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1994 Report of the Auditor General of Canada

Chapter 2—Follow-up of Recommendations in Previous Reports

Main Points


Information Security Audit—1990, Chapter 9

Payments to Employees Under the Work Force Adjustment Directive—1992, Chapter 7

Search and Rescue—1992, Chapter 8

Loans to Sovereign States—1992, Chapter 10

Canadian International Development Agency and the Regional Development Banks—1992, Chapter 11

Department of Finance—Participation in the Bretton Woods Institutions and in the European Bank for Reconstruction and Development—1992, Chapter 12

Department of Finance—Loan Guarantees—1992, Chapter 13

Department of Energy, Mines and Resources—Energy Megaprojects—1992, Chapter 14

Department of Indian Affairs and Northern Development—Indian Forest Management—The Manitoba Northern Flood Agreement—1992, Chapter 15

Department of National Defence—1992, Chapters 16, 17 and 18

Major Capital Projects—Industrial Development Initiatives—1992, Chapter 16

Major Capital Projects—Project Initiation and Implementation—1992, Chapter 17

The Canadian Forces Reserves—1992, Chapter 18

Department of National Revenue—Customs and Excise—Special Import Measures Act—1992, Chapter 19

Department of National Revenue—Customs and Excise—Goods and Services Tax: Registration and Related Sub-Activities—1992, Chapter 20

Royal Canadian Mounted Police—Provincial and Municipal Policing—1992, Chapter 22

Royal Canadian Mounted Police—Human Resource Management—1992, Chapter 23

Federal Emergency Preparedness—1987, Chapter 15, 1989, Chapter 27 and 1992, Chapter 24

Public Works and Government Services Canada: Procurement and Accounting Services—1987, Chapter 11, 1988, Chapter 16, 1989, Chapter 21, and 1991, Chapters 18 and 19

Main Points

2.1 Departments are taking action to correct reported deficiencies, but progress is slow in some areas.

2.2 Information Security Audit - Significant progress has been made by departments and lead agencies in establishing the basic security infrastructures. However, progress has been slow in several areas, such as regular security training, threat and risk assessments and security reviews.

2.3 Payments to Employees Under the Work Force Adjustment Policy - The Treasury Board Secretariat has made significant progress in analyzing the issues, and in determining the tools necessary to improve the management of the Directive. However, the measures undertaken are not sufficient for ensuring that departments are effectively managing work force adjustment and the payment provisions.

2.4 Search and Rescue - Departments have taken some action on our recommendations. However, there has also been a lack of action on many recommendations, mostly because the departments believe that what they are already doing is sufficient.

2.5 Loans to Sovereign States - The Department of Finance does not believe there is a need for an annual review of the risks and costs associated with loans to individual sovereign states ($19.1 billion at 31 March 1994) and has not yet provided to Parliament a comprehensive annual report on Canada's international financial commitments.

2.6 Canadian International Development Agency and the Regional Development Banks - There is considerable overall progress in improving Canada's oversight of the banks. The need to change the culture that rewarded new loans ("moving money") rather than effective management of existing projects has been identified as a priority at each bank. We encourage CIDA to consider the option of periodically preparing for parliamentarians a performance-oriented report on the regional development banks.

2.7 Department of Energy, Mines and Resources - Energy Megaprojects - Progress has been made in implementing our recommendations, but the Department should be moving with a greater sense of urgency in planning for the evaluations of the Hibernia and Bi-Provincial Upgrader energy megaprojects.

2.8 Department of National Defence - The Canadian Forces Reserves - There was a varied, though mostly limited, response to our recommendations. Accountability for Reserve performance, both within the Department and to Parliament, continues to require improvement.

2.9 Public Works and Government Services Canada - Chapters in the 1987, 1988, 1989 and 1991 Reports - Many initiatives have been introduced to improve operations, but many of these have not yet been fully implemented to realize the potential benefits, which amount to millions of dollars on an annual basis.


2.10 Departments are taking action to correct deficiencies noted in our previous Reports. Progress is slow in some areas. Timely resolution of these deficiencies is desirable to ensure funds are being used in the most efficient and effective manner.

2.11 Observations and recommendations made in our annual Report are normally followed up and their status reported two years after publication of the original chapter. This year, two follow-ups are reported in separate chapters, three have been deferred, one chapter is being partly followed up, and one does not require follow-up.

2.12 The 1990 chapter "Department of Agriculture - Farm Safety Net Programs" is followed up in Chapter 14 "Agriculture and Agri-Food Canada - Farm Income Protection".

2.13 Follow-up on the 1992 chapter "Information for Parliament - Departmental Reporting" is included in Chapter 7 "Departmental Reporting of Sectoral Activities".

2.14 Follow-up on the 1992 chapter "Change and Control in the Federal Government" has been deferred until 1995 so that proposed changes for 1994, such as a new control framework, can be included in the follow-up review.

2.15 The 1992 chapter on "Employment and Immigration Canada - Employment - Monitoring Performance Against Expectations" will be followed up in 1995 along with the 1993 chapter on "Canadian Aboriginal Economic Development Strategy".

2.16 Follow-up on the 1992 chapter "Department of National Revenue - Taxation - Resolving Disputes on Income Tax Assessments" has been deferred until 1995, so that it can be performed in conjunction with the follow-up of an "Other Audit Observations" on a related matter that appeared in our 1993 annual Report.

2.17 Follow-up on the 1992 chapter "Federal Emergency Preparedness", included in this chapter, focusses on the status of preparation of the National Earthquake Support Plan. We plan to follow up other areas reviewed in that chapter in the future.

2.18 The 1992 chapter on "The Learning Organization" was a study, not an audit. Studies are done to increase understanding of important and complex issues. Among other things, the insights gained during a study may help us in subsequent audits. No recommendations were made in this study. Therefore, no formal follow-up is required.

Information Security Audit - 1990, Chapter 9


2.19 In 1990, we reported on the departmental management of information security in government, based on a sample of 13 departments. In addition, we assessed the leadership provided to departments by central agencies. We delayed our follow-up review to allow internal auditors in those departments to complete their security reviews due December 1993, as required by the Government Security Policy. In the meantime, a rapidly changing information technology environment has been drawing more attention and effort to information technology security. In our follow-up, we reviewed the action taken by the sample departments to address our observations concerning their implementation of the Government Security Policy. The government reorganization of 1993 reduced our sample to 11 departments: the Department of Communications was merged into other departments, while Taxation and Customs and Excise became one department under Revenue Canada.


2.20 We found that all but one of the departments in the sample had addressed the basic infrastructure requirements of the Government Security Policy, including the definition of departmental security responsibilities and the establishment of security policies, standards and procedures. However, progress has been slow in several areas of information security, such as regular security training, threat and risk assessments and security reviews. Several departments have identified their mission-critical systems and have been establishing and testing plans to restore these systems in the case of disasters. However, no department has yet established and tested formal, comprehensive contingency plans for all critical systems at all sites.

2.21 Since 1990, the central lead agencies in information security have produced some key information security standards and guides and have created training opportunities. They have also been actively developing strategies to meet the security requirements of rapidly evolving government-wide information technology systems. The Government Security Policy was under revision during the audit and a new version was approved in June 1994. However, lead agencies are constrained by limited resources in their support of information technology security.


2.22 The Treasury Board Secretariat, the Royal Canadian Mounted Police (RCMP) and the Communications Security Establishment (CSE) are lead agencies in the support of information security. They have put in place new policies, standards and training opportunities and have taken important initiatives in the area of security strategies for the future. However, based on our interviews and discussions with the departments, there is a perception that the lead agencies lack the resources to be strong leaders in their respective activities. Based on the risks involved, the agencies should review their appropriate level of resources required to adequately support information security, including the functions of monitoring, central co-ordination of security agencies, product evaluation and independent security reviews. The increasing integration of communications and computing across government has caused confusion between the roles of CSE and the RCMP. The new Security Policy explains and allocates the responsibilities for information technology security among the lead agencies and other departments. Hopefully, these clarifications will be sufficient.

2.23 Departments have achieved significant progress in establishing a basic security infrastructure but they must pursue their efforts to implement the Government Security Policy. All except one of the 11 departments we visited have put in place security policies, standards and measures, including control of computer viruses, and have clear lines of security responsibilities. Six of the 11 departments have also identified their mission-critical systems. Although progress has been made, much remains to be done on periodic security activities that are more resource-intensive, such as formal security training and reviews and comprehensive threat and risk assessments. Five departments have developed contingency plans or business resumption plans for some critical systems and have been testing them to ensure that they are fully operational and effective. No department, however, has yet tested formal and comprehensive plans for all critical systems at all sites.

Payments to Employees Under the Work Force Adjustment Directive - 1992, Chapter 7


2.24 In 1992, we reported on the management of lump-sum payments made to surplus employees who, in the context of work force adjustment, offered to resign before being laid off. Such payments were made under the Work Force Adjustment Policy, which had been in force until 15 December 1991.

2.25 Upon completing our audit, we concluded that the payment provision had been well-managed in some situations, whereas in others it had not been managed in a satisfactory manner. The provision was increasingly being used for purposes not intended by the Policy, such as facilitating work force renewal, solving performance problems and rewarding employees.

2.26 Among the primary factors contributing to this deterioration, we found a number of major weaknesses in the management frameworks of the Treasury Board Secretariat and of departments. We therefore recommended that the Treasury Board Secretariat improve its management framework, notably its monitoring and control mechanisms, and that it work with the departments to help them improve theirs. We also recommended that it determine the need to develop other policies or mechanisms for managing certain human resource issues.

2.27 In the spring of 1993, the Standing Committee on Public Accounts held three hearings on our audit. During these hearings, the Treasury Board Secretariat, as the agency with ultimate responsibility for the Policy, made a commitment to seek improvement in management of lump-sum payments. The Standing Committee on Public Accounts had not issued any recommendations as of the October 1993 federal election.

2.28 The policy we reviewed (now called a directive) was amended considerably in December 1991:

  • The concept of work force adjustment was expanded to include cases of devolution, privatization and contracting out, thus increasing the number of situations to which lump-sum payment provisions could be applied;
  • Departments must now ensure that a reasonable job offer is made to employees they declare surplus who are mobile, retrainable and who fully collaborate. Surplus employees can then be laid off only if they refuse such an offer;
  • Surplus employees henceforth normally benefit from salary protection if they are reassigned to a position at a lower level until they can be reassigned to a position at the same level as the one held when declared surplus. This protection was previously limited to one year.
2.29 At the time of writing this report, the Directive, which forms part of the collective agreement, was subject to consultation with the unions as part of a triennial review. The Directive no longer has an expiry date. It is thus deemed to be in force until such time as the employer and the unions agree to amend it, or until the government passes legislation to amend it.

2.30 Despite these changes, we believe that the recommendations we made in 1992 are still relevant. The need to reduce expenditures is becoming more pressing. It is therefore important to ensure that any ensuing work force adjustment situations are managed effectively and that the payment provisions are used appropriately.

Objective and Scope

2.31 Our objective was to determine the extent to which the Treasury Board Secretariat had followed up on our observations and recommendations.

2.32 Our follow-up included discussions with representatives of the Treasury Board Secretariat, the Public Service Commission and a number of departments. It also included a review of various working documents and reports dealing with work force adjustment, including those issued by the Treasury Board Secretariat.


2.33 The Treasury Board Secretariat has made significant progress in analyzing the issues and in determining the tools necessary to improve the management of the Directive. It has also adopted a more global and strategic approach to work force adjustment.

2.34 Though the measures undertaken are appropriate, we believe that they are not sufficient. We are particularly concerned about how little information the Secretariat has to ensure that departments are now effectively managing work force adjustment and the payment provisions. It has not yet developed the structure and mechanisms to be put in place to monitor the performance of departments. The Secretariat is aware of the need to continue to improve the management of work force adjustment situations and the payment provisions.


Efforts to improve management of the Directive in departments
2.35 During the spring of 1993, the Treasury Board Secretariat asked departments to audit some payments they had made, including a number of payments made under the revised Directive. In conjunction with the Public Service Commission, the Secretariat also initiated a review of the Directive. This review had numerous objectives, including the degree of compliance with the Directive and the quality of the management control framework in departments.

2.36 In their review report, dated December 1993, the Secretariat and the Commission indicated weaknesses similar to those we had noted in the departments' management framework, such as lack of planning, insufficient control and monitoring mechanisms, and inadequate information systems. Moreover, in its audit report, dated March 1994, the Secretariat concluded that the management of lump-sum payments continued to pose problems. In June 1994, the Secretariat forwarded to the Standing Committee on Public Accounts the conclusions and the reports of the audit and the review. In September 1994, these reports were also forwarded to departments.

2.37 As a follow-up to these studies, the Treasury Board Secretariat set up, in November 1993, the departmental work force adjustment co-ordinators network. This initiative was aimed at enhancing the expertise of departments and fostering a common approach to the interpretation and application of the Directive. Co-ordinators have met on a regular basis.

2.38 The Secretariat has also developed a "departmental framework for the management of employment adjustment activities". According to the Secretariat, this framework is the cornerstone of the measures to be taken to improve the management of work force adjustment in the Public Service. The framework places work force adjustment in a strategic setting, taking into account government priorities and the department's strategic and operational plans. It also includes the administrative infrastructure that departments require to effectively manage work force adjustment situations. Finally, it deals with the specific requirements set out in the Directive. In June 1994, the Secretariat forwarded a copy of the framework to the Standing Committee on Public Accounts. In September 1994, the Secretariat communicated this framework to all departments and stated its intention to inform departments of the implications on the way they operate.

2.39 In spite of these significant improvements, in our view, more needs to be done to ensure that departments are effectively managing the Directive. Indeed, the Secretariat requested corrective action plans where our or its audit had identified weaknesses. However, it has not determined if the plans forwarded were appropriate, and it has done little follow-up to determine if any progress has been made.

Efforts to improve control and monitoring mechanisms in central agencies
2.40 Since our audit, the Treasury Board, through the Secretariat, undertook a number of measures designed to improve the co-ordination of work force adjustment situations and the control of lump-sum payments.

2.41 In December 1992, a steering committee for employment adjustment was created to oversee progress in work force adjustments. This committee includes senior representatives of the Treasury Board Secretariat, the Public Service Commission and the Privy Council Office.

2.42 The Secretariat has also taken other measures. It has withdrawn the authority granted to Deputy Ministers to sub-delegate authorization of lump-sum payments requests. Moreover, in conjunction with the Public Service Commission, the Treasury Board announced that there would be restrictions on hiring in the Public Service in order to improve the redeployment of surplus employees. It also placed limitations on departments' eligibility for Vote 5 - Government Contingencies - in order to make managers more accountable for the costs of their decisions. In addition, the Secretariat began developing a model for analyzing the costs associated with work force adjustment to assist departments in making informed decisions. The Secretariat is finalizing a manual aimed at helping managers to better manage work force adjustments. In spite of these improvements, additional corrective actions are needed.

2.43 During the 1992 audit, we noted that the Secretariat's data, obtained from central payroll records, was not reliable. The Secretariat has not corrected the weaknesses reported and is still using the same data source.

