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1983 Report of the Auditor General of Canada

Synopsis

EMR Background

9.1 Through the 1970s, the Energy Sector of the Department of Energy, Mines and Resources was almost exclusively involved in the provision of advice to ministers on energy issues. Program delivery in energy was not a major function of departmental management, as there were few programs being delivered.

9.2 With the 1980 National Energy Program (NEP), the Energy Sector was transformed. It was no longer a policy advisory organization with minor program delivery responsibilities. It became a delivery agent for many complex and diverse programs; at the same time the importance and difficulty of its policy advisory function increased greatly. Operational considerations began to affect policy, and the need to adapt policies to suit operational reality became urgent. At the same time, managers in the Energy Sector either had to learn the skills needed for successful program implementation or they had to be recruited - all of this in a very short period of time. The authorized person-years grew from about 370 to 1,380 from 1980 to 1983.

9.3 The precepts for the program were stated as follows:

It must establish the basis for Canadians to seize control of their own energy future through security of supply and ultimate independence from the world oil market.

It must offer to Canadians, all Canadians, the real opportunity to participate in the energy industry in general and the petroleum industry in particular, and to share in the benefits of industry expansion.

It must establish a petroleum pricing and revenue-sharing regime that recognizes the requirement of fairness to all Canadians no matter where they live.

9.5 While these programs were being implemented, the world energy environment was changing rapidly, and federal-provincial negotiations in energy were being conducted. The world prices for crude oil stopped rising; the effects of conservation efforts were greater than anticipated; the world economy slowed; and the demand for oil dropped. These influences demanded attention of program personnel.

9.6 In summary, the implementation of the National Energy Program was a large and difficult task done under rapidly changing circumstances and very strong time pressures.

9.7 We believe that the programs have been well implemented, considering the circumstances. Further improvement in procedures is needed and much is under way. We did not attempt to assess the value of any program or whether it had been successful in meeting its objectives.

Conservation, Renewable Energy and Oil Substitution Programs

9.9 With one exception, all the programs we audited are now well administered in the sense that applications are reviewed and approved, and payments are made under appropriate controls. However, ongoing monitoring of program procedures, effects and impacts needs further improvement. Some programs were well implemented but, in others, key functions were not well performed. For example, monitoring of procedures, impacts, and markets affected was not done in some programs; corrective or adaptive action was not prompt or appropriate in others; the links between the policy-setting level and the program operating level were sometimes weak. These omissions have resulted in allowing inappropriate program constraints or operational problems to persist. A lack of standard on the key functions required to manage program implementation appears to have been a contributing factor in some of these deficiencies.

9.10 In some situations, insufficient personnel resources were assigned to do the work needed to implement programs properly. For example, in 1978, only one person was assigned for the first two years to design, start up and operate a program intended to disburse more than $100 million over a five-year period. We consider it an important responsibility of management to assign the personnel resources needed during the life of a program to ensure economy, efficiency and effectiveness in program delivery. This has not always been done.

The Office and Panel on Energy Research and Development

9.12 The planning and co-ordination processes were generally satisfactory. However, we noted that all federal funds spent on energy R&D are not explicitly considered in the Panel's deliberations. In 1982-83, the Panel controlled $123 million; other expenditures on energy science and technology, excluding those of AECL, amounted to $134 million. Selecting and monitoring R&D projects, although sometimes informal, are done satisfactorily. The review and assessment processes were insufficiently developed to ensure comprehensive and independent reviews of R&D activities.

9.13 We believe that the OERD needs to increase the role of outside experts in reviewing and assessing energy R&D programs and needs to develop more formal selection procedures. It also needs to ensure that all federal expenditures on energy science and technology are explicitly considered in the Panel's deliberations.

Petroleum Incentives Administration

9.15 We examined the program's administrative processes and operating systems, and the procedures for managing its regulatory control framework both from a systems viewpoint and from a study of the applications of regulations and discretionary decisions in particular cases.

9.16 PIA is well administered overall, but some key management functions are not yet adequately performed. Program design was based on extensive consultation with the industry, and key factors in the operating environment were considered. Operating and delivery systems are in place and are consistent with good management practices. However, short-term monitoring of the program environment and program performance, and the framework for program effectiveness are not adequately developed. Key assumptions on which the program design is based have not been adequately assessed in light of experience gained thus far.

Oil Pricing and Compensation Programs Branch

9.18 Overall, the Branch manages its programs well. It has ensured that payments and revenues have been properly administered in the fiscal year ending 31 March 1983.

Administration

Canadian Ownership Account

9.21 The COA is also committed to accumulating $500 million for a financing offer to Dome Petroleum.

9.22 In our 1982 Report, we stated that there is "a serious weakness in the management of public funds when departmental and central agency officials have had no responsibility to ensure due regard to economy is demonstrated and value for money achieved." During the past year, we requested pre and post-acquisition evaluations done or being done by Petro-Canada of the Petrofina assets acquired by Petro-Canada. As of 15 September 1983, the evaluations had not been received. We are still unable to determine whether due regard for economy was demonstrated and value for money achieved in the $1.7 billion purchase of Petrofina Canada Inc.

9.23 The sale of Petrofina Canada Inc. to Petro-Canada was structured in such a way that foreign owners would not have to pay capital gains tax. We have been unable to ascertain whether this benefit, amounting to hundreds of millions of dollars and not available to the Canadian co-owners, was duly considered in determining the purchase price for Petrofina shares.

9.24 Petro-Canada had arranged for bridge financing in its purchase of Petrofina Canada Inc. Even though the interest costs are being paid from the Canadian Ownership Account and are not recognized as an expense by Petro-Canada, Petro-Canada has nevertheless used them to reduce its tax liability, resulting in a financial gain of $60.7 million to Petro-Canada.

Audit Scope

9.26 Last year, we audited the Minerals and Earth Sciences Program of the Department of Energy, Mines and Resources. This year, we audited some of the Department's programs in the energy area. We focused on those organizations responsible for program delivery. We did not audit the Energy Policy Analysis Sector or the four branches in the Petroleum Sector which are largely policy advisory groups. In the future, these organizations, the Canada Oil and Gas Lands Administration and the energy agencies will be examined as part of our continuing audit of the Department of Energy, Mines and Resources.

9.27 Exhibit 9.1 is a chart showing both the way that the Department is organized and the organizational entities covered by past, present and future audits.

Exhibit not available

Conservation, Renewable Energy, and Oil Substitution Programs

Background

9.29 The Conservation and Non-Petroleum Sector (CNP) is responsible for most of these programs; the Gas Branch in the Petroleum Sector has responsibility for several programs designed to increase the use of natural gas as a substitute for oil. The programs in this area are listed in Exhibit 9.2. This shows their number and their heterogeneity. For the CNP Sector, we examined in detail controls over $450 million of its $525 million expenditures.

Exhibit not available

9.30 For the Gas Branch of the Petroleum Sector, we examined the three major expenditure initiatives and the single revenue program. Their dollar value amounted to about $75 million in 1982-83.

9.31 In any program, there is a normal life cycle: policy development, pre-implementation planning, program start-up, ongoing operation and shut-down. The separations between the life-cycle stages are usually fuzzy, but we have assumed that the policy development stage was completed with the publication of the NEP on 28 October 1980. Few of the programs are yet at the shut-down stage, so we focused our audit efforts on the management control of the three middle stages - pre-implementation planning, program start-up, and ongoing operations.

9.32 For pre-implementation planning and program start-up, the general management practices we expected to find are listed below:

- There should be appropriate pre-implementation planning.

9.34 The management practices we expected to find for an ongoing program are based on those described in the 1981 annual Report of the Auditor General (Annex 2 to Chapter 2, page 65 "Audit Criteria for the Management of R&D Grants and Contribution Programs"). During the audit, we discussed with program managers and staff how special factors should influence these management practices.

9.35 Audit scope. We surveyed 35 programs and selected 17 for detailed audit. For the CHIP program, we relied on a major departmental program evaluation done during 1982 and early 1983. Ten of these 17 programs were audited by departmental internal audit personnel, under our direction.

9.36 In the following paragraphs, we report on our audit of the management practices followed in implementing and operating various programs. As stated previously, we did not attempt to assess the value of any program or whether it had been successful in meeting its objectives.

