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1993 Report of the Auditor General of Canada

Assistant Auditor General: Paul Ward
Responsible Auditor: Hugh McRoberts

Main Points

15.1 On 2 July 1992, the government announced a moratorium on fishing cod in the Northern cod zone of the North Atlantic. The Department estimated that over 25,000 people would be affected by the moratorium and that 19,000 would require income assistance. To meet this need, the government established the Northern Cod Adjustment and Recovery Program to provide immediate income relief to the fishermen, plant workers, and trawlermen affected, and to prepare for a much reduced fishery in the future.

15.2 Although it was faced with a difficult policy challenge in a new field, the Department met the government's objectives in terms of getting the new program in place and getting the cheques out in a timely fashion, and has been able to continue doing so. The program was rushed, as the Department had not considered the potential effects of a stock decline of this magnitude. As a result, compromises in program design were made that would have significant effects later.

15.3 The Department cites as its authority for this program the Atlantic Fisheries Restructuring Act that was passed in the mid-eighties to permit the government to implement certain recommendations of the Task Force on Atlantic Fisheries (the Kirby Commission). In our opinion, this Act does not provide a clear authority for the program, and hence, the Department is operating a $587 million program without a clear legislative authority.

15.4 Although the program was intended to benefit only those who fished or processed Northern cod and who were affected by the moratorium, the design compromises made in the interest of initial responsiveness meant that many who were not affected by the moratorium or did not fish Northern cod become eligible for the program under the established terms and conditions. We found a number of examples of this. However, because of the lack of information in departmental files, we and the Department were unable to quantify the extent of these problems. The Department is working to identify further instances of this type and to deal with them.

15.5 Another area compromised in the initial drive for responsiveness was the financial management and control of the program. In February 1993 a review team identified a list of significant weaknesses covering most important areas of financial management and control, and made some 68 recommendations to remedy them. The Department's figures indicate that 54 of these recommendations are, in its view, fully implemented.

15.6 An important objective of the program is to achieve a significant and permanent reduction in both the fishing and processing capacity in the Northern cod fishery by the end of the moratorium. To this end, the program has offered options including training, licence retirement and early retirement to assist those who wish to leave the fishery. These will be complemented by significantly higher standards for re-entry to the fishery at the end of the moratorium. Although it is early in the program, data on the choices being made by program recipients indicate that exits from the fishery are occurring at a lower rate than anticipated by the Department.

Introduction

15.8 Prior to the announcement, the Department had considered a range of options to keep the inshore fishery open. The option of closing the inshore fishery was not considered until very late, leaving the Department little time to prepare for the consequences.

15.9 Once it had been decided that the state of the Northern cod stocks warranted a moratorium, the government was faced with how it was to respond. As the lead department for this issue, Fisheries and Oceans was responsible for developing and delivering the program. Doing this would have been a formidable challenge for a department experienced in developing social support programs, had it been given the ten weeks allotted to do the job. Neither was true in this case. The Department had little past experience or expertise in developing and delivering programs of this type. Further, the government had decided that speed in delivery was of the essence, and it committed to have cheques in the hands of affected fishermen and plant workers within two weeks. Originally, the Department was to have had ten weeks in which to develop the long-term program. However, difficulties with the public reaction to the emergency program led to significant pressures to announce the long-term program sooner. The Department believes that it has succeeded in responding quickly. The initial cheques did go out to recipients just over two weeks after the program was announced. The long-term program was begun just four weeks after the initial announcement. However, the Department believes that some of the problems that we discuss in this chapter have resulted from the Department's need to respond swiftly to the challenges that it faced.

Scope and Objectives

15.11 Government often has to respond quickly to changing circumstances. This can require creating new programs or modifying existing ones in response to changing needs. In turn, consideration must be given not only to the specific content of programs, but also to the authority for expenditures and to the need for proper financial management and control of funds. In this audit we examined the Department's implementation of the Northern Cod Adjustment and Recovery Program, to determine whether funds have been expended only with proper authority, the program has been delivered with due regard to economy, efficiency, and effectiveness, and there has been a proper regard for financial management and control.

Background

15.13 According to the Department, the Northern cod fishery has been viewed for some time as an "employer of last resort". It is a fishery that the Department sees as having at least 50 percent more harvesting and processing capacity than is justified by the size of the resource. Many in its work force lack skills that can be transferred to other sectors of the economy. Finally, for many in this fishery there are no alternative sources of income available. The result of this is a population whose economic fate is tied to the health of the fishery in much the same way as the residents of a remote mining town have their fate tied to the amount of mineable ore.

