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1998 September Report of the Auditor General of Canada

Main Points

11.1 The Department's cash advance program is one vehicle the government makes available to producers of storable crops to provide additional flexibility in making marketing decisions. It consists of a short-term loan made available at harvest, a time when financial obligations of producers are often at their peak. The financing provides a bridge for producers until they market their crop and begin to earn revenue. In recent years, the annual amount of these loans has ranged from $730 million to over $1.2 billion.

11.2 The program has been very well received. Producers we contacted liked the availability and predictability of cash flow at harvest time, and the interest-free feature of the program. Many of the large agricultural assistance programs of the past have ended, and producers see this program as an important sign of continuing government support for the sector.

11.3 In 1993, the Department's Review Branch completed an evaluation that reached some positive conclusions about the program, but also raised some significant concerns, particularly with the program's interest-free nature. It also concluded that there was no firm evidence that the program contributes to orderly marketing.

11.4 In 1997 new legislation, the Agricultural Marketing Programs Act (AMPA) , was passed that updated and consolidated the two previous cash advance programs into one, and made permanent in legislation the interest-free provision. The rationale for providing advances interest-free was not made clear by the government, despite the evaluation's finding that a clear objective for this component was needed.

11.5 Under the new legislation, a review of the provisions and operations of the Act must be completed in the fifth year of operation, which begins in 2001. The 1993 evaluation furnished important information about the program's effectiveness; however, as in any study, some questions remain unanswered that we believe should be addressed in the coming review. Among others, these include whether producers indeed face a significant problem of access to credit at harvest time and whether losses arising from the government's guarantee on these loans are being well managed.

11.6 We identified limitations in how the cash advance evaluation findings were publicly reported. Similar limitations were noted in the dissemination of other studies produced by departmental branches on the impacts and effectiveness of programs. In our view, a number of characteristics of the Department, its legislation and stakeholder community create a strong case for more actively alerting outside parties to the existence and findings of effectiveness studies. Some areas of the Department are indeed taking steps in this direction.

Introduction

11.7 Managing cash flow is an ongoing challenge for all businesses, including agricultural producers. They incur significant up-front costs with no guarantee that a saleable product will result, and they face difficult decisions about when to sell their product in order to maximize overall returns. These decisions involve weighing a multitude of factors, including expected pricing patterns, borrowing capacity and costs, the likelihood of delivery opportunities, transportation to destination, on-farm storage capacity and others. As one farmer remarked to us during our work, "Why would I want to visit a casino? Farming is itself enough of a gamble."

11.8 The cash advance program of Agriculture and Agri-Food Canada is one tool the government makes available to producers of storable crops to provide additional flexibility in making these marketing decisions.

How cash advances operate
11.9 Producers apply for cash advances through their respective producer organizations after the crop is harvested. For many producers, this is the time of year when financial obligations are at their peak. Cash advances are basically short-term loans. The harvested crop serves as the collateral for the cash advance. Typically, producers may obtain an advance for up to 50 percent of the expected selling price of their crop.

11.10 The federal government pays the interest on the first $50,000 of an advance. The maximum advance is $250,000 but, in practice, few producers take advances beyond $50,000. For example, with respect to cash advances for prairie grain producers, only about 1,300 of the 26,700 advances made in 1997-98 were for amounts exceeding $50,000.

11.11 Exhibit 11.1 describes the situation of a typical Prince Edward Island potato farmer during the crop year.

11.12 Producer organizations negotiate the loans for the cash advances through local banks or other financial institutions. The largest of the producer organizations - the Canadian Wheat Board - is empowered to raise financing on its own. Because repayment of these loans is guaranteed by the Government of Canada, producer organizations are able to obtain financing at a lower rate of interest - usually below prime - than would otherwise be the case. Minimizing interest costs is important, both to the federal government, which pays the interest on the first $50,000 of an advance, and to those producers who take advances exceeding $50,000.

Who is involved and their roles
11.13 The operation of the program involves the co-ordinated efforts of many groups, the most significant of which include participating producers, producer organizations, the Canadian Wheat Board, elevator companies, financial institutions, and Agriculture and Agri-Food Canada. The producer organizations play a very key role. In fact, one must exist in order for the cash advance program to be offered for a particular storable crop. These organizations perform several important administrative functions, including:

  • arranging for the cash advance loans from a lender;
  • negotiating a cash advance guarantee agreement with the Department;
  • ensuring that the eligibility conditions are met before advances are given; and
  • ensuring that the advances are repaid.
How producers market their products
11.14 There are essentially three ways that producers market their products; these are described in Exhibit 11.2

The amounts guaranteed are significant
11.15 The value of advances guaranteed by the federal government fluctuates, depending on participation rates, product prices and product volume. Nevertheless, the total amount guaranteed is significant. In recent years, the maximum amount guaranteed has varied from $730 million to over $1.2 billion. The value of cash advances for Canadian Wheat Board grains exceeds those issued for other crops, by a large margin.