9.37 The conclusions we drew from this audit work are stated in paragraphs 9.86 through 9.89.

9.38 Canada Oil Substitution Program - COSP. COSP is an oil substitution and conservation assistance program providing taxable contributions toward the capital costs of converting heating systems from oil to other energy sources, or toward the capital costs of achieving energy savings in buildings. The contributions may be as high as 50 per cent of the eligible costs of such work to a maximum of $800 for a single unit, and up to $5,500 for a multiple-unit residential building. In 1982-83, $153 million was paid out under COSP; the program is to continue until 1991 and cost $2 billion.

9.39 For the most part, the program follows accepted practices for a contributions program, and we observed only a few discrepancies: the statement of objectives lacks precision, and there are weaknesses in comparing planned with actual achievements. On starting up the program, a management group responsible for linking policy and operations was created. This group also developed important control and reporting mechanisms and monitored the program closely and frequently so that appropriate and timely decisions on corrective action could be taken. For example, the regulations were changed once to enhance program effectiveness. Studies were conducted to measure the public's awareness of COSP and to determine which media to use for most effective program promotion. Management used audits to improve program administration and performance. Some monitoring of program effects was also done. An evaluation framework was completed as the basis for a full-scale evaluation of the program's impacts, effects and achievements. The evaluation is scheduled for 1984-85.

9.40 Canadian Home Insulation Program - CHIP. CHIP, approved in 1977, was originally administered exclusively by CMHC, and was to last seven years, at a cost of $1.3 billion. The primary purpose was to stimulate action by individual Canadians in insulating homes to save energy used for space heating. CHIP was extended by the NEP to 1986, with the total cost to be $2.2 billion. The program now makes a taxable contribution of up to $500 for eligible improvements to residential insulation. About $224 million was paid out in 1982-83; from the inception of the program to July 1983, about $700 million had been paid out.

9.41 Our review of the program files and records indicates that this program has been operating in a highly turbulent environment. One report indicates that, in 1977, the program had an unexpectedly slow start. Accordingly, in early 1978, steps were planned to increase the number of homes to be re-insulated under CHIP. However, in August 1978, as part of a fiscal constraint program, the Prime Minister announced that, over the current and next fiscal years, the CHIP budget would be cut by $122 million of an originally envisaged $350 million. By April 1979, the price of oil had gone up, and slow take-up of the program was again perceived to be a problem. The budget was increased, and the contribution formula was changed to make participation more attractive. By July 1979, it was recorded that needed changes in the application process were being deferred, pending government decision on energy policies, including the future role of CHIP. By November 1979, the decision had been made to transfer delivery responsibility for CHIP to the provinces and to increase funding to $1.8 billion until 1986. At the same time, CMHC was to cease program delivery on 1 September 1980, and program management responsibility was transferred to EMR from CMHC "to allow energy rather than the housing aspects of the program to be stressed." In early 1980, the Government announced that measures would be introduced to improve existing home insulation programs. In August 1980, a CHIP Secretariat was authorized in EMR with a staff of 10. At this time, the Treasury Board required that the application process be substantially changed and a two-step application process be adopted. With the NEP announcement in October 1980, CHIP was increased in size to $2.2 billion, and program management responsibility was immediately transferred to EMR, with financial responsibility to be transferred 1 April 1981. CMHC was to continue to review applications and issue contribution cheques, under an agreement negotiated with EMR.

9.42 A major evaluation of CHIP started in mid-1981 and was completed in the summer of 1983. Instead of repeating some of this work in our audit, we relied on the information collected in the evaluation. We also examined some aspects of CHIP that were not covered. For example, we examined other CHIP program reviews and evaluations to determine what problems had been identified earlier and what corrective or adaptive action had been recommended.

9.43 From our review, we concluded that, even considering the turbulence described, the implementation and operation of the CHIP program should have been better. The processes linking the policy-setting and operational levels of the program have been poor, monitoring has been inadequate and corrective action has been sporadic and often ineffective. Many improved management controls are now being implemented.

9.44 There were weaknesses in the procedures linking the operational and policy-setting levels of the program. A contributing cause to the weakness was that, on starting-up the program in 1977, a full-time, dedicated management group was apparently not formed in CMHC. Following the transfer of program responsibility to EMR in August 1980, the creation of the CHIP Secretariat with a staff of l0 was approved. This Secretariat had as its major role the management of the program, including linking operations and policy. At the time of the audit, the Secretariat was still below its authorized staffing level. The consequences of this weakness were several, including the use of unauthorized practices. For example, internal documents indicate that it had been program practice to recover CHIP payments in those cases where inspections revealed faulty installation. This practice was terminated in 1982 when it was found to lack proper authority. However, by termination, it was reported that about $300,000 had been improperly recovered. A manual of CHIP procedures relating policy and practice was started in May 1982; only recently has liaison between CMHC and EMR become adequate.

9.45 Some monitoring of the program was done, but an integrated, comprehensive approach is still being developed. Although the original program design of 1977 envisaged comprehensive monitoring activities, the original staffing authorization did not provide the necessary personnel. In the early years of the program, several contracted monitoring studies were either conducted or planned by CMHC. In March 1983, as part of the CHIP evaluation, a report on the CHIP inspection system was completed. It concluded, in part:

... the present CHIP inspection system does not provide sufficient objective and documented evidence to demonstrate whether or not the CHIP program is in control and meeting government program objectives...

9.47 An internal report, prepared as part of the 1983 evaluation, indicated that, during the period January to June 1982, five per cent of the disbursements were found to be incorrect or improper for various reasons. Our review of program inspection summaries also indicated a five per cent error rate in disbursements. The disbursement errors included making more than one payment to a particular address, payments for insulating a non-principal residence, and payments where work was not done. As we did not examine the procedures in CMHC for controlling the disbursement process, we were unable to determine whether this is an unreasonable error rate, but EMR and CMHC are continuing their efforts to reduce it.

9.48 Much corrective and adaptive action is now under way. As part of the CHIP evaluation, many reports were produced on various aspects of the program. As they are completed, they are reviewed by personnel in the CHIP Secretariat, and corrective action started. For example, regulation changes, designed to increase value for money, quality of workmanship and to tighten program control, have been implemented. A number of working and management committees involving CMHC and EMR have been organized and now meet regularly. The management information system has been revised and the quality assurance system redesigned. The recovery policy and the financial reporting systems have been redesigned. A system for monitoring energy savings was developed as a component of the CHIP evaluation and is to be implemented in 1983-84. A marketing organization, supporting CHIP, now exists in the Home Energy Programs Division.

9.49 Distribution System Expansion Program - DSEP. This program, announced in 1980, is managed by the Gas Branch in the Petroleum Sector. It is designed to help gas utilities enlarge their distribution systems, thereby expanding the market for natural gas as a substitute for oil. Gas utilities submit proposals for system expansion to the Gas Branch where they are reviewed. When specified selection criteria are met, a contribution of various proportions to the capital costs of the expansion is made. The program had spent or committed about $100 million by March 1983.

9.50 This program, and two others in the Gas Branch, are examples of well implemented programs. The others are the Natural Gas Laterals and the Gas Marketing Assistance Programs. The links between the policy-setting and operating levels of the program have been effective. For example, the gas utilities were involved in the pre-implementation planning, and this involvement assisted in tailoring the program to suit the various provincial regulations that the utilities must comply with. In addition, two application processes were developed, each appropriate to different situations. This use of two processes was quickly approved by the Treasury Board. A manual of procedures for preparing proposals, and the terms and conditions of the contributions, were available at the outset of the program.

9.51 Ongoing monitoring was extensive: after six months of operation, an interim technical audit of a sample of ongoing projects was conducted, weaknesses were identified in the application process, and the review and approval processes were corrected. Important design features of the program were tested when studies of the application review and approval process were conducted. Some changes, resulting in greater equity, were made. At the end of the first full year of operation, a financial audit of all projects was planned.

9.52 We believe that the success in implementing this program can be attributed, in part, to the fact that the resources which management thought necessary were obtained and assigned to do the pre-implementation planning, the planned tasks and the ongoing monitoring. Specifically, DSEP had 10 senior staff for planning and design tasks and 16 staff involved in its subsequent implementation and operation. Further, management and staff at all levels were disposed to take appropriate corrective action; people were also assigned to make the needed corrections.

9.53 Each of the three programs in the Gas Branch follows good management practices.

9.54 Forest Industry Renewable Energy - FIRE. The FIRE program was started in 1979 with a budget of $103 million for five years. In the NEP, the budget was increased to $288 million and the program extended to 1986. Originally, FIRE was designed to help the forest industries use wood residues as a renewable energy source to replace oil. With the NEP, it was expanded to help industrial, commercial and institutional establishments use municipal waste, agricultural waste and peat to replace oil. The program makes contributions of between 10 and 20 per cent for eligible capital costs. The size of the contribution is determined so that the payback period for the applying organization can be reduced to as low as two years. By the fourth year of this seven-year program, $58 million had been committed or spent.

