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1991 Report of the Auditor General of Canada

Main Points

9.2 The role of central agencies is changing; they are placing increased emphasis on the management of non-tax revenue by departments (9.23 to 9.29). The extent to which the Treasury Board Secretariat and the Office of the Comptroller General are to monitor non-tax revenue activity and results needs to be clarified and communicated to departments (9.30 to 9.33). They have completed some important tasks and are pursuing others (9.34 to 9.40).

9.3 A more businesslike approach is being sought (9.41 to 9.48). Increased departmental attention is required to ensure that potential sources of non-tax revenue are identified, planned for, and implemented (9.49 to 9.52). Millions of dollars of revenue are likely not being realized (9.53 to 9.56).

9.4 Before the new user fee policy can be successfully implemented, strategies that consider the costs and benefits to all parties will have to be determined and fees set accordingly (9.57 to 9.63).

9.5 Improved disclosure of non-tax revenue activity and performance is required to serve Parliament better (9.64 to 9.73).

9.6 Return on investments is usually received and recorded on a timely basis (9.74). Various deficiencies exist in collecting, controlling and accounting for other non-tax revenue (9.75 to 9.78). Other means of collection should be considered, such as consolidating the handling of accounts in one agency, contracting out to collection agencies and offsetting payments against moneys owed the Crown (9.79).

Introduction

9.8 Behind the accounting definition are diversified activities and programs. These include such different operations as: docking for boats; operations of the Bank of Canada; issuance of a fishing licence; sale of maps and charts; disposal of lands and surplus assets; recovery of moneys spent in prior years; and cost recovery in providing health services and in conducting food inspection.

9.9 The 1990 Public Accounts report non-tax revenue at $11 billion, including $2 billion of receipts credited to appropriations (net voted) and $1 billion from the operations of consolidated Crown corporations. This revenue arises from operations conducted with parties external to the "entity of the Government of Canada" as defined in the Public Accounts. "Net voting" is an alternative means of funding selected programs or activities. Parliament authorizes a department to apply revenue received to the cost incurred and then votes the net financial requirements (estimated expenditures minus estimated revenue to be received).

9.10 The largest component of reported non-tax revenue is called "return on investments" ($6 billion in 1989-90). Included in that figure are transfers from the Bank of Canada ($2.2 billion) and the net profit on foreign exchange operations ($1.6 billion). Other reported non-tax revenue for 1989-90 includes:

• services and fees of $1.4 billion (mostly airport services);
• privileges, licences and permits of $587 million (fees for passports, for example);
• refunds of previous years' expenditures of $551 million, which include recovery of contributions;
• proceeds from sales of $423 million (sale of surplus assets, publications, maps and charts);
• sale of coins for $355 million;
• miscellaneous revenue of about $2 billion.

Scope and Approach

9.13 We defined non-tax revenue, for the purposes of this work, as sums paid or payable to the Crown, exclusive of tax revenue, arising from government's transacting with external parties.

9.14 We reviewed revenue planning and control, cost recovery and costing practices, collection practices and information to Parliament as they related in particular to return on investments, user fees, recovery of prior years' expenditures and disposal of properties.

9.15 The entities examined were Treasury Board Secretariat, the Office of the Comptroller General and nine departments. The extent and focus of examination varied according to recent audit observations, the relative importance of the issue in the department and the nature of the revenue.

9.16 Since our focus was on the management of non-tax revenue in departments, we did not review the systems and practices in Crown corporations and other related government operations, such as the Bank of Canada and the Exchange Fund Account. However, we did consider the way revenue from these sources was classified and reported. We did not review the overall management of investments and loans which includes the financing, buying and selling of Crown corporations.

9.17 We did not examine fees or other charges levied by departments (for example, Public Works, Supply and Services, Communications) for the provision of services to other federal departments and agencies (about $3.5 billion for 1989-90).

Criteria

• There should be clear policy and related directives and guidelines for the planning and control of non-tax revenue. Management should periodically review operations to determine if there are opportunities to increase this revenue. This review should be part of departments' strategic planning and budgeting.
• Means should exist to identify the extent and costs of services, rights and privileges, goods and other property provided to users outside the federal government, and to implement appropriate user charges.
• Means should exist to manage and control non-tax revenue with due regard to economy and efficiency.
• Information to Parliament on non-tax revenue activities and performance should be clear, concise and complete and should include information that would allow non-tax revenue to be compared with the cost of generating it and the costs of the goods and services that produce it.
• There should be systems and procedures in place to ensure the prompt collection of amounts due to the Crown and to minimize losses.

• lack of pricing policy and sufficient, timely cost information;
• instances of foregone revenue or opportunities to increase revenue in the millions of dollars;
• lack of sufficient information to manage loans receivable under the Student Loans Program, and limited recovery effort;
• problems in the management of repayable contributions, resulting in lack of assurance that amounts are repaid when due;
• delays in reaching an agreement on the implementation of the proceeds of crime legislation, resulting in financial losses; and
• inadequate control over certain advances.

