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1992 Report of the Auditor General of Canada

Assistant Auditor General: Elwyn Dickson
Responsible Auditor: Larry Ting

Main Points


15.1 The Department of Indian Affairs and Northern Development (DIAND) has not fully discharged its statutory responsibilities with regard to Indian forest lands.

15.2 The Timber Regulations established by DIAND to carry out these responsibilities are inappropriate and unenforceable.

15.3 Band consent is needed for entering reserves and for issuing logging permits, but the Crown has title over reserve lands. Management of reserve forest thus requires the co-operation of both parties.

15.4 DIAND and band councils lack adequate information to make effective decisions about Indian forest lands.

15.5 Significant sustainable social and economic benefits would be possible if Indian forests were better managed.


15.6 Under the 1977 Northern Flood Agreement (NFA), the governments of Canada and Manitoba and Manitoba Hydro agreed to compensate five Indian bands for the adverse effects of hydro-electric development projects undertaken by Manitoba Hydro.

15.7 According to DIAND, the adverse effects included the flooding of up to 2,134 square kilometres of land, including 67 square kilometres of reserve land that is home to 10,000 status Indians.

15.8 The NFA is being implemented by a dispute resolution process rather than by a co-ordinated, co-operative effort by all parties. This is detrimental not only to the NFA parties, but also to the taxpayers of Canada, who ultimately pay the costs.

15.9 Certain environmental considerations have not been properly addressed, despite the federal government's knowledge of actual or potential dangers.

15.10 DIAND and other federal departments have spent over $115 million under the NFA (mostly since 1988), but they have not captured the total costs to date and they do not know what these are likely to be in the future. Under a 1990 proposal, the federal government would pay the bands an additional $78 million, not including ongoing normal funding.


15.11 According to Forestry Canada (FORCAN), the productive forest lands on Canada's Indian reserves total approximately 1.4 million hectares (see Exhibit 15.1 ). Of the 603 bands living on reserves, approximately 240 have forest areas in excess of 1,000 hectares.

15.12 Most reserve forests represent a major opportunity for social and economic development for Indian bands. Forests, no matter how small, are often the single most important asset of many bands. They are the base for many renewable resources, including timber, forage, and wildlife, and are crucial to the supply of fresh water and clean air. In fact, forests provide more than fuel, shelter and food to native people. They are an essential ingredient in the cultural and spiritual well-being of the Indian population.

15.13 Larger forest holdings, if properly managed, could provide employment and yield a steady income to band members. A number of reserve forests are economically accessible to industries that use wood.

15.14 The vast majority of on-reserve Indians live in areas remote from urban centres. They depend heavily on the resource base of the reserves and the limited employment opportunities in the immediate vicinity. Significant improvements in the social and economic conditions of Indians can come about only when development of the natural renewable resources is sustainable.

15.15 According to FORCAN, the forests of many reserves are seriously depleted due to several decades of neglect and lack of forest management. The main causes are indiscriminate logging, fire, lack of reforestation and inadequate site tending.

15.16 The Indian Act and the Indian Timber Regulations establish DIAND's statutory responsibility for Indian timber and reserve forests. The extent of this responsibility is subject to many interpretations, from acting as a trustee (fiduciary) to simply issuing licences and permits to cut timber on reserves.

15.17 FORCAN helps the Department fulfil its responsibility by providing expertise, leadership and funding in forest management matters. Approximately $17 million was made available for 1984 to 1990 under the federal-provincial Forest Resource Development Agreements (FRDA). This amount has been increased to $30 million for 1991 to 1995. We have not carried out any audit on the activities by FORCAN relating to Indian Forests.

15.18 As a result of its evaluation study on Indian Forest Resources in 1988, DIAND entered into a Memorandum of Understanding with FORCAN to establish co-ordinated working relationships and common objectives respecting Indian forestry programs. Notwithstanding this arrangement, DIAND retains ultimate accountability for its statutory responsibilities.

Audit Scope

15.19 In this audit we examined the way DIAND interprets and carries out its statutory role for the disposal of Indian timber. We also looked at its role in the management of reserve forests in the provinces. We did not include forests of the Yukon and Northwest Territories.

Audit Criteria

15.20 For DIAND to carry out its responsibility for managing the disposition of timber efficiently and effectively, it should have:

  • a clear statement of the nature and the extent of its responsibility (i.e. as an agent or as a trustee);
  • a policy and procedures that provide for the discharging of its responsibility;
  • regulations that are consistent, appropriate and enforceable;
  • adequate quality and quantity of resources;
  • adequate and appropriate data and management information for decision making and managing; and
  • adequate and appropriate provision for periodic reports to Parliament and the bands.

Observations and Recommendations

Lack of Clear Mandate

15.21 The mandate of the Department for granting permits and licences for Indian timber and the management of reserve land is stated in the Indian Act.

15.22 The Indian Act clearly states that the reserves are held by the Crown for the use and benefit of the Indian bands.

15.23 Section 18(1) of the Indian Act states: "...reserves are held by Her Majesty for the use and benefit of respective bands .... the Governor in Council may determine whether any purpose for which lands in a reserve are used or are to be used is for the use and benefit of the band."

15.24 "Reserve" is defined by the Act as: "a tract of land [including forests], the legal title to which is vested in Her Majesty, that has been set apart by Her Majesty for the use and benefit of a band...."

15.25 Furthermore, section 57 under the part of the Act entitled "Management of Reserves and Surrendered Lands" empowers the Governor in Council to make regulations "authorizing the Minister to grant licences to cut timber on surrendered lands or, with the consent of the council of the band, on reserve lands; and imposing terms, conditions and restrictions with respect to the exercise of rights conferred by licences granted."

15.26 The mandate for the disposition of timber on reserves is clearly stated. The precise meaning of other aspects of Indian forest management has been subject to different interpretations for years. The basis of the debate is whether the mandate represents a legal obligation or comprises discretionary activity. The Department should clarify its responsibilities with regard to these aspects of forestry management.