11.16 Exhibit 11.3 demonstrates that year-to-year variation in amounts advanced can be quite large, particularly for advances made to producers of Canadian Wheat Board grains. Officials at the Canadian Wheat Board identified the following factors that account for these variations: weather conditions at harvest; quantity and quality of harvested grain; availability of early delivery opportunities; costs of production inputs; trends in grain prices; and other financial pressures.

11.17 The manner in which prairie grains are marketed in Canada has a major impact on grain producers. In any given year, roughly 28 million tonnes of grains are produced that are marketed through the Canadian Wheat Board. However, the grain transportation system has a maximum capacity at any one time of about 5-6 million tonnes of product. This means that farmers cannot deliver all of their grain at harvest, even if they wanted to. They must provide for on-site storage of their product until the Canadian Wheat Board is able to sell their product and arrange for shipment to the buyer.

11.18 The government incurs three types of costs to deliver this program: interest costs on the first $50,000 advanced; the costs of making good on the principal and interest of any defaults on the funds advanced; and the costs of administering the program. The Department made a commitment to Cabinet to limit average spending on interest and administrative costs to $40 million a year over the next three years. The funding for these costs comes from the Department's "safety net" envelope of funds, the source of funding for departmental income stabilization programs.

11.19 Exhibit 11.4 provides general information about the size of cash advances and the financial benefits they provide for two typical groups of producers currently participating in the program. As might be expected, the interest benefit varies depending on the interest rate obtained by the producer organization, the amount of the advance and the average period the cash advance was outstanding.

Cash advances are seen as an important sign of government support
11.20 The cash advance program has been very well received. Of the producers we contacted, most liked the availability and predictability of cash flow at harvest time, and the interest-free benefit. Producer organizations endorse the program because it encourages participation in their organization by producers. The program appeals to many elected officials because it has achieved a high degree of support in the agricultural community while its annual costs are seen by many as relatively low.

11.21 In recent years, producers have been encouraged to become more market-oriented and more self-reliant. Most of the large subsidy payments of the past - including the Crow benefit, Feed Freight Assistance and other large ad hoc payments - have either been discontinued or are being phased out over time. Yet the cash advance program has survived these changing times, and today is seen by many producers as an important sign of government support to the storable crops sector.

11.22 The program is currently provided under the authority of the Agricultural Marketing Programs Act ( AMPA), which was passed in 1997. Although the AMPA refers to this as an "advance payments" program, in this report we refer to it as the cash advance program - the terminology commonly used by producers.

11.23 Previously, two cash advance programs operated under separate authorities, the Advance Payments for Crops Act (APCA) and the Prairie Grain Advance Payments Act (PGAPA). A third authority, the Cash Flow Enhancement Program (CFEP), provided for payments under the interest-free feature of the program . In 1997 these authorities were updated and consolidated within the AMPA, in order to:

  • eliminate inequities between the PGAPA and the APCA ;
  • reduce loan defaults by making producer organizations more accountable for proper administration and control over advances made to their members, including a provision that these organizations cover a percentage of any defaulted advances; and
  • make permanent in legislation the interest-free provision.
From a producer's perspective, however, the basic operation of the cash advance program has remained unchanged.

The purpose of the cash advance program
11.24 It is important to understand what the cash advance program is intended to achieve. Exhibit 11.5 describes recently available information about the intended objectives of the cash advance program.

11.25 Although these are somewhat different statements, the key elements seem relatively clear:

  • It is a marketing program first and foremost.
  • It has an objective of improving marketing opportunities.
  • Improving cash flow at or after harvest is the means by which the program improves marketing opportunities.
  • The government guarantee of repayment of the advance encourages lenders to provide cash advances, and these advances improve cash flow.
Focus of the audit
11.26 Since the legislation governing the cash advance program was recently revamped, and considering that the federal role in program administration is relatively limited, we concluded that the most significant issues were primarily related to program effectiveness. We focussed our efforts on determining whether the Department:

  • had sufficient information about the effectiveness of the program;
  • had adequately disclosed what it knew of the effectiveness of the program to Parliament and other interested parties outside the Department and whether these practices were indicative of the dissemination practices used for other effectiveness studies and analyses; and
  • was properly controlling financial risks to the Crown, particularly from loan defaults.
Further details on the audit are found at the end of the chapter in the section About the Audit.