9.55 In the first two years of the program, one, and then one-and-a-quarter person-years were assigned to plan, start-up and operate this $100 million program. In year three, there were three and a half person-years; in year four, four; and there are now seven assigned to this program. FIRE has not been quickly implemented: the lack of permanently assigned personnel is the most likely cause. It should also be noted that the one person responsible in 1978 for FIRE was also responsible for another program, Biomass Energy Loan Guarantee (BELG). BELG, with a budget of $150 million, was to be a loan guarantee program to encourage the use of forest and municipal waste for heat and electricity generation. This program never proceeded beyond the pre-implementation planning stage.

9.56 Several important program implementation tasks were not completed satisfactorily or in a timely way. For example, until the latter part of the first year of program operation, there was a lack of application forms, master contribution agreements and administrative guidelines. Program advertising brochures were not available initially or for the first two years after the program was expanded under the NEP. The latter delay was reported to be due to a backlog of work in the departmental Communications Branch.

9.57 The monitoring and corrective action functions were weak. The initial project selection and eligibility criteria were based on a study conducted in early 1979 by consultants familiar with the forest industries. The reasonableness and validity of these criteria were not examined before late 1980. Studies in 1980, 1981 and 1982 identified design weaknesses relating to the criteria used to determine eligible projects and calculate the amount of contribution. Changes to the criteria or to the possible amounts of payment require Treasury Board approval. This has not been obtained. Further, the terms and conditions for receiving contributions are not being monitored for compliance; for example, annual cost saving reports are not being received in most cases.

9.58 It should be noted that most of these deficiencies had their roots in the early, under-staffed years of the program. As resources were assigned to the program, management implemented several improvements. For example, program promotion activities were expanded; a management information system was developed; documented procedures for review and approval were implemented; monitoring activities, including a post-completion survey of projects, were started; and studies were commissioned to evaluate program effectiveness. Also, an evaluation framework that could provide guidance to monitoring program impacts and effects has just been completed.

9.59 Conservation and Renewable Energy Demonstration Agreements - CREDAs. In 1978, Cabinet authorized a program whereby the federal government would enter into agreements with the provinces and territories to finance projects that would demonstrate energy conservation and renewable energy technologies. For various reasons, the federal-provincial agreement approach was used for program delivery instead of the direct, and more easily controlled contributions approach. Among other things, it was considered that this approach would better foster provincial government activity and capability in the energy conservation and renewable energy fields. The budget for the program was $113 million, to be spent over a period of five years.

9.60 Between May 1979 and April 1980, agreements were signed with six provinces and two territories. In Alberta and Nova Scotia, there were federal-provincial arrangements in place which pre-dated the CREDA program and have not been replaced. In Quebec and Prince Edward Island, agreements were not negotiated, and federal delivery of the program has only recently commenced. Consequently, our audit focused on the agreements with the six provinces and two territories.

9.61 Because the approach adopted called for the program to be delivered by the provinces and territories, the administrative and managerial resources assigned to the program within EMR were minimal. From 1979 to 1981, only one person was involved full-time. The program now has a staff of nine, reflecting the evolution of the federal role into a stronger one than was originally conceived. By April 1983, some $35 million had been committed to about 300 projects. With the agreements ending in March 1984, it is expected that a considerable proportion of available funds will not be used.

9.62 There have been serious problems in implementing the program. Most of these can be traced back to inadequate staffing levels during implementation. We found no program strategy on which agreements could be based. After the program was launched, it became evident that the provinces and territories were not able to develop the necessary policies and procedures as quickly as had been envisaged or to assign the resources and staff. During 1979-81, the Department did not seek or assign the staff resources to provide the necessary back-up and impetus. Although many of the initial problems have been fully or partly resolved as provincial and federal capabilities have grown and the lessons gained through experience have been applied, it has taken four years of a five-year program period to achieve this.

9.63 Despite evident improvements in the management and administration of the program over time, our audit showed that deficiencies persist in such areas as the procedures to achieve information or technology transfer from the projects being funded; the controls over payments to the provinces and territories; and the availability and timeliness of management information. The weaknesses in financial controls make this the only program audited that is not satisfactorily administered.

9.64 While recognizing the difficulties of operating a technically sophisticated program through a number of federal-provincial agreements, it is our view that the persistence of the deficiencies results, in large measure, from the failure to have an ongoing planning and analytical function to support the program. Appropriate and timely corrective action has not, therefore, been possible on all issues. At the time of the audit, a proposal to extend and improve the program was being prepared, and steps to improve information and technology transfer were being taken.

9.65 The remaining program reports in this section are based on audit work done under our direction by EMR Internal Audit personnel.

9.66 Atlantic Energy Conservation Investment Program - AECIP. This program was announced in the 1980 NEP. It was designed to foster energy conservation and improve energy use efficiency in the Atlantic Region, and was to last five years and cost $40 million. Contributions of up to 50 per cent of eligible capital costs are made for approved projects.

9.67 At the request of management, an audit of this program was conducted by internal audit and was completed in early 1983. It revealed a number of management control deficiencies that were largely corrected by July 1983. This experience serves to demonstrate the need for ongoing monitoring in the form of management review. An evaluation framework is being developed to help identify the issues that should be monitored in the area of program effectiveness. If staff is assigned to do this monitoring and management continues to take appropriate corrective action, the likelihood of this program performing as desired will increase.

9.68 Industrial Conversion Assistance Program - ICAP. This program is slated to run from 1983 to 1987 at a cost of $30 million. It is designed to encourage the conversion of large boilers and process heaters from fuel oil to natural gas. Gas utility companies are to be heavily involved in administering the program. Contributions of up to 50 per cent of eligible capital costs of conversion will be made. The program had not begun making payments at the time of our audit.

9.69 The audit revealed that the pre-implementation planning, although informal, had been well done. Although all the planned tasks had not been completed at the time of the audit, applications procedures and guidelines had been prepared, review procedures had been defined and documented, and the selection criteria had been documented and appeared to support the program objectives. An evaluation framework was also being developed to specify indicators for ongoing effectiveness monitoring. Procedures for program promotion, audit and overpayment recovery were not yet defined. However, if personnel are assigned to do these tasks and the monitoring, and if management takes appropriate corrective action, the program will have a better chance of doing what is was designed to do economically and efficiently.

9.70 Canada-Nova Scotia Subsidiary Agreement on Energy Conservation. This is a five-year program designed to improve the efficiency of energy use, minimize the long-run social cost of providing energy, and develop plans and programs for the Nova Scotia energy system and its components. The agreement was negotiated by the Department of Regional Economic Expansion in 1978. Responsibility for the program was transferred to EMR in September 1982. There is joint federal-provincial funding of approved projects, with a total federal commitment of up to $15 million by the program termination date of 31 March 1984. Responsibility for program delivery rests with the Province, which prepares and invites tenders, awards contracts and pays the contractor. Program administration and control are assigned to a management committee that has 50 per cent federal participation. EMR now has policy and program control responsibilities.

9.71 The management controls over program delivery are generally satisfactory, although monitoring and evaluation attempts have been somewhat less than adequate. Program evaluation has been negligible, although EMR is now attempting to improve the situation.

9.72 National Energy Audit Program - NEAP. NEAP is an extension of the National Energy Bus Program that started in 1977, designed to assist small industrial and commercial establishments to analyse their energy use, identify areas of energy waste and plan and implement energy-efficient projects. NEAP, announced in the NEP, will terminate 31 March 1984 and cost about $40 million. It is a program of federal-provincial agreements.

9.73 The management control framework for NEAP seems adequate to ensure successful program delivery. However, although generally adequate controls exist over the processing of payments to the provinces, we noted several minor irregularities in the areas of financial control. Further, although federal-provincial agreements make provision for audits, detailed terms of reference for such audits have not been developed.

9.74 Federal Internal Energy Management Programs. Three sub-programs were audited in this area. The Retrofit sub-program's objective is to "accelerate" government efforts to upgrade the energy efficiency of its buildings. The Off-oil sub-program is to help departments reduce oil consumption in buildings. The Propane Vehicle Conversion sub-program is designed to convert the fuel systems of 8,000 government motor vehicles to propane from gasoline. A major objective of each of these sub-programs is to "demonstrate" the cost-savings potential and the technology to the public at large. The expenditures are forecast at $155 million over five years.