2.44 Moreover, in September 1994, the Secretariat once again authorized Deputy Ministers to sub-delegate authority for payments, under certain conditions. We do not know what mechanisms the Secretariat will use to effectively ensure that departments comply with these conditions since it will not evaluate the structure and procedures needed to monitor the performance of departments until negotiations on the Directive have been completed. Without adequate information, the Secretariat risks being unable to call to order departments that might abuse the payment provisions.

2.45 Finally, in our view, the monitoring of work force adjustment should no longer be restricted to departments and agencies for which Treasury Board is the employer. In the past few years, many small organizations with separate employer status, such as councils and commissions, have been dissolved or amalgamated. In such situations, unless the organization has agreed to the Directive with employee representatives, it does not apply. As the manager of public funds, the Treasury Board has, however, issued a directive on the benefits to be granted to employees affected by such adjustments.

2.46 Observations from our financial audits of some of these organizations have raised concerns about the management of work force adjustments and about payments made to a number of employees. For example, the implementation of the compensation program varies significantly from one organization to another, despite the Secretariat's intent to ensure a certain degree of equity. Moreover, it is difficult to determine who is ultimately responsible for effective application of the Treasury Board's directives when the organization has been dissolved, since management is no longer there to account. Given that the review undertaken by the government on the size, mandate and the costs of similar organizations could eventually lead to major restructuring, Treasury Board needs to be vigilant.

The effectiveness of the Work Force Adjustment Directive as a management tool
2.47 The report presenting the conclusions of the review carried out by the Treasury Board Secretariat and the Public Service Commission reiterated what we said in 1992 - in the absence of an integrated human resource management policy for managing involuntary separations, the Directive was being used for purposes other than those for which it had been intended.

2.48 This report also raised some concerns about the Directive's effectiveness. The report notes: "There is contradiction between the objective of the Directive and that of the government, which, by contrast, is to reduce the size of the Public Service. Furthermore, the emphasis on employment security does not recognize termination incentives as a viable option, even though the Directive does contain provisions respecting employee resignation and related lump-sum payments."

2.49 The review also indicated a major shortcoming of the Directive, in that it does not recognize that employees are not necessarily interchangeable or that it is difficult to offer another job to highly specialized employees who are declared surplus. The authors of the review conclude that this shortcoming could have serious consequences in cases of major work force adjustments.

2.50 The Secretariat has taken certain steps to facilitate work force adjustments in specific situations or to alleviate problems identified in its review of the Directive. For example, it is developing a training program for managers to assist them with the management of poor performance. Furthermore, it has consulted with departments to identify changes required in the Directive. In response, departments have provided numerous comments and suggestions. In the case of National Defence, the Secretariat, in conjunction with the Department and the unions, has developed an improved compensation program, available for a limited period of time, to help the Department carry out the reduction of its civilian staff by 8,400 persons as announced in the February 1994 Federal Budget.

2.51 There are nevertheless situations where applying the Directive could present difficulties given the specialization of employees affected by work force adjustments. For example, Chapter 27 of this report deals with the management of infrastructure at the Department of National Defence and discusses the fact that the Department will face significant constraints on ensuring a more efficient management of resources once the special compensation program expires. Similarly, as indicated in Chapter 11, departments and scientific research establishments must be able to adapt their work force to the strategic and technological changes they must make. These departments believe that they have no effective tool for managing work force renewal. In fact, in cases where researchers are declared surplus, their level of specialization makes reassignment difficult. We recognize, however, that departments and research establishments have not always clearly demonstrated the need to modify the Directive or to develop other tools. Treasury Board should either adapt the Directive, through consultation with unions or legislation, as appropriate, or develop other tools to meet these specific needs. In the current context of expenditure and wage restraints, this represents a significant challenge.

Search and Rescue - 1992, Chapter 8


2.52 Our 1992 audit of the search and rescue program focussed primarily on the federal search and rescue activities to aid people in distress. We also reviewed the management of the National Search and Rescue Program. Our audit covered the Department of National Defence, Department of Transport, National Search and Rescue Secretariat and Department of Fisheries and Oceans (the departments).


2.53 Our follow-up involved reviewing and discussing with departmental officials the departments' June 1993 and January 1994 status reports to the Public Accounts Committee on action taken in response to our 1992 observations and recommendations. We obtained and reviewed documentation to support reported progress.


2.54 The departments have taken some action in response to our recommendations, but work remains in most areas to fully address our concerns. The lack of action by the departments on many of our recommendations is mostly due to the belief that what they are already doing in many areas is sufficient.


Significant elements of a National Search and Rescue Program have not been developed
2.55 In 1992, we recommended that all departments and agencies involved in search and rescue accelerate efforts to reach agreement on the principles of the National Search and Rescue Program and develop applicable legislation, if required. The departments have held multijurisdictional meetings and briefings with the provinces starting in the spring and early summer of 1993. The meetings to date have focussed on gaining agreement on the objectives and principles of the National Search and Rescue Program.

2.56 During the last round of discussions, general agreement was reached on the broad outline of the program. However, more remains to be done to achieve the agreement needed for effective management of all search and rescue resources.

Service standards including performance information are lacking
2.57 At the time of our follow-up, the Department of National Defence and the Canadian Coast Guard were continuing to refine their readiness standards. However, the departments have neither established nor used time-based search and rescue service standards to plan for resources and indicate to the public the expected response standards for search and rescue resources. They continue to believe that time-based service standards would not be beneficial or practical because they do not provide a true indication of the effectiveness of the search and rescue program.

2.58 The departments involved in search and rescue are currently enhancing and integrating their information systems. However, they continue to lack an automated performance information system to provide timely data on the performance of federal search and rescue resources. In addition, further analysis of the severity of the incident and the type of assistance provided continues to be required for decisions on level of service, acquisition and management of resources.

Expanded use of volunteer and other resources should be pursued
2.59 In 1992, we recommended that the departments pursue the opportunities to increase the use of volunteers and other resources in search and rescue activities.

2.60 The Canadian Coast Guard has implemented procedures to assist volunteers in establishing search and rescue programs, and the Department of National Defence has recently renewed its Memorandum Of Understanding with the Civil Air Search And Rescue Association. The departments believe that those efforts have resulted in more use of volunteers and other resources in conducting search and rescue activities.

Greater use of other federal resources for search and rescue is possible
2.61 In 1992, we recommended that the Department of National Defence and the Canadian Coast Guard pursue the opportunities for increased use of other federal resources in providing search and rescue services.

2.62 The Department of National Defence is currently conducting a Defence Policy Review, and the search and rescue and Navy helicopter replacement project is being re-examined in conjunction with this Review. As a result, the Department was unable to indicate what impact this Review will have on the resources available to conduct search and rescue operations.

2.63 The Canadian Coast Guard states that it is currently pursuing the use of other federal resources.

The provision of search and rescue service with patrol vessels requires re-examination
2.64 A 1992 Department of Transport program evaluation of search and rescue indicated that the costs of providing patrol vessels exceeded the benefit provided. Further, we recommended in our 1992 chapter that the Canadian Coast Guard consider the appropriateness of decommissioning all search and rescue patrol vessels and discontinuing search and rescue patrols. At the time of our follow-up, a search and rescue program needs analysis had concluded that two of six Type 600 and two Type 500 search and rescue patrol vessels should remain in service, to be supplemented by using more multi-tasked vessels. By implementing more multi-tasked vessels, the costs reported for search and rescue activities has increased significantly, because some costs of operating the larger multi-tasked vessels are now charged to search and rescue rather than icebreaking or navigational aids as in the past.

Analysis of the causes of beacon failures and false alarms is required
2.65 In 1992, we recommended that the Department of Transport ensure that information on the causes of beacon failures and false alarms is collected, analyzed and considered before taking action designed to address beacon failures. The Department is aware of causes of beacon failures through its participation in international aviation and marine organizations working to address these problems. However, it still does not conduct ongoing analysis of the causes of aircraft and marine beacon failures and false alarms in Canada.

Canadian Coast Guard Comments: The Coast Guard has established Levels of Service for Search and Rescue which focus on quality and extent of service and the effectiveness of response, based on the actual probability for effecting a rescue. On the basis of these Levels of Service criteria it should be noted that the comparable results between Canada and the US for the period 1986 to 90 are 90.5% versus 80.3%. The departments are nonetheless committed to their efforts at improving performance reporting and analysis.

The Coast Guard specifically conducted the search and rescue program needs analysis cited in the report to address, in part, the issues raised by the Auditor General. This needs analysis confirmed the benefits of patrol mode operations in high-risk areas. The apparent increased cost arising with the use of multi-tasked vessels was attributable to the lack of clear guidelines regarding how they were to be accounted. This is an accounting issue and it will be resolved in the future financial reports.

Information on causes of beacon failures and false alarms is collected and analyzed before any action is taken to address beacon failures. The problem is one of universal concern and is being actively examined by the International Regulating bodies of IMO and ICAO and has resulted in the move to adopt more reliable equipment. Most importantly, special procedures have been put in place to enable the Rescue Coordination Centres to identify their sources and ascertain whether these are genuine.

Loans to Sovereign States - 1992, Chapter 10


2.66 In 1992, we reported on how the government recognizes and accounts for the risks associated with direct loans to sovereign states as well as those it guarantees. In addition, we reported on the adequacy of the information presented to Parliament on all sovereign lending, including the various risks associated with these loans. Our follow-up reviewed the actions taken by the government to address our 1992 observations and recommendations.


2.67 The Department of Finance still does not believe there is a need for an annual review of the risks and costs associated with loans to individual sovereign states. In this regard, the Department has taken limited action. Notwithstanding our opinion that the allowance was adequate as of 31 March 1994, we continue to disagree with its basis.

2.68 Parliament still needs to receive comprehensive annual reporting on Canada's international financial commitments. The Department of Finance has stated its willingness to provide additional information to Parliament on an aggregate basis, and is examining ways of doing so.

Observations and Recommendations

Risks Associated with Sovereign Loans
2.69 In 1992, we reported that individual sovereign states owed Canada $16.7 billion as of 31 March 1992. This amount had increased to $19.1 billion as of 31 March 1994 (see Exhibits 2.1 and 2.2 ) and continues to grow as additional credit is extended by Canada and interest compounds on amounts rescheduled. Most of this credit - $14 billion - was extended by two Crown corporations, the Export Development Corporation (EDC) and the Canadian Wheat Board (CWB), to support export sales. Also included was $2.4 billion loaned to sovereign nations through the Canada Account to enable them to buy Canadian exports on credit. This account is managed for the government by the EDC and is used to make loans deemed to be in the national interest.

2.70 Both the EDC and the CWB finance their export sales to sovereign states by borrowing domestically and internationally, using the Government of Canada as guarantor. As the government guarantees this borrowing, in effect it assumes the risks and the resultant costs if a sovereign state is unable to pay or if it delays repayment of its loans to the corporations.

2.71 In our 1992 Report, we suggested that the government review its current policies for recognizing and accounting for risks associated with loans to sovereign states to ensure that they are appropriate and realistic and that the government's financial statements adequately reflect the costs of those risks.

2.72 In accordance with its stated accounting policies in the 1994 Public Accounts: "The Government views loans to sovereign states as collectable unless formally repudiated by the debtor. The Government establishes allowances in respect of potential debt or debt service relief measures for financially troubled countries under multilateral agreements". In addition, the EDC, in accordance with its accounting policies as stated in the 31 December 1993 financial statements, "prudently sets aside a general allowance based on Management's best estimates of potential losses on the commercial and sovereign loans receivable portfolio for which no specific provision has been made". Unlike the EDC, the CWB's stated accounting policy is not to record any allowance for its sovereign loans, because of its reliance upon the guarantee of the government.

2.73 Many financial institutions, including Canadian commercial banks, recognize and quantify the risks associated with their sovereign loans, based on guidelines established by their national governments (in Canada, these guidelines are established by the Office of the Superintendent of Financial Institutions). Even the World Bank and regional development banks (see paragraphs 2.81 to 2.121), which have `preferred creditor status' ahead of national governments such as Canada, recognize and quantify the risks associated with their sovereign loans. For the year ended 30 June 1993, in recognition of the increased risk of sovereign debt, the World Bank increased its loan loss provision from US $2.5 billion to US $3.1 billion, for exposure totalling US $105 billion. The decision to increase the provision was supported by Canada's Department of Finance.

2.74 In November 1993, the Department of Finance analyzed the risks associated with debt or debt service relief for sovereign loans under existing Paris Club multilateral agreements, and provided support for the amounts held in the related allowance. The analysis considered specific debt or debt service relief options available to the government, and their costs. It indicated to the Department that, together with allowances recognized by the EDC, the government had adequate provisions as of 31 March 1993 to cover these specific debt and debt service relief options.

2.75 In connection with our audits of the government's financial statements as of 31 March 1993 and 31 March 1994, it was our view that the allowance was sufficient to result in a fair presentation of those statements. Notwithstanding our opinion that the allowance was adequate as of 31 March 1993, and 31 March 1994, we continue to disagree with its basis. We believe that the basis of the allowance should be the risk associated with the loans to individual sovereign states rather than a general allowance for only those loans to sovereign states that have negotiated, or have reasonable certainty of negotiating, multilateral agreements.

2.76 We also believe that the Department of Finance should review, on a regular basis, the risks associated with its loans to individual states; especially those loans with the greatest exposure, such as those to some Eastern European countries (see Exhibit 2.2). With the exception of the allowances established for debt relief under multilateral agreements, the Department informed us that, due to the rarity of outright repudiation of sovereign debt, there is no need for the government to take action to recognize or account for the risks associated with loans to sovereign states.

Better Information to Parliament
2.77 In our 1992 Report, we also suggested that better information be provided to Parliament on overall sovereign loan exposure, including adequate disclosure of total costs and commitments with respect to debt relief.

2.78 Parliament needs to receive comprehensive information on Canada's sovereign loan portfolio and commitments, including exposure by country, and on yearly activities including debt or debt service relief. The need for such `sectoral' information is discussed in Chapter 7 of this Report; the information that we believe could be disclosed by the lead department (Finance) is set out in Exhibits 2.1 and 2.2. Information could also be provided on the International Assistance Envelope and on Canada's participation in the International Monetary Fund, the World Bank and the other international financial institutions that extend loans to sovereign states (see paragraphs 2.81 to 2.121).

2.79 As reported in our 1992 Report, in 1991 the Canadian government agreed, pursuant to a Paris Club agreement, to pay the EDC and the CWB a portion of the interest payments due from Poland and Egypt ( debt service relief). Over a period of 18 to 25 years, an estimated $3.1 billion of the allowance was to have been used as payments were made to the EDC and the CWB for debt service relief to Poland and Egypt (the present value of the series of payments is about $2 billion). Recently, the Department of Finance informed us that it intended to switch from debt service relief to debt relief (forgiveness of principal and interest) for Poland and Egypt. Rather than continuing to make a series of interest relief payments over the next 20 years, the Department of Finance informed us the result may be multiple drawdowns of the allowance over a two to three year period. This is another example of the type of information that could be provided to Parliament.