Observations and Recommendations

Information on Program Effectiveness

The Department has gathered important information about the program's effectiveness
11.27 The Department's Review Branch completed an evaluation of the cash advance program in 1993. The evaluation scoped in all relevant elements of the program at that time, including the Prairie Grains Advance Payments Act, the Advance Payments for Crops Act and the Cash Flow Enhancement Program . The Department's methodology incorporated several complementary lines of enquiry. These included a review of documentation, case studies and extensive fact finding with key stakeholders including producers, producer organizations, processors and processor organizations, federal and provincial government departments, and the banking community. The methodology also included an independent review of the work by a leading agricultural economist. An advisory group representing many of the program's stakeholders oversaw the study.

11.28 We reviewed the evaluation, using procedures summarized in Exhibit 11.6 .

11.29 We concluded that there was appropriate and adequate support for the findings of the evaluation, and that these findings had been reached through the use of sound methodology. Nothing came to our attention to suggest that the evaluation findings were unreasonable or no longer relevant.

11.30 The evaluation furnished important information about the program's effectiveness but, as in any study, some questions remain unanswered. These are discussed more fully later in this chapter.

Evaluation identified some significant concerns about the program
11.31 The findings of the 1993 evaluation noted that producers and their respective organizations were very satisfied with the design and delivery of the cash advance program. As well, the evaluation found clear evidence that the government guarantee leads directly to lower borrowing rates for producers.

11.32 In a series of evaluation case studies of specific commodities, producers and producer organizations stated that the program enabled them to avoid dumping at harvest time when prices may be low, and to receive a higher and more stable price for their crops. Producers reported that the program has led to lower interest rates and improved relations with their bankers. Producer organizations believed they also have benefited from the program by being able to provide an additional value-added service to their members. Through the program, they learn more about their members' needs and increase their visibility to their membership.

11.33 At the same time, the evaluation also raised significant questions about aspects of the program's effectiveness, notably the following:

  • There was a need to articulate a policy that clearly outlines the rationale for the program.
  • There was no firm evidence that the program contributes to orderly marketing, and the incremental effect is likely minimal.
11.34 In addition, the evaluation expressed particular concern about the interest-free nature of the program, questioning the need for this feature: if the program provides producers with financing not otherwise available, allowing them to increase market returns, why would they need an interest-free incentive to participate? The evaluation suggested that the interest-free benefit serves as a form of income support.

11.35 Exhibit 11.7 elaborates on these findings, using extracts from the evaluation report.

Other concerns have been raised about the program
11.36 The 1993 evaluation is the most comprehensive study of the effectiveness of the cash advance program, but it is not the only one.

11.37 In the mid-1980s, the Nielsen Task Force examined the two existing cash advance programs. The Task Force concluded that the Canadian Wheat Board could operate its own cash advance program, if one were needed. In the case of the Advance Payments for Crops Act , the Task Force concluded that the interest subsidy could be cancelled and that an advance payments program at market interest rates could achieve the same marketing objectives.

11.38 In 1989, the government of the day decided to end the practice of paying the interest costs on the first $50,000 advanced to producers. Elimination of the interest-free benefit, although only one of several contributing factors, corresponded with a significant drop in participation in the cash advance programs in the 1989 crop year. Producers opposed the cancellation of the interest-free benefit and, one year later, the benefit was reinstated through the creation of the Cash Flow Enhancement Program .

11.39 Several current and former senior officials of the Department with an intimate knowledge of the cash advance program expressed concerns to us about the program's effectiveness. We also found departmental documents that suggest that the program does not sufficiently meet the six tests set out in the government's recent Program Review exercise: serving the public interest; necessity for government involvement; appropriate federal role; scope for public sector/private sector partnership; scope for increased efficiency; and affordability.

11.40 Given that the Department had important information about the program's effectiveness, and that the program was not significantly altered in the revamping of the legislation, we examined what the Department did to:

  • clarify the program's objectives and rationale, as the evaluation had recommended; and
  • make effectiveness information available to parliamentarians and others outside the Department with an interest in the program's effectiveness.
Program's rationale was not sufficiently clarified
11.41 The first recommendation of the 1993 evaluation emphasized the need to develop a clear policy rationale for the cash advance program - one that distinguished between marketing, cash flow and income support objectives. In its response to the evaluation report, the Department made a commitment to clarify the program's rationale during the legislative review.

