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1984 Report of the Auditor General of Canada

Introduction

3.1 This chapter contains matters of significance that we believe should be drawn to the attention of the House of Commons. These matters have not been reported in either the departmental chapters or the government-wide studies, but have come to our attention during our audits of the accounts of Canada, Crown corporations and other entities.

Observations on Crown Corporations

3.3 Canada Deposit Insurance Corporation - Unknown Ultimate Loss to the Corporation

The Canada Deposit Insurance Corporation anticipates heavy losses as a result of financial difficulties encountered by eight trust and loan companies. As of 31 December 1983, the Corporation had recorded a general provision for loss of $650 million, but recognized that there might be additional losses incurred during the winding down of the companies. Sufficient information was not available at the time of our audit to determine whether the $650 million provision was adequate.

3.5 During 1983, six member institutions encountered financial difficulties so serious that their business activities had to be terminated by the regulatory authorities. The CDIC became involved because of its mandate to protect depositors and to avoid instability in deposit-taking institutions. Under section 11(a) of its Act, the Canada Deposit Insurance Corporation entered into agency agreements with other member institutions to administer the assets and liabilities of the financially troubled companies and to ensure that their operations would be wound down in an orderly manner. During the term of the agreements, the agents are paying all liabilities on maturity.

3.6 In addition, a seventh member institution was placed in liquidation in 1983. An eighth member institution had been placed under an Agency and Operating Agreement in 1982 for the purpose of winding down its affairs in an orderly manner.

3.7 As of 31 December 1983, the Corporation had made loans to the eight troubled companies amounting to $942.5 million in order to fund payment of liabilities and operations. At March 31 1984, the amount of loans outstanding was $l billion. The Corporation has a registered floating charge against all the assets of these companies to secure its loans. However, the Corporation anticipates heavy losses and has recorded a general provision for loss of $650 million at 31 December 1983. This was based on the accumulated deficits of the troubled companies at that date. The Corporation recognizes that the actual losses may be different from the provision because there may be additional losses during the wind-down period, due to changes in the value of assets on disposition, interest rate levels and a number of contingencies arising from potential judicial actions.

3.8 Because of these circumstances, sufficient information was not available at the date of our audit to allow us to determine whether the general provision was adequate. Accordingly, in our audit report to the Minister of Finance, we stated that we were unable to express an opinion on the financial statements of the Corporation for the year ended 31 December 1983.

3.9 In addition, our audit report noted that Parliament may be required to make amendments to the Canada Deposit Insurance Corporation Act to permit increased premium rates from member institutions or to otherwise change the funding provisions of the Act. The Corporation has not gone to Parliament at this time to seek such amendments.

3.10 Canadian Dairy Commission - Levies Instituted Beyond the Powers of the Commission

In our opinion, levies are being assessed and collected from dairy producers by the Canadian Dairy Commission without proper authority. This matter, which was raised in our 1982 and 1983 annual Reports, is currently being addressed by the Commission. It is expected that a legislative mechanism will be in place within the year.

3.12 Since the establishment of the Canadian Dairy Commission in 1967, no regulation concerning levies has been made pursuant to section 12. We have obtained two separate legal opinions which state that, in the absence of a regulation made by the Governor in Council authorizing the imposition of levies, the Commission is powerless to impose them.

3.13 The Commission assesses levies to cover the cost of disposing of surplus dairy products. Producer levies for the dairy year ended 31 July 1983 amounted to $270.8 million, of which $6.9 million was collected direct by the Commission by deduction from subsidy payments to producers. Other deductions are made from payments by processors to producers on delivery of industrial milk and remitted to the provincial marketing boards, which, in turn, forward them to the Commission.

3.14 The Commission has obtained a legal opinion from the Deputy Minister of Justice that "the fixing, imposition and collection of levies has been validly adopted under the Agricultural Products Marketing Act."

3.15 Notwithstanding this opinion, our audit report to the Minister of Agriculture on the financial statements of the Commission for the year ended 31 July 1983 included a qualification that the producer levies have been instituted without benefit of regulation and are, therefore, beyond the powers of the Canadian Dairy Commission.

3.16 To correct this situation, the Commission is negotiating its relationship with provincial organizations in the assessment and collection of producer levies as provided for in provincial and federal legislation. It is expected that this work, which involves extensive consultations with provincial officials, will be finalized this year.

3.17 Canadian Saltfish Corporation - Sales, and Advances to Frozen Fish Producers, Beyond the Corporation's Statutory Powers

During the year ended 31 March 1984, the Canadian Saltfish Corporation made sales of $14.8 million of frozen fish products, and advances to frozen fish producers, which, in our opinion, were beyond its statutory powers.

