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1995 November Report of the Auditor General of Canada

Main Points

27.1 The Auditor General Act requires the Auditor General to include in his annual Report matters of significance that, in his opinion, should be brought to the attention of the House of Commons.

27.2 The "Other Audit Observations" chapter fulfils a special role in the annual Report. Other chapters normally describe the findings of the comprehensive audits we perform in particular departments; or they report on audits and studies of issues that relate to operations of the government as a whole. This chapter reports on specific matters that have come to our attention during our financial and compliance audits of the Public Accounts of Canada, Crown corporations and other entities, or during our value-for-money audits.

27.3 The chapter contains a number of observations concerning departmental expenditures and revenues. The issues addressed generally involve failure to comply with authorities, and the expenditure of money without due regard to economy.

27.4 Observations reported cover the following:

D subsidy paid for uneconomic main lines that raises concerns about accountability and transparency of the process used;

D interest not being charged on overdue non-tax receivables; and

D funds reallocated under the Nova Scotia Highway Improvement Program.

27.5 Although the individual audit observations report matters of significance, they should not be used as a basis for drawing conclusions about matters we did not examine.

Introduction

27.6 This chapter contains matters of significance that are not included elsewhere in the annual Report and that we believe should be drawn to the attention of the House of Commons. The matters reported were noted during our financial and compliance audits of the Accounts of Canada, Crown corporations and other entities, or during our value-for-money audits.

27.7 Section 7(2) of the Auditor General Act requires the Auditor General to call to the attention of the House of Commons any significant cases where he has observed that:

  • accounts have not been faithfully and properly maintained or public money has not been fully accounted for or paid, where so required by law, into the Consolidated Revenue Fund;
  • essential records have not been maintained or the rules and procedures applied have been insufficient to safeguard and control public property; to secure an effective check on the assessment, collection and proper allocation of the revenue; and to ensure that expenditures have been made only as authorized;
  • money has been expended other than for purposes for which it was appropriated by Parliament;
  • money has been expended without due regard to economy or efficiency; or
  • satisfactory procedures have not been established to measure and report the effectiveness of programs, where such procedures could appropriately and reasonably be implemented.
27.8 Each of the matters of significance reported in this chapter was examined in accordance with generally accepted auditing standards; accordingly, our examinations included such tests and other procedures as we considered necessary in the circumstances. The matters reported should not be used as a basis for drawing conclusions about matters not examined. The instances that we have observed are described in this chapter under the appropriate department headings.

27.9 Consistent with Office policy on the follow-up of matters in our annual Report, other audit observations included in this chapter are normally followed up two years after initial reporting. In our follow-up of the observations included in our 1993 Report, we found that for four of the ten observations, either corrective action had been taken to address the matter or we no longer considered the matter to be an outstanding issue. Six observations remain outstanding because they involve matters that we are continuing to monitor, and any lack of corrective action will be reported as deemed appropriate.


National Transportation Agency

Assistant Auditor General: Shahid Minto
Responsible Auditor: Hugh A. McRoberts

Subsidy to Canadian Pacific Limited for the operation of uneconomic main lines raises concerns about accountability and the transparency of the process used by the government
Pursuant to an Order-in-Council, the National Transportation Agency approved payment to Canadian Pacific Limited of a subsidy of $4.1 million, under sections 178 and 179 of the National Transportation Act, 1987, to reimburse the railway for the costs of continuing to operate two sections of what the Agency found to be its main line in Eastern Canada beyond the date on which the Agency had originally ordered them abandoned. However, those sections of the Act provide for subsidy payments only for the operation of uneconomic branch lines. Although according to the Agency (Decision No. 223-R-1994) it is arguable that the Order-in-Council directing this payment pursuant to sections 178 and 179 may have exceeded its jurisdiction, the Agency was of the opinion that the Order-in-Council had deemed the lines to be branch lines and hence obliged it to make the payment.

This raises questions about accountability and about the transparency of the process used by the government, and about whether, as a result, Parliament's opportunity to review the decision has been abridged. The new legislation pertaining to the Agency, currently before the House, contains similar provisions with respect to the processes to be used, and it is in this context that we report this note.


Background

27.10 February 1993. Canadian Pacific Limited filed applications with the National Transportation Agency to abandon a group of lines associated with its route from Sherbrooke, Quebec to Saint John, New Brunswick (see Exhibit 27.1 ). During June of that year, the Agency held public hearings on the application to abandon. The Agency concluded on 23 August 1993 that the lines were uneconomic and ordered their abandonment one year from that date.

