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2005 November Report of the Auditor General of Canada

Main Points

What we examined

Each year we audit the financial statements of the Government of Canada, most Crown corporations, and other organizations. Other Audit Observations discusses specific matters that have come to our attention in the course of that work or our performance audit work. This chapter includes four such observations, involving the Canadian International Development Agency (CIDA), Transport Canada, Parc Downsview Park Inc., and the Employment Insurance Act.

Because these observations deal with specific matters, they should not be applied to other related issues or used as a basis for drawing conclusions about matters we have not examined.

Why it's important

We may report a specific observation for any of several reasons. Generally, the issue is timely and signals the possibility of a larger systemic matter. It may involve a significant amount of public money, and it may raise a question of compliance with laws or regulations. Whatever the reason, each observation in this chapter concerns a matter that we think warrants Parliament's attention in the current Report.

What we found

• CIDA—Tsunami disaster relief. In the middle of the tsunami disaster in Southeast Asia, the Agency provided emergency relief and also successfully launched a matching-funds program. It has generally managed its grant agreements well and has established a satisfactory accountability framework for this five-year program. The Agency was unable to spend all its initial tsunami funds before the financial year end and spent about $69 million of the funds on other activities. It plans to redirect the same amount from its regular 2005–06 budget back to tsunami relief. Credible and candid reporting of the results of its tsunami aid activities will be important in the future.
• Transport Canada—The Quebec Bridge. In 1993, Transport Canada signed an agreement with the Canadian National Railway Company (CN), transferring the Quebec Bridge to CN (a Crown corporation at that time). In 1997 Transport Canada, CN, and the Government of Quebec signed a $60 million agreement for the restoration of the bridge over 10 years. Today, the restoration of this important regional transportation infrastructure, a national historic site, is only partly completed. It will not be completed within the timeline and budget established in the agreement. Major issues remain regarding the financing of the rest of the restoration work in the years to come. Transport Canada needs to act to ensure the long-term viability of the Quebec Bridge.
• Parc Downsview Park Inc.—The transfer of Downsview lands and financing of future operations. The government has prepared the way to obtain Parliament's approval for the transfer of 227.65 hectares of Downsview lands to Parc Downsview Park Inc. The government has also authorized that the lands then be used to generate revenue that will finance the creation of an urban recreational green space. If implemented, these decisions will resolve matters we have previously reported to Parliament.
• The Employment Insurance Act—A new rate-setting process. For the past six years we have raised concerns about compliance with the intent of the Employment Insurance Act—specifically, the process for setting Employment Insurance (EI) premium rates and its impact on the size and growth of the accumulated surplus in the EI Account. A recent amendment to the Act means that as of 2006, the rate-setting process will change so the premium rate each year will generate just enough revenue to cover the costs of the program. The Account will continue to record program revenues and expenses, but the accumulated surplus is no longer to be considered in calculating the break-even premium rate.

The Canadian International Development Agency

The Agency acted responsibly to deal with the tsunami disaster relief

In brief

We assessed the Canadian International Development Agency's efforts to deal with the tsunami disaster in Southeast Asia. As the full scope of the disaster emerged, the Canadian government committed $425 million toward a five-year comprehensive response. These funds were to be used for humanitarian aid, rehabilitation, and reconstruction initiatives in the most affected countries, particularly Sri Lanka and Indonesia.

Many Canadians supported tsunami relief efforts. Twenty-seven non-governmental organizations raised $213 million, which was eligible for matching funds from the government. By the end of June 2005, the Agency had disbursed $90.6 million in matching funds and an additional $37.6 million in immediate assistance to eligible organizations. In addition, Canada is working with the provinces and municipalities to support their involvement in providing technical assistance in the reconstruction process.

Our audit found the following:

• The Agency successfully launched a new matching-funds program in the middle of the emergency.
• Grant agreements were generally well managed.
• The Agency's accountability framework is satisfactory. In this first year of a five-year program, the Agency's approach seems to be headed in the right direction.
• The Agency was unable to spend its initial tsunami relief funds before the 2004–05 year-end and spent about $69 million intended for tsunami relief on non-tsunami activities. It plans to compensate for this by directing $69 million from its regular 2005–06 budget to tsunami relief and will need to report to Parliament on how it directed the funds and on its tsunami aid activities.

Audit objective

8.1 Our objective was to determine whether the Canadian International Development Agency, in responding to the tsunami disaster, had

• matched the funds contributed by Canadians and spent the funds as intended, within the authority granted by Parliament;
• put in place an accountability framework that adequately defined roles, responsibilities, and expected results for its tsunami relief program; and
• co-ordinated relief efforts between different governments and relief agencies.