3.19 During the year ended 31 March 1984, the Corporation marketed frozen fish products, under contracts with a number of producer companies. In accordance with certain of these contracts, the Corporation advanced up to 70 per cent of the projected market value of the fish products to the producer companies, with the balance payable determined by the ultimate selling price and any related expenses incurred. Between the time the advances were made and the end of the fiscal year, there was a substantial reduction in the selling price of frozen fish. As of 31 March 1984, advances were $1.2 million in excess of the frozen fish inventory, valued at $2 million. The Corporation has since changed its procedures in the current year to avoid making future excess advances and is endeavouring to recover excess advances outstanding.

3.20 In our opinion, because the Act specifies the Corporation's rights only in relation to cured codfish, sales of frozen fish products during the year, and advances to frozen fish producers, as outlined in the previous paragraph, were not within the powers of the Corporation under the Saltfish Act. Accordingly, in our audit report to the Minister of Fisheries and Oceans, our opinion on the financial statements of the Corporation for the year ended 31 March 1984 was qualified.

3.21 Loto Canada Inc. - Continuing Payments Beyond the Powers of the Corporation Used to Finance Sports Pool Scheme, and Other Concerns

For the past three years, we have expressed a number of concerns in our audit report on the financial statements of Loto Canada Inc. In particular, to 31 March 1984, the Corporation has financed $2.1 million for the research and development of a sports pool scheme, an activity which, in our opinion, is beyond the powers of the Corporation. We also expressed concern that no arrangements had been finalized to pay $15.2 million surplus funds due to Canada. Moreover, administrative costs continued to be incurred as a result of the delay in winding up the Corporation.

3.23 In January 1981, the Corporation began financing research on gaming concepts, including research and development of a sports pool scheme. In August 1981, Cabinet decided that a sports pool would be operated by a new federal agency. This agency, the Canadian Sports Pool Corporation, was established on 20 October 1983.

3.24 Loto Canada Inc. takes the position that financing this research was a business decision within its general powers and in support of the intention of the federal government. However, in our opinion, it was not authorized under the Corporation's Articles of Incorporation, which restrict the business that the Corporation may conduct and manage.

3.25 Payments for research and development of the sports pool scheme by Loto Canada Inc. from January 1981 to 31 March 1984 amounted to a total of $2.1 million, of which $1.3 million has been recovered. Recovery of the balance of $.8 million due from Canada will require a further submission to Treasury Board. Treasury Board rejected a claim for a portion of this amount in December 1982, pending an investigation by the Department of Justice and the Office of the Comptroller General as to whether improper or illegal actions took place in certain work contracted for by Loto Canada Inc. This investigation is still going on.

3.26 On 7 July 1983, the Board of Directors of Loto Canada Inc. passed a resolution to begin the final winding up of the Corporation. On 31 December 1983, the last of the Corporation's employees were released, and the remaining professional service contracts were terminated. However, although the lottery operations were terminated in 1979, the Corporation has still not finalized arrangements to transfer $15.2 million surplus funds due to Canada and has incurred further administrative costs, amounting to $884,000 for the three years ended 31 March 1984, attributed to the delay in winding up this Corporation.

3.27 These matters were brought to the attention of the minister responsible for the Corporation in our audit reports on the financial statements of the Corporation for the 1982, 1983 and 1984 financial years.

Observations on Departmental Operations

In 1976, 1977 and 1978, we reported on rental payments by the Department of the Environment (DOE) for approximately 55 acres of land which, apart from a small portion sublet, were vacant. In 1978, the Public Accounts Committee recommended that this lease either be disposed of or that a change in use be negotiated. In 1984, the situation is basically unchanged, except that the annual rent, which began at $0.6 million, has now risen to over $1.3 million.

3.30 The Department of the Environment has attempted to resolve this problem in conjunction with the Department of Public Works, which has primary responsibility in this area. Although it is six years since the Public Accounts Committee recommendations, the main portion of the lands is still unoccupied, and no tenants have been found.

3.31 During the first 11 years of the lease, the government has paid in excess of $8.7 million (lease acquisition, rental and taxes) on the land. The rent is adjusted based on an appraisal every five years and is partly offset by the amortized cost of the original leasehold acquisition. Valuations and rentals are as follows:

3.33 Should the lease continue to its maturity in 2045, with future increases based on an inflation of 5 per cent, as opposed to the average annual increase over the first 10 years of 9 per cent, total rent payable would be in excess of $460 million.

3.34 Department of Finance - Scientific Research and Development Tax Credit Program Implemented Without Adequate Safeguards Over Public Moneys.