15.27 Without such clarification, it becomes almost impossible to determine whether resources are being used for the purpose required by the statute or whether implementation of the Department's responsibility is consistent across the country.

15.28 DIAND, in consultation with Forestry Canada and aboriginal forestry groups, should develop a statement that delineates its responsibilities and those of the bands in relation to Indian reserve forests and outlines an operating plan to guide its activities.

Lack of Management Objectives

15.29 In order to meet its statutory obligation in managing the disposition of timber, we would expect the Department to have a policy that clearly states its objectives, responsibilities and accountability, as well as strategies for accomplishing its objectives. Following the development of such a statement, DIAND would need to consult with First Nations to develop a plan and procedures for discharging its responsibilities.

15.30 We found that the Department does not have a policy or a plan to specify how it would fulfil its obligation to ensure that all timber revenues due to the bands are collected and deposited to their accounts. Numerous attempts by DIAND staff in some regions to develop a forestry manual have never been carried through by the Department.

15.31 For any native forestry program to be socially, economically and environmentally successful, it must have the bands' full participation in its design and administration. DIAND has provided financial resources and technical support to the Intertribal Forestry Association of British Columbia and the National Aboriginal Forestry Association for their development of legislative initiatives. A long-term perspective is required for managing the harvest of timber on a sustainable basis and for determining how the activities will be funded.

15.32 DIAND should, in co-operation with Indian bands and FORCAN, develop, communicate and implement a clearly stated Indian forest policy that reflects the interests of both the Indian communities and the federal government.

Regulations Ultra Vires

15.33 The Indian Act authorizes DIAND to establish regulations that enable it to fulfil its responsibility. The regulations should be valid (not ultra vires), appropriate and enforceable. In 1982 the Standing Joint Committee of the Senate and House of Commons on Regulations and other Statutory Instruments stated that several of the provisions in the Indian Timber Regulations had serious shortcomings. They were, and still are, inconsistent with the Indian Act and in conflict with the Charter of Human Rights. The Department acknowledges these shortcomings but has not put recommended changes into effect.

15.34 DIAND has directed its regional offices not to use the sections of the regulations that are deemed to be ultra vires. The Department informed us that only non-controversial amendments to the sections will be included in an omnibus regulatory change bill in the fall of 1992.

Regulations Outdated

15.35 The Indian Timber Regulations were enacted in 1954. At that time forestry was considered to be synonymous with logging. Reforestation was left to nature. The regulations are silent on virtually all of the modern forestry practices that would ensure harvesting of Indian timber on a sustained-yield basis. They are also inadequate for the proper management of resources that are significantly affected by forestry operations, such as water and wildlife. Furthermore, preservation of the natural habitat is a vitally important factor in the agricultural, cultural and spiritual practices of Indian bands.

Inhibition of Joint Ventures

15.36 Many of the smaller reserve forests are not economically viable management units. Bands with a small forest base need to expand beyond the boundaries of their reserve forests and manage blocks of provincial Crown lands as well. The Indian Timber Regulations inhibit such joint ventures because of the contrast in regulatory regimes on and off the reserves. In one situation, a band was able to take advantage of an opportunity offered by a province to obtain a "tree farm licence" only through an Order-in-Council delegating reserve forest management rights and responsibilities from DIAND to the province. This delegation was subsequently challenged by the Standing Joint Committee of the Senate and House of Commons on Regulations and Other Statutory Instruments.

Inconsistent Implementation of Regulations

15.37 Implementation and enforcement of the Indian Timber Regulations vary widely across the country. In some provinces they are not applied at all; in others they are applied with varying degrees of effectiveness. In one province, the regional DIAND staff designed detailed permits for logging companies to overcome the shortcomings of the regulations. These permits stipulate the standards for logging and the requirement to comply with the provisions and regulations of the provincial Forest Act dealing with timber scaling and marking. These permits also include environmental protection provisions.

15.38 DIAND should consult with the Indian communities and institutions when revising the Indian Timber Regulations to ensure that they are appropriate for modern multi-use forest management practices and reflect the interests of all parties.

Lack of Appropriate Resources

15.39 DIAND needs to ensure that the required expertise is available to carry out its statutory responsibilities for the disposal of Indian timber. We believe that there is a shortage of departmental staff with either professional or technical training in forestry. There is one staff member for the entire Maritime area, one in each of Quebec, Ontario, Alberta, Manitoba and Saskatchewan, and two in British Columbia. Many of these staff members have other duties and little time for preparing and issuing permits or licences.

15.40 DIAND needs to determine what resources are needed and what can be made available, either from internal sources or through other federal departments or Indian institutions, to adequately discharge its responsibilities for Indian forests. Based on data collected by FORCAN in 1988, total expenditure per hectare of productive forests on Indian land is about half the average for Canada. This is a large discrepancy in investment.

15.41 There is virtually no enforcement, inspection or ensuring of compliance to terms and conditions in permits or licences. Furthermore, penalties prescribed by the Act for contravention of regulations are too light to act as a deterrent. Many bands simply ignore the Act and log timber for sale as they see fit. In some instances, individuals from outside the bands have illegally harvested timber on Indian lands. There is no existing process that allows a band council to effectively deal with this situation. Bands must request that the Minister prosecute for illegal removal of timber. The result has been a steady depletion of forest on most reserves and an ensuing loss of revenue.

15.42 Furthermore, DIAND often has no record of timber cuts, either because it is unaware of the operations or because its staff have insufficient time or resources to effectively monitor them. The Department, therefore, cannot ensure that reasonable standards of forestry practice are applied or that good value is received for timber that is cut.

15.43 There have been cases where valuable cedar was logged and the contractor did not pay any stumpage, even though a permit was approved and issued by the Department. Performance bonds or holdbacks were not requested, as would be the case in good business practice. In another instance, a permit was issued by DIAND for the harvest of 56 hectares of high-value spruce. The contractor went bankrupt, the wood was burned, and the band lost the $750,000 revenue from its forest.