11.42 As noted earlier, the overall objective of the program as set out in the Agricultural Marketing Programs Act is relatively clear. However, the government has not made clear why advances are provided interest-free. This is despite the evaluation's finding that a clear articulation of the policy rationale for this part of the program was needed, which was also the conclusion of a 1993 departmental internal audit of the Cash Flow Enhancement Program. This is significant because making the interest-free benefit a permanent feature of the program was a driving force behind the new legislation.

11.43 The only public indication we could find of a possible intent of the interest-free benefit was contained in the 1993 election platform of the government. It suggested that the intended purpose of the program was to reduce interest costs as a way of offsetting the rising costs of farm inputs. This view of the program is similar to that of the 1993 evaluation, which saw the interest-free benefit as a form of income support. Some departmental officials told us that they do not consider the interest-free component to be intended as income support. However, officials were unable to provide any public or internal statement of the intent of this provision.

11.44 It is important for the Department to clarify the objectives for this aspect of the cash advance program because it is a prerequisite to evaluating its effectiveness. Arguments can be made both for and against the interest-free aspect of the program, but without a clear idea of what it is meant to accomplish, meaningful debate about its merits is hampered.

11.45 Although the recommendation of the evaluation to develop a clear policy rationale for the program was not entirely implemented, we noted that, in revamping the legislation, the Department did act on other key recommendations of the evaluation.

Public Reporting of Departmental Effectiveness Studies

This case illustrates limitations of public reporting of departmental effectiveness studies
11.46 The Department included a summary of the evaluation findings in the 1994-95 Estimates Part III, reproduced in Exhibit 11.8 . This practice complies with Treasury Board requirements. It was the only public reporting of the existence of the evaluation and its findings.

11.47 The case of the cash advance program illustrates why these summaries, although useful, ought to be augmented by other means of alerting those outside the Department to the existence and findings of evaluations:

  • There are many topics covered in Estimates documents, so summaries are necessarily short and high-level. They cannot be expected to provide full information about all significant aspects of program effectiveness. In this case, the summary does not mention some of the key findings outlined in Exhibit 11.7 - particularly the issues raised about the interest-free nature of the program.
  • The Estimates summaries alert parliamentarians and stakeholders to the existence of an evaluation, and give an overview of the findings, so that parliamentarians, their staff and others can request further information or a copy of the study. But in this case, by the time the new legislation was before the House, more than three years had passed since the summary had been published. As documents of record, the Estimates are available for searching electronically and in hardcopy. However, this span of time increases the chances that parliamentarians, their staff and committee researchers might not have been aware of the existence of the evaluation during the course of deliberations on the legislation.
11.48 Strong arguments exist for more actively disseminating departmental effectiveness studies. We believe that there are a number of characteristics of the Department, the legislation it is responsible for administering and the nature of its stakeholder community that together create a strong case for more actively publicizing the existence and findings of departmental evaluations and other studies of the effectiveness of agricultural programs:

  • There is an extensive network of agricultural producer and industry groups interested in the effectiveness of agricultural programs, along with a relatively large community of agricultural economists who research the effects of agricultural programs. These groups and others engage in active public debate about the merits of various agricultural programs.
  • The Department is in a unique position to contribute to debate on the impacts of agricultural programs, recognizing that information on program effectiveness improves the quality of public debate by providing a factual basis for debate between program proponents and opponents. For example, the Department has access to considerable administrative data that are invaluable in such studies. Indeed, the Department produces numerous studies on the impacts of agricultural programs, particularly in its Policy Branch, which is one of the largest policy branches in the federal government.
  • Many departmental programs have sunset provisions or built-in five-year review requirements creating opportunities for debate on the effectiveness of these programs.
  • The Department conducts extensive consultations on the future direction of its programs, for which information on actual program impacts may modify or strengthen the views of those consulted.
For these reasons, we believe that the Department ought to augment its dissemination efforts in two key ways.

11.49 Better information dissemination at the time of parliamentary reviews and stakeholder consultations. First, at the time of legislative reviews by Parliament (for example, when legislation is revamped as with the cash advance program, or when parliamentarians are examining the results of five-year reviews of agricultural programs), we believe that the Department should inform parliamentarians of effectiveness information it has obtained about the program in question. This can come from evaluations, other studies or ongoing performance measurement. The Department ought to offer to provide briefings and supporting documents about this information to parliamentarians and staff. Parliamentarians have repeatedly said that they are interested in receiving evaluation information, a view confirmed in the April 1997 Sixty-Fourth ("Catterall") Report of the Standing Committee on Procedure and House Affairs.

