1996 November Report of the Auditor General of Canada

Assistant Auditor General: Robert R. Lalonde
Responsible Auditor: Harry A. Ruthnum

Main Points

32.1 In recognition of the change from commercial transportation to recreational activities and historic appreciation, the nine historic canals were transferred in the 1970s to Parks Canada. At that time, the government decided that "there should be a shift in emphasis in the management of the canal systems from transportation to historic restoration, preservation and interpretation; natural environment preservation and interpretation and optimum use of federal lands."

32.2 There is a significant gap between canal revenue and total operating costs. A number of studies have pointed to the need for restructuring and closing that gap; however, little progress has been achieved. Our audit noted that services do not reflect user demand, canals are not restored or operated in the least costly manner, and there has been a lack of success in finding partners to take over canal responsibilities or contribute to their financing.

32.3 Taxpayers are paying the major portion of expenses incurred by Parks Canada to provide a private benefit to boaters. Canal management has stated that it has no intention of increasing boater revenue such that it covers navigation costs, and that it is not possible to do so.

32.4 Navigation serves a very limited and declining market. In a typical year, no more than 1,370 and 2,200 boats navigate the entire Trent-Severn Waterway and Rideau Canal respectively. Although the canals operate for five months, 80 percent of boaters use them during July and August only. Shortening the navigation season would reduce operating costs by approximately 45 percent. In addition, combining a shorter season with the closing of underutilized locks could result in savings of close to $10 million annually.

32.5 Over the years, the Department of Justice has provided legal opinions on various aspects of the requirement for Parks Canada to provide for navigation. In June 1996, advice was offered which touched on another aspect of the issue. In our view, these opinions do not provide enough guidance on Parks Canada's obligation to provide for navigation. In light of new fiscal realities, Parks Canada's obligation with respect to the requirement to provide for navigation needs to be reviewed.

32.6 Parks Canada is seeking authorization from the Treasury Board to reconstruct a recreational lock at Sault Ste. Marie, in partnership with the Province of Ontario and the City of Sault Ste. Marie. Capital costs are estimated at $28 million over a 30-year period. If a rigorous business case analysis had been performed, continued operation of the historic site and permanent closing of the lock would clearly be the most cost-effective option.

Introduction

32.7 Parks Canada is responsible for nine historic canals: the Rideau, Trent-Severn Waterway and Sault Ste. Marie canals in Ontario; the Carillon, Ste. Anne de Bellevue, Lachine, Chambly and St. Ours canals in Quebec; and St. Peters Canal in Nova Scotia ( Exhibit 32.1 ). These canals, constructed throughout the 1800s, provided vital trade and transportation links as well as the free movement of military troops and supplies in the event of war. They vary from those with single locks, such as the St. Peters Canal, to complex systems of channels and natural waterways, such as the Rideau Canal and Trent-Severn Waterway. The canals contributed to regional trade for several decades, but commercial traffic began to decline shortly after their completion with the introduction of the railways in the 1850s.

32.8 Today, the historic canals are used primarily by pleasure boats. Visitors along the canals use the sites as park land, for picnicking, walking, observation and fishing. In addition to the canals, dams and locks, there are many elements of historical interest, such as lockmasters' houses, blockhouses, powerhouses and machinery. Different periods of canal history are illustrated by means of interpretive exhibits.

32.9 In recognition of the change from commercial transportation to recreational activities and historic appreciation, the historic canals were transferred to the Minister responsible for Parks Canada in the 1970s. All of the canals except two were transferred to Parks Canada from the Department of Transport in 1972. The Lachine Canal was transferred from Public Works in 1978 and the Sault Ste. Marie Canal was transferred from the St. Lawrence Seaway Authority in 1979.

32.10 Parks Canada's management of the historic canals falls under two distinct, yet complementary, mandates: government decisions directing the transfer of the canals to the Department of Indian and Northern Affairs, and sections 16 and 17 of the Department of Transport Act and the Historic Canal Regulations made pursuant to that Act; and decisions pursuant to the Historic Sites and Monuments Act , which provide for "the administration, preservation and maintenance" of national historic sites.

32.11 Parks Canada's mandate for the management of national historic sites derives from the Historic Sites and Monuments A ct . Under this Act, national historic significance is recommended by the Historic Sites and Monuments Board, an independent body that provides advice to the Minister. With respect to the canals, the Board has recommended commemoration by plaque only or commemoration by plaque with a further commitment to preservation and presentation. The Minister may accept or reject Board recommendations.

32.12 All of the canals have been designated as having national historic significance as waterways that are part of Canada's National Canal System. The Minister approved commemoration by means of a plaque for all of the canals but decided that only the Rideau and a portion of the Trent-Severn warranted preservation.

32.13 In November 1987, the Historic Sites and Monuments Board recommended that the Rideau Canal be established as a national historic park, or, failing that, be managed as such. This was approved by the Minister.

32.14 In addition, specific canal structures have been individually designated as worthy of commemoration and preservation due to their architectural significance. These include the Peterborough Lift Lock of the Trent-Severn and the emergency swing dam of the Sault Ste. Marie Canal.

32.15 All except the Lachine and Sault Ste. Marie canals are operating for through navigation. In 1959, the opening of the St. Lawrence Seaway meant the end of transit navigation in the Lachine Canal. Both ends of the canal have been filled in and recreational use of the water is prohibited due to contamination. The Sault Ste. Marie Canal was closed in the summer of 1987 due to a stability problem with the lock wall.

