This Web page has been archived on the Web.

1988 Report of the Auditor General of Canada

Main Points

This year we reviewed three major federal-provincial contribution programs involving a variety of provinces. A contribution imposes a greater degree of accountability to Parliament than, for example, grants or other types of transfer payments. Each program we reviewed showed evidence of weak accountability to Parliament. There are inadequate plans to guide spending on individual projects, and there is very little provision for objective assessment of program results. (paragraphs 10.60 to 10.64)

Some of the projects supported by the $200 million Canada-Nova Scotia Development Fund appear to be appropriately related to the objectives of the Fund, but many others - a total of more than $100 million in project commitments - do not. For example, federal money voted by Parliament to help develop offshore oil and gas resources was used to build unrelated roads, bridges and traffic light systems. Money was also spent, contrary to the terms and conditions of the Agreement, for salaries of regular provincial employees. (10.11 to 10.33)

In contrast, the projects supported by the $225 million Canada-Newfoundland Offshore Development Fund and the $63 million Mineral Development Agreements appear to be related to the broad purposes of these agreements. In the case of the Newfoundland Fund, however, virtually any type of project could be supported if the federal and provincial ministers agreed. Our main concern with the Mineral Development Agreements is that the federal government has not prepared adequate economic development plans on which they could be based. (10.34 to 10.59)

In view of the continuing importance of federal-provincial co-operation in the delivery of many programs, we believe the Treasury Board and program managers should review the problem areas we have highlighted in these programs, and take steps toward improving accountability to Parliament. (10.76, 10.77)

Introduction

Audit Objectives and Scope

10.1 Contributions are one of the means by which Energy, Mines and Resources (EMR) carries out its mandate and delivers its programs. Every year they involve the spending of significant sums. This year, we audited the following federal-provincial contribution programs, which had not been reviewed in detail in previous years:

    - the $200 million Canada-Nova Scotia Development Fund. We reviewed the files for all 50 projects approved to date.
    - the $225 million Canada-Newfoundland Development Fund. We reviewed the files for all 19 projects approved to date.
    - the $63 million of federal funds delivered by the provinces through the Mineral Development Agreements. We reviewed 29 projects in the $44 million contribution agreement with Quebec and the $4 million agreement with British Columbia.
10.2 A contribution, according to the Treasury Board definition, is a "conditional transfer payment for a specified purpose which is subject to being accounted for and audited pursuant to a contribution agreement". Management practices for contributions are contained in the Treasury Board's Guide on Financial Administration, the Comptroller General's Guide on the Audit of Federal Contributions, and in the specific legislation, agreements and terms and conditions approved by the Government for each particular contribution program.

10.3 Our objective was to see if the terms and conditions set out for these contribution agreements had been followed, and if Parliament had been appropriately informed. We did not audit the management of individual projects, which is generally a provincial responsibility. We concentrated on the information made available to the federal government, which is accountable to Parliament for the expenditure of federal funds. Our requests for project justifications, progress reports, and related information from the provinces were channelled through federal officials.

$200 Million Canada-Nova Scotia Development Fund

Description

10.4 The idea of a Canada-Nova Scotia Development Fund was first raised in the early 1980s when there was an expectation that significant offshore oil and gas activity was about to take place around Sable Island. Several problems threatened the development of the offshore, such as the issues of federal-provincial jurisdiction, the sharing of potential oil and gas revenue and the availability of capital for developing the reserves beyond the exploration stage.

10.5 In 1982, the provincial and federal governments resolved these problems and came to an agreement. This was formalized in the 1984 Canada-Nova Scotia Oil and Gas Agreement Act. The Act provided for the creation of the Canada-Nova Scotia Development Fund in the amount of $200 million.

10.6 The purpose of the Fund, as stated in the Act, is to finance "infrastructural costs directly or indirectly relating to the exploration for or development, production or transportation of oil or gas in the offshore area" of Nova Scotia.

10.7 The Minister of Energy, Mines and Resources is empowered, subject to approval of the Governor in Council, to enter into an agreement with the Province to establish the criteria and terms and conditions of making payments from and repayments to the Fund.

