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1999 September Report of the Auditor General of Canada

Main Points

17.2 The Program was implemented within very demanding time frames. Federal and provincial program managers view the program approach positively and regard it as having contributed to strong federal-provincial relations and co-operation. The Program's output from 1994 to date has involved mobilizing and co-ordinating the efforts and resources of three levels of government and other partners to plan and implement more than 17,000 engineering and construction projects nation-wide.

17.3 Our audit of Phase II indicates that, from an overall federal perspective, the Program is essentially "running on trust" with little accountability. Criteria for project selection were not clearly defined, and many of the files we reviewed lacked persuasive evidence to justify applicants' claims relating to selection criteria. In most cases, federal officials recommended projects for approval without ensuring that applicants' claims were adequately supported.

17.4 We found that federal officials relied on municipal and provincial certifications with respect to costs claimed. The implementation of compliance audits, which, among other things, represent a means of obtaining assurance on the adequacy of financial controls, has been slow.

17.5 There are incentives for provincial governments to transfer their budgetary resources away from their own programs to the federal infrastructure initiative. However, this program substitution is not inevitable; in two provinces, for example, safeguards were put in place in Phase I to limit the "substitution effect". Any substitution that does occur reduces the Program's infrastructure development and job creation benefits. The Treasury Board Secretariat has not set out the limitations of estimates of employment generated by the Program in reporting them to Parliament.

Background and other observations

17.7 Construction of roads, bridges, and water and sewer networks predominated in both phases, accounting for well over 60 percent of total expenditures. Community, cultural and recreational services were of less significance in Phase II.

17.8 The Canada Infrastructure Works Program is a contributions program, with a requirement for the payment of federal funds to be subject to performance conditions being met (such as project targeting) and to compliance with program requirements. However, our examination of the project files indicated that program officials have not adequately addressed these concerns.

17.9 Finally, we found that progress has been made under Phase II in conforming with the requirements of the Canadian Environmental Assessment Act . However, where negative environmental effects have been identified, the specification and monitoring of mitigation measures remain inadequate.

The Treasury Board Secretariat indicated that although improvements can and should be made in any future such programs, the chapter presents an inappropriately negative view of what was a highly successful program in terms of results and one that made a positive contribution to federal-provincial-municipal relations in Canada.

Introduction

Objectives and structure of the Program

17.11 The Program is a collaborative arrangement. The federal government is one of several program partners. The others include provincial and local governments, and, in some cases, the private sector. For the purposes of this program, the federal government entered into a separate agreement with each province and territory. Under these agreements, the federal government contributes up to one third of eligible project costs, and the provincial and local governments and other partners contribute the remainder. In the majority of cases, municipalities identified their priorities for infrastructure program funding based on local requirements, and submitted projects for provincial review. Provinces then forwarded projects selected to the federal government for review and approval.

17.12 While mostly similar in content, the federal-provincial agreements vary somewhat according to province or territory. Generally, they each set out the Program's purpose, the criteria for project selection, and the financial and operational responsibilities of the parties involved. The provinces are responsible for selecting, analyzing and proposing projects for funding. The federal government has the right to approve or reject individual projects proposed.

17.13 In accordance with the agreements, a joint federal-provincial management committee was established in each province to carry out the responsibilities of the federal and provincial governments. The management committees developed program guidelines for the implementation of the Program in their respective provinces.

17.14 Although developing and maintaining local infrastructure fall essentially under the jurisdiction of provinces and municipalities, over the years the federal government has frequently provided financial aid. This assistance has taken the form of loans, unconditional transfers of funds (grants) or conditional payments (contributions).

17.15 The Canada Infrastructure Works Program is a contributions program. This means that the federal government pays if performance conditions and program requirements are met, as specified in the agreements. These requirements have important implications for the Program's accountability regime - in terms of accountability among the partners to the agreements and also accountability to Parliament for expenditures undertaken and results achieved.

17.16 Originally, the federal government agreed to contribute up to $2 billion, to be matched by $4 billion from provincial and municipal governments and other partners. In January 1997, the government announced a program extension (referred to as Phase II) whereby it provided an additional $425 million to support new infrastructure projects, to be matched by a further $850 million from the provinces and the other partners. Over the course of the two phases, all of the partners are expected to have invested a combined total of $8.3 billion. Under both phases, construction for most projects was scheduled to be completed on or before 31 March 1999.