9.21 Our extended review on a government-wide basis found that central agencies and departments are taking steps to improve financial management and control of non-tax revenue. However, effective use of incentives, better information and improved control are needed to achieve comprehensive financial management, particularly in view of the significant changes taking place in authorities and policy.

Government-wide Observations

Increasing Attention to Non-tax Revenue by the Government

9.23 Central agencies of the Treasury Board have taken steps to modify legislative authorities and to promote policies that draw attention to non-tax revenue and influence the way it is managed. Prominent are amendments to the Financial Administration Act effective May 1991, issuance in September 1990 of a policy on external user fee charges (preparation began in 1985), introduction in December 1989 of Special Operating Agencies, issuance in February 1989 of a Guide to the Costing of Outputs, and a policy dated April 1990 that requires all future contributions to business to be repaid unless specifically exempted.

A Changing Role for Central Agencies

9.25 Central agencies are shifting from an emphasis on examination of transactions to policy leadership and provision of advice to departments on the application of policy principles. New mission statements are to be written that will guide the action of central agencies, and analysis is to be developed to identify areas of risk.

9.26 In this situation, it is difficult to establish responsibility, particularly since management of non-tax revenue is not vested in one place. Many organizational units perform various tasks, and responsibility is shared within and among entities. This requires a high level of communication and co-ordination to ensure control and to avoid fragmentation and undesirable results.

9.27 Policy responsibility for non-tax revenue rests with more than one entity, depending on the type of revenue. For example, the Department of Finance is responsible for any policy regarding return on investments, while the Treasury Board Secretariat has overall responsibility for the new user fee policy. Policy guidance for other non-tax revenue is scattered among numerous authorities, directives and guidelines.

9.28 We were informed that implementation of policies differs from one department to the next. The degree of consistency or difference is dependent, in part, on the work of program analysts in the Treasury Board Secretariat who are assigned individual ministries and on the functional specialists in the Office of the Comptroller General.

9.29 Departments are to follow the process outlined in the user fee policy and to be prepared to justify their decisions. The Treasury Board Secretariat reviews information in departments' multi-year operating plans, and aggregates information for the annual Estimates and budget. We were informed that the Treasury Board Secretariat may increase the budget reference levels of a department where it undertakes to increase revenue, or to reduce budget levels if it does not meet revenue targets. This would influence the amount of attention by departments to non-tax revenue. However, data on the frequency and extent of budget adjustments are not readily available to gauge the overall impact of the practice on present and future program costs and budgets.

The extent to which central agencies are expected to monitor non-tax revenue needs to be clarified and communicated to departments

9.31 A counter-balancing function would mean knowing, on a timely basis, what is being achieved so that problems can be solved, including the modification of central policy and authorities as appropriate and causing departments to take corrective action as necessary. Clarification of central agencies' mission and new accountability relationships are essential in this regard.

9.32 Central agencies do not routinely measure and assess revenue performance as a distinct process. It is not clear whether they are expected to monitor in this way. Anticipated revenue may be compared with actual as part of the IMAA process. However, many departments have not signed an agreement as required by the process. Full accountability reporting for a few departments begins in June 1991.

9.33 It may not be feasible to gauge revenue performance, even with the submission of IMAA reports, until experience is gained. Revenue plans will have to become consistent and refined, and the accounting systems will have to generate data that can be compared with budgets on each type of non-tax revenue as well as at an aggregate level. Moreover, feedback to management and central agencies through internal audit and program evaluations, which has been limited, should increase when studies are done in support of a user fee policy review scheduled for 1993.

Central agencies have completed some important tasks and are pursuing others

9.35 The Office of the Comptroller General has made cash management a priority for some time. Several years ago it increased attention to the collection of accounts receivable. This caused departments to clean up their accounts and to collect them faster.

9.36 The Comptroller General's Office no longer monitors receivables and revenue in this way. The last available data for 1987-88 indicate that, although accounts were outstanding for as few as 20 days in some departments, in others they averaged as long as 235 days. This suggests that some further gains may still be possible.

9.37 In May 1990, the Office of the Comptroller General completed a review of the government's loan and receivable portfolio. Initial findings pointed to these problems:

• lack of clearly defined collection strategies and tools to recover amounts owed;
• lack of checking before extending credit;
• lack of specific terms and conditions for managing repayable contributions;
• inability to access information quickly, or to update account information, and difficulty in monitoring delinquent accounts; and
• a concern that existing management practices did not adequately focus on risk assessment or early warning systems to detect problems.

9.39 Another task of the Comptroller General's Office was to initiate internal audits and program evaluations in departments as part of the 1993 user fee policy review. We found this had been started, although at the time of our review that Office did not have progress reports and some audits and evaluations had been deferred or delayed. Renewed attention is planned between then and March 1993.

