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1985 Report of the Auditor General of Canada

Background

12.1 The Department of Regional Industrial Expansion (DRIE) was created in December 1983 from the merger of the former Departments of Industry, Trade and Commerce (ITC) and Regional Economic Expansion (DREE).

12.2 DRIE's basic objective is to increase overall industrial, commercial and tourism activity in all parts of Canada and, in the process, reduce economic disparity across the country. The Department pursues this objective through direct financial assistance programs and other functions involving non-financial assistance as shown in Exhibit 12.1. In 1984-85, DRIE's expenditures were expected to total $1,070 million, with expenditures on assistance programs amounting to $837 million, or roughly 78.2 per cent of the total. Under these programs, financial assistance is provided through a range of mechanisms, including contributions, grants, loans and loan guarantees.

(Exhibit not available)

12.3 DRIE's non-financial assistance functions include policy development, technology transfer, and analysis and dissemination of economic and commercial information. The Department also assists industry by identifying development opportunities and markets and promoting economic benefits from major government procurements and Crown-sponsored projects.

12.4 When the Ministry of State for Economic and Regional Development was disbanded in July 1984, its Regional and Project Co-ordination Branch and Federal Economic Development Co-ordinators were transferred to DRIE to form the Regional Development Branch.

12.5 DRIE headquarters' organization is based on industry sectors, regional development and corporate support. The Department is extensively decentralized, with regional offices in each province. In terms of assistance programs, roughly 67 per cent or $556.8 million of expenditures originated with requests received in regional offices in 1984-85.

Audit Scope

Industrial and Regional Development Program (IRDP);

Defence Industry Productivity Program (DIPP);

Canadian Industrial Renewal Board (CIRB);

Federal-Provincial Subsidiary Agreements;

Shipbuilding Industry Assistance Program (SIAP);

Small Businesses Loans Act Guarantees (SBLA); and

Machinery Program.

(Exhibit not available)

12.8 We examined whether project approval decisions were consistent with governing legislation, regulations, objectives, internal directives and statements of program intent. We also examined the corporate activities that support DRIE's direct assistance programs, such as internal audit and program evaluation, and the role played by sector branches in reviewing project proposals.

12.9 In 1982, we examined and reported on the industry development programs of the former ITC Department. The Department committed itself to action in a number of program areas as a result of our observations. With the exception of the Enterprise Development Program of ITC, all the programs we reported on continue to exist in DRIE. For these programs, we reviewed the extent to which action has been taken in the intervening three years.

Observations and Recommendations

Corporate Direction and Control

12.11 Most of DRIE's assistance programs are highly discretionary. The Minister has wide authority to approve or reject specific projects under these programs. Much of this authority has been delegated to departmental staff, with the Minister retaining the authority to decide on larger cases. The discretionary nature of DRIE's programs and the impact that particular projects can have on a community or company place the Department under considerable pressure and scrutiny not only from the applicant but from other interested parties, including elected members of all levels of government.

12.12 DRIE's largest industrial support programs call for projects to meet the basic criteria of need for Crown assistance and significant contribution to the economic or social benefit of Canada. These criteria, which are key to the success of the Department's assistance programs, have not yet been translated into operational terms that are sufficiently specific to guide decision making on individual projects.

12.13 The criterion of need for Crown assistance is perhaps the most difficult issue with which DRIE has to deal in assessing projects, and it requires considerable judgement and skill. Because it is so important, we believe the Department should have developed general guidelines for its application. For example, we would have expected the Department to set out in a general way the circumstances under which the projected return on investment without assistance was high enough that a lower level of DRIE funding, or no funding at all, was required for a project to proceed. We would also have expected a definition of what constitutes prior commitment by an applicant to proceed with a project without DRIE support.

12.14 In our 1982 audit of the Enterprise Development Program of the former ITC Department, we noted the absence of guidelines defining what was meant by "economic benefit to Canada". At that time, the Department indicated that this issue would be addressed in the new program under development following the merger of ITC and DREE. However, the new Industrial and Regional Development Program was launched without these guidelines being finalized and implemented. As a result, we observed that projects were funded where evidence of the need for DRIE assistance was questionable, and that the statements of expected benefits were often increased beyond a level that was supported in file documentation.

12.15 DRIE's programs are highly decentralized. Under the Industrial and Regional Development Program, regional offices are authorized to approve projects involving up to $100,000 in Crown support. At the time of our audit, regional offices could also approve projects under most federal-provincial subsidiary agreements without reference to a specific dollar limit. This helps provide rapid and regionally responsive delivery. However, for a Department with such a decentralized organization to function cohesively, corporate management must have timely and accurate information on regional programs and appropriate procedures for guiding and monitoring regional activities.

12.16 We observed problems in these key areas of corporate control. For the Industrial and Regional Development Program, there was little or no corporate monitoring of projects approved by regional offices or of the procedures followed by regions in making recommendations on projects beyond their delegated approval authority. In about half the projects we reviewed, we had observations on matters such as project eligibility, statement of expected benefits, prior commitment, or information for decision making by management. We observed inconsistencies among regions in how the program was being delivered, and areas where statements of program policy were required. Also, in over half the projects we examined, there were serious errors in the data in the department-wide IRDP information system. Although relatively few IRDP projects were processed by headquarters staff, we observed many of the same problems at headquarters as we found in the regions.

12.17 Similarly, there was little headquarters review of projects under the federal-provincial subsidiary agreements, although expenditures under these agreements amounted to $174.1 million in 1984-85. Several projects, in our opinion, were not consistent with the objectives or intent of the program under which they were approved. Information to headquarters was largely on expenditures and commitments and not on the nature of the projects supported or on the results achieved.

12.18 The focus on obtaining approval for particular projects and the absence of review also led to instances where we observed that the information to senior management, the Minister or, at times, to Treasury Board was inaccurate, incomplete, or not consistent with the information in project files. This occurred in projects involving the Industrial and Regional Development Program, subsidiary agreements, and the Canadian Industrial Renewal Board.

12.19 Regional flexibility and substantial delegation of authority are essential if DRIE is to deliver regionally responsive programs effectively. However, in a Department as decentralized as DRIE, a balance must be struck between this need and the equally legitimate need for corporate guidelines and controls to ensure consistency in program delivery across the country and compliance with program legislation and directives. In our view, the extent of regional autonomy and lack of provision for corporate information and project review meant that this balance was not present. This undoubtedly contributed to many of the problems we noted.

A Statement From DRIE

Although considerable attention has been given to the various management principles governing program operations, DRIE is also committed to implement improvements to strengthen management control.

Particular attention is now being directed to decision-making on specific projects and on-going evaluation, audit and monitoring. To this end, the Department is in the process of creating corporate accountability centres for the planning, development and monitoring of program operations.

Rigorous attention will be paid to the program management process; to the standards of design and the process of development for new, reduced or rationalized programs and agreements. The Department's capacity for the review, monitoring and assessment of programs will be substantially increased.

Industrial and Regional Development Program

12.21 To encourage industrial activity and reduce disparity between economically disadvantaged regions and the rest of the country, increased levels of assistance are available in such regions. They are identified by means of a Development Index which sorts 260 of Canada's census divisions into four tier groups based on a formula using indicators of employment, income and provincial fiscal capacity. Projects in Tier I, which covers 50 per cent of the population, are eligible for a basic level of assistance; projects in Tiers II to IV can receive progressively greater levels of assistance.

12.22 IRDP is a decentralized program delivered through DRIE's 10 regional offices, which can approve projects involving DRIE support of up to $100,000. Approximately 72 per cent of IRDP projects fall into this category. For projects between $100,000 and $500,000, the Minister reviews and exercises a right of veto on all DRIE staff decisions. Until September 1984, the Minister decided on all cases involving a request for DRIE assistance greater than $500,000, including those where rejection had been recommended. Since that time, decision authority for projects between $100,000 and $1 million in DRIE support has been delegated to the Minister of State for Small Business. All contribution projects of $1 million or more are reviewed by an internal DRIE board at headquarters, which advises the Minister.

