three leases, we had difficulty with the degree of risk transferred to the private sector partner. In all three cases, the degree of risk transfer was less than what we believed to be necessary to fulfil the requirements to keep the leases off the books, to treat them as operating leases.

We recommended that the three leases be treated as capital leases. The government decided to go along with that recommendation and they accounted for those three leases and the O'Connell Drive Elementary School lease in Porters Lake, which had been signed the previous year. Those four leases have now been accounted for as capital leases and that means that the debt for leases is now reflected on the financial statements of the province, so we concur with the decision.

I guess the one point that I want to make out of that is that this particular decision and the accounting treatment relates to only those four leases at this point. The other leases that are involved in the P3 school construction initiative we haven't looked at from an accounting classification perspective, and there are changes going on in accounting standards at the Canadian Institute of Chartered Accountants with respect to leases and I think it is too early to tell now what will ultimately happen with the accounting of the other leases relating to the other schools that are in progress or planned.

The other thing that is included in this chapter is just a status report with respect to the school construction initiative. We just wanted to see where the Department of Education was with respect to construction of the schools and also with respect to the signing of the formal legal agreements. So for the first 39 schools there are 11 completed and occupied; there are 27 under construction; and one is still in the planning stage. With respect to legal agreements, there are 28 signed leases or service agreements and 11 signed development agreements for those 39 schools. In addition, the government has announced 17 schools for which the planning may be in process, but there hasn't been a selection of vendors yet or any construction actually taking place.

The last point that we dealt with, with respect to P3 schools, is that the government contracted an independent consultant to do a review of the P3 process, and a major portion of that review is related to the P3 school construction initiative. The review is ongoing and I believe that their report will be released within the next couple of months.

The Northern Regional Health Board - moving to the health sector - this was our first audit of a regional health board. It was a large audit. It took a fair amount of time and it was, I think, an extremely beneficial audit for our office to try and get involved in that sector. We had done audits of hospitals previously and of programs within the Department of Health but we had never looked at the regional health boards since they had been established.

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To give you a little bit of background on the Northern Regional Health Board. It was established in 1994 to serve Colchester, Cumberland, Pictou and the Municipality of East Hants. Between 1994 and October 1, 1996, the board did not have responsibility for the hospitals. On October 1, 1996, there were nine facilities designated to it, including three regional hospitals and those regional hospitals are Colchester, Aberdeen in New Glasgow and Highland View in Amherst. It is a huge operation. It has 1,750 employees, 200 physicians with privileges. The budget for the 1999-2000 fiscal year is $99 million. During its tenure the Northern Regional Health Board established 10 community health boards. There were over 100 volunteers serving on those community health boards.

We started the audit in September 1999, so what happened was that during the course of the audit, the regional health board received word that governance for the health board had been transferred to the Department of Health. So, it was an interesting audit in that we were part-way through an audit of a government structure that changed during the course of the audit. So deciding on how we were going to report this was quite the challenge.

As I go through the findings I have tried to segregate them between those findings that relate primarily to the responsibilities of the Northern Regional Health Board and those that relate primarily to the responsibilities of the Department of Health. So the first couple of pages relate to the Northern Regional Health Board itself, the management and the governance of the health board.

Our findings were that the board members, we felt, were performing their responsibilities well. They met frequently. They were totally volunteer board members, they were not paid. They had a committee structure that was, for the most part, quite appropriate. They had been involved in an extensive strategic planning exercise. They seemed to be doing a good job in governing the activities of the Northern Regional Health Board.

With respect to strategic planning, they had an extensive strategic planning process, they had established all these various working groups and the working groups had, in fact, reported their findings to the board but the final plan was due to be approved by the board in January 2000. Of course the board was disbanded in October 1999, so I really don't know what has happened to that initiative since then.

One of the areas with respect to the Northern Regional Health Board, and this finding also carries forward to other regional health boards, is that we were quite surprised by the limited degree of accountability between the foundations and the regional health boards. The foundations are mainly associated with the facilities that come under the control of boards and when we asked about financial information, like financial statements for the foundations and those kinds of things, we found out that the board didn't receive financial information from the foundations and that there is no legal requirement for foundations to submit that information to the boards.