32.16 Government decisions in the early 1970s provided direction to Parks Canada on the management of the transferred canals. In July 1971, with respect to the transfer of the Rideau and Trent-Severn canals, the government directed that "the transfer be undertaken with the clear understanding that the canal systems be maintained and operated with special regard to their important historical values." In February 1972, the government decided that "there should be a shift in emphasis in the management of the canal systems from transportation to historic restoration, preservation and interpretation; natural environment preservation and interpretation and optimum use of federal lands." A plan for the optimum recreational development of the Rideau-Trent-Severn Waterway corridor was also adopted.

32.17 Both the Lachine and the Sault Ste. Marie canals were transferred to Parks Canada with specific mandates distinct from the 1972 decision. With the transfer of the non-operating Lachine Canal in 1978, Parks Canada was to take on, among its other objectives, responsibility for urban and near-urban park development. When the Sault Ste. Marie Canal was transferred in 1979, a government decision directed that it be developed as a heritage park and that lock operation be reduced due to a decline in commercial shipping.

32.18 To date, neither the provinces nor local municipalities have made any financial contribution to defray canal costs, although recreational development is a provincial responsibility. Economic analysis indicates that direct visitor and government expenditures add more than $44 million annually to provincial gross domestic product.

32.19 At the time of the canals' transfer, the Parks program was delivered by the Department of Indian Affairs and Northern Development. In 1979, the program was transferred to the Department of the Environment, along with the historic canals. Then, in June 1993, the program was amalgamated with the new Department of Canadian Heritage. In the 1996 Budget, it was announced that Parks Canada would become a separate service agency. Legislation to create the agency is being drafted.

32.20 Distinct from the creation of the agency, Parks Canada is considering employee takeovers and increased contracting-out of work, where this would generate savings and improve efficiency. Treasury Board's Employee Takeover Policy sets out the government-wide position with respect to employee takeovers in general. The Department of Canadian Heritage has recently been declared a Most Affected Department. To be designated as such, a department needs to demonstrate to the Treasury Board that it will not be able to meet expenditure reductions using attrition or existing tools that emphasize the placement of surplus personnel. If implemented, these changes may provide Parks Canada with greater flexibility in the way canal services are delivered.

32.21 Total operating expenses of the nine canals amount to approximately $24 million annually; capital costs average $11.5 million annually. In addition to providing navigation services and preservation of canal structures, Parks Canada provides a number of other services in connection with the canals. These include water control, wetland and wildlife conservation, realty rights and privileges, interpretation and recreational services. However, a significant proportion of canal resources is spent in providing for navigation and in maintaining canal structures. Operations and maintenance expenses for the Rideau and Trent-Severn comprised 76 percent of their total operating expenses in 1994-95 ( Exhibit 32.2 ).

32.22 Canal expenses quoted in the chapter exclude costs relating to specialized services, such as archaeology, historical resource conservation, cultural resource management, advisory and business management, and historical research, as well as administrative overhead costs. These costs relate to the operations of headquarters and the Cornwall District Office, and are not allocated by Parks Canada as overheads to canal expenses.

Focus of the audit

32.23 Our audit objective was to assess whether Parks Canada is managing the canals in an efficient and cost-effective manner, given its mandate and priorities. Further details on the audit objective, scope, criteria and approach are found at the end of the chapter in the section About the Audit .

Observations and Recommendations

Need for a Different Approach

Slow progress toward change

32.24 During the last 11 years, the canals have been subject to a number of reviews to identify opportunities for streamlining and savings. These reviews are presented in Exhibit 32.3 .

32.25 The report resulting from the Nielsen Task Force on Program Review recommended increasing canal revenues to cover operations and maintenance costs over a five-year period; approaching the provinces and municipalities for a contribution to operating costs; changing the Sault Ste. Marie Canal to non-operating status; and more extensive contracting-out of maintenance operations. Except for negotiations with the provinces, which were unsuccessful, these recommendations were largely ignored.

32.26 The Heritage Canals Task Force Report reviewed Parks Canada's mandate, legislation, policies and functions relating to heritage canals. It noted that navigation consumed the major part of both capital and operating resources, followed by preservation, while interpretation and recreation received the lowest level of resources. The report considered options for reducing canal operations. Its recommendations focussed on ownership of the canals, the need to increase revenue and the canal's share of parliamentary funding, and the need to transfer the Lachine Canal to another agency or government.

32.27 The 1993 Operational Reviews of the Rideau Canal and Trent-Severn Waterway were conducted in response to a management proposal that the canals reduce their service to better reflect levels of use. That proposal would have resulted in a significant reduction in the hours of work for operating staff and in the level of service to the public. At that time, the Program Management Committee agreed to fund the Ontario Region's shortfall for the 1993-94 fiscal year, but expected the study to identify ways to reduce total operating costs by 30 percent and increase revenue from $2 million to $5 million, commencing in 1994-95. The National Operational Review included preliminary analysis with respect to reducing canal services, although no effort was made to accurately calculate savings. The review concluded that the canals should continue to operate as navigation systems, while recognizing that the costs of operation far outweigh the revenues received. It was recommended that Parks Canada commence negotiations with the Treasury Board on revenue retention and status as a special operating agency.