12.23 The Industrial and Regional Development Act contains general criteria relating to project eligibility and the need for DRIE assistance. It also requires that a project make a significant contribution to the social or economic benefit of Canada. The IRD Regulations include the requirement that a project be commercially viable within reasonable bounds of risk, and that there must have been no commitment by the applicant to carry out the project prior to an application being made. The Regulations also require that the assistance provided be the minimum amount necessary to permit successful completion of the project.

12.24 The program's introduction in July 1983 was made more difficult by public announcements that stressed its flexibility and generous funding levels. The Department was flooded with applications; many were incomplete and many proved to be ineligible. At the same time, DRIE was establishing new procedures for assessing and approving cases, training staff, and implementing new management information systems across 10 regions.

12.25 Our audit focused on how the Department manages the IRDP. We examined a representative sample of 224 projects taken from all DRIE regions, including both rejections and approvals. It contained 167 approved projects - 11.5 per cent of the number and 30.8 per cent of the dollar value of approvals at the time we selected the sample of projects.

12.26 Our observations are based on projects from the first 16 months of this highly visible new program. Some of the problems we found could be expected in any new program; some involved areas where policy or procedures needed to be developed or strengthened; and others involved some fundamental issues relating to how the program was being administered and controlled.

12.27 Major amendments were made in November 1984, eliminating two elements of the program, revising or restricting eligibility in others, and establishing new maximum levels of assistance. Also, projects recommended for support up to $100,000 became automatically eligible for the new maximum levels of assistance.

Policy Direction

12.29 A Program Policy Management Committee, with a representative from each region, was established in July 1983 and meets approximately every two months. Its purpose is not to make decisions but to encourage an exchange of views and discussion of issues in program delivery.

12.30 In each of these groups, the Department had a core of expertise in IRDP policy and program delivery. However, neither group was clearly responsible for identifying and resolving questions of policy interpretation and there was no central review for compliance with established policies and procedures. This contributed to inconsistencies in program delivery among regions and a need for greater policy direction. The following are examples of some areas where such direction is needed.

12.31 Dividend restriction clauses. Some regions use these, although not consistently, to ensure that DRIE assistance does not flow through the company to the owners, shareholders or parent company in the form of higher than normal dividend payments.

12.32 We noted six instances where such a clause would have been appropriate or at the very least should have been considered. These involved projects in which the Department had approved contributions where information on file showed that substantial dividends, including amounts greater than the requested DRIE funding, had been withdrawn just before or just after obtaining DRIE support. The project files also did not address why government assistance was needed in these cases.

12.33 Commercial viability. The Regulations require that projects be commercially viable to be funded, and that activities be financially self-sustaining. In some regions, this is interpreted in such a way that projects or activities that require and receive public funding from other sources on a regular basis can nonetheless be considered as commercially viable or financially self-sustaining, and therefore eligible for assistance. In other regions, regular receipt of public funding is considered to indicate that this requirement of the Regulations has not been met.

12.34 Previous assistance. Several projects involved requests for assistance to rebuild, expand, or modernize assets that had previously been assisted by DREE or ITC. Under a predecessor DREE program, projects involving the modernization of assets previously funded by DREE were not eligible for further funding. IRDP does not have a similar restriction. As a result, it is possible that the program will be regarded as a continuing source of financing. We recognize that this may be necessary in some more economically disadvantaged regions; however, in our opinion there should be a review of the issue of further assistance where assets have previously been funded by DREE or ITC.

12.35 Treatment of subsidiaries. Subsidiaries and divisions of larger companies frequently request DRIE assistance to raise the expected rate of return on a project to the parent company's threshold level. This is the rate of return the parent company states it must obtain to go ahead with a project. However, file documentation usually did not include the rates of return referred to by applicants or an assessment of them for reasonableness against industry standards.

12.36 Seasonal job creation. In our view, there needs to be policy direction in relation to the costs and benefits of seasonal job creation, which may give temporary employment to individuals who receive unemployment insurance. Current practice in some instances is to include as a benefit the temporary reduction in unemployment insurance payments but not to include the costs of future payments that may have to be made when the seasonal job ends. For new seasonal jobs, the cost of continuing expenditures by the federal government for any future unemployment insurance payments is not calculated. These expenditures should be included in the Department's cost-per-job calculation if the Department is to treat unemployment insurance benefits and costs in an even manner.

12.37 The Department should re-establish a corporate group with the mandate of providing advice on policy and interpretation of Regulations and directives. To ensure a consistent approach to program delivery, regions should be canvassed systematically to identify issues where corporate advice is required.

DRIE's response: Line managers are responsible and held accountable for interpretation of regulations and directives in the delivery of the program. Program Development and Operations (PDO) Branch and the Program Policy Managers' Committee (PPMC) provide advice upon request of line managers. Without interfering with lines of responsibility, support systems to assist line managers will be strengthened and formalized, e.g., the "hot line" will be reinstituted, the PPMC mandate will be formalized and their interpretations promulgated, etc.

PDO will establish a quality control function for cases submitted to headquarters for approval to monitor inconsistencies of interpretation and take remedial action.

Development Index

12.39 The Department was fully aware of problems associated with this Index, such as the reliability of data for small geographic areas and the absence of indicators of industrial disparity. However, it was working toward improving the Index over the longer term as data availability improves.

Project Eligibility

12.41 The following are examples of cases where, in our opinion, there were questions concerning eligibility, but there was no indication on file of why the projects were considered to be eligible.

- A contribution of $2.4 million was approved toward total capital costs of $4.8 million for an expansion of services by an existing non-profit organization. It was approved under a section of the Regulations that permits assistance for establishing a centre or institution, not for expanding it. The section that permits assistance for expansion of services by existing institutions allows DRIE to support operating costs only, not capital costs. There was no analysis indicating how the organization would become self-sustaining in the future. It had received other public assistance annually and would continue to do so for at least the next three years.

- A contribution of $17,780 was given to a Chamber of Commerce for expansion of its building, although it was not eligible under the expansion element because it was not a commercial operation as described in the Regulations. Also, the original application indicated that the total project costs would be $40,400, which was below the $50,000 threshold for an IRDP expansion project in Tier I. The applicant subsequently increased the project costs to $50,800, but the reason for this increase was not documented.

- A land developer received a contribution of approximately $60,000 for a golf course based on its tourism potential. Departmental tourism policy required that a tourism project assisted by IRDP be "clearly targeted toward attracting the international/interprovincial visitor and tourist". However, file documentation on this project described it as assistance to "a land developer for a key aspect of a cottage subdivision". The golf club was for day visitors and cottage residents, some of whom were to receive membership with the purchase of a cottage. In addition, a club manager had been hired and an advertisement for the club appeared before the project was approved.

DRIE's response: An operations review function at headquarters is being established and should be operational by October 1985. However, a balance between central review and advice and regional responsibility and accountability must be respected in the process.

Economic or Social Benefit and Need for Assistance

12.44 Examples where statements of benefits were increased beyond what was supported on file include:

- A repayable contribution of approximately $690,000 to help an applicant restructure and purchase a second company was credited with creating estimated sales of $12.5 million in the first year; however, this included $6 million in sales from the applicant's existing company.

- In two cases involving contributions toward marketing assistance for conferences, unsupported benefits were claimed. In one case, a $12,000 contribution for an already scheduled five-day conference of medical specialists was credited with generating $1.8 million in expenditures. In the other case, a $40,000 contribution toward marketing a three-day conference on making cities in winter climates more liveable was credited with creating 450 full-time jobs and generating $450 million in sales.

