1999 Annual Report

Preface

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 1999. That Report contains approximately 500 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.

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Introduction

The Report of the Auditor General to the House of Assembly on Reviews of Departments and Crown Agencies for the Year Ended 31 March 1999 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 1999. Therefore, along with this Summary, two reports are tabled before the House of Assembly.

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Chapter 1

Auditor General’s Overview

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 1999.

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Chapter 2

Framework of Accountability

While I am pleased to see that some action has been taken, I am concerned that Government has not introduced legislation designed to hold its departments, agencies of the Crown and the University accountable to the House of Assembly for their performance and use of public resources. The Bill which is presently before the House of Assembly is designed to hold only those entities which are defined as public bodies (ie. hospital boards, school boards, and regional health and community services boards) accountable for their operations, and then only if the minister requests. However, I now understand that Government has decided not to proceed with enactment of this legislation.

My review of the Hansard of the House of Assembly has disclosed that of the $1.905 billion paid to 63 Crown entities for government operating grants for the 1997-98 year, the House of Assembly received reports on only 5 entities which had received $163.5 million.

While Government has made some progress toward the development and design of a framework of accountability, no annual reports have been provided to the House of Assembly by Government or its departments. There is no legislation requiring Government, its departments, agencies of the Crown and the University to be accountable to the House of Assembly for their operations and use of public resources. On behalf of the taxpayers of the Province, the House of Assembly approves the allocation of resources to Government, its departments, agencies of the Crown and the University. True accountability would require that these entities, in turn, report back to the House of Assembly on their use of the resources granted. If these entities do not provide any information on their use of the resources granted to them, or if they provide information only to Government, then we cannot say that a true system of accountability exists.

Government should complete its work in establishing a framework of accountability. This framework should apply to all departments, agencies of the Crown and Memorial University of Newfoundland. If this framework is to be successful it is imperative that it be approved by the House of Assembly and enacted in legislation and that it specifically require the tabling of annual reports in the House of Assembly.

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Chapter 3

3.1 Monitoring Agencies of the Crown

As at 31 March 1999 there were approximately 152 (1998 – 156) Crown agencies in the Province. Of these, 83 (1998 – 85) were required to prepare annual financial statements while 69 (1998 – 71) were considered non-financial and did not prepare financial statements. Any expenditures related to the operation of these 69 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 83 entities required to prepare annual financial statements, 30 (1998 – 29) were audited by our Office while 52 (1998 – 56) were audited by private sector auditors and one has not yet appointed auditors.

Most of these entities do not have any requirement to report to the House of Assembly on the discharge of their responsibilities. 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 which they audit. These financial statements and management letters along with our Offices audits of Crown agencies provide the basis for our monitoring of all Crown agencies.

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3.2 Monitoring Expenditures of the Consolidated Revenue Fund

As part of our audit of the financial statements of the Consolidated Revenue Fund (CRF), we perform tests and reviews of the expenditures made by the various departments.

In addition to our financial statement audit work, during the past year, we obtained expenditure information from Governments 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; property, furnishings and equipment; purchased services; professional services; allowances and assistance; and transportation and communications. Details of the expenditure of each of these categories are presented in Part 3.2 of the Report of the Auditor General to the House of Assembly for the year ended 31 March 1999.

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3.3 The Canada-Newfoundland Economic Renewal Agreement

The Canada-Newfoundland Economic Renewal Agreement was signed on 20 June 1996 to increase opportunities for economic development in Newfoundland, and specifically to enhance growth of earned incomes and employment opportunities in the Province. The Agreement covers the period 1 April 1996 to 31 March 2001 and provides funding of $100 million, cost shared between the Federal Government ($80 million) and the Provincial Government ($20 million). The Agreement is comprehensive and specifically defines what is required to implement, monitor and manage the Agreement.

Our review indicated that from 1996 to 1998 there has been a steady improvement of the implementation, monitoring and management of the Agreement programs and projects. Further improvements are required and we were informed that further improvements are planned.