15.44 DIAND should ensure that adequate expertise, in terms of quality and quantity, is available to enable it to discharge its statutory responsibilities for Indian forests.

Lack of Information

15.45 Section 57(a) of the Indian Act requires the Minister of DIAND to seek the consent of the band council when granting licences to cut and dispose of timber on reserve land. The Minister first has to judge whether or not a proposed licence benefits the band as a whole. Without proper information, DIAND is unable to realistically assess the opportunities and problems of Indian forests. The band council also needs appropriate and adequate information to ascertain whether or not a licence is in its best interests. At a minimum there should be an inventory of the forest and a forest management plan with adequate resources for implementation. In discharging its responsibility, DIAND has to ensure that the timber is sold at competitive prices and that the cutting complies with the band's forest management plan (if it has one).

15.46 In our 1986 annual Report, we recommended, and DIAND agreed, that the Department compile and maintain a complete, accurate and up-to-date inventory of Indian forests. Subsequently, in 1987, DIAND made a commitment to the Public Accounts Committee to have such an inventory completed by 1991 for all bands with commercial forestry potential.

15.47 Most of the current inventories and comprehensive forest management plans are carried out with the assistance of FORCAN and are funded through Forestry Resources Development Agreements (FRDA). FORCAN reports that less than 50 percent of the Indian productive forest land has been adequately inventoried. Exhibit 15.2 provides details of inventoried areas by province.

15.48 According to DIAND, the principal reason for not completing the forest inventories is that many bands have not initiated a request for an inventory, in part because the inventory program has not been actively promoted.

15.49 DIAND, with the assistance of FORCAN and the co-operation of the Indian communities, should complete the forest inventories on Indian reserve lands as quickly as possible.

Periodic Reporting

Lack of Adequate Reporting

15.50 In order to fulfil its accountability requirements regarding Indian forests, DIAND should obtain pertinent information from the bands and report periodically to Parliament on the performance of all parties concerned. In addition to the basic information normally contained in a performance report, it would be useful to indicate where to obtain additional information, such as an inventory of Indian forest under its management, the status of the development of Indian forest management plans, and descriptions of programs or assistance being offered by federal and provincial government departments. Well-performing band forestry management activities could be included to serve as role models for other bands who are considering investing in forestry development.

15.51 We found that the Department did not regularly report to Parliament on the situation regarding Indian timber and forests.

15.52 FORCAN, which publishes a biennial report entitled "Timber Harvest on Federal Lands" that contains data on timber harvested, stumpage revenue, economic impacts and forest management, also has difficulty collecting accurate data from DIAND or the bands. This is due to the absence of systematic recording and collecting of data for evaluation and planning purposes.

15.53 DIAND should consult with the Indian communities to develop a mechanism for reporting on its statutory responsibility and other aspects of the management of reserve forests and should report regularly to Parliament on the performance of all parties concerned.


15.54 Based on the results of our examination, we concluded that DIAND is not discharging its statutory responsibility for Indian forest management with professional and due care.

15.55 In view of the uncertainty surrounding this issue and an increasing tendency for the federal government to be called to account for its stewardship of Indian interests, the Department needs to review with the various bands the manner in which forest management is carried out. Failure to discharge its responsibilities in this regard could lead to legal action against the Department.

Other Benefits

15.56 Successful management of reserve forests would yield social and economic benefits both to the bands and to Canada. Benefits from investment in long-term forest management could reduce future federal spending on other economic development, health and social assistance programs for the bands.

15.57 Forestry Canada estimates that each thousand cubic metres of timber harvested creates 1.94 jobs in the forest sector and 3.42 jobs in other sectors, providing an economic benefit to society of around $166,000.

15.58 According to FORCAN estimates, the current reported harvest levels on reserve forests represent only 25 percent of the annual potential allowable cut. Indian forests are also growing less wood fibre than they are capable of. Therefore, it appears that existing harvest levels could be increased significantly with improved forest management. In the long term, this could potentially raise the annual harvest to nearly 5 million cubic metres, which would generate log shipments with an estimated value of $200 million annually and prospective direct employment for almost 10,000 people.

Example of Good Investment in Forestry Management

15.59 A few bands are already benefiting from comprehensive forest management. We selected one for reporting that had readily available data on the resultant social and economic benefits.

15.60 In 1981, because of a legal restriction under the Indian Act, the Stuart Trembleur Lake Band had to obtain a federal Order-in-Council and incorporate Tanizul Timber Ltd. to acquire a tree farm licence from the British Columbia provincial government so it could manage forest lands both within and outside its reserve. The licence was awarded for a period of 25 years with provision for replacement.

15.61 The licence covers approximately 47,500 hectares of provincial Crown forest and 2,200 hectares of reserve forest. It allows an annual cut of approximately 132,300 cubic metres. The forestry operations generate between $4 and $6 million annually, depending on the volume cut and market conditions. Stumpage, which averages $10 per cubic metre, generates revenues of approximately $1 million annually for the provincial government.

15.62 At the time it obtained the licence, the band had no experience in either business or resource management; nor did it have equity funding to operate the tree farm. But, with training in various professions and strong, capable leadership, it has overcome these deficiencies. Within a few years, the band has:

  • created a stable employment base close to home for its members;
  • provided band members with practical job training that could lead to long-term employment on or off the reserve;
  • increased employment and income levels for the band as a whole;
  • reduced dependency on federal government support; and
  • contributed to immediate and future social and economic benefits for the band and the public in general.
15.63 Tanizul Timber has created employment for five full-time office staff and three full-time forest supervisors and managers. During the logging season, up to 25 people are hired for falling, bucking and operating machinery in the woods. The company also hires four silviculture contractors, who employ up to 50 people to work in various aspects of silviculture. A sawmill under construction will create direct employment for 20 to 25 people.