27.11 September 1993. The Governor in Council, on the recommendation of the Minister of Transport of the day, issued Order-in-Council P.C. 1993-1864. The Order directed that the abandonment date be changed from 23 August 1994 to 1 January 1995. It also directed that, pursuant to sections 178 and 179 of the National Transportation Act, 1987 , Canadian Pacific Limited be paid for the continued operation of the lines until they were abandoned.

27.12 January 1994. Canadian Pacific filed an interim claim for the losses incurred in the operation of its uneconomic branch lines during 1993. This claim included the lines referred to in paragraph 27.10. On 5 May 1994 , following a hearing on written submissions, the Agency ruled that certain lines for which losses were claimed (referred to in the abandonment order and Order-in-Council) were not branch lines but were part of the main line of the railway ( see Exhibit 27.2 ) and therefore were not eligible for the subsidy for 1993. As a result, it reduced the payment for Canadian Pacific's 1993 branch line claim by the amounts claimed for main lines.

27.13 January 1995. Canadian Pacific filed an interim claim for the losses incurred in the operation of its uneconomic branch lines during 1994. The claim included losses covering the period from 23 August 1994 to 1 January 1995 on the main lines previously referred to in Exhibit 27.2 . On 18 April 1995 , the Agency approved a payment under sections 178 and 179 of the National Transportation Act, 1987 of $4.1 million to Canadian Pacific for losses incurred on the operation of these main lines (see Exhibit 27.2 ) for the period from 23 August 1994 to 1 January 1995. On this basis, a payment of $3.7 million ($4.1 million less a holdback of $400,000) was made to Canadian Pacific.

Issues

27.14 According to the National Transportation Agency, the authority for the payment was the Order-in-Council given on 23 September 1993. In considering that authority, the Agency stated that since the lines in question are main lines, it is arguable that the Order-in-Council exceeded its jurisdiction by requiring payment of a subsidy pursuant to sections 178 and 179 of the National Transportation Act, 1987 .

27.15 However, the Agency was advised by its counsel that the courts might be reluctant to review and strike down such an Order-in-Council, even if Council had exceeded its jurisdiction in making the Order, where the Order dealt with a matter of public convenience and general policy. The National Transportation Agency also noted that, since the Order was made, it had been neither challenged nor varied. Based on this, the Agency concluded that it must accept that the Minister of the day had deemed the main lines to be branch lines for the purposes of paying the subsidy and must comply with the order to pay Canadian Pacific for its losses in operating these lines for the period from 23 August 1994 to 1 January 1995.

27.16 This outcome raises concerns about accountability and about the transparency of the process used by the government in giving directions to the Agency.

27.17 The National Transportation Act, 1987 provides for two ways in which Council may give direction to the Agency. First, under section 64, Council has the power to vary any decision, order, rule or regulation of the Agency. It was this section that Council used to vary the date of the abandonment orders in this case. However, as the Agency had not made a decision, order, rule or regulation with respect to the classification of these lines of rail at the time the Order-in-Council was made, section 64, according to the Agency, arguably may not be invoked for a subject matter on which the Agency had not made a decision, specifically whether these lines are main lines or branch lines.

27.18 Second, the National Transportation Act, 1987 does provide a method whereby Council may decide to give direction to the Agency on policy matters pursuant to sections 23 through 26, where the matter is not before the Agency on the date the direction is given. These sections provide that before direction from Council becomes binding on the Agency, the direction must be tabled in both Houses of Parliament, and must forthwith be referred to the appropriate committee of the House for its consideration. The direction does not then come into effect until the thirty-first sitting day of Parliament after the tabling has occurred. This process, which was not followed by the government in this instance, is more transparent and provides for greater accountability for the government in giving direction to the Agency than the process used. However, as the matter of whether the lines were or were not main lines was still arguably before the Agency, it is possible that even this process would not have been available.

Conclusion

27.19 By proceeding in the manner in which the government did, the right of Parliament, as set out in the National Transportation Act, 1987, to review and hold the government accountable for the direction to deem a main line to be a branch line may have been abridged.

27.20 At the time of our audit, Parliament was considering Bill 101, which proposes to reconstitute the National Transportation Agency as the Canadian Transportation Agency with different powers in many areas. The new Bill does not propose the continuation of branch line subsidies. However, the provisions regarding the two ways in which the government may give direction to the Agency remain the same under Bill C-101. We believe that the matters discussed in this note may be of value to members of Parliament in considering the new legislation and, in particular, whether Parliament should provide clearer direction on the circumstances under which each provision should be invoked.