15.14 Fortunately, for most of the 500-year history of the Northern cod fishery, the stock has proved to be a robust and forgiving resource. Indeed, the Department's scientists have had to search back in historical records to 1713 to find evidence of a collapse of the Northern cod stock on the scale that has occurred beginning in 1991.

Observations

The Program Was Rushed, as the Department Had Not Considered the Potential Effects of a Stock Decline of This Magnitude

15.16 During that fall, the ships of the Department's Science Branch were at sea carrying out their annual survey of the Northern cod stock. This survey, combined with an analysis of commercial landings, forms the basis for the annual scientific advice to the Department on the state of the stock. As the reports from sea came in, and as the new year approached, it became increasingly clear that survey results would show a sharp decline in stock from previous years. The survey results showed that the stock was 52 percent lower by weight than in the previous year and 33 percent lower by count. Not only did this point to a dramatic decline in the size of the stock, it indicated that the surviving fish were significantly smaller than in the previous year.

15.17 February 1992. An interim assessment of the state of the stock was presented in February 1992. It confirmed a serious decline in the Northern cod stock. The scientists advised that average weights at age were lower than average, that the winter fishery had decreased substantially, and that research vessel indices of abundance were among the lowest since data had begun to be compiled. They recommended that catches be restricted to the lowest possible level for the first half of the year. They also stated that they were carrying out additional confirmatory procedures but added that they did not expect the final July assessment to differ substantially from the interim assessment. In March, the results of a hydroacoustic survey confirmed that there was no significant concentration of cod in the Northern cod area (2J3KL). ( See Exhibit 15.1 )

15.18 On 24 February, the Minister instituted a "conservation ceiling" that effectively closed the offshore cod fishery. He expressed his expectation that the inshore fishery would continue to operate without limits on catches when it opened in May. Finally, he created a task force on incomes and adjustment in the fishery.

15.19 March 1992. By early March, the Department had begun an assessment of the economic impacts of the catch reductions. However, there was no analysis of the possible impacts of a catch failure in the inshore fishery. Although catch failures had been experienced in the past, and indices of abundance were near to the lowest on record, the Department's economic impact analyses were based on the assumption that "the inshore catch will remain at the 1991 level of 75,000 tonnes, but the actual catch could be higher."

15.20 April and May 1992. The Northern cod stock is what is called a trans-boundary stock, one that has international waters as part of its range. Because of this, Canada attempts to work with the other nations fishing this stock to manage it. This is done through the North Atlantic Fisheries Organization (NAFO). By early April, European Economic Community scientists had also concluded that there was a possibility of biological problems in the Northern cod stock. Two weeks later, Canada asked NAFO scientists to review the state of the Northern cod stocks.

15.21 June 1992. On 4 June 1992, NAFO confirmed that the stock had declined rapidly to a level at, or close to, the lowest ever observed, that the small size of the spawning stock was cause for concern, and that the causes for this decline were not clear. NAFO suggested a total allowable catch for Northern cod of 50,000 tonnes, much of which had already been caught. The Department began monitoring the inshore fishery on a daily basis.

15.22 By mid-June, the possibility that the range of responses to the scientific advice might include a moratorium began to be considered. Within the next two weeks, an interdepartmental committee began meeting to discuss possible courses of action.

15.23 Moratorium. On 2 July 1992 the Minister announced a two-year moratorium on the Northern cod fishery.

15.24 Between January and June, no consideration had been given to the possibility that a sudden, unexplained decline in biomass to the lowest level ever recorded might have an impact on the inshore fishery. Indeed, we have been told by the Department that the notion of a restricted inshore fishery (let alone a moratorium) was so foreign to the Department's corporate culture that it was raised as a possibility only quite late and, even then, with great reluctance. Rather than develop its economic impact analysis based on a range of possible fishing volumes (including a small or nil fishery), all of the Department's economic analysis was based on the assumption that the inshore fishery would somehow be unaffected. As a result, the Department was unprepared to deal with the consequences of the moratorium.

15.25 In 1988 we wrote that the Department's objectives in managing the fish stocks encompass both conservation and economic matters. Setting the total allowable catches has very significant impacts directly affecting the economic circumstances of those involved in the fishery. We were concerned then about the need to formalize the economic analysis and link it more closely to the scientific advice. At the time, the Department agreed.

15.26 For all of the major stocks, the Department should prepare annual economic assessments of the economic effects of the possible stock management decisions.