15.64 The success of a band depends on the extent of community involvement. Bands must be prepared to initiate, develop, implement and administer their own forest management programs. DIAND can expedite the process by supporting native institutions that in turn can assist in the training of native foresters, bringing opportunities to the attention of bands, and citing success stories to demonstrate the potential benefits. In order to carry out a cost-benefit analysis of investments in forestry development, baseline social and economic data are required. The bands or institutions should be encouraged to collect such data so that an evaluation can be carried out.

15.65 DIAND should provide encouragement and support for Indian communities to follow the lead of bands that have undertaken systematic, sustainable development of reserve forests for their social and economic benefit .

Department's response: The Department's legal obligations are limited by the Indian Act to the regulation of cutting and removal of reserve timber, and compliance with the terms and conditions of any surrender or designation of timber resources.

In addition to its statutory mandate, the Department plays a development role with regard to Indian forests. This includes the promotion of environmental stewardship and sustainable development and the improvement in the quality of life for native people in Canada. In fulfilling this role, the Department believes it is essential to further develop the ability and capacity of Indian peoples to manager their forests. To this end, the Department has been working closely with Indian groups and Forestry Canada to develop Indian forestry institutions, to assist Indian communities in planning their forestry management programs, to promote forest management and stewardship and, particularly, to encourage Indian communities to harvest timber in accordance with responsible and effective forest management practices.

This close co-operation between the Department of Indian Affairs and Northern Development, Forestry Canada, and Indian groups is reflected in a policy statement, "Sustainable Forests: A Canadian Commitment", which was endorsed by the Canadian Council of Forest Ministers and Indian forestry leaders on 4 March, 1992. The statement includes an action plan on Indian forests.

Since 1990, the Department has been working with Indian forestry leaders on the development of a comprehensive forestry strategy. Part of the strategy includes developing legislation and policies on managing and regenerating Indian forest lands. Department officials are working with representatives of the National Aboriginal Forestry Association (NAFA) on a legislative alternative to the forestry-related sections of the Indian Act. Part of this initiative will include technical amendments to the Indian Timber Regulations. As well, the Department and Forestry Canada have supported the National Aboriginal Forestry Association in developing guidelines and standards to be used by Indian communities to manage their forest lands.

The Department will implement the recommendations of the Auditor General, insofar as they conform to the Department's statutory mandate. The Department will develop, in consultation with Indian forestry leaders and Forestry Canada, a policy and operating plan to outline the Department's responsibilities and guide its activities. The Department will also continue to work with Indian forestry leaders to improve the regulatory environment for Indian forestry. It will put in place appropriate resources to fulfill its statutory responsibilities. Finally, it will report to Parliament on its statutory mandate.

Regarding those aspects of forest management beyond its statutory mandate, the department will work with Indian forestry leaders and Forestry Canada to better define and implement its role.



The NFA: Its Purpose and Parties

15.66 The Northern Flood Agreement provides a framework for compensating five Indian communities for the adverse effects from various hydro-electric development projects undertaken, or to be undertaken, by the Manitoba Hydro-Electric Board (Manitoba Hydro). The Agreement states that, when it was made, there was uncertainty as to the effects of the Hydro projects and that it was not possible to foresee all the adverse results.

15.67 The Hydro projects, which include the construction of up to 14 power stations and other assorted water control structures, have significantly affected the water levels and/or flows of the Nelson and Churchill rivers and Lake Winnipeg. Four stations had been completed by mid-1988. Hydro estimates that the remaining 10 stations will not be completed until 2050.

15.68 The NFA was signed in December 1977 by:

  • the Government of Manitoba (Department of Northern Affairs);
  • Manitoba Hydro;
  • the Northern Flood Committee Inc. (NFC), an Indian corporation representing the five affected bands - Nelson House, Norway House, Cross Lake, Split Lake and York Factory; and
  • the Department of Indian Affairs and Northern Development (DIAND), on behalf of the Government of Canada.
15.69 The Northern Flood Capital Reconstruction Authority (NFCRA), an Indian corporation, was incorporated to manage construction of water and sewer systems as contracted with Canada through a 1988 agreement related to the NFA.

15.70 As well, other federal departments, including Environment, Fisheries and Oceans, and Health and Welfare have been involved in various NFA-related activities.

15.71 The Agreement does not specify an implementation schedule.

Financial Data

15.72 According to DIAND, costs or financial commitments incurred by the federal government under the NFA totalled over $115 million as at 31 March 1990. Costs incurred by Manitoba and Manitoba Hydro totalled $65 million. In 1990, these three parties offered to settle their current obligations by paying additional amounts of up to $243 million, including an additional federal government share of $78 million, not including ongoing normal funding. We observe on federal government costs and the offer to settle in paragraphs 15.141 to 15.143.

Scope and Physical Impact of the Hydro Projects

15.73 The Churchill and Nelson rivers, major waterways in northern Manitoba, flowed approximately parallel to each other and emptied into Hudson Bay. By 1977, Manitoba Hydro had diverted up to 90 percent of the Churchill River into the Nelson River so that generating stations along the Nelson could produce more hydro-electric power. The level of the Nelson was further raised by regulating the outflow from Lake Winnipeg. ( see photograph )

15.74 DIAND acknowledges that the following adverse effects, among others, have occurred:

  • flooding of up to 2,134 square kilometres of land, affecting 67 square kilometres of the Indian reserve lands of five communities, home to 10,000 status Cree Indians (see Exhibit 15.3 );
  • damage to recreational and commercial areas;
  • decrease in the quantity and quality of fish, including an increase in mercury toxins;
  • contamination of drinking water;
  • increased scarcity of wildlife for hunting and trapping;
  • hazards in water travel because of low water levels; and
  • increased danger in winter travel because of unexpected melting patterns of ice caused by abnormal water levels.

Canada's Obligations

15.75 The NFA relates to DIAND's mandate under the Indian Act. Section 35 of the Act permits a provincial body to take or use Indian reserve lands, with the consent of, and subject to, any terms prescribed by the Governor in Council. Section 35 also states that any amount that is awarded or paid in respect of such land shall be for the use and benefit of the Indian peoples.

