1991 Report of the Auditor General of Canada
Chapter 10—Department of Agriculture—Farm Safety Net Programs
Vague socio-economic objectives need to be transformed into clear, consistent and measurable statements
The requirement for self-sustainability is not sufficiently defined for purposes of program management and accountability
Department managers are relying on audit provisions that do not give them the assurance they believe they are getting
Vague provisions in agreements for sharing of administrative expenses allow for wide interpretations
The Department is unable to provide evidence that approval was sought from the Governor in Council for substantial departures from the program it approved
10.2 We last reported on a comprehensive audit of the farm safety net programs in 1986, when we identified problems in effectiveness measurement and reporting, and in financial management and control. This year's audit re-examines these areas with respect to two types of safety net programs managed by the Department: those designed to counteract market risk and those intended to protect farmers against the hazards of nature (10.21 to 10.23).
10.3 Since our last audit, the Department has performed little ongoing performance measurement or program evaluation of these programs. Consequently, management has had little reliable information on the impacts and effects of these programs (10.36 to 10.47).
10.4 Some of these programs are required in law to be self-sustaining. Because the Department has not defined "self-sustaining", it is difficult for managers to recognize whether a program meets this requirement and hence, whether any deficit it may show is likely to be significantly reduced. It is sometimes not clear who is liable for the deficit if a program is found to be not self-sustaining, because responsibilities are not always adequately spelled out (10.50 to 10.56).
10.5 Most of these programs operate under federal-provincial agreements. We expected that the drafting and approval of agreements would be a tightly controlled process, involving the Department's legal, accounting, auditing and program experts. Despite the significance of these agreements, we found that the process is not well controlled. In the agreements, key matters such as objectives, responsibility, cost-sharing allocation and accountability are not made clear. These weaknesses have significant consequences (10.63 to 10.66).
10.6 Under the terms and conditions of most agreements, the provinces play a significant part in delivering the programs - including ensuring that producers comply with program terms and conditions and gathering essential program data. As matters currently stand, the Department authorizes federal contributions and requests advances to finance program deficits without reasonable assurance that the provinces and the producers have complied with the agreements' terms and conditions (10.67 to 10.70).
10.7 The Department has known about many of the problems identified in this chapter for some time; they were raised in our 1986 audit and its own internal studies. But it has made little progress in responding to most of our 1986 recommendations, despite a commitment to the Public Accounts Committee to do so. The Department has been very busy in this period developing new legislation and programs. Our recommendations still apply to the continuing programs and are equally pertinent to the implementation of the new programs (10.93 to 10.99).
10.9 By the 1970s, the Agricultural Stabilization Act had evolved into a program that paid eligible farmers a subsidy on each unit of production. The payment was based on the amount by which the market price of the commodity fell below a target price established according to a formula. The details of this formula have varied over the years. In general, the target price of a commodity has been calculated using the average market price over a set period of years and the change in the estimated average cost of production. Operationally, the programs were very simple: the federal government applied the formula, calculated the amounts, and wrote the cheques to the farmers.
10.10 The other major program, the Canadian Crop Insurance Program, sells insurance to farmers to protect them against crop failures. Unlike the Agricultural Stabilization Act programs, the Crop Insurance Program is a shared program. The provinces deliver crop insurance and until 1990 - with the exception of Quebec and Newfoundland, who chose to cost-share - bore the administration costs. As with any insurance plan the subscribers pay premiums. The federal government assists in two ways: it contributes funds to these provincial schemes based on the premiums paid by the farmers - in essence sharing the risk - and it operates a "reinsurance" fund to advance cash to provinces to help finance any deficits in their schemes.
10.11 Both the provincial schemes and the federal reinsurance fund were to be self-sustaining - over time, farmers' premiums and government contributions had to equal the insurance paid to farmers.
10.12 There were additions to these two basic programs along the way. In 1976, the Western Grain Stabilization Act (WGSA) was introduced, largely in response to the feeling that Western grain farmers were not adequately assisted by the Agricultural Stabilization Act and other programs. As a result, all grain farmers in the Canadian Wheat Board's designated area were eligible for support under this new program and were no longer eligible for payments from the Agricultural Stabilization Act. Central and Eastern grain and oilseed farmers continued to be covered by the Agricultural Stabilization Act.
10.13 The Western Grain Stabilization Act was designed as an insurance program to protect against falling prices and/or rising costs. Farmers who paid the premiums were eligible for support payments, and the federal government provided funding at a level that was to match and exceed producer premiums.
10.14 In the 1970s and early 1980s, some provinces entered the field of price or income stabilization. They developed programs of their own to support eligible farmers who felt that national averages like those used in the Agricultural Stabilization Act programs were insufficient for their particular circumstances, and to give their farmers a competitive advantage in interprovincial trade.
10.15 In 1975, Parliament amended the Agricultural Stabilization Act to permit the creation of tripartite or bipartite stabilization plans. No bipartite schemes were developed and it was not until 1986 that the first of the plans in the National Tripartite Stabilization Program (NTSP) was signed.