Our examination ended on 29 July 2005.

Background

The tsunami and Canada's response

8.2 The earthquake that struck under the Indian Ocean on 26 December 2004, triggered a massive tsunami that affected countries throughout the region. According to the International Red Cross, the tsunami left 280,000 people dead or missing, and displaced more than one million from their homes in South and Southeast Asia.

8.3 Within hours of the disaster, Canada promised immediate assistance. As the full scope of the crisis emerged, the Canadian government allocated $425 million toward a comprehensive response to the tsunami devastation in South and Southeast Asia. The federal funding was originally allocated in the following manner:

• an initial $265 million for the 2004–05 fiscal year, and
• an additional $160 million over the following four years.

Of the $425 million, the Canadian International Development Agency is managing 90 percent or $383 million. The government had originally planned to spend an estimated $150 million for a program that would match, dollar for dollar, the generous contributions made by Canadians between 26 December 2004 and 11 January 2005.

8.4 The funds were to be

• used for humanitarian aid, rehabilitation, and reconstruction;
• used for debt relief in the affected countries;
• used, over five years, in the most affected countries—particularly Sri Lanka and Indonesia; and
• determined by the needs and priorities identified by affected countries.

Issues

Co-ordinating efforts is a challenge

8.5 The major challenge for the tsunami relief effort was, and still is, co-ordination. People and organizations all over the world responded impressively to the tsunami disaster, donating funds to multilateral groups working in the affected area. Adding to the co-ordination challenge were

• the many different types of donors that wanted to help—individuals, businesses, and different levels of government;
• the unsolicited supplies that arrived in the affected countries and hindered the routing of more urgently needed supplies;
• the many aid agencies that rushed to the tsunami-hit communities;
• the fact that two of the hardest hit areas—in Indonesia and Sri Lanka—are areas of civil unrest; and
• the disagreements between governments and rebel groups that made it more difficult to send aid to affected communities, in those two countries.

8.6 The Agency's efforts have been part of a "whole of government" approach, and the Agency has been working with many other federal organizations, led by Foreign Affairs Canada. During our audit, both Foreign Affairs Canada and Agency officials indicated that lessons learned during the relief response to Hurricane Mitch, in 1999, made dealing with the tsunami less difficult. For example, standard operating procedures had been established to deal with major disasters, and relief supplies had been prepared before any immediate need. In June 2005, the federal Interdepartmental Tsunami Task Force received a Public Service Award of Excellence. Exhibit 8.1 outlines the Agency's efforts at co-ordination.

The Agency was unable to spend its initial funds before the end of 2004–05

8.7 In addition to co-ordinating donations, donors—including the Government of Canada—must make sure that donations for emergency relief are timely. The government anticipated that it would spend $265 million from January to March 2005, of which the Agency would manage $223 million, and other government departments would manage $42 million. The government prepared supplementary estimates to fund the $223 million, and Parliament approved the related appropriation act on 22 March 2005.

8.8 The Agency was to spend $30 million on debt relief, $150 million for a matching-funds program, and $43 million for other emergency relief (Exhibit 8.2). This is a large amount of money to spend in such a short period even for an organization like the Agency, with an annual budget of almost $3 billion. The limited flexibility provided to departments and agencies to transfer funds appropriated by Parliament from one year to the next presents a significant challenge for the Agency in reacting to natural disasters.

8.9 By early January 2005, the Agency had put a matching-funds program in place, using its normal criteria for selecting non-governmental organization (NGO) agents for humanitarian aid in disaster situations. In order for the NGOs to qualify for the matching-funds program, they were required to provide audited statements of the amounts collected from the public for tsunami relief and to submit an appropriate request for project approval to the Agency. However, many of the eligible NGOs were not able to submit requests before the end of the fiscal year.

8.10 In addition, the cost of debt relief in the affected countries remained undecided, pending international discussions aimed at developing a common approach to the issue of debt relief.

8.11 As a result, by 31 March 2005, the Agency had

• spent roughly $89 million on the matching fund proposals that it had received by year-end;
• made emergency grants of about $35 million to multilateral aid organizations from December 2004 to March 2005; and
• let the $30 million, earmarked for debt relief, lapse.

In the absence of any mechanism to carry any unspent portion of the $223 million forward into the following year, the Agency spent the remaining $69 million on other non-tsunami related programs (Exhibit 8.2).

