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1996 November Report of the Auditor General of Canada

Assistant Auditor General: Don Young
Responsible Auditor: Douglas Timmins

Main Points

28.1 The Western Grain Transition Payments Program (the Program) provides $1.6 billion to Prairie landowners to compensate for the anticipated decline in land values attributable to the termination of the "Crow Benefit" transportation subsidy, effective 1 August 1995. The Program's design and administration are the responsibility of Agriculture and Agri-Food Canada.

28.2 The decision to end the long-standing subsidy was one component of a significant change in government policy, aimed at reforming the Western grain transportation system. The decision will contribute to fiscal restraint in the longer term by ending the annual "Crow Benefit" of $560 million.

28.3 The Department was cognizant of problems in the delivery of the Northern Cod Adjustment and Recovery Program (NCARP), which this Office had reported in 1993, and took appropriate steps to avoid repeating them.

28.4 Within 16 months, the Department gathered and processed sufficient data to enable 209,887 landowners to receive an interim payment equal to approximately 71 percent of the total entitlement from the Program. In total, eligible landowners will receive payments of between $7.25 and $48.31 per acre, depending on the distance to port and the productivity of their land.

28.5 We found that the payments were calculated pursuant to the Program's enabling Act and regulations. We also found that the Department made substantial efforts to ensure that the payments were made on a timely basis, given constraints on data availability. In addition, we performed a limited review of the key internal controls governing the payment process. Nothing came to our attention in the course of this review to suggest that there were significant problems with these payments.

28.6 The Department needs to monitor and assess over the long term the direction of changes related to the goal of crop diversification and development of value-added processing industries.

Introduction

Historical background
28.7 From 1897 through 1983, Prairie farmers paid fixed rates for transportation of the majority of Western grain production. In the early 1960s it became clear that the railways were losing money in handling grain traffic, and consequently the federal government introduced various programs to try to maintain and improve the Western grain transportation and handling system. These efforts culminated in the introduction of the Western Grain Transportation Act ( WGTA ), which was implemented in 1984.

28.8 One of the Act's main provisions committed the federal government to sharing in the costs of rail transportation of Western grain destined for specified Canadian ports (primarily Thunder Bay and Vancouver). The government's commitment (the WGTA subsidy, often referred to as the "Crow Benefit" after the Crow's Nest Pass Agreement of 1897) was paid directly to the railroads on behalf of producers. The subsidy was initially set at $658.6 million in 1984, but the government's commitment provided that the amount could vary depending on the results of quadrennial costing reviews and the impact of inflation.

28.9 Fiscal pressures and the results of the 1992 costing review resulted in reductions in the WGTA subsidy, from $726 million in 1992-93 to $560.6 million in 1994-95; further reductions appeared likely. In addition, the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) concluded with announcements that export subsidies (as a portion of the WGTA subsidy was considered to be) would face substantial reductions over the next few years. Further, bottlenecks developed in transporting grain to Canada's export markets, prompting complaints from customers and raising questions about Canada's ability to get the product to market when customers needed it. As part of their pre-1995 Budget consultations, the ministers of Agriculture and Agri-Food and Transport asked for the views of industry and farmers on reforming the Western grain transportation and handling system, including changes to the WGTA subsidy.

Overview of Western grain transportation reform
28.10 The 1995 Budget terminated all federal railway transportation subsidies because the government felt that the Western grain transportation and handling system was slower, costlier and less efficient than was needed by farmers to be fully competitive in world markets. Exhibit 28.1 provides a visual overview of the Western grain transportation reform. The government hoped to achieve four main goals:

  • to contribute to fiscal restraint;
  • to comply with new international trading obligations regarding export subsidies;
  • to encourage the evolution of a more efficient and effective transportation system for moving Western grains to market; and
  • to encourage crop diversification and the development of more "value-added" processing of agricultural products.
28.11 The government believed that it would need to make three major changes to achieve these goals:

  • end the subsidy referred to as the Crow Benefit;
  • allow the sale or abandonment of unprofitable, grain-dependent railway lines; and
  • revamp the Canadian Wheat Board pooling system (the way producers share transportation costs).
28.12 The government recognized that ending the subsidy would have negative financial implications for certain segments of the Western economy. Accordingly, some form of financial assistance would be required to help the affected areas adapt. The Western Grain Transition Payments Program, the subject of our audit, provided $1.6 billion to compensate landowners for the loss of the subsidy, while the Western Grain Transportation Adjustment Fund provided $300 million to help industry adapt to the changes. Both of these programs are components of the government's Western grain transportation reform initiative.