10.8 In November 1984, the federal and provincial ministers signed the Development Fund Agreement that was approved by the Governor in Council. In accordance with the requirements of the Financial Administration Act, the Treasury Board approved certain terms and conditions governing the operation of the Fund. The following are the main features of this authorities framework:

    - Projects to be funded must be for infrastructure costs related to oil and gas activities in the offshore. They must have a defined social and economic rationale; must consider the benefits to Canada and Nova Scotia; must consider the relationship to other provincial and federal initiatives; and must take into account the existing infrastructure. (There is no definition of "infrastructure".)
    - Contributions from the Fund are to be repaid by the Province out of revenues from oil and gas royalties.
    - There is a $200 million statutory appropriation for the Fund which does not lapse at the end of any particular fiscal year.
    - In proposing a project to the federal minister for approval, the provincial minister is to submit a basic description, outline its need, give an estimate of cost and timing and deal with its relationship to the selection criteria.
    - Costs of any regular employees of the Province or its agencies are not eligible.
    - A joint federal-provincial Development Fund Committee of four persons has been set up. It does not approve projects; its role is to review and monitor their implementation following approval by the federal minister.
    - The federal government may make quarterly interim payments based on estimates of costs. The Province must provide a statement of actual expenditures incurred and paid, within three months of the end of the quarter in which the payment was made.
    - The provincial auditor is required to certify provincial claims for payment. The Province must produce books and records for audit and inspection on request, and provide access to any project for inspection. In addition, the federal government may commission its own audits of the Fund (and has done so).
    - The federal minister is required to table an annual report in Parliament on the operation of the Fund.
10.9 Treasury Board Policy also requires an evaluation procedure for contribution programs, to determine the effectiveness of the contribution in meeting a department's objectives.

10.10 Exhibit 10.1 indicates the current status of the $200 million Fund, which is financed entirely by the federal government.

Exhibit not available

Observations

10.11 We found that some projects have a reasonable relationship to offshore development. Examples are the shipbuilding and metal fabrication assistance projects, where most of the allotted money has not yet been spent, and support for the decompression chamber at the Victoria General Hospital in Halifax.

10.12 However, we found many other projects financed by federal tax dollars that could be considered questionable in relation to the criteria in the Development Fund Agreement. For example:

    - projects that were not related to the objectives of the Fund;
    - projects where the costs of regular employees of the province or its agencies were paid, although these were specifically excluded in the approved terms and conditions; and
    - failure to co-ordinate federal spending.
10.13 Our observations are summarized below and illustrated by case studies of particular projects. They represent $111 million in committed funds, of which $90 million has been spent.

10.14 Projects not related to the objectives of the Fund. Having regard to the importance of offshore development and the substantial funds being provided by various federal departments, we expected a long-term plan to be in place to guide investment decisions and co-ordinate spending. In EMR files we could not find any evidence that there was a strategy or overall plan for infrastructure which would support Nova Scotia offshore development. Although federal officials discussed the idea of having a co-ordinated investment plan for Nova Scotia and Newfoundland, no such plan has been developed to guide the expenditure of funds.

10.15 In the absence of an overall plan, we saw ad hoc proposals for spending money on various projects. The individual project descriptions on file were usually brief, and generally they did not appear to us to make a convincing case for spending federal funds. Project proposals did not clearly explain the connection to offshore oil and gas development and other factors listed in the Agreement. Even though the private sector was expected to play a significant role in offshore development, we did not see any analyses of their plans and priorities in relation to the projects being proposed. Nor did the rationale for projects indicate whether or to what extent other federal departments and other levels of government were involved in supporting offshore development.

10.16 Timing for the construction and development of capital infrastructure is important. Roads, bridges and industrial parks must be ready to meet the requirements of a booming offshore industry. At the same time, expenditures made too far in advance of need can be wasteful. Assets can deteriorate, or the situation can change dramatically and make them obsolete.

10.17 Most of the activity in the Nova Scotia offshore has been near Sable Island, where some oil and a considerable quantity of natural gas have been found. The main natural gas discovery is called the Venture Field, located about 177 kilometres southeast of the Strait of Canso or 300 kilometres from Halifax.

10.18 Between the time the Development Fund Agreement was signed in 1984 and the time when most of the projects were approved in 1985-86, there was a lot of offshore drilling activity, but gas prices were declining and the development of the Venture Field was in doubt. Since the drastic fall in oil prices in early 1986, there has been little oil or gas exploration activity off Nova Scotia and reduced prospects for early development of the known resources.

10.19 The appropriation of money for the Development Fund allowed for uncertainty about when the money would be needed. The full $200 million had been voted by Parliament through statute, to be advanced as required. In light of this, we would have expected funds to be conserved until the need was clearly demonstrated. This did not happen. Despite declining offshore exploration activity and uncertainty as to when it would become economically viable to exploit offshore reserves, spending from the Fund proceeded at a rapid pace. As Exhibit 10.1 shows, between the spring of 1985 and 31 March 1988, $186 million of the $200 million Fund had been committed. Of this, $130 million has already been spent.