8.12 Although the Agency's funding request to Parliament specified it was to be for tsunami aid, the actual wording of Appropriation Act No. 4, 2004–2005 passed by Parliament did not specifically refer to tsunami aid and allowed the Agency considerable flexibility in how to spend the money. Agency officials told us that the $69 million was spent on 2005–06 budgetary requirements that could be paid early and that amount would be freed from the 2005–06 budget to be spent on tsunami aid. In our view, in order to be fully accountable for the matching-funds program objectives, the Agency will need to report clearly to Parliament how it has spent funds received for tsunami aid, including the $69 million to be taken from its 2005–06 budget, and how it is currently funding all its tsunami-related activities.

Reallocation of funds required to match funds donated

8.13 The Government had expected that up to $150 million in donations would be eligible for the matching-funds program, but the total figure grew to $213 million, based on eligible donations made by Canadians between 26 December 2004 and 11 January 2005. To make up the difference between the $213 and $150 million, the Agency is planning to

• use $8 million in emergency relief money that it has not yet spent from its 2005–06 budget;
• request from Treasury Board and Parliament the $30 million, which was originally earmarked for debt relief and which had lapsed at the end of 2004–05; and
• use $25 million from its approved long-term 2005–09 reconstruction budget of $160 million to fund reconstruction projects submitted by NGOs, under the matching-funds program.

Total planned Agency spending for tsunami aid remains at $383 million over the five-year period.

The Agency set up the matching-funds program quickly

8.14 On 30 December 2004, the government announced that it would match donations made by individual Canadians to Canadian non-governmental organizations (NGOs) that were already responding to the disaster. The government initially provided a list of seven eligible NGOs, and the Agency later expanded the list to twenty-seven. The Agency reviewed submissions and accepted, as eligible, NGOs that met its humanitarian-aid criteria and could effectively deliver aid in the stricken area. In total, 72 NGOs applied to be eligible for the matching-funds program.

8.15 Following the announcement of the matching-funds program, a series of conference calls and meetings took place to determine how to manage the program. At this point, the Agency was already choosing its NGO partners. All this activity took place in a few weeks in late December 2004 and January 2005. However, when the Agency set up the program and communicated the eligibility requirements and selection process to the NGOs, there was some confusion for the Agency and NGOs coming into the process. For example, several NGOs that were on the ground and involved in responding to the disaster were determined to be ineligible for matching funds. These NGOs were close to qualifying but could not meet all the criteria at the time that the Agency was making its decisions. Some NGOs were uncertain about how to demonstrate that they met the criteria. We found that the Agency did not fully communicate the reasons for its eligibility decisions to NGOs during the early days of the program.

8.16 After reviewing the files and discussing them with Agency staff, we concluded that officials made reasonable selections. The early confusion that surrounded the NGO selection was a direct result of having to launch a new matching-funds program in the middle of a humanitarian-aid crisis. There was too much to do and not enough time to do it.

Grant agreements were generally well-managed

8.17 We also examined whether the Agency is effectively managing the grants that are going to relief operations under the matching-funds program. The Agency is planning to use both grant and contribution agreements to fund tsunami aid. We examined 13 relief grant agreements, with a total value of roughly $90 million. We did not examine any contribution agreements for rehabilitation and reconstruction, as few such agreements were in place at the time of our audit.

8.18 We found that generally, the Agency managed the grants well and that the approved projects addressed most of the key program objectives. For example

• the funded projects delivered humanitarian relief assistance that focussed on short-term and temporary interventions and that addressed basic immediate needs for health, clean water, sanitation, and shelter;
• projects met the maximum one-year duration and had reporting stipulations and agreement provisions for the return of any funds not spent as intended; and
• the Agency documented its financial control of matching-funds program money, and those documents reflected appropriate signing authority related to key sections of the Financial Administration Act.

8.19 We also expected that the grant agreements would explicitly tie the NGO recipients to all the terms of the matching-funds program. Treasury Board approved the Agency program where each NGO would formally agree to

• account for the funds it had raised,
• manage the results, and
• only use the funds in tsunami-affected areas.

The grant agreements that we looked at addressed most terms of the program. However, the agreements did not commit the NGO recipients to inform the Agency about how the funds were spent and whether the NGOs only spent the funds they collected from the public in tsunami-affected areas. The Agency needs this detailed information to demonstrate the program requirement to spend only in tsunami-affected areas. The Agency intends to ask the recipient NGOs to include in their annual reports details of their tsunami-related spending. This information would likely be useful to the Agency and others for aid co-ordination efforts in the tsunami-stricken areas.