17.17 Six federal departments and agencies take part in the Program. The lead minister, identified as the Infrastructure Minister, is the President of the Treasury Board. Within the Treasury Board Secretariat, an Infrastructure Office performs a co-ordinating and information-generating role. While each program within the provinces is fairly autonomous, all projects, regardless of the value of the federal contribution, require the formal approval of the Infrastructure Minister.

17.18 The federal regional development agencies - Western Economic Diversification Canada, Industry Canada, Canada Economic Development for Quebec Regions and the Atlantic Canada Opportunities Agency - implement the programs in their respective provinces. Representatives from each of these organizations sit as federal co-chairs on their respective management committees established under the federal-provincial agreements. In some provinces, while there can be several provincial implementing departments, only one provincial representative sits as the provincial co-chair. Thus, for each province there is a balanced federal-provincial representation, with one co-chair each. In Alberta, a third co-chair was appointed to represent municipalities in an ex officio role with no formal decision-making authority.

17.19 In addition to the above-mentioned agencies, the Canada Infrastructure Works Program includes the First Nations Infrastructure Initiative, which is administered entirely by Indian and Northern Affairs Canada and has no direct provincial government involvement. Hence, there are no federal-provincial agreements for this initiative; applications for projects are made directly to Indian and Northern Affairs Canada.

The allocation of responsibilities between the federal and provincial governments is based on their comparative expertise

17.21 In both phases of the Program, federal funds were allocated to the provinces, territories and First Nations based on their respective shares of population and unemployment (see Exhibit 17.1 for Phase II allocations). In each province and territory, and in Indian and Northern Affairs Canada, funds were allocated in a manner that reflected local priorities. This resulted in a variety of allocation methods.

17.22 Based on their specific priorities and local requirements, individual municipalities and other organizations submitted project applications to the responsible provincial ministry or, in some cases, the joint federal-provincial secretariat. If approved at that level, applications were forwarded to the federal co-chair and the Infrastructure Minister for approval.

17.23 In general, once the Infrastructure Minister gave final approval for a project, a separate local agreement was made between the province or territory and the municipality or other organization. These local agreements are project-specific, dealing with such matters as eligible costs and contribution limits; they do not involve the federal government directly. First Nations projects are characterized by local agreements between Indian and Northern Affairs Canada and the relevant First Nations community.

Focus of the audit

17.25 The follow-up component is a standard practice of our Office. We chose to undertake an additional audit of Phase II for several reasons. One important reason is the large expenditure involved - $425 million. As well, this audit takes into account experience gained since the first audit. In 1996, the Program had been under way for less than two years. At the time of our examination for this audit, the Program had been in place for more than four years. Finally, and perhaps most important, this audit is an opportunity to identify those practices that have worked well and those that require improvement.

17.26 Objectives. Specifically, this audit set out:

• to determine whether the projects undertaken in Phase II conform with the targeting and project selection requirements of the relevant Infrastructure Works agreements;
• to determine the adequacy of the financial and management regime for Phase II;
• to determine the extent to which Phase II conforms with the requirements of relevant environmental law; and
• to determine the extent to which the observations and recommendations made in the 1996 Report of the Auditor General, which could have been acted upon in the program extension, have been acted upon.

17.28 This chapter presents observations, conclusions and recommendations pertinent to the federal government, our specific jurisdiction. The reports of the Auditor General of Nova Scotia and the Provincial Auditor of Saskatchewan are expected to be tabled with their respective legislatures, and will deal with matters pertinent to the provincial governments concerned.

17.29 We supplemented the findings from our jointly undertaken audit work in Nova Scotia and Saskatchewan by focussing the rest of our audit on selected provinces. Overall, we selected British Columbia, Alberta, Saskatchewan, Ontario, Quebec and Nova Scotia for audit to ensure representation of all federal implementing departments. This coverage amounted to about 90 percent of the Program's expenditures. For the other provinces and territories, the findings from our audit do not necessarily apply due to possible program differences.

17.30 For the provinces covered by our audit, we examined a sample of federal project files and many of the corresponding provincial project files. As well, in selected cases, we broadened our review to include an examination of related project files held by municipal governments. We examined the First Nations Infrastructure Initiative in terms of its planning and approval process only.