10.16 Tripartite plans were to operate on an insurance basis and were to be self-sustaining. Enrolled farmers paid premiums related to the amount of the stabilized commodity they produced or the size of their operation. Each of the other partners in a plan - the provinces and the federal government - matched producer premiums. Target prices were established according to a formula, and when market prices fell below these target prices, it triggered a payment from the fund. If the payment were to exceed the balance in the fund or if the fund were to be in deficit, the federal government would advance the necessary money from the Consolidated Revenue Fund. However, the participating provinces had to agree to share with the federal government the liability for any deficits that might remain unrepaid at the end of an agreement.
10.17 In addition to contributing to the fund and sharing responsibility for possible deficits, participating provinces had to reduce or eliminate their own support programs for the commodity, or lower them enough to eliminate any competitive advantage in interprovincial trade. In 1989 the participants in the plans covering red meat (beef, hogs and lambs) and apples agreed to be bound by an overall net benefit ceiling on the combined provincial and federal benefits, including any contributions to farmers' premium payments made by either government. Officials of the Department state that they expect similar amendments in other plans. In all red meat agreements, both governments agreed to follow the advice of farmers' representatives and undertake a joint review of the ceiling in order to comply with Canada's evolving trade obligations.
10.18 In the government's view, the ongoing stabilization programs did not adequately protect producers from more severe damage caused by large-scale crises - whether natural disasters like drought or those caused by economic factors like international trade wars. Between 1985 and 1990, the Department implemented ad hoc programs to respond to what it saw as exceptional hardships faced by farmers - the Special Canadian Grains Programs (SCGP) of 1986 and 1987 and the Canadian Crop Drought Assistance Program (CCDAP) in 1988.
10.19 These programs, collectively known as the farm safety net programs, were administered by about 1 percent (124 of 11,337) of the Department of Agriculture's total person-year base in 1990-91 and were responsible for the distribution of $1.2 billion, which represented 44 percent of the total budget. As Exhibit 10.1 shows, between 1986-87 and 1990-91 the federal government supported Canadian agriculture through the safety net programs to the amount of some $7.6 billion (including amounts required to finance program deficits).
Audit Scope10.20 Our audit focussed on three types of safety net programs delivered by the Department, as shown in Exhibit 10.2 : those designed to protect farmers against the hazards of nature (the Crop Insurance Program), those designed to protect against shocks in the market (the National Tripartite Stabilization Program and the Western Grain Stabilization Program), and those designed to protect farmers from the severe damage caused by large-scale crises (the Special Canadian Grains 1986 and 1987 and the Canadian Crop Drought Assistance ad hoc programs).
10.21 As in 1986, we asked whether management had in place satisfactory procedures for: a) measuring and reporting on the effectiveness of these programs; and b) offering reasonable assurance that the programs are subject to proper financial management and control.
10.22 In 1986, we included in our examination the subsidy paid to the Canadian Dairy Commission for distribution to dairy farmers, which accounts for some 70 percent of annual program expenditures under the Agricultural Stabilization Act. At that time, we were concerned about the terms and conditions governing the transfer of funds from the Department to the Commission. We recommended that a Memorandum of Understanding be developed to resolve these concerns, and this has since been done. We excluded the dairy subsidy from the scope of this year's examination.
10.23 The completion of a major review of agricultural policy resulted in the passage early this year of the Farm Income Protection Act: in effect, a new framework for all of the safety net programs. The Agricultural Stabilization Act and the Western Grain Stabilization Act have been repealed. The new legislation permits the establishment of a federally and provincially supported insurance program as a means of combining market risk (price) and production risk (crop damage and/or failure) protection for farmers. The new Act calls this program the Gross Revenue Insurance Program (GRIP) and complements it with the Net Income Stabilization Account Program (NISA). We did not audit these new programs, but we note that their design incorporates many features of certain existing programs, in particular the National Tripartite Stabilization Program and the Crop Insurance Program.
Audit Observations and Recommendations
A Period of Enhanced Partnership10.24 By the early 1980s, the problems with support for agriculture had reached what many felt were near-crisis proportions. International trade issues, combined with domestic trade and other economic problems, rapidly escalated the costs to the federal purse of both yield risk and market risk protection programs. By 1985, faced with these combined pressures, the government began a series of discussions with its provincial counterparts aimed at making significant changes in farm safety net programs.
10.25 The government had three objectives for these changes: first, to encourage all parties to take a more responsible fiscal approach to agricultural income stabilization; second, to induce all levels of government to co-operate more in assisting farmers by creating a national safety net; and finally, to try to reduce the use of provincial support programs as instruments of competitive advantage in interprovincial trade.
10.26 As a result, the period from 1985 to 1991 has been very busy for those involved in the Department of Agriculture's safety net programs. Not only did they have to continue operating existing programs, but they were also involved in an intensive co-operative effort to restructure the entire federal-provincial approach to safety nets that had served agriculture for 20 years.