15.76 The NFA assigns most responsibilities for its implementation to Canada, Manitoba and Manitoba Hydro. Some of these responsibilities are joint, while others are specific to a designated party, depending on the nature and cause of the obligation.

15.77 The NFA states that Indian people who are adversely affected by Hydro projects shall be treated fairly. In the Agreement, Canada and Manitoba acknowledge the need to set forth principles on which compensation will be based.

15.78 The NFA states that Canada, by virtue of its responsibility for Indians and the land reserved for them, is "committed to playing an active role in providing opportunity for the continued viability of the [affected] making available resources and expertise to the communities in planning and improving [their] social and economic conditions...."

15.79 However, Canada is not alone. Article 2.1 of the NFA states, "...Canada and Manitoba shall take such steps as are necessary to give effect to all of the provisions of this Agreement." Examples of significant obligations include:

  • Canada will establish, as Indian reserve land, an area of not less than four acres (1.6 hectares) of land for each acre of affected land. The additional land will be selected by the bands, with the agreement of the parties, from certain areas in Manitoba.
  • Canada will provide a continuous supply of safe drinking water to the affected communities. Manitoba Hydro will reimburse Canada 50 percent of its reasonable costs incurred to provide water, providing these costs are attributable to the adverse effects of the Hydro projects.
  • Canada and Manitoba will co-operate to provide the resources required to enable each of the five affected communities to formulate a comprehensive community development plan. The plan shall serve as, among other things, a joint action program, subject to the endorsement of all NFA parties, for the eradication of mass poverty and unemployment and the improvement of physical, social and economic conditions and transportation.
  • Canada, Manitoba and Manitoba Hydro will implement the recommendations of the 1975 Study Board concerning the impacts of the Hydro projects. In addition, they will report annually to each applicable band council on the status of the recommendations and will continue to monitor the impacts of the projects.
  • The onus is on Manitoba Hydro to establish that its projects did not cause adverse effects where any claims are made in connection with the projects.
  • All four parties to the NFA will appoint a single arbitrator to settle claims and other matters that may arise, relating to the NFA.
15.80 The NFA's duration is for the lifetime of the Lake Winnipeg Regulation and Churchill River Diversion projects, including any substantially similar redevelopment of these projects. No termination or target completion date is specified, apparently due to the ongoing nature of the hydro projects.

Audit Objective and Scope

15.81 Our objective was to assess the NFA and its implementation in terms of Canada's compliance with the Agreement and good management practices. We took into account DIAND's legislated responsibilities for the Indian peoples and the effects of the NFA on the applicable bands and on the taxpayers of Canada.

15.82 No conclusions are implied on matters not discussed in this chapter. Although there are necessary references to the other parties, our observations are directed to the federal government participants in the NFA, particularly DIAND.


Ambiguous Terms and Conditions

15.83 Because of the importance of the NFA, we expected that its terms and conditions, and the responsibilities it assigns, would be clear. We believe that clarity is essential for appropriately implementing the Agreement and obtaining accountability for results.

15.84 According to DIAND, Canada's NFA obligations can be categorized as those that are specific to Canada and those that are shared with others.

15.85 We found that several years after the NFA had been signed, DIAND had requested an extensive legal analysis of its obligations. The NFA is about 100 pages long. In 1983, government lawyers issued a 72-page report on the possible interpretations of the agreement. In 1987, a legal consultant under contract with DIAND issued a 200-page analysis of the NFA. This analysis attempted to clarify the nature and scope of obligations under the agreement. It noted that the various parties to the NFA had interpreted it very differently.

15.86 Because the NFA includes provision for paying compensation, certain financial information is needed to establish the extent of the parties' obligations. We therefore expected the NFA to include criteria and methods for calculating cost estimates for all significant obligations; deadlines for performance and payment; and clear identification of financial obligations by the respective parties.

15.87 The NFA contains appropriate information for only some of the many obligations specified. For example, with regard to Canada's major obligation to provide a continuous supply of drinking water, with 50 percent funding by Manitoba Hydro, the Agreement does not disclose the costs to be shared, deadlines for drinking water projects and funding, or even the nature of the water supply (such as trucked or piped).

15.88 Hydro's share of water supply costs is based on the portion of such costs that are attributable to the adverse effects of the Hydro projects. However, "adverse effect" has not been defined and no method to determine attribution has been specified.

15.89 At the time of our audit, Canada had paid about $88 million for a drinking water supply system and related requirements. This was done through a separate 1988 contribution agreement pursuant to the NFA, and represents Canada's major expenditures to date. Hydro is not a party to this agreement and has paid nothing, despite its NFA obligation to reimburse Canada 50 percent of the applicable costs. Paragraphs 15.131 to 15.137 discuss disputed water issues involving the obligations of Canada and Hydro.

15.90 Further, because the NFA does not specify a termination date (see paragraph 15.80), the extent of certain obligations specified in the NFA could continue indefinitely.

NFA Implementation Failures

Implementation by arbitration
15.91 Implementation of the NFA has been a lengthy and frustrating challenge for DIAND and probably for the other participants as well.

15.92 Very little action was taken during the first several years after the NFA was signed. The co-operative approach required in the NFA was replaced with an adversarial approach, as evidenced by the extensive use of the NFA arbitration provisions. All parties became claimants or respondents or both, either jointly or separately.

15.93 As of November 1991, the parties had filed over 150 claims with the arbitrator. These included 35 claims filed by the bands against Canada between 1980 and 1991, mostly as a joint respondent with Manitoba and Manitoba Hydro.

15.94 The issues include allegations of non-compliance with the NFA, damages relating to mercury contamination, lack of environmental monitoring and reporting, inadequate drinking water, and failure to take remedial measures as agreed.