17.31 Further details on the audit are presented in About the Audit at the end of the chapter.

Observations and Recommendations

Program Implementation

Some program differences exist between Phase I and Phase II

17.33 Moreover, in Phase II the federal government significantly lowered its level of expenditures. The federal-provincial agreements authorizing additional funding for Phase II specified that construction activities had to be completed within one year. The period for project completion was subsequently extended to two years, compared with the five years allowed in Phase I. The shorter lead times in Phase II, coupled with a lengthy approval process (see paragraph 17.39), resulted in many projects receiving project approval after construction had begun.

Both phases of the Program were implemented quickly

Program officials view the program approach very positively

17.36 Officials believe that the Program's approach - combining the specific expertise of the two levels of government within an established framework of federal-provincial agreements - has been largely responsible for this achievement. The provincial governments are responsible for the day-to-day running of the Program, while the federal government has a less operational role. Consequently, the federal government has not become involved in project nomination or in second-guessing the decisions made at other levels on the screening and selection of initial project proposals.

17.37 Program managers we spoke to believed that there were significant savings as a result of reduced overlap and duplication of activities between the two levels of government. Such savings have not been measured to date. Moreover, any savings identified would need to take into account our assessment, as identified in this chapter, of the current financial management and control arrangements.

Effort was devoted to ensuring that participation of all partners was recognized

17.39 In some provinces, each project nomination submitted to the Infrastructure Minister for approval was forwarded to the appropriate provincial and federal members of Parliament for their input. As well, in all provinces, final federal approval could not be given until environmental assessment requirements had been fully met. In the two provinces where we examined these processes in detail, we found that all of these requirements combined added approximately two months to the approval process.

17.40 We were told that in some provinces applicants could proceed at their own risk prior to federal approval because of the tight time frames involved. However, if for any reason a project was not approved, the federal government's share would not be paid. For many of the projects we examined, approval was received after construction had already begun. In our opinion, the fact that construction can begin beforehand reduces the significance of the role of the federal approval process.

17.41 The lengthy project approval process frustrated program officials. In our view, it would have been reasonable to streamline the delegation of approvals based on risk and level of expenditure, so that the Infrastructure Minister need not have approved every project application. In all likelihood, this would have improved the turn-around time for approvals.

17.42 In future programs of this type, the project approval process should be based on a more streamlined approach, with delegation of authority for approvals based on risk and level of expenditure.

Treasury Board Secretariat's response: In principle, streamlining of the project approval process is desirable. In practice, the process is one of the elements that must be negotiated with the other program partners and we would endeavour to do so.

Funding, Targeting and Impacts of the Program

Funds were spent largely on traditional infrastructure

17.44 Projects undertaken by First Nations communities differed somewhat from those in the rest of the country, owing to distinct community differences. There are over 600 First Nations, 75 percent of which are located in communities of less than 1,000 people. Most of these communities can be described as rural or remote, with vastly different infrastructure needs from those of other Canadian communities. First Nations projects often focussed on building or expanding their community's basic infrastructure.

Program targeting is weak

17.46 As we found in 1996, the project selection criteria most frequently cited in support of project proposals related to providing additional infrastructure facilities in response to local needs, upgrading existing infrastructure to meet community standards, and creating short-term employment (see Exhibit 17.3). In 1996 we noted that the meanings of many of the terms relating to these and other selection criteria were not clear. We found that situation unchanged.

17.47 We found that the operational definition of the term "incremental investment" can differ across provinces and is not always fully in line with the Program's overall objectives. Similar concerns apply to the meaning of "employment creation". We found no clear identification of what "community standards" mean in practice or how such standards could be assessed in applying project selection criteria. Finally, as noted in paragraph 17.54, even the term "infrastructure", which determines the basic scope of the Program, would benefit from clarification.

17.48 Most of the federal and provincial project files we examined lacked persuasive evidence to support the claims of project applicants relating to selection criteria. Although some files for large and complex projects contained more detailed analyses, most applications were prepared in qualitative and often vague terms, with no information, other than certifications by project applicants, to back up claims that criteria were being met. In most cases, federal officials endorsed provincial assessments without ensuring that provincial officials had received and analyzed the appropriate information or requiring direct supporting information themselves.