In January 1984, amendments to the Income Tax Act were enacted to provide for a scientific research and development tax credit program. The program was introduced to make tax incentives of more immediate value to companies performing research and development (R&D) and to facilitate financing R&D. To achieve the first aim, the program was specifically designed in such a way that investors were able to realize quick, no-risk profits, by a procedure known as the "quick flip". This has caused a significant overrun in the cost of the program. On 10 October 1984, the Minister of Finance announced a moratorium on "quick flip" transactions. Although neither the Department of Finance nor the Department of National Revenue - Taxation was able to provide us with actual program costs, tax credits issued to investors to 6 October 1984 approximated $1.6 billion. Moreover, we are concerned that this program could result in bad debts for the government.

3.36 The program enabled a company to issue to an investor a security that carried a right to a government guaranteed tax credit equivalent to 50 per cent of the funds invested, even though the company had not at the time of issue performed any R&D. To ensure that the R&D was ultimately performed, the company became liable for a refundable tax equivalent to the tax credit.

3.37 For each $2 of R&D performed and for which the company had renounced its right to any related tax benefits, the tax liability was reduced by $1. The tax liability was also reduced for tax credits received by the company for investments made by it under the program.

3.38 We are concerned that the Department of Finance has failed to safeguard public moneys in this program.

3.39 Neither the Department of Finance nor the Department of National Revenue -Taxation was able to provide us with potential program costs to 6 October 1984. We were advised, however, that tax credits issued by companies to investors amounted to approximately $1.6 billion and the offsetting refundable tax liabilities had not yet been paid to National Revenue - Taxation. Although that figure overstates actual program costs to 6 October 1984, we are concerned that the program costs will significantly exceed the amount that Parliament was advised the program would cost.

3.40 Parliament was told that the overall impact of the proposal would be to increase the tax assistance to R&D by some $100 million in the first year. We were told by the Department of Finance that it had estimated internally that annual costs of the program, once the system was in place, would be about $225 million, and the figure of $100 million represents the net cost of all the R&D tax changes. In our opinion, the information presented to Parliament was susceptible to misinterpretation.

3.41 In addition, we were told by National Revenue - Taxation that anomalies in the legislation led the Department of Justice to advise National Revenue - Taxation that it is not clear when payment of the refundable tax must be made.

3.42 To deliver a program such as this through the tax system, complex legislation is required. The legislation is, in effect, the program delivery system. A program of this nature makes taxpayers' funds directly available to a participant, and, in this respect, similar to a program directly funded through the Estimates. We would have expected the Department of Finance to ensure that the legislation included basic procedures to safeguard public moneys.

3.43 The program did not require the investment to be outstanding for a minimum length of time; the investment could be repaid immediately for a prearranged amount. This procedure came to be known as a "quick flip". The amount repaid, plus the tax credit, provided the investor with a quick, no-risk profit.

3.44 In a "quick flip" transaction, a company might issue a security to an investor, providing for each dollar invested a return of 55 cents. This amount, plus the government guaranteed 50-cent tax credit, would give the investor a quick, no-risk profit of 5 cents. The company would retain 45 cents.

3.45 Parliament was told that the program was founded on four principles, two of which are: "incentives should not be used, or set at a level, to promote R&D activities that do not conform to sound business practice"; and, "as much as possible, tax incentives for R&D should be of immediate benefit to firms". We were told by the Department of Finance that the "quick flip" arrangement was clearly envisioned from the outset of the program to make the incentive of immediate benefit to firms.

3.46 Although "quick flips" provided the incentive of immediate benefit, they could be used to promote R&D activities that do not conform to sound business practice. R&D activities that are unprofitable in a business sense could become attractive to investors solely because of the tax treatment. The result might be waste of valuable resources. In our opinion, the information presented to Parliament was also susceptible to misinterpretation.

3.47 The opportunity to obtain a "quick flip" has created a lucrative market for a unique type of government guaranteed security. As a result, most transactions under the program to date have involved "quick flips".

3.48 "Quick flips" have also created problems for National Revenue -Taxation. It became concerned that unless a company had access to additional financing, the net proceeds from a "quick flip" would not be sufficient to finance the level of R&D necessary to ultimately eliminate all its refundable tax liability. This could result in bad debts for the government. Therefore, on 10 July 1984, the Department began issuing assessments for the refundable tax, to be followed by individual contacts by District Officers to determine the status of the tax and any collection action required.

3.49 On 10 October 1984, the Minister of Finance announced a moratorium on "quick flip" transactions. For the duration of the moratorium, only common equity shares complying with certain criteria will be entitled to the tax credit.