Department's response: As part of its mandate, the newly created Fisheries Resource Conservation Council (FRCC) will undertake a full economic analysis of significant quota changes in conjunction with the Department. This information is meant to be used as part of the FRCC's public consultation process and as input into the advice to the Minister for the setting of total allowable catches.

Currently, the FRCC is limited to examining groundfish stocks on the east coast. However, its mandate includes expanding its areas of responsibility to both coasts and to other species.

15.27 The response - July 1992. The government's response was to provide emergency support immediately while it developed a comprehensive plan to provide assistance to meet the Northern cod crisis through income replacement, adjustment and industry restructuring over the two years of the moratorium. The plan was to be consistent with the goal of a sustainable Northern cod fishery. The projected cost of this program was $920 million, of which $587 million was to be spent by the Department.

15.28 In attempting to respond to the moratorium, the Department was faced with a formidable task. The moratorium, in the Department's estimation, caused the largest layoff in Canadian history. Geographically it affected a large area including the East coasts of Newfoundland and Labrador and the lower north shore of Quebec. Over 25,000 people scattered over 400 largely remote fishing communities throughout this area were thought to be affected by the closure of the fishery. Of these, the Department estimated that some 19,000 would require income assistance.

15.29 In a very short time, a program had to be designed and the eligible population defined and identified. Before cheques could be issued, necessary resources - both human and financial - had to be found. In dealing with these issues, the Department had to ensure that the necessary authorities, and financial management and accountability regimes, were in place.

15.30 In issuing the initial cheques within ten days, management was certainly successful in meeting its objective of responding in a timely fashion. In other aspects, we have observed significant weaknesses in the Department's response, many of which were caused or exacerbated by time constraints.

Lack of a Clear Legislative Authority for a $587 Million Program

15.32 In our opinion, departmental expenditures on the Northern Cod Adjustment and Recovery Program have been made without clear legislative authority. The government has cited the Atlantic Fisheries Restructuring Act as the authority for its expenditures on the Northern Cod Adjustment and Recovery Program. However, this Act is questionable as an authority on two grounds. The income replacement component of the program is paid to the recipients in the form of grants. However, the Act contains no specific authority to pay grants for any purpose. The Department paid grants in the amount of $183 million for this purpose in 1992-93 and plans to spend a further $238 million for the remainder of the program. In addition, the Act is a questionable authority for some of the program's adjustment options. The Department estimates that it will spend $147 million on these.

15.33 The Atlantic Fisheries Restructuring Act was passed by Parliament in 1983 specifically to give authority to the government of the day to effect some of the recommendations arising from the Task Force on Atlantic Fisheries (the Kirby Commission). The relevant sections of that Act empower the Minister of Fisheries and Oceans to make a loan or contribution to a fishery enterprise to facilitate the development of viable Atlantic Fisheries that are competitive and privately owned, through the restructuring of fishery enterprises. The Act in turn defines the "restructuring" of an enterprise as including the reorganization, refinancing, modernization, rationalization and expansion of the enterprise, and any similar activity directed toward improving the economic performance of the enterprise.

15.34 The Northern Cod Adjustment and Recovery Program has two components - income replacement and adjustment. The purpose of the income replacement component has been clearly set out as the replacement, in whole or in part, of income that was lost as the result of the closure of the fishery. The replacement is effected through grants paid bi-weekly, subject to continuing eligibility.

• The payments are grants, not contributions. The Act contains no clear authority to make a grant for any purpose.
• The purpose of the payments is to compensate for lost income. This purpose is not specifically included in any definition of restructuring as set out in the Act, nor is any restructuring in that sense accomplished.

• The retirement of licences and the provision of retirement annuities arguably does not achieve enterprise restructuring objectives as defined in the Act and hence no clear authority to spend for these purposes exists in the Act.

The Department received cautionary advice from its lawyers

15.37 In a subsequent legal opinion provided on 31 July 1992, the Department of Justice advised that the Atlantic Fisheries Restructuring Act does not provide authority for making grants. Counsel also advised that the fact that the Act was used as the authority for the payments for the first ten weeks (the emergency period) does not automatically confirm that its use is legally correct. It was noted that, as the Department had used the Act as an authority before without being challenged, it might choose to try it again. Again, another option (ex gratia payments) was discussed as being legally more defendable but was not pursued by the Department.

15.38 The government, quite properly and at the appropriate times, went to Parliament by way of Supplementary Estimates and, for the 1993-94 fiscal year, by way of Estimates for the funds to pay for the Northern Cod Adjustment and Recovery Program. However, as explained in paragraph 15.31, these appropriation Acts provide funding, not substantive program approval.