2.80 In response to our follow-up work, the Department of Finance has stated its willingness to provide additional information to Parliament on an aggregate basis. The Department informed us that it is currently examining mechanisms to present this information.

Department's response: Risks Associated with Sovereign Loans. The Department of Finance's policies and procedures are reflected adequately. A difference of opinion remains regarding applicability of the principle of ultimate collectibility to loans to sovereign governments and about the risks of outright repudiation. In this connection, we would wish to point out that Paris Club reschedulings have protected the net present value of Canada's sovereign loans. Also, we are pleased to note that there is agreement on the adequacy of the government's contingency reserve.

Better Information to Parliament. The Department of Finance is in the process of identifying the best means of providing information to Parliament on Canada's sovereign loan exposure aggregated on a country-by-country basis. The Department will continue to work with parliamentary staff to determine the most appropriate content and format of such information.

The Department of Finance will also be providing information to Parliament on Canada's debt reduction activities. Parliamentary authority was previously obtained for debt reduction payments made over the past three years. The Department of Finance is now seeking to renew its authority to make such payments. Accordingly, the amount of debt reduction that will be provided to each country and the related beneficiaries will be appearing in the Public Accounts of Canada in 1994-95 and subsequent years.

Canadian International Development Agency and the Regional Development Banks - 1992, Chapter 11


2.81 In 1992 we reported on CIDA's management of Canada's participation in the regional development banks (RDBs): the African Development Bank, the Asian Development Bank and the Inter-American Development Bank. Noting that Canada's involvement with the RDBs was a significant and growing aspect of multilateral co-operation, we conducted the audit to help Parliament scrutinize the activities, financial resources and, most important, the developmental results associated with Canada's participation. We recommended that CIDA:

  • periodically assess and report how Canada's objective of promoting social and economic development in developing countries has been achieved through the regional development banks;
  • seek clarification from the appropriate authority, possibly through legislation, of what the Minister could reasonably be asked to account for in terms of the means chosen and the results achieved in respect of Canada's participation in the regional development banks;
  • urge the regional development banks to carry out systematic analyses of their loan portfolios based on the sovereign risk of individual borrowers;
  • in consultation with the Department of Finance and the Office of the Comptroller General, reconsider the accounting treatment of paid-in capital of the regional development banks;
  • seek amendments to the International Development (Financial Institutions) Assistance Act that would require the Minister to obtain the approval of Parliament before financial commitments are made to the unpaid capital subscription of the regional development banks;
  • in consultation with the Department of Finance and the Office of the Comptroller General, reconsider and revise, as appropriate, its accounting for and reporting of notes payable to the regional development banks;
  • try to link the results expected from its participation in the regional development banks with the money spent. If CIDA finds that this link cannot be made, it should disclose the basis for this finding in its Part III of the Estimates; and
  • seek, possibly through amendments to the International Development (Financial Institutions) Assistance Act , a requirement for conducting a periodic assessment and report to Parliament on the developmental and other returns from Canada's participation in the regional development banks.
2.82 The need to enhance the effectiveness of the banks as instruments of development has become a matter of growing concern to many member nations. In 1994, the Development Committee of the International Monetary Fund/World Bank agreed to establish a task force to review the development impact of these institutions. The task force is expected to report to the Committee at its October 1995 meeting. CIDA has informed us that it proposes to monitor this task force through the office of the Canadian directors to ensure that there is comprehensive coverage of the regional development banks as well as of the Bretton Woods institutions.


2.83 There is considerable overall progress in improving Canada's oversight of the banks. As an active member in the RDBs, Canada has helped to modify some of their policies and programs in light of Canadian concerns and developmental objectives. CIDA has fully recognized the need to strengthen the Minister's accountability to Parliament for the effective use of funds provided to these institutions for the fight against poverty and to report periodically on the results achieved. The quality of the loan portfolio of each bank is being assessed for its development impact. Major reforms are under way to improve management at the banks and the quality of the projects they fund. Systematic analyses of the banks' loan portfolios, based on the sovereign risk of individual borrowers, are now being conducted in conjunction with assessment of their financial viability. The need to change the culture that rewarded new loans ("moving money") rather than effective management of existing projects has been identified as a priority at each bank.


How effective are the regional development banks?
2.84 CIDA agreed that the objectives and results of Canada's participation in the banks needed to be clearly stated, and it has taken a number of actions in this regard.

  • CIDA has sponsored, along with other donors, a study of the banks by the North-South Institute. The study examines a series of indicators related to the objectives of the banks and provides information on what Canada has achieved through its contributions to the banks. The study states, however, that it is very difficult to determine exactly how effective the banks are. The Institute points to the need to monitor the performance of the banks in implementing strategies aimed at reducing poverty, and to continue to press them to demonstrate the results of those strategies. CIDA has reviewed the methodology used for the study and agrees with its conclusions.
  • CIDA has encouraged the banks to focus more on developmental activities that support the objectives of Canada's aid policy - poverty reduction, environmental sustainability and good governance. For example, in the recent general resource increase of the Inter-American Development Bank, the Bank agreed to increase its programming for the social sector to 40 percent of total lending. The African Development Bank has agreed to channel "...around 20 to 25 percent [of lending] for the social sectors...the bulk [of which] should be committed in support of primary health care and primary education...." Special emphasis will be put on the environmental aspect of the energy and forest sectors. The strategic objectives for the Asian Development Bank include economic growth, poverty reduction, more involvement of women in development, population planning, and environmental protection...all Canadian priorities.
  • CIDA has started a series of reviews of the development impact and quality of projects funded by the banks. It is using these reviews as tools to advocate greater emphasis on areas important to Canadian objectives.
  • CIDA has also played an important role in advocating the establishment of portfolio task forces by the banks, which have examined the quality of bank projects and made far-reaching recommendations to bank management to improve that quality. The banks are now implementing action plans to address the recommendations of the task forces. It is too early to assess their impact.
Clarifying accountability
2.85 CIDA has embarked on a comprehensive "management renewal" process, which incorporates, as one of its central tenets, "results-based management". It is fully committed to enhancing accountability, including its accountability for participation in the regional development banks. We urge the Agency to complete this component and to report on its findings to Parliament as soon as practicable.

Monitoring the quality of loan portfolios
2.86 CIDA has completed the second annual update of its assessments of financial viability of each of the banks. These assessments form the basis for CIDA's monitoring of the financial aspects of the banks, including their portfolio quality and the adequacy of their financial policies. The assessments are shared with like-minded donor countries and, as appropriate, with bank management. Through its executive directors at each institution, CIDA has encouraged the banks to improve their comprehensive analyses of the quality of their loan portfolios.

2.87 The banks are responding with greater transparency in regard to country risk. The Asian Development Bank, for example, has decided to establish a special unit to assess sovereign risk. Similarly, at Canada's urging, the Inter-American Development Bank is preparing a special report on credit risk while African Development Bank management has proposed a comprehensive upgrading of its financial policies and a revision of its policy on country exposure and risk assessment.

2.88 CIDA is currently revising its Framework for the Assessment of Financial Viability and will soon complete its third set of financial viability assessments of the banks.

Accounting for Canada's paid-in capital
2.89 CIDA still agrees with the Comptroller General of Canada that the current accounting treatment is appropriate: that paid-in capital is used by the development banks to make loans to developing countries; that these investments are essentially a flow-through mechanism for Canada and other countries to make loans to sovereign states; and that government's valuation policy for sovereign loans also applies to these subscriptions. In other words, the loans are viewed by the government as collectable unless formally repudiated by the debtor countries. Notwithstanding this stated position, we continue to believe that it does not reflect reality.

Parliamentary approval for unpaid capital subscriptions
2.90 CIDA has disclosed, in Part III of the Estimates, the financial commitments for the unpaid capital subscriptions of the banks. In the 1994-95 Part III, for example, CIDA clearly identified the callable capital for each bank. As previously indicated, it is CIDA's intention to change the vote wording for financial commitments for the unpaid capital subscriptions of the regional banks. A modified vote wording will be reflected in the 1995-96 Estimates documents.

Accounting for notes payable
2.91 CIDA continues to believe that the current accounting treatment is appropriate, and has not undertaken any additional measures. It points out that the Department of Finance holds the same view.

Parliament needs to know the risks and benefits
2.92 CIDA agreed to the periodic assessment and reporting of how Canada's objectives, as set out in the International Financial Institution (IFI) Act , are being achieved through the banks. It attempts to make such assessments on an ongoing basis and, in particular, in the context of decisions on fund replenishment or capital increase negotiations. It undertook to try to improve the link between funds disbursed by Canada to the banks and the results expected from our memberships. CIDA noted, however, that assessing the benefits of participation against Canada's objectives in unequivocal and quantifiable terms is difficult. The banks engage in a range of activities that provide benefits to Canada and the international community but that are not easily measured.

2.93 In addition, CIDA has analyzed the various task force reports on portfolio quality, and the findings will be factored into the extent and nature of Canada's future participation in the banks.

Reporting to Parliament

2.94 CIDA has begun to improve its reporting through Part III of the Estimates, and in 1994-95 stated: "CIDA is continuing its review of the IFIs which began in 1992-93 ...This research will help the Agency assess the developmental effectiveness of the RDBs and better define long-term objectives for both the IFI system and its component parts." In addition, CIDA officials and Canadian executive directors have continued to appear before parliamentary committees as requested, including the subcommittee on IFIs. CIDA is currently considering how to more systematically provide pertinent information from Canada's directors in the regional banks to parliamentarians. We encourage CIDA to consider the option of periodically preparing for parliamentarians a performance-oriented report on the regional development banks.

Department of Finance - Participation in the Bretton Woods Institutions and in the European Bank for Reconstruction and Development - 1992, Chapter 12


2.95 In 1992, we noted that because of the significant financial commitments involved, the Department of Finance and the government needed to carry out periodic reviews and assessment of the objectives, extent and results of Canada's participation in the Bretton Woods institutions (the International Monetary Fund and the World Bank Group) and weigh them against Canada's financial commitments to these institutions and other demands on the public purse.

2.96 We observed that several factors pointed to the need for such review. Those factors included the reported decline in the success rate of projects supported by the World Bank, the evolution in the roles and operations of the institutions, and domestic fiscal restraint. We also observed that the Department of Finance needed to further improve the information on the objectives and results of participation and on the associated financial commitments and risks to which Canada was exposed.

2.97 Since our audit, there have been a number of relevant developments. A sub-committee of the House of Commons Standing Committee on Finance, which was established to study the management and policies of international financial institutions, in particular the International Monetary and the World Bank Group, completed its work and issued a report in June 1993. The report confirmed our recommendations and went even further to recommend analysis and review of the World Bank's practices.

2.98 A Special Joint Committee of the House of Commons and the Senate is currently carrying out a review of Canadian foreign policy, which includes a review of Canada's international assistance priorities, policies and approaches. The Committee's report is expected in the fall of 1994.

2.99 In 1994, the Development Committee of the International Monetary Fund/World Bank decided to establish a small task force to review the development role being played by multilateral development banks, including the World Bank and the main regional banks. The task force is expected to report to the Committee at its meeting in September/October 1995.

2.100 Our follow-up reviewed actions taken by the Department of Finance to address our recommendations.

2.101 Finance has initiated actions to address our major recommendations. However, it is too early to assess the impact of those actions. The Department has embarked on a review to examine the effectiveness of Canada's participation in international financial institutions (IFIs) as a means of influencing economic development in developing countries and achieving other Canadian foreign policy, economic development and commercial objectives. The review is yet to be finalized and provided to Parliament.

2.102 Canada and other member countries were instrumental in encouraging the World Bank management to focus more on results in its evaluation than on the amount of loans for development projects, and in having the Bank management review the adequacy of loan loss provisioning and reserves-to-loans ratio.

2.103 The Department of Finance has improved information it provides to Parliament on Canada's participation in the International Monetary Fund and World Bank Group. However, it needs to pursue further the difficult task of selecting and reporting on indicators that could serve in assessing how well Canada's objectives for participation in these institutions are being achieved.


Objectives and results of Canada's participation
2.104 We recommended that the government provide a clear and comprehensive statement of the objectives of Canada's participation in the Bretton Woods and related institutions. We also recommended that the Department of Finance identify, monitor, analyze and report selected indicators that can serve in assessing how well Canada's objectives for participation in these institutions are being achieved.

2.105 The Department agrees that the objectives of Canada's participation in these institutions need to be clearly stated. In its 1993 Report on Operations under the Bretton Woods and Related Agreements Act , the Department identified three main objectives to support sustainable development in the poorest countries, which the International Development Association (IDA 10) agreement emphasized that IDA should focus on - poverty reduction, economic adjustment and growth, and environmental protection. The Department also listed a number of specific benefits to Canada of International Monetary Fund membership, and reported on Canada's role, along with other countries, in encouraging the World Bank to integrate environmental criteria into its lending programs.

2.106 In internal documents on the IDA 10 review, the Department reviewed specific indicators of results of developmental assistance, such as proportion of population below poverty line, life expectancy, education attainment index and GDP per capita - by country and region. However, other than indicators such as procurement in Canada by the World Bank and the International Development Association, and the number of Canadians working in the Bank, which it had reported in the past, the Department has not selected and reported such indicators to help in assessing how well Canada's objectives for international financial assistance through participation in these institutions are being achieved.


2.107 We recommended that the Department of Finance investigate the feasibility of Canada undertaking a joint evaluation with other interested members to assess the cost-effectiveness of participation in the Bretton Woods and related institutions as a way of promoting national objectives. Lessons learned could be applied to improve the functioning of the institutions, particularly concerning the objectives of countries that supply hard currencies and the financial backing for market borrowing. We also recommended that Finance consider combining its evaluation capacity with that of other departments and agencies involved, such as CIDA, to assess the extent of Canada's overall participation in multilateral financial institutions.

2.108 Finance has initiated a review of Canadian participation and strategy, to examine the effectiveness of Canada's participation in international financial institutions (IFIs) as a means of influencing economic development in developing countries and achieving other Canadian foreign policy, economic development and commercial objectives. A draft report has been prepared and circulated interdepartmentally for discussion prior to being finalized.

2.109 The draft report specifies current Canadian objectives for participating in IFIs, and provides qualitative and some quantitative assessment of their achievement. It also raises questions, but provides no specific answers, about the most cost-effective way of combining the bilateral and multilateral mechanisms for delivering aid programs, and how large a presence is necessary to continue to influence IFI activity in order to advance Canadian objectives. In addition, the report presents guiding parameters for Canada's participation in IFI replenishment negotiations.

2.110 Two of the conclusions of the review are that multilateral development banks (MDBs) have been important in advancing a number of Canadian objectives, thereby complementing Canada's bilateral assistance program; and that MDBs have had a more mixed success in addressing the Canadian policy agenda of poverty reduction, social and private sector development and environmental sustainability. The report is yet to be finalized. We encourage the Department to complete the review and to include a summary of its conclusions in its next Report on Operations under the Bretton Woods and Related Agreements Act or in its Part III of the Estimates.

