1998 Report Summary Booklet
REPORT OF THE AUDITOR GENERAL
To the House of Assembly
Table of Contents
This document is presented as a summary of the Report of the Auditor General to the House of Assembly on Reviews of Departments and Crown Agencies for the Year Ended 31 March 1998. That Report contains approximately 300 pages of conclusions, commentary, recommendations and auditees' comments. When readers identify a topic of interest, we encourage them to read the relevant section in the Report. This document contains information on the items reported in Chapters 1 through 4 and are numbered to coincide with the Report.
The Report of the Auditor General to the House of Assembly on Reviews of Departments and Crown Agencies for the Year Ended 31 March 1998 was prepared in compliance with Section 12 of the Auditor General Act. Section 12 requires that the Report outline significant matters noted during the course of examining the accounts of the Province, agencies of the Crown and other entities which, in our opinion, should be brought to the attention of the House of Assembly.
Comments on the audit of the financial statements of the Province are contained in a separate report entitled Report of the Auditor General to the House of Assembly on the Audit of the Financial Statements of the Province for the Year Ended 31 March 1998. Therefore, along with this Summary, two reports are tabled before the House of Assembly.
This chapter provides an introduction to the Report of the Auditor General to the House of Assembly on Reviews of Departments and Crown Agencies for the Year Ended 31 March 1998.
I again express concern over the lack of information being provided to the House of Assembly on Crown agencies which are funded primarily by the public purse. The House of Assembly, as part of the budgetary process, approves funding for these agencies and should receive information on how this funding was spent and what this funding has achieved. While considerable attention is given to the Government's budget, there is a lack of emphasis on receiving and reviewing information on how agencies spent the monies which were approved during the budget process.
Our review of the 1997 annual reports tabled in the House of Assembly disclosed that, of the 92 entities receiving government operating grants of $1.512 billion in 1996-97, only 4 entities receiving $163 million, had their reports tabled in the House of Assembly. In summary the House of Assembly received reports on entities which had received $163 million of total funding of $1.512 billion. There were no reports tabled in the House of Assembly which related to the remaining $1.349 billion.
In June 1997, the Minister of Finance and President of Treasury Board was directed, by Cabinet, to proceed with the implementation of a new authority and accountability framework for Government departments.
In October 1998, Cabinet Secretariat issued Guidelines for Departmental Planning 1999-2000 to 2001-2002 to assist departments in planning. As part of this planning process, departments will be required to set out performance targets and measure results against these targets. In future, departments will be required to prepare an annual progress report outlining progress during the fiscal year.
During the year, Government also established the Public Service Reform Initiative which focuses on organizational and structural issues which impact on how Government operates. A concept paper was prepared outlining an approach to the development of an authority and accountability framework for agencies, boards and commissions. This concept paper will be used to commence a broader discussion on the issue of establishing an improved authority and accountability framework for these entities.
We again recommend that Government implement a framework to hold Crown agencies accountable to Government and the House of Assembly.
As at 31 March 1998 there were approximately 156 Crown agencies in the Province. Of these, 85 were required to prepare annual financial statements while 71 were considered non-financial and did not prepare financial statements. Any expenditures related to the operation of these 71 entities are included with those of the government department responsible for the entity and are audited annually as part of our audit of the public accounts of the Province.
Of the 85 entities required to prepare annual financial statements, 29 were audited by our Office while the remaining 56 were audited by private sector auditors.
Most of these entities do not have any requirement to report to the House of Assembly on the discharge of their responsibilities. As a result, a major role of this Office is to monitor these entities in order to provide some accountability to the House of Assembly. Section 14 of the Auditor General Act requires all private sector auditing firms to submit to our Office a copy of the audited financial statements and any management letters for all Crown agencies for whom they audit. These financial statements and management letters along with our Office's audits of Crown agencies provide the basis for our monitoring of all Crown agencies. The results of our monitoring activities are outlined in Part 3.1 of the Report of the Auditor General to the House of Assembly on Reviews of Departments and Crown Agencies for the Year Ended 31 March 1998.
As part of our audit of the financial statements of the Consolidated Revenue Fund, we perform tests and reviews of the expenditures made by the various departments.
During the past year, we obtained expenditure information from Government's accounting system relating to all expenditures of the Consolidated Revenue Fund. We performed a general review and analysis of amounts paid relating to grants and subsidies, purchased services, professional services, allowances and assistance, and transportation and communications. This information is provided in Part 3.2 of the Report of the Auditor General to the House of Assembly on Reviews of Departments and Crown Agencies for the Year Ended 31 March 1998.
The common parliamentary means of providing spending authority to government is through the annual passing of supply acts. This involves having the Members of the Legislature vote on the government's funding requests. Approval by a majority of the Members of the House of Assembly is needed to pass an Act.
There are three types of supply acts which are usually approved by the Legislature each year. These are the main Supply Act, the Interim Supply Act and the Supplementary Supply Act.
Through the use of a "special warrant", the government can authorize itself to spend public money without obtaining the prior approval of the Legislature. Section 28 of the Financial Administration Act outlines two instances where a special warrant can be approved and additional funding can be provided to Government if the expenditures are of an urgent and immediate nature.
There were thirteen special warrants totalling $88.6 million issued in the 1997-98 fiscal year, of which $34.6 million were issued in March 1998.
Of the $88.6 million in special warrants issued in 1997-98, $30.9 million were issued although it appears there was not an urgent requirement for the funding.
Special warrants as provided for in the Financial Administration Act, are intended to be issued to fund expenditures of an urgent and immediate nature.
Expenditures authorized by special warrants will be recorded as expenditures in the financial statements of the Consolidated Revenue Fund in the same year that the warrant is issued. As a result, these expenditures will decrease surpluses or increase deficits in the year in which the warrant is issued.
Because special warrants authorize expenditures that affect the reported surplus or deficit in the financial statements of the Consolidated Revenue Fund, the issuance of special warrants should be in compliance with the Financial Administration Act.
Government has made a significant investment in microcomputer hardware and software in recent years and relies heavily on information technology to deliver programs, manage resources and account for what it does.
Given the significant investment made by Government and the importance of the information maintained on the microcomputers, it is important for departments to have systems in place to manage and control their microcomputer inventory. This is especially important since microcomputers are movable capital assets that are susceptible to loss or theft.
To provide guidance and assistance to departments in the acquisition and use of computer hardware and software, the Treasury Board Secretariat, in 1991, reissued its information technology policy and procedures which are included in Volume II of the Province's Management Manual. The manual indicates that departments are responsible for among other things:
In 1996-97, Government departments spent $6.3 million on computer hardware and software. In 1997-98, expenditures had increased to $9.8 million. We reviewed 3 of the 18 Government departments to determine whether computer hardware and software were adequately safeguarded and controlled. These 3 departments accounted for $1.9 million of the $6.3 million in expenditures in 1996-97 and $2.8 million of the $9.8 million in 1997-98. The departments reviewed were the departments of Municipal and Provincial Affairs, Justice, and Human Resources and Employment.
We completed our review of controls over microcomputer hardware and software in the three Government departments in September 1998. Our review indicated that controls over computer hardware and software in the three departments reviewed are not adequate. Specifically:
Policies over the safeguarding and control of computer hardware and software need to be improved and communicated to staff. For example, two of the three departments reviewed did not have a policy prohibiting the use of unauthorized software.
Departments do not routinely check their computers to ensure that only authorized software is being used.
In the early days of computer system design, computer software was developed to use two digit date codes to represent a particular year. This practice was followed in order to save costly storage space and reduce processing time. On 1 January 2000 some of these systems are expected to interpret the year as "1900" instead of "2000", or to abort operations completely because the year component will be processed as "00". This problem is commonly referred to as the Y2K bug and could result in failure of computer systems which are dependent on date information. In addition to computer systems, many machines and equipment have microprocessors that may also use two digits to process year data. Therefore, equipment such as facsimile machines, heating systems and medical equipment, may also be affected.
Information Technology experts advise that the correction of the Y2K issue should be addressed before the end of 1998 because problems may begin to surface in 1999 when future dates begin to be recorded and processed. It is also agreed that timely attention to identification and correction of the Y2K issue is necessary to provide the time required to correct and test the affected systems.