15.95 In addition, Canada filed five claims against Manitoba or Manitoba Hydro in 1984. These included a major claim to recover its 50 percent share of costs incurred for the drinking water supply system. Canada estimated that its total capital and operating costs for this water system exceed $160 million. At the time of our audit, this claim was unresolved.

15.96 Of the 40 claims involving Canada as respondent or claimant, eight were resolved, and 32 were under review by the arbitrator or under further negotiation by the parties as of November 1991. All but one of these unresolved claims were filed between 1980 and 1984.

15.97 We are not commenting on the merits or outcome of any claim. However, we are concerned that the NFA is being implemented by a dispute resolution process rather than by a co-ordinated, co-operative effort by all parties. In our view, this is detrimental not only to the NFA parties, but also to the taxpayers of Canada, who ultimately pay the costs.

15.98 We attribute many of the difficulties to the lack of an implementation plan acceptable to all parties. In our view, such a plan should have been negotiated before the NFA was signed. It should have addressed such matters as:

  • strategies, priorities and a timetable for implementation;
  • sources of funding for the various obligations;
  • an appropriate monitoring mechanism for all parties; and
  • criteria and methods for evaluating the adequacy of implementation.
15.99 We noted that, in 1982, DIAND expressed concern about the lack of NFA implementation.

15.100 Moreover, in January 1987, DIAND appeared before the Standing Committee on Public Accounts, regarding our 1986 report on a comprehensive land claim settlement. At that time, DIAND testified that 10 years is "an awfully long time" to determine obligations and implement an agreement.

15.101 In response to a Committee member's question about potential government liabilities in similar agreements, DIAND identified the NFA. Yet, 15 years after signing the NFA, Canada's obligations have not been fully determined. (See paragraph 15.143)

Monitoring deficiencies
15.102 Because of the number of parties to this Agreement and their joint responsibilities, we expected to find a monitoring group with representation from each party to facilitate implementation and encourage compliance to the NFA.

15.103 Since DIAND has general fiduciary responsibility in matters relating to the Indian people, we thought that it ought to have exercised a lead role in monitoring. This would also be consistent with the general undertaking of DIAND in the Agreement.

15.104 We found that an interdepartmental committee was established to discuss matters of interest to the various federal departments that may be affected by the NFA. However, no monitoring group was established, and DIAND did not routinely monitor the other parties, or even itself; there were no periodic, summary reports in DIAND on the results of NFA implementation.

15.105 In our opinion, the lack of a co-ordinated monitoring function has increased the tendency towards arbitration and has resulted in additional delays, frustration and costs.

Environmental Issues

Adverse effects and mercury concerns
15.106 The parties acknowledge in the NFA that adverse effects have occurred, and may continue to occur, on the lands, pursuits, activities and lifestyles of the residents of the reserves. The onus is on Manitoba Hydro to establish that, when an adverse effect is identified, its projects did not cause or contribute to that effect. ( see photograph )

15.107 The federal departments of Environment, Fisheries and Oceans, and Health and Welfare, the Government of Manitoba, Manitoba Hydro and the bands have participated in various studies over the years to determine or monitor adverse effects. One example of a serious adverse effect is mercury contamination in fish.

15.108 In March 1987, a joint Canada-Manitoba study report on mercury in the NFA area disclosed that the occurrence of mercury in some women of child-bearing age exceeded the normal range. It further noted that, although mercury levels in the water were normal, mercury levels in fish along the diversion route were elevated. The report attributed this increase to the effect of Hydro flooding on certain organic material that affects how fish accumulate mercury. The study team estimated that it will take decades for mercury in predatory fish to return to historical levels.

15.109 This actual or potential danger has been studied extensively for many years and was the subject of a claim against Canada, Manitoba and Hydro in 1981. The bands conditionally settled the claim for various periods of time ending in December 1994.

Environmental management approach
15.110 We did not perform an environmental audit; nor did we attempt to second-guess the numerous studies and reports on environmental issues. Instead, we reviewed how DIAND, as Canada's signatory to the NFA, manages environmental matters.

15.111 We expected to find a co-ordinated approach among the NFA parties, under DIAND's leadership, to identify, evaluate and resolve environmental issues relating to the NFA. We also expected that DIAND would have an appropriate plan for implementing its own NFA environmental responsibilities. Without these mechanisms, we believe management effectiveness is reduced and the possibility of non-compliance with the NFA is increased.

15.112 Our review disclosed that various environmental monitoring programs and boards or committees representing the parties were established periodically to analyze issues, perform studies, provide advice and monitor effects of the Hydro projects. However, none of these bodies had the authority to assign responsibilities among the parties and enforce necessary action. Eventually, they disbanded and unresolved environmental issues were left to linger in the claims arbitration process.

15.113 We also found that DIAND did not have a plan for the required environmental monitoring. Furthermore, DIAND had not complied with the NFA requirement to report to the bands annually on the implementation status of recommendations made by the Lake Winnipeg, Churchill and Nelson Rivers Study Board in 1975. Over 40 percent of the 47 recommendations concerning the effects of the Hydro projects were assigned to Canada and other parties for joint implementation.

15.114 These recommendations included the monitoring of ongoing social, economic and ecological impacts related to hydro-electric development. The most recent report filed by Canada covers 11 years ended December 1987. We could find no documented reasons to justify a reporting gap for the four years ended in 1991.

15.115 We believe the continuing effects from the Hydro projects require Canada to continue its reporting. We noted that a claim filed by the bands in 1981 against Canada and the other parties in connection with the recommendations of the Lake Winnipeg, Churchill and Nelson Rivers Study Board was still unresolved as of November 1991.

Attribution of impacts to Hydro projects
15.116 The NFA provides for relief from adverse effects of the Hydro projects. In order to attribute an ecological or other effect to these projects it is desirable to have appropriate information of a "before and after" nature. This would allow the comparison of "baseline" or pre-project development data with data gathered during and subsequent to the construction or development process.

15.117 Other methods of determining changes in the impact area could include post-project comparisons with locations that have similar characteristics but are not developed.