9.75 In 1980, we reported on our audit of the In-house Energy Conservation Program. In our current audit, we determined that the Department had taken appropriate corrective action in response to our findings in 1980, except for two issues. First, a theme of the observations in 1980 was the need for this program to play a stronger leadership role in internal energy conservation efforts of government departments. A recent management review identified this same issue; a proposal to address it is now being prepared. Second, we recommended a program evaluation, but an evaluation scheduled for 1982-83 by the EMR Program Evaluation Branch has been postponed until 1985-86.

9.76 Division management has satisfactory information about and control over its programs' operations. Specifically, management was fully aware of what each sub-program was doing, and available resources had been assigned on a priority basis. Some months before the audit, a program review had been conducted, weaknesses identified and corrective action initiated. This corrective action, slow to take effect, involved the creation of an interdepartmental committee and the preparation of a Treasury Board submission for program restructuring.

9.77 Some weaknesses were identified both by the auditors and the program review. All the official sub-program objectives were not being pursued because operational emphasis has been given to fostering conversions and retrofit activities, the more concrete objectives of the program. For example, in all three sub-programs, the demonstration value of successful conversions was not being gained because there have been no satisfactory activities for communicating results or effecting technology transfer to the public.

9.78 In the Retrofit program, the objective, "to aid in the development of a body of competent energy conservation officers within federal departments and agencies", is not being pursued by program management.

9.79 The information that is needed to achieve three of the objectives of the Off-oil sub-program is not being developed. These sub-program objectives are to review all government facilities currently using oil; to identify their location in relation to natural gas delivery; and to develop a total cost package and time schedule for converting these facilities from oil to gas heating.

9.80 In the Retrofit sub-program, important program effects information is not available. For example, energy costs before and after Retrofit are generally not produced by departments and agencies. Consequently, valid economic or energy savings analyses cannot be performed and results cannot be communicated to the public.

9.81 Propane Vehicle Grant Program. This program will make a $400 taxable contribution for conversion of fuel systems in commercial and farm vehicles to propane from gasoline or diesel, or toward the purchase of new propane-powered vehicles. One objective is to reduce oil consumption in Canada by 13,000 barrels a day by having 100,000 propane-powered vehicles on the road by 1985. A second objective is "to provide a clear and credible signal to the public" that propane is an acceptable substitute for petroleum products. The program expenditures are to total about $40 million by 1985-86.

9.82 Although generally well administered, program start-up has been slow. The program is 30 per cent behind in its schedule of conversions and, at the time of the audit, there was evidence that little corrective action was underway. Several implementation tasks have not been completed satisfactorily. The program was launched in June 1981, but the communications aspects were not functioning adequately even by mid-1982. Corrective action was taken when responsibility for certain communication functions was reassigned to the program management from the departmental Communications Branch in late 1982. The original computerized applications review process was a failure but has since been corrected. There are still no satisfactory plans for appropriate post-payment audits.

9.83 Compressed Natural Gas Demonstration Program. This demonstration program was designed to provide information on whether compressed natural gas (CNG) is a feasible alternative to petroleum liquids as a fuel for motor vehicles. The costs were to be about $1 million in the first year, funded from Energy R&D funds, and less than $100,000 in each of two succeeding years. The program has two aspects: first, a taxable contribution of $600 can be made toward the cost of converting a vehicle to CNG fuel; and, second, data on converted vehicles, engines, safety and fuel costs are to be collected. The one-year conversion phase of the program is now over, and there were 474 of a targeted 1,500 conversions . Data are being collected over the next two years in two ways. First, a condition for individuals to receive the contribution is that they complete each month a "Vehicle Use Diary" of operating cost and experience for one year. Second, two contracts of about $120,000 each have been awarded for the collection of similar data on two large fleets that have been converted to CNG.

9.84 The planning and control for this program have had both strengths and weaknesses. During the pre-implementation planning stage, program management took adaptive action. The NEP originally proposed a CNG demonstration program involving only large fleets but, as a result of industry interest, the program was expanded, with Treasury Board approval, to include individual vehicle owners. This was a major improvement as most of the subsequent conversions were by individuals.

9.85 Several pre-implementation tasks were not performed satisfactorily. Application forms for individual conversions were not available until six months after the program had invited applications, contributing to the fact that the program met only 30 per cent of its targeted conversions. Contractors being paid for assembling cost and experience data on fleets have not always provided useful information. It was observed that Vehicle Use Diaries had not been sent to individuals receiving contributions during the period February to May 1983, although completion of these diaries was a condition of the contribution; this has now been rectified.

9.86 Summary conclusions. Over 40 diverse energy programs involving over $500 million of annual expenditures have been implemented or expanded and are now up and running with appropriate administrative controls. This is an impressive achievement.

9.87 The preceding programs that we audited show that the management of program implementation has varied in quality and appropriateness. The implementation of DSEP, COSP, NEAP and ICAP has been satisfactory, that of CHIP, FIRE, CREDAs and Propane Vehicle Grants has been less so. In some programs, important management functions were not performed. In COSP and DSEP, program impacts, critical assumptions, clientele needs and motives, levels of service, and so on were adequately monitored so that appropriate and timely corrective action could be taken. However, in the FIRE, CREDAs and CHIP programs, even where such monitoring has been done and weaknesses identified, timely corrective action has often not been taken. In CHIP and FIRE, this appears to be due in part to poor links between the policy-setting and operational levels of the program.

9.88 All but 1 of the 17 audited programs now follow good practices for program administration - applications are received, reviewed, and approved, and payments are made with appropriate controls. The CREDA program structure has inhibited the development of adequate financial controls. The most significant common weakness lies in the processes for monitoring program effects and taking corrective action - only some programs do this well.

9.89 In some cases, it is apparent that the resources assigned to a program have been insufficient to perform all the tasks needed for proper program implementation and operation. For example, in the FIRE program, with planned expenditures of $100 million, only one person was assigned to design, implement, and operate. We believe that assigning insufficient staff resources to the implementation of some energy programs has also contributed to the lack of pursuing program objectives and, in one case in 1978, the non-implementation of one program - BELG.

Conservation and Non-Petroleum Sector Management Controls

Background

Exhibit not available

9.91 The Sector was created in January 1980, and in its short history has experienced rapid change. It has grown from an authorized staff of 183 in 1982-83 to 461 in 1983-84. Since the NEP, principal managerial tasks have included preparing Treasury Board submissions, obtaining people to perform pre-implementation tasks (application form design, review procedure design, etc.), training people to operate the designed procedures, and making payments for approved applications. This has been difficult because of the number, size, diversity and complexity of the individual programs. The lengthy position classification and staffing processes have been a major constraining factor on managerial effectiveness - even considering that special procedures were established for EMR because of the NEP. It should also be noted that the acquisition of resources through Treasury Board submissions has demanded a very heavy commitment of top management time and energy.

Observations

9.93 Most of the programs we audited are now well administered in that applications are being reviewed and cheques issued under appropriate controls. A factor contributing to this achievement has been the enthusiasm of managers and staff who have worked long and hard during this period. Sector management procedures have been informal but, in the period January to July 1983, management introduced many formal controls, and we saw plans for their further development.

9.94 Our audits of the various programs give examples where it appears that nobody has been assigned the task of program monitoring. There were also examples where corrective action had not been appropriate. This indicates that Sector controls to ensure monitoring and appropriate corrective action have not been as effective as they might have been. There had also been limited use made of departmental internal audit and program evaluation in the Sector in the years prior to our audit.

9.95 While an effort to review objectives was made as a part of the recent preparation of the Sector long-term plan, we found inconsistencies between statements of objectives in this plan and in other operational planning documents. We concluded that inadequate control existed over the objectives-setting process in the Sector. The audit reports show that some managers pursued objectives different from those in official planning documents.

9.96 With the exception of the Electrical Energy Branch, the Uranium and Nuclear Energy Branch, the Coal Division and some areas in the Renewable Energy Division, we found that managers did not have available, nor had they prepared, up-to-date assessments of the markets or economic sectors their programs were supposed to be affecting. The recent evaluation of CHIP contained a major effort to obtain such market information, albeit in the sixth year of a 10-year, $2.2 billion program. Some efforts have also been made on this issue for COSP.