15.39 The government implemented a program - the Northern Cod Adjustment and Recovery Program - for which, in our view, no clear and satisfactory authority existed. At no time did it go to Parliament to seek proper substantive authority for its actions. Parliament was denied thereby the proper opportunity to review and debate the government's proposed program as part of the normal legislative process, to decide on its objectives and to approve expenditures to achieve those objectives.

15.40 The government should present to Parliament legislation that will provide a proper authority for this program and for any future programs of a similar nature.

Department's response: The Department of Fisheries and Oceans continues to maintain that, given the nature of the crisis and the fact that the program was intended to be interim in nature, there was legislative authority for the program both pursuant to the Atlantic Fisheries Restructuring Act and the requisite appropriation Acts that authorized spending for the program.

The Department Had Difficulty in Targeting Payments to Those Clearly Affected by the Moratorium

15.42 The government stated that assistance was only for those who fish or process Northern cod and whose livelihood was affected by the moratorium. Subsequent appropriation Acts identified the target population as those fishermen, plant workers and trawlermen affected by the Northern cod moratorium. The information booklet presented to recipients as part of the declaration process (see paragraph 15.64) states that:

"The Emergency Assistance and Income Replacement Programs are meant to provide compensation to fisherpersons, plant workers, and trawlermen whose livelihoods depend directly on fishing or processing Northern cod."

15.44 There are two broad classes of persons eligible for the program - plant workers and fishermen. In establishing the eligibility of plant workers, the key concept in the terms and conditions is the definition of a "designated Northern cod processing plant" as a plant whose throughput in 1990 or 1991 consisted of ten percent or more Northern cod. We asked the Department for its analysis of the relationship between throughput level and effect of the moratorium on the number of person-weeks of work available in the plant. It did not provide us with any analysis of this type and accordingly we cannot determine the basis on which the ten percent level was chosen, or whether that was a reasonable basis on which to decide that all of the plant's employees had been affected by the moratorium.

15.45 We are also concerned that, by extending eligibility back to 1990, the Department may be including plants where the level of employment was affected by factors other than those that the program is intended to compensate, such as bankruptcy or corporate restructuring.

15.46 In view of the broad sweep of the plant worker eligibility criteria, it is perhaps not surprising to find that the current number of plant worker recipients exceeds the Department's original estimate by over 60 percent.

15.47 The terms and conditions define a resident "Northern cod fisherman" as a fisherman resident in the Northern cod area with a 1992 commercial fishing registration. This represents over 90 percent of all eligible fishermen ( see Exhibit 15.2 ). In these cases, the concept of "effect" resulting from the moratorium has been dropped entirely. It is possible, as our examples show, for a person who did not fish Northern cod (and hence who was not affected by the moratorium) to be eligible for the program.

15.48 The eligibility criteria for resident fishermen establish eligibility based on their Unemployment Insurance history for 1991 and 1990, or on their participation in the 1991 Ice Compensation Program. While the participants in these programs may have included many who participated in the Northern cod fishery, those programs also included many who did not. Hence, the use of participation in these programs to define eligibility in the terms and conditions again broadened eligibility to persons who were not affected by the moratorium.

15.49 Departmental data show that over 70 percent of all resident fishermen were placed in the program because they had earlier been placed in the Ice Compensation Program, a program that was directed much more broadly than solely to those who fished Northern cod.

15.50 Although the government approved a program intended to be restricted to those who were directly affected by the moratorium, the terms and conditions fail to establish a clear requirement to demonstrate injury caused by the moratorium as an essential requirement for eligibility. Indeed, those outside the Northern cod fishery and those who have suffered loss from causes other than the moratorium can benefit from the program on the same basis as those who suffered injury.

15.51 In the examples that follow we present instances of such cases based on our examination of individual case files. However, we attempted to go further and to quantify the extent of these problems in the recipient population. We asked for information on an individual's level of activity in the Northern cod fishery and also on his or her level of dependence upon Northern cod. The Department does not maintain this information and was unable to otherwise obtain it. Therefore, neither we nor the Department are able to determine to what extent the population receiving Northern Cod Adjustment and Recovery Program benefits accurately reflects the intent of the program with respect to who should receive benefits .

15.52 In our examination of the files, we have identified the following instances where the terms and conditions have enabled payments to be made to individuals not affected by the closure of the Northern cod fishery. Because of the information limitations discussed above, we are unable to determine how many other cases like these exist.