- A modernization/expansion project involved approximately $90,000 in DRIE support; the statement of benefits included 56 new jobs. However, the project file indicated that these jobs were not directly related to the project. Any increase in jobs would result from an anticipated general increase in business rather than from this project. Other documents on file showed that the company's work force would likely be reduced by one because of modernization.

- In another case, an applicant had two projects under consideration. The combined benefits of the two projects were attributed to each, resulting in a double count of benefits.

DRIE's response: A review of benefits and their documentation will be included in the quality control function.

12.46 The Act requires that no assistance be given if it is likely that a project will go ahead without assistance within the same location, scope and timing. The Regulations add that no project cost is eligible if the applicant entered into a legal commitment in respect of that cost prior to the date the application was received. Assessing whether a project meets these criteria requires considerable judgement. It is rarely clear how the scope or timing of a project may be affected by government assistance, or what actions by the applicant constitute a prior commitment.

12.47 Guidelines on how these key criteria should be interpreted and applied in analysing project proposals have not been developed. We observed that several projects were funded despite indications that the applicant would have proceeded without assistance, or would have obtained a rate of return on investment without assistance such that the need for public support was questionable. There was little analysis or documentation on file to support why government funding was necessary for these projects.

12.48 We noted projects that were financially supported by the Department despite analysis that indicated high rates of return on investment - up to 80 per cent a year in one case - without government assistance, or where file documentation indicated that the company had the funds to undertake the project. The Department also supported two projects where cost savings to the applicants within one or two years were greater than the cost of the projects; however, in these instances the need for public funds to support projects that made such good business sense was not addressed.

12.49 We noted two additional cases, involving a total of approximately $237,000, where the documentation on file indicated that the applicant had proceeded without assistance. In approving one of these, which was already almost completed, the DRIE regional office waived the stipulation in section 8(a) of the IRD Act that no assistance can be given to a project if it would have been carried out without assistance. However, no one has the authority to waive this section of the act. In the second case, documentation at the regional level recommended waiving section 8(a) but the documentation that went to the Minister was silent on both this and the fact that the project was 70 per cent to 80 per cent completed.

12.50 A related issue is the level of assistance that should be provided, once the decision to support is made. Only very general guidelines have been developed to assist in determining how much assistance is required. As a result, few files contained an explicit link between the level provided and the applicant's need. In some cases, the amount of assistance was determined by factors other than need. These included cases where assistance was greater than the amount analysis indicated was needed in order to make it comparable to the amount given to another company, or to reflect a historical funding level. In one project, this amounted to $1.3 million more than an internal DRIE analysis showed the company needed.

12.51 We observed a few cases where the level of assistance was reduced from the amount requested to just under $100,000, which was the maximum amount that could be granted under regional authority. In three of these, documentation on file indicated that the level of assistance was established at just under the level requiring a higher approval authority.

12.52 The Department should strengthen and document its guidelines for applying sections of legislation, Regulations or program directives relating to:

- the need for Crown support for a project to proceed;

Information for Decision Making

- In a project involving a contribution of $403,000 toward expansion of a ski resort, the Minister's fact sheet cited 85 jobs created and 300 jobs maintained. Because this project involved seasonal rather than full-time jobs, the seasonal jobs should have been converted to an annual basis. In addition, the project file indicated that the 300 jobs were being extended for five to six weeks, and not that they would be in jeopardy if the project did not go ahead.

- A regional project approval document indicated that an approved sawmill establishment project would create 7.5 jobs. The Department's management information system showed 15 jobs for the project. The Minister's fact sheet showed that 28 jobs would be created.

- The fact sheet on an innovation project involving approximately $190,000 in DRIE support indicated that the project would have no direct impact on the applicant's competitors. However, other regional approval documents indicated that there would be a detrimental effect on companies manufacturing competing products that would become obsolete.

Repayable Contributions

12.56 A revision to the IRDP in November 1984 removed the requirement to use or consider the option of a repayable contribution for projects involving less than $100,000 in DRIE assistance. Although this simplifies the administration of the program, in our opinion it does not remove the need for a more consistent application of this form of assistance for larger projects.

12.57 The Department should develop more specific guidelines on the use of repayable contributions for projects involving more than $100,000 in DRIE assistance.

DRIE's response: The question of guidelines for repayable contributions will again be reviewed.

Management Information Systems

12.59 We compared the data recorded in the Program Resource Information System for Management with the information in each project file we examined. We also verified whether forecast cash flow patterns in the Resource Allocation Management System were accurate. There were errors in the data recorded in nearly all the approved projects. About half of these were serious errors, for example the amount of assistance or jobs created. The extent of these was such that the overall usefulness of the system to management was impaired.

12.60 Some of the problems were due to difficulties with the definitions of what should be entered into certain data fields. Others were due to errors in original data input or poor procedures for verifying and updating the many data requirements of the system. In most regions, a copy of the information system printout for a project was not on the project file. This meant that errors could not be spotted and corrected by case officers. However, the basic problem appeared to be that responsibility for the quality of information in the systems was not clearly identified, and individual project officers did not have to use this information in analysing projects. At the end of our audit, action was under way in the regions to correct the most serious problems we noted, and definitions were being clarified.

12.61 The Department should clarify responsibility for the quality of data in its information systems and should review the need for all the existing data required by the system. It should also establish procedures to ensure that the data are accurate and updated as appropriate. A comparison of system data with project file data should be included as part of internal audit activities.

DRIE's response: The Regional Executive Directors and other responsibility centre managers delivering IRDP are responsible for the quality of data. The procedures will be developed by each responsibility centre under the functional direction of headquarters. The data elements are currently undergoing a review.

Sector Branch Consultation

12.63 In projects where sector branch advice was recorded on approval documents, we examined whether the approval documents accurately and completely reflected the advice provided. In five cases, concerns expressed by the sector branch were not adequately reflected in the project documentation. In another seven cases, decisions at the regional level were made prior to the receipt of formal sector branch support.

12.64 The advice was sometimes ambiguous, indicating support and then identifying serious problems related to the project. For one project, involving $3.8 million in DRIE support, the sector branch indicated both that the company had adequate resources to implement the project without IRDP assistance and that the company should be supported because a similar project, in a different company, had been supported by a different DRIE program.

Letter of Offer

12.66 We examined the letters of offer for all projects in our sample and noted that many contained vague project descriptions, making identification of eligible costs or any subsequent recovery action, if required, very difficult. Also there was usually no definition of the control period - that is, the period during which a facility must be in commercial production and more than 50 per cent of the assets supported by DRIE in use.

12.67 Many letters contained a clause indicating that other sources of public funding had been considered in arriving at the amount DRIE offered. However, there was no specific requirement in the contract for the applicant to advise DRIE if other public funds were received. According to the Regulations, any significant change in other public assistance requires the Minister's prior written consent. "Significant" was not defined nor was DRIE's right to re-examine the amount of its assistance stated explicitly.

12.68 The Department should develop guidelines on the nature of the information to be included in the project description.

DRIE's response: The Department will develop guidelines on the nature of information to be included in the project description.

12.69 In its letters of offer, the Department should include:

- the definition of key terms; and

Additional Case Examples

Case 1. Project eligibility, economic or social benefit, management information systems

12.72 The applicant described itself as a national trust with the objective of conserving "buildings, sites and natural areas of importance to the country's heritage". Other documentation on file described its purpose as housing and street restoration and indicated that the project was essentially a redevelopment project for the purposes of benefiting retail operations.

12.73 The DRIE Tourism Branch indicated that the applicant was eligible because, by revitalizing the town core, the area would become more attractive to commercial operations such as tourism operators, and by reviving the community the town would become more attractive to manufacturers and processors. There was no indication in the file on how the project would meet the requirement in the Regulations that it provide specialized services to commercial operations for purposes of benefiting industrial development as defined in the Regulations.