3.50 Department of Indian Affairs and Northern Development - Inadequate Accounting for Contributions of $500 Million to Indian Bands

Since 1967, this Office has reported to Parliament that controls exercised over contributions to Indian bands are inadequate. Despite recommendations by the Public Accounts Committee, the Department has yet to establish an effective accountability process for these contributions. The level of contributions has grown from $300 million in 1979-80 to over $500 million in 1983-84.

3.52 The Office has reported to Parliament in 1967, 1977, 1978 and 1980 on the inadequacy of practices followed by the Department in controlling and monitoring public funds administered by Indian bands.

3.53 A condition of the transfer is that the bands provide the Department with yearly audited financial statements, to ensure an adequate accounting for the funds and to provide a basis for departmental monitoring and evaluation of expenditures. More than half of the audit reports on financial statements provided by the bands to the Department during the year were either qualified or expressed a denial of opinion.

3.54 The Standing Committee on Public Accounts, in its Sixth Report dated 23 June 1981, recognized the different needs of bands and recommended that the Department and Treasury Board develop accountability processes appropriate for different funding methods and different means of program delivery, which are more appropriate both for the Indians and the Government.

3.55 The Department has made a submission to Treasury Board on a proposed mechanism of accountability for the use of the funds. Treasury Board has not agreed to this method. In the meantime, the level of contributions to Indian bands has grown from $300 million for 1979-80 to over $500 million for 1983-84.

3.56 Department of Indian Affairs and Northern Development -Questionable Safeguards over the Release of Indian Capital Moneys

During the year ended 31 March 1984, the Department of Indian Affairs and Northern Development authorized payments of $196 million out of Indian capital moneys to Indian bands. Legal counsel has advised us that certain of these payments may not be permitted under the terms of the Indian Act.

3.58 During the fiscal year 1983-84, the Department authorized payments of $196 million out of Indian capital moneys. Legal counsel has advised us that, while certain kinds of non-capital expenditures can, by the terms of the Act, lawfully be made out of capital funds, some payments may not. These include operating expenditures for welfare programs, community services, adult education, recreation and work development programs. In those cases where section 64 of the Act presents real difficulties of interpretation, and particularly where large sums (and therefore a large potential Crown liability) are involved, the Department of Justice suggested that such expenditures be approved by the band membership as well as the band council. The Department of Justice further suggested that the Department of Indian Affairs and Northern Development seek a judicial opinion from the courts. These suggestions have not been acted on by the Department.

3.59 According to the Department of Justice, the control of capital moneys, even after they have been transferred to the band councils, remains the responsibility of the Crown. The Minister would thus be obliged to review periodically the ways in which the approved expenditure plan was being implemented and to make any adjustments in the plan or in its implementation that appeared to be for the benefit of the band.

3.60 Department of Indian Affairs and Northern Development - Reimbursement of Education Costs Totalling $2.6 Million Made Without Parliamentary Authority

In 1983-84, the Department, without parliamentary authority, made an out-of-court settlement of $2.6 million with a school board in the Province of Saskatchewan for certain education services that are not permitted under the Indian Act.

3.62 Because the Indian Act excludes Indians not residing on reserves from being eligible for education assistance, the Department should have sought authority from Parliament for the full amount of $2.6 million. Further, the Department should have credited the $821,000 to the Consolidated Revenue Fund.

3.63 Department of Indian Affairs and Northern Development - Education Costs Paid Twice

Under the terms of tuition agreements with three school boards in the Province of Ontario, the Department had to make payments of over $600,000 for tuition costs for children of several Indian bands. The Department had already paid for this tuition through contributions to the Indian bands.

3.65 The bands received the tuition services but either failed to make the payments to the school boards or made only partial payments. Because the Department had signed the tuition agreements with the boards, it had a contractual liability to pay for the tuition services. In spite of the Department having previously provided funds to the bands, it had to make payments of over $600,000, including interest charges, to the school boards.

3.66 Department of Indian Affairs and Northern Development - Loss Due to Unauthorized Issue of Timber Licence

The Department issued a timber licence to cut trees on a reserve; the licence was subsequently declared invalid. As a result, the Department had to make a $1.2 million out-of-court settlement with the company that was deprived of the right to cut the trees.

3.68 A court of appeal upheld the band's claim that the licence was invalid and the renewal was also not properly issued. Because of its non-compliance with the Regulations, the Department had to make a settlement with the company that was deprived of the timbering rights. This resulted in an out-of-court settlement in May 1984 for $1.2 million. An amount of $574,926 was charged to the accounts in 1983-84.