9.40 Finally, the Office of the Comptroller General issued a costing guide in 1989 and more recently has given courses on the costing and implementation of user fees. These have been well accepted by departments.

A more businesslike approach is being sought

9.42 Treasury Board approved a user fee policy in December 1989 (issued in September 1990). The intent of the new policy is to promote equity in financing of activities that provide specific benefits to external users and to improve the allocation and management of government resources. This involves ensuring, to the maximum extent practicable, that the cost of providing specific benefits to users is borne by such users.

9.43 In 1990 a new organizational form, a Special Operating Agency, was introduced. A Special Operating Agency is a service unit that is given direct responsibility for results and increased management flexibility where necessary to reach new levels of performance. The policy rationale is to encourage a more businesslike approach where entities are to compete in the marketplace and be financially self sustaining. Since Special Operating Agencies are new, and at present deal mainly with revenue internal to government, we did not include them in the scope of this audit. However, we recognize that they represent a challenge of structural and cultural change. Their accountability and specific operating policies are being developed.

9.44 The White Paper issued in late 1990 on the reform of the Public Service (PS 2000) included proposals to use non-tax revenue as an incentive to departments to finance and improve services to program clients. Organizations that find new ways to generate revenue will be able to retain part or all of the funds, and managers will be encouraged to dispose of or transfer surplus government assets.

9.45 Amendments to the Financial Administration Act, passed by Parliament in May 1991, now provide explicit authority for departments to spend revenue that they receive in a fiscal year, if authorized by an appropriation Act of Parliament. Departmental corporations have also been granted standing authority to spend revenue received during the year. These amendments should encourage increased revenue generation. However, guidance is needed in the use of these authorities. A policy is to be prepared on net voting and revolving funds to establish a decision and control framework to guide departmental use of such authorities that lead to revenue spending directly by departments.

9.46 Financial Administration Act revisions also recognize that fees for rights and privileges may be levied in amounts that yield revenue greater than the cost to provide them. In these cases, rates may reflect a measure of the value of the right or privilege given (for example, through a licence or a patent). In these circumstances, departments must pay particular attention to the acceptance of fees by users and the relationship between fees and the level of service provided. Where the value to the user exceeds cost, specific legislative authority is required.

9.47 The need for care in determining fair and equitable fees and securing authority for them has been demonstrated in debates in Parliament on the Financial Administration Act amendments. Varying views have been expressed on both the fundamental principles of revenue generation and the anticipated economic results of user fees. One view is that nearly all government services should be funded through general tax revenue. Another is that user fees are a way of achieving equitable, efficient and responsive programs. Concern has also been expressed that Parliament would not have sufficient opportunity to debate future fee increases.

9.48 Allowing entities to use non-tax revenue to finance their operations is a powerful incentive. However, a note of caution is in order since Parliament relinquishes a certain amount of control when programs are not financed exclusively by appropriations. Considering also that funds other than those coming out of the consolidated revenue fund will increasingly be used to finance expenditures, our concern is accounting and full disclosure to Parliament. This has not always been the case, as reported in paragraphs 9.64 to 9.73.

Increased Departmental Attention to Non-tax Revenue Management is Required

• a much higher priority given to program expenditure than to revenue generation;
• lack of incentive to overcome constraints and frustrations and to maximize revenue, particularly when time and money must be spent to collect such revenue without budgetary compensation; and
• little recognition or other reward for pursuing new or innovative revenue generating ideas, and few sanctions against neglecting revenue.

Planning and control need to be improved

9.52 Financial staff or similar groups usually issue the required procedures, including the forms and instructions for submitting revenue plans. They may consolidate the data from the plans of operational units, but generally do not review, critically challenge or analyze non-tax revenue plans and results. The opportunity is available to enhance this role by participating, in partnership with program management, in other important aspects of revenue management such as:

• basing strategy and policy advice on both program knowledge and financial information;
• identifying opportunities for increased revenue and challenging expectations and assumptions;
• participating in reviews of costs of services and in the development of related fee schedules;
• monitoring and evaluating revenue performance in terms of costs, program impacts and results;
• resolving anomalies, inconsistencies or conflicts with program goals; and
• showing where improved revenue and program delivery can be achieved, including cases where lack of cost recovery or inability to achieve revenue targets indicates a poor service delivery or lack of demand for it.

9.54 We identified cases similar to those reported in past audits. Collectively, these illustrate that there is a cost to slow revenue planning and implementation. In paragraph 9.108 we note that a delay in cost recovery for pre-market evaluation of drugs has cost roughly $90 million since 1989; and in paragraph 9.111 we note $8 million of costs unrecovered for dosimetry services since 1984.