• Income Replacement payments were made to unregistered fishermen. We are aware of over 20 instances in which individuals who applied for Northern Cod Adjustment and Recovery Program benefits had been participating in the Northern cod fishery without a valid fishing registration. As such, they were fishing illegally. If the individuals could prove, however, that they had fished commercially (albeit illegally) prior to the moratorium, the Department then issued fishing registrations and made the individuals eligible for Northern Cod Adjustment and Recovery Program payments. Payments were made retroactively.
• Individuals who fished species other than Northern cod are eligible for Northern Cod Adjustment and Recovery Program payments. Resident fishermen need not substantiate their dependence on the Northern cod fishery; they need only have a valid commercial fishing registration, a minimum condition to fish any species. Thus, resident fishermen in the Northern cod zone who hold a valid commercial registration are eligible for income replacement payments, regardless of the type of fishery they pursue. For example, a fisherman who had fished only in the crab fishery in 1991 was eligible for the program because he had the necessary 20 insurable weeks of fishery activity in 1990 and 1991.
• The extension of eligibility for plant workers to include those who had worked at designated plants in the years prior to the moratorium resulted in persons being eligible who had left the fishery well before the moratorium and for other reasons.

In addition, six plants that were closed prior to the moratorium (i.e., affected by factors other than the Northern cod moratorium) were designated as Northern cod plants under the terms and conditions (plants operating in either 1990 or 1991 can receive departmental designation). However, when a plant has been closed for a year before the moratorium, the employees cannot be considered to have been affected by the moratorium by virtue of their past employment at these plants.

• Workers who were being trained for employment outside the fishery were made eligible for payments. In 1990, a Northern cod plant announced its intention to permanently cease operations. Several employees were offered skills training under the Atlantic Fisheries Adjustment Program. This training was designed to lead to employment outside the fishery. The Department deemed the employees eligible for the Northern Cod Adjustment and Recovery Program.
• The terms and conditions for plant workers state that, to be eligible, they must have worked for a number of weeks in a designated plant in 1990 and 1991 combined. The Department qualified several individuals who did not meet this requirement. It developed a policy, using extenuating circumstances as permitted by the terms and conditions, whereby weeks worked in 1989 were used in conjunction with weeks worked in 1990 or 1991 to qualify people. This policy makes people eligible who, although they were available for work in 1992, were affected by declines in the fishery prior to 1992, rather than by the moratorium itself.
• Individuals whose income had come mostly from work outside the fishery qualified for payments. These people were made eligible despite their employment histories' indicating that the majority of insurable weeks were earned outside the fishery in 1990 or 1991.

Another situation involved an individual who had accepted a full-time job outside the fishery in 1990, had later been laid off and yet was approved for payment by the Department.

15.53 In summary, individuals were qualified who had fished species other than Northern cod, who had retired from active participation in the fishery, who had left the province during the qualifying years of 1990 and 1991, or who had been out of the country during that period - in short, individuals who were not affected by the moratorium.

15.54 Despite the fact that the Northern Cod Adjustment and Recovery Program aimed to encourage participants to leave the fishery, the income replacement component brought back some who had already left.

The Department has recognized the difficulty of targeting the intended population

"... the terms and conditions of the program introduced criteria which were very broad incorporating more workers than the previous forecast considered as being dependent on Northern cod. The 10% criteria for plant designation caused the number of plants to rise above the number previously considered as Northern cod plants.

However, more significantly the eligibility requirements for plant workers resulted in peak and/or marginally dependent workers in the plants being able to meet the eligibility criteria... The criteria have in effect defined [as] full[y] dependent (in terms of workforce numbers) all individuals involved in the harvesting and/or processing of Northern cod, whereas, the original budget projections reflected a more stringent estimate of hard core employees."

Payments were made to individuals who did not meet the eligibility criteria

15.58 Many of these payments occurred because the Department used data not suitable for identifying individuals who met the various eligibility criteria. These data were not verified before payments were made.

15.59 Individuals who did not have sufficient insurable weeks in the fishery were made eligible under the Northern Cod Adjustment and Recovery Program. This happened because the unemployment information first obtained identified only whether a person had received unemployment benefits in a particular period and the total number of qualifying weeks. The database did not specify the source of each of those weeks - just the last week worked.

15.60 In addition to the fact that the Ice Compensation data did not indicate if the person had fished Northern cod, information from the Ice Compensation file was found to be unreliable in identifying eligible participants for the Northern Cod Adjustment and Recovery Program. Many individuals included on the database have been found to have received Ice Compensation payments in error. The Department has, thus far, identified 712 individuals not eligible for Ice Compensation and has eliminated 318 of those individuals from the Northern Cod Adjustment and Recovery Program eligibility list.