12.74 The creation of 1,000 jobs was attributed to the project. This estimate was based on a calculation that included construction jobs and new indirect jobs in downtown businesses, although it was contrary to usual IRDP practice to include such jobs.

12.75 Although the total amount of $5 million in project funds was given to the applicant in advance in February 1984, no expenditures were recorded in the IRDP management information systems. The advance payment for this 10-year project was justified on the grounds that the foundation could then better plan and administer its activities. However, the project description in the contract did not provide details on how the $5 million would be spent.

Case 2. Project eligibility, economic or social benefit, prior commitment

12.77 DRIE initially was of the opinion that the applicant was not eligible because it was not clear that the association's membership was primarily involved in the production of advanced software systems. DRIE asked the association to justify its eligibility and, after receiving its response, accepted it as eligible. There was no indication of further questioning. There was no documentation on file indicating how DRIE's initial concerns as to eligibility had been resolved. The eligibility of the project, which involved preparing a report to identify "market opportunities" and propose "remedies to trade barriers" for the computer software and service industry as a whole, rather than dealing specifically with advanced software systems, was not addressed on file. The Department subsequently advised us that they considered the association to be eligible. This was based on DRIE's belief that its membership was moving into software development, although there was little information on the extent to which this was happening. The application of this section of the Regulations has been difficult because the term "advanced" software is hard to define.

12.78 The contract, dated 15 August 1984, originally cited the date the application was recorded as received by DRIE - 24 April 1984 - as the effective date of assistance. This was back-dated to 1 March 1984, contrary to Section 29 of the Regulations which stipulates that the Minister may not make a contribution for a cost incurred prior to the receipt of the application. The first claim by the applicant included salary costs from 1 March 1984. This was an indication that the association had proceeded with the project prior to a decision by DRIE.

12.79 At the time the IRDP application was made, a senior DRIE officer was on an Interchange Canada assignment with the association until 30 June 1984. The intent was to extend the interchange assignment so that the officer could carry out the IRDP project for the association. The association was obliged to reimburse DRIE, under the Interchange Canada agreement, for salary costs for the period to 30 June 1984. However, we noted that DRIE had been advised by the association that it could not honour this commitment after 1 March 1984. Reimbursement for the period from 1 January 1984 to 31 December 1984 was not made until 21 January 1985 and took the form of DRIE's withholding payments under IRDP. It appears that IRDP funds were used so that the association could meet its prior obligations to DRIE under the original interchange agreement.

Defence Industry Productivity Program

12.81 Assistance is provided for research and development, establishing Canadian companies as qualified suppliers, modernizing facilities, and carrying out market feasibility studies. In 1984-85, DIPP contributions totalled $152.7 million.

12.82 The program is managed centrally at headquarters. At the time of our audit, projects involving less than $500,000 in Crown assistance were authorized at the Assistant Deputy Minister level. Projects involving more than $500,000 were decided by the Minister. Applications for assistance in excess of $10 million required Treasury Board approval, and those greater than $20 million had to be approved by Cabinet.

12.83 In our 1982 audit, we examined the process by which proposed DIPP projects were reviewed and approved by ITC, and that department's procedures for monitoring projects, including identification of amounts due to the Crown from completed projects. In our current audit, we reviewed whether appropriate action had been taken to address the problems we had noted.

Project Assessment

12.85 The Department should finalize and obtain Treasury Board approval of the Administrative Directive for the Defence Industry Productivity Program.

DRIE's response: Terms and Conditions were prepared for TB approval in August 1984, as were an Administrative Directive and Procedures Manual. Circumstances in the fall and winter of 1984-85 made it prudent to await seeking TB approval as a number of events were taking place that had implications for DIPP, namely the Ministerial Task Force on Program Review, negotiation of a Memorandum of Understanding with the Aerospace Industries Association of Canada, Office of Internal Audit review of DIPP, and the present Comprehensive Audit. A work plan aimed at developing new Terms and Conditions for TB approval and associated and directives and manuals is being implemented with a late fall completion date.

12.86 All criteria relating to economic benefit should be addressed in project assessment.

DRIE's response: Over the past year, the Department has implemented economic benefit assessment for all projects. In addition, the new Terms and Conditions and Directive will deal explicitly with the project selection criteria and will allow project comparison over time.

Level of Assistance

12.88 For most projects, the level of assistance provided was not linked to factors such as the applicant's financial condition and ability to proceed, and there was no analysis on file of possible alternative levels of funding. The draft directive in use for DIPP projects indicates that the amount of DRIE assistance should be the minimum required for a project to proceed. However, without an explicit link between the need for assistance and the level of DIPP support, it is difficult for the Department to know whether the assistance offered is, in fact, the minimum required.

12.89 The Department should document the link between the level of support and the applicant's need for assistance.

DRIE's response: The Department agrees that the recommendation is valid in principle but wishes to stress that in practice the link between level of support and need for assistance is rarely amenable to precise measurement and documentation. In assessing projects the Department will continue to take into account and document the support companies' need to undertake particular projects, the expected benefits to the economy of the project, and the level of assistance required to enable companies to be competitive over the long run with their foreign competitors.

Project Sales Information

12.91 The Department should document and compare actual sales attributable to DIPP assistance with the forecast made at the time projects were approved.

DRIE's response: The Department concurs in principle. This issue has been addressed in revisions to the draft directive made since the audit. However, the Department would like to indicate that to implement a complete system of comprehensive monitoring, including comparing actual and forecast sales, would take more resources than it presently has available for this task.

Project Monitoring

12.93 Projects should also be audited to ensure that only eligible costs have been claimed by the company and paid by the Department. DRIE uses the services of the Audit Service Bureau (ASB) of the Department of Supply and Services for the audit of DIPP projects. However, DRIE had not established terms of reference for ASB that covered matters such as the selection of projects, the scope and frequency of audit, or the nature of reports to be provided on the general status of DIPP project audits. We observed 11 projects in our sample that had not been audited, although they were two and three years old. The Department did not have a system that recorded which audits had been carried out or which remained to be done, and the status of those under way. The Department was aware of the need to address these issues, but had not yet finalized and implemented a policy on auditing DIPP projects.

12.94 The Department should finalize its policy and approach to the audit of DIPP projects.

DRIE's response: The Department concurs; this issue is being addressed in the development of new Terms and Conditions and Directives. In late 1984 the Department put a system in place which requires Supply and Services Canada to have audits carried out on all DIPP projects and to report quarterly on the status of audit assignments.

Repayment of Crown Assistance

12.96 The Department has still not specified what "fair and reasonable" means, although we noted the problem in 1982 and the Department indicated that it was working on DIPP repayment procedures. The Department and the companies supported need this information to know the amount and timing of repayments that are to be made.

12.97 The need to establish what is meant by "fair and reasonable" and to incorporate this in DIPP contracts is illustrated in a case where the Department was having difficulty obtaining a $2 million repayment from a successful DIPP project. The company considered that its profit was fair and reasonable and had rejected the Department's request for repayment. The Department is pursuing the matter.

12.98 The Department was also having difficulty in obtaining information it needs to identify repayments owed. It requested information from recipients annually at a company's fiscal year-end on sales and profits generated by DIPP projects. Approximately one-third of the companies did not respond to the initial requests for information. In some cases the Department waited up to two years before following up on the these requests. As a result, potential repayments to the Crown were not being identified and collected on a timely basis.

12.99 The Department should document guidelines on what is meant by "fair and reasonable profits" and establish procedures for identifying and obtaining repayments.

DRIE's response: Due in large part to the difficulties in establishing a firm, uncontroversial definition of "fair and reasonable project" the Department is, in an increasing number of cases, using repayment conditions that are firm and specific. It is anticipated that the new contribution agreements being developed in tandem with the new Terms and Conditions and Directive will not include the "fair and reasonable" repayment clause.