17.49 In our view, the federal government accepted the responsibility for approving projects and is accountable to Parliament for program results. Consequently, there was a need for federal officials to make recommendations on proposals either on the basis of assurance that their provincial counterparts had carried out a review of adequate supporting information or on the basis of their own review. While some measure of assurance would be required for every project, the depth and detail of review could be expected to vary, depending on risk and the level of expenditure for a particular project.

17.50 In future programs of this type, the government should ensure that project selection criteria are clearly defined, and that persuasive information and analyses are available and have been assessed to support recommendations for project approval.

Treasury Board Secretariat's response: We agree that project selection criteria should be clear in any further program and that projects would need to be assessed against them.

17.51 In the case of Indian and Northern Affairs Canada, program officials told us that there was a requirement that the First Nations Infrastructure Initiative should accelerate the implementation of supported projects by at least three years - the incrementality requirement. Once approved, First Nations infrastructure projects were administered under existing departmental capital program activities.

The implications of private-sector-related projects need to be addressed

17.53 As part of our audit of Phase II, we conducted a review of project descriptions in the Infrastructure Office database, and examined project files where the description indicated possible private sector connections. In addition, we obtained management representations on the nature and extent of such investments. We extended our examination to any files identified by this means.

17.54 We found that federal government program expenditures in support of the projects we identified were approximately $10 million. This included funding such diverse projects as the construction of a research laboratory and tourist facilities (including the construction of a convention centre and an artificial lake), and upgrading a road leading to a mine (see Exhibit 17.4). Although these investments made up only about two percent of total federal funding under Phase II, in our judgment the design of the Program would have benefited from more precise clarification at the outset of the coverage of infrastructure assistance that was intended, as well as possible implications.

17.55 For example, our examination raised the possible issue of unfair competition resulting from direct or indirect assistance to some firms and not to others. Such government assistance may unfairly tilt the playing field against other competing firms that do not benefit from the assistance provided by the Program. In our examination of the program guidelines and federal-provincial agreements, and our interviews with program officials, we did not find any evidence that program designers had considered these or other implications of funding projects involving private sector partnerships and other linkages to the private sector.

17.56 In future programs of this type, the government should clearly define the coverage of the term "infrastructure". If that coverage allows for support of projects involving private sector partnerships and other private sector linkages, the government should ensure that program guidelines specifically address related implications.

Treasury Board Secretariat's response: The recommendation implies that the term ``infrastructure" was not clearly defined. It was, and it did allow for support of private sector initiatives. However, care was taken to ensure that none of the projects that had private sector involvement (i.e. two percent of federal funding under Phase II) resulted in unfair competition.

Incentives exist to substitute Canada Infrastructure Works Program funds for regular, ongoing provincial infrastructure expenditures

17.58 Exhibit 17.5 outlines examples of provincial government programs providing ongoing assistance to municipalities for infrastructure investment, based on programs in place for either some or all of the period from 1993 to 1999. This covers the period immediately before and during the implementation of the Canada Infrastructure Works Program. In most cases, the provinces' own programs require provincial governments to outlay half or more of the eligible costs of municipal infrastructure investments. However, when projects are funded under the Canada Infrastructure Works Program, provincial government expenditures average only about one third of the total investment. Because of the different provisions of federal and provincial programs, we believe there are financial incentives for provincial governments to transfer their budgetary resources away from their own regular programs to the national infrastructure program.

17.59 The Canada Infrastructure Works Program is meant to encourage additional investments in local infrastructure - a condition necessary to increase infrastructure development and create employment. For this reason, if provinces simply switch funds between programs, the national program's intended effects are reduced.

17.60 The government's own 1996 evaluation of the Program expressed concerns about the lack of effort to enforce the requirement to encourage additional investment levels. The evaluation identified this as a "program weakness". We believe that the possibility of program substitution deserves attention as a key part of this issue.

17.61 Identifying the actual extent of program substitution that may have occurred is an extremely difficult task, and one that the current audit could not address in the absence of detailed data from other program partners. However, in our examination of project files, we found evidence that some projects approved under the Canada Infrastructure Works Program may have been funded under programs that would have been more costly for the provinces involved. Although we would not have expected project files automatically to contain such information, we found specific cases where projects that would likely otherwise have received approval for funding under existing provincial programs, or had actually received approval, were ultimately funded under the Canada Infrastructure Works Program. We believe that this file evidence, coupled with the financial incentives identified in Exhibit 17.5, suggests that program substitution is an issue that needs to be addressed in program design.