11.50 Similarly, we believe that the value of departmental consultations would be enhanced by providing those consulted with information on what is known about program effectiveness. The Department often undertakes consultations with stakeholders concerning the future direction of agricultural programs. In the case of the cash advance program, a very comprehensive series of consultations were held before the legislation was revamped. Those consulted were provided with extensive material outlining a number of possible options for the program. We believe that, in future consultations, augmenting such information with what is known about the program's effectiveness would enhance the value of the consultation process.

11.51 In future parliamentary reviews and consultations with stakeholders on agricultural programs, the Department should provide briefings and supporting documents on program rationale and objectives, and on what is known about the program's effectiveness.

Department's response: The Department routinely provides stakeholders and the Standing Committee on Agriculture and Agri-Food with briefings and other sources of information that speak to questions of program rationale, objectives and effectiveness. For example, as part of the recent national safety net review consultations, Industry Advisory Committee members were provided with exclusive Internet access to all available departmental analysis of safety net programs. In all of its external communications and consultations, the Department strives to meet the information needs of parliamentarians and industry stakeholders while respecting legitimate international trade considerations, federal-provincial relations and Cabinet direction.

In the case of advance payments, the 1993 evaluation was a catalyst that ultimately led the Department to embark on a comprehensive and, according to several industry leaders, effective national consultation process on options for reform. Although the evaluation itself was not distributed, the Department's discussions with stakeholders were informed by its main findings/recommendations as well as a number of other information sources and other legitimate factors. One such factor was the 1995 Budget statement that, in keeping with a 1993 promise to the Canadian people, committed the government to bringing the interest-free feature of advance payments into legislative force.

The Department is committed to improving its formal parliamentary reporting practices, including the five-year review required under the Agriculture Marketing Programs Act. This commitment is evident in the Department's voluntary participation in the Improved Reporting to Parliament Project and in its ongoing implementation of a business line, results-based approach to managing and reporting.

11.52 Better ongoing dissemination of effectiveness information. Second, we concluded that the Department ought to be more proactive in disseminating evaluations and other studies of agricultural program impacts as they are completed. A number of concerned stakeholders told us that in recent years the Department has not been forthcoming in making these studies public.

11.53 As Exhibit 11.9 notes, we found two areas in the Department that had not been systematically disseminating studies but that have recently taken steps to make analyses and effectiveness studies available to interested parties outside the Department. These initiatives represent a promising new orientation toward openness.

11.54 The initiatives of both Directorates are in their infancy and, therefore, it is too early to draw definitive conclusions on their impact, or on whether they will effectively address stakeholders' concerns. As well, these initiatives have been limited to those two areas. Studies on the impacts and effectiveness of departmental programs are undertaken elsewhere in Policy Branch, in the Review Branch and by program management.

11.55 Review groups in a number of other departments have taken proactive steps to alert outsiders to the existence and findings of effectiveness studies; for example, some groups have made entire evaluation reports or their executive summaries available on departmental websites or on a Treasury Board Internet data base of evaluations and reviews. As in the case of the evaluation of cash advances, the Department publicly reports effectiveness studies in a one- or two-paragraph summary in departmental Performance Reports in the Estimates, without references to how more detailed information can be obtained by those interested. This same summary is the extent of the information that the Department provides on the Treasury Board Internet data base. Adopting the practices of these other departments could enhance the ease of access by outside parties to the findings of departmental effectiveness studies.

11.56 Other inexpensive means are available that would increase the likelihood of interested stakeholders becoming aware of effectiveness studies and would make access to these studies easier for those interested in more detailed information. For example, it would be a relatively simple matter to create a list of interested stakeholders (as the Economic and Policy Analysis Directorate has done) and alert these stakeholders by mail, facsimile or e-mail when particular effectiveness studies have been completed. As a further example, the studies could be included in the catalogue of publications available to the public from the departmental Publications Service.

11.57 Again, the Department's existing practices meet the specific requirements of Treasury Board policy. However, the additional steps noted above represent practices that are consistent with the Treasury Board policy's thrust toward making reports readily accessible to the public, and already are being initiated in two areas of the Department.

11.58 The Department should implement practices to better alert interested stakeholders of the existence and findings of evaluations, ongoing performance measures, and other studies of program impacts. These practices should include:

  • providing information on how more detailed information can be obtained (in addition to the summary of study findings in departmental Estimates documents);
  • publicizing the list of completed studies;
  • developing and maintaining a list of interested stakeholders and notifying stakeholders about completed studies; and
  • examining the feasibility of additional vehicles to disseminate information, including the Internet.
Department's response: As the audit notes, the Department's current dissemination practices comply with the Treasury Board Policy on Review. Nevertheless, the Department is committed to finding new and better ways to serve the emerging information needs of its clients.