Description of the Western Grain Transition Payments Program
28.13 The stated intent of the Western Grain Transition Payments Program is to compensate landowners for loss in the value of their property attributable to the elimination of the Crow Benefit. This transition program distributes $1.6 billion to landowners in Alberta, Saskatchewan, Manitoba and certain areas of British Columbia, as shown in Exhibit 28.2 . Landowners are eligible to be paid under the Program provided that a crop eligible for the WGTA subsidy was grown in the 1994 crop year or, where the land was summer-fallowed in 1994, an eligible product had been grown in the 1993 crop year. The total compensation was allocated to three regions on the basis of the nine-year average payments from the WGTA subsidy (1985-86 to 1993-94 inclusive), as shown in Exhibit 28.3 .

28.14 The $1.6 billion was to be paid out in two instalments: an interim payment of approximately 75 percent (which had been paid by the time our audit work concluded in August 1996), with a final payment of the remainder scheduled for the fall of 1996. The amount of payment is based on a formula that considers the number of eligible acres; the productivity of the soil; whether or not the land is irrigated; and the distance of the land from the nearest port (the closer of Vancouver or Thunder Bay). Based on data from the first interim payments, the average payment to a landowner will be approximately $7,624 in total.

Focus of our audit
28.15 We conducted this audit with a view to assessing the adequacy of the Program's design to implement the Budget decision; the Department's monitoring of potential impacts; the calculation of payment factors; and the verification of applications and calculation of interim payments.

28.16 Since the Program is also an integral component of the government's efforts to reform the Western grain transportation system, our audit work was extended to examine relevant aspects of the broader objectives of this reform initiative. It should be noted that both Agriculture and Agri-Food Canada and Transport Canada have significant roles in these reform efforts. Our audit addressed only Agriculture and Agri-Food Canada and its responsibilities related to those objectives. Further details are presented in About the Audit , at the end of the chapter. The government's administration of the WGTA Program and certain matters related to the proposed reform were the subject of an earlier Report by this Office in May 1995.

Observations and Recommendations

Learning from a Similar One -Time Federal Payout Program

28.17 Although each one-time payout program has unique characteristics, we expected that this new payout Program would apply lessons from past programs. In addition, we expected that the Department would evaluate the Program to identify lessons for the future.

28.18 In our 1993 Report on the Northern Cod Adjustment and Recovery Program (NCARP), we reported on a number of issues involving payments to individuals affected by the government's moratorium on the Northern cod fishery. As we expected, the Department had considered those issues when developing the control framework for this Program. Exhibit 28.4 summarizes some of our observations on NCARP and the extent to which they were addressed in this Program.

28.19 The Department also took other steps at an early stage to ensure that Program controls were adequate, so that any weaknesses detected could be addressed before interim payments were made.

28.20 An evaluation of this Program would be beneficial in identifying best practices and lessons for future programs. The Department is considering an evaluation of the Program, and has ranked it as a moderate priority in its 1996-97 "Review Plan".

Implementing the Budget Decision

28.21 The Budget decision specified that a one-time payment would be made to landowners to compensate for the decline in land values anticipated as a result of ending the subsidy. We expected that the Department would consider design alternatives to implement the Budget decision.

28.22 In this regard, the Department had available a recent study completed in June 1994 by the "Producer Payment Panel". The Panel had been created in 1993 by the Minister of Agriculture and Agri-Food and given a mandate to develop a mechanism for paying the WGTA subsidy to producers rather than to the railways.

28.23 This Panel included experts and technical working groups, and consulted extensively with interested parties. The Panel and its working groups considered the results of the numerous studies conducted since the late 1970s; it carried out its own analyses and incorporated the relevant considerations arising from more recent events such as the GATT. The Department relied extensively on the Panel's findings and recommendations to determine how to distribute the compensation.

28.24 The Panel recommended that compensation for the loss of the Crow Benefit be assigned to parcels of land and that it take into account the two factors related to the subsidy, namely:

  • the farther the land was from port, the greater the impact on freight costs per tonne; and
  • the more the land produced, the greater the impact on total freight costs.
28.25 Consistent with this recommendation, the Department distributed the compensation to landowners taking into account productivity and distance.