2.111 The Department supported a comprehensive study of the banks by the North-South Institute, which was sponsored by CIDA and other donors. (see paragraph 2.84 in CIDA follow-up, which reported on this study).

2.112 Canada and other member countries were instrumental in encouraging the World Bank management to focus more on results than on the amount of loans for development projects. In May 1993, the World Bank adopted a program of action to respond to the recommendations of a task force that it had established in 1992 to examine problems affecting the quality of its portfolio of loans and credits. One of the recommendations of the task force was to enhance the role of the Operations Evaluation Department (OED) of the Bank, as an instrument of independent accountability, and to give greater emphasis to impact evaluations.

2.113 The OED has begun work on impact evaluations and has completed seven by mid-1994. Canada continues to influence the results-oriented direction and emphasis of OED's evaluations through its executive director who is a member of the Joint Audit Committee of the Bank, which, among other functions, oversees OED's work.

Financial risk

2.114 We recommended that, because the financial risk to which Canada is exposed in the World Bank is closely linked to the level of provisioning, Finance consider calling for an assessment, in collaboration with its G-7 partners, of the loan loss provision rate and the method used to determine it. The assessment would ensure the adequacy of accumulated provision for loan losses from the perspective of shareholders, so that the risk of a call on capital would remain low.

2.115 As a result of encouragement from Canada and other member countries, the World Bank carried out a review of the adequacy of its loan loss provisions and reserves. In April 1993, the executive directors of the Bank (which includes those from all G-7 countries) were presented with a paper entitled "Review of the Adequacy of Loan Loss Provisions and Reserves". The paper discussed how loan loss provisions for the Bank are determined to ensure the adequacy of accumulated provision for loan losses from the perspective of the shareholders. In May 1993, the executive directors of the Bank approved an increase in the rate of loan loss provisioning from 2.5 percent to 3.0 percent. As well, the target for the ratio of reserves to loans was increased to a range of 13 to 14 percent, to be achieved during fiscal years 1994 to 1995.

Information for Parliament

2.116 We recommended that the vote wording in the Appropriation Act for payments to the World Bank indicate that the payments are for the purchase of shares, and the amount of financial commitment for the callable capital portion. We recommended that, as Finance continues to improve the information it provides to Parliament on Canada's participation in the International Monetary Fund, the World Bank Group and the European Bank Group for Reconstruction and Development, the Department should also provide more complete and understandable information on the objectives and results of participation and on the resulting financial commitments.

2.117 Since our 1992 audit, Parliament has approved one payment to the World Bank for the purchase of shares. The vote wording in the Appropriation Act did not indicate that the payment was for the purchase of shares; nor did it indicate the amount of financial commitment with respect to the callable capital portion. However, in Part III of its 1994-95 Estimates, the Department specified that payments for the purchase of World Bank shares represent only the paid-in portion of the shares, as the callable portion would become payable only in the unlikely event that the funds were required.

2.118 Finance has further improved information it provides to Parliament on Canada's participation in the International Monetary Fund and World Bank. Since our 1992 audit, new information on Canada's objectives and benefits from such participation has been added to the annual report under the Bretton Woods and Related Agreements Act . This new information includes specific benefits to Canada resulting from membership in the International Monetary Fund, Canada's particular interest and the reason why it supported the enlarged International Monetary Fund Enhanced Structural Adjustment Facility, and Canada's policy priorities in regard to the World Bank's Special Program of Assistance. However, our concern about inadequate information on the results of Canada's participation has yet to be fully addressed. The completion and publication of the results of the Department's current review of Canadian participation and strategy should help to do so.

2.119 Information reported on financial commitments has improved. The annual report on the Bretton Woods and Related Agreements Act now includes a table outlining Canada's financial position in the International Monetary Fund. However, the report still does not clearly indicate how much money has been committed and how much money has been spent for International Development Association subscriptions. Again, this information, including comparative cumulative capital subscriptions by G-7 countries as of 31 December 1992, is presented in the draft report on the review of Canadian participation and strategy.

Accounting for notes payable
2.120 We recommended that the government reconsider, and revise as appropriate, its accounting for and reporting of notes payable to the International Development Association.

2.121 Finance believes that the accounting for and reporting of notes payable to the International Development Association are appropriate. However, the government is working on a paper to review the current accounting treatment and assess whether any changes are needed. We will continue to work with the government in that review to resolve this accounting issue.

Department's response: The Department has reviewed with interest the follow-up report and appreciates the constructive dialogue which has taken place with the Office of the Auditor General.

We wish to make only one comment relating to the suggestion that the Department should reconsider the way it accounts for notes payable to the International Development Association (IDA). On this point, we would simply note that current accounting standards allow for either methodology. Both Finance and the Treasury Board Secretariat share the view that the current practice of accounting for our contributions as notes are encashed, rather than issued, is fully appropriate. However, as mentioned in the report, the current accounting treatment is being reviewed to assess whether any changes are needed.

Department of Finance - Loan Guarantees - 1992, Chapter 13


2.122 In 1992, we reported on the extent of compliance with the government's guidelines to control the design of new loan guarantees; on how the risks and related costs are recognized and accounted for; and on the adequacy of the information provided to Parliament about loan guarantees.

2.123 We recommended that the government recognize the cost or risk of loss of a loan guarantee on an annual basis and account for loan guarantee costs by establishing an appropriate reserve in its Statement of Assets and Liabilities. We also indicated that there was a need for the government to review the way it estimates the costs of loan guarantees.


2.124 The government has revised its accounting policy on loan guarantees, and the accrued costs of loan guarantees are now included in the Financial Statements of Canada.


Accounting for loan guarantee costs
2.125 In 1993, changes were made in accounting policies for loan guarantees. An allowance for loan guarantees is now recorded, and included in accounts payable and accrued liabilities when it is likely that a payment will be made in the future to honour a guarantee and where the amount of the loss can be reasonably estimated.

Estimation of risk of losses
2.126 The government has revised the way it estimates the risk of loss on loan guarantees. The estimation of the risk is now based on departmental assessments of the likely payments on any loan guarantee issued and in effect at the end of the fiscal year. This new estimation method provides a more realistic indication of the risk associated with loan guarantee programs and their potential liability.

Security against government-guaranteed loans
2.127 In 1992, we noted that the terms and conditions of the Small Business Loans Program did not require lenders to take a first fixed charge on the assets used to secured guaranteed loans. The Small Business Loans Regulations were amended in 1993 and now impose such a requirement.

Department of Energy, Mines and Resources - Energy Megaprojects - 1992, Chapter 14


2.128 In 1992, we examined and reported on the Hibernia, Lloydminster Bi-Provincial Upgrader and Regina NewGrade Upgrader energy megaprojects assisted and funded by Natural Resources Canada (which incorporates the former Department of Energy, Mines and Resources).


2.129 We were encouraged to see progress in implementing our recommendations.

  • For Hibernia, the Department has taken initiatives to improve its monitoring of benefits and recommendations arising from the environmental assessment and review process.
  • The Department has improved access to information on the Bi-Provincial Upgrader project and has set up a specific unit to monitor the environmental impacts.
  • The Treasury Board has issued a policy to aid departments in managing future projects of this type. This policy addresses the concerns raised in our 1992 Report.
  • The Canada Hibernia Holding Corporation (CHHC) is appropriately fulfilling its mandate to manage Canada's 8.5 percent equity interest in Hibernia in a commercial manner.
2.130 The Department has also improved reporting to Parliament about its own funding responsibilities for the energy megaprojects. The separation of responsibilities between the Department and CHHC for funding Hibernia creates a division in the reporting of financial information. This makes it difficult for parliamentarians to obtain a full understanding of the overall financial arrangements and exposures relating to the Hibernia Development Project.

2.131 In its recently completed draft evaluation framework, the Department has made progress in identifying the issues that need to be addressed by an evaluation of Hibernia. However, it has not completed an assessment of the precise information it requires to do such an evaluation. The framework has yet to be approved within the Department.

2.132 The government is accountable to taxpayers and to Parliament for the results obtained from the large federal investments in the Hibernia and Bi-Provincial Upgrader energy megaprojects. We believe that the Department should be moving with a greater sense of urgency in planning for evaluations of these projects.

2.133 In light of these ongoing issues concerning the megaprojects, we will continue to monitor government participation in the projects.



2.134 NewGrade Upgrader. The nature of Canada's support to the NewGrade Upgrader has changed since our 1992 audit. The federal commitment was for up to $275 million in loan guarantees. The Government of Canada, the Province of Saskatchewan and Consumers' Co-operative Refineries Limited, the operator, have agreed to a financial restructuring of the project. A combination of a heavy debt load and depressed oil price differentials threatened the Upgrader's ability to meet its debt obligations. Under the terms of the new agreement, Canada will make a one-time payment of $125 million to the project. In exchange for this payment, Canada is to be relieved of any future financial obligations related to the project, and Saskatchewan will indemnify the Government of Canada in the event that Canada's loan guarantees are called.

2.135 Bi-Provincial Upgrader. Construction of the Bi-Provincial Upgrader (a joint venture between Husky Oil Limited and the governments of Alberta, Saskatchewan and Canada) was completed in November 1992. Since the start of production, the Bi-Provincial Upgrader has required funding to cover operating shortfalls. As of 30 June 1994, Canada had advanced $28.2 million to fund its share of those shortfalls. At the time of the audit, discussions were under way among the Joint Venturers on the future funding of shortfalls and on future options for the project.

Natural Resources Canada Comments: On 5 August, 1994, Canada, Alberta, Saskatchewan and Husky Oil Limited announced a new financial structure for the Bi-Provincial Upgrader. Canada and Alberta agreed to sell their interests in the Bi-Provincial Upgrader to Husky Oil Limited and Saskatchewan. Canada will receive $41.96 million for its 31.67 percent interest in the project. In addition, Canada will receive an upside interest in project revenues, if the differential between heavy oil and synthetic crude exceeds $6.50 a barrel.

2.136 Hibernia. Since our 1992 chapter, there have been significant changes in Canada's financial obligations to the Hibernia Development Project, with the assumption of an 8.5 percent equity interest. Canada's direct involvement in this project is in the form of contributions, loan guarantees, other loans and the equity interest. As of 31 March 1994, the federal government's contribution expenditures to Hibernia totalled $492 million and its loan guarantees had been drawn upon to a total of $484 million. As of 31 December 1993, Canada's equity in Hibernia totalled $69.4 million.

2.137 As an equity owner in Hibernia, Canada has the opportunity to benefit from any profits resulting from the sale of its 8.5 percent interest or from production. However, Canada is now responsible for its share of any cost overruns incurred, plus any other responsibilities that fall to the owners. Previously, Canada's financial exposure was capped by the agreements. At the time Canada acquired an 8.5 percent interest in the project, its equity investment to production start-up, based on the original 1990 estimate, was expected to total approximately $357 million. In June of 1994 the owners announced that the preproduction capital cost of the Hibernia Development Project would increase from the 1993 estimate by $1.172 billion. As a result of a previous reduction in the total estimated preproduction capital cost, and the recent cost overrun, Canada's equity investment to production start-up is now expected to total approximately $410 million.

Monitoring of Canada's 8.5 percent equity interest in Hibernia

2.138 Canada's 8.5 percent equity interest in Hibernia is held by the Canada Hibernia Holding Corporation (CHHC), which is a wholly owned subsidiary of Canada Development Investment Corporation (CDIC) and is funded through the Department of Finance. CDIC reports to Parliament through the Minister of Finance. The arrangement was made for the federal government to provide for independent commercial management of the investment and to effectively market its interest in the project at an appropriate time. Thus Natural Resources Canada and CHHC have distinct and separate responsibilities for managing Canada's interest and obligations in the Hibernia Development Project.

2.139 The sole purpose of CHHC is the holding, management and funding of the 8.5 percent interest in Hibernia, with CDIC having responsibility for the ultimate disposal of the 8.5 percent interest on a commercial basis. CHHC has its own Board of Directors consisting of five members, including one senior Natural Resources Canada official, three Directors from CDIC and the President of CHHC. Two of CDIC's officers are officers of CHHC. The President of CHHC sits on the Executive Committee of the Hibernia Development Project. This structure allows CHHC and CDIC to fulfil their mandate appropriately by active participation in the project and by providing monitoring of and accountability for Canada's equity investment in the Hibernia Development Project.

2.140 A memorandum of understanding among the Department of Energy, Mines and Resources (EMR), the Department of Finance, CDIC and CHHC outlines how information is to be co-ordinated and shared. The parties agreed to establish a committee as a forum to exchange information, on a regular and timely basis, on the status of the Hibernia Development Project and to consult fully on any major issues or developments concerning the project. The committee was to consist of officials of each of the parties and to be chaired by an official designated by the Minister of EMR.

2.141 However, the committee is not active. CDIC and Natural Resources Canada have informed us that they maintain informal communications on an ongoing basis. In our opinion, the agreement suggests use of a more formal method of communication.


2.142 In responding to our 1992 chapter, the Department noted that it was determining evaluation requirements for the megaprojects. The Department also agreed to undertake, at an appropriate time, an evaluation of the Hibernia project.

2.143 In October 1992, the Department prepared an evaluation assessment to review possible approaches to the evaluation of the energy megaprojects. The assessment recommended that both the Bi-Provincial Upgrader and Hibernia be evaluated by focussing on impacts and the achievement of objectives, a course of action that we strongly support.

2.144 The Department had planned to complete an evaluation of the Bi-Provincial Upgrader project by the end of March 1995. It now intends to reassess this plan in the light of change to the project (see paragraph 2.135 and the Department's comments). Regardless of the change, we believe it is important to determine, and account for, the results achieved with the federal money spent, as well as to identify lessons learned that may be applied in the future.

2.145 The Department has recently completed a draft evaluation framework for Hibernia. Among other things, the framework identifies the evaluation issues to be addressed and goes some way towards determining the requirements and sources for the information that will be needed to address those issues. However, the Department has not completed an assessment of the precise information it requires to evaluate Hibernia. The framework has yet to be approved within the Department.

2.146 The draft Hibernia evaluation framework does not propose a specific time for the evaluation to be completed. However, departmental officials have indicated that they plan to carry out an evaluation after oil production starts.

2.147 Given the very substantial federal investment and financial exposure in Hibernia, we believe it is important for the Department to:

  • move quickly to complete and approve the evaluation framework;
  • put in place additional procedures, as necessary, to collect, on an ongoing basis, information required for the evaluation; and
  • assess the need for interim evaluation work that draws together available information on results to date, analyzes it and reports to Parliament.
2.148 In our opinion, it is important for both the government and Parliament to be able to assess whether Hibernia has been a good investment for Canada.

Information for Parliament and the public

2.149 The Department has improved its reporting of the financial status of energy megaprojects in Part III of the Estimates, especially in relation to the funding it provides to the projects. As well, the Department's information on megaprojects is now consolidated in one section.