32.28 In 1994, an independent, external Canals Review Team was established. In its 1995 report Corridors of Change , the Team recommended increasing revenues through a number of activities and decreasing costs through reorganization and better use of lock operator time. This report contributed to the consolidation and realignment of canal functions and the pursuit of a variety of revenue sources. After two decades of stable staffing levels, the number of employees on the Rideau Canal and Trent-Severn Waterway has been reduced by 16 percent, from 373 in 1993-94 to 312 in 1995-96.

32.29 The Canals Review Team noted, "Operating costs are too high for the number of boaters served during significant parts of the year, mainly in the shoulder season, and in certain underutilized parts of the canals. The canals can no longer afford the luxury of current staffing levels and practices." The Team commented, ``The federal government and Parks Canada policies are very clear. Where services are provided primarily for personal benefit, the cost must be recovered through user fees. Marine fees very clearly fall under this user-pay policy." Despite these findings, the Corridors of Change report recommended the continuation of canal hours of service for the next five years, "in order to provide stabilized hours of operation and to support tourism marketing initiatives."

32.30 While the studies pointed to the need for restructuring and closing the gap between total operating costs and revenue, no fundamental change in canal services has been implemented. Maintaining the status quo in terms of services has resulted in revenues covering only a small percentage of costs, services that do not reflect user demand, canals that are not restored or operated in the least costly manner, and a lack of success in finding partners to take over canal responsibilities or contribute to their financing. In addition, we noted that neither the canal management plans nor the Central and Eastern District Business Plan offer any substantial change to the current way of operating.

Significant gap between revenue and total operating costs

32.31 The canals have made little progress in closing the gap between revenue and total operating costs ( Exhibit 32.4 ). In 1994-95, revenue for the Rideau and Trent-Severn (excluding a back payment for hydro-electricity generation) covered 8.9 percent of total operating costs and 9.2 percent for all canals. By comparison, nearly a decade earlier in 1985-86, revenue covered 7.7 percent of total operating costs for the Rideau and Trent-Severn, and 9.5 percent for all canals.

32.32 In 1995, Parks Canada management directed the two canals (Rideau and Trent-Severn) to achieve a 20 percent reduction in total operating budgets over a three-year period, from 1995-96 to 1997-98. This reduction represents $1.2 million for the Rideau and $2 million for the Trent-Severn. In addition, revenue is to increase by approximately two and a half times, from $2 million to $4.8 million, over the same period.

32.33 The canals have requested an extension of the three-year timeframe to increase revenues. As a result, the period has been increased to four years. Even with the extended timeframe, the Rideau and Trent-Severn expect a significant gap between actual and projected revenue. Total projected revenues show an increase from $2 million in 1995-96 to $3.4 million in 1998-99 ( Exhibit 32.5 ).

32.34 Actual revenue for 1995-96 amounted to $2 million, with the Rideau Canal generating $0.5 million and the Trent-Severn $1.5 million. The revenue increase from previous years is almost entirely due to a renegotiated hydro-electricity agreement on the Trent-Severn. As a result of this agreement, hydro-electricity revenue will remain constant over the long term.

32.35 Total operating expenses for the Rideau Canal declined by $0.27 million or four percent in 1995-96, and by $0.15 million or one percent for the Trent-Severn. Even with a 20 percent reduction, total operating expenses for the two canals will still be over $14 million annually.

32.36 Parks Canada should re-examine its options and develop a realistic strategy and action plan that will lead the organization toward reducing costs and increasing revenues across the entire canal system.

Department's response: Parks Canada is implementing significant cost reductions across the canal system. Some costs are due to the restoration and preservation of Historic Canals for the benefit of all Canadians, and are appropriately funded through general government revenues. No feasible way has yet been identified to derive revenue to offset other costs, from all those who enjoy the many benefits associated with recreational activities and water management.

Boaters pay only a small fraction of the cost of canal services

32.37 All of the canal studies indicate that lockage fees paid by boaters fall well short of the costs of operating the locks. Based on lockage and mooring revenue and the reported number of vessels, boaters paid an average of $3.48 per lockage in the 1995 season compared with $2.75 in 1988. Revenue from boaters covered only five percent of total operating costs in 1995-96.

32.38 The situation is not improving. Over the past eight years, total lockage and mooring revenues have declined by one percent, and there has been a 6.5 percent decline since the 1990 season, when revenues from boaters peaked. The decline in revenues is primarily due to a reduction in the number of boaters ( Exhibit 32.6 ). This declining trend has continued in the 1996 navigation season. Results for the first four months show a decline of 8 percent in the number of boats for the Rideau Canal and 13 percent for the Trent-Severn Waterway.

32.39 Should the decline continue, even with fee increases, boater revenue is likely to cover an even smaller portion of navigation costs. It was reported in the 1995 Corridors of Change report that there is a strong feeling among many boaters that they must shoulder an unfair share of canal operating costs. This same report emphasized that "boaters pay only a small fraction of canal services." This has been a long-standing dilemma for Parks Canada. If lockage fees are increased, then the number of recreational boaters may decline, calling into question the need for an operating canal system. Parks Canada has not developed a solution for dealing with this important issue.

32.40 Taxpayers are paying the major portion of expenses incurred by Parks Canada to provide a private benefit to boaters using the Rideau and Trent-Severn systems. The fact that boaters pay considerably less than their fair share of costs contributes significantly to the revenue gap. Canal management has indicated that it has no intention of bridging the gap between navigation costs and revenues and that it is not possible to do so.