Accountability framework

8.20 Our audit examined whether the overall framework of the tsunami relief program adequately defined the roles, responsibilities, and expected results. We found that there were two frameworks in place. The first was an overall framework that was

• put in place by the government,
• expected to be applied by all federal organizations that were dealing with the disaster, and
• expected to be managed through the Privy Council Office (PCO).

The overall framework calls for Foreign Affairs Canada to take the lead and other departments to co-ordinate their efforts under their own mandates. Federal organizations, including the Agency, were expected to self-assess their accomplishments as they proceeded, and overall reports would be made to the government.

8.21 Under the overall framework, the Agency developed the second framework that applied only to its operations—from the Agency's terms and conditions approved by Treasury Board. We found that the Agency's approach is satisfactory; the following are specific details of what we found:

• The Agency centralized roles and responsibilities with a multi-branch co-ordination committee. This committee has a clear mandate to provide oversight and accountability, develop guidelines and criteria for various proposals, review all projects, and co-ordinate all tsunami-related communications.
• The Agency defined its overall expected results for its humanitarian relief operations in tsunami-affected areas and for reconstruction in Sri Lanka and Indonesia.
• The Agency took most of its management framework for the tsunami work from its existing program structure. Its accountability framework, which applies to humanitarian emergency aid, states that the Agency is committed to results-based management. This means defining realistic expected results, monitoring with appropriate performance indicators, managing risks, and reporting on results and resources used. To meet these requirements, the Agency's grant agreements quantified expected results.
• The Agency is monitoring its own activities and is learning from its performance, including ways to improve any future matching-funds programs and communications with the public and other government departments.
• The Agency has not obtained formal agreements from NGOs that they would provide detailed reporting on the tsunami appeal. The government expects such information to be reflected in Agency reports. The Agency intends to ask the recipient NGOs to include this information in their upcoming annual reports.

8.22 The Agency's approach seems headed in the right direction in this first year of a five-year program. Credible and candid reporting on program results to Parliament and to the public will also be an important element of the Agency's accountability.

Conclusion

8.23 The Agency has moved forward to match contributions made by individual Canadians and to co-ordinate its efforts with many groups. So far, the Agency has adequately managed its grants to NGOs.

In addition, our audit found the following:

• The Agency was able to launch successfully a new matching-funds program in the middle of the emergency.
• The Agency's accountability framework is satisfactory.
• The Agency was unable to spend its initial tsunami funds before the end of 2004–05. To free up funding for the new fiscal year, the Agency spent $69 million intended for tsunami relief on non-tsunami-related activities in the 2004–05 fiscal year. The Agency plans to compensate by directing $69 million from its regular 2005–06 budget to tsunami relief and will need to report to Parliament on how it has directed the funds and on its tsunami aid activities.

Audit team

Assistant Auditor General: Richard Flageole
Principal: Paul Morse

Robert Anderson
Anthony Levita
Catherine Martin

For information, please contact Communications at (613) 995-3708 or
1-888-761-5953 (toll-free).

Transport Canada—The Quebec Bridge

A solution is needed in the restoration and maintenance of the Quebec Bridge

In brief

Designated a national historic site in 1996 by the Minister of Canadian Heritage, the Quebec Bridge is an essential transportation infrastructure for the Quebec City region.

In 1993, Transport Canada signed an agreement with the Canadian National Railway Company (better known as Canadian National or CN), in which it transferred the Quebec Bridge and lands in various parts of the country to the Crown corporation, for one dollar. Under the transfer agreement, CN committed to compensating Canada for its financial obligations related to the Intercolonial and Prince Edward Island Railways Employees' Provident Fund, being responsible for all costs associated with the cleanup of any contaminants on lands transferred, and funding a major restoration program for the bridge. The restoration program, which includes the installation and maintenance of architectural lighting, was intended to restore the structure to a condition that would ensure its long-term viability and that would be maintained.

In 1995, the government privatized CN by means of a public share issue. In 1997, the governments of Canada and Quebec agreed to make a financial contribution to CN for the purpose of restoring the Quebec Bridge between 1997 and 2006.

The announced restoration program had two phases. The first phase, the restoration of the structure and cleaning of the structural components, was completed in 1999. However, we found that cost increases and significant delays affected the second phase (sanding, cleaning, and painting), so that the amounts forecast in the 1997 agreement will be enough to complete only 40 percent of the planned work. Major issues remain regarding the financing of the remainder of the restoration work in the years to come. Transport Canada needs to take action that will ensure the long-term viability of the Quebec Bridge.