Management Information Systems

12.101 The Department is aware of the need to capture DIPP information completely and accurately in these systems. A project to carry this out has been under way since April 1984.

12.102 Special Case - Helicopter industry establishment. In a contract dated 5 January 1984, Canada agreed to provide a $210 million (U.S.) contribution to a company to assist in the establishment of a helicopter manufacturing industry in Canada. DRIE's share was 60 per cent or $126 million (U.S.) and the Government of Quebec's share was 40 per cent or $84 million (U.S.). The total cost of the project was to be $392 million, excluding engine development and other associated costs. The company's share was $182 million. In 1984-85, payments by DRIE amounted to approximately $44 million.

12.103 We examined the information used in making the decision to proceed with the project, and the disclosure of information on the benefits expected from it.

12.104 The Department's analysis, which considered projected helicopter sales, job creation, and other benefits, indicated that the project would result in a net economic benefit to Canada of $219 million (Canadian). This was based on a total sales estimate, including both military and civilian sales and spare parts, of $7.2 billion (U.S.).

12.105 The market for civilian sales was estimated at $5 billion (U.S.). This estimate was based on extensive analysis of sales forecasts from manufacturers and a separate market study commissioned by DRIE. The remainder of the total sales estimated, $2.2 billion or 30 per cent, was accounted for by military and increased civilian sales.

12.106 We recognize that forecasting military sales is more difficult than civilian sales. However, given the significance of the estimated sales attributed to this market, we would have expected to find a documented rationale supporting the estimate at this level for military sales. Such a rationale had not been fully documented.

12.107 Departmental projections are that an average 2,773 jobs will be created from the project. We noted that, under the contract, the company is committed to create 250 engineering jobs. The remainder are dependent on production resulting from sales at forecast levels.

Canadian Industrial Renewal Board

12.109 Assistance is provided under two programs - Sector Firms, and Business and Industrial Development. The first has as its objective the restructuring, modernizing and rationalizing of the textile, clothing and footwear industries. The Board provides funds to stronger, viable companies in these sectors with the intent of establishing competitive industries and lessening dependency on import restraint. The second program's objective is to create employment and strengthen and diversify the economy in areas dependent on the textile, clothing and footwear industries. It is jointly administered with DRIE, in that DRIE staff carry out the project analysis and CIRB makes the decisions regarding assistance.

12.110 Assistance under these programs takes the form of contributions. The current contributions budget for the five-year CIRB mandate is $351.7 million. The Sector Firms Program accounts for $241.5 million or 69 per cent, and the Business and Industrial Development Program accounts for $110.2 million or 31 per cent.

Accountability

12.112 In effect, although the Board spends money voted to DRIE by Parliament, it is not accountable to the Department for its activities or decisions. The Department has 1 of 17 votes on the Board. DRIE's Main Estimates did not explicitly refer to CIRB until 1985-86, although other programs involving less expenditure have been mentioned.

Compliance with Program Regulations

12.114 Project eligibility. CIRB practice had been to give contributions for consulting studies involving preparation of restructuring plans and comprehensive analysis of applying companies, although this was not permitted under the Regulations. As of November 1984, CIRB had committed approximately $8.5 million to such studies. When we brought this to the attention of CIRB staff, they indicated they were unaware that contributions were not permitted for consulting studies. The Regulations have since been amended to make them eligible in future.

12.115 Repayable contributions. One section of the Regulations requires that full repayment of the contribution be made a condition of assistance, although this condition may be waived by the Board. This is consistent with the philosophy of funding viable projects in strong companies that are likely to be successful. Although this indicates that the intent of the Program was to offer some contributions where public funds would be repaid, CIRB has made only 3 offers of repayable contributions out of 281 projects to mid-December 1984. In two instances, the Board changed recommendations for repayable to non-repayable contributions. In our review of other project files, we found no record of the repayment requirement being waived explicitly.

12.116 CIRB staff indicated that repayable contributions would be less of an incentive to industry and would add excessively to the costs of administration. However, these costs had not been calculated or analysed. In effect, this decision amounted to a shift in policy away from the intent of the program as outlined in its Regulations.

12.117 Need for assistance. Under the Regulations governing the Business and Industry Development Program, only capital projects that are undertaken following the approval of an application are eligible for a contribution. CIRB practice did not always comply with this provision. We observed instances where applicants had either started projects or where there were indications that applicants were committed to projects before applying for CIRB assistance.

12.118 Type of assistance. In two cases, CIRB offered assistance totalling $75,000 in the form of grants rather than contributions. These were for a trade fair and a fashion show. They were approved despite the fact that the Regulations specify contributions, rather than grants, and the applicants themselves were not eligible.

12.119 Subsequent to the offer, CIRB realized that it did not have the authority under its Regulations for this type of assistance. The grants were then funded under the Institutional Assistance Program of ITC. While this program allows for grants, they are for scholarships and studies. In our view, these grants were improperly authorized.

Consultations with DRIE

12.121 Our review of project files to May 1983 indicated that submissions to the Board were frequently misleading concerning consultation with DRIE's sector branch. Of the 63 contributions CIRB had approved under the Sector Firms Programs to that time, 21 were not supported by the DRIE sector directorate. In the material presented to the Board by CIRB staff, however, this lack of support was frequently either not indicated or expressed as support with reservations. We also noted two instances where DRIE was shown as supporting a project where it had explicitly stated that it did not. The DRIE sector directorate was shown as being in support of two additional cases after mid-May 1983, although this was not indicated in DRIE documentation.

12.122 In the project involving the largest single contribution approved by the Board - $30 million for a capital project over four years - the documentation presented to the Board contained extensive information on the restructuring plan. However, we noted that DRIE pointed out to CIRB that firm commitments had already been made for certain major projects of the program. These indicated the company would have incurred these expenditures without support in order to maintain its domestic market position. This information was not given to Board members in the project summary documentation. Although a DRIE representative attended Board meetings and presented the departmental position in this and other cases, this was a breakdown in internal project processing procedures.

Consistency with Program Intent

Program Evaluation

12.125 Because the Program Evaluation Branch did not plan to undertake an evaluation until 1988-89, CIRB was proceeding with its own evaluation. At the time we completed our audit, CIRB had retained consultants to conduct the initial evaluation assessment.

12.126 To avoid difficulties in future programs similar to CIRB, the Department should take steps to ensure that:

- there is a clear accountability link between the program and the Minister, or the Department on the Minister's behalf;

Federal-Provincial Subsidiary Agreements

12.128 Specific subsidiary agreements are the means by which projects are authorized and financial commitments are entered into. Generally, agreements are administered by a management committee consisting of representatives from the province, DRIE, and other federal departments as appropriate, with equal representation of provincial and federal members. For most subsidiary agreements entered into under General Development Agreements, the province was responsible for overseeing implementation. Decisions to approve projects are made by the management committee based on project proposals submitted by provincial representatives. More recent subsidiary agreements have programs that are implemented directly by the federal government as well as programs implemented by the provinces.

Project Review and Approval

12.130 Broadening of objectives and eligibility criteria. All the subsidiary agreements we examined contained statements of objectives. In many, these had been translated into eligibility criteria against which projects could be assessed. However, we noted several instances where projects were approved that were not consistent with the objectives of the subsidiary agreement or of the specific program under which they were approved. We noted two agreements where the management committee had broadened the agreement objectives or eligibility criteria to include projects that would not originally have been eligible. In our opinion, these constituted changes to the substance of the agreements and were beyond the authority of the DRIE staff representative on the management committee. In two other agreements, similar amendments were made with the explicit approval of the Minister. Most subsidiary agreements signed after 1 April 1984 require Treasury Board and Governor in Council approval for amendments to agreement objectives.