32.41 Parks Canada should rethink its provision of navigation services, in order to ensure that its services are relevant, affordable and responsive to the changing needs of Canadians.

32.42 Parks Canada should develop a strategy to deal with the potential situation of increased lockage fees and declining numbers of recreational boaters. It should ensure that revenue from navigation more closely approximates navigation costs, in accordance with directives of the Treasury Board.

Department's response: Navigation is only one of a number of services provided for under Parks Canada's mandate for the Historic Canals. Boaters should pay an equitable portion of the cost of canal services in line with the application of the government's user pay principle. Fees from boaters should not exceed their fair share of costs. Research for the purpose of allocating costs between water-based and land-based users and between those who benefit by being on the canal and those who benefit from water management are complex and expensive. Such data would only be of use if these benefits and their costs could be linked to a feasible collection system.

Constraints to achieving savings

32.43 Salaries make up the largest portion of the Rideau Canal and Trent-Severn Waterway budgets. Employees who work a full year require 2,080 working hours. Lockmasters and lock operators have traditionally worked the majority of these hours during the five-month navigation season. This has resulted in staff working longer hours than required by boater demand, particularly in the fall and spring shoulder seasons. It has also resulted in maintenance/water management assignments, subsequent to the navigation season, designed to enable employees to work the full 2,080 hours. However, there are numerous maintenance staff on both systems, and specific water management staff on the Trent-Severn Waterway, where most water management occurs.

32.44 In an attempt to achieve the savings required in operating costs, management delayed the callback of some lock operators in the spring of 1995 and 1996, reduced the hours of operation by one to two hours per day, and reduced the number of personnel used in water control. As a result, a number of lock operators have become seasonal employees. Grievances were received on both canals, challenging the employer's right to change the tenure of employees from full-time to seasonal status. The employees also grieved that this change in hours constituted a work force adjustment situation and, as such, the employer should have provided the affected employees with the entitlements provided by the Work Force Adjustment Directive. If the affected employees are successful in their grievance, the projected cost savings will not be realized this year.

32.45 The canals also proposed operating most lock stations with one person in the spring and fall shoulder seasons. However, the Canada Occupational Safety and Health Regulations, which fall under the Canada Labour Code, require that where a worker is exposed to a hazard of drowning in the workplace, another person be made available to operate all the emergency equipment. The canals have partially offset this decision by using crews that serve more than one lock station in the shoulder seasons, where locks are in sufficiently close proximity.

32.46 The above interpretation of the Canada Labour Code has limited the ability of Parks Canada to take advantage of other potential savings. For example, we noted that many of the Trent-Severn locks are mechanized, with lock gates operated by means of push buttons. However, two staff members are still required to operate each lock. While accident records lack detail on the causes and seriousness of accidents, management has indicated that no serious accident has occurred to staff due to operating the locks. In addition, the original Rideau-Trent-Severn Waterway Corridor report indicated that power assists could be applied to the traditional Rideau Canal locking mechanisms. This would allow one staff member to operate each lock. The option has not been investigated, even for locations where there is virtually no historic fabric remaining.

32.47 It is expected that further revenue generation and/or expense reductions will be required of the canals beyond those already set out, as indicated in a memo issued to all staff in May 1996. With declining parliamentary appropriations, greater progress is needed in reducing total operating costs. Labour management is perhaps the most critical element to the future success of the canals, and has a direct impact on options for the future.

32.48 In its negotiation of labour agreements, Parks Canada should strive for greater flexibility in staffing arrangements to help ensure the long-term financial viability of the canals.

Department's response: Agreed. Parks Canada, as recognized by the auditors, will continue to search for innovative staffing arrangements.

Navigation services provided despite limited demand

32.49 Canals are currently open for navigation for five months, from mid-May to mid-October. Statistics indicate that there are fewer boaters using the locks in the months of May and October. In fact, the majority of boater needs could be met by operating the locks during July and August only ( Exhibit 32.7 ). Based on our analysis, operating costs would be reduced by an estimated $4.7 million while still meeting the needs of 80 percent of the boaters.

32.50 Only a few of the lock stations are extensively used on the Rideau and Trent-Severn systems ( Exhibit 32.8 ). A lock station may represent one lock with two staff members, or a flight of locks with a number of staff members. Boater data are compiled on a lock station basis, in order to avoid double counting boats as they pass through a flight of locks. As is illustrated by the graphs, in a typical year no more than 1,370 boats navigate the entire Trent-Severn Waterway, and no more than 2,200 boats navigate the entire Rideau Canal. Providing continuous through navigation therefore serves a very limited market.

32.51 Additional savings could be attained by closing the locks that boaters use infrequently. We have determined that 64 percent of the Rideau locks could be closed (30 out of 47 operating locks) and 55 percent of the Trent-Severn locks could be closed (24 out of 44) while still meeting the needs of 71 percent of the boaters. We estimate that this measure would provide an annual saving of approximately $7.7 million in operating, maintenance and administration costs. Based on our analysis, combining a shorter season with the closing of underused locks could result in savings of close to $10 million. There may be legal implications associated with closing the locks, as discussed in paragraph 32.58.

32.52 Exhibit 32.9 illustrates our estimate of potential savings based on Parks Canada's financial records. These records do not track actual costs per lock or lock station. Therefore, our calculations are based on an average cost per lock. To determine savings more precisely, Parks Canada would need improved costing information.