Exhibit not available

10.20 We found the following cases among the projects we looked at.

10.21 Case 1: Highway 107 and the East and West Petpeswick Bridges. $14.3 million was spent for the Dartmouth bypass highway, and $2.1 million was spent between 1985 and 1987 to build two bridges which are unrelated to offshore oil and gas development and not yet connected to any road.

    - These bridges are meant to link into an eastern extension of Highway 107 from Dartmouth. Another section of this highway, the $14.3 million Dartmouth bypass, was also paid for by the Development Fund. Other parts are being funded through the Canada-Nova Scotia Highways Improvement Agreement administered by the Department of Transport. Transport Canada officials were not informed that the bridges and the Dartmouth bypass were being built using federal funds. Nor did EMR seek information from Transport officials about other related road expenditures before recommending ministerial approval of the bridges.
    - At present, the bridges are not connected to Highway 107. It is planned that the missing 8 kilometre stretch of highway will be built by late 1989 or early 1990. Neither the highway nor the bridges appear to have any demonstrable connection with exploration and development of the offshore.
10.22 Case 2: Woodside Industrial Park and Ferry. $9 million has been spent to develop Phase 2 and part of Phase 3 of the Woodside Industrial Park in Dartmouth, notwithstanding the fact that Phase 1 of this park already had significant excess capacity. There is one building in the proposed 127-acre expansion, and no indication of when the rest of the space will be utilized. Nearby, a second ferry service and terminal connecting Halifax and Dartmouth was built at a cost to the Fund of $8.85 million.

    - The Woodside Ocean Industries Park is located in Dartmouth. Phase 1 had been developed by 1984 as part of another Canada-Nova Scotia agreement. The Province proposed a 127-acre expansion, to be completed in two phases, to accommodate industries that would service the offshore.
    - The project description does not mention any relationship to other industrial park facilities. When the federal Department of Regional Industrial Expansion assessed the proposal in 1984 at EMR's request, it advised deferring Phases 2 and 3 because a three- to five-year supply of serviced industrial land was already available in the Halifax-Dartmouth metropolitan area. Included in this estimate was extra capacity in Phase 1 of Woodside itself. An evaluation of Phase 1, conducted in 1986 for the federal and provincial governments, concluded that "except for the water access portion, the Woodside Ocean Industries Park was not needed. The Halifax Dartmouth area, and for that matter Nova Scotia, already had the capacity to handle the offshore oil and gas activities specifically and the development of the ocean industry sector in Nova Scotia generally."
    - At the time of our audit, $9 million of the allocated $14 million had been spent to clear and service Phase 2 and to clear some of the land for Phase 3. Phase 1 was not at capacity and there was one building in Phase 2. We understand a decision has now been taken to suspend further development.
    - $2.5 million of the $9 million was a contribution to the South Dartmouth trunk sewer to open up new residential and industrial land. Although presented as a sub-project of Woodside, it has no relationship to the industrial park project. The sewer system in Phase 1 of Woodside Industrial Park is not connected to the trunk sewer, and no connection points have been installed for proposed Phases 2 and 3 of the Park.
    - The Woodside ferry connecting Halifax and Dartmouth uses a common terminal with the existing Halifax-Dartmouth ferry at the Halifax end, and a new terminal that is only three kilometres away from the existing terminal at the Dartmouth end. The new ferry service runs only on weekday rush hours and has gained most of its passengers from the existing Halifax-Dartmouth ferry.
    - Although these projects were based partly on an expectation of population growth in the Halifax-Dartmouth area related to oil and gas development, in fact the main Venture project itself was expected to cause an average increase of only 220 persons a year into the area. Overall, we are not convinced there was a valid need to spend the money on these projects at this time for offshore oil and gas development.
10.23 Case 3: Sheet Harbour Highway and Industrial Park. $20 million has been committed to a highway from the north shore of Nova Scotia to Sheet Harbour on the eastern shore. The project rationale does not explain how this highway will support offshore oil and gas activity which at present is centred around Sable Island. A $9.2 million industrial park was also built at Sheet Harbour, when there were already underutilized industrial park facilities well suited to serve offshore development at the Strait of Canso and Halifax.