Audit objective

8.24 Our audit objective was to determine whether, at the time of the Quebec Bridge transfer in 1993 and the 1997 funding agreement, Transport Canada had applied management principles that protected the interests of Canadian taxpayers and ensured the long-term viability of this essential infrastructure.

Background

8.25 The longest cantilever bridge in the world, the Quebec Bridge was built between 1910 and 1917 by the Government of Canada to link the two shores of the St. Lawrence River at Quebec City. Originally consisting of one span with two railway tracks, two sidewalks, and an unused space in the middle, it was used solely for rail traffic for 12 years. In 1923, the federal government assigned the management and maintenance of the bridge to the Canadian National Railway Company (better known as Canadian National or CN), which was a new Crown corporation at that time. (See photograph)

8.26 In 1928, the Government of Canada signed an agreement with the Government of Quebec authorizing the province to build a roadway on the bridge. A second agreement was signed in 1949 for work to widen this road. Under this long-term lease agreement, the Government of Quebec agreed to pay $25,000 per year until 2012. In addition, the Government of Quebec became responsible for maintaining the road surface, approaches, and pedestrian walkway.

8.27 Declared an international historic monument to civil engineering in 1987 and designated as a national historic site by the Minister of Canadian Heritage in 1996, the Quebec Bridge represents an essential transportation infrastructure for the Quebec City region.

8.28 The bridge consists of a steel structure that requires ongoing maintenance. In recent decades, rust has gradually settled in. Toward the end of the 1980s, various interest groups in the Quebec City region began to express concerns about the deterioration of the structure and the poor appearance of the bridge.

8.29 Over the years, road traffic on the bridge has increased substantially. This led to many discussions over the years between the Government of Canada, the Government of Quebec, and CN regarding the division of responsibility for restoring and maintaining the bridge.

8.30 In the early 1990s, the federal government undertook various initiatives to commercialize certain assets in the transportation sector. In July 1993, Transport Canada signed an agreement with CN whereby it transferred to the Crown corporation, for one dollar, all rights, titles, and interests in, and to the Quebec Bridge and other lands CN used in various parts of Canada. The federal government had begun to acquire these lands in 1870 and had assigned the management and operation of these lands to CN in 1923. According to Transport Canada, the government had transferred 78,300 acres of land, 80 percent of which was designated for railway use. CN estimated the total value of these lands at $104.2 million at the time of the transfer. The 63,000 acres used expressly for railways, particularly lands used for right-of-way, stations, and marshalling yards, were valued at an estimated $69.7 million, while the 15,300 acres not required for railway activities were estimated to be worth $34.5 million.

8.31 Under the 1993 transfer agreement, CN agreed to compensate the Government of Canada for its financial obligations related to the Intercolonial and Prince Edward Island Railways Employees' Provident Fund, be responsible for all costs associated with the cleanup of any contaminants on lands transferred, and fund a major maintenance program on the bridge. The program included the installation and maintenance of architectural lighting. This program was intended to restore the structure to a condition that would ensure its long-term viability and that would be maintained. The agreement also provided that CN would attempt to reach an agreement with the Province of Quebec to co-fund the maintenance program, without limiting CN's obligations.

8.32 An engineering firm that carried out a study in 1995 estimated the cost of the bridge restoration work at more than $60 million. According to the study's authors, the bridge was in good shape for its age, but essential repair work needed to be done within five years to avoid the deterioration becoming irreversible. It was also suggested that preventive annual maintenance be done to preserve the structure over the long term.

8.33 In 1995, the government privatized CN by means of a public share issue. After negotiations on financing the Quebec Bridge restoration, an agreement was signed in early 1997 between CN and the two levels of government. The 1997 agreement called for a restoration program of $60 million spread over 10 years to ensure the long-term viability of the bridge. CN assumed 60 percent of the cost ($36 million); the Government of Quebec, 30 percent ($18 million); and Transport Canada, 10 percent ($6 million).

8.34 The announced restoration program had two phases. Restoration of the structure and cleaning of the structural components were to be done from 1997 to 1999, while sanding, cleaning, and painting were scheduled to take place from 1999 to 2006. Due to the length of time involved and the cost of the work, the second phase made up the largest part of the program.