12.131 Following are two programs in a subsidiary agreement in which this broadening of objectives and eligibility criteria took place without the Minister's approval. More examples are shown in the "Additional Case Examples" section, from paragraphs 12.146 to 12.162.

12.132 Eastern Ontario Subsidiary Agreement - Tourism Program. This program, with a $3.7 million budget shared equally between DRIE and Ontario, was established to "encourage private sector investment in major tourist facilities through the provision of project feasibility studies and the funding of selected tourist infrastructure".

12.133 During our audit, we observed that the objective of the agreement was broadened by the management committee to include provincial parks and special events and festivals. The approval of the Minister was not sought for this change. We estimated that approximately 35 per cent of the projects approved were not consistent with the original approved objectives. Some examples include:

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12.135 Eastern Ontario Subsidiary Agreement - Small Business Incentives Program. This program, with a $10 million allocation shared equally between Ontario and DRIE, was established to assist small businesses in Eastern Ontario. However, no definition of small business was developed. We noted that the management committee broadened eligibility under this program to include relatively large companies, one of which had sales up to $76 million and employed 700 persons. One commonly used description of a small business under DRIE's Small Businesses Loans Act is one with sales of up to $2 million.

12.136 We were advised by program management that the original objective of the program had been shifted away from its emphasis on small business by the management committee. However, approval was not obtained from the Minister for this change.

12.137 Need for assistance. Most subsidiary agreements do not contain a clause to the effect that support will be given only to projects that require government assistance to proceed within the proposed location, scope or timing. This means that there is no requirement that program management take into account whether public funds are needed for a project to proceed. As a result, funds may be spent on projects that do not require DRIE support.

12.138 We believe that, wherever appropriate, agreements should contain this type of provision, and noted that some of the recently signed subsidiary agreements did so. In the absence of this requirement, we noted instances where it appeared that projects had or would have proceeded without DRIE assistance.

12.139 Eastern Ontario Subsidiary Agreement - Tourism Program. As a condition of a 40-year lease of land from the National Capital Commission, a company was required to construct a pavilion and marina on the land. In 1983, the company applied to the Tourism Program for assistance in constructing the facility. In March 1983 it was offered $100,000 (DRIE share 50 per cent), despite the fact that the construction involved was an integral part of the company's commitment to the NCC for obtaining the lease, and that an internal management committee held the opinion that the project would likely proceed with or without the funding.

12.140 Payment in advance of requirement. The terms and conditions of some subsidiary agreements call for DRIE to make payments when progress on a project has reached a specific point, or a certain level of expenditures on a project has been reached. We noted two subsidiary agreements in which these terms and conditions were not complied with.

12.141 Ontario Pulp and Paper Modernization Subsidiary Agreement. We examined 5 of the 12 projects under this agreement. Under the agreement, recipients were to engage in a modernization program of a specific dollar value expressed in constant 1978 dollars, and were to receive a specified amount of government assistance. If recipients did not expend the amount called for in the modernization program, funds could be recovered from them.

12.142 In four projects, the agreement with the company stipulated that DRIE was to pay the full amount of its assistance before the company had spent the amount required on its modernization program under the agreement. We also noted that payments were based on expenditures in current dollars, but these expenditures were not adjusted back to 1978 dollars prior to payment to DRIE. As a result, recipients could, and in two cases did, receive full payment without spending the full amount called for in the modernization program as expressed in 1978 dollars.

12.143 Nova Scotia Ocean Industries Subsidiary Agreement. The terms and conditions approved by Treasury Board, under which assistance was given in the Applied Research Support Program, called for DRIE to pay recipients when facilities were in operation. However, the arrangements made by DRIE in three projects permitted advance or progress payments to be made. These projects accounted for 95 per cent of the $3 million of projects approved to 31 March 1984.

Information for Decision Making

12.145 This took the form of omitting the approved objectives of a program, or not describing how projects were eligible under agreement objectives. We also noted instances where financial information such as other federal government funding was not included, or there was no reference to the fact that the full payment was to be made in advance. In one subsidiary agreement, the number of jobs to be created from the projects was increased by using a method of calculation that differed from normal DRIE practice.

Additional Case Examples

12.147 In the summer of 1983, $13 million that had been reserved for a major zinc smelter project became available for other projects. The Resource Management Program was allocated $7.3 million of these funds, and the subsidiary agreement was extended by one year, to March 1985, to provide adequate time to identify additional projects to use the funds.

12.148 Despite the rationale for the program, we noted, among the projects we reviewed, two private golf and country clubs that received funding of $425,000 for golf course construction in June and July 1984. This was in addition to $180,000 previously provided by DRIE for these golf courses. The Department indicated to us that the golf courses were funded as a tourism initiative. However, we could not find any documented analysis of how they would contribute to tourism potential. A tourist development plan, commissioned with agreement funds, for the county in which one of the golf courses was located did not identify golf courses as potential tourist attractions. A tourist development plan for the county in which the other golf course was located was not finalized at the time the DRIE assistance was approved.

12.149 These two projects had also received approximately $1.2 million in funding from a Canada Employment and Immigration Commission Program, which supported them for purposes of reducing the rate of unemployment, creating permanent employment and improving community recreation.

12.150 Another project, approved in October 1984 under this program, involved $400,000 for a new marina site, also on the basis that it would encourage tourism. A feasibility study assumed that 90 of 100 berths would be for local users; we were informed that 60 to 70 might be a more realistic estimate. Even the lower number indicates that the marina was intended to be mainly for local users although it was justified on the basis of tourism potential.

12.151 DRIE's definition of a tourist is someone who crosses a provincial border or travels more than 80 kilometres from home. There was no analysis of how these projects could be justified in terms of encouraging tourism under this definition. There was no consultation with DRIE's Tourism Branch on these projects. We also noted that the marina had received an additional $889,000 in support from other federal programs.

12.152 At the time the marina project was approved, the Minister's approval was explicitly required because the Minister had expressed a particular interest in projects under this subsidiary agreement. DRIE's practice at the time was to exclude construction jobs from direct job creation numbers and to convert seasonal jobs to an annual basis in preparing fact sheets for the Minister. For this project, 20 construction jobs and 5 operating jobs were shown on the Minister's fact sheet as resulting from the project, giving a cost-per-job figure of $18,000. Without construction jobs, the cost per job increased to $80,000. Had these seasonal operating jobs been converted to an annual basis, the cost per job created at the marina would have been approximately $375,000.

12.153 We noted two other projects under this subsidiary agreement where information was not presented in a way that highlighted clearly and completely the cost per job created. One involved DRIE support of $750,000. The Minister's fact sheet showed 23 jobs created, for a cost per job of $32,600. If construction jobs had been excluded, the cost per job would have been $93,750. If the jobs had been converted to an annual basis, the cost per job would have been $250,000. In the second case, DRIE funding of $225,000 was approved for a project involving 12 jobs. The cost per seasonal job shown was $18,750. Excluding construction jobs, the cost per seasonal job would have been $56,250. On an annual basis, the cost per job would have been $160,000.

12.154 Prince Edward Island Comprehensive Development Plan - Industrial Development Program. In February 1984, DRIE rejected a proposal for three projects under this plan to purchase equipment that would allow fish to be unloaded more rapidly from fishing vessels. Delivery of this equipment was expected to take six weeks. DRIE rejected the project because there was no budgetary provision for this type of equipment under the plan and the proposal was not considered feasible at that time.

12.155 In mid-March 1984, DRIE agreed to support the projects under the Industrial Development Program because funds had become available. The termination date for approval of new projects under the program was 31 March 1984. Official approval was given on 30 March 1984 for a contribution of $97,200. On 25 April 1984 a claim for $97,150 was received and subsequently paid. The claim indicated that all expenditures were incurred prior to 31 March 1984, notwithstanding the six week delivery period.