Over the coming months, the Department will be consulting with its stakeholders in order to gain a better appreciation of those information needs, expectations and dissemination preferences. The above-noted suggestions for improvement will be implemented to the extent that they are consistent with stakeholder interest in receiving evaluations, audits and program impact studies conducted by the Department.

Information on Cash Advances Is Needed for the Future

11.59 In the new Agricultural Marketing Programs Act , Parliament reaffirmed its belief that periodic reviews of programs are an important tool for oversight. A provision was incorporated in the Act requiring, "During the fifth year after this Act is assented to, the Minister must review the provisions and operation of this Act in consultation with the Minister of Finance." The fifth year of operation will begin in 2001.

11.60 The 1993 evaluation provided important information about the program's effectiveness but, as with any study, some questions remain unanswered. We believe the Department needs to begin to develop an appropriate framework for this review and to identify the types of data it will need to complete the review. This would help ensure that the information required is available when needed. At the time our audit was being completed, departmental officials informed us that work was beginning in the Review Branch on an evaluation framework of the program in preparation for the five-year review.

11.61 In addition to clarifying the rationale for the program, as discussed earlier, there are a number of questions that the Department ought to explicitly address in the five-year review, if not earlier.

Do cash advances provide producers with additional credit availability?
11.62 The extent to which the cash advance program gives loans to producers that would not otherwise be available is key to the program's effectiveness. If it does serve this purpose, it would represent a significant benefit to producers. If it does not, then the value of the program in improving marketing opportunities would be questionable, since producers could use other financing to allow them to market crops later in the season.

11.63 The 1993 evaluation did not address this issue in depth. It did, however, raise important questions about the matter. Noting that participation would likely be "drastically reduced" without the interest benefit, the evaluators suggested that either producers already have adequate financing available, or that increased returns from delayed marketing do not cover the cost of interest. The Department was unable to provide us with any other studies or analyses about whether there is indeed an "access to credit" problem at harvest time.

11.64 We believe that there is a need to examine this issue more comprehensively in time for the five-year review, both because of questions raised in the evaluation and because of statements made to us by producers and banking officials during our work.

11.65 One aspect of this issue is whether those who already have access to credit from existing sources can obtain an increased amount by virtue of this program. Many producers use operating lines of credit to finance their input costs until the crop can be sold. Operating lines of credit are secured in whole or in part by the value of the producer's crop. When a cash advance is obtained, the financial institution is required to give the federal government priority over the bank's claim to this collateral. As a result, the collateral is no longer available to secure the operating line of credit. Producers and banking officials told us that if producers have fully used their available operating line and then obtain a cash advance, the bank generally requires the producer to reduce the operating line by using a portion of the cash advance. If the bank does not reduce the operating line, then this indicates that the bank would have been willing to increase the operating line by at least the amount of the advance, had the producer asked.

11.66 In other words, if these reports are correct, the program may not be increasing the credit available to producers with operating lines. Selected remarks by producers are found in Exhibit 11.10 .

11.67 It is also important to note that this program is not intended to finance producers who are poor credit risks. Indeed, the Department expects producer organizations to carry out credit checks on all producers before issuing advances. The program also requires producer organizations to cover a portion of defaults to help ensure that they do not take excessive credit risks.

11.68 It would be inappropriate to conclude from this limited evidence that the program does not provide additional financing to producers. These statements, however, do raise questions that suggest the need for a systematic analysis of actual participant financing experience to establish whether there is indeed a significant problem of access to credit at harvest time and whether the program provides significant additional financing to producers. Ongoing data needed for such a study could be collected when producers apply for an advance. The study could also examine how financing availability may vary over time. The last few years have been characterized by a relatively buoyant economy, and there is a feeling that credit availability declines in more difficult times. As well, interest rates have been low recently. If interest costs reach higher levels, credit may be available but less affordable to producers.

Does the program contribute to improved marketing opportunities?
11.69 Although the 1993 evaluation was unable to obtain hard evidence linking the cash advance program to improved returns to producers, it did note that most stakeholders and organizations are convinced that it does improve returns. Interviews we held with stakeholders suggest that this viewpoint is still widely held.