9.55 Departments generally have yet to formulate and test strategies and policies for revenue generation. This can be a difficult and lengthy process. Reconciling costs to be recovered with the value of benefits given to the general public and to specific users is a particularly sensitive issue, as was illustrated in the debates in Parliament.

9.56 The recently introduced User Fee Revenue Plans are departments' main annual planning documents specifically for certain types of non-tax revenue. For other sources of revenue, such as return on investments, sale of assets, and recovery of repayable contributions, strategies and specific plans are not necessarily being prepared. These areas are sometimes more difficult for departments to forecast.

Implementation of the user fee policy faces many challenges

9.58 Cost data are often inconsistent or incomplete. Cost components of a given service are subject to many interpretations, even among operational units of the same department. Often the cost information used does not take into account indirect costs, such as departmental administration and common service costs.

9.59 The new user fee policy indicates that full costs for the provision of facilities and services to external users should be known and recovered unless there are valid reasons to do otherwise. Compromising the objective of the program or other government goals, or an unacceptably adverse impact on the financial position of users, are two such reasons. The policy also indicates that a fee can exceed costs, such as in the case of issuance of limited rights and privileges, but reminds departments to have the necessary authority. However, departments do not always have a cost recovery policy and related procedures to help determine where program objectives could be enhanced or might be impaired, or to determine where costs and other measures would be necessary to establish appropriate fees.

9.60 A guide to costing methods has been published, but its application in departments varies. While the guide is quite thorough, it alone cannot be sufficient to deal with difficult technical subjects such as the calculation of overhead costs, the cost of capital, and the use of current costs in place of historical costs. Recent courses provide the opportunity for further guidance and instruction.

9.61 Inconsistent or deficient costing information can pose a problem for both departments and central agencies in assessing whether equitable and comparable cost recovery is taking place, and whether fees based on values other than costs are reasonable and fair. The determination of user fees can be influenced by multiple and complex political, economic and social factors. Deciding whether cost recovery is warranted and then being able to demonstrate the appropriateness of revenue levels are challenges management must meet. The central agencies may be able to further assist departments by providing diagnostic services in support of revenue management decisions.

9.62 Setting financial goals as part of preparing user fee plans is a concrete step toward managing non-tax revenue. It promises increased revenue, since the Estimates for the past two years have represented to Parliament that user fees are expected to aggregate $3 billion in the fiscal years 1990-91 and 1991-92.

9.63 However, because of differing data sources and classification anomalies, this expectation cannot be readily compared with other forecasts and actuals. Consequently, progress cannot be accurately reported and accountability for results readily served at this time. Revenue management does not always provide for a comparison of targets and actuals. Setting revenue targets and providing better financial information are needed if comparison is to be done.

Improved disclosure is needed to serve Parliament better

9.65 Public Accounts and Part III of the Estimates provide most of the public information on non-tax revenue. While considerable data are available, none presents comprehensive information on budgeted revenue that can be readily compared to actuals so that performance can be clearly demonstrated to Parliament and others.

9.66 For example, return on investments includes amounts earned with respect to loans, investments and advances (collectively called equities) with Crown-owned entities and others. These equities are considerable; in parent Crown corporations a total was reported of $18.2 billion at March 1990, net of an evaluation allowance of $4.5 billion. Other loans and advances amount to about $2.5 billion net of an allowance of $6 billion.

9.67 The nature and basic terms of loans and advances are disclosed. However, information is generally not provided to explain differences. As an illustration, the 1989-90 Public Accounts disclose certain loans totalling $74 million at varying interest rates. Our analysis indicates that about $5.7 million of interest revenue would normally be received. In comparison, however, only $1.2 million of interest was reported relating to one loan of $15.2 million. An explanation is not provided to reconcile the apparent shortfall, such as loss of interest on non-performing loans.

9.68 There are also financial reporting anomalies. What is included or not included in non-tax revenue data is important to know to understand them. A reader of the Public Accounts and Estimates may wish to make adjustments for the matters discussed in paragraphs 9.69 and 9.70. Additional information needs to be disclosed if readers are to be better informed about the substance of transfers from the Bank of Canada and interest collected and paid as part of the income tax system.

9.69 "Return on investments" can be a questionable term in the context of government. Moneys described as "transfer of profit" are transferred from the Bank of Canada and are included in non-tax revenue figures of the Public Accounts as "return on investments". This is the Bank's gross revenue less operating expenses. For 1989 this amounted to $2.2 billion, being $2.4 billion of revenue less expenses of $186 million. A considerable proportion of the Bank's revenue results from holding Government of Canada securities in the process of implementing monetary policy and managing public debt and cash balances. In effect, the Bank is returning some of the public debt charges. In view of this, additional information could provide a more complete picture of the net cost of public debt. It would also have an impact on the operating surplus reported in budget documents, since this is determined by deducting total expenditures net of public debt charges from gross revenue.