    - At the time of our audit, $4 million had been spent of the $20 million committed to the construction of a 90 kilometre all-weather two-lane paved highway to connect Sheet Harbour directly to the industrial area in Stellarton-Pictou-Trenton on the north shore. The project description and a press release explained the need for the project on grounds such as speedier travel between Pictou and Sheet Harbour, improved market access for coal mining companies in Pictou County and the possibility of enhanced tourism. Construction was also justified as connecting the infrastructure and services in Pictou County to the development of offshore oil and gas resources. Stellarton is approximately 115 kilometres from Sheet Harbour via existing paved highways. The proposed development plan for the Venture gas project includes a pipeline landfall at Country Harbour on the eastern shore. From there, gas would be transported by pipeline to the Strait of Canso area for processing. The most direct link between Pictou County and Country Harbour or the Strait of Canso is not through Sheet Harbour, but via the Trans Canada Highway.
    - Definition of the industrial park project began in early 1985 and went through several revisions before it was approved by the federal minister in late 1985. However, in February 1985 the project had already appeared in the 1985-86 Nova Scotia Estimates, which showed the Development Fund as a source of revenue.
    - The project description did not cite any specific connection to offshore oil and gas development. Before the project was approved, federal officials had commented in internal correspondence on the excess capacity at existing facilities at Halifax-Dartmouth and at Mulgrave on the Strait of Canso. They had also noted that the site could not be related to the proposed development plan for the Venture gas field off Sable Island.
    - At the time of our audit, the $9.2 million Park was nearing completion, including a new 3.5 kilometre access road. The wharf is being used for the shipment of natural resources such as wood products and gypsum, but there do not appear to be any plans to use the park or the wharf to support the offshore oil and gas industry.
10.24 Case 4: The Vocational Training Assistance Program. In response to provincial requests, the federal Minister agreed to set up a special program, the Vocational Training Assistance Program, to cover operational and other expenditures to a maximum of $45 million for two years, 1984-85 and 1985-86.

    - An offshore education and training fund had been envisaged in the 1982 Agreement between Canada and Nova Scotia, but it was to be financed by industry and separate from the Development Fund. No separate legislation was introduced, however, and the expenditures were made from the Canada-Nova Scotia Development Fund. This special program was used to fund five projects: $16.2 million for universities, $17.3 million for vocational schools, $5.4 million for institutes of technology, $2 million for computers and software for secondary schools, and $1.5 million for high technology infrastructure.
    - For the Vocational Schools project and the Institutes of Technology project, a vague and ambiguous project description form was submitted. This was the key document required to support the approval of the project, and it should have outlined the purpose of the expenditure, how it met the eligibility criteria, schedule and cost estimates, and an implementation plan. The form that was submitted showed the basis on which costs would be estimated, but contained no information about the choice of schools or courses, no explanation of the connection to the offshore, and no schedule or implementation plan.
    - We are concerned that part of this money has been spent for purposes not related to the offshore. Vocational school courses such as welding, drafting, cooking, denture technician, photography and stenography were funded. Although some of these had some potential for employment related to offshore oil and gas development, others had less connection.
    - The Province requested periodic advance payments, which EMR made. No details of courses were requested by EMR or provided at that time. At the end of this two year special program, the Vocational Schools project was $636,515 under budget, which exactly matches an overrun in the Institutes of Technology project. The project completion reports do not explain the variances. The rest of the course details have now been obtained as a result of audits commissioned by EMR and at our request.
    - Based on this additional information, we note that some of the expenditures are contrary to the terms and conditions of the agreement approved by Treasury Board, and that there has been a failure to co-ordinate federal spending.
10.25 Spending on salaries of employees of the Province or its agencies. Of the funds provided for the Vocational Training Assistance Program, $22.7 million has been spent on support for technical and vocational training given for the most part by employees of the Province or its agencies. These funds were used in both the Vocational Schools project and the Institutes of Technology project primarily to pay the salaries of staff employed by educational institutions run by the Province. The Development Fund terms and conditions approved by Treasury Board exclude any cost in respect of any regular employee of the Province or its agencies. The Minister's Annual Report to Parliament refers to this project as improving school and university facilities, rather than as paying salaries.

10.26 At the same time as the Vocational Training Assistance Program was set up, the Minister also set up an Offshore Resources Development Program, from which the Fund paid approximately $4 million to various provincial government departments. Some of this money was also spent on salaries and employee benefits for regular provincial employees.

10.27 Failure to co-ordinate federal spending. The Vocational Schools and Institutes of Technology projects were aimed at contributing to courses that would train students for employment in the offshore. In essence, the province was to estimate how many students enrolled in existing courses might eventually be employed in the offshore and was to bill the Fund for a corresponding proportion of their costs. Since Employment and Immigration Canada was also contributing to many of the courses involved, there was a requirement to estimate and deduct any payments received from them before submitting the claim to EMR. In such a situation there is a risk of overlapping funding unless eligible expenditures to be paid by each party are clearly defined and properly calculated.