There are key environmental factors that have to be considered when dealing with correcting Y2K problems including, the limitation of time and qualified personnel, the difficulty in obtaining computer parts or components and the costs associated with making systems and equipment Year 2000 compliant.
We reviewed Government's work plans to address the Year 2000 problem for Government departments, Crown agencies, the hospitals and municipalities. Our objective was to determine whether Government departments, Crown agencies, the hospitals and municipalities were taking appropriate action to address the Y2K problem.
Government departments have identified all mission critical systems and have developed a plan to make the necessary corrections required to have them Year 2000 compliant. Departments, however, have not identified all microprocessor dependent equipment (e.g. facsimile machines, heating systems and medical equipment) that may require changes or replacement as a result of the Year 2000 problem. Also, departments have not reported to Treasury Board Secretariat on their progress to address Year 2000 concerns on computer systems that are not considered critical for operations.
Government does not know the full extent of potential Y2K issues in its Crown agencies because the information has not been provided to Treasury Board Secretariat.
A Provincial Advisory Committee has been established to address the Year 2000 issue for all health care organizations in the Province. Boards are at various stages of addressing the Y2K problems but have not yet determined the total estimated cost of making the required corrections. Given that we are now approaching 1999, we are concerned with the progress being made by the health care organizations to identify and correct Year 2000 issues.
We are concerned that there is no monitoring of the municipalities to determine the status of any work undertaken by them to correct Year 2000 issues or to estimate the cost of correcting the Year 2000 problems.
Our previous reports to the House of Assembly have indicated that Government's systems for recording, reporting and controlling accounts receivable did not always provide timely and accurate information to users. As a result, Government did not know how much money was owed to it at any given point in time. The general exception was the amount owed as of 31 March of each year which was determined subsequent to year end in order to prepare the financial statements of the Province. Government anticipates that this problem will be addressed with the implementation of its new accounting system, which is presently in the implementation stage.
Our review of Government departments also indicates that a significant portion of their accounts receivable are in arrears and that their cash management program, which includes the collection of these accounts, is not adequate.
We reviewed the amounts owing to Government as at 31 March 1998 to determine whether they are collected on a timely basis.
Our review indicated that, in addition to not collecting amounts owed to it on a timely basis, Government has written off significant amounts owed to it. The systems in place to record, monitor, control and collect amounts owed to Government are not adequate.
Our review also disclosed that at 31 March 1998 the Consolidated Revenue Fund had total receivables of $461.6 million of which $211.8 million was considered to be uncollectible. In addition, during the period 1993 to 1998, Government had written off $198.3 million in accounts receivables, $17.6 million in tax remission and $11.2 million in tax forgiveness.
In June 1992, the Provincial Government's Challenge & Change: A Strategic Economic Plan for Newfoundland and Labrador identified many objectives which would determine the focus and direction of the Province's future economic development activity. In particular, the Strategic Economic Plan called for the creation of economic zones to:
In May 1994, the Task Force on Community Economic Development was established and consisted of federal, provincial, and community representatives. The major objective of the Task Force was to make recommendations regarding an approach to regional development in each of the proposed economic zones. The Task Force issued its report in January 1995. In that same month, Cabinet provided direction on each of the recommendations contained in the report and approved the establishment of 19 (now 20) regional economic zones and regional economic development boards.
The Task Force identified a two phase approach to the establishment of the regional economic development boards and the development and implementation of strategic economic plans for each board. It was decided that the boards would be funded by phase. Phase 1 included the development of a strategic plan for each zone while Phase 2 included the implementation of the strategic plans.
To commence the process of establishing regional economic development boards, Government established provisional boards to determine the structure and process of establishing permanent boards. These permanent boards are incorporated entities with democratically elected members that are community based.
The funding for the regional economic development boards was provided through the Canada-Newfoundland Cooperation Agreement on Strategic Regional Diversification (SRDA). The Department of Development and Rural Renewal was established in March 1996 to be the lead department in the development of economic zones. During 1996-97 the Department took over the administration of the SRDA. To facilitate the implementation of regional economic plans as set out in the Task Force Report on Community Economic Development, $3.7 million was initially allocated for Phase 1 and 2 in the SRDA Agreement and the original allocation of $3.7 million was subsequently increased to $6.1 million. This increase was approved by the Management Committee administering the Agreement. Actual expenditures totalled $5.5 million as at 31 March 1998; this was in addition to the $750,916 budgeted for the provisional boards.
We completed our review of the Regional Economic Development Program in October 1998. Our review indicated the following.
In January 1995, Cabinet provided direction on the recommendations made by the Task Force and approved the establishment of the regional economic zones and regional economic boards. Our review indicated that the direction of Cabinet was not always followed. For example:
As at 31 March 1998, 17 of the 20 Boards had completed and submitted their strategic plans. We note that as at the time of our review (October 1998), 18 Boards had completed and submitted their strategic plans.
With regard to Zone 1, an independent audit commissioned by the Department indicated management problems and identified various expenditures which were not in accordance with its performance contract. The Department is working towards resolving this matter.
In accordance with the performance contracts, zonal boards are required to provide information to the Department to keep it apprised of their progress. Our review indicated that the Department is not always receiving the information it is required to receive. As a result, the Department does not know whether all of the zones are complying with their performance contracts.
On 1 August 1996, in accordance with subsection 4(1) of the amended Schools Act, the Lieutenant-Governor in Council established 10 school districts under the Boundaries of School Districts Order. The existing 27 school boards continued to exist and administer the schools within their jurisdiction until their dissolution on 31 December 1996. As at 31 December 1996, there were approximately 445 schools in the Province with a total enrolment of 110,450 students.
As at 31 December 1996, the former school boards and student transportation committees reported approximately $647 million in assets, $41 million in liabilities and $606 million in equity. The majority of these assets, liabilities and equity balances were transferred over to the 10 new district boards based upon the number and location of former schools within a certain school district.
Our review of four new school boards and their predecessor boards identified numerous payments which contravened legislation, cabinet direction, ministerial direction and government policy. Given the financial needs of the education system for education-related expenditures which cannot be met by current funding levels, expenditures such as these should not be made. The Department should take steps to recover these payments.
The District #10 - Avalon East School Board (the Board) serves the eastern half of the Avalon Peninsula, from Holyrood, south to Peter's River and east. The current Board was created in 1996 and absorbed the schools served by the Avalon Consolidated School Board, the Roman Catholic School Board of St. John's, the Roman Catholic School Board of Ferryland, the Conception Bay South Integrated School Board, and two schools under each of the Pentecostal Assemblies Board of Education and the Seventh Day Adventist School Board. Upon its establishment, there were approximately 35,000 students in 85 schools with school enrolments ranging from 7 to 1,327.
Our review indicated the following.
Transfer of Assets and Liabilities
Assets of $573,000 described by the Avalon Consolidated School Board as "trust funds" in its 30 June 1996 financial statements were transferred to private trustees in November, 1996, rather than being transferred to the current board, and are still being held outside the current school board.
Of these assets, $293,502 as of 30 June 1996, consists of moneys received by the Avalon Consolidated School Board from the Trustee of the Pitts Estate Charitable Trust which was required to be paid to the Avalon Consolidated School Board for "its general educational purposes" by an Order of the Supreme Court of Newfoundland made in 1985. This was the result of an action taken by Avalon Consolidated School Board in 1979 against the United Church of Canada and the Newfoundland Conference of the United Church of Canada. This action was taken by the former school Board claiming sole entitlement to the accumulated income and profits and the annual income and profits thereafter.
An amendment to the Schools Act in force 19 August 1996, provides that "upon the dissolution of a school board, the successor board is the successor in law to the dissolved school board and title to all real and personal property of a dissolved school board is vested in the successor board and for all real and personal property held or used for the purpose of education by a dissolved school board, the successor board shall be substituted for the dissolved school board in respect of any entitlement, interest, instrument deed, contract, agreement or other document held by the dissolved school board with respect to that property". The same provision appears in the Schools Act, 1996 in force 3 January 1997. Neither the current Board nor the Department of Education challenged the right of the former Board to transfer the control of these assets to private trustees.