9.70 On the other hand, reported non-tax revenue does not include interest collected on income taxes receivable. Interest received is reported as tax revenue and not separately disclosed. However, interest is not a tax and therefore could be considered as a non-tax revenue item. Revenue Canada informed us that in 1990 it collected about $1.1 billion more interest than it paid.

9.71 The Estimates for departments tend to provide little insight into the source, rationale, trends and performance of non-tax revenue. It has not been considered significant enough to warrant more in-depth reporting. However, guidance is not available as to what is or is not significant. Collectively, non-tax revenue sums are not insignificant, particularly if uncollected amounts or unrecovered costs are considered. The interpretation of significance might change if revenue were reported in such a way as to be linked to levels of service and program objectives, and if budgets were meaningfully compared with actual revenue received.

9.72 Some specific observations on departmental Part IIIs of the Estimates illustrate various reporting gaps:

• While revenue is forecast in the Department of Agriculture, indications of potential additional revenue, comparison of costs incurred with those recovered, and explanations of year-to-year changes in revenues are not provided.
• There is no information on the cost to the Department of Energy, Mines and Resources of rendering services, the extent of cost recovery or the rationale where recovery is less than 100 percent of cost.
• The Department of External Affairs provides minimum information on the performance of non-tax revenue, and variances in revenue are unexplained. There is no mention of whether revenue targets have been met and no indication of a plan or policy for cost recovery.
• The Department of Finance provides information only on internal cost recovery of $5.3 million and on a revenue forecast of $120 million from domestic coinage. Its information for 1991-92 does not include budget data or information on the components of return on investments, by far the major revenue item ($4.3 billion in 1989-90).

• Chapter 5 includes observations on certain transactions of the Department of Fisheries and Oceans where millions of dollars in fish or fishing rights have been bartered in exchange for the use of fishing vessels to gather program information. The context and significance of this are reported further in Chapter 5.
• To encourage departments to dispose of surplus assets as part of life-cycle asset management, interim administrative mechanisms have recently been introduced which enable them to purchase certain goods and services from the proceeds of the sale of surplus assets, reducing the charge otherwise made to moneys appropriated to departments by Parliament. There is confusion in the use of this mechanism, and the practice may achieve the same result as net voting. Provisions to establish an explicit authority in legislation are being sought through Bill C-26 as presented to Parliament in June 1991. Proposed amendments to the Surplus Crown Assets Act would allow a department to make payment for its purposes, subject to terms and conditions of the Treasury Board, out of the Consolidated Revenue Fund equal to the net proceeds of sale of surplus assets. If the Bill is passed into law, a statutory expenditure will replace the need for such administrative mechanisms while still achieving similar results.
• Parliament does not receive information on the financial effects of exchanging property for other property or services.

There are deficiencies in collecting non-tax revenue, other than return on investments

9.75 For other non-tax revenue collection, a range of problems similar to those reported in the past were found in the departments examined in this review (see paragraphs 9.81 to 9.122). Additional findings are also reported in other chapters of this year's report. In Chapter 2, Audit Notes, we note that earlier assessment and billing of financial institutions by the Office of the Superintendent of Financial Institutions could save at least $1 million annually in interest costs.

9.76 Greater attention to accurate records and collection processes is needed, especially since accounts receivable are now formally booked at year end, and information about the age of receivables is to be included in the 1991 Public Accounts.

9.77 Some departments are beginning to contract out the collection of amounts due the Crown. This involves some implementation problems such as a restricted ability to take legal action, and the payment of agent fees. Standards, criteria and information needed to monitor and assess the efficiency and effectiveness of revenue management are not well developed. This will become more important given the changes to the Financial Administration Act. We understand that collection fees will be paid as a statutory expenditure (rather than charged to operating budgets of departments) when Treasury Board policy is issued, to ensure the cost-effective use of private collection agents.

9.78 Another difficulty encountered by departments is when and how to recognize receivables in differing circumstances, such as repayments arising from contribution agreements. Technical guidance available to handle such situations is insufficient, given the governmental context. Difficulty in determining when repayment terms and conditions have been met in contribution arrangements is a systemic problem.

Alternative means of collection need to be considered

Specific Observations in Departments

Introduction

Agriculture

9.82 We focussed on the Food Production and Inspection and Research Branches, which are most involved in cost recovery, and on the Corporate Management Branch, which shares the responsibilities for financial management and control of non-tax revenue. We reviewed the annual reports of the Canadian Grain Commission and note that the Commission has achieved its objective of full cost recovery to a significant degree.

9.83 The Department does not have a comprehensive department-wide system for management of non-tax revenue. Each operational area has established its own practices in this regard and the level of attention given to revenue activities varies among branches and regions. Responsibility for co-ordination is unclear and there is little monitoring of the revenue activities of the operating branches. While branch and regional systems do exist to identify, obtain and record non-tax revenue in the two branches included in our audit, improvement is needed in some managerial aspects.