10.28 We were informed that the claims paid by EMR for these projects were based on estimated rather than actual costs. At our request, EMR obtained additional information from the province. When compared with actual costs provided by the province to EMR on June 15, 1988 (some 18 months after the claims had been certified and finalized), it is evident that there were differences between what was claimed and paid for by EMR and the actual expenses incurred in both projects.

10.29 For the Nova Scotia Nautical Institute, for example, after taking into account EIC's share, the information provided to EMR shows "overclaims" of some $663,000 were made to the Fund in 1985-86. Indeed, for that fiscal year the amounts claimed from EIC, EMR and at least one other federal department exceeded the total operating cost of the Nautical Institute. As a result of other discrepancies between claimed and actual expenses, there were "underclaims" in other institutions within the same project. Taken together, the province contends that the "underclaims" balance the "overclaims".

10.30 A complicating factor is that the project description is so vague as to leave open to interpretation the costs to be included. For example, there is no definition of what is to be included in direct cost or overhead despite the fact that EIC was also involved in paying substantial portions of each of these categories of expenses. As a result, neither EMR nor the province had a sound basis for determining how the claims should be calculated.

10.31 In our view, the definition of eligible costs for these two projects, as well as the co-ordination by EMR with EIC and other federal programs, was not adequate to ensure that an overlap of federal funding did not occur. We also believe that for proper control EMR should have obtained a more timely adjustment of estimated to actual costs for these projects.

10.32 Other cases. In addition to the four cases cited above, a number of other projects have been approved that are of questionable relevance to offshore oil and gas development. For example, the Fund has committed $2 million for a computerized traffic light control system for Halifax-Dartmouth.

10.33 In total, over $100 million has been committed to projects that are of questionable relevance. These projects deplete the Fund before the long-term infrastructure needs of the Nova Scotia offshore are clear, and set an unfortunate precedent for any future contribution agreements that may be designed to achieve similar purposes.

$225 Million Canada-Newfoundland Offshore Development Fund

Description

10.34 In February 1985, Newfoundland and Canada signed the Atlantic Accord on offshore oil and gas resource management and revenue sharing. The Accord called for a $300 million Development Fund to be set up. Expenditures from the Fund were to be shared 75 percent by the federal government and 25 percent by the provincial government.

10.35 The first payment to the Province was made in October 1987, to cover work in progress. Up to 31 March 1988, $79.1 million in federal funds and $26 million in provincial funds had been committed to 19 approved projects. See Exhibit 10.4 for details. An additional $21 million of federal and provincial dollars has been approved in principle but the funds have not been committed.

Exhibit not available

10.36 The Act implementing the Atlantic Accord does not define a purpose for the Fund. It merely gives the Minister authority to enter into an agreement. There are no criteria in the Act that might guide the selection or rejection of expenditures.

10.37 Looking to other sources of notice to Parliament of the intent of expenditures from the Fund, one finds the purpose of the Fund stated in the "Grants and Contributions" detail of the 1988-89 Estimates, and it is the same as for Nova Scotia; that is: "in support of infrastructural costs directly or indirectly relating to the exploration for or development, production or transportation of oil and gas in the offshore area".

10.38 The Agreement itself, as approved by the Governor in Council, broadens the purpose of the Fund to the following:

"...to defray the social and economic infrastructure costs related to the development of oil and gas in the offshore area in the period before production begins and to ensure that the provincial economy is well positioned to reap the economic benefits of offshore development..."
10.39 In addition, the Agreement and terms and conditions allow for funding the salaries of provincial employees and operating costs to training institutions when "...expressly permitted by Ministers...". In all other respects, the project selection criteria in the Newfoundland agreement are similar to those for Nova Scotia.

10.40 As in Nova Scotia, this is a minister-to-minister agreement, but in this case either minister can propose projects to the other for approval. Of the 19 projects approved so far, the $2.6 million commitment to a wave generating project at the National Research Council's Institute for Marine Dynamics is the one that was proposed by the federal minister.

10.41 Also similar to Nova Scotia, there is a Development Fund Committee to monitor and review the implementation of projects following ministerial approval. The Federal Economic Development Co-ordinator in Newfoundland represents the federal aspects of the Agreement and acts as the federal co-chairman. Project management is the responsibility of whichever government proposed the project. The other partner has the right to inspect during implementation.