28.26 Paying each landowner the same amount of compensation per acre would have been expeditious but would not have reflected the real impact on land values. By the same token, it would not have been practical to consider the particular impact on each of 210,000 landowners for 730,000 parcels of land and to negotiate an amount of compensation that considered unique circumstances fully, particularly since actual reductions in land values would be difficult to determine and would occur only over time, through natural market forces.

28.27 Further to the Program legislation, the Department developed two payment factors ' distance and productivity ' to allow it to calculate the amount of compensation per acre that a landowner would receive. A third factor - irrigation - was later developed. These payment factors were used to adjust payments to take into account the expectation that removing the subsidy would impact land values in different ways. Payment factors are significant, since their application results in a range of estimated transition payments, varying from $7.25 to $48.31 per acre.

Monitoring Impacts

Measuring the impact of the Program was not considered practical
28.28 Treasury Board requires that departments conduct evaluations of key policies and programs to determine, among other things, whether they are effective in meeting their objectives. Given that the intent of this Program was to compensate "owners of Prairie farm land in recognition of the impact on land values that may result from the termination of the long-standing (subsidized) freight rates", we expected that the specific impact on land values would be assessed. However, the removal of the subsidy is only one among many factors, such as grain prices, that influence land value. The influence of these other factors can be variable and highly significant. The Department concluded that it would not be practical to measure or monitor the specific impact on land values of ending the subsidy. Although the specific impact on land values may not be easily determinable, it and other impacts, intended or unintended, need to be evaluated.

Assessing progress against the broad goals of reform
28.29 Since assessing the achievement of the Program objective ' compensation for the impact on land values ' was not considered practical by the Department, we looked at the extent to which it was measuring and monitoring the broader impacts of the removal of the subsidy. The government had established four broad goals for transportation reform (see Exhibit 28.5 ). The Department considers that the intended impacts in all four areas have been achieved, in that this compensation program has permitted the transition to the new transportation system while also contributing to fiscal restraint, complying with international trading obligations and removing impediments to crop diversification.

28.30 Previous studies that looked at terminating the subsidy had predicted that it would result in crop diversification and livestock production as well as the development of value-added processing industries. Therefore, the fourth goal has more ongoing significance to the Department. We expected that the Department would monitor those outcomes to determine whether, in general terms, the anticipated changes occurred over time or, if not, whether the reasons were known.

28.31 The Department is monitoring a wide range of indicators; however, it does not specifically monitor the intended and unintended impacts of removing the subsidy. The Department believes the range of factors that can affect these indicators makes it difficult, if not impossible, to analyze the results.

28.32 We acknowledge that it is difficult to determine the extent to which ending the subsidy has contributed to crop diversification and the development of value-added processing industries. Nevertheless, the Department needs to be able to answer the questions, "Where is the agriculture sector relative to where it was expected to be after the subsidy ended?" and "Is further action by this department necessary and appropriate?" We believe that it is possible for the Department to determine the direction of change in relevant indicators it anticipates over the long term as a result of ending the subsidy. Then, as part of its ongoing monitoring of these indicators, it needs to assess whether the direction of actual change is as anticipated and, if not, whether the reasons can be determined.

28.33 The Department should :

  • evaluate the Western Grain Transition Payments Program to capture lessons for future programs and to assess its impacts, both intended and unintended; and
  • assess the direction of changes over the long term related to crop diversification and the development of value-added processing industries in Western Canada.
Department's response: The Department accepts the Auditor General's recommendations.

Agriculture and Agri-Food Canada is proud of the successful implementation and sound financial management of WGTPP and is encouraged by the extent to which the results of the Auditor General's audit acknowledge WGTPP as an administrative success.

The size of this program, the difficulty in obtaining the required data and the need to get payments out quickly all posed enormous challenges to the Department. It has responded to these challenges in a spirit of fairness and equity while respecting the imperative of fiscal responsibility and the interests of the Canadian taxpayer.

A study has been initiated to identify "lessons learned". The results of this study will be shared broadly within the Department and, as appropriate, throughout the federal government at large.

Review of Interim Transition Payments

28.34 There are two significant areas of the Program's delivery: calculation of payment factors; and verification of applications and calculation of interim payments. We expected to find that payment factors had been calculated in accordance with the Program's enabling Act and regulations and taking into account to the extent possible the fact that the elimination of the WGTA subsidy would affect different landowners in different ways. We also expected to find appropriate controls in place to verify applications and to calculate interim payments.