Subsequent to the transfer of control of the $573,000 of assets referred to previously, the current board was paid $110,599 from the Pitts fund by the private trustees to partially reimburse the current board for the payment by it of enhanced severance packages to two employees of the former board whose positions had been made redundant. If the Pitts fund was appropriately withheld from the control of the current Board (which in my opinion it was not) it should not have been used for payment of enhanced severance packages.
The current Board paid severance packages of $269,224 to two employees of a former board, which were $110,599 in excess of the payments prescribed by government rules. These payments had been approved by the current Board only on the condition that the Minister of Education also approve them, and the Minister in fact refused such approval. Furthermore, these payments were in contravention of the Schools Act, 1996. The current Board was reimbursed $110,599 by the private trustees from the Pitts fund three months after the payments were made.
We are very concerned over the lack of control and accountability by the current Board and the Department of Education over various types of ancillary funds including canteen sales, fund raising events, donations and scholarships. The current Board, as well as other school boards within the province, do not adequately monitor and control the various school-based funds.
The current Board could not demonstrate whether all capital assets were properly accounted for since there were no listings of these assets. The ownership of schools vested with denominational authorities was still unresolved at the time of our review.
The records of the former school boards were not adequately stored or accounted for. Many of these records were stored at a former board office; however, there was no listing of what was stored or where certain records were located. The storage area was unorganized and different former board records were stored together.
Overall the financial position of the current Board as at 30 June 1997 is favourable compared to the combined former boards' financial position as at 30 June 1996, mainly as a result of the Department's repayment of the former boards' long-term debt. In total, the Board received $11.9 million from the Department of Education to fund its operating deficit and long-term debt. Certain expenditures have also been reduced, especially in the current Board's administration and instructional budgets.
Review of Expenditures
Our review indicated that salaries and other benefits of the executive of the current Board were in excess of the limits established by the House of Assembly under the Schools Act and by Cabinet. We found that, during 1997, the executive were overpaid $52,822 in salaries and $4,661 in other benefits. Furthermore in 1998 the executive will be overpaid $37,207 in salaries. Specifically:
The boards made certain other expenditures that were not in accordance with Government policy or the Schools Act, 1997 or its predecessor Act. Specifically:
The District # 9-Avalon West School Board (the Board) serves the western half of the Avalon Peninsula, from Holyrood, south to Peter's River and east to Southern Harbour. The current Board was created in 1996 and absorbed the schools served by the Western Avalon Roman Catholic School Board and the Avalon North Integrated School Board, two schools operated by the Pentecostal Assemblies Board of Education and one school operated by the Seventh Day Adventist School Board. Upon its establishment, there were approximately 13,400 students in 60 schools, with school enrolments ranging from 10 to 681.
Our review indicated the following.
Transfer of Assets and Liabilities
The financial assets and liabilities of the former boards as reported on their financial statements were properly recorded in the accounts of the current Board.
We are very concerned over the lack of control and accountability by the Board and the Department of Education over various types of ancillary funds including canteen sales, fund raising events, donations and scholarships. The extent of ancillary funds within the current Board is not known; however, we identified canteen funds of $256,855 which were recorded previously on the financial statements of one of the former boards but is not reported on the financial statements of the current Board.
Accounts receivable transferred to the current Board included $7,020 owing for cash advances to an employee of the Board. At 31 March 1998 this employee owed a total of $40,587 to the current Board and the Department of Education. This amount consisted of $8,973 owing to the current Board for various advances, $21,800 owing to the current Board for redundancy pay repayment and $9,814 owing to the Department of Education for redundancy pay repayment. No interest is being charged by the Department or the current Board.
The current Board could not demonstrate whether all capital assets were properly accounted for since there were no listings of these assets. In addition, the ownership of schools vested with denominational authorities was still unresolved at the time of our review.
Better cash management and early consolidation of bank accounts could have resulted in lower overdraft charges.
Overall the financial position of the current Board as at 30 June 1997 was favourable compared to the combined former boards' financial position as at 30 June 1996. Also, expenditures were reduced, most significantly in the current Board's instructional and administration budgets.
Review of Expenditures
The former boards and the current Board continue to spend monies on such things as Christmas parties, retirement dinners and gifts, for which there was no authority under the Schools Act, 1997 or predecessor Acts. The former boards spent $10,400 and the current Board spent $10,687 during the period under review.
The boards also made certain expenditures which were not in accordance with Government policy. These include retiring gifts of $12,000 over and above earned entitlements, $8,775 for 33 unused vacation days in addition to the 50 day maximum established by the Department of Education, the payment of unused vacation days for a number of staff of former boards, totalling $62,711, who are currently working for the current Board, the red circling of salaries for a number of positions transferred from the former boards, and the payment of vehicle allowances in excess of Government policy, some as high as $450 per month.
Both the former boards and the current Board allowed personal expenses to be charged to corporate credit cards or allowed personal expenses to be paid for by the boards and later repaid by the employee. Allowing personal items to be charged or paid by the boards basically provided employees with public monies to be used for short term financing needs.
The District #6 - Lewisporte/Gander School Board (the Board) serves an area from Norris Arm in Notre Dame Bay to Charlottetown, Bonavista Bay. The Board was created in 1996 and absorbed all 39 schools served by the Notre Dame Integrated School Board and the Nova Consolidated School Board, which included nine joint service schools with the Gander-Bonavista-Connaigre Roman Catholic School Board and the Exploits-White Bay Roman Catholic School Board. It also took over one non-joint service school from the Gander-Bonavista-Connaigre Roman Catholic School Board and six schools operated by the Pentecostal Assemblies Board of Education. Upon its establishment, there were about 11,000 students in 46 schools with school enrolments ranging from 34 to 866.
Our review indicated the following.
The financial assets and liabilities of the former boards as reported on their financial statements were properly recorded in the accounts of the current Board. However, certain trust funds and school-based funds have not been recorded on the current Board's financial statements as they were not recorded previously with the former boards. As a result, we are very concerned over the lack of control and accountability by the Board and the Department of Education over various types of ancillary funds including canteen sales, fund raising events, donations and scholarships. Adequate controls do not exist for the control of school-based funds to ensure that they are used for the purpose intended.
The current Board could not demonstrate whether all capital assets were properly accounted for since there were no listings of these assets. In addition, the ownership of schools vested with denominational authorities was still unresolved at the time of our review.
Overall the financial position of the current Board as at 30 June 1997 is favourable compared to the combined former boards' financial position as at 30 June 1996, mainly as a result of the Departments repayment of the former boards' long-term debt. Also, certain expenditures have been reduced, especially in the current Board's administration and pupil transportation budgets.
The former boards have spent and the current Board continues to spend monies on such things as Christmas parties, retirement dinners, various staff gifts and retirement gifts, for which there is no authority under the Schools Act, 1997 or predecessor Acts. The former boards spent $3,436 and the current Board spent $2,502 during the period under review.
The current Board has made certain expenditures which are not in accordance with government policy. These include the payment of unused vacation days for three staff of former boards, totalling $12,599, the red circling of salaries for two positions transferred from a former board at a total cost to the current Board at $29,814 over the next five years, and the overpayment of redundancy to one employee at a cost of $2,347.
The District # 1 - Labrador School Board (the Board) serves all of Labrador except for a small portion located south of Norman Bay which is served by the District #2 school board. The Board was created in 1996 and absorbed the schools served by the Labrador East Integrated School Board, Labrador Roman Catholic School Board and the Labrador West Integrated School Board and one school operated by the Pentecostal Assemblies Board of Education. There were approximately 6,000 students in 22 schools upon the establishment of the Board with school enrolments ranging from 9 to 704.
Our review indicated the following.
The financial assets and liabilities of the former boards as reported on their financial statements were properly recorded in the accounts of the current Board. However, our review indicated a lack of detail, support and approval of numerous adjusting entries put through the current Board's accounts during the first two months. In addition, the financial assets and liabilities of the joint school bus committee, which administered and operated pupil transportation in western Labrador, were not transferred until four months after the former boards were dissolved.
School-based funds have not been recorded on the current Board's financial statements as they were not recorded previously with the former boards. As a result, we are very concerned over the lack of control and accountability by the current Board and the Department of Education over various types of ancillary funds including canteen sales, fund raising events, donations and scholarships. Adequate controls do not exist for the control of school-based funds to ensure that they are used for the purpose intended.