2.150 Although Natural Resources Canada has improved the reporting of its share of the funding, the separation of responsibilities between the Department and CHHC for financing Hibernia creates a division in reporting. The Department's Estimates show information related to its responsibilities for Hibernia. The Department of Finance's Estimates show CHHC's appropriation for Canada's equity interest. CDIC, in its annual report, provides information about CHHC's appropriation and its ongoing investment in Hibernia.

2.151 Canada also has an indirect investment in Hibernia through its ownership of 70 percent of Petro-Canada shares. Petro-Canada is a 25-percent participant in Hibernia, and provides information on its investment in the project through its annual report.

2.152 Another important source of information on Hibernia is provided by the Annual Report of the Canada-Newfoundland Offshore Petroleum Board, which is tabled in Parliament.

2.153 Each organization reports separately on its own area of responsibility for Hibernia. Thus, if parliamentarians wish to obtain a full understanding of the overall financial arrangements and exposures relating to the Hibernia Development Project, they have to examine five separate documents. In our opinion, for projects of such a scale as Hibernia, a complete picture needs to be available from one source.

2.154 The problems involved in sectoral reporting are more fully addressed in Chapter 7, Departmental Reporting of Sectoral Activities.

Department of Indian Affairs and Northern Development - Indian Forest Management - The Manitoba Northern Flood Agreement - 1992, Chapter 15



2.155 In 1992, we reported that the Department of Indian Affairs and Northern Development (Indian and Northern Affairs Canada) needed to develop a statement delineating its own responsibilities and those of the bands for Indian reserve forests. We noted that the Indian Timber Regulations were outdated and inadequate for the proper management of Indian forests. In addition, we reported that the Department did not have adequate expertise available to enable it to discharge its statutory and fiduciary responsibilities for Indian forests, and that there was a lack of adequate information to make effective decisions about reserve lands.


2.156 The Department has initiated action on all our recommendations, with varying degrees of progress.

2.157 We recognized that, to address our recommendations, the Department needed to consult with and obtain the participation of First Nations and Canadian Forest Services of Natural Resources Canada. We also recognized that initiatives to address our recommendations would be time-consuming and complex. Our follow-up confirmed this to be the case. The Department needs to continue to implement our 1992 recommendations.


Clarifying statutory and fiduciary responsibilities
2.158 In its response to our chapter, the Department stated that it has legal obligations for the disposition of timber on reserves. The Department has developed a fiduciary management strategy. The strategy outlines how the Department intends to manage fiduciary responsibilities arising from managing and administering reserve lands and natural resources, including timber. However, it has not clearly stated the Department's fiduciary responsibilities and objectives in managing Indian forests. Without this statement of fiduciary responsibilities and objectives, it is difficult to assess the extent to which the Department is fulfilling its responsibilities.

Development of an Indian forestry strategy
2.159 Under the leadership of Canadian Forest Services, the Department and the National Aboriginal Forestry Association (NAFA) plan to develop a comprehensive Aboriginal forestry strategy. The Department initiated a joint planning process with Canadian Forest Services and NAFA, but there has been no substantive progress to date.

Amendments to the Indian Timber Regulations
2.160 The Department drafted several technical amendments to the Indian Timber Regulations, which received approval from the Governor in Council in May 1993. In 1994, additional technical amendments to the Regulations are being considered. The Department is continuing to work with Indian forestry leaders to develop an alternative legislative framework for Indian forestry to put in place a modern, multi-use forestry management regime.

Expertise to discharge statutory responsibilities
2.161 The Department has undertaken some initiatives to develop appropriate expertise to discharge its statutory mandate for reserve forestry. It is finalizing a forestry policy and procedures manual and has developed courses to train staff in implementing the procedures.

Interim measures are needed
2.162 As stated in the 1992 chapter, in many cases, forests on reserve lands represent a major opportunity for the social and economic development of Indian bands. Forests are the single most important asset of many bands. However, forests on many Indian reserves are seriously depleted due to a lack of forestry management. Judging from the Department's past experience, corrective action may encounter many constraints and take a number of years to take effect. In the meantime, to protect against further depletion of forestry resources, interim measures are needed.

Department's response: The Department will continue to act on the 1992 recommendations of the Auditor General, insofar as they relate to its statutory mandate.

In addition, the Department is undertaking interim measures, in conjunction with Indian forestry leaders and the Canadian Forest Services, to promote good forest management practices for reserve forests.



2.163 The Manitoba Northern Flood Agreement (the Agreement) provides a framework for compensating five Indian bands for the adverse effects of hydro-electric development projects undertaken or to be undertaken by the Manitoba Hydro-Electric Board.

2.164 The parties to the Agreement, which was signed in 1977, are Indian and Northern Affairs Canada, the Manitoba Hydro-Electric Board, Northern Affairs of the Government of Manitoba, and the Northern Flood Committee Inc., an Indian corporation representing the five bands. These parties have joint and separate obligations under the Agreement, depending on the nature of their respective responsibilities.

2.165 In 1992 we reported on the Department's management and implementation of the Agreement. The Department concurred with our recommendations.

2.166 We recommended that the Department encourage and monitor compliance with the Agreement by all parties; ensure that a valid environmental assessment is performed to determine and report on the impact of the hydro-electric projects; use the environmental assessment as a basis for further implementation of the Agreement; and capture and report performance information and all costs associated with the Agreement.

2.167 We also recommended that, before entering into any future agreements of this nature, the Department ensure that the obligations of each party are clearly stated. We further recommended that such future agreements contain commitments from all parties on specific matters of implementation such as progress target dates and the methods to be used to evaluate the adequacy of implementation.


2.168 The Department advised us that the assessment of environmental impact and other outstanding issues, such as clarification of responsibilities, are still under study and discussion. In our view, the Department ought to ensure that the performance of ongoing responsibilities and the implementation of any settlement agreements are based on sufficient and appropriate information.


2.169 The Department and the other parties have focussed their efforts on negotiating comprehensive settlement agreements with the bands to satisfy their respective obligations under the Manitoba Northern Flood Agreement. Under a comprehensive settlement approach, the Department and other parties to the Agreement seek to reach an overall final settlement agreement with each band, covering financial and other compensation for damages sustained. The purpose of such agreements is to supersede all outstanding and future claims and effectively provide a full and final release of the parties from past, present and future responsibilities under the Agreement.

2.170 As of June 1994, a comprehensive settlement had been reached with one band; comprehensive negotiations were under way with three bands; and one band, as in the past, had elected to pursue its own claims, thereby opting out of the comprehensive settlement approach. The Department's financial commitments under the one settlement agreement reached are approximately $16 million. Comprehensive settlement amounts have not been finalized with the other three bands.

2.171 In negotiating comprehensive settlement agreements, it is fundamental that the environmental impact be appropriately assessed and used as a basis for any settlement. Without an adequate assessment of the environmental impact, the possibility remains that comprehensive settlements and their implementation may not be appropriate. It is also essential in any settlement that a clear understanding and consensus be reached on the nature and extent of each party's respective obligations under the agreements. At the time of our follow-up, the Department was continuing its efforts to address these and other issues reported in 1992.

Department's response: The Department agrees with the conclusion. While there has been little change in the environmental impacts of the Northern Flood Agreement (NFA) project since 1988, when the last report on environmental impacts was compiled, the Department is preparing a report on the years 1988-1994 prior to the end of March 1995.

The Department agrees, in principle, that it is fundamental that the environmental impact be appropriately assessed and used as a basis for any settlement. However, it should be pointed out that the objective of negotiations to implement the NFA in a comprehensive way also focusses upon what is required by the affected First Nations to live with the impacts of the NFA project. The value of compensation under the comprehensive agreements is not determined by the damage done by the project per se but by the economic development and administrative requirements of a community to change their way of life in view of how the project has changed the environment in that part of Manitoba.

The comprehensive implementation packages, such as the Split Lake Agreement, put in place practical arrangements that will clarify responsibilities and ensure that the obligations of the parties are implemented in a manner that can demonstrably assist in improving the quality of life for members of the NFA reserves and effectively implement this recommendation.

Department of National Defence - 1992, Chapters 16, 17 and 18


2.172 The Auditor General's 1992 Report included three chapters on the Department of National Defence (DND). Two chapters dealt with capital spending: one of them reported on industrial development initiatives and the other on project initiation and implementation. The third chapter reported on the Canadian Forces Reserves.

2.173 In general, the Department of National Defence's response to the chapters has been to study and propose possible solutions to the problems that we raised. It has taken action on some issues.

2.174 We have found that while the Department of National Defence has generally concurred with our recommendations, it takes a long time to implement improvements. It has completed action on only 44 of 79 recommendations made in our reports from 1984 to 1990 (see Exhibit 2.3 ). Although 35 recommendations remain incomplete, action has been taken on satisfying many of them. In some cases, action cannot be considered complete until the new Canadian Forces supply system is in place. It takes a similar length of time to react to its own studies, as Chapters 24 and 27 of this Report illustrate.

Major Capital Projects - Industrial Development Initiatives - 1992, Chapter 16


2.175 Achieving value for money in major capital projects entails three major objectives: meeting operational requirements in the most cost-effective manner; achieving cost-effective, long-term industrial and regional development; and achieving other national objectives. The 1992 chapter addressed the interplay between the first two of these objectives.

2.176 National Defence is responsible for defining the most cost-effective way of meeting its operational requirements. Industry Canada is the lead department responsible for achieving cost-effective industrial development.

2.177 In our 1992 Report, we noted that government procurement policies were not being followed and made several recommendations. The recommendations were to improve strategic planning, to provide decision makers with adequate analyses of costs and benefits, to share costs of the initiatives among the relevant departments, and to improve information reported to Parliament.


2.178 Since our 1992 Report, departments responsible for industrial initiatives have reviewed industrial and regional benefits policy and practices, and consulted with industry. However, Industry Canada has yet to fully respond to our recommendations.


2.179 Our follow-up has identified that Industry Canada has pursued what a draft departmental report calls an "opportunistic strategy" for industrial benefits. Under this strategy it is difficult to provide an advance assessment of the benefits and costs of the initiatives due to the uncertainty concerning what companies will offer in their proposals.

2.180 Since 1992, studies by Industry Canada and other parties have confirmed the need for a different strategic approach to industrial development. In response to our Report, Industry Canada initiated a policy review by a task force, which completed a draft report in July 1992. The federal government's Prosperity Initiative in 1992-93 provided additional feedback from industry and led to further interdepartmental consultation. An interdepartmental working group carried out a review and analysis of the government's industrial benefits policy. The resulting report, "Federal Procurement in the 90s", summarized most of the issues pertaining to benefits policy and practices, and recommended changes. A recent draft report by Industry Canada reviewed previous work and recommended that separate strategies be developed for the various industrial sectors. In response to these studies, Industry Canada has streamlined its reporting requirements for industrial initiatives, but has done little else to change departmental policies and procedures.

2.181 We could not determine whether decision makers are receiving better information on the costs and benefits of initiatives, as the government has not approved any new major Crown projects since 1992. Thus the opportunity for Industry Canada to take action in this area has been limited.

2.182 In 1992, we identified the need for increased monitoring and auditing of projects and better reporting to Parliament on industrial development initiatives. We note that since 1992, Industry Canada has devoted fewer resources to monitoring existing projects. We also note that the various departments responsible for industrial initiatives remain unco-ordinated in their reporting to Parliament on individual projects.

Major Capital Projects - Project Initiation and Implementation -
1992, Chapter 17


2.183 Our 1992 chapter on the initiation and implementation of capital projects examined the effects of defence program management system's policies and procedures on achieving value for money in major capital projects. We found that defence program management was suffering due to the lack of a stable Canadian Forces strategic plan, that there was a lack of information for managing the defence program, and that the purchasing of spare parts for new equipment could be improved.

2.184 We recommended improvements in Canadian Forces long-term strategic planning and in the day-to-day management systems of the overall capital program. We also recommended that a system of priorities be established for the entire Defence Services Program, and suggested that the Department reconsider its practice of buying initial stocks of spare parts from its prime contractors.


2.185 National Defence has acted to address our recommendations, but some activities are not yet complete and the action taken may be inadequate. Our 1994 chapters on Information Technology (Chapter 25) and Infrastructure Management (Chapter 27) point to continuing problems with the project and program management systems.


2.186 The Department met the requirement for a stable long-term strategic plan with the approval of the "Defence Development Plan" in 1993. The plan translates defence policy commitments into a force structure and is supposed to provide a 15-year strategic plan for capable and affordable armed forces. Its aim is to detail the force structure deemed most capable and affordable; provide the necessary guidelines for resource planning to effectively man, equip, house and sustain that force structure; and provide a framework to guide the implementation of the force structure. The Department will also work to review and update the development plan as national or international events dictate. Except for reservations about its overall price (see paragraphs 24.39 to 24.45) and its comprehensiveness (see paragraphs 24.27 to 24.38 and 26.26), the plan meets the intent of our 1992 recommendation.

2.187 Our chapter found that the Defence Program Management System generates an enormous staff workload and that the program control process did not effectively track changes to projects. The Department has included several changes to the Defence Program Management System, which provide more guidance for day-to-day management of the program. The Department also has measures and processes in place intended to bring significant changes in project costs and scope to the attention of senior management in a timely fashion. However, our chapter on Information Technology (paragraph 25.56) indicates that these problems continue to exist.

2.188 Since our recommendations in 1992, the Department has also redesigned the Defence Services Program Information System. The system records the details of individual projects as project documents are circulated and approved. Information from project offices that used to take four to six weeks to be incorporated into the system is now entered automatically or, if manually, in less than one week. Program management staff now have direct access to the system and update it regularly. Several of the project offices will also have direct access to the system in the near future. Although the information system appears to be significantly improved, we are concerned about the quality of some of its data, particularly the data related to information technology projects (see paragraph 25.46).

2.189 The Department has made progress in establishing a priority system for the entire Defence Services Program. It now has criteria to assign priorities to projects among the Maritime, Land Force and Air Commands, as well as within the environmental command structure. The criteria for ranking priorities among the environmental Commands include operational need, safety, government direction, international agreements and strong business cases. These criteria were helpful to program managers in determining which projects to postpone as a result of the February 1994 budget cuts. Nonetheless, more guidance is needed on how to assess the benefits offered by some projects and the opportunity cost of delaying their funding (see paragraph 25.52).

2.190 In 1992, we suggested that National Defence and Supply and Services Canada consider buying spares directly from the manufacturers of the original equipment instead of from the prime contractor as is the current practice. We also pointed out the benefits of conducting a value engineering analysis during the specifications process.

2.191 Since then the Department has made progress by completing some value engineering analyses. The Department has also made progress by expanding its "Buy Our Spares Smarter" program. This program obtains price comparisons for spare parts submitted for review. Over 4,500 items have been reviewed under the program, contributing to savings of almost $10 million. Still more money could be saved if National Defence increased its efforts to realize savings that the program has identified.

The Canadian Forces Reserves - 1992, Chapter 18


2.192 Our follow-up focussed on recommendations from our 1992 Report in seven areas: Reserve Force planning, human resource management, training, equipment, facilities, readiness and accountability.