17.62 The period during which the program functioned featured a lot of general budget cuts by provincial governments, including cuts in provincial capital assistance programs. At the same time, however, the federal initiative was attempting to increase levels of infrastructure investment. In this context, substitution would represent a rational response by provinces to the national infrastructure program. It does not represent a violation of the Program's terms and conditions; rather, it responds to a design element that program developers may not have sufficiently considered beforehand. To the extent that it occurs, program substitution directly affects the achievement of the Canada Infrastructure Works Program's primary objectives: infrastructure development and employment creation that would not have occurred otherwise at that time.

Safeguards are needed to limit program substitution

17.64 The types of provisions used in Quebec and by the Saskatchewan Association of Rural Municipalities in Phase I of the Program provide examples of safeguards that can deter program substitution. In 1996, we reported that Program expenditures in Quebec had to be in addition to a minimum level of ongoing investment that municipalities were required to maintain in order to be eligible for assistance under the Program. In these circumstances, we believe that substitution would be necessarily limited.

17.65 In future programs of this type, the government should ensure that there are safeguards to limit the substitution of program expenditures for expenditures that would otherwise have been undertaken by the programs' partners.

Treasury Board Secretariat's response: While not disagreeing with the recommendation per se, the government disagrees with the implication that there were no safeguards to limit substitution in Phases I and II. There were and they worked: after two audits and one follow-up, no evidence of significant substitution has been presented.

Continuing questions about job creation estimates

17.67 Our 1996 audit recognized a number of strengths derived from the application of the Statistics Canada employment estimation model. However, we also questioned whether it was appropriate to rely on this approach alone. We noted that the assessment of the Program's employment impact would be more balanced if more than one estimation approach were used, particularly for individual projects at the local level.

17.68 We found that the government has not taken any steps either to improve the estimates of employment actually created by the Program, or to clearly set out the limitations of employment estimates in reporting them to Parliament. The Treasury Board Secretariat's Performance Report to Parliament for the period ending 31 March 1998 indicates simply that over 128,000 jobs have been generated by the Program. It provides no information about such matters as the source of the estimates, the duration of the jobs or whether all these jobs can be attributed to the Program.

17.69 The answer to the question of how much job creation can be attributed to the Program's activities remains unclear. If, for example, the Program's funding of infrastructure investment resulted in part in substituting Canada Infrastructure Works Program expenditures for regular, ongoing provincial program expenditures, then the Program's net job creation effects would be correspondingly reduced.

17.70 At the time of our examination, we noted a project where Canada Infrastructure Works Program funds were supplemented by another federal program. Yet until we brought this to the attention of program management, all of the estimates of employment benefits were attributed to the Canada Infrastructure Works Program alone. Subsequent changes were made to the project that dealt with the issue we identified. Where other programs contribute to an infrastructure project, the employment associated with that project cannot be attributed solely to the Canada Infrastructure Works Program.

17.71 In our judgment, the absence of a more thorough assessment of the Program's job creation effects is a crucial omission. The lack of such an assessment erodes the reliability of program performance information, which is essential for adequate accountability to Parliament and Canadians. Furthermore, without adequate performance information there is a risk that program design features of questionable effectiveness will be repeated, should any decision be made to undertake a similar initiative in the future.

17.72 In its Performance Report, the Treasury Board Secretariat should provide Parliament with information on the employment effects of the Canada Infrastructure Works Program that clearly sets out its sources and limitations.

Treasury Board Secretariat's response: We agree that Parliament should be provided with complete information on the employment effects of the Canada Infrastructure Works Program.

Financial and Management Controls

Insufficient attention to ensuring control

17.74 Our current audit has confirmed and extended the findings from our 1996 Report: from an overall federal perspective, the Program is essentially "running on trust", with insufficient attention given to ensuring adequate control of public funds. In several of the provinces we examined, public moneys have been released to municipalities for work undertaken without provincial officials demanding invoices or proof of payment (see Exhibit 17.6). Without this documentation, it is impossible to determine whether claims have been made for expenditures specifically disallowed by the Program, or even whether the expenditures were actually made.

17.75 In every province examined, we observed that federal officials relied on provincial and municipal certifications that the projects were implemented and that costs were claimed in accordance with the federal-provincial agreements and guidelines. The implementation of compliance audits, which represent a means of verifying certifications, has been slow. Compliance audits have almost always taken place after all projects were approved, and in many cases after projects were completely constructed and funds paid out.