15.118 Opinions on the availability and use of baseline data for purposes of the NFA were inconclusive. Some suggested that since Hydro flooding commenced in the 1970s, baseline data may not have been collected in a satisfactory way. Others believed that meaningful baseline data did not exist at all or that it was incomplete or that it was not analyzed properly. In any event, we found no evidence that a comprehensive environmental impact assessment had ever been performed. We believe that such an assessment is essential for NFA implementation because the purpose of the Agreement is to compensate for adverse environmental impacts.

15.119 We noted that as recently as August 1989, almost 12 years after the Agreement was signed, an Environmental Steering Committee representing all NFA parties expressed concern over the absence of impact statements. The Committee reported that statements of adverse effects were urgently needed for each NFA community. During our audit we found no documented impact statements. DIAND told us that this recommendation of the Committee had not been implemented.

15.120 This means that even if adequate baseline data existed and were properly analyzed, there would be insufficient current information for comparison. Thus, it would be difficult for Hydro to demonstrate, as required by the NFA, that its projects did not have an adverse effect. It would also be difficult for Canada to determine what remedial action or compensation was necessary. (See paragraph 15.79.)

15.121 We are concerned that DIAND proceeded to implement the agreement and financed construction of a major water delivery system, even though it lacked significant information needed to determine its obligations.

The Water System Project

15.122 In May 1988, DIAND, the Northern Flood Capital Reconstruction Authority (NFCRA), the Northern Flood Committee Inc. (NFC) and the five NFA bands entered into an $88.5 million agreement to implement Canada's NFA obligation to provide a continuous supply of drinking water to the bands. As we noted earlier, the NFA does not specify the cost or type of system required to fulfil Canada's obligation.

15.123 Under the May 1988 agreement, the NFCRA was responsible for managing the construction of a major water delivery system for the bands. The objective was to provide fully operational water and sanitation systems, comprising a combination of piped and trucked water services to 90 percent of the housing units on the five reserves. According to the NFCRA, this objective was subject to Canada's recovery of Hydro's share of costs under the NFA. The work involved the construction of municipal infrastructure, housing upgrades and plumbing and bathroom additions for 1,309 housing units.

15.124 The parties agreed that upon execution of this agreement, Canada would be deemed to have met its NFA obligation to provide drinking water. Further, with respect to water obligations under the NFA, there would be no recourse by any party to the arbitration provisions for 20 years.

15.125 DIAND's responsibilities included funding and monitoring the project and approving certain construction-related documentation or activities. DIAND also agreed, subject to parliamentary funding approval, to give the NFCRA any monies it recovered from Manitoba Hydro pursuant to Hydro's obligation under the NFA. This payment would be used, with DIAND's approval, to expand or otherwise amend the scope of the water system.

15.126 At the time of our audit, DIAND had paid most of its $88.5 million commitment. DIAND made payments to the NFCRA which, in turn, paid sub-contractors for their work on the project.

15.127 We enquired as to how DIAND obtained assurance that the NFCRA complied with the agreement, particularly the cost, quality and quantity requirements. We also enquired into the general status of the project.

15.128 We noted that DIAND obtained its assurance of compliance with the agreement primarily from the internal control system used by the NFCRA; from project monitoring status reports received from the federal Department of Public Works; and from the annual audit of the NFCRA financial statements performed by its external auditors.

15.129 While each of the above sources can contribute to a certain level of assurance, they are not, in our opinion, a substitute for a construction audit that would independently assess contract performance regarding cost, quality and quantity requirements. Such an audit would provide DIAND with greater assurance of compliance. We noted the agreement provides for an independent audit at the discretion of either party.

15.130 With respect to the general status of the project, we found that the following major dispute among the parties was still unresolved when we completed our audit.

Three-party dispute
15.131 In April 1984, DIAND filed a claim against Manitoba Hydro requesting, among other things, its 50 percent share of the water system development and operating costs. The amount of this claim was not specified. In October 1988, DIAND estimated that Hydro's liability to Canada under the NFA could reach $80 million. This included Hydro's share of costs under the May 1988 agreement with the NFCRA, to which Hydro was not a party, as well as a share of other expenditures.

15.132 According to DIAND, Hydro believes that its share of water system costs is limited to $300,000. Hydro maintains that it is a federal responsibility to provide safe water to the Indian communities; that the adverse effects of hydro-electric development projects are minor; and that the water system funded by DIAND exceeded what was reasonably required to supply drinking water.

15.133 In September 1991, the NFCRA and NFC, upon providing notice, terminated the May 1988 water agreement after DIAND had almost fully funded the NFCRA under the agreement. In the opinion of the NFCRA and NFC, this termination had the effect of revoking the 20-year release provided to Canada regarding the supply of drinking water (see 15.124).

15.134 The apparent reason for terminating the agreement was that Canada had allegedly not exercised its best efforts, as required under the water agreement, to recover Hydro's share of costs (see 15.79). The NFCRA believed it was entitled to receive any monies recovered from Hydro so that water services could be extended.

15.135 In November 1991, the five bands served Canada with a claim that confirmed the termination of the May 1988 water agreement. The claim requested, among other things, that the arbitrator order Canada to make payments (amount unspecified) to the claimants or provide other relief that the arbitrator may deem to be appropriate concerning Canada's alleged failure to comply effectively with the NFA provisions respecting the supply of drinking water.

15.136 The alleged non-compliance by Canada includes failure to fund various water and sewer line projects in each of the five reserves covered by the May 1988 water agreement. In January 1992, DIAND instructed its legal counsel to defend against the claim.

15.137 Although we are not offering an opinion on the merits or outcome of this dispute, we believe that it illustrates some of the difficulties associated with the NFA and its implementation.

Land Exchange

15.138 Paragraph 15.79 describes the obligations of Canada and Manitoba to compensate the bands by providing four new acres of land for each acre taken or damaged by Hydro. DIAND considers this to be a major obligation.