2.193 In our 1992 Report, we noted that the Department needed to address the definition of cost-effective roles for the Reserves. Clearly defined, appropriate roles lead to effective human resource structures and policy, training, equipment and facilities; they also provide good indicators to determine and communicate levels of military readiness. Defining appropriate Reserve roles is a key element in having cost-effective Reserves.


2.194 Our follow-up audit found a varied response to our recommendations. The Department continues to define and implement Total Force Reserve roles according to unique command environments. Responses to our 1992 recommendations therefore varied by command, and the specific nature of Total Force implementation in that command. In general, the Department has taken limited action in response to our recommendations.


Reserve Roles and Organizational Structure

2.195 The Militia is the largest component of the Primary Reserve with 73 percent of the personnel budget during 1994-95. Land Force Command has extensively studied solutions that we believe would satisfy many concerns arising from our 1992 audit. Those solutions include rationalizing Militia roles, force structure and unit organization. However, the Command has decided not to take complete action on the proposed solutions, pending completion of the 1994 Defence Review and clarification of the Land Force's role in national defence policy. Until the Command is able to take appropriate action, the Militia will continue to provide only limited military capability. We intend to conduct additional follow-up work on the Militia in 1995.

2.196 In our 1992 Report, we noted the need for appropriate cost information on the Reserves. Additional cost information is needed to support Reserve decision making at all levels, but particularly when Reserve roles are being decided. Since 1992, the Department has done cost studies to support specific decisions and, in some cases, new Reserve efforts are being field-tested to determine their costs before full implementation. Although the Department is trying to include costs in Reserve decision making, departmental systems may not identify all the costs necessary to support the Department's decisions (see paragraph 24.70).

2.197 Our 1992 Report also recommended that the Department make greater effort to ensure that Reserves are available for training and emergencies. After studying the issue, the Department has acted to strongly support the National Employers Support Committee, now called the Canadian Forces Liaison Council. This council has a mandate to promote the Reserves so that employers will grant leave-of-absence for training without loss of job promotion and vacation time, and to encourage the hiring of Reservists. The Council reports that it has approached thousands of employers and, over an 18-month period, its list of employers offering their general support has grown from 20 to more than 1200 names. In 1996, the Council expects to carry out a fundamental review of its program and report on the program's results to senior departmental management.

2.198 Land Force Command has rejected, as a concept and in practice, the assignment of operational roles, tasks or missions to individual Militia units. Instead, Militia units are to be assigned specific training missions that will allow individual unit members to augment the Regular Force. To implement these training missions, and to solve a continuing rank-qualification problem and a disproportionate ratio of officers to non-commissioned members, the Command has proposed "total army establishments". These new establishments would provide a standard for all army units. Based on the size of the units, the Militia would have the same unit establishments, or organizational structure, as their respective functional counterparts in Regular Force units.

2.199 At this stage, it is too soon to determine if "total army establishments", based on Regular Force organizational and rank structures, are the most efficient way to achieve a training mission in a Reserve unit of part-time volunteers. No trial of this new model is being planned. However, the Command expects to implement the structure over the next three years.

2.200 Over the last two years, Communication Reserve has reviewed and expanded its roles. Reserve units will not have operational roles but will be expected to provide trained members to perform tasks. In addition to individual augmentation, Communication Reserve plans to start providing small groups of people trained to meet specific tasks. This provision should serve as a basis to review the establishments and organizational structure.

2.201 Communication Reserve intends to improve the efficiency of unit organization and establishments by restructuring and standardizing the units. A "standard model unit" has been developed for all units providing augmentation personnel. The tasks of these units should be finalized in the fall of 1994. The size, manning level and rank structure of each unit will be examined and matched with its ability to meet task requirements. The standard model unit is being field-tested at several locations; its results will be evaluated in 1995-1996 to determine its operational effectiveness and efficiency.

2.202 The Naval Reserve is in the process of conducting a complete review and reorganization of the Naval Reserve Establishment, which it plans to complete by the end of 1994. The proposed establishments for the Naval Reserve are based on assigned operational roles, which is a significant change from the Total Force augmentation role assigned to the Naval Reserve in 1991. A major effort is being made to rationalize requirements and establishments in Naval Reserve Divisions. We were not able to assess the adequacy and efficiency of the proposed changes. The Naval Reserve told us that it intends to monitor the implementation of the new establishments over the next year.

2.203 The Air Force is also revising roles for the Reserves with the development of new Airfield Engineering Squadrons. Officials told us that Reserves will be providing almost half the personnel for three new squadrons in support of contingency deployment plans.

Reserve Occupational Structure

2.204 The Canadian Forces occupational structure identifies the aggregate skills and knowledge necessary to do the jobs required by the Canadian Forces. In 1992, we reported that the Reserve structure was deficient. Over the past two years, the Department has undertaken a review of its policies and procedures with the objective of meeting the "Total Force" occupational structure requirements. A draft paper has been produced, but senior management has not yet approved it.

2.205 In 1992, we also pointed out that specifications outlining the duties, tasks and skill levels for each occupation were generally poor in quality or non-existent. The Department has responded by reviewing the 143 occupational specifications in the Canadian Forces, and by developing the Canadian Forces Integrated Occupational Specifications. Those specifications detail the job requirements for all Forces components including the Reserves. Updating occupational specifications and converting them to the new format is scheduled for completion in 1997-1998, assuming the current resource arrangements continue.

2.206 The Reserve occupational structure is composed of 27 officer occupations and 38 other rank occupations. As of July 1994, about 18 percent of Reserve occupations had been updated and converted to the new format. About 37 percent of the Reserve occupations are at various stages of the conversion process and about 45 percent are outdated or lack specifications.

2.207 As we reported in 1992, the application of the Total Force concept to personnel functions, such as promotion, is still not adequately defined. There is no clear definition of the kind of qualifications and experiences that are required of members at each rank level of the Reserves to achieve its mission. Reserve officer promotion policies have not been updated over the last 16 years, and policies for non-officers were written seven years ago, before the adoption of the Total Force concept. The qualification levels and the time-in-rank criteria are still formulated to seem identical to those of the Regular Force, but actually bear no resemblance to them. For instance, the time-in-rank prerequisite is stated in calendar time for both components, although the Regular Force has a full-time commitment while the Reserve Force is composed of part-time volunteers with no actual attendance obligation. The Department is currently undertaking a Primary Reserve Career Management Study in which several Reserve promotion concerns are examined and major improvements are expected to receive departmental approval in the coming year. However, the study has not yet adequately addressed the key issue of the type and length of experience necessary to meet operational requirements at each rank level, for each command environment.

Reserve Recruiting

2.208 The Department accepted and has sought to act on our 1992 recommendations on recruiting. It reports that older, more skilled people are now being targeted for recruitment, but that progress has been inhibited by the downsizing in the Regular force and by reductions in recruiting funds. In 1992, we observed that targeting more skilled people should reduce training costs and costs due to attrition.

Reserve Training

2.209 We did not do a complete assessment of training to determine the Department's progress; nor did we assess its progress in improving the efficiency of training delivery. We also did not completely assess training at Communication or Air Command because these areas were not examined in that part of our 1992 audit.

2.210 In 1992, we said that existing training standards and objectives were inadequate and poorly applied. The Militia has not yet been able to realign its training because, as mentioned previously, the Department is still trying to define Militia roles and establishments and is still developing integrated occupational specifications.

2.211 Departmental officials told us that some individual Reservists are now at a high level of readiness due to the amount of Regular Force training they have undergone for peacekeeping missions. Land Force Command also expects that its devolution of training responsibility to Area Commands, and its new Warrior Program, which is now being field-tested, will enhance the basic combat readiness of the Militia.

2.212 Naval Reserve roles and training objectives are much more developed, but the Naval Reserve training is also being affected by the slowness in the development of integrated occupational specifications, which are the basis for developing training standards and programs. In addition to a better definition of roles and the development of establishments, Maritime Command is making progress in validating its training, and expects to have all courses validated by 1996.

Equipment and Facilities

2.213 In 1992 we recommended that Reserve equipment acquisitions be part of a long-term affordable force structure plan, and said that individual equipment projects could be managed better. The Department addressed the first point with the 1993 approval of the Defence Development Plan, except for the question of its overall cost (which is discussed in Chapter 24). It addressed the second point by amending its internal procedure manuals to clarify the roles of key project personnel, thereby improving the likelihood of compliance with departmental policies.

2.214 The Department has not yet completed a strategic plan for Reserve facilities, as we recommended in 1992. The Department expects that detailed Reserve requirements will be developed after further refinement to the Defence Development Plan and completion of a Land Force Infrastructure Development Plan. However, Defence Information Services Organization (formerly Communication Command) has already incorporated a Reserve facilities assessment into its development plan, and has a capital project to take corrective action. Other commands have yet to complete similar action.

2.215 In our Report we noted that Land Force Command did not have a rationale for existing Militia units and that Militia replacement construction was proceeding without adequate justification. Since our Report, commands have continued to bring forward Militia armoury projects and the Department has continued to complete projects.

2.216 Chapter 27 of this Report, on National Defence Infrastructure Management, confirms that many problems we identified in Reserve construction were found generally for all departmental construction projects.

Supplementary Ready Reserve

2.217 The Supplementary Ready Reserve is a group of former Canadian Forces members and individuals with special skills who can assume a military role in times of emergency. In 1992, we noted fundamental problems with the Supplementary Ready Reserve and a lack of value for money. Since our Report, the Department has made further studies of the Supplementary Ready Reserve and individual commands have taken steps to improve the Supplementary Ready Reserve's efficiency and effectiveness. However, the commands are only now reaching a limited consensus on the future of this Reserve. The Department is also waiting validation of the Supplementary Ready Reserve concept by the 1994 Defence Review.

Reserve Accountability and Reporting

2.218 We could identify no comprehensive review of organizational accountability for the Reserves, as we recommended in 1992. However, Land Force Command, Communication Command and Air Command have continued to integrate Reservists into their headquarters structures, while Maritime Command has plans to do the same. This action should lead to greater awareness of Reserve issues at the headquarters level. In addition, Land Force Command has continued to develop its area headquarters concept. Under that concept, individual area commands are held responsible for all the land forces in their respective areas, whether Regular or Reserve. Although the Department has not undertaken a comprehensive review of organizational accountability, it has taken some steps to improve the awareness of Reserve issues at headquarters levels.

2.219 The Department has made little progress in reporting Reserve cost-effectiveness in Part III of the Estimates. For example, it continues to report the paid ceiling of each command. We reported that paid ceiling was an extremely poor indicator of available military manpower. The Department is providing little meaningful information to Parliament while increasing its reliance on a component of the Canadian Forces that has undisclosed performance problems. The Department expects that after 1996, its business planning initiatives should eventually improve reporting to Parliament.

Department of National Revenue - Customs and Excise - Special Import Measures Act - 1992, Chapter 19


2.220 The Special Import Measures Act (SIMA) is a law that protects Canadian industries from two sources of unfair trade. The first source is "dumped" goods. Dumping refers to the selling of foreign goods to Canadian importers at prices lower than their home market prices or their costs of producing and selling the goods. The second source of unfair trade is goods imported into Canada which have been "subsidized" through an economic incentive program sponsored by a foreign government. A Canadian manufacturer or producer who has evidence that the dumped or subsidized foreign goods have "injured" its business may request Revenue Canada to investigate the matter further.

2.221 Our 1992 chapter contained observations and recommendations in the following areas: consideration of injury during the investigation stage; monitoring of undertakings; program evaluation; and limitations resulting from technical aspects of the legislation.


2.222 Revenue Canada and the Department of Finance have made reasonable progress responding to our recommendations. The Department of Finance expects that the Special Import Measures Act will be amended in 1995 to reflect the recent changes to the General Agreement on Tariffs and Trade (GATT) that have come as a result of the Uruguay Round of Multilateral Trade Negotiations (MTN). It is anticipated that the GATT-based changes to the SIMA legislation will address some of the concerns identified in our 1992 audit while others will be addressed during the Department of Finance's own review of the Act (see below).


Injury determination

2.223 In order for a case to be opened, Revenue Canada must have evidence that the goods have been dumped or subsidized and that these practices have caused injury to the Canadian manufacturer or producer. Injury is often evidenced by a decline in sales, market share or profits; price erosion or suppression; a drop in employment levels; negative growth; and decreased utilization of production capacity. The Department evaluates information supplied by the complainant (a Canadian manufacturer or producer) when determining whether there is a reasonable indication of injury.

2.224 In 1992, we recommended that Revenue Canada maintain a broader perspective to give greater consideration to the injury sustained by the complainant during the investigation stage leading to a preliminary decision.

2.225 Once the Department makes a preliminary decision on a case, it issues a "Statement of Reasons". Since the audit in 1992, the Department has revised the document to better demonstrate its work completed in considering the evidence of injury.

2.226 In our 1992 audit we noted that, at the early stage of an investigation, interested parties have the right to refer a case to the Canadian International Trade Tribunal to determine whether an investigation is warranted on the grounds of injury. Under the current legislation, once the Tribunal confirms that the evidence discloses a reasonable indication of material injury, the Deputy Minister of National Revenue must treat the issue of injury as settled, even if evidence obtained later raises doubt about the earlier finding. However, the proposed changes to the SIMA legislation to implement the MTN results envisage that the Deputy Minister will no longer be precluded from further consideration of the injury issue in light of additional evidence.


2.227 Undertakings are an alternative method for exporters or foreign governments to resolve the injurious action they have caused. Instead of proceeding through a full investigation, the exporters responsible for dumping goods into Canada agree to increase their prices to a level which eliminates the injury to the Canadian manufacturer or producer or eliminates the dumping. Likewise, the foreign government can eliminate the subsidy or limit the volume of subsidized goods, thereby removing the injurious effect.

2.228 In 1992, we recommended that Revenue Canada implement a plan to monitor undertakings more closely. Since that time, the Department has shifted additional responsibility to the regions for the monitoring of several undertakings. This results in more timely monitoring of undertakings and has other advantages since regional offices are more familiar with the various goods that are being imported into their region and they often have closer ties with the local importing community.

2.229 Although undertakings are a less costly alternative to the full length proceeding they can easily be vetoed and terminated at any time by any interested party. In 1992, we recommended that the Department of Finance consider, if appropriate, amendments to the SIMA provisions concerning the veto of undertakings. The Department of Finance indicated that this would be addressed in its review of the Act.

Review of the Special Import Measures Act

2.230 The Department of Finance is responsible for the SIMA policy and legislation. Since the inception of the Act in 1984, a formal evaluation of the program had not been completed although Finance had established preliminary plans to complete a review.

2.231 In 1992, we recommended that the Department of Finance resume and complete its formal evaluation of the Special Import Measures Act . In August 1993, the Department of Finance advised Revenue Canada, the Canadian International Trade Tribunal and other interested departments of the initiation of the review. The Department of Finance has worked with Revenue Canada, the Tribunal and other interested departments to identify the pertinent issues. Some of the issues identified will be addressed by the Omnibus Trade Bill from the Multilateral Trade Negotiations while the others will be earmarked for the review of the Special Import Measures Act .