Implementation of compliance audits has been slow

17.77 With the exception of Quebec, and to a lesser extent British Columbia, the Phase II compliance audits are scheduled for completion only after a considerable amount of time has passed since the start of the Program. Their completion averages approximately two and one-half years into the Program - six months before most final payments are scheduled to have been processed. In our view, this delay creates two problems. First, if the audits were to identify required changes in program approach, the opportunity to implement these changes might be missed altogether. Second, we are in agreement with some program officials who maintain that if the audits were to identify ineligible costs paid out, it would be more difficult to recover these moneys, as the final payments (including the release of the holdback) would likely have occurred for many of the projects.

17.78 Compliance audit work that had been undertaken for both phases of the Program at the time of our audit illustrates the value of a timely and rigorous audit regime. For example, a provincial compliance audit of a Phase II project identified $121,000 of $516,000 in expenses claimed as potentially ineligible. Upon resolution by the applicable management committee, including subsequent changes to the original project approval date, $49,000 was determined to be ineligible. In still another case, auditors raised questions about $279,000 of $1 million in expenses claimed. As a result of this, the auditors recommended that the provincial ministry concerned request supporting documentation for the next claim.

17.79 During our own examination of Phase II project files, we noted that both levels of government had paid for some regular, ongoing provincial and municipal worker salaries. Under the Program, for these salaries to be eligible, it had to be demonstrated that these government workers would have been laid off or that they were hired specifically as a result of the project approved. However, in 25 of 167 projects examined, approximately $2.5 million in salaries was paid out without adequate assurance that they were incremental.

17.80 In our view, the federal partner needs assurance that all costs claimed and paid out are eligible as specified in the federal-provincial agreements and program guidelines established for each of the provinces. Because it may be more difficult to recover funds once they have been paid out in full, we urge that a timely review take place in much the same manner as undertaken by the Province of Quebec. In this province, a sample of projects is selected based on risk and materiality, and is audited prior to the final payment. If an adjustment is required, the amount is deducted from the final payment.

17.81 In future programs of this type, the government should ensure that agreements among partners make adequate provision for rigorous and timely compliance audits. Such provisions should clearly assign responsibilities among partners, and specify the coverage, timing and reporting of audits, along with resource levels to be allocated to the compliance audit function.

Treasury Board Secretariat's response: Compliance audits are a requirement in Phase II and are either completed or under way in all provinces. As Canada Infrastructure Works Program payments are made from one order of government to another, and as these governments have a range of ongoing financial transactions, the risk of not being able to recover any overpayments is minimal.

Insufficient assurance of value for money

17.83 The federal-provincial agreements have provisions that limit the possibility of cost overruns being paid. However, we observed several cases where amendments had been made to cover such extra costs. These cases may point to a lack of adequate costing in project proposals. In still another instance, an internal audit identified an approved project with construction standards that were beyond provincial standards. In this case, the issue was dropped, as matters relating to construction standards were not identified during the approval stage. With an up-front assessment, these costs might well have been avoided.

17.84 When we raised these issues with program officials, they claimed that establishing such controls for all projects would add significantly to program operating costs. A possible solution would be to use a selective assessment process tied to the value of the projects concerned, along with a risk assessment based on the individual municipality's track record for infrastructure investment. We do not suggest that the federal government needs to carry out the assessments itself; rather it needs assurance that a system is in place and operating adequately.

17.85 The federal-provincial agreements specify that contracts must be awarded and administered according to provincial administrative, management and contract procedures. This may or may not include the requirement that all contracts be tendered. Among the provinces we examined, only Saskatchewan had guidelines requiring project contracts to be tendered.

17.86 In the majority of the federal and provincial files we examined, we found no information to indicate whether tendering had taken place. In a limited number of cases, however, partial or indirect references in file material showed that the projects had been tendered. Overall, except in the case of one Ontario government implementing department, the project files provided little information about whether or not this control was implemented.

17.87 In future programs of this type, the government should ensure that project proposals are assessed to provide an adequate level of assurance with respect to technical feasibility and financial requirements.