3.69 Department of Regional Industrial Expansion - Deficiencies in Purchase and Sale of LRC Trains

In July 1982, under the terms of a guaranteed purchase agreement, the Department of Industry, Trade and Commerce purchased two trains from a Canadian manufacturer. The Department paid the maximum guaranteed price of $9 million despite the fact that a major condition of the agreement was not complied with. Two years later, in 1984, the Department sold the trains to VIA Rail for one dollar. The trains have been out of service since May 1982.

3.71 The trains had been purchased by the Department of Industry, Trade and Commerce (ITC) for $9 million in July 1982. The purchase was made as a result of an agreement between ITC and a manufacturing company. The purpose of the agreement was to assist in the development and marketing of the LRC concept. Under the agreement, ITC agreed to pay up to $9 million for the trains if a United States railway declined to exercise its option to buy them. The U.S. railway had operated the trains under lease between November 1980 and April 1982.

3.72 ITC paid the maximum guaranteed price of $9 million despite the fact that a major condition of the agreement was not complied with.

3.73 The agreement required that the trains were to be returned in good operating condition, normal wear and tear excepted. However, a July 1982 deficiency list, prepared by outside consultants, indicated many repairs were required. In spite of this deficiency list, ITC certified on 23 July 1982 that the trains were in good condition and authorized the $9 million payment.

3.74 Under a further agreement dated 18 January 1984, the company agreed to carry out the repairs noted in the deficiency list. These repairs should have been completed before payment of the $9 million in July 1982 to acquire the trains.

3.75 Under the purchase agreement, $500,000 was deposited in escrow by the company for its use in marketing the trains. No claim on these funds for marketing was ever made by the company. The agreement also stipulated that these funds were to be paid to the Crown if the trains were not sold within 18 months of their purchase by ITC; that is, January 1984. This date was subsequently extended to April 1984. As a result of this extension and the one dollar transfer of ownership on 19 April 1984, the Crown relinquished the opportunity to be paid $500,000.

3.76 The trains were taken out of revenue service in May 1982. At the time of our review in August 1984, they were in storage and could still not be used in their present condition.

3.77 Department of Transport - Annual Earnings Retained by Seven Harbour Commissions Without the Minister's Authority as Required by Parliament

At 31 December 1983, seven Harbour Commissions had retained a total of $79 million in revenues in excess of expenditures without the Minister of Transport's explicit approval, required by law. The Department of Transport is currently taking steps to strengthen the financial accountability of the Commissions to the Minister.

3.79 At 31 December 1983, the seven Commissions established under the Act had retained in total some $79 million in revenues in excess of expenditures. The financial statements of these Commissions for 1983 indicate that, in practice, the earnings have been retained for the ongoing capital or operating requirements of the respective Commissions. The Department conducts an annual review of the Commissions' activities. However, we found the analysis of the Commissions' annual earnings insufficient for determining whether any portion of the earnings should be considered for payment to the Receiver General. There was no evidence that the Department had sought a decision from the Minister on the annual retention of any surplus earnings by the Commissions.

3.80 Departmental officials now recognize the need for formalizing the necessary approvals. They plan to draw the matter to the attention of the Minister, with a request that the Minister specifically authorize any funds allocated by a Commission for further development. Excess funds, if any, as defined in section 15(2)of the Act, would then be returned by the Commission to the Receiver General. We believe these steps will strengthen the accountability of the Commissions to the Minister. We propose to follow up the final resolution of this matter.

3.81 Department of Transport - Excess Funds of $74 Million Provided to VIA Rail

Last year, we reported that there was an urgent need for the Government to clarify the terms and conditions that govern the existing arrangements for subsidizing VIA Rail and to assess the options for providing VIA Rail with funds to meet its normal working capital requirements. This issue is still not resolved, and the amount of excess funds provided to VIA Rail increased from $24 million in 1982 to $74 million in 1983.

(Exhibit not available)

3.83 The terms and conditions under which VIA Rail is provided funds indicate that excess funds are to be refunded upon written notice from the Minister of Transport to VIA Rail requesting such repayment. Departmental officials have raised the issue of excess funding several times over the past two years with VIA Rail. The Department also informed us that VIA Rail is using the funds in question, without authorization, to augment its working capital. The Department maintains that this use is not consistent with the governing authority under which VIA Rail was provided funds for capital acquisitions.

3.84 The need to recover all excess funds in VIA Rail's control has now been clearly recognized. At the end of July 1984, $43 million in 1984-85 capital funding requested by VIA Rail has already been withheld by the Department. We were informed by the Department that the total amount of excess funds currently outstanding will be established very shortly. Full recovery is anticipated by the end of this calendar year, and the amount recovered will be credited to the Consolidated Revenue Fund as a refund of previous years' expenditure.