10.27 The first of the new safety net programs began with the signing by the federal minister and four provincial ministers of the 1986 National Tripartite Stabilization Program Agreements for hogs, lambs and beef. Today, the National Tripartite Stabilization Program includes eight plans operating in nine provinces. In 1990, significant amendments to the Crop Insurance Act resulted in all provinces contributing premiums to their schemes. Finally, in 1991, came the passage of the new Farm Income Protection Act, which gives the federal government authority to enter into agreements with provinces to create market and production risk protection programs for Canadian farmers. The new Act provides for a continuation and enhancement of both Crop Insurance and the National Tripartite Stabilization Programs, and as an option adds a Gross Revenue Insurance Program that provides insurance for both natural and market risks together.
10.28 The new Act also establishes the Net Income Stabilization Account, which provides for direct stabilization of farmers' incomes through a federal-provincial government-supplemented savings plan.
10.29 In developing these programs, the Department brought producers and provinces together in an extensive consultative process. The results were innovative. Essentially, each new program is based on a contract among three co-equal partners: the producers, the provinces and the federal government. This new partnership has been reflected in a series of structural changes in the relationship among the parties. However, according to the Department a new "corporate culture", involving all three parties and their approach to farm safety nets, is at least as important as the structural changes.
10.30 Under the new Act, the Department will be required to do two things well. First, it must be a skilled consulter, negotiator and mediator of interests. While all of the programs are now essentially tripartite in nature and the farmers, the provinces and the federal government are co-equal partners in shaping and managing these programs, the federal level continues to be looked to for leadership because of its national role. The achievements of the Department as negotiator and mediator are already a matter of public record. The second thing the Department must do well is apply management and administrative skills to turning successful negotiations into clear, well-structured agreements that can serve as the foundation for good management and co-operation in the longer term. This requires a very different set of skills.
Vague socio-economic objectives need to be transformed into clear, consistent and measurable statements10.31 In the enabling legislation for the safety net programs, Parliament has set out the objectives in general terms. Thus, these broad statements of intent need to be transformed into clear, consistent and measurable objectives as the basis for program design, management and accountability.
10.32 We were unable to find a single definitive statement of objectives for any of the safety net programs. Instead, our review of the Department's documentation identified a range of statements from a variety of sources showing significant differences about what should be expected from these programs. Moreover, each of these sources - the Operational Planning Framework, Part III of the Estimates and other documents such as departmental program evaluations - could be regarded as reasonably authoritative in its own right. In short, the wording and the number of objectives of any given program varied depending on where we looked.
10.33 We found key terms that had not been clearly defined. For example, the Department could not clearly explain what "fair share of the national income" means when applied to assistance under the Agricultural Stabilization Act and, in the case of Crop Insurance, the Department was unable to define clearly what was to be included in, or excluded from, multi-risk protection.
10.34 We also found that, under the Western Grain Stabilization Act, variations in statements of program objectives produced a target that was difficult to pin down, leaving the Department unable to define the program effects intended.
10.35 Together, the above problems can confuse managers, clients, trading partners and those ultimately responsible for programs about what they ought to expect from the programs.
Up-to-date evaluation information and ongoing effectiveness information are absent10.36 Effectiveness measurement helps to answer the question: has the program been producing the results it was intended to produce? In a period of change, this is particularly important as a source of information for deciding what elements of existing programs should be carried forward into the design of new programs, as well as for identifying what has gone wrong. It is the identification of what has gone wrong, especially the unintended results, that can be of greatest value to those charged with developing new policy.
10.37 We examined the Department's program evaluation performance for the five-year period between 1985 and 1990 and found that none of the ongoing safety net programs had been evaluated. (A study looking at impacts of the Crop Insurance and Western Grain Stabilization programs in 10 communities was completed in 1986. However, the data applied to 1984-85 and this limited study was not designed to permit inferences about the overall results of these two programs.) Furthermore, no evaluation has been completed for the National Tripartite Stabilization Program, which had its first year of operation in 1986.
10.38 When the evaluation function looked at the safety net programs during this period, it focussed on the ad hoc programs. A series of studies was made of the 1986 and 1987 Special Canadian Grains Programs.
10.39 The absence of up-to-date evaluation information on the strengths and weaknesses of the ongoing safety net programs is significant, in view of the major changes in program design that the Department recommended be put in place. When one considers that significant change in these programs was clearly probable as early as the 1986 Ministers' Statement of Principles, and quite definite by 1988, it is surprising that the Department did not change its evaluation plans to gather current information on these programs, especially the National Tripartite Stabilization Program, for the policy review process. Eighteen months to two years is enough lead time for all but the most difficult of evaluations.
10.40 The absence of ongoing effectiveness information is a further significant gap. In 1986, we commented on the limited measurement and reporting of program effectiveness, particularly the development of performance indicators. In response, the Department concurred with our recommendations and undertook to develop specific, measurable indicators of performance, to measure performance using these indicators and to report the results. A series of performance indicators was approved by the Deputy Minister in 1989 as part of the Operational Planning Framework. However, the Department has not yet implemented the necessary information systems to gather ongoing information on safety net program results using these indicators. Management continues to operate these programs - spending hundreds of millions of dollars each year - with no continuing source of objective information about their effectiveness in relation to their several goals.