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Our concern is with respect to adequate accountability for funds that are raised in the communities, that are raised for the purposes of health care. We just bring that issue forward as something that we believe that government should take a look at in terms of the relationship between the foundation and the individual health care facilities or regional health boards or district health authorities, whatever you call them, what that relationship is between the foundations and the rest of the health sector.

The next slide relates to findings in financial management of the health board. We did see some deficiencies in financial management. The board had consciously chosen not to have a separate finance committee. They explained their rationale to us and there were good reasons for the decision to not have a separate finance committee. Our thought was that because finance is and continues to be such an important issue for health boards that a separate finance committee would make sure that the issue is given more attention at the board level. These boards have a lot of issues to deal with, issues like physician privileges and staffing and all kinds of other issues, quality of care issues related to health, that finance couldn't take up all the time at all the board meetings. We felt that to have a board subcommittee focusing only on finance and then bringing the significant issues to the board would have helped. So that is a recommendation with respect to that.

We looked very superficially at the background of the board members and we discussed with the people at the regional health board where these people came from, what their experience was and that kind of thing. What we found was that there were no board members with extensive financial management experience in a large organization. We think, to the extent that that is possible, that it is a good idea that whether these people be professional accountants or whether they be comptrollers or directors of finance, vice-presidents of finance for large organizations, that it would be helpful to get as many of these people involved on the boards in the health sector as is possible. We realized that this is a significant time commitment and that these people are not paid for their responsibilities that they take on, but to the extent that it is possible we believe that this is good for financial management.

The board approved deficit budgets during its tenure. Generally speaking, approval of deficit budgets is not a good idea; you want to see the board taking the initiative and getting the budget to a break-even basis before it is approved. In this case there were extenuating circumstances. The Department of Health had informed the boards that they were not to cut programs and that they were to maintain services and for that reason the board felt justified in approving deficit budgets throughout its tenure. In fact, the budget for the 1999-2000 fiscal year is the first one that is not a deficit budget.

Another thing that we found was that the board did not receive information on the financial performance of individual facilities. The board members had chosen to get financial information on a very summarized basis. They didn't want to know how one regional hospital was faring on a financial basis as compared to another one. They wanted the board to come

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together as a whole and they wanted to look at the programs as a whole. They felt that they didn't want to get into these rather parochial concerns about whether one facility was getting more money than another, doing better or worse than another one from a financial perspective, so there were good reasons why they chose to do it this way. I guess our recommendation would be that the information that goes to the board or its finance committee include financial information that compares the performance of individual facilities.

From a financial perspective - the next slide - we determined that the board had inherited a deficit of approximately $7 million from it predecessor facilities - so that $7 million deficit came from the predecessor hospitals - we also determined that those predecessor hospital boards had transferred about $10 million to their foundations prior to being designated to the regional health board, so they had about $10 million.

We tried to look at the source of that $10 million and we found that about 50 per cent of it was from donations. The other 50 per cent we weren't really sure what it came from, whether it was government money and had come about through operating surpluses or whether in fact it was donations, but 50 per cent of it was pretty clear that it was endowment funds and other donations. So the hospital boards had transferred this $10 million to their foundations prior to designation. As a result they created a deficit of $7 million and that $7 million deficit was transferred to the regional health board when it was formed. By March 31, 1999, the regional health board deficit had grown to $13.7 million, so in two or three years it had grown by approximately $6 million. As I had mentioned previously, the board doesn't anticipate a deficit for 1999-2000.

In 1998-99, from a financial perspective, the regional health board accomplished one of its goals, which was to merge the financial systems of the nine facilities that were under its control. So that was a big initiative for them and it was accomplished in 1998-99. The hospitals all have the same financial system and it is run out of the Colchester Regional Hospital.

Now getting to findings that relate to the Department of Health. We had some significant findings come out of this audit that relate to the Department of Health and the performance of its rules and responsibilities with respect to the health care system. There have been several attempts by the Department of Health, in recent years, to prepare a strategic plan for the health system. Those attempts haven't come to fruition yet; there is no strategic plan or direction for the health care system. We recommend that this be done in order to provide direction to those who are in the front lines actually delivering the programs. So that was the major recommendation.