9.84 Continuing development of cost recovery. Inspection and regulation activities consumed approximately $268 million in 1989-90, and the Food Production and Inspection Branch reported about $13 million in cost recovery revenue for the same period.

9.85 The Branch has reviewed revenue generation in collaboration with the food industries. A complete user fee plan is being developed for approval by the Treasury Board. However, costs have not been established for many of the individual inspection activities. For those where costs are known, the rate of recovery varies considerably.

9.86 In the Research Branch, cost recovery has not been a major item of business, and the extent of potential revenue generation is as yet uncertain.

9.87 Lack of cost information. For most activities, cost information is not captured; nor is there a consistent interpretation of what constitutes the cost of a given activity. Therefore, the amount of unrecovered cost cannot be readily estimated or a relationship drawn between fees and the cost to deliver the service for purposes of making revenue decisions.

9.88 We also noted:

• The corporate financial function does not comprehensively challenge revenue plans and performance for the Department as a whole, thereby minimizing its input to revenue realization.
• At the request of the Research Branch, a recent internal audit of collaborative research arrangements was carried out. It reported a lack of reasonable assurance that interest in intellectual property and the revenue potential of patents are safeguarded.
• In most cases, authority to recover costs is contained in statutes administered by the Department. In a number of instances, however, authority is not cited or an authority is used which does not relate to the fee revenue activity undertaken.
• The Department identified $11 million in overpayments in the Special Canadian Grains Programs and the Canadian Crop Drought Assistance Program. It has recovered $7.6 million over several years, with $3.4 million still outstanding. A lack of timely notification and reminders hindered the recovery process.

Energy, Mines and Resources

9.90 Need for policy guidance. The Department does not have a comprehensive policy on cost recovery. As a result, there is no overall thrust or direction to ensure that efforts are co-ordinated and consistent or to identify where non-tax revenue from cost recovery activities may be appropriately increased or decreased.

9.91 Inconsistent cost recovery objectives. An earlier attempt, in 1989, to develop and establish a comprehensive policy on cost recovery was not successful. As a result, each sector of the Department conducts its own cost recovery based on its interpretation of what constitutes the cost of a given service or product and how much of that cost should be recovered. However, other Department of Energy, Mines and Resources officials external to the concerned sector, such as the corporate financial function, do not undertake substantive reviews or challenge these sectoral plans and related user fee revenue plans.

9.92 The Department is currently developing a comprehensive cost recovery policy and related procedures and is reviewing accountability relationships between the finance and operational sectors. It has also identified other potential sources of revenue.

9.93 Lack of costing of a service or product. The full departmental cost of most products or services is not known, and there is no common definition of direct costs, thus leaving room for different interpretations in each sector. Further, the relevant departmental overhead costs and generally the indirect costs incurred by the sector are not identified.

9.94 Therefore, the selling price cannot be compared to the cost and is generally determined more with regard to a perceived market value. As a result, there are limitations to any assessments of program or product demand and knowledge of where cost recovery could be increased or operational efficiency improved.

9.95 Collection needs to be improved. Collection of interest on loans (return on investments) is generally satisfactory. At the same time, management is currently implementing corrective measures to improve the timeliness of invoicing and deposits, the monitoring of late accounts and other collection inefficiencies in the sale of goods and services. Also, the Department plans to develop and implement a policy on charging interest on overdue accounts.

Department's response: Agreed. Energy, Mines and Resources has initiated the development of comprehensive Cost Recovery and Revenue Management policy guidelines and decision criteria. This will include a complete assessment of all current and projected cost recovery and revenue generating activities taking into account potential impacts on scientific programs and activities.

External Affairs and International Trade

9.97 Low level of collection monitoring and co-ordination. There is little monitoring and co-ordination of the collection of rent and related expenses from employees posted abroad (about $16 million in "shelter shares"). A foreign mission does not know whether shelter shares have been paid by deductions in Ottawa from the foreign service allowances, and headquarters does not know whether shelter shares have been collected at the mission. There is no periodic central list providing management with information on unpaid shelter shares. Consequently, inconsistencies have been noted, including instances of late paying by six months or more.

9.98 Difficulty in sustaining collections and preventive control. In 1986, we reported a backlog in recoveries relating to the Program for Export Market Development. Program contributions are designed to assist Canadian companies in export markets. When they are successful, the companies are to report and make repayments. To resolve the backlog, a one-time "collection blitz" was undertaken and collections increased. Four years later, the number of annual reports outstanding from companies was increasing. At March 1990 there were approximately 4,600 companies that had not met reporting requirements on $42.8 million of contributions. So another "collection blitz" was started. This suggests a difficulty in sustaining collections. We did not determine all causes, but these include poor central follow-up notification and headquarters' failure to request exception reports to identify companies receiving new contributions while having failed to meet the reporting requirements for previous contributions.