10.41 The Department should define performance objectives for its safety net programs and develop indicators for measuring the achievement of these objectives. It should measure the extent of such achievement and report the results of its performance measurement to Parliament and other interested parties.
Department's response: The Department is addressing the development of performance indicators. For example, one critical gap in the range of performance measurement information has been in the area of "farm level data" to indicate the financial and management impact of government programs on individual farm businesses in different regions with various types and sizes of farm enterprises.
The Department is addressing this issue by undertaking the construction of a major Farm Level Database. This effort builds on several surveys currently conducted (or planned) by Statistics Canada, data from various administrative sources (including the safety net programs themselves) and farm management data obtained from the provinces and universities. It will be an important resource for evaluating program modifications and developments, with specific plans already underway to use the information in the program evaluations required under legislation for the Gross Revenue Insurance Program (GRIP) and the Net Income Stabilization Account (NISA).
10.42 The effectiveness of the Department's safety net programs is closely scrutinized by our trading partners, who measure the effects of the programs and report them publicly. When we drew the Department's attention to two such studies - one carried out by the Organization for Economic Co-operation and Development and the other done by the United States Department of Agriculture - the Department responded that it was aware of the studies and did not accept the results. We asked for the analysis that led it to reject these results; the Department provided nothing in reply. In the highly competitive world of agricultural trade policy, the failure to refute is often accepted as concurrence. This can mean that others whose interests may not coincide with Canada's are defining the effects of the Department's policies to the world.
The quality of program evaluations needs to be addressed10.43 We reviewed all the evaluations of the Special Canadian Grains Programs undertaken thus far by the Department and found significant problems with their quality.
10.44 The evaluation of the 1986 Special Canadian Grains Program failed to address the problems of unclear program objectives. There was, in fact, no formal statement of program objectives included in the evaluation study. The evaluators asked the program clientele to offer their own idea of what the program's purpose was and to assess it accordingly.
10.45 The evaluation of the 1987 Special Canadian Grains Program ignored the issue of cost-effectiveness in assessing the program. It identified the objective of the program as "to cushion the effects of low commodity prices by ensuring that farmers' receipts are maintained at a level similar to previous years". The specific factor identified as giving rise to the need for the program was price variation caused by the European Economic Community and the United States international subsidy trade wars. The evaluation concluded that the program, in conjunction with the Western Grain Stabilization Act, had proven to be very effective. This was because total payments from both safety net programs to these farmers resulted in 75 percent of them having an income greater than they would have had in 1985 (pre-trade war). However, these data also raise the possibility that the cost to the government may well have been significantly higher than necessary. The Department did not attempt to assess this possibility.
10.46 The Special Canadian Grains Programs of 1986 and 1987 had an overall budget of $2.1 billion. Had the cost-effectiveness issue been addressed at the time the program's first year of operation was evaluated, program management would have received critical and timely information and could have recommended ways to more effectively target the second program.
10.47 Despite the resources the Department spent to evaluate these programs, it was only a later departmental study done outside of the official evaluation stream that tackled the "hard" issues. This study - one that departmental management points out is not an official evaluation - grapples with the issue of what the objectives of these initiatives really were and then assesses the program against those objectives; explores the key impacts (including the interaction with other programs); and ends by asking the question, "Was a 1986-87 Special Canadian Grains Program needed?"
Review under the Farm Income Protection Act10.48 The new Farm Income Protection Act requires that a study of the programs be prepared for the Minister within five years. Departmental officials have assured us that this study will include all of the issues conventionally addressed by a program evaluation.
10.49 In addition to the specific financial and socio-economic objectives established for each program, the Department views the new Act as setting out five broad principles to be met by all programs:
- they should be production and market neutral so that farmers will adjust to market signals;
- the level of protection under each agreement should be consistent among agreements, and treatment of all classes of products should be equitable;
- programs should encourage the long-term social and economic stability of farm families and communities;
- programs should recognize the need for future changes that may emanate from Canada's evolving international obligations under the General Agreement on Tariffs and Trade, the Free Trade Agreement or other similar trade agreements, and be compatible with these obligations; and
- in their design and operation, programs should reflect Canada's commitment to environmental sustainability and reflect economic sustainability aims, in order to promote initiatives that are efficient, self-sustaining over time and conducive to the sector's long-term development.
Requirement for Self-sustainability
The requirement for self-sustainability is not sufficiently defined for purposes of program management and accountability10.50 In keeping with the insurance component in their design, these programs - Crop Insurance, National Tripartite Stabilization, Western Grain Stabilization and the new Gross Revenue Insurance Program - are required to be self-sustaining. Setting this financial objective implies a requirement that, over time, premiums and government contributions together should match the amounts paid to farmers. However, this general definition does not define the term sufficiently clearly to serve as the basis for either program management or accountability. It is sometimes not clear who is liable for the deficit if a program is found to be not self-sustaining, because responsibilities are not always adequately spelled out.
10.51 Based on consultation with actuaries with experience in this type of plan, we are advised that, if the term "self-sustaining" is to be measured in a consistent and professional way, there are three questions that must be answered by the Department:
1. What is the time period over which the experience of the program is to be assessed?
2. What is the expected loss or gain over the term of assessment?
3. What is the required degree of confidence that actual experience will not deviate significantly from the expected loss or gain?