Calculation of payment factors
28.35 The Department needed to identify data sources to verify applications. Even the best available data source was imperfect for the task and inconsistent among provinces, complicating the Department's development of payment factors. At the same time, the separate allocations to each province helped to reduce the significance of inconsistencies in provincial data. Not all inadequacies could be addressed, given the data available. However, the Department concluded that, in general, the impact of these issues was not that great. Exhibit 28.6 sets out the three factors, the basis of calculation, and some inadequacies in the data available to calculate each.

28.36 The Department made the conscious decision to avoid making ad hoc changes to payment factors in an attempt to address equity issues. In its view, the factors were reasonable for the purpose intended, and making ad hoc changes could delay payments or could create other problems of equity among landowners or regions. Also, the Department wanted to maintain the transparency and objectivity of the payment factors, which ad hoc changes would diminish.

28.37 One instance where changes were subsequently made involved the adjustment of the payment factors for irrigation, so that irrigated land received higher compensation. The reason for this change was that irrigated land, being more productive, would be more affected by the elimination of the subsidy, as the increase in total freight costs per acre of production would be greater.

28.38 Factors used generally provide for consistency within a province. Before finalizing payment factors, the Department considered alternatives and did substantial analysis of the potential impact of the payment factors it ultimately used. For example, it analyzed the differences in payments per acre between adjacent rural municipalities, and made adjustments to generally keep payments within $2 per acre in Saskatchewan and Manitoba and $4 per acre in Alberta for contiguous land parcels within a province and with similar soil.

28.39 Consistency among provinces is not as high as within a province. Achieving similar payments for similar land across provincial boundaries is more difficult for a number of reasons. First, the legislation governing the Program set separate allocations by province. Further, landowners are eligible for payment if their crops were eligible for the WGTA transportation rates, even if a particular landowner never actually shipped grain. In Alberta, the sharing of the Program allocation among a larger base of landowners than those who received WGTA subsidies has a greater impact than in the other provinces, since historically a higher percentage of Alberta's crops that were eligible under the WGTA subsidy were used for animal feed, not shipped.

28.40 The Department analyzed the significance of cross-province inequities. We reviewed the Department's analysis of parcels of land on either side of provincial borders where parcels have similar soil. We reviewed 10 comparisons of land on the Alberta-Saskatchewan border where, in the Department's view, the soils were similar; we found a difference in payments of between $5.58 and $12.46 per acre. In 10 similar comparisons on the Saskatchewan-Manitoba border the difference was between $0.62 and $10.90 per acre.

28.41 The net effect is that application of the payment factors likely results in a high level of payment consistency within provinces but not necessarily among provinces for similar farms. In our view, the calculation of payment factors was reasonable given the fixed provincial allocations, the intended use of the factors, and the time and information available.

Verification of applications and calculation of interim payments
28.42 Interim payment process . The legislation allows interim payments up to 75 percent of the total $1.6 billion available. This is intended to allow relatively quick payment of the bulk of the compensation, with 25 percent held back to allow for a more detailed review prior to final payment. Between February and June 1996, the Department processed applications and made interim payments of $1.134 billion, or 71 percent of the total. The Department tried to get as close to 75 percent as possible, while at the same time being conservative in managing the possible risk of overpayment.

28.43 The Department developed and refined a control framework to deal with specific risks that could result in payment errors, and monitored the controls developed to manage the risk and reduce the chance of payment errors.

28.44 Overall review of applications. Even before beginning interim payments, the Department performed checks on the reasonability of the total number of acres applied for. For example, acres applied for (based on the 1994 base year) were compared with eligible acres reported in the 1991 census. The number of acres applied for was about 3 percent lower than the number shown in the 1991 census and this was deemed reasonable.

28.45 The Department also compared the total number of irrigated acres applied for with available information on total irrigated acres with eligible crops. The number of acres applied for was higher than the total of eligible acres in production. This is significant, since irrigated land has a high productivity factor and consequently receives a higher per-acre payment than dryland acres. As a result, the Department required landowners applying for irrigated acres to provide additional information, including completion of a supplementary application. Based on that information, the Department reduced applications by some 82,000 irrigated acres, or about 11 percent of the total number of irrigated acres applied for. This resulted in redistribution of some $3.3 million to other applicants, although provincial allocations were not changed.