3.85 Further, discussions with VIA Rail are in progress on the question of expanding the scope of the audit of VIA Rail's financial and operating results. The Department wants to enhance its monthly review of VIA Rail's actual performance against approved budgets. These steps should prevent future unnecessary payments in advance or in excess of need.

3.86 Department of Transport - $46.8 Million Double Payments Made to Canadian National Railways in 1979 and 1980 Not Returned to Consolidated Revenue Fund

No action has been taken to recover $46.8 million double payments to CN, a matter we first reported to Parliament in 1981.

3.88 The double payments were made during 1979 and 1980 and recorded as government expenditures for those years. The interest benefit to CN for the continued use of this $46.8 million, which it was not entitled to receive, totalled about $20 million to 31 March 1984.

3.89 Departmental officials informed us in August 1984 that the matter has been raised with successive Ministers of Transport. No action has been taken by the Department to obtain parliamentary approval for extending its loan to CN or to recover the amount of the double payments, pending receipt of instructions from the Minister. In its financial statements, CN continues to show the amount owing to Canada as a long-term debt.

3.90 Exchange Fund Account - Valuation of Gold and Accounting for the Realized Gains on Sales of Gold

Recent amendments to legislation were made to provide explicit authority for accounting policies followed by the Exchange Fund Account. Until that time, the lack of such authority had caused us to qualify our audit report on the financial statements of the Account.

3.92 Our audit report to the Minister of Finance for the year ended 31 December 1983 was qualified with respect to the accounting policies being followed by the Account. In our opinion, the accounting policies for the valuation of gold and accounting for the realized gains on sales of gold were not in accordance with section 16 of the Currency and Exchange Act (now titled the Currency Act).

3.93 Amendments to the Act to provide explicit authority for the accounting policies being followed by the Account were passed by the House of Commons on 23 May 1984 and received Royal Assent on 7 June 1984.

3.94 Questionable Compensation Payments Involving Management Staff

Two departments made cash compensation payments totalling $163,806 to five members of the Management category for accumulated vacation and furlough leave. Such payments were not permitted under published compensation policy for this category.

3.96 According to the Personnel Management Manual which describes the terms and conditions of employment for public service staff in the Management category, conversion of leave credits to cash is permitted only on termination of employment. This did not apply in any of these cases.

3.97 We raised the question of the legality of such payments with the Treasury Board Secretariat (TBS), which is responsible for administering compensation policy affecting this category. TBS advised us that the payments were legal, notwithstanding what was contained in the Personnel Management Manual. TBS indicated that the payments were permitted under the terms of a non-promulgated Treasury Board decision dating back to January 1982. TBS had not promulgated the decision because a number of issues still had to be resolved. TBS indicated that the subsequent enactment of the Public Sector Compensation Restraint Act was another reason for not making the decision known.

3.98 Although it was never promulgated, the existence of the January 1982 Treasury Board decision became known to some departments. Although the fact that the decision had not been announced was a clear sign that payments should not be made, the CRTC proceeded to make them, acting on unofficial information about the Treasury Board decision. We have been advised by the Solicitor General of Canada that it made the payment after confirming orally with TBS that there was a Treasury Board decision on the matter. TBS indicated to us that in every instance departmental staff who enquired about these payments were advised that there was no instruction permitting them.

3.99 In our opinion, these were questionable compensation payments to members of the Management category. We believe the CRTC and the Solicitor General of Canada should have sought advice formally and should not have made these payments unless officially authorized to do so by TBS directive.

Report Under Section 11 of the Auditor General Act on our Continuing Review of the Oil Pricing and Compensation Programs

3.101 Sections 65.11 to 65.19 of the Energy Administration Act provide authority for imposing a Petroleum Compensation Charge on domestic and foreign petroleum including foreign petroleum products for processing, consumption, sale or other use in Canada. Sections 71 to 76 of the Act provide authority for paying compensation to importers of foreign crude oil, producers of new conventional oil, special old oil and synthetic oil, and to companies transferring crude oil from Montreal to eastern Canada and when exchanging Canadian crude for foreign crude oil. Under section 77 of the Act, these revenues and expenditures are brought together as part of the Petroleum Compensation Accounting process. Effective 1 January 1984, a designated portion of the Oil Export Charge revenues was added to the process.

Petroleum Compensation Accounting Transactions

3.104 Effective 1 January 1984, all Oil Export Charges collected in lieu of a compensation payback on oil exports made from provinces east of Ontario were designated to be a portion of Petroleum Compensation Accounting. This designation was by Governor in Council under section 77(2) of the Energy Administration Act.