The current Board could not demonstrate whether all capital assets were properly accounted for since there were no listings of these assets. The ownership of schools vested with denominational authorities was still unresolved at the time of our review.
The current Board's financial position deteriorated during 1996-97. The current Board's debt increased from $187,000 as at 1 January 1997 to $904,000 as at 30 June 1997.
The Schools Act, 1996 prohibited a board from incurring expenditures that are more than its estimated expenditure as set out in its annual budget without the approval of the Minister. The current Board contravened the Schools Act, 1996 and failed to operate within its budget and incurred expenditures of $434,880 in excess of available funds for the period 01 January 1997 to 30 June 1997.
Review of Expenditures
The former boards expended and the current Board continues to spend monies on such things as Christmas parties, retirement dinners, various staff gifts and retirement gifts, for which there is no authority under the Schools Act, 1997 or predecessor Acts. The former boards spent approximately $14,874 while the current Board spent $3,151 during the period under review.
One former board paid three senior staff vehicle allowances in excess of Government guidelines. Each of the three employees was paid a monthly vehicle allowance of $200. In addition, two of the three employees were paid an annual extraordinary travel allowance of $2,802 each while the third employee was paid an annual extraordinary travel allowance of $4,674. The maximum travel allowance provided under Provincial government guidelines is $85 per month. The current Board provides a $100 per month vehicle allowance for its executive staff.
Our review of the current Board indicated that the salaries of its four executive employees were topped up by $62,323 thereby placing all four above step 33 on the approved salary scales and contrary to the direction of Cabinet and the Schools Act, 1997 or its predecessor Act.
The Department of Fisheries and Aquaculture has a primary mandate to promote the ongoing development of marine fisheries and the aquaculture industry. Policies and programs have been developed to support this mandate in harvesting, processing and marketing.
The Canada/Newfoundland Memorandum of Understanding on Aquaculture Development, signed on 22 February 1988, assigned responsibility for the licensing and regulation of the aquaculture industry within the Province to the Government of Newfoundland. To govern the aquaculture industry, the Province introduced the Aquaculture Act which was amended in 1994. The purpose, as stated in the Act, is "... to govern the conduct of aquaculture in the province..." and in particular, to promote the prudent and orderly development of an aquaculture industry. Aquaculture Regulations were introduced in 1988 and were consolidated under the Consolidated Newfoundland Regulations in 1996.
The Canada-Newfoundland Economic Renewal Agreement (ERA) was signed on 20 June 1996. The agreement is between the federal and provincial governments and covers the period 1 April 1996 through 31 March 2001. Its purpose "...is to increase opportunities for economic development in Newfoundland and, specifically, to enhance growth of earned incomes and employment opportunities in the province." The primary focus of the agreement is on tourism, aquaculture and advanced technology. Funding under the ERA totals $100 million, cost-shared between the federal government ($80 million) and the provincial government ($20 million). A total of $20 million has been allocated under the ERA for development of the aquaculture industry.
There were 231 aquaculture licences issued for the 1997 year. Licences are for a one year period and expire on 31 December of the year in which they are issued. There are three classes of licence: search; developmental; and commercial. Each of these can be described as follows:
We completed our review of the Aquaculture Program in April 1998 and the aquaculture component of the Canada-Newfoundland Economic Renewal Agreement in September 1998. Our review indicated the following.
Nature of the Aquaculture Program
There has been little advancement over the last ten years in terms of the level of activity and significance of production levels achieved. While the number of licences is slowly increasing, the number of productive, utilized sites remains small, with the province lagging behind the other Atlantic provinces in the volume and value of aquaculture production. This fact was recognized by both the Federal and Provincial governments during negotiations leading to the signing of the Canada-Newfoundland Economic Renewal Agreement in June 1996.
Newfoundland is behind the other Atlantic provinces and British Columbia in terms of production levels and values, and other than Prince Edward Island, has the lowest production value per tonne produced.
Information required to assess the potential viability of aquaculture activities proposed by applicants for aquaculture licences was not always present in Department files.
The lack of required licensing documentation and related analysis, coupled with the inspection and monitoring problems referenced in the report, are contributing factors in the lack of development of the aquaculture industry.
There was compliance with most provisions of the Aquaculture Act and Regulations. Exceptions were noted relating to licensing and inspection.
Our review disclosed that systems used to collect data to measure progress towards achieving the Department's objectives were not adequate. In particular, data submitted by the licensee during licence renewals is not received in a timely manner and is not checked for accuracy.
In 1995, Cabinet approved the redevelopment of the former provincial fish plant in Belleoram into a scallop hatchery. The intent, as stated in the Cabinet approval, was to establish the hatchery but to privatize it as soon as possible. This has not been done to date. Cabinet ordered that after the first year of operation, a report be made on the options and feasibility of attracting the private sector to assume operations of the hatchery. The Department indicated that this report was never made to Cabinet. As at 31 March 1998, a total of $1.5 million had been spent in capital and operating costs. A review of sales information maintained at the Department at the time of our review indicated that net sales totalled $5,000.
Accountability and Reporting
There is no legislative requirement for reporting to the House of Assembly on the results of the Aquaculture Program. The last annual departmental report submitted to the House of Assembly was in 1993. There was no reporting in 1994 or 1995 with a report being prepared for 1996 for internal purposes only. At the time of our review, the Department indicated that a 1997 report would be prepared during 1998.
Accountability reporting by licensees to the Department and related monitoring by the Department is not adequate. In particular, data is not received on a timely basis from licensees, and information submitted with annual returns is not formally checked during the inspection process.
Compliance with the Aquaculture Licensing Policy and Procedures Manual was lacking in several areas of licensing and inspection, and required documentation was absent. Information to support whether an applicant met the requirements for an aquaculture licence was not adequate.
In reviewing documentation for one licensee, it was noted that during the year ended 31 March 1998, Government authorized the issuance of a loan guarantee to the licensee. As at 31 March 1998, the limit of the loan guarantee was $5,000,000 with a current liability of $3,850,000. Government has included a provision in its financial statements for the year ended 31 March 1998, to reflect the probable loss to be incurred relating to this loan guarantee. In July 1998, Government authorized an increase of the limit for the loan guarantee to $6,000,000. In September 1998, the Department requested that Cabinet approve a further increase in this loan guarantee to $6,700,000.
Our review of the licensing process indicated that application turnaround time exceeded the Department's documented time frames. Turnaround time for applications for which there was no reasonable reason documented for the delay, ranged from 175 days up to 317 days. In many cases, the Department could not demonstrate that the applicant was notified of reasons for the delay.
There are no operational plans with regard to inspection frequency targets and timing.
Expenditure under the Canada-Newfoundland Economic Renewal Agreement
Authorization forms completed for the projects reviewed did not provide complete details of the proposed projects as required under the Agreement.
Problems were noted with expenditures made by the Department in connection with projects reviewed. Some of the expenditures claimed by the contracting parties were not adequately supported.
Approved projects were not adequately monitored.
Newfoundland Farm Products Corporation was established in 1963 under the Farm Products Corporation Act. As a Provincial Crown corporation, Newfoundland Farm Products Corporation produced a full range of chicken products which were marketed throughout the Province, the Maritimes and central Canada. The Corporation operated two federally inspected abattoir complexes in the Province, one in St. John's and one in Corner Brook. In 1996-97, the last full year of operation, the Corporation processed 8.0 million chickens, 5.1 million in St. John's and 2.9 million in Corner Brook, resulting in 11.8 million kilograms of saleable product. The Corporation employed approximately 275 people and had an annual payroll of $10.2 million.
A new Board of Directors was appointed in November 1996 and given the mandate to pursue privatization of the Corporation. In April 1997, the Corporation closed its plant in Corner Brook and transferred processing to its plant in St. John's. In June 1997, Government announced an agreement to sell the St. John's processing operation to a consortium of local chicken producers, Integrated Poultry Limited. Government and Integrated Poultry Limited operated the Corporation under a joint management agreement until 4 October 1997 when the sale of the St. John's processing operation to Integrated Poultry Limited was concluded.