Department of National Revenue - Customs and Excise - Goods and Services Tax: Registration and Related Sub-Activities - 1992, Chapter 20


2.232 Our 1992 audit of the Goods and Services Tax (GST) focussed on registration and response to requests for information from the public. We also examined simplification, particularly with respect to small business, and reports of GST implementation costs to Parliament. During our follow-up, we reviewed a status report prepared by Revenue Canada explaining the action it has taken on our observations and recommendations. We conducted interviews and reviewed related documentation to assess the extent of the progress.


2.233 We found that the Department has taken action on all of the recommendations and observations in our 1992 chapter. Progress is continuing in improving the accuracy and completeness of registration information and in implementing new initiatives for small business. However, further work needs to be done in certain areas.



2.234 In 1992, we observed that most of the registration staff were occupied with follow-up and maintenance of the initial registration program. This limited their capacity to actively identify new registrants. We recommended that the Department ensure a proper balance between registrant identification and maintenance functions. The Department subsequently strengthened the registration program, by decentralizing the registration function from regional to district offices and by increasing the number of registration staff. We found that there is an increased focus on ensuring the correctness of information gathered, including Standard Industrial Classification (SIC) codes from new registrants. However, additional steps are required to ensure the completeness and accuracy of annual sales amounts and SIC codes for existing registrants. The Department stated that, starting in January 1995, SIC codes will be assigned by Statistics Canada for new "single business registration number" registrants (those having a common registration number for Taxation, GST and Customs). Existing registrants will remain the responsibility of Revenue Canada.

2.235 In order to better identify registrants, we also recommended that the Department facilitate a further exchange of information and techniques with other taxing authorities. Exchange-of-information agreements have been initiated with the provinces; eight have been finalized and two are nearing completion. The Department is also involved in finalizing co-operation agreements with the provinces, which deal with underground economy initiatives.

Information to Registrants

2.236 In 1992, we noted a high volume of telephone enquiries and written requests for information from registrants. We recommended that the Department periodically analyze the reasons for the volume of telephone enquiries, with a view to identifying measures to reduce the demand. We also recommended that the Department consider means to prioritize written requests and explore ways to better inform users of changes. Our follow-up found that the volume of telephone requests, walk-in requests and written requests remains high due to the flow of new registrations and cancellations and to the legislative changes that were introduced. Actual telephone enquiries were 1.6 million in 1992-93 and 1.7 million in 1993-94. Walk-in requests increased from 147,000 in 1992-93 to 175,000 in 1993-94. The Department has taken appropriate measures to cope with the volume of registrant enquiries, through staff training, experience and improved telephone systems. In fact, the actual response rate for telephone enquiries was 87 percent, considerably better than the planned target of 75 percent. On a national basis, written requests continue to be assigned on a first-come, first-served basis. Brief instructions have been included in the 1994-95 planning guidelines indicating types of requests carrying a higher priority.

2.237 In order to minimize the number of requests for information, we recommended that the Department of Finance be informed of the difficulties caused by the significant delay in enacting amendments concerning the GST. Over the past two years, Revenue Canada has provided support and assistance to Finance in advancing proposals for legislative amendments that were included in Bills C-13 and C-112.

Simplification and the Small-Business Sector

2.238 Our 1992 report noted that most registrants are from the small-business sector, and that streamlining administration for this sector has the potential for significant gains in efficiency to both the registrants and the Department. We recommended that the Department continue its efforts to address issues arising in the small-business sector, and compile revenue and cost data to support analysis of the appropriate treatment of small suppliers. Our follow-up found that the Department had taken a number of steps to address this recommendation, such as active promotion of annual filing; a revamped quick method of accounting; a simplified combined annual return; default annual filing; a simplified tax credit calculation; and temporary cessation of filing for registrants with seasonal business activity. However, these steps have not yet resulted in much reduction in the workload associated with the significant number of registrants from the small-business sector. For example, as of March 1994, approximately 59,000 registrants were using the Quick Method of Accounting, whereas the number potentially able to use that method exceeds 1 million. In addition, more than 1.5 million registrants eligible to file annually continue to file quarterly. As well, approximately 26 percent of the registrant population consists of small suppliers having less than $30,000 in annual sales and, consequently, have registered voluntarily. The Department stated that businesses often have legitimate reasons for not opting for some of the simplification initiatives that were introduced.

Accountability and Reporting

2.239 In 1992, we recommended that the Department address the needs of the main users of the GST automated system, and consider means to improve its accountability and reporting on this major Crown project. According to the original agreement with Treasury Board, the Department was to have submitted seven progress reports by September 1993. Instead, only two progress reports were submitted, with a final report submitted in November 1993. The final report reviews overall GST development to date and indicates that the project is complete, except for a number of initiatives currently in progress to improve the reporting and accountability for the GST. These remaining initiatives will be blended in with the ongoing integration activities of the Department.

Royal Canadian Mounted Police - Provincial and Municipal Policing - 1992, Chapter 22


2.240 In 1992, we reported that the Royal Canadian Mounted Police (RCMP) could improve the efficiency of its provincial and municipal policing operations in a number of areas. We also reported that the federal government needed to improve the financial management of RCMP policing contracts and to provide better financial information to Parliament on these contracts.


2.241 The RCMP and the Department of the Solicitor General have initiated corrective action on all recommendations. However, most of the corrective action and related projects had yet to be completed at the time of this Report.


2.242 Cost sharing. A study by the Department of the Solicitor General is ongoing to determine the total cost incurred by the federal government for the provision of the RCMP contract police services. The Department has yet to establish mechanisms to ensure an adequate review of the RCMP's billing practices. We have noted inaccuracies in the RCMP's billing to the provinces for 1992-93, the first billing under the new 20-year contract. The RCMP has issued a corrected billing. This latter billing corrected some inaccuracies and the remainder are being addressed.

2.243 Policing operations. As part of its ongoing activities for the general implementation of the community-based policing concepts across the Force, the RCMP is studying ways to implement differential response strategies in its management of calls for service. It is also carrying out studies on the 12-hour shift scheduling practices in detachments ("E" Division) and on its case ("occurrence") reporting requirements. We note that federal, provincial and municipal budgetary constraints are exerting pressure on the RCMP to reassess the delivery of its police services and to find ways to improve the efficiency of its operations.

2.244 The RCMP has progressed on another important project with the completion of the development of its Computerized Integrated Information and Dispatching System (CIIDS). The RCMP aims at completing the installation of CIIDS in the lower mainland of British Columbia in 1994-95. It anticipates that, where appropriate, the installation of CIIDS in the rest of the country should be completed over the next five years.

Royal Canadian Mounted Police - Human Resource Management -
1992, Chapter 23


2.245 In 1992, we reported on the RCMP's human resource management systems and practices concerning its uniformed members. We reported that the RCMP needed to improve its human resource planning, recruit selection and training, refresher training, career management and member physical and psychological health. We also noted that the RCMP had major initiatives addressing those issues.


2.246 The RCMP has continued with its major initiatives, and corrective action has been ongoing for all issues raised in 1992. In many cases, that action is still continuing at the time of this Report.


2.247 Civilianization. The RCMP has made progress on its civilianization project. It has revised the definitions of the Force's three categories of employees. It has also set up a working group with a mandate to review the classification of positions, that is, to determine whether a uniformed member, a civilian member or a public service employee is to occupy a given position. That group aims to make recommendations to RCMP management in the fall of 1994 concerning the full implementation of this project, which is expected to take a period of time.

2.248 In the meantime, while the Force has converted a few uniformed member positions to civilian member or public service employee positions, it is not yet in a position to evaluate the total potential savings that may be realized through civilianization.

2.249 Recruit selection. The RCMP has made significant progress in the selection and screening of potential recruits, with the institution, in 1993, of new management tools and procedures. However, the Force still needs to further improve its current Recruit Selection Test. It also needs to compile and analyze appropriate data to assess the effectiveness of its recruiting, screening and selection processes. The RCMP has plans to address those remaining issues.

2.250 Training. The RCMP has resolved many training issues; the others are being or have yet to be addressed. For example, the Force plans to revise its Recruit Field Training programs and orientation packages in the fall of 1994. Recently, the RCMP completed an evaluation of its Second Language Training Program, of which the Recruit Official Languages Training Program is an important component. The management of the Force is reviewing the recommendations arising from that evaluation.

2.251 Psychological Health. The RCMP reports an increase in the use by members of its emotional health programs and it perceives a basic change in the members' attitude toward receiving psychological help. However, the Force has yet to evaluate the effectiveness of its emotional health programs for members. The Force also notes that its national statistics on psychological services and its member assistance program are incomplete. The Force is currently examining what data need to be collected for carrying out such evaluation.

Federal Emergency Preparedness - 1987, Chapter 15, 1989, Chapter 27 and 1992, Chapter 24


2.252 We reported to Parliament on federal emergency preparedness in 1987, 1989 and 1992. The focus of this follow-up audit is the status of preparation of the National Earthquake Support Plan, which primarily concerns dealing with the consequences of a possible catastrophic earthquake in lower British Columbia.

2.253 We expressed our concern about the status of federal emergency response plans in our first report to Parliament on federal emergency preparedness in 1987 and subsequently in 1989. One of the major findings of those audits was the absence of clear goals and deadlines to complete federal emergency plans. We were concerned that the delays in developing co-ordinated plans for major emergencies would reduce the speed of the emergency response, which is a critical factor in saving lives and protecting property.

2.254 In 1990, the Standing Committee on Public Accounts recommended to the House of Commons that Emergency Preparedness Canada complete a National Earthquake Support Plan as soon as possible in conjunction with provincial authorities.

2.255 Our 1992 audit found that a National Earthquake Support Plan was nearing completion but that it was a framework for detailed planning rather than an operational plan.


2.256 We asked Emergency Preparedness Canada to provide us with information on the current status of the Plan. In March 1994, Emergency Preparedness Canada informed the Office that CANATEX II, the first major test of the National Earthquake Support Plan, would take place as scheduled in May 1994 and that a comprehensive evaluation of the exercise would be available relatively rapidly after the test. We were also informed that the Plan was expected to lay the groundwork for a generic plan to co-ordinate a nation-wide federal response for major civil disasters.

2.257 British Columbia has the lead role in response to a major earthquake in its Lower Mainland; the national government's role is to co-ordinate federal support to the affected province(s) or territory(ies). The aim of CANATEX II was to "test the National Earthquake Support Plan for British Columbia and its interface with the British Columbia Earthquake Response Plan".

2.258 The national objectives of the CANATEX II exercise were:

  • to evaluate the federal Plan's effectiveness to assist British Columbia regarding the effectiveness of the emergency structures and systems; consultative procedures associated with the activation, implementation and operation of the Plan; national crisis management operation and communications; the interface between the National Plan and earthquake arrangements of British Columbia and Alberta; and other emergency preparations.
  • to provide provincial and federal departments and agencies in British Columbia and Alberta with an "opportunity to evaluate their joint and several response and support arrangements and interfaces with the national structures, procedures and systems."
2.259 Emergency Preparedness Canada plans to complete its evaluation of CANATEX II by the end of September 1994. We plan to review the evaluation.

Public Works and Government Services Canada: Procurement and Accounting Services - 1987, Chapter 11, 1988, Chapter 16, 1989, Chapter 21, and 1991, Chapters 18 and 19


2.260 Since June 1993, Public Works and Government Services Canada has provided the centralized procurement, and the banking and accounting services of the government. Between 1987 and 1991, we conducted a series of audits that identified opportunities to improve four aspects of the performance of these services, then operated by the Department of Supply and Services. There were opportunities to:

  • achieve more fully the public purposes of centralized procurement;
  • weigh more carefully the costs and benefits of secondary objectives of procurement activities;
  • improve productivity; and
  • improve systems development capability.
A senior official describes below the context in which the Department has sought to realize these opportunities:

The period since these performance opportunities were identified has been a turbulent one for the Public Service in general and Public Works and Government Services Canada in particular. Public Service 2000, and its theme of empowerment of line managers; a revised Treasury Board Common Services Policy, which favours optionality; and, the creation of quasi-commercial Special Operating Agencies have introduced, in a somewhat tentative manner, a new administrative model composed of mostly autonomous departments managed within a fairly loose administrative framework. At the same time, the demand for openness, integrity, consistency and simplicity in government administration, generated by increased public scrutiny of government, Canada's obligations under international and internal trade agreements, and the possibilities offered by information technology, suggest the continuation and strengthening of centralized administrative services. The effective use of government procurement as an instrument of social and economic development also demands strong policy and administrative direction.

The Department has had to steer a course through this shifting and confused landscape. In doing so, it has been guided by a belief that sound procurement practice, encompassing integrity, openness, value for money, and the government's broader social and economic goals, must be an objective shared by all parts of government. In the event of conflict, the Department finds itself in the unfortunate position of front line enforcer. Such a position is consistent, however, with the Department's accountability for the procurement process.

Scope and limitations
2.261 We prepared this report by discussing progress with departmental officials, reviewing and analyzing departmental data and documents and comparing and analyzing information from different sources. This process of enquiry, discussion and comparison, unless otherwise stated, enabled us to confirm the plausibility of the information presented. We have not, however, conducted a full audit of departmental performance in these areas.


2.262 The Department has introduced many initiatives as part of its overall strategy for improvement, which generally respond to our observations of 1987-1991. Once these initiatives have been fully implemented - for example, when computer systems become fully operational - significant improvement may occur. Departmental officials report some important progress has been made, which is at a point where adding audit assurance to their reports would add value.


Achieving the public purposes of centralized procurement
2.263 Each year the government spends about $15 billion (1992-93) on goods and services. This represents 11 percent of total government expenditures, excluding interest payments on the public debt. Government policy is to contract for these goods and services in a manner that will:

  • meet operational requirements of user departments;
  • stand the test of public scrutiny in matters of prudence and probity, facilitate access, encourage competition, and reflect fairness in the spending of public funds; and
  • where appropriate, support long-term industrial and regional development and other national objectives.
2.264 The acquisition of goods and services for clients by Public Works and Government Services Canada (except those relating to construction and real property services) is the responsibility of the Supply Operations service. The service comprises the Supply Operations service Branch plus regional components that provide much of the delivery. The service procures goods and services costing about $11 billion, or two thirds of the amount spent, on behalf of government departments. Thus it plays a key role in achieving government policy.

2.265 Our audits between 1987 and 1991 identified opportunities to improve five specific aspects of performance linked to the above-noted broader public purposes. These areas are: sharing responsibility and authority more effectively, increasing the extent of competition, ensuring reasonableness of profit levels, strengthening the monitoring of contracts, and linking the "track record" of suppliers to contract awards.

2.266 Sharing responsibility and authority more effectively. The Department of Supply and Services Act gives the Minister responsibility for the acquisition of goods and services when such functions are not "by law assigned to any other department, board or agency ...". Within the framework of Treasury Board Regulations, the Minister is responsible for procuring most goods, unless he has delegated the responsibility to another minister and for procuring services when requested to do so by other departments. In practice, the Department and user departments share responsibilities for meeting public purposes, even where delegation has not been granted. In 1989, we pointed out opportunities to delegate further authority to departments, minimizing red tape and administrative constraints and allowing the Department to concentrate on high-value items. In 1991, we noted the opportunity to clarify roles where the responsibility for procurement was being shared with user departments.