Another thing that came forward was that there were many documents that came from the regional health board to the Department of Health for which they were looking for approval. They wanted a sense of direction. Those include business plans, construction plans for the Highland View Regional Hospital replacement, which I am going to talk about in a

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second, budgets that were coming forward, and basically what we found was that those documents were not being approved or disapproved by the Department of Health. They were just sort of going to Health and although Health had processes in place to look at these documents, there were I think extenuating circumstances at the Department of Health, a lot of personnel changes, so that some of these things just were not being dealt with or at least the results of that process were not being communicated back to the regional health board.

What the regional health board saw was documents that were going to the Department of Health and that were never being specifically approved or disapproved so that they did not really have a sense of direction in terms of where they should be going with some of these things. So we recommend that if these documents require Department of Health approval, if these initiatives require Department of Health approval, that the response come back one way or another on a timely basis.

We found that the roles and responsibilities of community health board members were not included in legislation. We issued a written survey to all of the Northern Regional Health Board members and all of their 100 or so community health board members. What came back in those surveys was that the roles and responsibilities for the community health board members were not clear even to those members. More than 40 per cent of them indicated that they weren't really clear on their roles and responsibilities and we feel that this clarity is extremely important.

The accountability between the board and the minister was not really clear. There is a Department of Health publication called Accountability in Nova Scotia's Health System that laid out some of these accountabilities, but it had never been defined in legislation and the Department of Health was not strictly requiring compliance with that document. We feel that an improvement would be to put these roles and responsibilities in legislation and the accountability requirements so that they, in fact, happen so that there is forced compliance.

Another thing that we looked at was the acute care facility for Cumberland County. There was a government announcement made with respect to this facility, construction contracts for preliminary design and this slide is wrong. As I look at it, I see that there is a mistake in it. The construction contracts were actually for preliminary design and land clearing. There has been no actual physical construction that has taken place, to date, aside from a land clearing but, anyway, those contracts were awarded without formal government approval; that is, there has been no OIC for the project. The costs to date, which total somewhere in the vicinity of $1 million, have been paid from the local share; that is, from funds raised in the community and under the control of the foundation.

Our conclusion is that all parties involved, the Department of Health, the Northern Regional Health Board, the foundation, have taken significant risks in proceeding without formal approval for the project. The Department of Health estimates for 1999-2000 include $1 million for this project; $1 million won't take it very far. It is estimated to be somewhere

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in the vicinity of a $50 million project. The cost-sharing arrangements between the related parties have not been finalized. So we think it is important that the Department of Health decide what is being approved for this facility and to get the agreements in place with respect to it.

We had an overall conclusion that we have reproduced on this slide. You can read it for yourselves. What we are trying to say is that replacing the regional health boards with another form of governance will not correct the problems in the health care system unless there are some other fundamental changes that are made, particularly with respect to planning and accountability. We just want to draw that to your attention.

Also reported in this chapter there were a couple of points that followed up on some comments that we had last year on the Department of Health, regional health boards and non-designated organizations. I just want to bring to your attention that the Department of Health has set aside $314 million to fund the accumulated deficits and debt of the regional health boards and non-designated organizations. That amount should be sufficient to wipe away the accumulated deficits and debt of each of those organizations as at March 31, 1999. It is to be applied first to the amounts that are owing from these organizations to the Department of Health and then the plan is that the remainder of the $314 million will be paid out in cash.

The regional health board and non-designated organizations had forwarded business plans to the Department of Health. Those were initially for the 1997-98 fiscal year and they have not been approved yet. They were three year business plans so the Department of Health, to the best of my knowledge, is still looking at the longer term implications of those plans, but they have not been formally responded to and that was the point that we made earlier. If the Department of Health needs this stuff, then either approve it or disapprove it, but communicate would be our recommendation.

That is it for health and you will be glad to know that infrastructure is much shorter. Infrastructure was also our second audit of the infrastructure works program which is a federal-provincial-municipal program. Our first audit had taken place in 1996. There was much more money from all three sectors that had gone into the first phases of the program. This one was quite a bit smaller, provincial funding of $14 million levered to approved projects of $58 million because of money that is coming in from the municipal sector and from the federal government.

The interesting thing about this audit from our perspective was that it was a joint audit with the federal Auditor General and also with the provincial Auditor General of Saskatchewan. It is the first time that we had ever done a joint audit with the federal Auditor General's Office. Where there was provincial money and federal money going into the program, we felt that there were all kinds of synergies that could take place if the audit activity was merged and I think that we did realize those benefits.