9.97 The Sector has not developed the capability to monitor and assess its total environment. Without such assessments, it is difficult for the Sector to develop good policy advice, ensure its portfolio of programs is appropriate to meet its approved objectives, or ascertain whether the programs continue to be relevant in light of current or prospective market and economic conditions.

9.98 The Sector should require managers to monitor their programs and ensure that timely corrective actions are taken.

9.99 The Sector should conduct a thorough review of the statements of the objectives of its various organizational units and programs, and ensure consistency and control in changes to these statements.

9.100 The Sector should improve its knowledge of the environment within which its programs operate and of the impact of its programs on the environment.

9.101 The Sector should develop a comprehensive plan for program review, audit and evaluation and ensure that reports are made and reviewed and that recommendations for improvement are acted on appropriately.

The Office and Panel on Energy Research and Development

Background

Exhibit not available

9.103 The Panel has evolved a complex system for reviewing energy R&D resource allocation and use. The energy R&D expenditures are divided into seven general "task" areas. In turn, each "task" is divided into programs, sub-programs and projects. The Panel's review is in addition to the management review in departments receiving Panel funds. The Panel periodically gives policy guidance to the co-ordinators and managers of R&D. Proposals to undertake projects are prepared by departments and agencies. Review of these proposals by interdepartmental committees is co-ordinated by the staff of the OERD, and proposed allocations of resources are presented to the Panel. The Panel reviews these proposed resource allocations and makes its recommendations to the Ministry of State for Economic and Regional Development, the Cabinet and Treasury Board, which decides on the actual allocation of resources. Exhibit 9.4 illustrates this review process. Twenty-three departments or agencies were involved in the process that resulted in allocating energy R&D funds to 14 departments. There are 42 Interdepartmental Co-ordinating Committees and more than 100 other review committees.

Exhibit not available

9.104 Audit scope. We examined the processes of the Panel and OERD in three areas: planning and co-ordination; selection and monitoring of R&D work; and review and assessment. We did not examine the quality or value of the energy research being done, or the appropriateness of the allocations made.

Observations

9.106 Planning and co-ordinating. The planning and co-ordination processes of the Panel and the Office were generally satisfactory, with one exception. During the early years of the Panel, it was decided to exclude from the Panel review and co-ordination process expenditures on already established energy R&D activities. In 1982-83, total federal energy R&D expenditures of $338 million were expended as follows: $103.8 million by AECL; $123.1 million under Panel control; and the balance of $111.3 million by various departments as part of their expenditures on previously established energy R&D activities. A further $23.3 million was expended by departments in 1982-83 on science and technology aspects of energy development, including demonstrations of new energy and conservation technologies. The two departmental exclusions, totalling $134.6 million, raise the question of whether the Panel co-ordination of energy R&D can be truly effective. Certainly, the Panel should consider these expenditures explicitly in the process of allocating the funds under its control.

9.107 Selecting and monitoring R&D work. The project or program selection and priority system at OERD has emphasized the professional judgement of scientists, technologists, policy and user groups and a number of research review committees in selecting energy R&D projects considered most likely to achieve federal energy objectives. On the basis of our interviews with participants and review of documentation, we concluded that, although the process is sometimes informal, the energy R&D expenditure allocation process performs satisfactorily. Monitoring has also provided reasonable assurance that funds are being used for the purposes approved at the program and project level.

9.108 However, increased levels of Panel funding, combined with a recent emphasis on commercializing energy R&D results, indicate that more explicit management procedures for selection and allocation should be considered in some areas. The significance of the emphasis on commercialization is that it is widely accepted that research conducted without considering innovation issues is less likely to lead to innovation than research that does consider these issues. Selection criteria can direct proposers of research projects to consider innovation issues. During our review, we found extensive guidelines and criteria for members of some program review committees. We also found other committees without appropriate guidelines or documented project selection criteria. Consequently, we concluded that the selection processes at OERD need to be more formal in some cases and thereby improved.

9.109 Review and assessment. In our audit, we examined the existing controls over 12 large projects. At the project level, the OERD review and assessment processes can involve a number of mechanisms, ranging from advisory, program or sector committees, to formal departmental project management systems, to independent, ad hoc review committees. For example, in February 1983, a review of the Fossil Fuels task was completed. CANMET, the lead federal agency on the Fossil Fuels task, prepared extensive review material for reviewers from OERD, the Ministry of State for Science and Technology and the National Research Council. We consider that many of the reviews conducted, although addressing useful questions in useful ways, were not sufficiently comprehensive (at the level of individual projects), nor were reviewers adequately independent to qualify fully as reviewers and assessors. Further, independent post-performance evaluations on much of the Panel task-level work between 1974 and 1982 have not been completed.

9.110 We concluded that, in general, review and assessment processes are insufficiently developed by OERD to ensure adequate external assessment of tasks and major programs.

9.111 We believe there is a need for a documented plan for reviewing and assessing all Panel-funded activities and the resources allocated to execute the plan. At the more general task and program level, periodic assessments, independent of program management, would address the questions of whether the funded activities are consistent with federal energy objectives and whether there is a reasonable expectation that activities will make a cost-effective contribution to promoting Canada's energy development. To provide the comprehensive coverage, there is a need for OERD to report to the Panel on departmental reviews and assessments of energy R&D activities. Such departmental reports would normally include periodic, independent assessments of project or program achievements, the relevance and quality of the research work conducted, and the likelihood that it will produce desired results.

9.112 OERD should make greater use of outside experts in their process for reviewing and assessing the effectiveness of energy R&D tasks and programs.

9.113 OERD should develop more explicit and formal project selection procedures for all committees.

9.114 The Panel should take steps directed to ensuring that all federal expenditures on science and technology for energy are explicitly considered in the allocation of Panel-controlled energy R&D funds.

Petroleum Incentives Administration

Background

9.116 In its operational role of delivering a key component of the NEP, the PIA contributes to two major objectives: "security of oil supply"; and "opportunities for Canadians to participate in their oil and gas industry."

9.117 The COCD Act provides for the issuance of certificates of Canadian ownership and control required by persons or companies applying for PIP incentives, Alberta petroleum incentives, and some types of exploration licensing on Canada Lands designated on the map in Exhibit 9.5. The PIP Act gives entitlement to incentive payments for eligible expenses of persons and companies meeting basic standards for ownership and control. Eligible expenses are those incurred for development and exploration for oil and gas in Canada. Both Acts specifically provide for the exercise of ministerial discretion under certain conditions. Discretion may be exercised in cases where the strict application of the legislation is determined by the Minister to be "manifestly unjust" (COCD Act) or "not in the public interest" (PIP Act). To a great extent, the exercise of ministerial discretion has been delegated to the Administrator, the senior officer of PIA.

Exhibit not available

9.118 The disbursement of large amounts of money to eligible groups for eligible expenses is the major task of PIA. A key function is to update the eligibility criteria by modifying the regulatory framework of the Acts as warranted by the energy situation, the state of the industry and the specific application. This updating function needs to be supported by analyses conducted on precedents, implications of the exercise of ministerial discretion, environmental trends, and evaluations of program impacts and effects. We believe that, as experience with the program increases, the program should, by design, evolve to a point where the application of regulations is the rule and where the number of precedents and the need for the exercise of ministerial discretion are reduced. This will ensure that all applications are subject to the same rules and that these rules are known to all potential applicants.

Audit Purpose and Scope

9.120 In this section, we report on program monitoring and evaluation; program control systems; records management; program delivery; and controls on program expenditures.

Observations

9.122 Program monitoring. In general terms, the purpose of monitoring is to determine where a program is going and how well it is doing. A well designed monitoring system can assist management in anticipating and reacting to operational problems and to a changing environment. Questions that a monitoring system could address and help to resolve in PIA include the following:

- Have circumstances changed sufficiently to warrant review of the Acts?

- Is there a need for regulatory amendments?

9.124 Although an attempt to develop a framework for monitoring the program impacts and effects was undertaken at one point, it has not been actively pursued. Currently, only special purpose studies are being proposed. We were advised by management that there are now plans to undertake, in the near future, a preliminary assessment to monitor short-term program impacts. Such monitoring work is also intended to contribute to a long-term program effectiveness evaluation.

9.125 Assessment of long-term program effects and impacts is also needed. On this issue, some of the main impacts that had not been determined at the time of the audit include:

- total costs and benefits of Canadianization and progress toward achieving security of oil supply;

- net effect of incentives on the level of exploration activity and the success rate of discovery of economic oil and gas reserves since the inception of the program;

- success of the program in attracting small investors and other sources of Canadian investments to the energy industry;

- relative costs and expected contribution to oil self-sufficiency of the Beaufort and Hibernia fields;

- impact on Canadian control in the oil and gas industry of substituting foreign debt for equity; and

- effectiveness of NEP funds invested in exploration incentives relative to conservation measures.