Issues

The bridge restoration work will not be completed within budget and on time

8.35 The first phase of the work was completed according to the established schedule, and painting began in 1999 as planned. However, a number of problems and new environmental requirements have increased costs and delayed work considerably. Transport Canada told us that only about 40 percent of the structure will be painted when the agreement expires in 2006. On a site visit, we were able to see that there was a problem with corrosion on the unrestored part of the bridge and that the paint was in poor condition. (See photograph)

8.36 In its report produced in April 2003, the internal audit services of Transport Canada reported that a cost estimate suggests that the restoration program will be more costly than expected in the 1997 agreement and that there is a chance that the work will not be completed according to the agreement's provisions because of a lack of funding. The remainder of the work could cost more than $60 million. For its part, CN indicated a few years ago to Transport Canada that it did not intend to spend more money on restoring the Quebec Bridge and that it considered that it had fully complied with the agreement negotiated in 1997 with the governments of Canada and Quebec, which sets out each party's contribution to the bridge's restoration. At the time of writing this report, the financing of the remainder of the restoration work was still under discussion between Transport Canada and CN.

8.37 The difference of view between Transport Canada and CN is in large part based on their different interpretations of provisions of the 1993 and 1997 agreements. In particular, it is CN's position that the 1997 Agreement specifically annulled and replaced the 1993 Agreement. CN, therefore, takes the position that any obligation to maintain the Quebec Bridge should be described by reference to the 1997 Agreement. It is Transport Canada's position that CN is responsible for the long-term viability of the Quebec Bridge as per the 1993 Agreement.

Transport Canada did not follow some management principles when it entered into the 1993 and 1997 agreements

8.38 When an agreement to transfer a public good is signed, management principles require, among other things, the establishment of specific objectives, an analysis of the value of the assets transferred and the anticipated benefits, determination of the project's inherent risks, and control procedures designed to ensure risk management and compliance with commitments. In our view, Transport Canada did not follow these principles before signing the transfer agreement in 1993.

8.39 The Department was unable to indicate to us what its objectives were in transferring the Quebec Bridge and various lands to CN. Similarly, it was unable to demonstrate that this project complied with a long-term management policy for federally owned bridges. In addition, it could not provide analysis of the benefits it hoped to derive from this transaction. We also found that Transport Canada did not sufficiently analyze the risks inherent in transferring an essential transportation infrastructure to a Crown corporation that would be privatized two years later, and that the 1993 and 1997 agreements contain no procedures for managing these risks. Such an analysis would have been helpful to demonstrate that Canadian taxpayers' interests were protected when entering into these agreements.

Conclusion

8.40 More than 10 years after the Quebec Bridge was transferred to CN, the restoration work on this important regional transportation infrastructure, which was designated a national historic site, is only partly completed. Major issues remain regarding the financing of the rest of the restoration work in the years to come. Transport Canada needs to take action that will ensure the long-term viability of the Quebec Bridge.

Transport Canada's comments. It is Transport Canada's position that CN is responsible for the long-term viability of the Quebec Bridge as per the 1993 agreement. The 1993 agreement is clear that "CN shall undertake to fund a major maintenance program on the Bridge ... which shall restore this structure to a condition which shall ensure its long-term viability and ensure it is maintained in this state." Transport Canada intends to ensure that CN fully complies with the requirements of the 1993 agreement as well as the requirements of the 1997 tripartite agreement pertaining to the restoration program for the Quebec Bridge.

For the last fifteen years Transport Canada's policy has been to divest itself of the operations of the transportation system. In the case of the Quebec Bridge and other Canadian Government Railway (CGR) lands, the Government transferred the lands to CN, a Crown Corporation, which had been entrusted the lands for management and operation since 1923. The full value of CN, including the CGR lands, was realized by Canadian taxpayers through the privatization of CN in 1995.

Audit team

Assistant Auditor General: Richard Flageole
Principal: Sylvain Ricard
Director: Mario Malouin

Francis Séguin

For information, please contact Communications at (613) 995-3708 or
1-888-761-5953 (toll free).

Parc Downsview Park Inc.

Progress in the transfer of Downsview lands and financing of future operations

In brief

In our November 2004 Report to Parliament we indicated that the government had not yet resolved the issues related to the transfer of the Downsview lands from National Defence to Parc Downsview Park Inc. and to the financing of the Corporation's future operations. We reported that the Corporation's ability to fulfil its mandate to develop and operate an urban recreational green space on a self-financing basis was dependant on resolving these issues.

In May 2005, the government reconfirmed its previous decision to use a portion of Downsview lands for the development of a park and gave its approval to the Minister of National Defence and the Minister of State (Infrastructure and Communities) to transfer 227.65 hectares of Downsview lands to the Corporation by December 2005, and to obtain Parliament's approval to execute the transfer of the lands. The government also authorized that the lands be used to generate revenue to finance the creation of an urban recreational green space for the enjoyment of future generations.