15.61 Information received from the various plants identified only former employees, not whether an individual was available for work and therefore an eligible plant worker under the Northern Cod Adjustment and Recovery Program.

15.62 Because "throughput", as used to designate plants, was not adequately defined in the terms and conditions, the Department designated two processing plants that were later determined not to have processed sufficient Northern cod and hence were ineligible. The affected individuals owe the Crown approximately $290,000.

Corrective action taken by the Department

15.64 The Department attempted to address both issues by preparing a declaration form. This form and an information booklet attempted to explain the terms and conditions of the program, and to require recipients to provide the information on their involvement in the Northern cod fishery that the Department could not obtain from the data used to qualify them. The forms also required that recipients certify that they had received and understood the information booklet on the program. This booklet provides a detailed description of the program, its objectives and the eligibility criteria. The forms were to be signed by the recipients and returned to the Department by the end of October 1992.

15.65 In explaining the program to the recipients, the Department placed considerable emphasis on the concept of "dependence on the fishery" as a necessary condition for access to the program, and attempted to gather some information that would allow it to better conclude on the involvement of recipients in the fishery. However, the Department failed to gather sufficient information to allow it to reach such conclusions. For example, fishermen were asked what percentage of their fishing income came from the Northern cod fishery. However, by not asking about the amount of that income and the amount of income from all other sources, the Department was little further ahead. This is reflected in the very limited use to which the information has been put. According to the Department, only those who reported that they derived none of their fishing income from the Northern cod fishery were investigated. Further, although the Department introduced the concept of "dependence on the fishery" in the declaration form, by failing to define the concept for recipients, by failing to establish clear operational indicators for itself, and by failing to amend the original terms and conditions, the Department has left itself with little basis to retrench from the initial expansive terms and conditions that remain in force.

15.66 The Department has conducted further reviews of the Unemployment Insurance data. As a result, a number of recipients have been declared ineligible. In addition, overpayments to eligible recipients were identified. As of 31 March 1993, the total recoverable was $10.13 million. The Department continues to identify ineligible applicants through third-party complaints, inconsistencies reported on subsequent income reporting forms it received and other investigation activities.

15.67 In addition, on 11 August 1993, payments to 20 percent of the recipients were `on hold' while information was being reviewed. The Department did not know at that time the total amount of potential overpayment.

Authority is also needed to manage

• The Department wishes to establish an `Investigations Unit' to determine where eligibility may have been granted as a result of misleading or fraudulent information. Legal counsel, however, has informed the Department that the Atlantic Fisheries Restructuring Act provides no authority for audit, review, or investigations or for any remedies where a wrong has been detected. Counsel advised that the only authority available to the Department would flow from the declaration form, signed by most Northern Cod Adjustment and Recovery Program recipients several months after payments were first issued. As a result, the powers and duties of investigators are limited to inspecting documents and asking questions of the recipient. No authority exists to require any other party to disclose information to investigators without the express permission of the recipient under investigation. In other similar government programs, the necessary authorities are frequently included in the program legislation.
• Another avenue not legally available to the Department is that of putting payments `on hold'. In spite of this, more than 5300 individuals are currently `on hold'. That is, they are still deemed eligible; however, their eligibility, entitlement, or the information provided is in doubt to such an extent that program managers have deemed it prudent to suspend payments until the issue is resolved. Legal advice, obtained in July 1993, states that there is no legal authority for these `on hold' procedures. In the absence of legislation, legal counsel looked to both the terms and conditions and the declaration form, and found no mention of these procedures.
• The Northern Cod Adjustment and Recovery Program terms and conditions state that recipients will be disqualified from receiving any future payments if they refuse work within the fishing industry. Legal counsel has advised that this may be subject to legal challenge unless the Department informs recipients of the guidelines under which these decisions will be made. These guidelines were mailed to recipients on 4 August 1993 - more than halfway through the program. As a result, none of the some 80 refusal-to-work files as of that date has been resolved.
• Action to recover payments made in error prior to the introduction of the declaration forms has been delayed while the Department attempts to confirm its legal right to collect these amounts. It is the absence of any written agreement between the Department and the recipients that has placed the recovery of these amounts in doubt.

15.70 Once a satisfactory legislative foundation for this program has been established, the Department should amend the terms and conditions and its administrative procedures to correspond to the legislation.

Department's response: The Department would amend terms and conditions as a matter of course if new legislation were passed.

Weaknesses in the Financial Management and Control of the Income Replacement Component

15.72 We would have expected, in a program of this size and complexity, that the Senior Financial Officer would have been given leadership on financial management and control matters. We would have expected that, in exercising this leadership, the Senior Financial Officer would have directed the design and maintenance of systems of financial administration.