Once these questions have been answered, "self-sustaining" will be defined and the professional assessment of the premium rate necessary to achieve this objective becomes possible.
10.52 We found that, while the Department had indicated the time period over which self-sustainability was to be assessed for some programs, it had not answered all three questions for any of them. As a result, the Department does not know whether premium and contribution levels are adequate or excessive in relation to the need to be self-sustaining.
10.53 In the case of Crop Insurance, the Department is required both to assess reports on self-sustainability from the provinces and to render reports on self-sustainability to the Minister and others. The other programs also require reports on this. In the absence of a proper definition of the term "self-sustainability", the Department cannot fulfil its responsibilities.
10.54 Without clear criteria against which to assess self-sustainability, necessary and difficult decisions such as whether to raise premiums, or to recommend that programs that are not self-sustaining be shut down, become entirely matters of judgment. Judgment calls like these offer the decision maker little incentive to do anything other than continue with the status quo and hope that the agricultural economy will improve enough in the future to save the program.
10.55 In the current trading environment, the failure to manage these programs on a basis consistent with self-sustainability can be very serious. If, in the future, it were to become clear that these programs were consistently attracting deficits that farmers would be unlikely ever to repay, there would be every likelihood that our trading partners could view the deficits in whole or part as subsidies. Exhibit 10.3 outlines some cumulative surplus and deficit figures for three of the farm safety net programs that provide some indication of the extent to which they can be considered self-sustainable.
10.56 The Department should define the criteria for a self-sustaining program.
Department's response: The Department obtained the services of an independent actuarial firm to receive advice on the most appropriate premium rate methodology and to provide their definitions of the terms self-sustaining and actuarially sound. The reports of these projects were provided to all provinces to incorporate into their premium rate methodology.
The Crop Insurance Regulations require that by 1993, each province must provide signed actuarial certificates attesting to the fact that each plan is actuarially sound and that the crop insurance scheme is self-sustaining.
The Department has contracted with an actuarial firm to develop the guidelines and criteria which provincial actuaries will follow to certify the actuarial soundness and self-sustainability of programs.
Need for Trade-offs
Socio-economic objectives need to be balanced with financial objectives10.57 One of the challenges in managing these programs, and those under the new Farm Income Protection Act, is to balance the attainment of socio-economic objectives and the requirement for self-sustainability. If objectives are unclear and performance measurement against them either is not possible or is not done, management will have difficulty making reasoned choices. Those to whom management is accountable will find it difficult to determine whether a decision to sustain a significant program deficit represents, in fact, value for money.
Western Grain Stabilization Program as an example10.58 The Western Grain Stabilization Program is an example of how the pressures to help farmers in financial trouble came into direct competition with the objective to be self-sustaining. Lacking criteria for ordering priorities and a suitable control for limiting advances to keep program deficits within the self-sustaining range (i.e., a "stop loss" control), short-term decisions invariably added to the program's deficit, which reached the point in 1988 that a $750 million bail-out was necessary.
10.59 In 1986 we recommended that the Department of Agriculture, as a matter of urgency, review in detail all aspects of the Western Grain Stabilization Program for the program's financial viability. We also reported that the financial viability of the fund was in doubt - despite the fact that early in 1986 it had a surplus of approximately $600 million. The Department responded by stating that it would review all aspects of the program by December 1986.
10.60 Claims that the program was self-sustaining over a 20-year period had been made by the Department and reported routinely to Parliament. However, no study was ever conducted to demonstrate that the Western Grain Stabilization Program was, in fact, financially viable and self-sustaining over the 20 years the Department cited.
10.61 Both Western Canadian grain farmers and the federal government paid into the program's fund but the Farm Income Protection Act, which repeals the Western Grain Stabilization Act, does not specify what will become of the fund's $1 billion deficit (see Exhibit 10.4 ). The new Act simply states "the Western Grain Stabilization Account established in the accounts of Canada ... is hereby continued until such day as may be fixed" by Governor in Council. At the same time, because no current comprehensive
evaluation of the program has been done, decision makers are unable to assess what - if any - socio-economic benefits balance out this billion dollar deficit.
Implications under the Farm Income Protection Act10.62 Under the Farm Income Protection Act, the ability to recognize the precise point at which trade-offs must be made is even more vital than in the past. In order to trigger ad hoc programs, the new Act requires that the Minister be of the opinion that exceptional circumstances exist requiring action outside the scope of an established program. Good measurement of both the socio-economic support objectives and the self-sustainability of these established programs is essential if the Department is to advise the Minister appropriately on when to invoke ad hoc provisions.
Framework for Financial Management and Control
Clear and complete specifications in agreements are essential to manage the programs properly10.63 For the National Tripartite Stabilization Program, the Crop Insurance Program, the Canadian Crop Drought Assistance Program and the new programs pursuant to the Farm Income Protection Act, the agreement among the parties is the substance of the program. If the agreement is a clear, complete, well-drafted document, future difficulties - be they substantive or administrative - will be minimized. However, in each of the ongoing programs based on an agreement, we found significant problems arising from a lack of clarity and incomplete specification in the agreements.