Our review identified two significant weaknesses which should be addressed:

Under the Agreement, the Management Committee has the right to examine and audit the records of projects managed by third party individuals and organizations who have received funding under the Agreement. As of March 1999, these third party individuals and organizations have received $51 million in project funding. However, no inspection or audit of these records and supporting invoices has been carried out to date. As a result, Government cannot demonstrate that all expenditures made by third parties under the Agreement were eligible for funding under this Agreement.
Although the Management Committee established an Evaluation Framework as required under the Agreement and some useful information is being provided through this framework, adequate performance information necessary to evaluate the programs is not being provided by all of the implementing departments. In addition, since key performance targets were not included in the third party contracts there is no formal requirement for these third parties to provide this information. As a result, it will not be possible for the Management Committee to evaluate whether the objectives of the Agreement are being achieved.

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3.4 Special Warrants

The common parliamentary means of providing spending authority to government for its operations is through the annual passing of supply acts. This involves having the Members of the House of Assembly vote on the governments funding requests before the spending authority is provided. Approval by a majority of the Members of the House of Assembly is needed to pass an act.

Through the use of a a special warrant, Government can, without the prior approval of the Members of the House of Assembly, spend public money. 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.

There were 14 special warrants totalling $136.1 million issued in the 1998-99 fiscal year, of which $123.8 million were issued in March 1999. It is my opinion that $95 million of the $136.1 million of the special warrants issued in 1998-99 did not meet the requirements of the Financial Administration Act in that they were not urgently required and therefore should not have been issued. If these special warrants had not been issued, and in my opinion they should not have been, Government would have reported a cash surplus of $105.1 million compared to the $10.1 million that was actually reported.

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3.5 Cellular Phones in Government

Since the use of cellular phones is increasing, government should ensure adequate systems and procedures are in place.

Many Government departments do not have adequate control over the acquisition and administration of cellular phones, and not all departments have developed procedures to verify receipt of cellular service and approve invoices for payment. I am recommending that Government establish a government-wide policy to control the acquisition and administration of cellular phones.

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3.6 Accounts and Loans Receivable in Government

As I have indicated in previous reports to the House of Assembly, Governments systems for recording, reporting and controlling accounts receivable do not always provide timely and accurate information to users. As a result, Government does not know how much money is owed to it at any given point in time. The general exception is the amount owed as of the 31 March of each year which is 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. Government introduced the accounts receivable function of its new accounting system in May 1999 and between May and October 1999 the accounts receivable function was implemented in 12 of the 15 departments.

Our review of Government departments 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.

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3.7 Human Resource Management Information Systems

In 1987 Government recognized the need to more effectively manage its human resources and established a Steering Committee to develop a comprehensive computerized Human Resource Management Information System. In 1990 it was determined that a new system would cost approximately $2.1 million and would be completed by March 1993. There were 17 functional areas that were identified as necessary to address in order to have the required system. As at 31 March 1995, Government had spent approximately $4.3 million and no further significant costs have been incurred. At the time of our review, Government had only developed or partially developed 5 of the 17 functional areas and made enhancements to 4 functional areas. Government still does not have an adequate Human Resource Management Information System.

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3.8 A Review of the Financial Management System

In November 1998, Government completed the replacement of many of its key financial systems with a new integrated Financial Management System. The acquisition and implementation of the Financial Management System was one of the most significant information technology projects undertaken by Government, involving over 15 departments and 500 users at 31 different locations. Our review indicated that the system was implemented within time and within budget.

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3.9 Repayment of Severance and Redundancy Pay

Government has undertaken a number of initiatives in recent years to decrease the size of the public service.

During 1996-97, 1997-98 and 1998-99, Government and its Crown agencies paid a total of $67.5 million in ex-gratia and other payments. A significant portion of the $67.5 million was redundancy and severance paid to displaced employees of Government departments, school boards, health care boards and other Crown agencies.