15.73 However, because implementation of the program and the related financial authorities were delegated directly to the region, bypassing the Senior Financial Officer, there was no involvement on the part of senior information or finance personnel in the program's design or implementation. In fact, neither the Senior Financial Officer nor any of his staff had any involvement in the design of financial or systems controls.

15.74 Those to whom program responsibility was delegated focussed from the outset on the need to issue cheques as quickly as possible. Little attention was paid to establishing an appropriate management control framework.

15.75 As the program was implemented, it became clear to management that a number of key information and financial issues had been overlooked in the design of the program. For example, management had failed to understand the data requirements for the program. Recipients were identified using a combination of various databases that were not well adapted for this purpose. Payments were automatically made to individuals, using only third-party information.

15.76 Following implementation of the program, cheques started coming back, either voluntarily returned by recipients or marked undeliverable. It took several months before the Department began to analyze the reasons for these returns. By December 1992, over 4600 cheques had been returned. In addition, concerns were raised about the adequacy of the income support budget. When it was realized that additional funds would be required before the end of the fiscal year, management had difficulty in projecting financial requirements.

15.77 As early as October 1992, the Department's Internal Audit Group had offered to conduct a review of the implementation of the Northern Cod Adjustment and Recovery Program components. This proposal was rejected. In December, concerns were raised in headquarters about the region's ability to control program costs, and about the lack of a reliable accounting system to track expenditures. Finally, in February 1993 a team began to review and make recommendations concerning quality control, system integrity and procedural compliance with respect to the Northern Cod Adjustment and Recovery Program.

15.78 The review was completed in March 1993 and, among the 68 recommendations, the review raised concerns regarding:

• the lack of documentation on the computer programs used to determine the eligibility of claimants and to calculate payments.
• weaknesses in security, including the observation that the system allowed unauthorized access. For example, changes could be made to recipients' files, without anyone being able to identify the person making the changes. This included access that would allow for the unauthorized addition, deletion or amendment of client status, data or rate of pay. Because of the lack of adequate paper files, this finding was particularly worrisome.
• inadequate controls over data input.
• no procedures manuals developed for assessing or reviewing recipient files.
• no plans developed by the Department to collect the more than $4 million in overpayments that were deemed to be recoverable.

15.79 Following receipt of this report, the Department established a second team to implement many of the 68 recommendations. This team, which includes headquarters finance and informatics staff, has begun to address many of them. The Department states that it has fully implemented 54 of the recommendations and rejected five, and work on nine is still in progress.

Preliminary Results from the Adjustment Components of the Northern Cod Adjustment and Recovery Program Show that Capacity and Dependence on the Fishery Remain High

15.81 The objective of the Northern Cod Adjustment and Recovery Program comprehensive plan was to provide assistance to meet the crisis through income replacement, adjustment and industry restructuring. This was to be done in a manner consistent with the goal of a sustainable Northern cod fishery in balance with the potential of the resource. The government saw the moratorium as an opportunity to achieve a significant and permanent reduction in capacity.

15.82 The Department has targeted adjustment in two ways. It has attempted to decrease the number of people dependent on the fishery through a variety of initiatives, and has attempted to reduce fishing capacity by reducing the number of licences.

Reducing the number of people dependent on the fishery

15.84 The Department expected that, of the 19,000 anticipated program participants, 33 percent of the fishermen (3000) and 50 percent of the plant workers (5000) would leave the fishery. ( see Exhibit 15.3 )

Lower than expected reduction in number of individuals dependent on the fishery

15.86 Conversely, 74 percent of Northern Cod Adjustment and Recovery Program participants (19,395 participants) have not enrolled in components leading to a possible exit from the fishery.

15.87 There is no assurance that those enrolled in components leading to a possible exit from the fishery will actually leave. While 5213 participants were enrolled in skills training for potential employment outside the fishery in August 1993, they are under no obligation to actually leave the fishery. Therefore, the real adjustment will occur only when these people find other employment and are no longer on the Northern Cod Adjustment and Recovery Program payroll. In addition, the early retirement option (chosen by 1730 participants) is not binding until such time as the Department and the individual agree on the amount of the annuity. All of these are included in the figures in paragraph 15.85 as potential exits from the fishery. However, as of October 1993, payments have been approved for only three recipients and the number of people who are expected to retire using this component is not known.

15.88 This means that a large proportion of Northern Cod Adjustment and Recovery Program participants will not have been adjusted out by the end of the moratorium.