Treasury Board Secretariat's response: The program design takes advantage of the fact that local and provincial governments have much experience in carrying out infrastructure projects and that they are paying two thirds of the costs. Thus they are both competent and motivated to obtain value for money. Further detailed monitoring by the federal partner would be unlikely to improve the return on the taxpayers' investment.

Improvements made in fulfilling federal environmental obligations

17.89 More than half of all Phase II projects did not require environmental assessments. Where they were required, the federal project files in all of the provinces we examined contained evidence that they were undertaken before final federal project approval. As we found in 1996, procedures and documentation varied among the departments. However, for the most part, we noted considerable improvements in the thoroughness of documentation and analysis undertaken for Phase II projects. Unfortunately, we also observed weaknesses in the identification and monitoring of mitigation measures.

17.90 Mitigation measures are designed to deal with potentially harmful environmental effects. Incorporating these measures during the construction of infrastructure projects increases the likelihood that risks to the environment are effectively mitigated. Their implementation is a necessary condition for the receipt of federal funds, and requires monitoring. Mitigation measures need to be clearly specified, along with the project applicant's responsibility for implementing them.

17.91 The results of our examination vary by province, with some project files containing little or no information on mitigation efforts required and others providing very complete information. Project proponents were asked to certify, either directly or indirectly, that mitigation measures had been implemented. However, we found no evidence in the project files we examined to show that federal authorities had verified whether these measures were put in place and were effective. We believe that such verification, carried out selectively, would provide additional assurance that irreparable damage has not been done to the environment. In this context, we note that in most of the provinces we reviewed, compliance audits do not address matters relating to the implementation of mitigation measures.

17.92 We observed several projects where construction began before federal approval was given, and before an environmental assessment was completed. Because of the short time frame in which Phase II of the program had to be implemented, some provinces informed applicants that they could go ahead with construction. However, the applicants would be responsible for all costs, including any environmental clean-up costs, if the project was not approved. In half of the Ontario projects we examined that required mitigation measures, construction began before the environmental assessment was completed. Two of these projects were entirely constructed before the environmental assessments had been completed. As the mitigation measures had not been specified when construction began, their identification and implementation were left solely to the discretion of the project proponents.

17.93 Beginning construction before federal environmental assessment and project approval does not contravene the provisions of the Canadian Environmental Assessment Act. However, it contravenes the spirit of the Act, as irreparable environmental degradation effects are possible. We are concerned that, in many cases, environmental assessments have not occurred early enough in the project planning and approval process to be an effective means of preventing environmental damage. As we observed in 1996, it may be difficult to withdraw support for projects once funding commitments - albeit conditional - have been made.

17.94 In future programs of this type, the government should ensure that:

• environmental assessments are completed early enough to be taken into account in the project planning and approval process;
• necessary mitigation measures are clearly identified; and
• a system for obtaining assurance of the implementation of mitigation measures is in place.

Response to 1996 Audit

Limited progress on the recommendations of the 1996 Phase I audit

Improvements are needed in federal-provincial agreements

17.97 We concluded that in any future program activities of this type, the agreements could be improved in several areas. First, the term "infrastructure" could be defined more clearly. Also, project selection criteria need to be clarified, particularly in support of objectives relating to generating additional infrastructure investment and creating employment.

17.98 Further, continuing concerns with the timeliness and coverage of compliance audits indicate that a more explicit delineation of the responsibilities of the federal and provincial partners is needed in these areas.

17.99 Finally, we recognize that the federal government took important steps during Phase I to implement a program evaluation. However, despite evidence of deficiencies from this source, as well as from our 1996 audit and compliance audits, program management has not made the necessary adjustments. Hence, we believe there is a need to incorporate more rigorous and formal provisions within agreements to address problems revealed by feedback on performance.

Conclusion

17.101 In this audit, we were particularly concerned to determine whether the Phase II projects conformed to the targeting and project selection requirements of the relevant federal-provincial agreements. Our conclusion is that, overall, there is a lack of clarity in a number of key targeting requirements established as part of the Program's design, including what actually constitutes infrastructure or an incremental investment for the purposes of the Program.

17.102 The Program's approach may well have produced several benefits; however, there is still a need for adequate financial control and timely, reliable performance information. We have concluded that financial and management controls for this program are inadequate.