We completed our review of the Corporation in November 1998. Our review indicated the following.
Purchase and sale agreement between Newfoundland Farm Products Corporation and Integrated Poultry Limited
Although the sale of the St. John's processing operation to Integrated Poultry Limited was concluded on 4 October 1997, the audited financial statements of Newfoundland Farm Products Corporation for the year ended 31 March 1998 were not available as at September 1998. As at 4 October 1997, the Crown Corporation had bank indebtedness of $10.4 million of which $10.2 million was guaranteed by the Provincial Government. As a result of not having current audited financial statements, we are unable to assess the financial position, including the bank indebtedness, of Newfoundland Farm Products Corporation.
In June 1997, Government sold the St. John's processing facility to IPL Processing Limited, a subsidiary of Integrated Poultry Limited. In addition to providing $8.5 million in grants to Integrated Poultry Limited, the Provincial Government also provided two loan guarantees of $10 million and $1 million. The Share Purchase Agreement between Newfoundland Farm Products Corporation, Integrated Poultry Limited and IPL Processing Limited requires that Integrated Poultry Limited provide the Minister of Finance with various financial information, including a copy of their audited financial statements within three months of their fiscal year end. Accordingly a copy of these audited statements should have been received by 27 September 1998. These audited financial statements would enable Government to assess the financial condition of Integrated Poultry Limited. At the time of our audit (November 1998), these audited financial statements had not been received. Various other terms and conditions related to the $10 million loan guarantee have also not been met.
An employee of the Provincial Government is currently serving as the chief operating officer of IPL Processing Limited, a subsidiary of Integrated Poultry Limited, while continuing to be on the payroll of the Government and accruing employment benefits, including pension, as a government employee. As the chief operating officer of IPL Processing Limited this person owes a fiduciary duty to IPL Processing Limited but as a senior employee of the Provincial Government he owes a fiduciary duty to the Provincial Government. Given the terms of the Share Purchase Agreement between Newfoundland Farm Products Corporation, Integrated Poultry Limited and IPL Processing Limited, which provides for many future obligations between the seller (Government) and the purchaser (Integrated Poultry Limited) this individual owes a fiduciary duty to conflicting interests.
It is therefore, in our opinion, inappropriate to have a government employee in such a dual role. In a June 9, 1998, letter from Government to IPL Processing Limited, Government states that in future this individual should "be considered an employee of IPL" and that "Government will accept no liability for actions or decisions he may take while employed by IPL"; but proposes that he will "continue to be paid by Newfoundland Farm Products Corporation in order to protect his pension entitlement and other benefits". It was further proposed that IPL would reimburse Newfoundland Farm Products Corporation for payments made to the individual but not apparently for the full cost of having him on Government's payroll. To date no reimbursement has been made; thus IPL Processing Limited is benefitting by having the services of a chief operating officer provided by the Government, either cost free, or at a delayed and reduced cost.
Government payments to Newfoundland Farm Products Corporation and Integrated Poultry Limited
During 1997-98, Government made payments totalling $16.9 million to Newfoundland Farm Products Corporation. Payments totalling $1.6 million related to the operating grants prior to the divestiture and payments totalling $1.7 million related to operations of the Corporation subsequent to the divestiture. Employee termination benefits totalled $3.8 million and $0.8 million related to production subsidies. A total of $8.5 million was paid for Integrated Poultry Limited and $0.5 million was set aside for the Corner Brook plant.
The Government Service Centre provides the public and the business community with access to a single Government Department for their convenience when applying for various permits, licences, certificates and approvals.
Effective 1 April 1995, the Government Service Centre became responsible for implementing certain programs and services on behalf of several line departments and agencies, including food premises inspection and licensing activities on behalf of the Department of Health and Community Services. At that time, regional managers, assistant managers and inspectors were transferred from the Department to the Government Service Centre. As a result, the Government Service Centre is accountable to the Department which retained the mandate for these programs and services. The Government Service Centre also works in conjunction with the Health and Community Services Boards in implementing some of their health promotion and health protection programs.
To promote an effective and efficient working relationship among the three parties, a Memorandum of Understanding between the Department, Boards and the Government Service Centre was put in place effective 1 April 1995. The Memorandum of Understanding establishes responsibilities and accountabilities among the three parties as they relate to mandated programs and services of the Department of Health and Community Services, including food premises inspection and licensing.
There are four classes of food premises as follows:
1. Food retailing - includes premises involved in the retail sale of prepackaged meats, fish, poultry, vegetables and fruit, for example, retail food stores and food stands.
2. Food preparation - includes premises involved in the preparation and/or cutting and/or sale of food products, for example, restaurants and snack bars.
3. Food production - includes premises where food is produced from an original source, for example, dairy farms and bottling of water.
4. Food manufacturing - includes premises where two or more products are combined to create a new one, for example, milk processing plants and bakeries.
Food premises inspections relating to licence renewals are typically only completed during the period from 1 November through 31 March.
Inspections performed by the Government Service Centre began 1 April 1995. Information maintained by the Government Service Centre indicates that, in terms of total inspections completed, their inspection activity has been below the level achieved by the Department of Health and Community Services for the year ended 31 March 1995. The inspection activity was under by 8.7% for the year ended 31 March 1996 and by 5.6% for the year ended 31 March 1997. It is recognized that these percentages are impacted by the change in the total number of licensed food premises each year; however, this information was not available for the years 1993-94 through 1996-97.
We completed our review of food premises inspection and licensing in January 1998. Our review indicated the following.
The Food and Drug Act provides for the inspection of food premises to ensure public safety in relation to the food supply. The Food Premises Regulations were enacted under the Food and Drug Act to prescribe the manner in which food intended for human consumption should be prepared, packaged, stored, transported, sold, advertised or exposed for sale, and delivered. An integral part of the inspection process of food premises requires the inspectors to physically inspect food premises.
The Regulations state that "A person shall not operate a food premises without a licence." Our review disclosed that:
The Government Service Centre could not demonstrate whether food premises are fully complying with the Food Premises Regulations because the Environmental Health Inspection Report used by the inspectors are not always fully completed. In addition, the Reports do not provide enough information to properly determine whether or not the inspector has ensured that the food premises has complied with all areas of the Regulations.
Food premises in the Province are not being inspected the required number of times each year. The Government Service Centre is required to inspect food premises a specified number of times each year to minimize health risk. We reviewed the files of 84 food premises in 1995-96 and 95 food premises in 1996-97. Many of the files reviewed indicated that the required number of inspections were not carried out. In other cases, there was no evidence of any inspection activity for the full year.
We could not determine whether the number of inspections currently prescribed for the various types of food premises is appropriate. The Department of Health and Community Services has not developed risk assessment tools and risk management techniques to rationalize how frequently food premises should be inspected.
Food premises inspections relating to licence renewals are typically not completed between March and November of each year. The Government Service Centre performs its renewal inspections in a five month period each year. Therefore, inspections are not representative of year round operations of the food premises.
The Department of Health and Community Services and the Boards are not receiving sufficient information on the inspection of food premises in the Province. The Government Service Centre is required to provide a monthly statistical summary of activities to the Boards, a quarterly statistical summary of food premise inspections to the Department, and an annual narrative report outlining achievements and activities both to the Boards and the Department. We found that monthly statistical summaries of activities are not being provided to the Boards by all regions of the Government Service Centre. In addition, the Government Service Centre has not been providing quarterly statistical summaries of activities to the Department of Health and Community Services, and has not provided the Boards or the Department with any annual reports of activity.
Temporary food facilities are not being inspected and do not have to comply with any standard health guidelines. Various regulations under the Food and Drug Act were repealed in 1996 with the establishment of the new Food Premises Regulations. The new Regulations exempt certain premises (including temporary food facilities) from its requirements provided these facilities meet "standard health guidelines of the department". However, the Department of Health and Community Services does not have "standard health guidelines" in place to assess whether the new Regulations apply to a temporary facility or not.
Policy and Procedures
Two of the five Government Service Centre Regions do not have a database of licensed food premises, while the databases currently utilized by the remaining three Regions are not current and accurate. The Department of Health and Community Services requires the development and maintenance of an on-going up to date listing of all active food establishments to facilitate inspection by the five Regional offices of the Government Service Centre.