9.127 Management has recognized the problem relating to the timing of the corporate evaluation study. A new plan was subsequently developed to address, on an interim basis, the most significant effectiveness questions for PIA and the industry. Other EMR groups will also participate in this process, with the results available by the end of 1983.

9.128 EMR should co-ordinate the scheduling of program evaluation studies to ensure timely information for the decision-making process.

9.129 PIA should ensure that the fundamental effectiveness questions pertaining to the PIA mandate are included in the evaluation study and that monitoring systems contribute to the evaluation data base. In the meantime, a proposed monitoring system should be implemented as soon as possible to generate an information base sufficient to permit management to respond to short-term program performance issues.

9.130 Control systems - PIP. Here we examined two critical systems - processing applications and processing payments. Payment controls ensure eligible applicants receive their entitled payments. Although the controls over applications processing are generally sound, our audit found areas needing improvement. The documentation of the case analyst's review and of the manager's review is insufficient at present. Management is aware of this shortcoming; it had been identified earlier by various sources.

9.131 PIA recognized that the case assessment process is vulnerable because analysts deal with information supplied by applicants, and the authenticity of this information is not verified at the time of assessment. To deal with this, a claims audit function was set up. At present, the audit activity is centering around the 1981 incentives year, for which payments commenced in July 1982. Four audits have been completed to date and reports have been issued. The remaining audits for the 1981 incentives year are to be completed by the end of September 1983.

9.132 Control systems - COCD. Again, we examined two critical systems - processing of applications for determination of control status and for determination of Canadian ownership rate. We found two weaknesses in the present systems. First, the case analysts' assessments are not subject to any internal guidelines regarding documentation of the evidence used in the analysis. For quality control purposes, it is therefore difficult to verify that the assessment has been adequately performed. Second, the procedure for conducting a quality review of the analysts' assessments is not clearly defined. Provision is made in the COCD Act for the audit of applicants and this function is in the planning stages. A procedures manual was being developed at the time of the audit.

9.133 Documentation of case assessment in COCD should be sufficiently extensive to permit verification of the adequacy of case analysis and subsequent review.

9.134 Records management. In our review of the program decision-making process, we observed that the documents summarizing key decisions in PIA are of uneven degrees of completeness. In particular, there were instances where documentation on applicants' files was insufficient to enable case analysts to identify relevant precedents. Furthermore, many central registry case records that we have reviewed were incomplete with respect to decisions taken by review and approval committees. Inasmuch as successful precedent analysis relies on the body of decisions already taken, this weakness in program records increases the risk of inconsistent and possibly unequal treatment of applicants. Generally, PIA does not analyze the reasons for discretionary decisions, their costs, and emerging trends in the use of discretions. Knowledge of these would be useful in the ongoing administration of the regulatory framework and should also contribute to the information base for program monitoring, assessment and application of financial controls.

9.135 PIA should ensure that documentation in applicants' files and central registry records is sufficient to allow for the review of the quality of case treatment and furnish the data for analysis of emerging patterns in the use of discretion. Any trends in the exercise of discretion should be closely monitored and their implications analysed.

9.136 We noted one case where the regulations were changed to include previously non-eligible expenses. The conditions of applying the regulation were defined in such a narrow fashion as to be of benefit to only one applicant. We question the use of a regulatory amendment to permit payments to be made where the regulatory amendment is not designed to be of general benefit.

9.137 Program delivery. The critical program delivery functions are determining the eligibility status of applicants and ensuring that eligible applicants receive proper benefits. Under the COCD Act, there is a process to establish the Canadian ownership rate and control status of an applicant. The PIP Act and regulations specify a review of each payment application against expense eligibility criteria and approved incentive levels.

9.138 We found that PIA was generally functioning satisfactorily in determining applicants' eligibility and their entitlements. However, we noted that several key program delivery assumptions have not been reviewed.

9.139 For example, under the PIP legislation, when a PIP applicant undertakes exploration activity on a foreign-owned property, certain minimum working interests are required to be earned in order for exploration expenses to be eligible for maximum PIP payments. A part-owner's working interest is the proportion of the ultimate production to be received by this part-owner. On foreign-held and previously unexplored land, a PIP applicant who pays for 100 per cent of the exploration costs must receive at least a 50 per cent working interest ("two for one") for the exploration costs to be eligible for maximum PIP payments. Similarly, on foreign-held land where there is a known accumulation of gas or oil, a PIP applicant contributing 100 per cent of the expenses to drill a well must receive at least a 10 per cent working interest ("ten for one"). During our audit, we saw no evidence that these minimum ratios had been assessed for reasonableness in terms of NEP objectives and the economic expenditure of public funds.

9.140 PIA should review the reasonableness of the minimum working interests that must be earned before exploration expenses are eligible for PIP payments.

9.141 A second key assumption relates to the determination of control status. The control status of an applicant is a significant factor in program delivery, since Canadian control is a condition used to establish the level of benefits to be paid. The maximum incentive payment obtainable by a non-Canadian controlled applicant is 25 per cent of eligible exploration expenses; a Canadian-controlled applicant may obtain incentive payments of up to 80 per cent of its eligible expenses. For example, a particular company, Canadian-controlled and with a Canadian ownership rate of 70 per cent, incurring $10 million of eligible expenses, would be eligible for PIP contributions of $8 million. If that same company, notwithstanding significant Canadian ownership, were foreign-controlled, the maximum incentive available to it would be $2.5 million.

9.142 There are two ways that an applicant's control status can be determined. Applicants can apply to either PIA or the Foreign Investment Review Agency. Under the COCD Act, the PIA is required to adhere to an opinion of the Minister of Industry, Trade and Commerce, that designates a certain entity as Canadian controlled if the entity has sought such an opinion under the Foreign Investment Review Act (FIR Act). The existence of two procedures presents the risk that control status determinations may be inconsistently applied to different applicants with essentially similar ownership or control arrangements. The inconsistency can arise because the COCD Act allows PIA to use broader sources of information, compel disclosure and perform audits of the information provided.

9.143 PIA should review the process for control status determination and determine whether recommendations to amend the COCD Act should be developed in this regard.

9.144 Controls on program expenditure. We noted in our review of the governing legislation that the PIP incentives program is essentially demand driven. Approximately 95 per cent of the total expenditures are on Canada Lands, where exploration agreements with the industry are negotiated by the Canadian Oil and Gas Lands Administration (COGLA) in EMR. These agreements will be the basis for most of the demand for expenditures under the PIP program. This demand is potentially unlimited, and we consider that the potential demand pattern and magnitude should be well controlled. This requires that PIA have adequate information on estimated incentive payments arising from agreements negotiated by COGLA. The reasonableness of these estimates and long-term trends should also be considered.

Oil Pricing and Compensation Programs Branch

Background

9.146 These charges and payments are made in pursuit of the following program objectives: to achieve a uniform price, exclusive of transportation costs, for crude oil used in Canada; to achieve a balance in Canada between the interests of consumers and producers; to protect consumers in Canada from instability of prices for petroleum in the international market; and to encourage the development and production of an adequate supply of crude for Canada to be self-sufficient.

9.147 Section 77 of the Energy Administration Act introduced the Petroleum Compensation Accounting (PCA) concept. Effective 23 July 1982, the PCA brought together the Petroleum Compensation Charge revenues and expenditures under the Oil Import Compensation Program (OICP), New Oil Reference Price, Special Old Oil Price, Synthetic Oil Supplement Program and Domestic Transfer Compensation Program and the Crude Oil Exchange Program.

9.148 A summary of revenues and expenditures of the programs is shown below:

9.150 In 1974, the Governor in Council asked the Auditor General to undertake a continuing inquiry into the administration of expenditures under the Oil Import Compensation Program. Since 1978, this inquiry involved an audit of the Petroleum Compensation Revolving Fund. In this audit, we continue this work and report on the administration of the revenues and expenditures of the Petroleum Compensation Accounting concept, of which the OICP is now only one element. We examined the OICP and Revolving Fund operations for the period 1 April 1982 to 22 July 1982 and the PCA for the period 23 July 1982 to 31 March 1983.