32.53 Our estimates are conservative. We have indicated that shortening the navigation season from five months to two months would reduce operating costs by 45 percent. This is to provide for water management activities and the longer hours worked in July and August. As indicated elsewhere, Parks Canada does not separately track the cost of water management for navigation versus flood control. Although capital savings would be realized, particularly in discontinuing some lock operations, we have not provided an estimate due to the limited information available. It is not known to what extent capital and maintenance costs are incurred to provide for safe navigation, in addition to preservation of canal structures.

32.54 To operate within lower appropriation levels, Parks Canada should study options to streamline its activities by being more aware of its market. These options should include consideration of more innovative modes of operation and improved use of available technology where appropriate.

32.55 Where locks are underutilized, the provinces or municipalities could be provided with the option of contributing financially or assuming lock operation, with the alternative being closure of the lock in the event that no interest is expressed.

32.56 Costs relating to individual lock stations should be compiled, reported and used in making decisions with respect to canal operations.

Department's response: Parks Canada will continue to meet the legal requirement for the provision of through navigation on the Historic Canals in the most effective and efficient manner. Parks Canada is building demand through marketing, innovative operating procedures and partnership possibilities within the government's mandate.

Obligation to provide for navigation unclear

32.57 The issue has been raised of whether Parks Canada has a statutory obligation to maintain navigation along the Trent-Severn Waterway and Rideau Canal. When the canals were transferred from the Department of Transport, the legislation governing them was not changed. Therefore, the powers, responsibilities and functions of Parks Canada with respect to historic canals are included in sections 16 and 17 of the Department of Transport Act , and its associated Historic Canal Regulations.

32.58 Over the years, the Department of Justice has provided legal opinions on various aspects of the requirement for Parks Canada to provide for navigation. In June 1996, advice was offered which touched on another aspect of the issue. In our view, these opinions do not provide enough guidance on Parks Canada's obligation to provide for navigation. In light of new fiscal realities, Parks Canada's obligation with respect to the requirement to provide for navigation needs to be reviewed.

32.59 Parks Canada's current emphasis on navigation severely limits the ability of the canals to become financially viable. Without the requirement for navigation, the costs of operating and maintaining the canals would be significantly reduced. By closing parts of both canal systems, revenue from navigation would more closely approximate navigation costs, in line with Treasury Board policy on cost recovery. This could lead to greater interest on the part of other levels of government or private enterprise to assume responsibility for part or all of canal operations.

32.60 Parks Canada should:

• clarify its obligations with respect to navigation;
• establish clear priorities with respect to navigation, preservation of canal structures, historical presentation and natural resource conservation; and
• implement actions that reflect those priorities.

Department's response: Legal advice to Parks Canada has confirmed a legal obligation to provide for through navigation on the Rideau and Trent-Severn canals. Parks Canada has shared that advice with the auditors.

Planning to Meet the Future

Adequate information not available for establishing user fees

32.61 In March 1994, Parks Canada introduced a policy whereby user fees would shift the burden of paying the costs of government services from taxpayers to those who benefit most directly. This means that services that benefit the public in general should be funded from appropriations, but services that provide primarily personal benefits to individual users should be funded out of revenues collected for those services.

32.62 Parks Canada has targeted the realty rights and privileges area as the major source of future revenue growth. In addition, Parks Canada has significantly increased fees in this area, which includes hydro-electricity, over the past eight years ( Exhibit 32.10 ). For 1996-97, proposed fee increases included:

• charging commercial waterlots a new annual rental fee of $50 per vessel for their docking facilities (delayed for the 1996 season, pending further consultation);
• doubling the minimum annual rental fee for access lots;
• increasing dredge and fill permits by 40 percent for non-commercial operations, 185 percent for existing commercial operations, and 615 percent for new commercial operations;
• doubling the minimum annual rental fee for utility and cable crossings; and
• increasing the minimum fee for municipal sewer outfalls by 150 percent.

32.63 While significant fee increases are being implemented for realty rights and privileges, on a full cost-recovery or cost-recovery-plus basis, those who benefit most from an operating canal system, the boaters, faced a lockage fee increase of only 10 percent for 1995-96. It is not possible to make comparisons with the subsequent year, as the basis on which fees are determined has changed. This has resulted in some boaters paying more and others paying less, depending on length of boat and type of permit.

32.64 Accurately determining the cost of Parks Canada's services and their primary beneficiaries is vital in establishing user fees that are fair both to the individuals receiving personal benefits and to taxpayers.

32.65 The fact that others benefit from the existence of a waterway has been used to argue that the actual costs incurred in providing for navigation should be shared. For example, a number of Parks Canada reports indicate that navigation represents a benefit to land-based visitors, who have the opportunity to view the boats on the canal system. Accordingly, navigation is partially a public good and the cost should be shared by all taxpayers.

32.66 There are no recent visitor surveys that support the crucial assumption that land-based visitors receive a personal benefit from watching boats pass through the locks. The last survey of land-based visitors was completed in 1987. While that survey found that 57 percent of visitors to lock stations watched boats lock, it did not address whether land-based visitors were willing to pay for the benefit of watching boats. The survey also did not include the large number of visitors to the canals who do not visit lock stations. Parks Canada introduced a "report card" style survey for the 1996 season. This survey asks land-based visitors if they watched the boats lock through. However, it does not ask visitors if this activity is important to them, or whether this is a benefit that they should pay for. In fact, when land-based visitor fees were introduced at lock stations, attendance dropped dramatically. It is difficult to argue that land-based visitors are receiving a personal benefit when they are unwilling to pay a minimal amount for it.