Observations

10.42 The purpose of the Canada-Newfoundland Offshore Development Fund is not sufficiently detailed in the Act to hold the Government accountable to Parliament for expenditures under it. The purposes of the Fund, as disclosed in the Government's spending estimates, have been broadened by a minister-to-minister agreement without any specific notice to Parliament. Since the terms and conditions for use of the Fund are so broad, virtually any project in Newfoundland would be eligible. As with the Nova Scotia Fund, federal officials are not involved in the preparation and technical analysis of proposals submitted by the Province.

10.43 At the same time, although we are concerned that this agreement is distanced from federal management control and accountability to Parliament, in most cases the types of projects being financed seem to be related to offshore oil and gas development.

10.44 As in Nova Scotia, we saw no sign of a co-ordinated plan for federal investment in the offshore. But an important difference is that in Newfoundland, the Hibernia Benefits Plan and the Hibernia Development Plan have been approved by the Canada-Newfoundland Offshore Petroleum Board. Although these plans do not cover the whole range of offshore activity, they provide a focus for planning, and for dealing with issues of concern such as avoiding the "boom or bust" construction cycle.

10.45 Some projects, such as the enhancements to the Marystown Shipyard, indicate responsible management of Fund monies. In this case, the total expected cost of $19 million has been broken into milestones with funds to be released at stages of progress related to the needs of development of the Hibernia offshore oil discovery. The first milestone is infrastructure planning, to which the federal government has committed $750,000.

10.46 More responsible management of the Fund may perhaps be attributed to several factors, such as the cost-sharing nature of the agreement and the comparatively brighter prospects for oil and gas development in the Newfoundland offshore. The Hibernia plans also provide guidance for the wise use of the Fund. However, since expenditures from the Fund have begun only recently, it is too early to tell if value for money will be received.

10.47 Neither the Newfoundland nor Nova Scotia agreements have built in a requirement for an evaluation. In this respect they differ from many other federal-provincial agreements, including the mineral development agreements. This does not excuse the federal government from carrying out its own evaluations, as required by the Treasury Board. We are therefore concerned that there are no plans for conducting effectiveness evaluations of the expenditures.

$63 Million Mineral Development Agreements

Description

10.48 The federal government is providing $143.1 million to selected provinces under a series of Mineral Development Agreements (MDAs), each of which runs for five years. The partners to the agreements match this in aggregate with $110.4 million, making the cost-shared total for MDAs $253.5 million. Of the federal government's $143.1 million, $62.8 million is delivered through federal-provincial contribution agreements. The distribution of money is shown in Exhibit 10.5.

Exhibit not available

10.49 Although the stated purpose of each MDA varies, the common purpose could be represented as follows:

    - to establish frameworks for the implementation of programs and measures to stimulate mineral development and increase economic benefits of the mining industry in a co-operative and co-ordinated manner.
10.50 The MDAs are funded through the Resources and Technical Surveys Act and managed on behalf of EMR by the Mineral Policy Sector. Each MDA specifies how the federal and provincial governments will co-operate in individual and joint activities. A federal-provincial management committee has overall responsibility to ensure that the intent as well as the terms and conditions of the agreement are met. Working level technical sub-committees usually recommend annual work plans to the management committee for approval.

10.51 Our audit focussed on the $43.2 million of federal funds in Quebec and the $4.4 million of federal funds in British Columbia that are delivered through contribution agreements. In the Quebec MDA, each partner has agreed to spend $50 million. The federal government is providing $5 million directly to various programs related to asbestos, and $1.8 million in techno-economic studies. The remaining $43.2 million in federal funds is contributed to the Province to deliver the following programs:

Geoscientific Activities

$ 17,375,000

Mineral Development Infrastructure

13,453,700

Opening up the Iron Ore Industry

6,996,300

Public Relations

125,000

Promotion of Mining Sector

2,000,000

Mining Exploration Assistance

3,250,000


10.52 In the British Columbia MDA, each partner has agreed to pay $5 million. The federal government is providing approximately $625,000 directly, in the form of geological surveys. The remaining $4,375,000 is contributed to the Province to deliver the following programs:

Promotion of B.C. Mineral Potential

- Geological Surveys

$ 2,827,000

- Geoscientific Data Systems

195,000

- Market, Feasibility and Technical Studies

583,000

Financial Assistance for Mine Development

523,000

Management, Public Information and Evaluation

247,000


10.53 The Quebec and British Columbia mineral development agreements come under the umbrella structure known as Economic and Regional Development Agreements (ERDAs). The ERDA objectives are: to emphasize a strategic approach to regionally focussed programs, based on coherent national policies and analyses of economic strengths of sectors and regions; to contribute to regional development by providing critical infrastructure; to ensure that assistance provided to the private sector will be for activities that are self-sustaining in the long term; and to ensure that activities of each level of government are clearly identifiable by Canadian taxpayers. The government-wide responsibility for ERDAs was assigned to the Minister of State for Economic and Regional Development (MSERD). In mid-1984, this responsibility was transferred to the Minister of Regional Industrial Expansion.