9.151 We concentrated our audit on the financial and management control of two functions:

- administering the Petroleum Compensation Charge (PCC) which includes forecasting and rate setting, and PCC revenue collection; and

- making compensation payments, which include compensation rate setting for imported oil, supplement rate setting for domestic production (New, Special Old oil and Synthetic oil), and the compensation and supplement payment processes.

Observations

9.153 Expenditures. The expenditures are primarily the product of the compensation rates for the specified categories of domestic or imported oil and the eligible volumes for such production or imports. There are additional charges for exchanges and transfers. Appropriate procedures are in place to recommend the correct rates, and appropriate controls exist to assure that payments are made in correct amounts for eligible oils in accordance with the Act.

9.154 Program monitoring. The Energy Administration Act provides that the PCC revenue should be used to subsidize only specific categories of oil. The monitoring of eligibility for payments from the PCC is an important task. The rate for import compensation depends partly on world oil prices; thus, the monitoring of world oil prices is also an important task. Import compensation payments are made on import volumes net of exports by the importers. The assessment of the accuracy of reported import and export volumes is important.

9.155 Appropriate procedures and controls are in place to carry out the monitoring of the key pricing and volume factors for this program.

Conclusion

- appropriate financial controls over revenues and expenditures;

- the necessary management functions in place and operating satisfactorily;

- an adequate and timely report on the program, as required; and

- ensured that all payments in the fiscal year ended 31 March 1983 have been properly processed and that payment of compensation and supplement and collection of revenues are in conformity with applicable legislation and regulations.

Administration

9.158 Staffing where classification levels had not been approved was permitted on the basis of general descriptions of the work to be performed instead of formal job descriptions. Organization structures and classifications were often quickly approved by Treasury Board. Treasury Board also allocated 150 Special Assignment Positions (SAP) to the Department, enabling EMR to transfer quickly suitable persons from other departments, usually on lateral transfers. These transferees could immediately begin to plan and implement programs; job descriptions were only later written and approved. The Public Service Commission assisted the Department in its search for suitable persons to recruit or transfer to EMR. Finally, the Energy Sector was provided with its own personnel staff as part of special administrative resources committed to establishing the NEP. These people played a key role in implementing the NEP.

9.159 Despite this, there remained considerable constraints to putting the program in place. Even with the flexibility and extra support in the personnel areas, job filling took an average of 151 days (almost 6 months) to complete, due to such factors as the heavy workloads, complexity of the staffing processes and the difficulty in locating qualified persons. In addition, the Department found that provisions of the contracting regulations prohibiting "a master-servant relationship for contractors" prevented it from using private sector people on short-term assignments to meet unpredicted, urgent needs.

9.160 In our audit of the management controls of the payroll costs management function in the Energy Program of EMR, we recognized the challenge faced in establishing the NEP. Energy Program staff grew from approximately 370 in October 1980 to about 1,380 in March 1983. To cope with this growth, the staff of the personnel functions committed to the NEP grew from 6 to 44. We have made a number of suggestions to management concerning those personnel processes that need to be improved now that the urgency of staffing for program start-up has diminished. These include staff planning and the audit of job descriptions and duties performed.

9.161 Program evaluation. Program evaluation is carried out in the Department by the Program Evaluation Branch which reports to the Associate Deputy Minister. The Department has adopted a policy for program evaluation, developed a long-term evaluation plan and established evaluation procedures conforming to government guidelines.

9.162 Last year, we audited the Program Evaluation Branch as part of the comprehensive audit of the Minerals and Earth Sciences Program. Based on our recommendations, EMR revised its policy on evaluation in April 1983. We recommended that the annual and long-term evaluation plans be developed on the basis of actual resources available in the Program Evaluation Branch. This has been done. The Branch introduced new management procedures to improve control over the conduct of evaluation projects.

9.163 The current level of resources assigned to evaluation is not sufficient for the Branch to evaluate all the program components of EMR within a seven-year cycle, which is the longest recommended by Treasury Board. In fact, the long-term evaluation plan of EMR is based on an 11-year cycle. Nor does the evaluation plan relate program evaluations to the "life cycle" of many of the Department's programs. For example, as indicated earlier, the Petroleum Incentives Program, involving some $4.6 billion dollars for the period 1980-85, will be renegotiated prior to the originally scheduled evaluation. We pointed out to management that such a scheduled evaluation could have little affect on improving the management and effectiveness of this program.

9.164 The Department has asked Treasury Board to provide additional evaluation resources. The current plan, calling for an 11-year cycle, is clearly unsatisfactory, and there will be a need to find adequate resources to ensure that the timely evaluation of programs is carried out.

9.165 From its creation in 1978 to 31 March 1983, the Program Evaluation Branch has produced 22 evaluation outputs consisting of one evaluation framework; six evaluation assessments; nine evaluation studies; and six other evaluation-related documents. Sixteen of these evaluation outputs relate to the Minerals and Earth Sciences Program; six relate to the Energy Sector. However, the Energy Sector alone has more than 40 programs with forecast expenditures of many billions of dollars during the period 1981 to 1986. In our opinion, the Department has not devoted sufficient attention to the evaluation of these programs.

9.166 The Department decided to delay its evaluation effort on the National Energy Program until the end of 1982-83 on the grounds that it was a new program that first had to be implemented. However, the Office of the Comptroller General's guidelines on evaluation clearly specify that evaluation frameworks should be prepared at the start of new program initiatives. Until very recently, this was not done at EMR. As a consequence, required data may not be available when the programs are to be evaluated, and the ability of the evaluations to provide timely information to decision-makers may be compromised.

9.167 During our audit of the Program Evaluation Branch, we examined half the evaluation outputs: four evaluation studies relating to the Minerals and Earth Sciences Program (MESP) and one to the Energy Program; four evaluation assessments relating to the MESP and one to the Energy Program; and one evaluation framework relating to the Energy Program. With the exception of one evaluation study produced more than three years ago, all the evaluation outputs examined were adequate, given the current development of the function.

9.168 Sufficient resources should be assigned to the program evaluation function to ensure timely evaluations.

9.169 Internal audit. This year, we assessed the Internal Audit Branch to determine whether and to what extent reliance could be placed on its work. Although we noted and reported minor deficiencies, we concluded that reliance could be placed on the audit work performed and that the Department has received value for money expended on Internal Audit.

9.170 Financial management and control. In last year's Report, we focused on financial management in the Mineral and Earth Sciences Program. This year, we carried out a preliminary review of the financial function in the Energy Sector.

9.171 The financial function has changed significantly since the 1977 follow-up of our 1975 Financial Management and Control Study. The report of the follow-up study performed by a firm of independent accountants included recommendations for improvement similar to those made in 1975.

9.172 In an environment of change, rapidly developing programs and increasing resources, financial system improvements are being implemented. But we are concerned over the time being taken to improve management information and financial services to program management. Managers, in some cases, have maintained their own information systems to provide appropriate control information.

9.173 Last year, we recommended that the Financial Administration Branch undertake a thorough assessment of the appropriateness of the Management Accounting Reporting System (MARS) in relation to the needs of various users. In response, the Branch has made revisions and planned to implement the resulting Financial and Managerial Information System (FAMIS) in October 1983.

9.174 Finance staff have a major role in providing a wide range of financial services and advice to program management. They have been directed to build relationships with program personnel that will aid in managing financial and non-financial resources. We have noted some cases where financial staff are very much involved in program and financial management. However, we have noted other cases where financial personnel are not appropriately involved.

9.175 Finance staff should always be appropriately involved in program financial management and control.

9.176 Management improvements. At the time of our audit, improvements to the management process were being co-ordinated by the Director of Management Improvements of the Corporate Planning Group. Since 1979, improvements have been focused through the Management and Control Program (MAC). In 1982, this program was terminated and the unfinished projects were assigned to sector heads to complete. The original program is now about 70 per cent complete. During the past year there has been little monitoring of progress on the unfinished projects. When the MAC program was terminated, there was no validation of completed projects to determine whether the original deficiencies had been resolved.

9.177 During the year, progress has been made in completing some of the planned management improvements projects. For example, long-term plans for the Energy Sector have been prepared, Part III of the Estimates for the Energy Sector has been started and revisions to the management and financial information systems have begun. However, the overall status of the improvement process had not been determined by the Department until June 1983; and a revised action plan for management improvement was being prepared at the time of our audit.

9.178 Information for Parliament. Part III of the Estimates, containing the Expenditure Plan for the Mineral and Earth Sciences Program, was published in the spring of 1983. The Energy Sector has been directed to prepare its Estimates in this new form for 1984-85. At the time of our audit, progress was under way to achieve this goal.