17.103 Grants are unconditional payments made by the federal government to individuals and organizations, whereas the payment of a contribution is subject to performance conditions that are specified in a contribution agreement. The recipient must show that these conditions are being met in order to be reimbursed for specific costs over the life of the agreement. The government can also audit the use of contributions, whereas this is usually not a requirement for a grant. While there can be some blending of the requirements involved, the accountability requirements for contributions are generally more onerous than for grants.

17.104 The government specifically chose the option of contributions over that of grants as a means of delivering the Canada Infrastructure Works Program. However, we have found that, from an overall federal perspective, the Program is essentially "running on trust", with little confirmation that performance conditions are being met.

17.105 Although the positive features of the present program approach cannot be ignored, we believe that certain controls need to be put in place to provide assurance that public funds are spent economically, efficiently and effectively, and that accountability for results is achieved. We do not suggest that the federal government itself needs to exercise up-front controls. It does, however, need assurance that controls are in place and working adequately. In this regard, a rigorous compliance audit function needs to be implemented in a timely manner.

17.106 The absence of adequate financial and management controls for this program is not the first case where we have identified such problems. Our December 1998 Report, Chapter 25 Transport Canada - Investments in Highways, identified similar concerns. We believe that if the government puts in place a set of conditions, it is reasonable to expect it to institute mechanisms to ensure adherence to those conditions.

17.107 We found that progress has been made in the extent to which Phase II of the Program conforms to the requirements of the Canadian Environmental Assessment Act. We have concluded that the requirements of the Act are being met with respect to assessments of environmental impacts. However, where negative environmental effects have been identified, requirements for specifying and monitoring the implementation of mitigation measures are inadequate.

17.108 The government has made limited progress in responding to the recommendations of our 1996 audit of Phase I of the Program. Most of our Phase I recommendations addressed issues that could have been pursued under Phase II, but were not. In view of the size of the expenditures involved in Phase II operations, this lack of progress is a source of concern.

Treasury Board Secretariat's response: Commencing in 1994, Canada Infrastructure Works was at the leading edge of intergovernmental collaboration in the effective delivery of a trilateral program. It has resulted in $8.3 billion being invested in over 17,000 projects across Canada, and involved hundreds of governmental organizations each adding their particular strengths to keep administration costs to a minimum. All of this was accomplished without any financial mismanagement.

Unfortunately, the auditors have approached their review as if Canada Infrastructure Works was a standard federal contribution program requiring the traditional amount and type of supervision above and beyond meeting the legal requirements. This fails to recognize that each of the three orders of government involved had investments at stake, each was competent to effect its part of the collaborative program delivery and that each had audit and evaluation capabilities as well as political oversight.

Although improvements can and should be made in any future such programs, the chapter presents an inappropriately negative view of what was a highly successful program in terms of results and one that made a positive contribution to federal-provincial-municipal relations in Canada.

About the Audit

Objectives

• to determine whether the projects undertaken in Phase II conform with the targeting and project selection requirements of the relevant Infrastructure Works agreements;
• to determine the adequacy of the financial and management regime pertaining to Phase II;
• to determine the extent to which Phase II conforms with the requirements of relevant environmental law; and
• to determine the extent to which the observations and recommendations made in the 1996 Report of the Auditor General, which could have been acted upon in the program extension, have been acted upon.

Scope and Approach

In addition, because of its unique features, we examined the First Nations Infrastructure Initiative strictly in terms of its planning and approval processes. We did not examine project files.

Criteria

• Actions should have been taken on recommendations made in the 1996 Report of the Auditor General that apply to Phase II of the Program.
• Financial and management control of program expenditures should comply with relevant federal policies.
• Program management should ensure that a program accountability framework is developed and clearly communicated, including assignment of responsibility for the achievement of results.
• Program management should set out clear operational objectives that define "success" and provide the basis for program implementation.
• Program management should measure, monitor and clearly report on results achieved to legislators and within and among federal/provincial partners.
• Program management should be supported by reliable, relevant and timely information on program needs, operations and performance.
• Program processes and procedures and their implementation should further the achievement of program objectives and comply with the terms of the agreements, while controlling costs.
• Program management should ensure that each project has been assessed for potential environmental concerns.
• The Program should be implemented in conformity with the requirements of The Canadian Environmental Assessment Act, where applicable.

Audit Team

Louise Grand'maison
Jayne Hinchliff-Milne
Raymond Kuate-Konga
Pierre Labelle
Joanne Moores

For information, please contact Henno Moenting.