Follow-up inspections to determine whether food premises have corrected previously identified health hazards are not always being performed. Inspectors are not withholding the licensing of food premises when health hazards have not been corrected.
There has been no review of Department of Health and Community Services' policies relating to the inspection and licensing of food premises since they were approved in 1994, to determine their adequacy. Since 1994, significant events, such as the passing of the new Food Premises Regulations directly impact the way food premises inspection and licensing activity is carried out. As a result, the policies being followed by Government Service Centre staff may not reflect current legislative requirements.
The Government Service Centre does not have clear established performance indicators or monitoring procedures for its inspection and licensing activity. In particular, the Government Service Centre has not specifically documented any operational goals or objectives for its food inspection and licensing program and does not have an operational plan in place to ensure that inspection and licensing activity is carried out in accordance with the legislation and the Memorandum of Understanding. The lack of clear operational objectives for scheduling and monitoring of inspection and licensing activity at the Government Service Centre has contributed to the Government Service Centre's overall failure to discharge its responsibilities to inspect and license food premises.
The Health Labrador Corporation was established in November 1994 as a result of the restructuring of health boards in the Province. This restructuring resulted in the creation of two new boards to take over the services previously provided by four boards in northern Newfoundland and Labrador.
Although the Corporation was established in November 1994, it did not commence its first fiscal year until 1 April 1995. At that time the Board assumed management and operation of health care services in Happy Valley-Goose Bay, Churchill Falls and coastal Labrador north of Black Tickle, all of which were previously operated by the Grenfell Regional Health Services Board. The Board also assumed management and operation of the Harry L. Paddon Memorial Home in Happy Valley-Goose Bay and the Captain William Jackman Memorial Hospital in Labrador City.
The Corporation was established under the Hospitals Act and is governed by a 13-member board of directors appointed by the Lieutenant-Governor in Council, representing various communities and groups in Labrador. The Board is responsible for all provincially funded health services and programs, including acute care, community health, public health, long-term and continuing care, dental health, addictions and mental health.
The Corporation has significant financial problems as indicated by the following:
The Corporation has not complied with the Public Tender Act. Fourteen of 25 purchases that we reviewed were not made in compliance with the Public Tender Act. Ten of these 14 purchases were not tendered, one purchase was made for an item that did not meet tender specifications, one tender was for insurance services that was received two days after closing, another tender call stated a specific model number which contravenes Government policy, and in one instance we could not determine if the lowest bidder was accepted because of a lack of documentation.
There is insufficient information on the cost of air ambulance services. Although this service cost $1.6 million in 1995-96 and $1.8 million in 1996-97, there is no analysis of the number of patients receiving services and usage trends. This is significant since the cost of providing these services exceeded the revenue received from Government grants and patient fees.
While the Corporation called proposals for the provision of support services to reduce costs, we could not determine how the successful bidders were determined. In addition, we could not determine how the Corporation will measure savings identified by the successful bidders given the lack of accurate financial information. Our review disclosed that the cost of providing these services increased from $4.3 million in 1995-96 to $4.4 million in 1996-97.
Capital Assets and Inventories
Controls over capital assets are not adequate. There is no centralized listing of capital assets and not all assets are physically identified. The Corporation is attempting to improve controls in this area and has engaged a consultant to tag and list the assets at the Melville Hospital. The Captain William Jackman Memorial Hospital has a listing of its assets and the Harry L. Paddon Home is in the process of preparing such a list. None of these lists have dollar amounts assigned to the asset and therefore cannot be reconciled to the Corporation's accounting records.
Established controls over inventories are not being utilized. A significant number of variances between annual counts of medical supplies and pharmacy inventories indicate that control cards are not being updated as inventory items are used.
Job competitions and employee leave were not always properly documented. Job appraisals were not being conducted in accordance with Board policy.
In its Budget Speech of 1992, the Government of Newfoundland and Labrador announced its intention of reviewing the number of health care boards operating institutions under the Hospitals Act. Carrick Consulting Services were retained to undertake this review and in February 1993, its report was presented to the Minister of Health. Government subsequently approved the creation of eight hospital boards and identified the hospitals, clinics, and other services for which each board would be responsible.
As part of the on-going audit work of our Office, we review the financial statements and other information of hospital boards on a regular basis. Our review of hospital boards in 1998 included an assessment and comparison of the financial results and the financial position of each of the eight boards for both 1997 and 1998. An overview of the financial position of each of the eight health care boards for both 1997 and 1998 indicates that the health care boards are in poor financial condition, and also that, overall, the financial position of the boards has deteriorated since 1997. For example:
The $183.5 million in total liabilities of the health care corporations as at 31 March 1998 will be affected by the results of current operations and the level of funding from Government. If the corporations have annual surpluses in the future, these surpluses could be used to fund their liabilities. If, on the other hand, the corporations have annual deficits, these deficits, along with the liabilities, will also have to be funded.
Most hospital boards have incurred annual deficits for the last two years. Our review showed the following:
As part of our audit of expenditures made through the Consolidated Revenue Fund (CRF) for the year ended 31 March 1998 we performed a general review and analysis of amounts paid relating to purchased services, professional services and allowances and assistance. The purpose of our review was to assess whether the expenditures had been properly authorized and approved and whether they were in compliance with legislation such as the Public Tender Act and Government policies such as the Guidelines Covering the Hiring of External Consultants.
During the year we examined certain payments made by the Department of Human Resources and Employment relating to services provided to individuals. As of 1 April 1998, these services were provided by the Department of Health and Community Services.
We reviewed the expenditures made by the Department relating to Allowances and Assistance. Our objective was to determine, for the expenditures examined, whether the Department had complied with legislation and government policy.
Many of the services provided by the Department are provided to individuals. In the past, the Department has taken the position that these services were purchased for individual clients, and that the client is deemed to be the purchaser of the service even though payment is made by the Department. Because these are expenditures of public money they should comply with the Public Tender Act and the Guidelines Covering the Hiring of External Consultants.
Our review of expenditures made to specific service providers disclosed payments made to four counselling firms where the Department did not request public proposals as required under the Guidelines, as well as payments to two corporations for products or services where the Department did not call for public tenders as required by the Public Tender Act.
In our 1997 Annual Report to the House of Assembly, we reported on the results of our review of the privatization of Newfoundland Hardwoods Limited (the Corporation). This review disclosed that although the assets of the Corporation were sold in August and September 1995, as of November 1997, the transactions had yet to be finalized, audited financial statements for the years ended 31 March 1996 and 31 March 1997 had not been released, and the Province had only received 5.6 million of the estimated $7.0 million. Furthermore, while the $7.0 million in estimated proceeds are net of environmental remediation costs estimated to be $1.1 million, these environmental remediation costs have yet to be incurred.
In 1998 we completed a follow-up review of the privatization of Newfoundland Hardwoods Limited. Our review indicated the following.
Audited financial statements have been completed to 31 March 1998; however, there are still issues regarding the wind-up of the pension plan and the removal of storage tanks which have to be addressed before the sale of the Corporation can be considered complete.
Total proceeds from the sale of assets to date has been $5.6 million, $1.4 million less than the $7.0 million net proceeds originally estimated. The difference of the $1.4 million is primarily attributable to payments to consultants and other administrative costs which were not anticipated.
The Province does not have a formal process to determine whether the companies which purchased the assets of Newfoundland Hardwoods Limited have complied with the terms of the privatization agreements. However, information has been provided by the companies, at the request of the Department of Industry, Trade and Technology, to address the requirements of the various sales agreements. The information provided by the companies has not been verified by the Province.
In April 1996, the Ministers of Industry, Trade and Technology, and Finance entered into a Unanimous Shareholders' Agreement (the Agreement) with seven banks, and the three other Atlantic provinces. The Agreement provided for the establishment of ACF Equity Atlantic Inc. (ACF). The primary mandate of ACF is to make direct equity or quasi-equity investments in small- and medium-sized companies in Atlantic Canada that appear to have moderate or significant growth potential. The life of ACF will be limited to ten years with provision for three one-year extensions subject to approval by a majority of the shareholders.