3.105 Rates of compensation or supplement applicable to the four major expenditure categories declined from 1982-83 to 1983-84 as a result of the decreasing spread between international and Canadian oil prices. In the Oil Import Compensation Program, declining rates, combined with declining import volume, resulted in reduced expenditures. Under the Synthetic Oil Supplement Program, declining rates reduced expenditures, although the volumes of oil were fairly stable over the two years. However, volumes of oil subject to the New Oil Reference Price Program increased significantly. This more than offset the effect of the decline in the supplement rates and resulted in an overall increase in expenditures.

3.106 For the Special Old Oil Price Program, there were only nine months' expenditures in 1982-83, since the program began on 1 July 1982. While supplement rates declined through to the early part of 1983-84, Special Old Oil became eligible to receive the higher New Oil Reference Price supplement rates as of 1 July 1983. Because New Oil and Special Old Oil after 1 July 1983 had the same price, Alberta did not differentiate these oil categories in its applications to receive supplement, thus payments are included under New Oil Reference Price Program Expenditures.

3.107 There were no significant changes in the volume of expenditures under the Domestic Transfers Compensation Program or the Crude Oil Exchange Program between 1982-83 and 1983-84.

Audit Scope

Conclusion - Financial Transactions

Audit Observations

3.111 For the Programs administered by the Provinces of British Columbia, Saskatchewan, Manitoba and Ontario, staff of Energy, Mines and Resources have carried out program audits for periods up to 31 March 1983.

3.112 These audits are in accordance with the Memoranda of Agreement with the participating provinces wherein they will provide access to the accounts of the program for purposes of audit and review by the Government of Canada.

3.113 At the time of our audit for the year ended 31 March 1984, no material matters had been identified.

3.114 Unpaid levies. A total of $26.4 million in unpaid levies is owed to the Crown by two levy payers in financial difficulties ($26.2 million is owed by one company). Departmental officials are monitoring this situation.

Change in Audit Mandate

3.116 Until we receive instructions from the Governor in Council to discontinue our inquiry, this Office will report annually as directed.

1984 IMPAC Progress Review

Introduction

3.118 These plans cover such key areas as developing or improving departmental planning systems, financial management and controls, management and operational information systems, and developing program evaluation, internal audit and other functions.

Scope of Review

3.120 Information for our review was provided by the departmental IMPAC co-ordinators and the liaison officers of the OCG; we did not verify this information.

3.121 We integrated this IMPAC review with our comprehensive audits of departments and agencies. Consequently, chapters reporting on the comprehensive audits, as well as Chapter 5, our government-wide study of the internal audit function, provide audit observations and recommendations, where reasonable and appropriate, on management practices in the key areas covered by departmental IMPAC action plans.

Status of Action Plans

3.123 Of the original 31 departments, 3 have disengaged from the IMPAC process. The Treasury Board Secretariat stated in a letter to the OCG in 1983 that its management practices and controls had been improved to such an extent that further OCG involvement was no longer required. In the case of the Department of National Defence, the OCG rated its management systems as satisfactory and hence did not require the preparation of an action plan. The Post Office became disengaged when it became a Crown corporation and thus outside the OCG's IMPAC mandate.

3.124 Exhibit 3.2 shows the status of the 28 departmental action plans at 31 March 1984 in terms of their endorsement by the OCG; that is, approval of their contents, costs and implementation strategy. The exhibit also shows the expected completion dates as well as budget and cost data.

(Exhibit not available)

3.125 Four departments - DSS-Services, DSS-Supply, National Revenue -Taxation, and Employment and Immigration - have graduated from the IMPAC process. This term is used by the OCG to indicate that the completed action plan has been reviewed, validated, judged satisfactory and signed off. Two others, the Department of Regional Economic Expansion and the Department of Industry, Trade and Commerce, had their implementation terminated in 1982 as a result of government reorganization. Arising out of this reorganization was the Department of Regional Industrial Expansion for which a new IMPAC action plan was prepared.

3.126 Progress in implementing action plans in the remaining 22 departments and agencies is shown in Exhibit 3.3, which also shows the change since last year's report. Most action plans have undergone some degree of revision in content or timing. However, 11 of the 22 plans had major revisions and were re-endorsed by the OCG.

(Exhibit not available)

3.127 Exhibit 3.2 also shows the costs for implementing action plans as estimated by all 28 IMPAC departments. Committed costs for IMPAC, as reported by the departments, were $273 million. About $232 million had been spent at 31 March 1984. Because the cost figures were not compiled by departments in a uniform manner, we could not assess their accuracy.