10.64 Drafting agreements such as these in a manner that accurately incorporates both the program intent and appropriate levels of financial control and accountability requires a team of skilled legal, accounting, auditing and program staff all working closely together. Based on our experience with the Department's controls over its contracts, we expected to find that draft agreements were thoroughly reviewed from all of these perspectives before they were finalized and signed off by the senior official for each function. Despite the fact that these agreements involve dollar values many times greater than those typically involved in contracts, we found that there was little formal requirement for specialist review. We found some evidence that legal services had reviewed the agreements, but these reviews do not seem to have focussed on the quality of the agreements as contracts. We were surprised to find that the financial function in the Department was not involved in drafting or reviewing the agreements before they were signed.
10.65 In formulating the agreements, federal officials first develop a draft of the agreement, which is negotiated with the provinces, refined and edited. The draft is sent for order-in-council approval, authorizing the Minister to enter into the agreement with other parties, substantially in the form submitted. It is vital that departmental experts be involved in the process. First, they can ensure that the drafts to be discussed with the provinces and the drafts to be sent to the Governor in Council for approval are well struck and include all the terms and conditions necessary to manage the program properly. Secondly, they can give assurance that the final agreement remains faithful to the order-in-council before it is signed by the Minister.
10.66 When it develops and negotiates agreements, the Department should ensure that the appropriate expertise is brought to bear before negotiating with the provinces. Senior departmental officials responsible for legal, accounting and auditing services and program delivery should be satisfied with the draft agreement and should sign off to the Deputy Minister before presentation for order-in-council approval. These officials should sign off all significant amendments to agreements thereafter, prior to approval by the Minister.
Department's response: The Department fully agrees that clear, well-drafted agreement documents are the basis for strong program performance and administration, and will endeavour to ensure that all relevant experts of the Department contribute to formulation of such agreements and that senior officials sign off to the Deputy Minister.
Department managers are relying on audit provisions that do not give them the assurance they believe they are getting10.67 Before making payments pursuant to an agreement, prudent management and the Financial Administration Act require that compliance with its terms and conditions be verified with supporting evidence. Accordingly, a well-executed agreement should include the basis and timing of payments and audit arrangements.
10.68 Joint programs offer particular challenges in establishing appropriate levels of financial management and control to ensure, among other things, that federal interests are protected. This is especially important when a program is delivered, in whole or in part, by entities in other jurisdictions who also maintain the records, participate in program funding and share the responsibility for any deficits should a program be dissolved. We found weaknesses in all of these areas in the agreements we examined relating to the ongoing programs.
10.69 We found that departmental managers were relying on audit provisions that did not give them the type and level of assurance they believed they were getting from the audit reports they received. The result is that they were often unaware of serious administrative and compliance problems in the administration at the provincial level.
10.70 The Department should ensure that the terms of engagement and types of opinion sought from audit reports on provincial information provide the Department with the assurance to support the annual authorization of federal contributions made pursuant to the agreements. The Department should ensure that it receives sufficient and appropriate evidence of provincial compliance with the terms and conditions of the agreements, including evidence of provincial fulfilment of their responsibility for ensuring producer compliance.
Department's response: A compliance audit scope for crop insurance has been developed. This audit is being done to ensure compliance exists with the terms and conditions, laws, regulations and other authorities affecting the expenditures of federal and provincial funds and adequate internal controls exist and meet the objectives of the federal and provincial programs.
As part of the compliance audit, the working papers of the provincial auditor will be reviewed. This same process will be established for other agreements.
Vague provisions in agreements for sharing of administrative expenses allow for wide interpretations10.71 Where costs are to be shared, the nature and amount of the costs should be spelled out clearly enough that reasonable people are unlikely to disagree materially about the allocation of amounts involved. Canada will pay half of the provincial administrative expenses for the Crop Insurance Program, retroactive to 1 April 1990. Provincial administrative expenses will also be shared under the Gross Revenue Insurance Program. At the time of our audit, agreements had not been signed, but many of the terms and conditions in the draft agreements relating to cost sharing were so vague that wide variations in interpretation - with potentially significant financial effects - are possible. Departmental officials have stated that they share our concern and are working to draft these documents more precisely.
Appropriate evidence is not always sought prior to program payouts10.72 Agreements should be structured in such a way that they provide evidence of compliance and allow for appropriate recourse where that evidence is not available or clearly departs from the agreement. In the Western Grain Stabilization Program, individual farmers' grain sales were used to determine what they owed the fund. Eligible grain sales and the payments deducted from them were reported by grain companies and elevators to whom these sales were made. However, the Department did not audit the accuracy and completeness of the data. Because data on these payments are used to determine support payments, it is critical that the data be both accurate and complete.
10.73 The Department approves federal contributions to the Crop Insurance Program and the National Tripartite Stabilization Program, without sufficient and appropriate evidence that the provinces have complied with the terms and conditions of the respective agreements. The Department's financial services group (responsible for an integral part of the verification and authorization process for the National Tripartite Stabilization Program and Crop Insurance Program) have told us that they authorize the payments of contributions to these programs without sufficient program knowledge for their authorization to be a meaningful financial control.