10.54 According to the Government Organization Act of 1983 and subsequent legislation, an ERDA agreement with a province was to be preceded by a plan for economic development approved by the MSERD minister or his successor, in concert with other ministers. We have found no indication of what these plans should contain, but we think they should provide a rationale for how much money should be allocated to particular industry sectors, such as mining, forestry, fishing or tourism. This would allow MDAs to fit within the economic plan agreed to through the ERDA agreement with the province.

Observations

10.55 Mineral development agreements differ from the development funds in a number of ways. MDAs involve less money within any one province, and the money is voted annually by Parliament. The agreements are also more detailed than those for the development funds. For example, they define the management structure in more detail; they state the share of the cost to be paid by each participant; and they describe the mineral development programs and the financial resources allocated to each program, for each of the five years during which the agreement is in force.

10.56 As with the development funds, however, we have some concerns about whether Parliament, or the Government, is in a position to know whether the MDA programs or projects are achieving their overall purpose. We could find no evidence that adequate economic development plans were prepared to provide a framework for the MDAs. The Quebec and British Columbia ERDAs do not provide a clear mineral development strategy at the provincial level, to build on areas of strength, for example, or to support weak industries.

10.57 Within this uncertain framework, EMR proposed programs that would benefit the minerals sector within each province, for discussion with its provincial counterparts and final approval by Cabinet. However, the logic supporting the selection of programs was not clearly documented. For example, $7 million was provided toward a highway to open up the Quebec iron ore industry, at a time when world prices were falling and the Canadian industry had excess capacity.

10.58 The lack of precision regarding economic development plans and objectives for MDAs has created problems in evaluating their effectiveness. The departmental assessment and our own review showed that little useful evaluation has been done. EMR does not have plans to evaluate the overall $143 million MDA expenditure in relation to departmental objectives. It is planned that all individual agreements will be subjected to final evaluation. Some interim evaluation work of varying quality has been done for most of the agreements except Quebec.

10.59 Once the projects have been approved, the process for implementing them seems to work reasonably well. However, we found some problems in the management of the Quebec Agreement. For example, the management committee has not met as often as required; EMR has had some problems in obtaining progress reports; and at the time of our audit EMR had audited only the first year of the Agreement, 1985-86.

Conclusion

10.60 The federal-provincial agreements we audited shared one characteristic: weak accountability to Parliament. We examined the course of events to see whether and to what extent Parliament could hold the Government accountable for the results of money spent.

10.61 There are several ways federal money can be transferred to the provinces - for example in the form of grants, contributions, or other types of transfer payments. In the cases we examined, the method chosen was to set up contribution agreements, with terms and conditions approved by Treasury Board Ministers. This imposes a requirement for the Government to control funds and to account to Parliament for their results.

10.62 Because these contribution agreements were conducted on the basis of partnership with provincial governments, a major factor determining their success would seem to be the degree of understanding that exists between the two levels of government. From the federal point of view, for example, problems could arise if a provincial government attempted to pursue objectives that did not coincide with the stated purpose for which the federal Parliament had voted funds.

10.63 For the MDAs and the Newfoundland Development Fund, we were generally satisfied that the projects being implemented were consistent with the governing legislation. But in the case of Nova Scotia, federal money voted by Parliament to help develop offshore oil and gas resources was used to build unrelated roads, bridges and traffic light systems. Often, the federal Minister's approval of Nova Scotia projects seems to have been given in light of an interpretation of the Agreement that was different from the legislated purpose as passed in an Act of Parliament.

10.64 In all of the agreements we found instances where they did not comply with the accountability requirements for contribution programs set by the Treasury Board - for example, regarding evaluation of effectiveness.

10.65 We reviewed the problem areas we found in the various agreements to see if there were any useful lessons that could be drawn for the future, and our conclusions follow.