2.267 Since 1989, the Department has increased the general level of delegation to procure goods from $500 to $2,500. It has also arranged some 23,000 standing offers for both goods and services. By using standing-offer arrangements, departments are generally allowed to contract up to $40,000 per transaction. The Department advises that at this time it cannot determine the proportion of original contracts of less than $10,000 to total contract activity. But such measures have reduced the number of low-value contracts handled by the Department. In 1986-87, 224,000 (81%) of 277,000 contracts and amendments processed by the Department were for less than $10,000. By 1991-92, the Department had reduced the number and proportion of such contracts and amendments to 103,000 (59%) out of 174,000, and in 1992-93 to 83,000 (54%) out of 153,000. The Department received legal advice that the ministers of the user departments have full responsibility when the Department delegates procurement responsibility to them.

2.268 The Department is seeking, in co-operation with Treasury Board, a review of existing and potential new delegations before recommending that future delegations be granted. This review will presumably permit assessment of how well delegated responsibilities have been discharged.

2.269 Increasing the extent of competition. The Department acknowledges that competition is the cornerstone of government procurement. Where feasible, effective competition reduces the price that the government pays, and promotes fairness, openness and equity in the government's relationships with business.

2.270 In 1991, we found that about 40 percent of the contracts that the Department of Supply and Services processed, valued at approximately $3 billion, had been awarded on a non-competitive, sole-source basis. At that time we pointed out that research in other jurisdictions indicated potential for significant price savings (depending on the type of commodity and the state of the market, for example) if previously non-competitive contract requirements were competed, where feasible. We acknowledged that it would not be feasible to compete every contract. We recommended that the Department look more closely at the underlying reasons for sole-sourcing contracts, increase competition where feasible, and remind client departments that responsibility for ensuring maximum competition is shared.

2.271 Departmental statistics for 1992-93 show that 38 percent of the 174,000 contracts and amendments the Supply Operations Service issued (representing 39 percent of the value or $4.7 billion) were sole-sourced. Comparable data for 1993-94 are not available, but officials advised that the Department sole-sourced 39 percent of 126,000 contracts with a total value of $7.1 billion. The value sole-sourced was $2.5 billion or 35 percent of the value.

2.272 Departmental managers point out, and we agree, that these statistics provide an incomplete indicator of the real level of competition in federal procurement. They do not cover direct contracting by other departments. Further, these statistics classify as:

  • "non-competitive" contracts - those for which advance notice of intention to award to a single source without competition was publicized, thus giving other suppliers an opportunity to challenge the award; and
  • "competitive" contracts - those for which only one bid was received.
2.273 Interpreting available data is made more difficult because the Department classifies contracts in different ways for different audiences and purposes. Better indicators, not currently available , would classify contracts more consistently and take into account, for example, the number of bids attracted. Departmental officials have concluded that the current level of competitiveness is significantly improved and they do not believe that they could realize significant savings by using competitive processes instead of sole-sourcing.

2.274 They base their assessment on the successful implementation of the electronic Open Bidding System, the rate of complaints and successful appeals, and their day-to-day experience. The Open Bidding System moves government procurement into the electronic era, connecting the department and suppliers through a network operated by a contractor. An important element of the Open Bidding strategy gives suppliers an opportunity to identify their ability to compete, by advertising proposed sole-source procurements. The Department issues such notices for about 40 percent of proposed sole-source contract awards over $25,000. A preliminary review by the Department suggests that competitors challenge slightly less than 10 percent of advertised sole-source proposals and that they succeed in about one third of their challenges. The Department has not analyzed the monetary effect of successful challenges on the prices government pays and, after completion of our review, stated that it considers that such analysis is not feasible. The Department also acknowledges that the Open Bidding System has moved from a pilot project to full acceptance without a formal assessment of its impact.

2.275 The data regarding the impact of advanced contract award notices are indefinite. We estimate that savings achieved to date probably lie within a range from less than $1/2 million to more than $6 million per year. We encourage the Department to continue its attempts to increase the level of effective challenge to sole-source awards in the system by advertising more proposed awards and encouraging more suppliers to connect to the system. We still believe that there is an opportunity for substantial savings.

2.276 In view of the importance of fair and open competition, the materiality of the potential savings, and the imprecise data, the Department is prepared to work with the Office, to develop a consistent series of data that will provide a proper foundation for analysis and comment. This data will clarify the extent and impact of competitive tendering, substantiate the progress reported, and develop better indicators of the extent of competition for both departmental and delegated procurement.

2.277 Ensuring reasonableness of profit levels. According to 1992-93 data, about 3 percent of contracts, representing about 23 percent of total value, are let on the basis of cost reimbursement or other bases that include allowances for profit and contribution to general business overhead. The Department's profit policy establishes boundaries limiting the costs that are allowable and the amount of profit a business can make on government work. In 1991, we recommended that the profit policy be revised to relate the profit calculation more effectively to the level of risk assumed by the supplier.

2.278 In 1992, the Department proposed changes to the profit policy, which drew objections from industry. The Department engaged consultants to study the effects of the profit policy. The consultants were selected in conjunction with the relevant industry association and they then used data from companies who had volunteered to participate. The results of the study were presented in 1993. The consultants had developed two indicators to compare the relative profitability of government work with that of similar work done for others. One indicator showed that contractors earned significantly less profit per dollar for government work than for other work. A second, more relevant, but considerably less reliable indicator showed that contractors earned slightly higher return on capital invested for government work. Following the studies, the Department concluded that the contractors studied were realizing a reasonable level of profit from government work and that the Department should not implement the proposed changes to the profit policy.

2.279 Strengthening the monitoring of contracts. Contract auditing is an important element of monitoring contract performance. About 11 percent of contracts, representing 61 percent of contract value, are priced on cost-plus or other mechanisms that could create incentives for contractors to charge the government for borderline or even invalid costs. In 1988, we reported a number of opportunities to improve audits of contract performance. In summary, the Department could improve its selection of the contracts it audits, and individual audits could focus more on determining whether the Crown was paying too much for goods and services.

2.280 To improve contract selection, the Department has implemented a sampling plan to select the optimum mix and coverage of contracts to audit. To catch up on its backlog and implement its sampling plan, the Department decided to skip two sample years. Officials point out that their audits of contracts have uncovered a relatively low level of non-compliance. Further, they can always look at past years should future audits suggest a problem with particular suppliers.

2.281 One indicator of the effectiveness of individual audits is the proportion of unallowable costs detected by audits to the amount actually recovered. In 1991-92, the Department's audits identified $13 million in non-allowable costs. Of that amount, it now estimates that it will recover about $6.5 million. The Department is analyzing why 50 percent of the disallowable charges found by audit are ultimately collected, and whether changes might be needed either in audit practices or in procedures used to negotiate the disposition of findings.

2.282 Linking "track record" of suppliers to contract awards. For a number of years, unsatisfactory performance by suppliers has been recognized as a problem entailing additional cost to the government. In our 1991 Report, we recommended that Supply and Services investigate the feasibility and cost-effectiveness of revising its computer systems to include key information related to suppliers' past performance.

2.283 In May 1993, the Department produced a draft Supplier Sanctions Policy that calls for assessing suppliers' performance and provides for sanctions against those who do not perform satisfactorily. The Department is in the process of testing its Vendor Information Management system, a prerequisite to both implementing the policy (once it has been approved) and dealing effectively with the problem of unsatisfactory performance by suppliers.

Weighing the costs and benefits of secondary objectives of procurement activities
2.284 Government procurement policies and practices can produce certain secondary benefits, such as more opportunities for Canadian suppliers through Canadian content requirements, and increased industrial and regional development.

2.285 Canadian content policy. Our 1991 audit found that certain aspects of domestic preference policies were complex to administer and might conflict. Furthermore, the policy to buy Canadian products encourages the use of domestic agents by foreign suppliers. These agents charged approximately 16 percent to cover their administrative costs and profits. We recommended that if the policy of providing preference to domestic agents continued, procedures be established to evaluate the additional costs and benefits of applying the policy.

2.286 The Department introduced a new Canadian content policy on 1 April 1992. Where allowable under trade agreements, the policy gives preference on the basis of the origin of goods and services rather than distribution channels. For certain contracts, suppliers are advised that where sufficient competition exists in Canada, other bids will be rejected.

2.287 The Department does not capture data on the operation of the policy (a policy that we estimate applies to more than 10 percent of procurement contracts over $25,000), and advised that it is not in a position to evaluate the effects.

2.288 Industrial and regional development. In response to our findings in 1991, the Treasury Board Secretariat stated that it was reviewing and updating its policy on management of procurement. One of the objectives of the review was to establish a better framework for analyzing and evaluating proposals to use procurement to promote industrial and regional development in a selective, judicious and cost-effective manner. The proposed framework would include criteria for evaluating project performance risks.

2.289 In June 1992, Treasury Board approved a revised policy on management of procurement. As under the former policy, procurement review committees are convened, as required, to assess the potential for achieving socio-economic benefits case by case.

2.290 The reviews are carried out under a new framework, directed by a senior interdepartmental committee known as the Procurement Strategy Committee, and are chaired by a senior official from Public Works and Government Services Canada. The Committee provides the previously missing link between individual procurements and the government's industrial and regional development policy and direction on other national objectives.

2.291 Operating departments are now required to produce annual forecasts providing details on all planned purchases exceeding $2 million. The Procurement Strategy Committee gives further consideration to any of these purchases that are not subject to international agreements and that have potential for achieving industrial and regional development benefits.

2.292 The new policy requires that any significant increased cost and risk associated with industrial and regional benefits be disclosed and that the source of the necessary extra funding be identified. Although we have not reviewed the documentation on the individual procurement proposals that the Procurement Strategy Committee has considered, we have been advised that the Committee has looked at only a few. In those proposals, operating departments did not identify any significant increased cost and risk attributable to industrial or regional benefits that a proposed procurement strategy might provide.

2.293 In view of our past audit findings in this area, we believe there is a need to review how this policy is being implemented by departments. The Department states that it is a Treasury Board policy, and thus the Treasury Board Secretariat should undertake the evaluation.

Improving productivity
2.294 In our 1987 Report, we noted that the Department had a productivity problem. The services it provided were of adequate quality, but they were expensive. We identified the keys to improving performance as:

  • management attention and leadership;
  • better performance information; and
  • exploiting the benefits available from automation.
2.295 We illustrated the extent of the potential for improvement by comparing cost and productivity levels of different regional offices and identifying significant discrepancies among them. Further, we established that the per-unit cost of administering the public service payroll and superannuation services were between two and three times higher than those of other governments whose quality of service was essentially the same. We estimated that the government could save up to $46 million a year of the $82 million it then spent by bringing its unit-cost in line.

2.296 Since 1987, management has initiated a series of strategic projects and is now providing leadership and focus on productivity. The Department states that between 1987 and 1993 it significantly improved its performance measurement system. It reports that its new system regularly provides data on workload, effectiveness and efficiency, including cross-regional comparisons. While amalgamation of Supply and Services and Public Works into Public Works and Government Services Canada required the redevelopment of corporate systems, inhibiting progress in this area, the Department reports that work is proceeding and will be completed over the next several years. Hopefully, this will enable departmental officials to better analyze their situation, set targets and manage performance, and explain and support their positions.

2.297 The Department has significantly increased its expenditure on new systems development. It has developed and introduced a number of "strategic projects" to update the technology it uses. Significant portions of the computer budget have been reallocated from maintenance to development. The Department estimates that four completed projects have produced annual savings of about $23.2 million.

2.298 For regional variations in cost and productivity, the Department has estimated the amount of work that could be eliminated, in connection with system development plans. Furthermore, it has developed new standards for management and support levels in regional offices.

2.299 Since 1987, the Department has been planning and developing a Public Service Compensation System as one of its strategic projects to reduce costs significantly. Officials project the system will cost about $137 million, come on line in 1996, and save the Department an estimated $24.4 million annually. In the meantime, the Department reports that per-unit costs are generally the same today as in 1987, representing an improvement in efficiency of 18 percent for pay, and 4 percent for pensions (for an overall improvement of 14 percent), when salary increases of 26.5 percent and other changes are factored in.

2.300 The Department agrees with the findings in the 1987 Report. However, it does not believe that the cost differential between provincial and federal systems can be eliminated because of differences in the overall approach requiring a complex model for compensation. The Department maintains that responsibility for the federal government approach to compensation rests with the employer, Treasury Board.

2.301 The 1985-86 comparison of provincial payroll costs indicated that the provincial unit costs were then in the $50 to $70 per account range (federal unit costs were then $172). A 1993-94 survey carried out by the Province of Alberta found unit costs of provincial payroll systems for those with over 30,000 accounts to be in the $45 to $116 per account range. (Federal unit costs are $162 for payroll and $63 for pensions.) The Department estimates that post Public Service Compensation System costs will be in the $80 to $90 range for payroll and the $50 to $60 range for pensions.

2.302 The Office of the Auditor General believes that the Department could have better supported its position as described above, and would be in a better position to move forward, had it:

  • bench-marked its processes and costs to establish targets and quantified the incremental costs of the federal compensation model features; and
  • established the total cost to the government of implementing the Public Service Compensation System.
2.303 The Department reported, in 1988, its intent to proceed carefully, balancing the pressure to reduce costs with the need to avoid past errors and the need for its people to adjust to automation. The Office of the Auditor General accepts that it is the Department's responsibility to make such trade-offs. We have concerns, however, that the returns expected from investment in the Public Service Compensation System may not fully cover its costs, taking into account the combined effects of:

  • the level of improvement sought;
  • the time frames adopted;
  • the time value of money; and
  • the total investment required by the government.
Improving systems development capabilities
2.304 In 1987 we pointed out opportunities to make significant improvements in systems development and computer support. We illustrated the importance of seizing those opportunities by noting systems development projects that had not always fulfilled their objectives and that had not been completed on time and within budget.

2.305 The Office is conducting a government-wide audit of "Systems Under Development". We plan to report our findings on these projects in 1995.

Department's response: The Department is constantly seeking ways to improve productivity and has made good progress since 1987. With respect to the compensation area, once the Public Service Compensation System (PSCS) is implemented, unit costs will be within the range of costs of other jurisdictions. However, the Department does not believe simple comparisons across jurisdictions provide for useful productivity targets. Costs for compensation administration are heavily influenced by the compensation framework, that is, collective agreements and personnel policies. In this regard, the federal system is more complex than provincial jurisdictions. The mandate of Public Works and Government Services Canada is to administer the framework as determined by the employer. The Department advises on the cost implications associated with changes in that framework. It is in no position to assess the relative costs or benefits of that framework.

With respect to the Auditor General's concerns on the business case, the Department believes that the business case for PSCS continues to be sound and in accordance with Treasury Board Secretariat guidelines. As part of its system development methodology, however, the Department is planning a post-implementation review to verify benefits and address this issue.