28.46 Verification of individual applications. There were 210,000 applications involving 730,000 parcels of land. Limitations in the available data complicated verification. For example, the Department attempted to obtain computerized information on land titles in order to verify ownership. However, this information was not computerized for all regions. Instead, the Department is using two computer edits to help ensure that payments are being made only to landowners. Exhibit 28.7 describes in simplified terms the data sources and reliability concerns that needed to be managed; Exhibit 28.8 outlines the verification procedures.

28.47 Our review of interim payments . We developed audit procedures in conjunction with the Department's Review Branch, and the Review Branch tested a sample of 158 interim payments. We reviewed that work. We also performed our own procedures for areas such as compliance with authorities and computer controls.

28.48 The Review Branch testing found no significant errors. The computer edits had worked as designed, the computer had applied the payment factors selected, and the interim payments made had been calculated as intended.

28.49 Our review covered only interim payments (71 percent of the total to be paid). Given the inherent limitations in the available data and the limited nature of our review, we cannot provide assurance that individual recipients received the correct payment amounts. However, nothing came to our notice in the course of our review to suggest that there were significant problems with the interim Program payments.

28.50 In its procedures to follow up the interim payments, the Department has identified some minor problems and is taking action to deal with them. For example, it identified some cases where landowners had received more as an interim payment than they were entitled to in total. Action is being taken to recover these amounts, which are relatively small. Other review efforts are continuing beyond the completion of our audit.

28.51 The Department has made arrangements with nine federal departments and agencies to reduce the Program payments to recipients who owe money to the government. As a result, $10.8 million owed to these other departments and agencies has been recovered to date. In addition, repayment schedules have been arranged with recipients that should result in recovery of an additional $6.6 million by these departments and agencies.

About the Audit

Scope

The main subject of this report is the management of the Western Grain Transition Payments Program. Since the Program is also an integral component of the government's efforts to reform the Western grain transportation system, our audit work was extended to examine the relevant aspects of the broader objectives of this reform initiative. It should be noted that both Agriculture and Agri-Food Canada and Transport Canada have significant roles in these reform efforts. Our audit addressed only Agriculture and Agri-Food Canada and its responsibilities related to those objectives. The government's administration of the WGTA Program and certain matters related to the proposed reform were the subject of an earlier Auditor General's Report in May 1995.

In this audit we did not examine the other programs or changes that occurred as part of the government's overall reform measures, including the $300 million Western Grain Transition Adjustment Fund, which only began to distribute funds in July 1996.

We also did not attempt to determine whether the $1.6 billion constituted an appropriate amount of compensation. This is a complex question involving quantitative and qualitative assessments of need, the funding available within the government's fiscal framework, the government's priorities of the day, competing alternative uses for funds and other factors beyond the scope of the audit.

Objectives

We conducted this audit with a view to assessing the adequacy of the design of the Program; the Department's monitoring of potential impacts; the calculation of payment factors; and the verification of applications and calculations of interim payments. Specifically, we:

  • assessed whether the Program had avoided the problems associated with a previous federal payout program of a similar magnitude and with similar logistical considerations;
  • assessed whether the Department had appropriately considered design alternatives for the Program necessary to implement the decision made by the government in its February 1995 Budget;
  • assessed whether the Department was monitoring and evaluating the results or outcomes against those it had expected; and
  • assessed whether the payment factors had been calculated in accordance with the Program's enabling Act and regulations, and in a manner consistent with the design decision.
We also performed a limited review of the controls over the interim payments to determine whether any significant problems came to our notice. In particular, we intended to provide limited assurance regarding the Department's verification of applications and calculation of interim payments.

Criteria

We expected that:

  • the Program would avoid the well-documented problems associated with previous federal adjustment payout programs;
  • the Program's design would consider alternatives necessary to implement the Budget decision;
  • the Department would measure and report the extent to which Program objectives and goals related to transportation reform were being achieved; and
  • payments would be calculated in accordance with the enabling Act and regulations and appropriate controls would be in place to verify applications and to calculate interim payments.

Audit Team

Linda Anglin
Rose Chevrier
John Rossetti
Dale Shier
Tammy Squires

For information, please contact Douglas Timmins, the responsible auditor.