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12.156 The objective of the Industrial Development Program is to "focus on opportunities for resource based industries while diversifying the manufacturing base where appropriate." These projects did not involve a diversification of the manufacturing base, nor did they fit the DRIE definition of fish processing, which is described as taking place after the fish have been landed. Eligibility was broadened to include projects that involved quality improvements in the harvesting part of the fishing industry, which is part of the mandate of the Department of Fisheries and Oceans, rather than DRIE.

12.157 North Portage Development Project. This is a $66 million urban redevelopment project with costs shared equally among DRIE, the City of Winnipeg and the Government of Manitoba. Payments are made to the North Portage Development Corporation, which was established to administer the project. The project was approved in 1983 by Treasury Board under the Institutional Assistance Program (IAP) of the former ITC Department. We recognize that this project is technically not a subsidiary agreement. However, because it shares many of the characteristics of a subsidiary agreement, we treated it as one for purposes of our audit.

12.158 The objective of the contribution to the North Portage Development Corporation was "to enable it to undertake the construction of infrastructure in support of major public, private and institutional development of the North of Portage area in Winnipeg." However, this objective was not consistent with IAP objectives. The IAP objective that appeared closest in terms of this project stated that IAP's purpose was "to assist institutions, organizations and associations in the establishment of non-profit centres or institutes which provide specialized services to industry." The project involves land assembly and the construction of retail space, commercial space, office space, housing units, a hotel and a public mall. In our view, this type of urban infrastructure is not consistent with the establishment of a non-profit centre or institute that provides specialized services to industry. The submissions to Treasury Board did not address how this project could be considered as consistent with IAP objectives.

12.159 We were advised that a verbal legal opinion was obtained to the effect that IAP was the most appropriate program for the payment. However, this was not confirmed in writing.

12.160 DRIE paid approximately $1 million in 1983-84 under its agreement with the Corporation. The agreement also required that all the remaining federal share of $21 million be advanced by 31 March 1985, regardless of the costs actually incurred by the Corporation. DRIE complied with this requirement. In our view, this was an agreement to pay in advance of need, because the federal one-third share of costs at that date would have amounted to approximately $6 million, not $22 million.

12.161 We were advised by the Department that funding for the project came from the Special Capital Recovery Projects Program (SCRPP) and advice on the payment arrangements was given through headquarters from the SCRPP Secretariat. Because SCRPP projects were "fast-tracked", this advice was only verbal. By 31 March 1985, expenditures had been made to acquire property, but construction had not been started. This meant that the project did not meet the intent of SCRPP to aid economic recovery by accelerating construction work on capital projects. We also noted that only the federal government was required to advance all its funds by a particular date. Agreements with the other parties called for them to advance their funds on the basis of actual project expenditures.

12.162 This payment in advance of need amounted to an additional federal subsidy to the Corporation. There is no provision in the agreement to return the interest on this advance payment to the Crown.

Conclusion: Subsidiary Agreements

12.164 The objectives of subsidiary agreements we examined were frequently stated in very broad terms, but were usually translated into more precise sub-objectives or eligibility criteria to guide decisions on particular projects. However, the amount of money specified in a subsidiary agreement to be spent by a certain date frequently appeared to become an expenditure target. This undoubtedly contributed to the instances we noted where projects were approved that did not appear to be consistent with the objectives or eligibility criteria of the program under which they were funded. This tended to occur more frequently in subsidiary agreements that were designed to cover specific geographical areas.

12.165 Subsidiary agreements are managed in an environment where the DRIE regional office and the agreement management committee are subject to pressures from all levels of government, in addition to the pressure normally associated with this type of highly discretionary contribution program. In a number of instances, we were advised that a decision was made in a particular agreement because of what a provincial representative on the management committee wanted, and that regional staff had little choice but to accept the provincial proposals.

12.166 In March 1985, the Department instituted new procedures for review and approval of projects under sub-agreements. They must now follow the approval and sector sign-off procedure used for the Industrial and Regional Development Program. This should serve to strengthen the project approval process and lessen the likelihood that questionable projects will be approved. However, in our opinion, there is still a need for review of projects for consistency with program authorities and directives, as well for compliance with administrative and financial requirements relating to a project or subsidiary agreement. This should be included in regular program review activities.

12.167 DRIE should ensure that a clause to the effect that support will be provided only for those projects where government assistance is required is contained in all subsidiary agreements where it is applicable.

DRIE's response: The Department agrees with this recommendation and is recommending such a clause in all subsidiary agreements where it is deemed appropriate.

12.168 Departmental program review activities should include a review of subsidiary agreement projects for consistency with program authorities and directives and for compliance with administrative and financial requirements.

DRIE's response: This will be included in the activities of newly created corporate accountability centres.

Tourism

12.170 As a result, it was difficult to see how the Department could effectively monitor its tourism expenditures across the country and ensure that projects funded are consistent with an overall tourism strategy. The new March 1985 procedures requiring sector branch sign-off of subsidiary agreement projects greater than $500,000 should ensure that Tourism Branch is aware of the more significant tourism projects proposed under subsidiary agreements. However, because of the extent to which tourism projects are now being funded under subsidiary agreements, we believe that consultation with the sector branch for projects involving more than $250,000 in DRIE support should be required, as it is for projects under IRDP.

12.171 The Department should extend the requirement for consultation with Tourism Branch to subsidiary agreement projects involving DRIE support greater than $250,000.

DRIE's response: An informal consultative process is already in place. Steps will be taken to formalize this process for projects involving DRIE support greater than $250,000.

Shipbuilding Industry Assistance Program

12.173 This program is now being phased out. Accordingly, we concentrated our audit on those issues in the program that would continue during the phase-out period and that might be present if a similar program were launched in the future.

12.174 In 1982, we examined this program as part of our audit of ITC. We observed that there was no documented program directive that described the objectives of the program, or guidelines on how the Regulations should be interpreted. Since then, the Department has developed guidelines for the performance improvement grants element. Although the production subsidies are being phased out, claims will continue to be processed for projects approved prior to the termination of the program.

12.175 The shipbuilding subsidy was administered by the Department as a fixed rate subsidy program. If an applicant was considered eligible, the maximum subsidy was approved. However, the Regulations state that the Minister "may" provide a subsidy to eligible applicants and determine the upper limit of the amount of the subsidy. The amount of the subsidy was not linked to a need for assistance. There are other references in the Regulations to the Minister's ability to exercise discretion in particular situations. We believe that, if an industrial assistance program is to be administered as an entitlement program, this should be explicitly documented and authorized, and the administration of the program should be consistent with its governing regulations.

12.176 In reviewing subsidy payments in 1984-85, we noted that a final payment of approximately $250,000 was made on a subsidy of $2.2 million for construction of a ship for a subsidiary of a Crown corporation, in spite of the fact that the Regulations prohibit any subsidy to a shipbuilder for a vessel intended to be owned by Her Majesty in Right of Canada. No internal legal advice was sought prior to payment. The Department subsequently obtained an opinion that the payment was permitted because the subsidiary company was not an agent of Her Majesty in Right of Canada. However, the Department advised us that in administering this program it considers Crown corporations to eligible ship owners in the same way as private companies, and that the intent of the Regulations was not to exclude vessels intended for Crown corporations from being eligible. In our opinion, the wording of the Regulations is clear. If the Department believes that the wording of the Regulations governing the Program is inappropriate, it should seek to have the Regulations revised.