Department's response: Stemming from observations contained in internal audit reports, remedial action was undertaken in the collection of shelter shares, starting with a request to all missions, dated 30 November 1990, to do a complete review of collections from the beginning of the fiscal year. That has been followed up by a review at headquarters in which all of the rates being applied were checked for accuracy. All errors and oversights are being corrected in terms of the records involved and retroactive collections totalling approximately $350,000 as of 20 September 1991. With the benefit of the knowledge gained in the course of this investigation, changes will now be undertaken to the systems and processes of collection to ensure that proper controls are implanted and maintained.

In regard to recoveries relating to the Program for Export Market Development, the Department recognizes that there have been inconsistencies in the level of effort directed at collecting repayments of amounts owing. The process in place for follow-up has focussed on the Project Officers within the regional offices of Industry, Science and Technology Canada. An initiative is being undertaken by the Department to centralize the follow-up and regularize the frequency of contact with delinquent companies, which is intended to eliminate the inconsistencies cited and the need for periodic "collection blitzes".

Finance

9.100 Collecting and recording is not a risk. We found that recorded non-tax revenue is received in accordance with authorities. In the case of the Bank of Canada, transfer of moneys was accelerated beginning in January 1991.

9.101 Terminology and classification anomalies. The way in which revenue is reported may lead to misunderstanding. Use of the term "profit" to describe moneys received could be a misnomer. The Bank of Canada is not in the "profit-making" business in the commercial sense, and indeed does not use that term in its own financial statements. However, by definition the Bank is external to the accounting entity of the government and this creates an anomaly in how this return on investment is categorized and reported (see paragraph 9.69).

Department's response: The Auditor General's observations and recommendations in respect of the Bank of Canada surpluses have merit and the Department shall include these items for consideration during the next review for changes to the accounting and reporting practices.

Fisheries and Oceans

9.103 The Department increased certain licence and other fees, resulting in increased collection of about $10 million beginning in 1987-88. A value-for-money audit in 1988 reported potential for additional revenue relating to inspection activities. In 1988 we also reported an instance of failing to deposit public money. Chapter 5 of this report describes additional authority and disclosure issues.

9.104 Policy is yet to be clearly established. The Department is in the process of developing a comprehensive strategy and policy for revenue generation. This has been a slow process. Until a strategic direction is agreed to in consultation with the industry and other affected groups, compliance with central policy, increasing of revenue, and review of costing practices and other functions are on hold.

Department's response: The observations are fair and accurate. The area for greatest revenue potential is domestic fishing licensing; however, implementation of any new policy in this regard has been and will continue to be dependent upon economic conditions and the capacity of the industry to absorb these costs in the commercial sector. In the past two years, the industry has not been able to absorb these costs.

Indian Affairs and Northern Development

9.106 Opportunity to improve revenue control system. Each sector prepares an external user fee revenue plan. These are submitted to headquarters where they are incorporated into the Department's multi-year operational plan. The Department needs to take a more rigorous approach to ensure that user fees in the Northern Affairs program conform to government policy. The financial function should perform a more active challenge of non-tax revenue activities. It could also periodically review and challenge the status of non-loan receivable collections through the use of control accounts.

Department's response: The Department of Indian and Northern Affairs concurs with these suggestions. The Department will examine its user fee practices when modernizing Northern legislation. In performing its challenge role on policy documents leading to new or revised legislation, the central finance function will ensure consistency with government policy on user fees. Regarding the review and challenge of non-loan receivable collections, the Department is currently undertaking a major overhaul of its financial system and associated processes, which will include the correction of deficiencies in our existing system for control of receivables.

National Health and Welfare

9.108 Delay in implementing full cost recovery for Pre-market Evaluation of Drugs. In 1988, Treasury Board approved additional resources of $13.6 million for the Department's Pre-market Evaluation of Drugs program to help clear a backlog of drug submissions. Those resources were allocated on condition that a full cost-recovery program would be implemented by 1 January 1989. However, the Department has been unable to reach agreement on the manner in which cost recovery will take place. Following extensive consultations, a proposal is now in final form for ministerial consideration. Meanwhile, program costs of roughly $90 million have been incurred since 1 January 1989 without cost recovery.

9.109 Inconsistent efforts to increase recovery of insured medical services. Medical services provided by departmental hospitals are, in most instances, covered under provincial and territorial health insurance plans. In 1989-90 the Department recovered about $23 million out of $40 million in operating costs that include certain expenditures not normally incurred by public hospitals.

9.110 Attention to the level of cost recovery varies from place to place. For example, one regional office negotiated an increase in rates for in-patient care from $40 a day (unchanged for 13 years) to $140 for 1990-91. This should increase cost recovery by $500,000 annually. Similar action by other regions could result in additional cost recovery. Even a nominal increase (say 5 percent overall) translates to up to approximately $2 million annually.