Treasury Board Secretariat

Assistant Auditor General: David H. Roth
Responsible Auditor: Trevor Shaw

Interest not charged on overdue non-tax receivables
The government has foregone the opportunity to charge millions of dollars in interest since 1991 on overdue non-tax receivables.


Background

27.21 Cash management is an important part of controlling the costs of government. The Cash Management Improvement Program of the Treasury Board Secretariat began in 1985. Since then, the Treasury Board has reported significant savings as a result of this Program.

27.22 An important principle of cash management is that amounts owing to the government should be collected on or before the due date and interest should be charged on late payments, where this is permitted under legislation or agreement. Whether or not interest is charged on non-tax receivables depends on whether specific authorities and agreements exist to charge interest.

27.23 The need for a general authority to charge interest on overdue accounts was formally recognized when section 155.1 of the Financial Administration Act (FAA ) came into effect in May 1991. This section stipulates that, unless otherwise provided, interest is payable to the government in accordance with regulations on any amount owed as a result of an overpayment or an erroneous payment, or under any other Act of Parliament, regulation, order, contract or arrangement. Regulations have been drafted by the Treasury Board Secretariat, are in the process of legal review, and are expected to be issued sometime in 1995 or 1996. Until these new regulations come into force, departments lack the power to unilaterally charge interest where no other authority applies or where interest has not been negotiated as part of agreements.

27.24 According to the accounts of Canada, 55 departments and agencies reported $4.1 billion (net of allowance for doubtful accounts of $1.7 billion) of total non-tax receivables as at 31 March 1995. Of this total, short-term receivables amounted to $2.5 billion. Short-term non-tax receivables usually do not involve the charging of interest for overdue amounts. These include, for example, receivables arising from the sale of assets and the recovery of expenditures.

27.25 Our analysis indicates that approximately $222 million of short-term receivables as at 31 March 1995 had the potential to attract interest. This figure results from reducing the $2.5 billion total by subtracting all accounts less than 90 days old, unemployment insurance overpayments and penalties receivable, interest-bearing student loans owed to the Crown, and other particular receivables.

27.26 Few of the 55 departments and agencies appear to be charging interest on overdue accounts. According to data in the central accounting system, only eight entities reported collecting such interest during the 1994-95 fiscal year. In total, the amount reported was less than $1 million.

Issues

27.27 The government has foregone the opportunity to charge millions of dollars of interest on overdue accounts since 1991. Using a base of $222 million for 1994-95, we estimate that the government may have potentially foregone up to $17 million in annual interest charges with respect to overdue short-term receivables. This estimate does not include consideration of any interest on unemployment insurance receivables or the potential for additional interest on long-term receivables. The potential amount of additional interest that could be charged on non-tax receivables cannot be practically determined until new regulations pursuant to the FAA are implemented by departments. The actual interest received would depend on the collection of the accounts receivable.

27.28 Regulations for charging interest pursuant to the FAA have taken five years to develop. The Secretariat informed us that it takes time to develop regulations for a variety of reasons. These include attention being given to other priority areas, availability of expert staff, and complexities involved in the charging of interest. By the time the new interest regulations come into force, five years will have elapsed since legislation was passed. This has a consequential financial cost.

27.29 The issuance of these regulations will require departments to review existing authorities, contract arrangements, financial practices, and accounts receivable information. Treasury Board Secretariat has informed us that, as part of maintaining effective cash management, it will provide guidance to departments so they can prepare for the charging of interest under new regulations.

Conclusion

27.30 Due to the time required to implement regulations, the government has foregone the opportunity to charge millions of dollars of interest on overdue accounts since 1991 and to further encourage the timely payment of amounts due to the Crown.


Transport Canada

Assistant Auditor General: Shahid Minto
Responsible Auditor: Hugh A. McRoberts

Funds reallocated under the Nova Scotia Highway Improvement Program Agreement from Highway 104 to the Fleur-de-Lis Trail
Funds allocated under the Nova Scotia Strategic Highway Improvement Program Agreement were transferred from Highway 104 to the Fleur-de-Lis Trail. The transaction was within the authority of the federal Minister of Transport. The two governments have since agreed to reverse their earlier decision.