Section 17 of the Financial Administration Act indicates that the Minister of Finance may, subject to the approval of the Lieutenant-Governor in Council and another Act, negotiate and accept a settlement of a debt. Treasury Board Secretariat did not have the approval of the Lieutenant-Governor in Council as required by the Financial Administration Act when it issued its Directive stating that employees who are required to repay redundancy and/or severance benefits have the option of making lump sum repayments or negotiating a repayment schedule acceptable to their department based on their ability to pay and the salary earned in their new position. As a result, Government is in contravention of the Financial Administration Act.

Governments policy is unclear as to who is responsible for ensuring amounts owing for severance and redundancy pay are actually collected by Government. Furthermore, Government has not carried out any reviews to ensure employees who received severance and/or redundancy payments, and who were subsequently rehired by Government departments, Crown corporations, and other Government agencies, repay amounts owing in accordance with Government policy.

Although Minute of Council 94-520 indicates that compensation practices of Government are applicable to Crown corporations and other Government agencies, Governments current policy is silent on the issue of rehiring in these entities. Governments current policy does not address the repaying of severance and redundancy pay if an employee of one Government entity obtains employment with another Government entity.

Of 24 employees selected for review to determine compliance with the Financial Administration Act and Governments Re-employment Priority Policy, we found a number of instances of non-compliance.

I am recommending that Government comply with the Financial Administration Act and determine whether employees who receive severance pay and/or redundancy pay and were subsequently rehired, have repaid the amounts owed.

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3.10 Strategic Enterprise Development Fund

The Strategic Enterprise Development Fund is administered by the Department of Development and Rural Renewal. The Fund provides capital financing to assist the start up and growth of small and medium sized businesses which have activities consistent with strategic sectoral opportunities identified as zonal or provincial priorities and whose funding needs cannot be met through other sources. Capital financing may take the form of loan advances, equity advances, loan guarantees, company development grants or conditional forgivable loans.

The Province provided $18,100,000 to the Fund in 1996-97, $7,000,000 in 1997-98 and $8,975,000 in 1998-99. These funds were then transferred to Enterprise Newfoundland and Labrador (ENL) to provide capital financing to various individuals and entities.

Our review indicated the following:

Reporting on the performance of the small business loan program is inadequate. There are no reports on the actual number of jobs created or what economic benefit has resulted from the loan program. Each year approximately $7.0 million is invested in this program without adequate structures in place to determine if the program is achieving its intended purpose and without any reports, other than audited financial statements, to the House of Assembly on what has been achieved. In June 1999 the Department prepared a report on approvals and employment by industry sector; however, this is an internal report and is not required on a regular basis. It was not provided to the House of Assembly.
Assessment of loan proposals was not always adequate as significant pieces of information were not included in the assessment. Our review identified concerns with 7 of the 42 files reviewed regarding the adequacy of the assessment of the proposal.
Loans were made to companies that had existing loans in arrears or when there were indications that management was not acting in good faith. Our review identified concerns with 7 of 42 files reviewed regarding the future viability of the proposal.
Adequate security was not always obtained prior to the loan disbursement and funds were disbursed prior to conditions for the loan being met. Our review identified concerns with 4 of 42 files reviewed regarding the adequacy of security.
Once the loans are issued there is inadequate follow up to ensure the conditions for the loan continue to be met. Required financial information is not always submitted to the regional offices and there are very few personal visits or contact with the loan clients documented in the files. Without these visits the Department cannot ensure the loan security is still in place and the business is operating in accordance with the loan agreement.
Only 25% of ENLs total loan and equity portfolio of $78.2 million is estimated to be recoverable. The remaining 75% is an estimate of the uncollectible accounts and has been provided for in the allowance for doubtful accounts. This estimate is a matter of judgement and the actual collections may be more or less.