32.67 The Corridors of Change report states that 33 percent of total operating costs are allocated to land-based users, presumably for ground maintenance and a share of the maintenance of canal structures. The remaining costs associated with navigation are reduced by an additional 40 percent, due to an estimated public benefit. As a result, the reported cost of navigation is a fraction of the real cost incurred by Parks Canada. In addition, overhead costs and recapitalization costs are not included in the calculation. This method of cost allocation results in questionable information for use in determining user fees.

32.68 Parks Canada does not have adequate financial information to establish user fees accurately. For example, the additional maintenance and capital costs incurred to keep the locks operating and to ensure safe passage are not tracked separately from historical preservation costs. Parks Canada has indicated that the canal staff have significant responsibilities with respect to water control. However, there is a lack of both cost and performance information for this function. Consequently, the costs incurred to control and monitor water levels for navigational purposes compared with flood control and other purposes are not available, nor is there an appropriate basis for assigning resources to this function. This lack of complete cost information makes it difficult for Parks Canada to establish a fee structure that is sound and that reflects the costs of services provided.

32.69 Parks Canada should ensure that it has gathered the appropriate information and performed the cost analysis necessary to establish user fees that are in accordance with Treasury Board policy. It should conduct a rigorous analysis of the public and private benefits derived from the canal systems, such that the establishment of user fees is properly supported.

Department's response: Parks Canada is improving its gathering and analysis of cost and performance information by class of beneficiary and will apply this information to the efficient management of the canal system.

Accountability not built into management plans

32.70 The development and management of each historical canal and its associated lands is based on a management plan, prepared by each canal, which establishes the direction of the canal for the next 10 years. The management plan for the Rideau Canal was completed in December 1995. The Trent-Severn management plan is in the final departmental and consultation phase.

32.71 Our examination of both the Rideau and Trent-Severn management plans and the Central and Eastern District Business Plan found that they do not adequately present realistic options for the future. The plans do not include an analysis of canal use to help identify potential operating efficiencies; nor are any concrete actions proposed for achieving cost recovery. The management plans lack specific operational objectives and timeframes for which canal management could later be held accountable. For example, while the plans focus extensively on partnership, there is no indication of which responsibilities, if any, will be divested to the partners, and what financial contribution toward operating costs Parks Canada expects from them. This information is also lacking in the Business Plan. Without this information, it is difficult to understand how the objectives of each plan can be achieved.

32.72 Parks Canada should ensure that each canal management plan has clear objectives, associated activities and timeframes, and a clear accountability for meeting the established objectives.

Department's response: Management plans, business plans and management agreements together provide an integrated, comprehensive framework of planning and accountability for meeting established objectives.

Non-compliance with intent of Business Plan

32.73 The Parks Canada Business Plan, which was finalized in February 1995, covers the period 1995-96 to 1999-2000. It encourages Parks Canada managers to adopt more businesslike practices in the management of public funds. It also includes accountability for the wise and efficient use of resources. Investments are to be based on strict guidelines, criteria and objectives. We are concerned that a subsequent major investment decision, relating to the reconstruction of the Sault Ste. Marie Canal, was not in accordance with the intent and objectives of the Business Plan ( Case 1 and Exhibit 32.11 ).

32.74 Parks Canada should ensure that major projects are subject to a rigorous business case analysis prior to decision making.

Department's response: Agreed. A business case analysis for the Sault Ste. Marie Canal began in 1988 and culminated with an agreement in principle in October 1994. The Parks Canada Business Plan was approved in 1995.

Preserving the best of the past - developing an approach for the management of historical resources

32.75 The Rideau Canal and Trent-Severn Waterway have an estimated asset replacement cost of $913 million, which includes such assets as dams, locks, channels, walls, wharves, banks and buildings. Approximately 90 percent of these assets are marine structures. To the extent that all of these structures will eventually require recapitalization, they also represent a significant potential liability for Parks Canada. How these assets are recapitalized will therefore have a significant economic impact.

32.76 In 1985, a detailed assessment of structures on the Rideau Canal was undertaken to determine the best surviving examples. In order to select those most suitable to receive the fullest heritage protection, the structures were categorized as to high, medium and low historical significance ( Exhibit 32.12 ).

32.77 Criteria used in the assessment were the uniqueness and structural integrity of the asset, and overall integrity of the site. With respect to structures with low historic significance, the report states, " Structures in this class have undergone significant alterations or else have been reconstructed in concrete with a stone masonry facade resulting in significant loss of original fabric ."

32.78 In 1995-96, assets on both canals were categorized into three levels - Level 1, Level 2 and Other - in accordance with the Cultural Resource Management Policy. A number of structures were classified as having higher historical value in 1995 than in 1985. In fact, a number of structures previously found to have low historical significance became Level 1 assets, with highest historical significance. Exhibit 32.13 illustrates the changes for locks only on the Rideau system, although similar trends can be found for other canal structures, such as dams and bridges. We were informed by Parks Canada that the rationale for the change is based on intangible historic values rather than engineering assessments. We are concerned that such an assessment does not take into consideration reconstruction and restoration costs in a time of constraint.