Background

27.31 The Auditor General of Nova Scotia's Report of 6 April 1995 raised certain issues about the transfer of money from one project to another under this agreement. Because those issues also had potential federal implications, we decided to examine the transaction. In particular, we were concerned with whether there was proper authority for this transfer of money.

The Agreement
27.32 December 1992. The Strategic Capital Investment Initiative was announced as part of the federal Budget. A major element of that initiative became the Strategic Highways Improvement Program.

27.33 February 1993. Cabinet authorized $515 million in funding for federal-provincial agreements under the Strategic Highways Improvement Program, including $70 million for Nova Scotia. The federal funds were to be matched by the provinces on a dollar-for-dollar basis. Cabinet also approved a pro forma agreement that authorized the Minister of Transport to enter into agreements with the provinces that were substantially in accordance with the pro forma agreement.

27.34 The agreement is in three parts: the agreement proper; Schedule A, which sets out the elements of the provincial highway strategy to be pursued under the agreement; and Schedule B, which lists the specific projects approved for funding under the agreement.

27.35 The pro forma agreement specifies that the federal contribution cannot be increased without federal Cabinet approval; the rest of the agreement, including Schedule A, the program strategy, may be amended if the federal and provincial ministers agree. The agreement also creates a Management Committee of two officials, one appointed by each minister, which is empowered to amend Schedule B.

27.36 April 1993. The federal Minister of Transport and the Nova Scotia Minister of Transportation and Communications signed a federal-provincial Strategic Highways Improvement Program (SHIP) agreement. Initially, the agreement was intended to apply all of the funds to those highways in Nova Scotia that were part of the National Highway System.

Issues

The Fleur-de-Lis Trail Amendment
27.37 January 1994. On 29 May 1995, the Minister of Transport reported in the House of Commons that a meeting had been held in January 1994 with the Minister of Transportation and Communications for Nova Scotia. During the meeting the ministers had reached an agreement in principle to provide funding for the Fleur-de-Lis Trail under the SHIP agreement.

27.38 17 February 1994. The Office of the Minister of Transport advised Transport Canada staff of the decision by the federal and provincial ministers to add the Fleur-de-Lis Trail to the projects included under the agreement. The project was to be funded within the existing agreement. The Minister's Office requested Transport Canada to advise the federal member of the Management Committee, and requested that the changes be made at the Committee's earliest convenience.

27.39 18 February 1994. The federal Minister of Public Works and Government Services, on behalf of the federal Minister of Transport, and the provincial Minister of Transportation and Communications announced the provision of funding for the Fleur-de-Lis Trail. A total of $26 million, including $13 million in federal funding, was provided.

27.40 May 1994. Pursuant to the 17 February 1994 instructions from the Office of the Minister, the Management Committee amended Schedule B of the agreement. The funding of $26 million was transferred from a project on Highway 104 to the project for the Fleur-de-Lis Trail. The Fleur-de-Lis Trail is a secondary highway outside of the National Highway System. The Management Committee did not, however, prepare an amending document for ministers to amend the sections of the agreement that require all projects be in the National Highway System.

Conclusion

27.41 The agreement assigns a duty of "project review and approval" to the Management Committee. Normally, such a review would have required that a thorough analysis of the priority, cost, benefits and other merits of the proposed project be presented to the Management Committee before amendments to the agreement were implemented. In this case, however, such a review was pre-empted by ministers who presented the matter as a " fait accompli " to officials who, in the circumstances, could only implement the decision.

27.42 The agreement, as currently worded, clearly indicates that projects funded under the agreement were intended to be projects that were part of the National Highway System in Nova Scotia. Our review of the agreement makes it clear that the ministers jointly had the capacity to amend the relevant parts of the agreement and Schedule A. The 17 February 1994 direction to Transport Canada, and the various public statements made since by both ministers, make it clear that they had the intent to amend the agreement insofar as was required to permit the funding of the Fleur-de-Lis Trail project. Accordingly, we have concluded that the action taken was within the authority of the federal Minister of Transport.

Subsequent Event

27.43 23 August 1995. Nova Scotia's Minister of Transportation and Communications and the federal Minister of Public Works and Government Services together announced their recommendation to their governments to reverse the earlier amendment of the Nova Scotia SHIP agreement, to remove the $26 million that had been allocated to the Fleur-de-Lis Trail and to restore it to the Highway 104 project. Officials in Transport Canada have indicated that they are taking the steps required to make the necessary amendments to Schedule B of the agreement. They have also indicated that the federal moneys paid to Nova Scotia under the agreement for work already done on the Trail will be recovered.