11.70 Given that the stated objective of the cash advance program is to improve marketing opportunities, we believe the Department needs to gather the appropriate data to demonstrate whether or not that is occurring, in time for the coming five-year review. We also believe that the Department could gather information that would shed light on this matter at a reasonable cost. A collaborative effort over several years may be necessary in order to ensure that sales history and related data necessary to address this issue are available.

11.71 An important aspect of this question is whether, beyond any benefits to individual producers, there are broader benefits to the market prices received by all producers because of the program. Some producers contend that dumping by even a small number of producers at harvest time can have a detrimental effect on prices for the entire season. If this is true, then providing some financial incentive to encourage program participation may well have a clear policy rationale.

Is the payback for producers better elsewhere?
11.72 The cost effectiveness of the cash advance program needs to be compared with that of other safety net programs. Because the safety net expenditures are capped, producers benefit if the money is spent on programming that provides the greatest cost effectiveness. This is especially relevant if the purpose of the interest benefit of the cash advance program is income support, as the 1993 evaluation suggested.

11.73 For the same reason, the program needs to be evaluated in comparison with other agricultural programs. In recent years, the Department and others have conducted studies that argue that returns on public expenditures strongly favour investments in productivity and growth-enhancing measures such as crop research and product/process development, with benefit-cost ratios many times that of income support programs.

11.74 As well, it may be that a more cost-effective program could be designed. When the administrative costs incurred by producer organizations, the Canadian Wheat Board and elevator companies are added to that of the federal government, the total annual cost of program administration is likely upward of $5 million. These administrative costs might be reduced or better utilized under other program alternatives. For example, if it is determined that the program does not significantly increase the availability of credit, other program delivery options - such as paying a benefit directly to eligible producers - could provide interest rate relief while crops are in storage. This could avoid the administrative cost of providing a financing mechanism already available from financial institutions, and avoid the costs incurred on defaults. Such options ought to be examined as part of the five-year review.

Is the Department managing losses well?
11.75 A major impetus behind the recent revamping of the legislation and consolidation within the Agricultural Marketing Programs Act was the desire to reduce losses due to defaults, that is, the amounts paid by the government to financial institutions for cash advances that have not been repaid. In the mid-1990s, the level of defaults, especially relating to the Prairie Grains Advance Payments program, threatened to undermine the viability of the entire cash advance program. When it became apparent that losses were becoming unacceptably high, the Department together with the Canadian Wheat Board took action to try to reduce the level of defaults. The changes they introduced to administrative practices contributed to reducing loan defaults from their peak of $61.6 million in 1993-94. Exhibit 11.11 provides a recent history of defaults attributable to both Canadian Wheat Board grains and other crops.

11.76 The new AMPA legislation puts more onus on producer organizations to ensure that cash advances are made only to eligible producers. The government guarantee is effective only if the advances are properly administered. Producer organizations are now responsible for between 1 and 15 percent of the costs of any defaulted advances, with the percentage depending on the organization's historical loss experience. Once the government pays a default, it continues efforts to seek repayment from the producer.

11.77 Although Exhibit 11.11 indicates that defaults have improved in recent years, and the Department believes that its recent default performance is acceptable, it has no real basis for concluding so because it lacks any objectively determined benchmarks. For the same reason, we were unable to determine if the Department was managing defaults sufficiently well. It does not have adequate information in the following two important areas and, accordingly, is not able to draw conclusions about how well it is managing defaults.

  • The Department has no rational basis for predicting what ultimate losses are likely to be. It currently manages defaults more than it manages losses (the ultimate cost of these defaults, after the Department has exhausted collection avenues). Having reliable information on estimated losses is important for putting defaults in perspective.
  • The Department has no meaningful performance targets for program losses, but it could develop some easily using the commercial banks for benchmarking purposes. Bank operating lines of credit are secured by the same collateral as cash advances, and the cash advance program is not intended to give money to poor credit risks. Therefore, it is reasonable to conclude that agricultural loan loss targets for the commercial banks would be an appropriate starting point for determining an appropriate departmental target.
11.78 A recent Treasury Board submission by the Department illustrates the need for this information. The Department has decided to assume collection responsibility for all defaults relating to advances made through the Canadian Wheat Board. The Department estimated it would collect at least $40 million of more than $90 million in outstanding defaults under the Prairie Grains Advance Payments Act - but it had no objective data on which to base this prediction. Most of these defaults are now four to five years old, and are still outstanding despite existing set-off opportunities and other collection efforts that have already taken place. This estimate was basically nothing more than an educated guess. In reality, the feasibility of collecting such a large proportion of an aging debt is open to question. Indeed, departmental officials informed us that they no longer consider this to be an achievable target.