32.79 The Rideau Canal has 91 assets identified as Level 1; 47 identified as Level 2; and 70 identified as Other. For the Trent-Severn, there are 30 Level 1 assets, 139 Level 2 assets and 184 assets rated as Other.

32.80 The original intent of classifying the structures along the canals was to identify the best surviving examples to preserve for future generations, based on their uniqueness and structural integrity. Had this classification been used, it would have enabled Parks Canada to target its scarce resources to preserving fewer assets. However, there is currently an extensive list of Level 1 assets that have not been prioritized, all of which are considered equally significant, and which will require full heritage protection. We were informed by management that sufficient funds are not available for recapitalization, yet there is no rational basis on which to allocate funds among competing projects.

32.81 We are also concerned about the treatment of resources rated as Other, which have little or no remaining historical fabric. The cost of replicating these assets is significant, as illustrated by the Ottawa locks case ( Case 2 ). It is not evident that all of these structures need to appear historical or be operated in an historical fashion. Both maintenance and recapitalization costs could be reduced through careful selection and preservation of a few representative examples.

32.82 Parks Canada should review the categorization of assets for the purposes of protection and preservation so that available funds can be directed to those of greatest historical value.

32.83 Where structures are restored so that little historical material remains, Parks Canada should consider the most cost-effective options.

Department's response: Agreed. Resources should be properly directed to the cultural resources of historic significance.

Need for better management information

32.84 The lack of useful, reliable information for making fundamental decisions about canal operations was raised in the 1987 Task Force report and the 1993 Operational Reviews of canals. We noted a similar lack of information during our audit. In addition, information on the operations of canals is not provided to Parliament.

32.85 A reliable visitor data system does not exist for either water or land-based visitors. Parks Canada estimates that there were approximately three million land-based visitors to the Rideau Canal and Trent-Severn Waterway in 1993-94. This estimate does not include those who visit the canal at locations other than lock stations. The total number visiting the canal corridor is estimated to be close to 10 million. Both our examination and the results of Parks Canada's reviews indicate that statistics on land-based visitors are considered unreliable. In addition, an independent 1992 economic analysis indicated that land-based visitors had been significantly undercounted.

32.86 Furthermore, there is no attempt to count the actual number of boats passing through the system. For example, the Rideau Canal and Trent-Severn Waterway report 84,000 and 187,000 boats respectively through their locks for 1994-95. However, the same boat may be counted many times as it passes from one lock to another. We estimate that no more than 8,000 boats used the Rideau Canal locks and no more than 20,000 used the Trent-Severn locks during that year, based on the number of lockage permits sold. These data have implications when one is considering reducing operations, determining the impact of fee increases, or performing economic analysis.

32.87 For example, the amount of revenue that Parks Canada could earn from 28,000 boat owners would be considerably less than could be obtained from 271,000 boat owners. Without knowing the population to which fee increases apply, Parks Canada cannot determine their potential impact. It is also difficult to understand how Parks Canada can analyze options in levels of service without knowing the population that uses those services. A reduction in level of service could affect very few boaters who are crossing the same lock many times. We also note that the foundation for the 1992 economic impact analysis of the canals was based on the number of boats using them. As this number was not available from Parks Canada, an estimate of 198,141 boats was made, based on other available information.

32.88 Information on whether boaters are Canadian or foreign is not gathered for trend analysis. Although management plans indicate the importance of marketing the canals to international boaters, it will be difficult to determine the success of such programs without this type of information. A 1986 survey of boaters indicated that 88 percent of boaters reside in Ontario, 9 percent come from the United States, one percent from other countries, and 2 percent from provinces other than Ontario. Since that time, only one survey has inquired about the origin of boaters. That survey was conducted at the Ottawa locks only, and therefore cannot be considered representative of all boaters using the Rideau Canal. The origin of boaters is also crucial in estimating the canals' economic contribution to local and provincial economies. There are assumptions that boaters on a canal spend a certain amount per day. However, boat traffic patterns suggest that many of the boaters, particularly on the Trent-Severn, are local cottagers. Cottagers are likely to be spending in the local community whether or not the locks are operating. In this case, the additional contribution to the local economy may be less than estimated.

32.89 We also noted that the reported economic impact of $44 million includes Parks Canada's operating and capital expenditures. The additional economic benefit beyond direct expenditures by Parks Canada is approximately $20 million. Economic benefits are not reported for land-based visitors compared with boaters, although this information is available in a detailed economic impact analysis, which was based on 1990 boater data and 1987 land-based visitor data. That analysis indicated that land-based visitors to lock stations on the Rideau and Trent-Severn accounted respectively for 75 percent and 66.7 percent of total land-based and boater expenditures. As boat lockages have declined by 18 percent since 1990, these percentages may no longer be accurate. Consequently, the current information is out-of-date and not reliable for decision making. In addition, the detailed economic analysis indicates that there are significant direct expenditures by land-based visitors who do not visit lock stations, such as visitors to resorts and those attending special events on the canals. This information is important in analyzing the economic impact of reducing canal services .