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3.11 Strategic Enterprise Development Special Reserve Fund

The Department of Development and Rural Renewal administers the Strategic Enterprise Development Fund and through this fund provides assistance to small and medium size businesses. Over 90% of the $11,975,000 in the Special Reserve Fund was provided to three companies. There are stated objectives for the fund and standard procedures to be followed in assessing, approving and monitoring assistance provided to businesses through this fund. Our review disclosed that these procedures were not followed for the three projects that we reviewed under the Special Reserve Fund of $11,975,000. For example:

Although the Department of Development and Rural Renewal, through Enterprise Newfoundland and Labrador Corporation, was responsible for the disbursement of the funds, it had very little to do with the assessment, approval and monitoring of the three projects that we reviewed under the reserve fund. The Department of Industry, Trade and Technology was responsible for the call centre projects and the subsequent monitoring of these projects, while the Department of Finance was responsible for Newfoundland Bonding & Composites Limited. It was evident from our review that these projects were pre-approved before the Board of ENL or the Department became involved.
Our review of three approved projects funded through the reserve fund indicated that they were not subject to the policies and procedures as established for other loan and equity investments. Thorough assessments were not performed, verification of business plan assertions was limited and monitoring was inadequate.

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3.12 The Enterprise Network Inc.

The Enterprise Network Inc. is a Crown corporation which was established to make commercial, technical, and industrial information equally accessible to individuals and organizations in urban, rural and remote regions of the Province. The Corporation commenced operations in 1991 and closed its head office and five telecentres in 1997. Over the seven year period, the Corporation had spent approximately $1.9 million on capital assets. When the Corporation closed in 1997, it decided to distribute its capital assets to various government departments, Crown agencies and community groups. Our review indicated the following:

The Corporation did not maintain adequate records on its capital assets and as a result, the Corporation could not provide us with a listing of assets that should have been on hand when it ceased operations in October 1997.
As a result of the inadequate records on capital assets, the Corporation could not indicate exactly what was the final disposition of its capital assets totalling $1.9 million.
Although there were listings prepared for assets transferred to government departments and Crown agencies, the listings were deficient in that there was no cost information provided which would relate these assets back to the total assets of $1.9 million.
The Corporation did not maintain listings of the individual assets and their costs which were distributed to each of the community groups. After our enquiry, the Corporation contacted some of the community groups and obtained asset listings. However, these listings were not independently prepared by the community groups and appeared to be photocopies of listings prepared by the Corporation at various dates prior to or during October 1997. Such listings included references to assets as a missing or being located at employees homes.

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3.13 Provincial Post Secondary Awards Program

Government, in 1998 announced a $4,000,000 provincial post secondary awards program over a two year period, intended to provide awards to post secondary students based on academic merit and financial needs. This Program is intended to provide a bridge to the new $2.5 billion Canada Millennium Scholarship Program which commences in 2000. The Provincial Post Secondary Awards Board was established in May 1998 to formulate awards criteria and general administrative procedures regarding the program. Awards were available to students who obtained a student loan from the Department of Education which was insufficient to meet all of their assessed financial need.

As at 31 March 1999, 1,601 students received awards totalling approximately $1.3 million.

The Department has no documented policies and procedures with respect to the delivery of the provincial post secondary awards program and there is no evidence that the established eligibility criteria were ever approved by the Provincial Post Secondary Awards Board.

There are weaknesses in the process which the Department is following to determine the amount a student is entitled to receive. We found numerous and significant errors in amounts awarded to students as a result of the timing of the award calculation.

Significant issues raised at the Provincial Post Secondary Awards Board meetings have not been addressed by the Board in a timely manner. For example, the time the reports should be produced to determine the amount of an award, the establishment of an appeals process, and the establishment of institutional sub-committees have yet to be resolved.