10.74 Before it authorizes payment from the Consolidated Revenue Fund the Department should ensure that the signing officers have sufficient and appropriate evidence that the terms and conditions of the agreement have been adhered to and that the charge is a proper charge against the appropriate act.
Department's response: Most departmental programs in this area depend on information provided by third parties. The Department recognizes that it must confirm the integrity of this information through increased monitoring and compliance auditing.
Adequate control frameworks have not been built into the agreements10.75 Given the significance of the federal contributions to these programs and the size of the program deficits, we would have expected departmental program managers and the financial services group to have collaborated closely in drafting agreements and in developing compliance systems and procedures. However, we found no evidence of functional direction from the Department's financial services group or other financial specialists. We found this surprising in light of the Department's expenditure monitoring policy, which is based on risk assessment. However, procedures supporting this policy do not address statutory contribution programs such as the safety net programs - despite the fact that this is now the single largest category of expenditure by the Department.
10.76 Financial management and control requirements vary depending on how roles and responsibilities are divided between Canada and the provinces. For example, the Crop Insurance Program is delivered by provincial crop insurance organizations who are also responsible for financial reporting. The Gross Revenue Insurance Program is expected to operate in the same way. On the other hand, the National Tripartite Stabilization Program requires centralized accounting to support the preparation of national annual reports, which include national financial information.
10.77 It is important that the Department's financial systems provide integrated financial and non-financial information for the purpose of monitoring compliance with agreements. This should enable the Department to identify unusual variances promptly, allowing it to focus its compliance audit procedures more efficiently. In both programs, we found significant deficiencies with obtaining timely and reliable information from the provinces. Further, we found that financial and non-financial indicators necessary for management's analytic review were not integrated with departmental systems.
10.78 Inadequacies in the Department's systems for monitoring and reporting on individual programs are magnified when they are viewed from the perspective of the entirety of the farm income safety net programs. The financial and management information systems for the individual programs are not integrated with each other to give senior management timely information on the combined effect of all programs on an individual producer or commodity basis.
10.79 At the time of our audit, the accounting system for the National Tripartite Stabilization Program was not up to the task of preparing timely financial information. Despite the best efforts of the accounting staff, it is taking between 7 and 20 months after the year end for a plan to produce the annual report. Timely financial reporting is important to all of the partners in the plans.
10.80 In our opinion, the program's accounts have not been kept in a manner that permits the preparation of timely and accurate financial information and statements. As a result, accountability to participants in the program, the Minister, legislators, and the public is not adequate.
10.81 The Department should ensure that books of account for both new and continuing programs permit the timely preparation of accurate financial statements and appropriate management information, and should see that they are faithfully and properly maintained.
Department's response: The Department agrees with the recommendation. While we recognize that financial systems and procedures in place for the 1988 and 1989 NTSP fiscal years were not up to the task of enabling the ASB to prepare annual reports to signatories on a timely basis, the systems are being reviewed to implement any required improvements.
Review under the Farm Income Protection Act10.82 As we noted earlier in our discussion on effectiveness, a review of the programs must be prepared for the Minister before 1 April 1996. In addition to addressing program effectiveness in the context of clearly defined objectives, we would also expect the review to examine the management and, in particular, the financial management of these programs. Such a review should address, among other matters:
- the definition(s) of self-sustainability adopted for each program and the measurement of performance against that definition;
- the appropriateness of the systems developed to monitor progress toward program objectives;
- the administration of the agreements, particularly such processes as determining loss, accounting and financing, data processing and management;
- the adequacy of evidence that provinces and producers are complying with the terms and conditions of the agreements;
- the adequacy of management information and accounting systems both for the management and control of the programs and for accountability; and
- the adequacy of accountability reports, such as Part IIIs and annual reports.
Reporting to Parliament10.83 Information on Crop Insurance, on Crop Reinsurance and on the National Tripartite Stabilization Program is presented in the Estimates Part III for the Department of Agriculture. However, in each case this information is presented in an aggregated form as described below. Aggregating this information for financial accountability purposes is not warranted, and the result is the presentation of misleading information.
Crop Insurance10.84 The Department reported in its 1991-92 Part III that the cumulative loss ratio is one indicator of long-term self-sustainability, and it presented an aggregated cumulative loss ratio for all provincial schemes of 1.10. A consistent cumulative loss ratio greater than 1.00 indicates that a scheme is not self-sustaining; it shows that over the long term cumulative indemnities have exceeded cumulative premiums. A ratio of less than 1.00 is not unfavourable; it indicates the existence of a reserve to address the risk of major losses in future years.
10.85 The Department's presentation of an aggregated cumulative loss ratio for all schemes combined is misleading; each provincial scheme should be shown separately because each must be self-sustaining on its own. At 31 March 1991, cumulative loss ratios for the individual provincial schemes varied between 0.64 and 1.27. A ratio of 1.27 indicates that cumulative indemnities have exceeded cumulative premiums by 27 percent and that the scheme has accumulated a deficit of $270,000 for every $1 million in premiums it collects. Similarly, a ratio of 0.64 means a reserve of $360,000 for every $1 million collected.