(Exhibit not available)

3.128 As of 31 March 1984, the OCG estimated benefits of $144.9 million annually, recurring, and $19.1 million, non-recurring, as a result of the IMPAC process. Deputy heads in departments and agencies have formally committed themselves to a further $75.1 million. Confirmation of all benefits should be included in the evaluation of the IMPAC process that has been commissioned by the OCG.

Progress in Implementing Action Plans

(Exhibit not available)

3.130 Progress is summarized according to information supplied by departments. An indicator was selected that permitted measurement of progress made. This indicator, shown in Exhibit 3.3, is the number of completed tasks as a percentage of the total number of tasks in a particular action plan. A task in this context means a project activity, with clearly defined starting and completion points, undertaken to improve some aspect of management procedures and controls. Exhibit 3.3 also shows the percentage change from last year.

(Exhibit not available)

3.131 Exhibit 3.3 shows only the progress made by each of the 22 departments in implementing its action plan, according to a common indicator. Comparisons between departments are not possible because of the unique nature of each action plan in terms of content as well as complexity and size. For example, the plan for National Revenue -Taxation contains 10 projects, while plans for Transport Canada and External Affairs contain 87 and 121 projects respectively.

(Exhibit not available)

Progress in Key IMPAC Areas

(Exhibit not available)

3.133 This information, provided by departments and the OCG, shows that departments have made notable overall progress during the past four years in establishing and improving the infrastructure for the internal audit, program evaluation, planning and financial management functions. Reasonable progress has been made in the complex process of establishing management information systems, particularly in the past year.

Conclusion

3.135 To date, no assessment has been made of the extent to which planned improvements in management practices and controls have been implemented. Neither has an assessment been made of the effectiveness of the measures in achieving objectives and goals. There has been no evaluation of the actual effects of IMPAC in making departmental operations in the federal government more economical, efficient and effective.

3.136 In 1982, the Office of the Comptroller General gave an undertaking to the Public Accounts Committee that it would arrange for such an evaluation. In 1984, the OCG selected consultants to perform an evaluation, and the work is currently under way.

Major Capital Projects

Canadian Coast Guard - Deficiencies in Vessel Design and Acquisition Procedures

3.139 We found that, although the design and construction of the vessels were adequate, in two of the three projects there were deficiencies in both the design and procurement processes that affected their life cycle costs and construction quality. In view of the substantial capital outlay planned, it is important that future ship acquisitions be accomplished with due regard for economy.

3.140 The Des Groseilliers , delivered to the Coast Guard in 1982 at a cost of $62 million, was built using propulsion systems produced in Canada, which, because of their design, require a high level of maintenance. Although the Coast Guard recognized that this choice would involve high maintenance costs, it accepted the engines because they were the only Canadian engines available, and it did not make a life cycle cost comparison of other options. The propulsion system accounts for approximately 15 per cent of the total cost of the vessel. In our view, in future, the long-term financial costs of satisfying particular Canadian content policy requirements should be presented to the appropriate ministers.

3.141 Also, the manning level of the Des Groseilliers was established without the use of modern method study techniques. The resulting level is much higher than the level for commercial vessels with similar profiles. We were informed that this was because of the specific tasks performed by the Des Groseilliers . However, since the Coast Guard did not formally determine the most cost-effective method of operation, it does not know whether the vessel's crew size is the most appropriate. The Coast Guard should ensure that its future ship designs reflect the most cost-effective crew sizes, and should use the most modern study techniques in developing crew sizes.

3.142 For the four Class 400 Search and Rescue Cutters, the construction contracts did not include clearly defined quality assurance standards against which Department of Supply and Services (DSS) inspectors could judge completed work. For example, specific standards for aluminum hull welding were omitted. As a result of this, two years after delivery, the vessels' hulls were found to be poorly welded. The Department of Transport had to spend $270,000 for special repairs to fix the defects.

3.143 Also, DSS did not evaluate the capability of the ship construction yard to do the specific work contracted for before assigning the construction contract. It was subsequently discovered that the yard was not qualified to do the aluminum welding work.

3.144 In our view, these problems could have been avoided had appropriate quality assurance standards been clearly defined by the Department of Transport and had an evaluation of the shipyard facilities updated by the Department of Supply and Services prior to awarding the contract.

3.145 The Department of Transport acknowledges that modern study techniques could lead to possible reductions in crew size, but states that because the Des Groseilliers project was implemented under objectives of a government-wide economic stimulation program, it was not possible to use these techniques because of time constraints. We were also informed by the Department that contract documentation for the proposed new 800 series of vessels incorporates requirements for quality assurance. We propose to review the adequacy of quality assurance programs in future.