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3.14 Deferred Bursaries

Prior to the introduction of the Newfoundland Student Loan Program in 1994-95, the Province administered a Deferred Bursary Program which was intended to offset student debt which was borrowed under the Canada Student Loan Program. This program provided students, who qualified, with bursaries which were deferred until the student consolidated their Canada Student Loan at the bank for purposes of repayment. The bursaries are paid out when the student begins to repay their Canada Student Loan. As at 31 March 1999, there were approximately 7,900 students still entitled to receive approximately $6.0 million in deferred bursaries which were approved prior to July 1994.

We found that the Department does not have procedures in place to ensure that all students are paid the $6.0 million in bursaries they are eligible to receive. A significant number of annual notifications mailed to students in 1998 advising them of their outstanding deferred bursaries, were returned to the Department marked undeliverable. Currently, the Department has no plans to address the undelivered notifications or the large number of deferred bursaries still outstanding.

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3.15 Loan Remission Program

The Department of Education administers a Loan Remission Program through its Student Aid Division. The Loan Remission Program was announced by the Province in 1994-95 coinciding with the introduction of the Newfoundland Student Loan Program in 1995 and the earlier termination of the Deferred Bursary Program (see Item 3.14 of this Report) in 1993. However, students were not eligible to commence applying for a loan remission until September 1997. The Loan Remission Program is intended to encourage students to pursue their post-secondary education in Newfoundland and to complete their program of study in a timely fashion by offering a debt forgiveness incentive to students who borrow.

Loan Remissions are provided to borrowers who qualify in accordance with established loan remission criteria. The success of this program depends largely on the Departments efforts to inform students when they begin and continue through their program of study as to the eligibility criteria they must meet in order to qualify for a loan remission at the end of their program of study.

As of 31 March 1999, the Department approved 661 loan remissions totalling approximately $3.5 million. Of the $3.5 million, $900,000 was paid in 1997-98 and $2.6 million was paid in 1998-99.

Although the Loan Remission Program was announced by Government in 1994, the eligibility criteria were not finalized and conveyed to students until the 1997-98 academic year. As a result, students enrolled in programs prior to the 1997-98 academic year may have been unaware of the criteria they would be required to meet in order to qualify for a loan remission on completion of their program of study. It is unfair to require students to comply with criteria that they were not aware of at the time of their studies and which had yet to be finalized. It is possible that some students who did not meet the graduation period eligibility criterion would have made a concerted effort to complete their academic programs within the appropriate time frames if they had known this at the time they were pursuing their studies.

The Department was not applying its criterion of requiring students to submit their loan remission applications within 90 days of completing their studies. As a result, we found instances where, because the Department relaxed its loan remission application deadline criterion of 90 days, it was unable to process all loan remission applications in a timely manner and forward them to CIBC within the required 180 day time frame necessary to avoid being charged the 5% risk premium.

It is possible that students who did not meet the 90 day application deadline would have applied if they had known that the Department had relaxed the deadline criterion of 90 days.

We found instances where the Department failed to process loan remission applications in accordance with established guidelines. Of the 38 loan remission applications reviewed, 9 did not meet all of the established guidelines. In one case, a student was awarded a loan remission of $5,225 although the student did not meet the established criteria.

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3.16 Student Loan Program

In 1994-95, the Department of Education and Training commenced the delivery of the Newfoundland Student Loan program through its Student Aid Division. The Newfoundland Student Loan Program is delivered along with the Canada Student Loan Program. While both loan programs are separate from one another, there is sufficient harmony in the loan programs to permit delivery as one program. Student loans are issued at 60% and 40% under the federal and provincial programs respectively and the costs of servicing are shared, for the most part, on the same basis.

As of 31 March 1999 there was $223 million in issued and outstanding student loans of which $87 million relates to loans currently on repayment by students who have completed their studies. Of the $87 million in student loans which is currently subject to repayment, $29.4 million or 34% is in arrears greater than 30 days. This is similar to 31 March 1998 when $18.5 million or 35% of the $50.3 million in student loans under repayment were in arrears greater than 30 days.

