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1996 November Report of the Auditor General of Canada

November 1996 Report—Chapter 32

Case Study 32.1—Sault Ste. Marie Canal

Business Plan investment criteria not met, resulting in significant potential liability and funds to be disbursed without a definite need

Background

Continuing declines in commercial use resulted in the Sault Ste. Marie lock being transferred from the St. Lawrence Seaway Authority to Parks Canada in 1979, for use primarily by recreational traffic. Commercial traffic has historically used the four much larger American locks, located nearby (Exhibit 32.11). At the time of the transfer, a government decision directed that the St. Marys and Whitefish Islands, on both sides of the Canal, be developed into heritage parks. The "heritage park" concept encompassed a major visitor reception centre, outdoor interpretive exhibits, an extensive trail system, large day use areas, boat stop-over facilities and boater camping. Development of the parks was to commence as soon as Parks Canada assumed responsibility for the Sault St. Marie Canal. These heritage parks have not been developed as envisioned.

In July 1987, subsequent to a structural failure of the south wall, the canal was closed to navigation. Since that time, all traffic has used the American locks.

Studies and discussions of options have been ongoing since the failure of the lock wall. These have resulted in a tripartite agreement between the federal government, the Ontario government, and the City of Sault Ste. Marie, dated 6 September 1995. The federal and provincial governments have agreed to share the costs of constructing a recreational lock within the now closed lock at the Sault Ste. Marie Canal. At the time of the agreement, the total cost was estimated to be $10.4 million. Ontario would contribute 50 percent of the capital costs up to $6 million. Prior to the agreement, Parks Canada's position was that it would not pay any of the operating and maintenance expenses of the lock, once constructed. Letters and documents state: "The fact that there is an operating canal on the US side for boaters does not justify creating further federal operating expenses at the Canadian site," "Our bottom line is simply to operate as a national historic site" and "The Parks Canada mandate for the protection, presentation and commemoration of the historically significant resources at the Canal is fully met whether the lock is operational or not." Despite this, the City of Sault Ste. Marie would not accept full responsibility for operating costs. The final agreement indicated that while operating and maintenance responsibility for the lock itself would rest with the City, Parks Canada would contribute 75 percent of the annual operating and maintenance costs. Lockage, mooring and site entrance fees, if any, would be turned over to Parks Canada. Under the terms of this agreement, Parks Canada will continue to operate the historic site in the vicinity of the lock.

Options considered for the site prior to the agreement, costs for the first five years and totals over 30 years are shown in the table below.

The analysis for the recreational lock notes that repairs to various canal structures and equipment would still be necessary to operate the lock safely and efficiently. The estimated total cost would be $28 million over a 30-year period.

The Parks Canada Business Plan

While discussions were ongoing for the reopening of the Sault Ste. Marie Canal, Parks Canada was preparing a Business Plan. A final version of the Business Plan was released on 13 February 1995. The Business Plan sets out five logical "investment streams" along with criteria for considering financial allocations. Resourcing decisions focus on three main objectives: operating the current system of parks and sites; improving the condition of the heritage assets; and expanding the system of parks and sites. Within these objectives are three sub-objectives: reducing expenditures on current operations; addressing the most threatened heritage assets first; and achieving the 1996 targets for park system completion.

Investment stream four, "New investments in existing parks and sites", applies in the case of the Sault Ste. Marie Canal. This stream was used to approve the work. The criteria under this stream include:

consistency with approved management plans;
acquisition of new assets only if no other options exist to protect heritage resources;
investments that will increase revenue or decrease operational expenditures;
investments with revenue potential that demonstrate they will achieve the appropriate level of cost recovery in reasonable time; and
a business case analysis that demonstrates a positive net present value or is justified based on a specific qualitative assessment.

Issues

Businesslike approach not followed

We are concerned that Parks Canada did not carry out a rigorous, business case analysis prior to deciding to proceed with the reconstruction of the Canal. The analyses of revenue potential and economic impacts are not well supported and they were completed subsequent to the decision being made. Although final agreement for this project was signed in September 1995, discussion was ongoing during the previous 14 months. The major project, with significant dollar implications, was approved in principle in October 1994, without due consideration of the draft business plan and its investment stream criteria. A business case approach would have questioned the validity and rationale for the project.

The criteria included in the business plan would have ensured a proper businesslike assessment of the decision to reconstruct the recreational lock at Sault Ste. Marie. Specifically, most of the above investment stream criteria were not met. There is an interim plan but no final management plan for the canal. The new construction would not lead to improved protection of heritage assets; rather most of the floor and gates would be removed, thereby destroying these particular heritage resources.

Weak economic analysis

The economic analysis is notably weak, relying on general interpretations of 1985 tourism data, which indicated that 3.8 percent of tourists to the area were interested in historic sites, and 30 percent were interested in sightseeing. This gives "the impression" that the tourists would visit an operating canal. It further relies on informal surveys of visitors to the local tourist office to reach "the impression that 40 percent of visitors interested in pleasure/recreation may be interested in viewing the new canal." We find this to be weak as economic analysis for such a major project, involving significant investment.

Revenue calculations optimistic

Revenue calculations include $30,000 per annum anticipated from the historic site, whether the canal is operating or not. This amount now becomes revenue foregone, as under the agreement it will go toward Parks Canada's 75 percent contribution to operating and maintenance costs. Parks Canada's proposal to charge $10 per boat for lockage has yet to be established in the context of free lockage on the American side. The $10 fee may potentially violate an existing agreement between Canada and the United States. The American locks have been able to handle the number of recreational boaters, which has declined significantly in recent years. One lock is dedicated to recreational traffic.

The economic argument that the public and communities benefit from lockages is difficult to support. Benefits to the communities derive from visitor expenditures. In the case of Sault Ste. Marie, only 3.8 percent of tourists are interested in historic sites. The economic benefits would therefore be relatively low. We have seen no analysis to indicate that an operating lock would make a substantial difference over a static site. We also note that only one Canadian tour boat company has expressed interest in using the Sault Ste. Marie lock. Parks Canada estimates that 2000 recreational boaters will use the lock annually.

Cost estimates may be understated

We are especially concerned that cost estimates may be understated, both for operations and for capital. Parks Canada has indicated that the change from a full-sized lock to a recreational lock will reduce operating costs from the previous $1.2 million annually to $140,000. However, other departmental estimates place operating costs between $160,000 and $270,000. Although various studies have been carried out over nine years, capital cost estimates have risen by $2.2 million from $10.1 million in early 1995 to a total of $12.3 million. This raises the federal government's share by 20 percent, already above the maximum approved, and work has not yet begun. As the amount exceeds $10 million, Parks Canada is now seeking approval from the Treasury Board for the project. We also note that the prior options analysis included funds for restoring the historical buildings on the site, as well as improving facilities for visitors. These additional funds are not included in the tripartite agreement. If anticipated operating costs, as projected by Parks Canada, and the amortization on a $12 million capital investment are considered, we estimate an annual cost of almost $1 million. This amounts to taxpayers paying the equivalent of $430 each time a recreational boat uses the lock.

Conclusion

The project has not been subjected to a business case analysis that demonstrates positive net present value. The analyses available indicate that none of the capital would be recovered, that limited potential for increased tourism exists and that the historic resources can be adequately protected and interpreted without the canal being operational. The federal share of $6.3 million appears to be a regional or local development expenditure, which is not within Parks Canada's mandate. In addition, the development of an historic park appears to be more consistent with the direction provided by the government at the time of the Canal transfer.

In our view, if a rigorous business case analysis had been performed, continued operation of the historic site and the permanent closure of the lock would clearly be the most cost-effective option.