10.86 At 31 March 1991, as Exhibit 10.3 shows, five of the schemes had cumulative loss ratios in excess of 1.10 and, therefore, may not be meeting their legal requirement to be self-sustaining - a very different picture from that implied by the presentation and discussion in the Part IIIs. Reporting a single consolidated amount masks the serious problem of the most troubled account - Saskatchewan (see Exhibit 10.5 ).
Exhibit 10.6 ).
10.88 The Department reported in its 1991-92 Part III that "it is estimated to take six years to eliminate the deficit" in the Reinsurance Fund. We are of the view that this forecast is unfounded in light of the observations presented above.
National Tripartite Stabilization Program10.89 The Part III disclosure of the deficit for this program is also misleading. Again, it nets individual plan surpluses and deficits, thus masking the financial position of the individual plans. However, the government's responsibilities in cases where there are deficits differ from its responsibility for those plans in a surplus position. Deficits are divided between participating provinces and Canada, while surpluses are divided equally among the stakeholders.
Western Grain Stabilization10.90 Last year, during the course of the follow-up audit of the Part III, we expressed concern with the presentation of financial information on this program. In this year's document, the Department has significantly improved the presentation of the information.
Ad Hoc Assistance
The Department is unable to provide evidence that approval was sought from the Governor in Council for substantial departures from the program it approved10.91 The Canadian Crop Drought Assistance Program (CCDAP) was announced as a shared-cost program, initially to be funded on a 50-50 basis with the affected provinces. The provinces, however, had not agreed to this sharing ratio. The Governor in Council finally approved an agreement based on a 75 percent federal to 25 percent provincial sharing ratio. However, the Department had paid most of the money to the farmers in 1989, well before any of the agreements with the provinces had been made. In our opinion, this may have compromised the federal government's ability to negotiate. The signing of agreements went on throughout the following year, with the last agreement signed in October 1990. However, at the time of our audit, one province - Manitoba - had yet to sign an agreement. If Manitoba signs an agreement based on a 75:25 ratio, the province will owe the federal government $37 million.
10.92 We reviewed the agreements that had been signed. We found that, although the order-in-council approving the program provided for a 75:25 cost-sharing ratio, in real terms the agreements produced ratios of from 75:25 in one case to as high as 89:11 in another. The Department is unable to provide evidence that approval was sought from the Governor in Council for these substantial departures from the original program the Governor in Council had approved. We note that the agreement with Saskatchewan provides for a credit to Saskatchewan in the amount of $41 million. There is no authority in the program order-in-council for such a credit, and the Department cannot provide any other authority for it.
Need to Readdress Issues That Were Raised in the Auditor General's 1986 Report10.93 Many of these problems are not new to the Department. We and others have drawn these matters to its attention, but the Department has not yet dealt with most of them.
10.94 When we last looked at the safety net programs, we identified a number of problems and made several recommendations to remedy them (see Exhibit 10.7 ). The Department agreed with each and made a commitment to Parliament to act expeditiously to implement them.
10.95 In 1987, the Public Accounts Committee stated in its Report to the House of Commons on our 1986 audit of the Department: "Your Committee is concerned by the Department's slow progress in implementing the recommendatIons of earlier audits. This raises the question of the effectiveness of the internal audit and program evaluation functions within the Department....Your Committee is also concerned about the response to the present audit." In 1989, we reported on the status of action as at 31 December 1988, taken by the Department in response to the Office's observations and recommendations of its 1986 Report. We reported that during the 18 months that had elapsed between the end of our audit and the end of 1988, while significant progress had been made, many of the structural problems relating to our recommendations remained unresolved at the time of our follow-up. Today we find that, in all but a few cases, the Department has made little further progress on the 1986 recommendations.
10.96 In response to one of these recommendations, the Department commissioned a study of the Crop Insurance Program. The resulting report identified a number of areas where improvements could be made. Action has been taken on some of these, but many remain outstanding.
10.97 The Department also commissioned a study of the associated financial management and controls, which identified a variety of problems and suggested how management could address them. In 1989, the Department wrote to the Auditor General enclosing a copy of the study report and stating that action was under way to implement the recommendations. We found that little progress has been made since then.
10.98 As we noted earlier, the period from 1986 to now has been an active one for the managers of the safety net programs. They have had to respond to the Minister's priorities and have focussed most of their available energies on achieving what has been little short of a policy revolution. This has, however, been at the cost of good housekeeping and program maintenance. Although some of our recommendations were directed at programs that no longer exist, the recommendations remain valid for the surviving programs. The Department should now turn, as a matter of some urgency, to actions they agreed to take at an earlier date.
10.99 In addition to responding to the recommendations of this chapter, the Department should return its attention to dealing with the 1986 recommendations it agreed to, as restated in their generic form in Exhibit 10.7 .
Department's response : The Department agrees and work is currently underway to complete implementation of the recommendations.