10.66 Clear objectives. The process of government accountability to Parliament for expenditures should begin with clearly stated objectives. If the Government's strategic planning assumptions or logic are weak, Parliament should have the opportunity to challenge them in an effort to clarify objectives. This process did not seem to be working well in the federal-provincial agreements we audited. Many questions, such as the following, were not asked:

    - How were the dollar values set?
    - How would initiatives relate to other government programs?
    - What would be an appropriate pace of spending to match need while avoiding a "boom and bust" cycle?, and
    - What type of projects are excluded from funding?
10.67 For the Nova Scotia and Newfoundland Development Funds, strategic planning appears to have been a process of negotiation between elected governments. The output of this process has been a package deal which is presented to Parliament. Debate on the package and the opportunity to adjust it are limited, because a small change could cause the whole deal to collapse.

10.68 In the case of the MDAs, objectives are set by ministers after negotiations by officials, but again the process takes place beyond the view of Parliament. The legislative base for the ERDAs is the Government Organization Act, while the funding for the MDAs is through the Resources and Technical Surveys Act. Parliament is not involved in questioning or clarifying the economic objectives of ERDAs to form plausible links with the mineral objectives of the MDAs. Again, package deals are negotiated with another government. Parliament's chance to influence them comes only through the annual appropriations process.

10.69 Role of the Treasury Board. Normally when legislation is debated by Parliament, vague and open-ended clauses can be questioned, and perhaps clarified. This did not happen with the legislation enacting the development funds. The "offshore infrastructure" purpose of the Nova Scotia Development Fund is broad and unclear as to what is excluded. The Newfoundland Accord Act does not specify a purpose for the Development Fund at all; instead, the Minister was empowered to negotiate and sign a Development Fund Agreement once it was approved by the Governor in Council. This process places the onus on central agencies like the Treasury Board Secretariat to specify what is intended so it can be successfully implemented.

10.70 The Treasury Board does not seem to have played a strong control role during the process of creating terms and conditions for the development funds, to ensure that the broad wishes of Parliament were defined in operational detail. In neither of these agreements, nor in their terms and conditions, did the Board clearly define "infrastructure", flesh out the broad selection criteria, insist on a formal analysis by federal officials of economic viability, social factors, and relationship to objectives or include a requirement for evaluation. Where appropriate, most of these points are covered in the MDA contribution agreements.

10.71 We suggest that the Treasury Board and its Secretariat should play a leadership role in interpreting the intent of Parliament so it can be carried out.

10.72 In addition, both before and after agreements are signed, there is a need for better co-ordination between federal departments, to present a consistent image to the province and to prevent overlapping programs. The administration of the Nova Scotia Development Fund needs to be strengthened in this regard. Treasury Board or other central agencies could play a useful role here in ensuring that this co-ordination takes place.

10.73 Evaluation. Strategic plans and objectives may be difficult to state even though there may be a legislative requirement for them. This weakness in accountability could be balanced in part by a strong feedback mechanism, such as program evaluation. But evaluation, as applied in these agreements, may not be an effective accountability tool. In the development funds there are no plans for evaluation, while in the MDAs interim evaluation efforts so far have not produced useful results. In our view, the Treasury Board should have ensured that appropriate evaluation procedures were in place before authority to spend funds was granted.

10.74 Better Definition of Need. Where there are clear and pressing needs which provide a focus for spending decisions, there would seem to be a closer relationship between stated objectives and the use of funds. This appears to be the case in Newfoundland. Where needs and objectives are not clearly defined, some braking mechanism needs to be installed to ensure that money is still available when the requirements come into sharper focus. Annual appropriations provide one means of keeping control.

10.75 Cost Sharing. The Nova Scotia fund is financed 100 percent by federal dollars. In Newfoundland, the province must contribute 25 percent. We also note that, a portion of the work is always cost shared in the MDAs. The experience with the Newfoundland Fund and the MDAs indicates that cost-sharing in federal-provincial agreements is an incentive for each partner to seek cost effectiveness.

10.76 Recommendation. Because our audit covered several federal-provincial agreements within only one department, we cannot draw government-wide conclusions. Nevertheless, it appears to us that there is a need to ensure, at a minimum, that all legislation presented to Parliament is consistent with the best control practices already developed in the Government. Moreover, the special nature of federal-provincial contribution arrangements may require special measures to improve accountability to Parliament.

10.77 The Treasury Board and program managers should review the problem areas we have highlighted, and apply the lessons learned to future federal-provincial contribution arrangements. The following factors appear to be particularly important:

    - definition of clear objectives;
    - more specific definition of needs and plans in terms and conditions;
    - independent program evaluation;
    - cost sharing; and
    - adequate interdepartmental co-ordination of federal spending in a province.