Capital funding for ACF under the Agreement was to total $30 million, with $10 million provided by the banks, $10 million by the provinces and $10 million by the Atlantic Canada Opportunities Agency (ACOA). Newfoundland's investment in ACF Equity Atlantic Inc. is expected to total $2.39 million.
In the case of the four Atlantic Provinces, each province's share of the aggregate provincial share commitment was pro-rated on the basis of population. The Agreement was amended in 1997 to permit an eighth bank to become a co-investor in ACF. This bank will acquire 150,000 common shares in ACF over the life of the Agreement.
Under the Agreement, the Board of Directors for ACF will consist of nine individuals, with at least one director resident in each of the four provinces and at least eight of the nine directors being residents of Atlantic Canada. There are two directors on the Board who are residents of the Province. ACF's offices are located in Halifax, Nova Scotia.
We completed our review of the Province's investment in ACF in October 1998. Our review indicated the following.
The original budget for the fiscal year ended 31 October 1997 called for the completion of four investments in that year. As at 31 October 1997, only one investment of $1.5 million was completed. By 31 August 1998, four investments totalling $4.333 million had been completed, one of which was additional funding for an earlier investment. Two of the four investments, totalling $1.833 million, were in New Brunswick, one investment for $1.5 million was in Nova Scotia with the other being for $1.0 million in this Province.
ACF has indicated that it would provide the Department of Industry, Trade and Technology with quarterly updates on its activities, but this has not occurred. For the year ended 31 October 1997, the Department received interim reports as of June and July 1997, audited financial statements, a Chairman's report and a report to the investor committee. For the year ended 31 October 1998, the Department received interim reports as of May and July 1998. This information was not routinely forwarded to the Department as agreed by ACF, but appears to have resulted from requests by the Department, one of which was in response to a query from our Office. The reports received vary considerably in their presentation and the amount of information provided.
The Newfoundland Government Fund Limited was incorporated on 10 November 1995 under the Corporations Act of the Province of Newfoundland. All shares of the Corporation are held by Ministers of the Crown on behalf of the Province. Its affairs are governed by a Board of Directors which is elected by the shareholders of the Corporation.
The Corporation is a Government-administered venture capital fund under the Immigration Act (Canada) and Regulations. Under the Canadian Immigrant Investor Program, the Corporation issued an Offering Memorandum in September of 1996 to raise funds from immigrant investors in order to provide loan and equity capital to establish, expand, purchase, maintain or revitalize businesses or commercial ventures in Newfoundland. For the immigrant investors, in addition to earning a nominal return on their capital, their investment in the Corporation helps satisfy a portion of their visa requirements under Canada's Immigrant Investor Program.
The offering was comprised of units each of which represents a $250,000 promissory note bearing interest at the simple rate of 2% per annum. Although the promissory note is repayable in full five years from the date on which 70% of the investor proceeds are invested or upon refusal of an investor's Canadian visa application, neither the Government of Canada nor the Government of the Province of Newfoundland offers any guarantees or assurances of a return on an investor's original investment and neither government is liable for any loss or damages that may be suffered by an investor as a result of the investment in the securities. The minimum and maximum amounts of the offering were $3,500,000 (14 units) and $35,000,000 (140 units) respectively. The offering was scheduled to expire on 30 June 1998; as at that date a total of 45 investment units were closed, representing $11,250,000 of investment proceeds received by the Corporation. Two more units had closed by 30 September 1998.
In undertaking the offering, the Corporation engaged the services of an escrow agent and a distribution agent for the purposes of facilitating the marketing and closing of these investment units. For the provision of these services, as at 30 September 1998 the Corporation incurred distribution and marketing fees of $822,500 (7% of the offering proceeds of $11,750,000) and reporting and liaison fees of $63,863 (0.6% annually of the offering proceeds).
The first project to receive funding from the Corporation is a health care facility on the Connaigre Peninsula. In August 1998 the prime consultants for the project were selected, and contracts for site preparation, and foundations and site services work were awarded in September 1998. As at 30 September 1998 a total of $1,200,000 had been disbursed by the Corporation toward this project. As at that date no formal action had been taken on a second proposed project.
For administrative purposes, the Corporation is operated by the Department of Industry, Trade and Technology.
Our review of the Corporation indicated the following.
As an approved government-administered venture capital fund, the Corporation is required to comply with the Canadian Immigration Regulations under the Immigration Act (Canada). In accordance with the Regulations, the Minister of Citizenship and Immigration Canada may suspend the approval of the Newfoundland Government Fund Limited if the Corporation does not comply with certain terms or conditions. The Corporation is not in compliance with several Regulations. Because of the Corporation's non-compliance in relation to beginning eligible projects, Citizenship and Immigration Canada has not granted the Corporation a marketing extension beyond 30 June 1998, and the Corporation is therefore not currently permitted to pursue new investors.
Compliance with the Confidential Offering Memorandum
The Corporation issued a Confidential Offering Memorandum in September 1996 which outlined the terms and conditions of investment to potential investors. The Corporation is not in compliance with all of the terms of the Confidential Offering Memorandum, nor has it exercised all of its rights in accordance with the Memorandum.
Consulting and Professional Services
Of the Corporation's total expenditure of $797,284, $688,992 relates to consulting and professional services. The Corporation has not developed any policies regarding the selection, monitoring and evaluation of consultants. Furthermore, the Corporation could not provide information as to how the various consultants were selected.
During the audit, we noted that the Corporation's records were not properly maintained. This resulted in the Corporation misplacing the original share certificates and not being able to readily provide other corporate records, such as the Corporation's articles of amendment, investor subscription documents, invoices and documentation of federal approval of the Fund.
The Newfoundland and Labrador Housing Corporation (the Corporation) operates under the authority of the Housing Corporation Act. The Corporation provides housing and related programs for the benefit of the residents of the Province with priority given to those most in need. Its affairs are governed by a Board of Directors appointed by the Lieutenant-Governor in Council.
On 22 April 1997, the Corporation entered into an agreement with Canada Mortgage and Housing Corporation (CMHC) to consolidate the management and administration of the social housing programs previously administered by the Corporation and CMHC. Under the agreement, these social housing programs will be administered solely by the Corporation.
Under the Agreement, the Corporation assumes CMHC's responsibilities for the management and administration of the social housing programs to which the Agreement applies. In return for the Corporation carrying out these responsibilities, CMHC will provide funding in accordance with the Agreement. This funding consists primarily of annual funding from 1997-98 through 2038-39, commencing at $55.3 million and reducing each year until 2038-39 at which time funding by CMHC will cease.
The $55.3 million was developed through a series of negotiations between CMHC and the Corporation. In substance, it was intended to represent the 1995-96 costs of operating the social housing programs administered by the Corporation ($49.2 million for 9,400 units) and the 1995-96 subsidies paid by CMHC for the operation of its portfolio ($6.1 million for 4,100 units).
A total of over $1.4 billion in annual funding will be provided to the Corporation over the forty-two year term of the Agreement. In addition to the annual funding, CMHC also paid the Corporation a one-time allowance of $5.9 million for future increases in costs due to inflation, changes in interest rates, and losses on loans owing by third parties.
Not all of the $1.4 billion in funding from the new agreement will be received by the Corporation. The $1.4 billion includes two components: subsidies for the operation of the various programs and amortization costs for the 9,400 portfolio previously cost-shared with CMHC. The amortization costs, totalling $588 million over the term of the Agreement will be intercepted by CMHC to pay off the debt owed to CMHC relating to the 9,400 units.
Funding decreases during the life of the Agreement result from unit phase outs and reduction of the amortization component. Unit phase out is the term used to indicate when a particular unit or units will no longer be eligible for funding by CMHC. The phase out schedule in the new agreement is in line with the unit phase outs that were already in place under the previous agreements.
We completed our review of the Corporation's involvement under the Social Housing Agreement in November 1998. Our review included an analysis of the terms of the Agreement and the process followed by the Corporation leading to the signing of the Agreement.
The Corporation had two options: maintain the status quo or accept the new agreement. The Corporation did not conduct an adequate analysis of the two options. The anticipated revenues and estimated expenditures of both options were not determined and compared to identify which option would provide the greater benefit to the Province.
The Corporation accepted the new agreement even though it had projected a deficiency in the range of $6.9 to $26.9 million in the inflation/interest rate reserve provided by CMHC under the Agreement.