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The planning was done jointly by the three offices, Saskatchewan, our office and the feds. The work in Nova Scotia was done by staff of the federal Auditor General's Office and our office. There were three separate reports that came from the large audit; the Saskatchewan Auditor General made one to his Legislature, the federal Auditor General's Office had a report to Parliament, and then our report.

The findings, the next slide, all projects we examined could reasonably be defined as infrastructure; 85 per cent of the projects that took place in Nova Scotia were for core infrastructure and by core infrastructure we mean sewer, water and transportation. The program objectives of infrastructure renewal and employment creation appear to be met. Generally positive findings.

The next slide, the things that are not quite so positive. In 1996 we had reported some deficiencies in file documentation and in audit processes. We found that there had not been a whole lot of change in those areas. The files still looked much as they had in 1996. This is important because we could not verify compliance with certain aspects of the agreement because of these deficiencies in file documentation. I will just give you an example. One of the things in the agreement is that all of these projects should be subject to a technical evaluation. Well, the technical evaluation apparently was done for each project, but it was not in the files. It was not documented. So coming in after the fact it is really difficult for us to establish a conclusion that, yes, in fact, there was a technical evaluation of the project done. So it is those kinds of things that we had difficulty with.

These projects were being managed at the municipal level. That is where all of the tendering was done and all of the documentation for implementation of the project was actually kept. We believe that there is a need for a strong audit process for the management committee, which is comprised of representatives of the province and the federal government, to take a lead role in establishing a strong audit process to make sure that the activity at the municipal level is, in fact, being audited to make sure that we have due regard for economy and efficiency and compliance with the agreement at that level. So there is some need to strengthen that audit regime.

Although we are sure that jobs were created by these projects, we felt that there was a deficiency in the reporting of the employment, that what was reported was actually estimates of job creation as opposed to the actual number of jobs that were created. We felt that there could be some improvements with respect to reporting the actual jobs that were created and there were problems with some aspects of the agreement itself. There were some terms in the agreement that were not really clearly defined. Like, there was something in there that said all of the projects should be incremental and should result in acceleration of a project. But those terms were not defined so that when you come to the audit after the fact, it is difficult to determine what the authors of the agreement meant in terms of incrementality and acceleration, and what would qualify as fulfilling those criteria.

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Thank you very much. That is the last slide. If you have any questions, I would be pleased to try to respond.

MR. CHAIRMAN: I am going to throw this out to the committee for their consideration. Given the time that is left, my thought would be, perhaps we could invite the Auditor General and members of his staff back next week for further questioning on their presentation today. Between now and then it would allow the respective caucuses opportunity to give some consideration for some witnesses that they would like to invite subsequent to the Auditor General's Report. There appears to be a lot of material that we could sink our teeth into.

MR. HOLM: Did we have a meeting scheduled for next week?

MR. CHAIRMAN: No, there isn't. The only thing that we have is MacNeil's Cove and, apparently, and as Mora indicates, they are not able to come for at least another month. So that kind of leaves a bit of a vacuum there.

This would allow us, perhaps, an opportunity for each caucus to review the Auditor General's Report a little more in detail, subsequent to the presentation today and then we could have a good questioning next week. Then, perhaps, towards the end of next week's session we could discuss and give consideration for further witnesses, if each caucus would bring back a list of potential witnesses.

Is it agreed?

It is agreed.

Okay, then. Thank you very kindly. Is that agreeable with the Auditor General and his staff?

MR. SALMON: Yes, we have no problem coming back next week and answering any questions that you would have on this report. I just wanted to make one closing comment, if I could. That is, we have a fiscal management task force that has a preliminary report out there that is attempting to make recommendations to help this province deal with its fiscal situation.

I just want to reinforce that the area that needs the most attention is health care. Elaine made the point of the need for a strategic direction and a strategic plan for health care in this province. If we do not get one and get health care costs under control, we are never going to deal with the deficit situation in this province. Health care is such a significant part of the costs of the budget of this province that if it is not brought under control, we will never deal with the problem.

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MR. CHAIRMAN: Well, it looks like Elaine will be receiving lots of questions next week then. Okay, thank you. We are now adjourned.

[The committee adjourned at 9:58 p.m.]