The Corporation and Infrastructure Canada informed us that the Governor in Council has approved a Corporate Plan for the period from 2005–06 to 2009–10 and that the Treasury Board approved a related submission that will be used to implement the government's decisions.

These decisions, if implemented, would resolve the matters that we have previously brought to Parliament's attention. Notably, Parliament's approval for the transfer of Downsview lands and the financing of the park would be obtained.

Audit objective

8.41 Our objective was to assess the progress made by the government in addressing our concerns raised in our November 2004 Report to Parliament about the transfer of Downsview lands and the future funding of Parc Downsview Park Inc.

Background

8.42 Downsview Park was established following the closure of the Canadian Forces Base in Toronto announced in the government's 1994 Budget. The National Defence budget impact paper referred to in the Budget indicated, "[the] Downsview site will be held in perpetuity and in trust primarily as a unique urban recreational green space for the enjoyment of future generations."

In November 1995 the government approved, in principle, the use of about 243 hectares (600 acres) of Downsview land for development of the park based on the following principles:

• the retention of more than one-half of the site as parkland;
• the ability to be "self-financing" from sources outside federal appropriations, including the ability to borrow funds from the private sector;
• the capability to raise and retain other qualifying revenues and to form corporate relationships with third parties for this purpose;
• the operation of the land would be based on a "trust concept," recognizing the special nature of the land; and
• the accommodation of a continuing military presence.

8.43 In April 1997, the government issued an order-in-council authorizing Canada Lands Company Limited (Canada Lands), a Crown corporation, to set up a subsidiary corporation that would develop an urban recreational green space on a self-financing basis for the enjoyment of future generations. Canada Lands incorporated CLC Downsview Inc. (now Parc Downsview Park Inc.) as a wholly-owned subsidiary Crown corporation in July 1998, and it began its operations in April 1999 following the appointment of its board of directors.

8.44 In our November 2004 Report we reported that the transfer of the Downsview lands from National Defence to Parc Downsview Park Inc. and the financing of the Corporation's future operations were issues that needed to be resolved to enable it to fulfil its mandate to create and operate an urban recreational green space on a self-financing basis.

Issues

8.45 On 19 May 2005, the government reconfirmed its previous decision to use part of the Downsview lands for the development of a park. It gave its approval to the Minister of National Defence and the Minister of State (Infrastructure and Communities), the Minister responsible for the Corporation, to transfer to the Corporation by December 2005, 227.65 hectares out of the 243 hectares of Downsview lands that were originally intended to be transferred. The government authorized the Minister of State (Infrastructure and Communities), to seek approval from Parliament for a one-time appropriation for the Corporation to purchase the lands. The government also authorized that the lands then be used to generate revenue to finance the creation of an urban recreational green space.

8.46 The Corporation and Infrastructure Canada informed us that the Governor in Council has approved a Corporate Plan for the period from 2005–06 to 2009–10 and that the Treasury Board approved a related submission that will be used to implement the government's decisions. They also informed us that the ministers concerned intend to seek Parliament's approval for the transfer through the supplementary estimates process in the fall of 2005. The intent is to transfer the lands at their current book value, which is the normal practice for transactions between related government entities. The book value of the lands to be transferred is $2.49 million. The request for approval of this appropriation will also indicate that the fair value of the lands being transferred is estimated to be $152 million according to a recent appraisal.

Conclusion

8.47 If the government's decisions of May 2005 are implemented, matters that we have previously brought to Parliament's attention would be resolved. Notably, Parliament's approval for the transfer of the Downsview lands and the financing of the park would be obtained.

Audit team

Assistant Auditor General: Richard Flageole
Principal: Alain Boucher
Director: Amjad Saeed

For information, please contact Communications at (613) 995-3708 or
1-888-761-5953 (toll-free).

The Employment Insurance Act

The process for setting premium rates has been changed

In brief

For the past six years, we have drawn Parliament's attention to our concerns about the government's compliance with the intent of the Employment Insurance Act, with respect to the setting of employment insurance premium rates and its impact on the size and growth of the accumulated surplus in the Employment Insurance Account. The accumulated surplus in the Account increased by an additional $2 billion in 2004–05 to reach $48 billion by the end of March 2005.

In June 2005, the Act was amended to reflect a new rate-setting process, beginning with the 2006 premium rate. The new process is based on the principle that the premium rate for a year should generate just enough premium revenues during the year to cover the expected program costs for that year. Under the previous provisions, the accumulated surplus of the Account was to be taken into account when premium rates were set. With the amendments, the Account will continue to record program revenues and expenses, but the accumulated surplus is no longer to be considered when calculating the break-even premium rate.