15.89 The Department believes that the Northern Cod Adjustment and Recovery Program could eventually remove from the fishery approximately 32 percent of eligible fishermen and 36 percent of eligible plant workers. To arrive at these numbers, it is assuming, although only three monetary agreements had been reached as of October 1993, that all of the 1730 participants who expressed an interest in early retirement will actually retire. It is also assuming that the 5213 participants enrolled in skills training for potential employment outside the fishery in August 1993 will all find other employment and be removed from the fishery. In addition, it estimates that 1200 participants will enrol in skills training in September 1993 and will also be removed from the fishery. Finally, it assumes that a number of crew members will exit the fishery as a result of licence retirements.

Reducing capacity

15.91 The federal government is responsible for licensing the harvesting sector. The Department intended to reduce capacity through licence retirement and cancellation of inactive licences.

15.92 When the adjustment components were designed, the Department estimated that there were approximately 6000 Northern cod licence holders, and that one third of these were inactive. It expected to remove 800 (or 20 percent) of the active licences through the licence retirement component (i.e., through providing compensation for licence retirement) and to remove all of the inactive ones without compensation. This would have left available a core of 3200 licences to fish.

Although licenses are being retired, significant overcapacity continues to exist

15.94 Cancellation of inactive licences has not proceeded as expected. Rather than removing inactive licences, the Department later decided to freeze inactive licences until 1994. At that time, active and inactive licence holders will be allowed to reactivate their licences as long as they meet certain criteria. These criteria have not yet been established. In addition, the Department is uncertain as to how many licences are actually inactive.

15.95 The Department now considers that there are approximately 6100 licences available to fish Northern cod. Although 1112 licence holders selected the licence retirement option, the actual number of licences that will be retired is not known, as the selection of this option is not binding until an agreement on the payment for the licence is reached. As of July 1993, only six monetary agreements had been reached. Assuming that 800 licences will be retired as originally planned, and given the uncertainty surrounding inactive licences, a core of at least 5300 licences could still exist at the end of the moratorium and only a 13 percent reduction would have been achieved.

15.96 Although funds are being spent to achieve a sustainable fishery, capacity and dependence on the fishery remain high. In the design of the Northern Cod Adjustment and Recovery Program adjustment components, the Department did not assess the potential of the resource in terms of fish biomass and amount of fish that can be captured while maintaining an ecologically sustainable fishery. Furthermore, it did not attempt to assess the number and nature of fishermen, plant workers, vessels, and licences that can be sustained, in order to target its adjustment programs. Rather, it has focussed on reducing the number of people involved in the fishery, and the number of licences, on a voluntary basis without linking these to what the resource can sustain.

15.97 The Department informs us that adjustment is a process that takes place over time and is the result of hundreds of individual decisions. The Department believes that the number of signed agreements to date is not indicative of eventual take-up rates. Early retirement and licence retirement programs involve a lengthy and time-consuming process before final agreements can be reached.

There are limits to what the Department can be expected to achieve

15.99 In the case of fishermen, the Department, in theory, has more ability to intervene directly. The Minister has the authority to determine both who shall participate in the fishery and how they shall do it. However, as a practical matter the Department is quite limited in what it can do with respect to those already in the fishery. The Department has attempted to withdraw registrations (the personal right to fish) but has found that, apart from voluntary surrenders of registrations, this is very difficult to do. Licences (the right to fish in a particular way) have proved even more vexing. As we noted in our 1988 Chapter on the Atlantic Fishery, it is the Department's practice to allow the capitalized value of a licence to accrue to the holder. When it wishes to withdraw a licence, it has, on occasion, paid much or all of this accrued value to the licensee. In doing this, the Department has placed a significant fiscal restraint on its ability to act.

15.100 Overall, the Department has little choice in dealing with those already in the fishery but to attempt to persuade them of the futility of remaining in the fishery and to facilitate their voluntary withdrawal. However, as the data indicate, the rate of even potential withdrawals is nearly 50 percent short of the minimum that the Department believes is needed.

15.101 With respect to the future, the Department has a greater ability to influence gradually the size of the fishery by limiting the number of new licences that it will allow. In the area of fishermen's registration, it can attempt to control numbers through its planned professionalization program. This program represents an effort to improve the quality of fishing effort and to limit entry into the fishery through a program that would require a period of formal education in fishery skills, followed by a certification of competence, as a prerequisite to getting a personal fisherman's registration.

15.102 All of this begs, of course, the crucial question: What, in a fishery reduced to 50 percent of its current size, will the displaced workers do?