32.90 The Maintenance Management System was designed to aid in the planning and recording of maintenance work (hours and cost). We noted that the system is used to varying degrees, and that it is not used for year-end reporting because the data are considered unreliable. Our 1989 audit of the Canadian Parks Service reported that underuse of the maintenance management system is impeding efficiency improvement, and that few system-wide reviews of maintenance functions have been conducted. Since that time, no significant review of the canal maintenance function has been undertaken. Given the number of resources dedicated to the maintenance function (88 full-time staff and 60 term positions as at May 1996) and the potential for future contracting-out of this activity, it is important that reliable information on maintenance requirements and costs be captured.

32.91 We noted that Part III of the Estimates does not include any information on canal operations, such as justification for resource use, performance indicators, strategic initiatives, or quantitative goals with respect to heritage resources. Without such performance information, Parks Canada management and the Department cannot be held accountable for the economic and efficient use of public funds. Most important, Parliament has no quantitative or qualitative information on the benefit Canadians are deriving from the operation of these canals.

32.92 Under the revised Expenditure Management System, Part III of the Estimates will be replaced with departmental plans and departmental performance reports. This offers Parks Canada the opportunity to improve information to Parliament on the activities of the historic canals.

32.93 Parks Canada should develop more complete and useful economic information to support planning for the future of specific canal sites.

32.94 Parks Canada should ensure that the maintenance function reflects actual needs; identify contracting-out options; and ensure that reliable and complete data are collected for decision making.

32.95 Parks Canada management should ensure that Part III of the Estimates, or reports required under the revised Expenditure Management System, include strategic initiatives, objectives, results and performance indicators.

Department's response: Agreed. More relevant and reliable information will be used for management decision making, responding to government reporting and accountability initiatives such as improved reporting to Parliament and the revised Expenditure Management System. Results and performance measurement are integral to the Department of Canadian Heritage planning and management cycle.

Overall departmental response: There is a clear difference of viewpoint between the audit report and the Department of Canadian Heritage with respect to the Historic Canals. The Department takes the view that it has a legal and policy mandate to protect the natural and historic features of the canals; to provide for their enjoyment and use by maintaining through navigation for boaters and accessible public space along the canals; and to provide water management for the conservation of natural values and the protection of private and public properties. We are reducing costs, moving to market rates for personal use, and developing and supporting marketing efforts to increase overall tourism and economic benefits from the canals. The Department acknowledges the need to define costs and benefits associated with the specific mandates.

The audit report does not recognize the Parks Canada mandate, but focusses only on boating. It thus concludes that Parks Canada should close less-used locks, creating major disruption of benefits to tourists and communities along the canal system.

We have not yet found a way, nor have the auditors been able to suggest a way, to derive revenues from all visitors, local residents and others who receive a private benefit from the canals. The auditors have recognized that "visitors along the canal use the sites as park land, for picnicking, walking, observation and fishing" and that "water control, wetland and wildlife conservation, realty rights and privileges" are among the many services provided by Parks Canada in addition to preserving canal structures and providing for navigation.

All Canadians benefit from our mandate to protect and present the cultural and natural heritage resources that the Historic Canals represent. As a public good, those costs are funded by general government revenue. Therefore a gap between costs and revenues will remain.

We are pleased that the audit recognizes the efforts made by Parks Canada to introduce innovative labour practices within the constraints of legislation and in the context of efforts made to introduce change in the operation of the Historic Canals. The introduction of the Parks Canada Business Planning approach, the implementation of the recommendations of the Corridors of Change report with its focus on marketing, as well as efforts to reduce costs and increase revenues clearly demonstrate our commitment to change. We continue to seek innovative ways to be even more efficient.

About the Audit

Objective

Our audit objective was to assess whether Parks Canada is managing the canals in an efficient and cost-effective manner, given its mandate and priorities. We conducted our audit by interviewing personnel, visiting a number of canal locations and reviewing documentation and reports.

Scope

Our audit focussed on the management of the Rideau Canal and Trent-Severn Waterway, as these two canals represent 77 percent of total canal operating costs, 67 percent of the capital cost, and 90 percent of the boats moving through locks. However, many of our audit findings pertain to the other canals as well. We have also examined the proposed reconstruction and reopening of the Sault Ste. Marie lock.

The Rideau Canal links the cities of Ottawa and Kingston via a 202 kilometre route. It consists of 49 locks at 24 lock stations. The Trent-Severn Waterway extends 386 kilometres from Trenton on Lake Ontario to Port Severn on Georgian Bay. It comprises 44 locks, including two hydraulic lift locks and a marine railway. There are also some 125 dams that provide an adequate water level throughout the navigation season.

Criteria

Our audit criteria were the following:

• Historic canals should be managed with due regard for economy and efficiency.
• The Department of Canadian Heritage should develop and apply appropriate economic criteria to meet transportation needs on the canals.
• The Department of Canadian Heritage should have and provide relevant, timely and accurate performance information to Parliament.

Approach

We interviewed officials of Parks Canada at headquarters and at the regional offices in Smith Falls, Peterborough, Cornwall, Halifax and Sault Ste. Marie; we also visited a number of lock locations. In addition, we examined relevant documents including departmental and other studies, parliamentary debates and Part IIIs of Estimates. We also held a stakeholders meeting to better understand the needs of stakeholders with respect to national parks and historic canals.

We consulted with the Department's Corporate Review Branch. As the Branch had not carried out a review of the management of the historic canals, it could not supply additional data.

Audit Team

Katherine Rossetti
Don Smith
Gaétan Gervais

For information, please contact Harry A. Ruthnum, the responsible auditor.