11.79 Developing appropriate information and performance indicators, as noted above, would assist the Department to assess how well it is managing losses, and demonstrate this in time for the five-year review.

11.80 In preparing for the five-year review of the cash advance program under the Agricultural Marketing Programs Act , the Department should:

  • further clarify the policy framework that explains why the cash advance program exists and what it is intended to achieve;
  • develop a review framework and identify the data and other information needed to examine the program's effectiveness in the five-year review; and
  • complete the examination of the program's effectiveness and provide the findings to parliamentarians and departmental stakeholders.
Department's response: The auditors are aware that program management is already working with the Department's Review Branch to develop an evaluation framework and to identify information that should be collected in order to ensure proper analysis, performance measurement and reporting.

11.81 The Department should identify a set of suitable performance measures for the cash advance program, including measures for loan loss management.

Department's response: This is being done through the development of the above-mentioned evaluation framework and performance measures.

Conclusion

11.82 The cash advance program is well regarded by producers. Many of the large agricultural assistance programs of the past have ended, and producers see this program as an important sign of continuing government support for the sector.

11.83 Work done by Agriculture and Agri-Food Canada in 1993 to look at the program's effectiveness reached some positive conclusions about the program, but also raised some significant concerns, particularly with the interest-free nature of the program.

11.84 Under the Agricultural Marketing Programs Act passed in 1997, a review of the provisions and operations of the Act must be completed in the fifth year of operation, which begins in 2001. The 1993 evaluation furnished important information about the program's effectiveness. However, as in any study, some questions remain unanswered, the answers to which are necessary for the Department to have sufficient information about the program's effectiveness.

11.85 The Department still needs to clarify the reason why advances are provided interest free. The Department also needs to establish benchmarks, without which neither management nor our audit could conclude whether loan losses are being properly managed.

11.86 It is important to be realistic about the role that evaluations and other forms of effectiveness information can play. They have a role within the internal management of government, providing advice on how policy and programs can be improved. They also have a role in informing parliamentarians, stakeholders and the public about the effectiveness of government programs. As noted in Matters of Special Importance in the 1996 Report of the Auditor General, effectiveness information does not replace judgments on the value of programs, but it allows these value judgments to be based on better facts and arguments. It enlightens - not ends - debate on the issues of the day.

11.87 We identified limitations in how the cash advance evaluation findings were publicly reported. Similar limitations were noted in the dissemination of other studies produced by departmental branches on the impacts and effectiveness of programs. In our view, a number of characteristics of the Department, its legislation and stakeholder community create a strong case for more actively alerting outside parties to the existence and findings of effectiveness studies. Some areas of the Department are taking steps in this direction.


About the Audit

Objectives

The legislation governing the cash advance program was recently revamped and also requires a five-year review of the program. Given these circumstances and since the federal role in the program's administration is relatively limited, we concluded that the most significant issues were primarily related to program effectiveness. We specifically asked whether the Department:

  • had sufficient information about the effectiveness of the program;
  • had adequately disclosed what it knew of the effectiveness of the program to Parliament and other interested parties outside the Department and whether these practices were indicative of the dissemination practices used for other effectiveness studies and analyses; and
  • was properly controlling financial risks to the Crown, particularly from loan defaults.

Scope

Our audit focussed on the Advance Payments for Crops Act (APCA), the Prairie Grain Advance Payments Act (PGAPA) and the Cash Flow Enhancement Program (CFEP). In 1997 these authorities were updated and consolidated within the new Agricultural Marketing Programs Act (AMPA).

We examined audit and evaluation reports completed by the Department, in particular focussing on an evaluation completed by the Review Branch in 1993. We conducted in-person and telephone interviews with a number of producer organizations, including the Canadian Wheat Board, as well as individual producers, financial institutions and officials from Agriculture and Agri-Food Canada. Further details about our approach are explained in Exhibit 11.6 .

We examined the dissemination practices used for other departmental effectiveness studies, and selected practices in other federal departments.

Finally, we examined departmental practices for managing program loan losses and defaults.

Criteria

We expected the Department to:

  • develop clear objectives, measures and a data collection methodology to allow for evaluations of the program;
  • respond to and take action on the recommendations in the evaluations;
  • share the results of evaluations of the program with parliamentarians and stakeholders;
  • share relevant information from all evaluations and other effectiveness studies with affected parties; and
  • properly control financial risks to the Crown.

Audit Team

Assistant Auditor General: Don Young
Principal: Neil Maxwell

Linda Anglin
John Rossetti

For information, please contact Neil Maxwell.