Audit objective

8.48 Our objective was to report new developments related to the concerns we had raised in previous years.

Background

8.49 From 1997 to 2001, premium rates were established according to section 66 of the Employment Insurance Act. Section 66 required that, to the extent possible, the premium rate be set to provide enough revenue over a business cycle to pay amounts authorized to be charged to the Employment Insurance Account, while maintaining relatively stable rates. In our view, this meant that Employment Insurance premiums should equal expenditures over a business cycle and provide a sufficient reserve to keep rates stable in an economic downturn. The legislation also made it necessary for the Canada Employment Insurance Commission to make certain key decisions, such as how it would define "business cycle" and "relatively stable rates."

8.50 In May 2001, the Act was amended to suspend section 66 for 2002 and 2003 and to give the Governor in Council the authority to set the rates for those two years.

8.51 In 2003, the government announced that it would conduct consultations on a new rate-setting process and would introduce legislation to implement a new process for 2005. In the 2004 Budget, the government noted that it was reviewing the results of the consultations and still planned to introduce legislation for 2005.

8.52 Section 66 was further suspended for 2004 and 2005, and the rates for those years were set according to the 2003 and 2004 Budget legislation.

8.53 In his 2001 report, the Chief Actuary of Human Resources Development Canada estimated that a maximum reserve of $15 billion would be sufficient, at the onset of a recession, to cover additional program costs, prevent cumulative deficits, and allow stable premium rates over the business cycle. From 2002 to 2005, when section 66 of the Employment Insurance Act was suspended, the Commission did not request another actuarial report.

8.54 Since 1999, when we first raised our concerns about the size and growth of the accumulated surplus in the Employment Insurance Account, the Account balance has increased from $21 billion to $48 billion, while the rates were reduced annually. At the end of March 2005, the accumulated surplus represented more than three times the maximum reserve considered sufficient by the Chief Actuary in his 2001 report.

Issues

Legislative amendments to the rate-setting process for premiums

8.55 In June 2005, with the passage of the 2005 Budget Implementation Act, the Employment Insurance Act was amended to establish a new rate-setting process, beginning with the 2006 premium rate. These changes are in line with the principles described by the government in the 2003 and 2004 budgets for a new rate-setting process for premiums.

• Rates should be set transparently and based on independent expert advice.
• Expected premium revenues should correspond to expected program costs.
• Rates should mitigate the impact on the business cycle and be stable over time.

8.56 Under the amended legislation, by 14 October of each year, the Chief Actuary is directed to provide a report on the premium rate for the next year to the Canada Employment Insurance Commission. The Chief Actuary is required to determine a premium rate for the year that should generate premium revenues that correspond to expected program costs for that year. This break-even rate is calculated on a "looking-forward" basis, which means that the Account surplus and the related interest credited to the Account balance are not part of the rate calculation.

8.57 The amended legislation provides that the Canada Employment Insurance Commission is to set the rate, taking into account the same principle that the premium rate should generate just enough revenue in the year to cover expected program costs for that year. The Commission is also required to take into consideration the Chief Actuary's report and any public input.

8.58 The Commission must make the Chief Actuary's report public. The premium rate cannot be increased or decreased by more than 15 cents for each $100 of insurable earnings from the previous year. A ceiling of $1.95 for each $100 of insurable earnings has been set for the premium rates for 2006 and 2007.

8.59 The Commission has until 14 November to set the premium rate for the next year. On the recommendation of the Minister of Human Resources and Skills Development and the Minister of Finance, the Governor in Council has until 30 November to set a different rate, if it believes that it is in the public interest to do so.

8.60 Under the previous provisions, the accumulated surplus of the Account was to be considered when setting premium rates. The principle underlying the new rate-setting process provides for rates to be established on a "looking-forward" basis at an annual break-even level. With these amendments, the Account will continue to record program revenues and expenses but the accumulated surplus is no longer to be considered when calculating the break-even premium rate.

Conclusion

8.61 In June 2005, the Employment Insurance Act was amended to reflect a new rate-setting process, beginning with the 2006 premium rate. The accumulated surplus in the Account is no longer to be considered when calculating the break-even premium rate.

Audit team

Assistant Auditor General: Nancy Cheng
Principal: Jean-Pierre Plouffe
Director: Lucie Cardinal

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1-888-761-5953 (toll-free).