12.177 On DRIE's behalf, the Audit Services Bureau performs field audits of projects to determine the eligibility of costs in claims submitted by shipbuilders. In 1982, we observed that program management did not document its rationale in deciding on how qualifications raised by Audit Services Bureau were to be resolved. This was still the case in over half of the reports we examined. Although decisions such as whether to allow certain expenditures as eligible costs were made on an individual basis by SIAP staff, there was no documented policy on how to resolve these difficult matters. Without documentation on how such issues are to be resolved, there is a risk that ineligible project expenditures will be allowed and paid for by SIAP.

12.178 For the Shipbuilding Industry Assistance Program, the Department should document its guidelines for the disposition of audit concerns raised by Audit Services Bureau.

DRIE's response: Procedures are in place for the full review of ASB audit qualifications, and these are resolved in conjunction with ASB and the shipbuilder as required. Whereas the Department is satisfied that these items are resolved appropriately, it will review the procedures with a view to documenting the policy for disposition of audit concerns.

12.179 Under the performance improvement element of SIAP, $6.3 million was given in 1984-85 and approximately $100 million remains to be given over the life of the program. According to Regulations, these grants to shipyards must be repaid if the subsidized assets are diverted to other uses or disposed of within five years of receiving assistance. In 1982, we observed that the Department had no procedure for monitoring compliance with this requirement. As a result, there was no assurance that the subsidy was being used for its intended purpose. In our current audit, we observed that this was still the case. However, the Department has advised us that it is implementing an inspection procedure for monitoring this requirement.

Small Business Loans

12.181 In 1984-85, there were 34,500 loans made under SBLA for a total value of $997 million. Commercial lenders are responsible for making the loans and for their general administration. The Department's main responsibilities are for processing lenders' claims for compensation on loan defaults, maintaining records of losses and other program information, and initiating recovery efforts.

12.182 In our 1982 audit of ITC, we examined and reported on the Department's procedures for monitoring loan guarantees, payment of claims and recovery of losses. Since then, the Department has improved its review procedures for payment of claims.

12.183 Although DRIE's procedures for reviewing claims for payment have been strengthened, our random sample of 40 claims paid by DRIE indicates that these procedures can be improved further. We noted an instance where further information should have been obtained prior to a claim being paid. A claim for $75,500 was paid to a chartered bank in April 1984. Documentation on file showed that a company had used its $84,200 loan from the bank to help acquire assets valued at approximately $162,000 in 1980. The company stopped operating in 1982. These assets were disposed of for $6,000 in July 1983 by the bank and the company agreed to this disposal amount. In our view, DRIE should have required the bank to document why an amount of $6,000 was accepted against assets acquired two years earlier at a much higher amount.

12.184 While this type of case appeared only once in our sample, it illustrates that a high level of effort has to be maintained in reviewing claims, particularly since claims have risen steadily from $6.8 million in 1981 to $29 million in 1984-85.

Machinery Program

12.186 The Department has taken action to address the major concerns noted in our 1982 audit of this program. Departmental policy and procedures in support of maintaining the industry data base have been documented, and an internal quality review of remission decisions where the duty value is less than $1 million has been implemented. As a result of this review, steps have been taken to improve product coding in the data base. This action should help reduce the possibility of errors in future remission decisions.

Internal Audit

12.188 We focused on how Internal Audit planned and conducted its audits, reported findings, and used resources. We examined 12 of 17 audits for which reports had been issued at the time of our audit. In reviewing audit project files, we noted some key areas that could be improved. In most projects, audit criteria were not documented, nor, in many instances, were the nature and extent of the audit work performed. Audit programs were not regularly prepared and used. Audit reports were finalized and reviewed by the departmental Audit Committee; however, reports frequently had no conclusion linking back to stated audit objectives. Action is being taken by departmental management to address these points and others with respect to audit planning and control.

12.189 Many audits focused on the management systems and controls that support program delivery. However, these audits did not include sufficient substantive testing in terms of review of documentation in project files to assure senior management that systems and controls were functioning effectively and that program authorities were being complied with.

12.190 Internal Audit should increase the amount of substantive testing it carries out in its audit projects.

DRIE's response: The Office of Internal Audit has increased the amount of substantive testing it now carries out in its audit projects in order to ensure that systems and controls are functioning properly and that program authorities are respected.

Program Evaluation

12.192 We examined how effectiveness evaluation activities were being carried out for two major programs, IRDP and federal-provincial subsidiary agreements. We reviewed the extent to which the recommendations from a previous major evaluation of DIPP were being used in the continuing operation of the program. We also examined the role of headquarters evaluation staff relative to that of regional evaluation staff.

12.193 We found that the program evaluation infrastructure was generally appropriate. However, the Program Evaluation Branch at headquarters did not become involved in regional evaluation activity unless requested to do so. The Branch did not, as a matter of course, review regional program evaluations before they were presented to senior management. In a number of instances, evaluations of subsidiary agreements had not been carried out as required.

12.194 The Department should ensure that regional evaluation plans cover all subsidiary agreements, and progress against plans should be monitored by the Program Evaluation Branch. Completed evaluations should be reviewed by the Branch to ensure that they meet appropriate quality standards.

DRIE's response: The Department concurs that in the past not all agreements were properly reflected in regional evaluation plans nor were all completed evaluations systematically reviewed by Program Evaluation Branch, Ottawa. To ensure that full remedial action is undertaken a list of all agreements and their evaluation status for which the Department is responsible has been prepared. In addition, copies of all completed evaluations are now distributed to Program Evaluation Branch, Ottawa for review and retention in the Branch library.

12.195 In April 1984, proposed evaluation frameworks for the IRDP components were sent to the regions. One of their purposes was to implement data collection procedures and performance indicators for the program. Specific data were to be collected on each project and entered into the management information system to permit subsequent measuring and monitoring of program effectiveness. The frameworks were intended to use information that could reasonably be expected to be found in project files.

12.196 The frameworks were never finalized. In addition, data the Branch expected to find on file were not present for over half the project files we reviewed. As a result, measurement of the effectiveness of the program will be considerably more difficult. In our opinion, the Branch, although not directly responsible for project files or for data quality, should have monitored whether information of appropriate quantity and quality was being collected.

12.197 The Program Evaluation Branch should determine why data necessary for evaluation of the IRDP were not being systematically collected and take the action necessary so that these will be collected for a future evaluation of the program.

DRIE's response: The Department agrees that the consequences will be a more expensive and time consuming effort to evaluate IRDP when the time comes but, nevertheless, a task that can be done given past experience with programs such as DIPP, PEMD, SBLA, etc. In the broader context of monitoring actions (data collection, etc.) resulting from any approved evaluation frameworks, the Department has instituted procedures to ensure that such actions are more closely monitored in future with any deviations noted and corrective action, as appropriate, taken.

12.198 The departmental evaluation policy establishes that the Program Evaluation Branch is responsible for monitoring and reporting on the implementation of approved evaluation recommendations. Following the 1980 evaluation of DIPP, an implementation status report on the recommendations was tabled by the Program Evaluation Branch at the Program Evaluation Review Committee in November 1981. No further follow-up reports were produced. Given the importance of the evaluation as one of the factors leading to increased resources for DIPP, we believe that there should have been more regular monitoring of the implementation of approved recommendations in the DIPP evaluation.

12.199 In regional offices there were no procedures in place to ensure that evaluation studies were used. There was no indication that evaluation recommendations were systematically accepted or rejected, and that plans to implement recommendations were established or monitored.

12.200 Unless the Branch monitors and reports on how the results of evaluations are being used by program management, the Branch and the Department as a whole cannot know whether evaluation is a useful management tool.

12.201 The Program Evaluation Branch should follow up and report on the implementation of accepted evaluation recommendations for improving program performance.

DRIE's response: The Department acknowledges the need to improve upon some of its monitoring and implementation procedures with respect to evaluation recommendations, in particular, a delineation of the respective role of the Director Program Evaluation, Office of Internal Audit, Regional Evaluation Directors/Managers.