15.139 In 1979, the bands requested that Manitoba determine the criteria that would be applied in the land selection process. However, the bands and Manitoba could not agree on these criteria. Consequently, with the exception of 149 acres (60 hectares), Manitoba has transferred no land to Canada as required by the NFA. Canada, in turn, has provided only the 60 hectares to the bands as compensation under the NFA. This represents less than one percent of the amount of land promised to the bands subject to the terms of the Agreement.

15.140 In 1984, the bands and Canada filed claims against Manitoba for its alleged failure to meet its obligation to provide new reserve land. Although some progress had been made over the years in identifying and agreeing to suitable land, the claims had not been settled at the time of our audit.

Other Matters

Federal government costs
15.141 DIAND has attempted to identify and gather all costs incurred under the Northern Flood Agreement. However, it is aware that not all federal departments involved with the NFA have reported their actual costs.

15.142 Without this information, it becomes more difficult for the government to compare results of NFA implementation to the obligations it undertook in the Agreement.

Proposal to settle obligations
15.143 In 1990, DIAND, Manitoba and Manitoba Hydro proposed a total NFA settlement to the bands. The federal government's share of this proposal was $78 million and would bring Canada's total known costs to about $195 million. The settlement offer included 206,000 acres (834 square kilometres) of provincial land to be transferred by Manitoba to Canada as new reserve land for the five bands. One band accepted this proposal; the other four did not. At the time of our audit, the matter was still under negotiation.

Community development plans
15.144 Paragraph 15.79 describes Canada's obligation to contribute to community development plans for the bands.

15.145 Canada funded community plans for all five bands. These were completed in the early 1980s. They covered a spectrum of economic and social development matters such as education, housing, transportation, health services and employment.

15.146 According to DIAND, the implementation of these plans was to be provided through its regular programs. However, there is no mechanism to monitor progress, and no reports were produced on the extent of implementation.

15.147 In 1983, the NFC filed a claim alleging that Manitoba, Manitoba Hydro and Canada failed to work towards development and implementation of comprehensive community development plans as required by the NFA. In September 1991, DIAND proposed that it would fund annual meetings of bands and federal government departments to co-ordinate planning efforts in the NFA communities. However, this funding would constitute a full and unconditional release of federal obligations for community planning. At the time of our audit, this matter was not yet resolved.


15.148 In making the following recommendations, we considered that the NFA is a multi-party agreement that was entered into some 15 years ago. We also considered that progress in implementing the NFA depends, to a large degree, on clarification of the responsibilities and funding obligations of all parties.

15.149 DIAND should:

(a) establish and implement procedures to encourage and monitor compliance to the NFA by all parties;

(b) ensure that a valid environmental assessment is performed to determine and report on the impact of Hydro projects;

(c) use the impact statements resulting from the environmental assessment as a basis for preparing a plan for further implementation of the NFA or assessing the adequacy of any proposed plans; and

(d) capture all NFA-associated costs, along with appropriate performance information, such as NFA impacts, achievements, claim settlements, and the nature and cost of work still to be done, and disclose this information in DIAND's annual Report.

Before entering into a future agreement of this nature, DIAND should:

(e) ensure that the agreement clearly defines the nature and extent of all financial and other obligations of each party; and

(f) obtain agreement from all parties on implementation matters such as progress target dates, priorities, monitoring procedures and methods for evaluating the adequacy of implementation.


15.150 Implementation of the NFA has been and remains difficult, partly because of the nature of the Agreement and the number of parties involved. Many disputes involving allegations of non-compliance with the Agreement still linger among the participants.

15.151 However, we believe there is room for improvement in how DIAND manages its responsibilities under the NFA. In view of the Department's legislated mandate for matters respecting Indian peoples, there is an opportunity and a need for DIAND to exercise greater initiative and leadership in resolving NFA issues. It is not sufficient, in our opinion, for DIAND to merely react to problems after the fact, which is the primary approach it has used over the years.

15.152 In addition, there are lessons to be learned from the NFA respecting any future agreements involving the use of natural resources that can affect Indian reserve land. DIAND should consider placing greater importance, in such agreements, upon clear responsibilities and funding obligations to each party. Further, co-ordinated plans to facilitate and monitor implementation must be prepared and agreed to by all parties.

Department's response: DIAND agrees with the facts and observations relating to the Manitoba Northern Flood Agreement. As noted in the Auditor General's conclusion, implementation of the NFA has been difficult, partly because of the nature of the Agreement and the number of parties involved.

With respect to the recommendations, the Department has the following comments:

(a) DIAND acknowledges that compliance with the NFA by all parties is important. Therefore, DIAND will implement procedures to better encourage and monitor compliance, with the co-operation of the other parties.

(b) and (c)

When the NFA was struck in 1977, environmental matters were generally not the priority that they are today. Over the years, DIAND and other federal departments participated in various studies or data research regarding NFA environmental impacts. For example, the Federal Ecological Monitoring Program (FEMP) studies water quantity and quality, sediment, mercury levels, aquatic life and other related matters. However, DIAND agrees that the results of these efforts cannot be considered a comprehensive environmental impact assessment.

Accordingly, DIAND will consolidate and analyze the existing information to determine what additional work is needed to complete the necessary impact statements. DIAND will encourage the other parties to participate in this process so that, together, we can plan and implement appropriate further action towards a complete environmental assessment and related remedial measures. DIAND believes that the final FEMP Report, released in April 1992, together with other DIAND initiatives, will contribute to the development of a plan for further implementation of the NFA.

(d) DIAND will improve its procedures to ensure that it adequately captures and reports the applicable information, including costs of proposed settlements.

(e) and (f)

DIAND recognizes the need to better address such things as clarity of obligations and implementation matters in future agreements of this type. This is why, with respect to the NFA itself, the Department has developed a proposed basis for settlement (PBS) that would clarify for each band how the NFA will be implemented in its own case. The recent Split Lake Cree Settlement Agreement demonstrates the ongoing efforts of the Department to remedy the difficulties in implementing the NFA.