9.179 Audit of programs. A control feature of many programs involving payments to or from the public and other levels of government is the right of the minister to order an audit of the related revenues and expenditures. These audits can aid in ensuring that the appropriate amount of revenue is collected, that recipients of payments meet the terms and conditions of agreements under which such payments are made, and that the payments are in the correct amounts.

9.180 We found that there is a need for more attention to be given by EMR to undertaking audits and reviews of major programs. Examples include:

- Canadian Ownership Control Determination - the control status deter-mination is a key factor in the PIP payment process. The legislation was promulgated in July 1982 but, at the time of our audit, control status determination audits were only in the planning stage.

- Canada Oil and Gas Lands Administration - no audits have been undertaken on public lands revenue amounting to $3.3 million received during the year for oil and gas royalties.

Authority Issues

9.182 We found no material discrepancies, and concluded that the required authority procedures are in place and operating satisfactorily. However, in the course of other audit work, we found some exceptions.

9.183 Registry of authority documents. As part of our audit we must examine supporting authority documentation. The departmental Secretariat is the place where a complete record of authenticated documents of authority would normally be found. We often had difficulty because the authority documents needed were often unsigned or not on file. The Department should have a complete registry of documents of authority.

9.184 Avoidance of Parliament's annual control of expenditures. In 1977, Parliament voted $34 million in grants for oil substitution and energy conservation, subject to conditions approved by the Governor in Council. In accordance with this authority, these funds were deposited in provincial bank accounts and expended under five federal-provincial agreements over planned periods ranging from 3 to 10 years. It should be noted that this procedure avoids Parliament's annual control of expenditures.

9.185 Drafting of agreements. There has been poor drafting of agreements. Two of the above mentioned five 1977 federal-provincial agreements and a 1980 Conservation and Renewable Energy Demonstration agreement did not contain a paragraph prohibiting Members of the House of Commons from participating in any ensuing contracts, as required by the Senate and House of Commons Act. Also, the handling of interest earned from the bank accounts established for the earlier agreements is not defined. In three cases, interest was credited to the program. In two other cases, there was no evidence of any such interest credit where Canada had paid a total of $4.5 million into the bank accounts. We did not examine in detail all transactions associated with these agreements but, in our review of available documentation, we did not find any indication that there had been a consequent abuse.

9.186 Violations of agreement terms were noted. In one of the above mentioned federal-provincial agreements, the required Governor in Council approval was not obtained for a further contribution by Canada of $500,000 with respect to an additional project. Further, the additional project was not on the approved list of projects in the original agreement approved by the Governor in Council. No evaluations were performed; and most of the management committees responsible for overseeing the individual programs did not meet at least quarterly as required.

9.187 Information to Parliament. The Government of Canada has agreed to compensate the New Brunswick Power Commission up to $25 million a year for losses associated with the renegotiation of a contract to export with the Maine Electric Power Corporation. The electricity was to be generated at the Coleson Cove facility of New Brunswick Power. These loss-subvention payments are authorized through the Estimates and appropriation process under "Non Petroleum Sources: Supply, Demand and Substitution". It is our view that the presenting of these payments in this way may mislead Parliament. It provides the appearance that such payments are being authorized for oil substitution where in reality they are to compensate the New Brunswick Power Commission for the cessation of oil compensation payments where the oil is used to generate electricity for export. Expenditures have been as follows:

9.189 Implementation of regulations. The Statutory Instruments Act states that implementation of regulations only begins after their publication, unless backdated. This had not been done in several cases for the Canadian Home Insulation Program (CHIP) regulations. For example, SOR/83-47 was published on 12 May 1983 without backdating. However, it was implemented on 9 November 1982, and payments made in the interim period were not properly authorized although operationally desirable. We observed two similar cases in the CHIP program.

9.190 The Department should ensure that:

- all agreements are properly drafted;

Canadian Ownership Account

9.192 It is unclear to us who has prime responsibility for the Canadian Ownership Account.

9.193 Canadian Ownership Account transactions. We have undertaken an audit of COA transactions, which form a part of the Public Accounts of Canada. The following table summarizes the financial transactions in the COA for the 12-month period ended 31 March 1983 and 1982.

9.195 Weakness in managing public funds. In our 1982 Report, we commented on the $1.7 billion acquisition of Petrofina Canada Inc. We stated that there is "a serious weakness in the management of public funds when departmental and central agency officials have had no responsibility to ensure that due regard to economy is demonstrated and value for money is achieved." We concluded that we were unable to ascertain whether due regard to economy had been demonstrated or achieved in respect of the $1.7 billion acquisition of Petrofina Canada Inc., because of the lack of evidence of a pre-acquisition evaluation. We stated in our 1982 Report that, during our 1982-83 audit of EMR, we would continue our investigation into this matter.

9.196 During the past year, we communicated with senior officials of Petro-Canada, requesting evidence that due regard to economy had been exercised in using $1.7 billion of public funds to acquire Petrofina Canada Inc. We also asked whether any post-evaluation of the acquired assets had been undertaken to determine what value had been received. The preparation of pre and post-acquisition evaluations is an accepted practice of prudent decision makers in the private sector. Although we have been informed by a senior official of Petro-Canada that a pre-acquisition commercial evaluation was undertaken, this has not as yet been made available to us. However, there is no indication that the evaluation considered the possible effects on the Government of Canada that would result from the acquisition. Effects on such matters as the balance of payments, foreign exchange, tax revenues and possible future capital requirements, in our view, merited pre-acquisition evaluation. Further, we were informed that a contract was awarded to independent appraisers in the spring of 1983 to conduct an evaluation of assets acquired, including oil and gas properties.

9.197 We have requested of Petro-Canada these evaluations but, as of 15 September 1983, we had not received them. Consequently, we have been unable to ascertain whether due regard to economy has been demonstrated and value for money achieved in the $1.7 billion acquisition of Petrofina Canada Inc.

9.198 Total cost of the Petrofina acquisition to Canada. It would be expected that the vendor and purchaser involved in a significant transaction would structure the transaction to optimize their tax positions to their mutual benefit. Such knowledgeable parties would normally be aware of their tax costs or savings in arriving at their overall evaluation of such an acquisition or sale. The Government of Canada, through its ministers and its representatives on the Board of Directors of Petro-Canada, was party to the corporate structuring involved in the Petro-Canada acquisition of Petrofina Canada Inc. The resultant structuring, involving the conversion of Petrofina Canada assets into preferred shares of Petro Canada Petroleum Inc., allowed the foreign owners of common shares of Petrofina Canada Inc. to be free of capital gains tax in Canada. We are unaware whether the impact on Canadian tax revenues was ever calculated and considered in pre-acquisition evaluations.

9.199 Financing the Petrofina acquisition. On the instructions of the Government, Petro-Canada arranged a loan to "bridge-finance" the purchase of Petrofina Canada Inc. shares. This instruction was complied with in such a manner that a gain of $60.7 million was realized by Petro-Canada.

9.200 As agreed between Petro-Canada and the Government, the bridge-financing loan including interest costs is being repaid by funds received from the Canadian Ownership Account so that the financial operating results of Petro-Canada would not be affected. Interest to 31 December 1982 amounted to $137,348,000. Governor in Council Order Number 1983-918, dated 25 March 1983, prescribed that certain common shares be issued at a premium equivalent to the bridge-financing interest cost. The premium on the shares was used to create a contributed surplus on the accounts of Petro-Canada against which the loan interest cost was to be applied, thus not affecting the financial operating results of Petro-Canada.

9.201 The audited financial statements of Petro-Canada for the year ending 31 December 1982, state that "such financing costs, net of deferred income taxes of $60,744,000 have been charged against this contributed surplus". This means that Petro-Canada applied the bridge-financing loan interest cost against taxable income to reduce its tax liability. Thus, Petro-Canada is left with a credit balance or a gain in its contributed surplus account, in the amount of $60,744,000. In other words, Petro-Canada received full compensation for the bridge-financing interest costs of $137 million and reduced its tax liability by $60.7 million, thus affecting favourably its reported financial position. Further, the total cost to Canada of this acquisition should take into account the $60.7 million.

9.202 We cannot assure the House of Commons that the total economic implications and costs to Canada were considered by the Government of Canada in its acquisition of Petrofina Canada Inc., and that due regard for economy has been demonstrated and value for money achieved.