9.111 Incomplete cost analysis and slow fee revisions. Revenue from dosimetry services totalled about $1 million in 1989-90. The current fee schedule for these services became effective 1 April 1990 (replacing the 1984 fee schedule). These fee schedules were set to recover only direct costs. We estimate that exclusion of indirect costs, plus anomalies in direct cost figures, have resulted in at least $8 million of lost revenue since 1984. The Department plans for full cost recovery in 1991-92; however, it has yet to seek Treasury Board approval for updating its current fee schedule. Delays in implementing full cost recovery for dosimetry services will result in lost revenue of about $1 million annually.

9.112 Uncertainty as to responsibility for ensuring efficient collection. Reported revenues from the enforcement of the Food and Drugs Act and the Narcotic Control Act amounted to $7 million for 1989-90. These revenues arise from fines, penalties and the sale of forfeited assets. The title to all seized drugs and forfeited assets is transferred to the Department's Bureau of Dangerous Drugs by enforcement agencies at the end of the legal process.

9.113 While the revenues are reported in the Department's accounts, various entities are involved in revenue collection and recording. Fines, penalties and forfeited moneys are deposited to the Consolidated Revenue Fund by the Royal Canadian Mounted Police, and the Department of Supply and Services. The Department also deposits moneys if and when received and is to maintain records of all revenues collected under the Acts. However, the Department has no means of ensuring that all moneys were received and all known revenues were collected.

Public Works

9.115 The Department's provision of common services accounts for a significant portion of internal government revenue ($2 billion in 1989-90). This was not included in the scope of this audit. We concentrated on the $326 million received from external parties in 1989-90.

9.116 We examined revenue from external parties, such as custodial and other revenue ($75 million in 1989-90), which consists mainly of building rentals and earnings from parking lots, a central heating plant, dry docks and the New Westminster Bridge. We also looked at the collection of service revenue from third parties ($251 million in 1989-90). We relied on relevant internal audit findings.

9.117 Planning. As a common service agency, the Department of Public Works has little need for a separate process for external revenue, which is mainly a by-product of its revenue activity internal to government. In this context, the Department has an acceptable planning process for external non-tax revenue.

9.118 Collection. We examined the length of time it takes the Department to bill and collect revenue for services provided. In 1989-90, its own studies and internal audits identified an unacceptably long process. The need to correct this was confirmed by our review and the Department was in the process of implementing improvements at the time of our review.

Department's response: The Department has completed improvements that will improve cash flow and customer relations. A new billing policy has been issued that will simplify invoicing and accelerate collections. A new business operations manual has recently been published that establishes standards for all regions and provides guidance to employees on various stages of a revenue earning cycle. These actions continue the planning and costing processes at Public Works Canada that have been in existence for a number of years and reflect private sector practices.

Secretary of State/Multiculturalism and Citizenship

9.120 Need for departmental cost recovery policy, plans and data. The departments are aware that there are opportunities to increase revenue and are in the process of establishing a cost recovery framework. They have recently undertaken a study so they can submit to Treasury Board, by September 1991, user fee revenue plans in accordance with government requirements.

9.121 Secretary of State is taking steps to improve the collection of student loans. The amount of student loans paid out by the Department aggregated $708 million at March 1990, and collections for 1989-90 were $80 million. Steps to improve the collection management of student loans are being taken in response to our 1990 value-for-money audit. These include intensified discussions with financial institutions, reporting of student loans in default to credit bureaus, better evaluation of collection performance by agencies, and improved disclosure to Parliament. The Department believes these measures will reduce program costs and improve collections. In addition, the Department is implementing the 3 percent guarantee fee on new loans announced in 1989. The Department estimates that this could generate $18 million a year starting in August 1991.

9.122 Multiculturalism and Citizenship. The Department has not determined the optimum level of fees related to citizenship registration, although it did revise fees for a five-year period. For example, the application for grant of citizenship fee for an adult has been set at $45 and will increase annually by $5 to reach $65 on 1 April 1993, in order to recover the additional revenue target of $2 million as approved by Cabinet and the Treasury Board in 1986. However, fees were not established with regard to the costs of providing the service. The Department considered other factors such as the class of users, market conditions, and the major increases implemented in April 1985. Nonetheless, the Department has yet to clearly determine the total costs incurred for registration activities. The revenue from citizenship registration fees, aggregating $5.5 million in 1989-90, represents about 27 percent of direct costs and perhaps 18 percent of total costs.

Departments' responses:

Multiculturalism and Citizenship. The Department confirms that paragraph 9.122 outlines the important facts concerning claimable rights for the registration of citizenship. The Department is now able to establish in a precise manner the total cost incurred by the activities of citizenship registration. The Department will be presenting to Treasury Board, in September 1991, its revenue plan in accordance with government policy.