On 10 October 1997, Newfoundland and Labrador Housing Corporation (NLHC) announced tender calls for the sale of the Linden Court Apartment Complex. Originally built in 1952 by the St. John's Housing Corporation and acquired by NLHC when the two entities amalgamated in 1981, the complex consists of two - 26 unit apartment buildings located in the residential and commercial area of Churchill Square. The sale of Linden Court was the result of the decision in the early 1990's by government for NLHC to divest of its market rentals.
On 1 December 1997, the tender closed and eight (8) bids were received. The bids ranged from $396,880 to $2,243,800. The sale of Linden Court was awarded to the highest bidder and was concluded on 19 February 1998. Shortly following the closing, the purchaser announced its intention to convert the 52 units in Linden Court into condominiums. Tenants were given until 31 March 1998 to notify the purchaser of their intentions. If they did not wish to purchase, they were given three months to find new accommodations. The tenants of Linden Court expressed concern over the announcement by the purchaser. Many of these tenants had resided in Linden Court for several years and either did not want to move or did not have the resources to finance the purchase. Public interest in the situation increased and concern was expressed over the stress and anxiety experienced by the tenants, many of whom were elderly.
In response to this situation, government announced that they would take any necessary action to assist the tenants of Linden Court. Based on discussions with the new owners and tenants, NLHC generated four possible alternatives to assist the tenants as follows:
In November 1998, we conducted a review of the sale of the Linden Court Apartment Complex. The tendering process and the events following the conclusion of the sale were examined. Our review disclosed the following.
Twenty-one tenants were assisted by NLHC in moving, 12 tenants purchased units with no assistance from NLHC, 5 tenants purchased units with a mortgage from NLHC, 10 tenants continued to rent with NLHC repurchasing their units, and 4 units were vacated.
NLHC offered to buy back units from the purchaser for any tenants that wished to continue to rent. Ten units were repurchased by NLHC at an average cost of $74,960 per unit. NLHC incurred approximately $7,000 in total for legal fees related to these transactions. When Linden Court was sold, NLHC received $43,150 per unit from the purchaser. This represents an average difference of $31,810 per unit on the price NLHC received on the sale and the price NLHC paid to the purchaser on the buyback of the 10 units. We were informed that part of the difference is attributed to improvements made by the purchaser.
Elizabeth Towers, an eight-story structure containing both residential and commercial space, was built in 1968 by the St. John's Housing Authority. The building was assumed by Newfoundland and Labrador Housing Corporation (NLHC) in 1981 when the two agencies amalgamated. At this time, the capital cost recorded in NLHC's financial records was $5.7 million.
In 1984, Elizabeth Towers was offered for sale for the first time. Three bids were received (range of $3.1 million to $7.8 million) but all were below the then appraised value of $8.1 million. Cabinet directed NLHC to reject all bids.
In 1986, NLHC discovered major structural problems with the exterior of Elizabeth Towers. A preliminary estimate for repairs was $1 million; however, in 1987 this figure had been revised to $4.4 million for which Cabinet gave approval to NLHC to borrow. Renovations continued from 1986 to 1991. In 1990, NLHC received approval from Cabinet to borrow a further $2.9 million. Total cost of renovations since 1982 was approximately $8.2 million. Cabinet ordered an independent analysis of the renovation project and it was concluded that NLHC and the contractors underestimated the complexity of the project and the extended time frame required to complete the restoration.
In April 1993, Elizabeth Towers was offered for sale a second time. Only one bid was received which was well below the then appraised value of $9.1 million. This bid was rejected. Shortly after this, NLHC was approached by a company that had not submitted a bid but was interested in the property. NLHC and this company commenced negotiations which culminated in an offer worth $9.4 million but which also included a government guarantee. NLHC's Board of Directors approved this agreement and were prepared to bring it to Cabinet for their approval. However, at this time, Cabinet ordered a review of the tendering process used by NLHC in the sale of Churchill Square. Since the process used for Elizabeth Towers was similar, NLHC decided to postpone the sale of Elizabeth Towers.
The report by the Department of Justice was released in the summer of 1994. It concluded that NLHC did not breach any statutory provision and did not take any action that amounted to procedural unfairness, but could improve its process through a public tender call by ensuring that all bidders were treated alike and to utilize cross negotiation when negotiating with bidders outside the tender process. In light of these findings, Cabinet authorized the re-tender for the sale of Elizabeth Towers.
In November 1996, a third proposal call for Elizabeth Towers was conducted. The appraised value of Elizabeth Towers was $5.8 million at this time. NLHC received three bids which were all rejected since they failed to meet the conditions of the Instructions to Bidders. In June 1997, NLHC was authorized by Treasury Board to enter into negotiations with interested parties. In response, NLHC invited six companies (including the three who had submitted bids in 1996) to submit an offer. At this time NLHC informed the parties that they were willing to finance the purchase of Elizabeth Towers up to 90% of the purchase price. Four offers were received in August 1997. After NLHC analyzed these offers, Elizabeth Towers was sold to the highest bidder on 28 November 1997 for approximately $5.3 million.
We completed our review of the sale of Elizabeth Towers in November 1998. Our review indicated the following.
Elizabeth Towers was transferred to NLHC in 1981 at a book value of $5.7 million. Between 1981 and 1997, when the building was sold, $8.2 million had been spent on renovating the building, $4.5 million was written-off and $3.7 million was recorded as depreciation. As at November 1997 when the building was sold, the net book value of Elizabeth Towers was $5.7 million. The building was sold for approximately $5.3 million.
Our review indicated that the sale of Elizabeth Towers and the conditions of the sale were authorized by Treasury Board. The purchaser has not yet met all the conditions of the sale.
The John Cabot (1997) 500th Anniversary Corporation was incorporated under the Corporations Act on 22 May 1992. It was established for planning and organizing the celebrations to recognize the 500th anniversary of John Cabot's voyage to Newfoundland. The total expenditures of the Corporation from its incorporation in May 1992 to 31 March 1998 were approximately $14.6 million. During this period, the Corporation received funding of $14.7 million from various sources.
In 1996, we completed our first review of the expenditures of the Corporation for the period of May 1992 to December 1995. This included a review of expenditures to 31 December 1995 which amounted to $7.0 million. A report outlining the results of this review was presented to the House of Assembly on 20 February 1997.
We completed our second review of the Corporation in September 1998. The review covered the period from 1 January 1996 to 31 March 1998.
Our review indicated that the Corporation has significantly improved its management and financial control systems since our initial review in 1996. Of the $14.6 million spent by the Corporation to 31 March 1998, $7.0 million was audited during our first review in 1996 while the remaining $7.6 million was audited in 1998.
In October 1993, the Department of Tourism, Culture and Recreation contracted an agency of record to serve as the sole advertising agency for tourism promotion in the Province. The agency of record was to provide advertising, marketing and research services, and print and electronic production capabilities to the Minister to promote Newfoundland and Labrador as a tourism destination.
Our review of the contract terms between the agency of record and the Department of Tourism, Culture and Recreation was completed in October 1998. The objectives of our review were to determine how the agency of record was selected and whether formal agency review and performance appraisals were completed. Our review indicated the following.
The Department did not follow the spirit and intent of Government's public proposal call process when it extended contracts for periods beyond those outlined in the original agreement with the advertising consultant. Although the original contract provided for an extension to 30 September 1996, the Department continued to extend the contract up to October 1998.
Although there was a requirement to perform a review and performance appraisal before extending the contract, the Department completed its only review and performance appraisal of the agency of record in June 1995. There was no review and appraisal of the agency of record for the two contract extensions covering the period 5 June 1997 to 31 October 1998.
The Department paid on average, $2.3 million annually, to the agency of record over the past five years on advertising. It concerns me that a two year contract, worth on average $2.3 million annually, with a one year extension, remained in place for an additional two years.
This year we continued a process whereby the recommendations are monitored and the results reported within two years of the original report date. This chapter provides the results of this monitoring process relating to the recommendations contained in the Reports of the Auditor General to the House of Assembly on Reviews of Departments and Crown Agencies for the Years Ended 31 March 1994, 1995 and 1996.