Currently, there is no written agreement between the Federal government and the Province governing the delivery of the Canada and Newfoundland Student Loan Program by the Province.

The current Student Assistance Act was enacted in 1996 and does not adequately reflect the changes which occurred in 1994-95 when the Province moved from a grants based program to a loans based program. In addition, in 1996 the Student Allowances Regulations, which related to student programs that are no longer available, were eliminated. As a result, the Newfoundland Students Loan Program is currently being administered without the appropriate legislative authority.

The Department does not have its own policy manual for the administration and delivery of its student loan program. The Department maintains that it is administering its student loan program, for the most part, in accordance with policies issued by the Federal government for its Canada Student Loan Program. However, our review indicated many instances of non-compliance with these policies, the details of which are included in my Annual Report.

The appeals process is currently coordinated through an Appeals Officer and an Appeals Board. There are weaknesses in the student loan appeals process and these are included in detail in my Annual Report.

In order for students to be eligible for student loans, the institution they are attending must be designated for purposes of student loans under the Student Assistance Act. The Student Assistance Act does not provide any guidance as to how an educational institution should be designated for purposes of student loans since there are no regulations established for this purpose under the Act, even though there is provision in the Act to do so. The Department maintains that it has been designating private educational institutions for purposes of student loans if they meet private training institution licencing requirements under the Private Training Institutions Act. Effective 1 January 1999, for purposes of student loans, the Private Training Institutions Regulations were amended to state that not withstanding the Student Assistance Act or regulations, a private training institution shall not be designated as an institution which offers courses for which student assistance is available unless it has been in continuous operation as a registered private training institution for one year and has graduated one class of students.

There are no approved guidelines or procedures in place to ensure that the Department can effectively monitor student loan default rates at designated educational institutions. Designated educational institutions with unacceptable student loan default rates may indicate that these institutions are experiencing program and/or operational problems. Our review indicated that for 1997-98, 23 of 54 educational institutions in this province had student loan default rates in excess of 30%. We could not determine if these default rates were acceptable to the Department. Draft Canada Student Loan Designation Guidelines as prepared by the Federal Government for discussion purposes, for example, suggest that for 1997-98, institutions with default rates greater than 30% and less than 55% should be placed on probation.

In October 1998, an internal departmental committee released its report on a designation for Student Aid Purposes to address weaknesses in the Provincial designation process. The Department has indicated that it intends to forward its draft designation policy to educational institutions for their input in the near future. We are concerned that a report dated October 1998 on such a significant issue has yet to be implemented in light of the significant increase in the number of students attending private educational institutions.

The Department has not reviewed error reports related to billings from the bank for interest subsidy, interest relief and risk premiums since December 1996. Our review of the exception report dated 31 October 1998 indicated that the exceptions total approximately $840,000. These exceptions could represent amounts paid by the Department in error.

The Department has honoured guarantees on defaulted loans totalling $1.9 million. It is now the Departments responsibility, and not the banks, to collect these loans. The Department does not have any policies on the collection of these loans. Although some former students offered to repay their loans, the Department would not accept payments because it did not have a collection process in place.

The Province is currently negotiating an extension to the lender agreement in place with the bank with respect to student loans that expired on 31 July 1999. As a result of increasing student loan default rates and the Departments failure to adequately monitor student loan default rates, the Province is expecting the 5% risk premium it is currently paying on Class B student loans to increase to between 10% and 15%. This will result in risk premium costs increasing from $2.1 million in 1998-99 to between $4.7 million and $6.6 million in 1999-2000.

The automated system being used to handle student telephone inquiries is not adequate. Information obtained from the Department indicated that there is an average of 2,290 calls per day made to this system and the majority of callers do not utilize its automated features, but request to speak to the operator instead. One operator cannot process all these inquiries in a timely manner.

The Switchboard at Student Aid is intended to direct callers to their appropriate destination. We found that a significant percentage of calls made to the Student Aid switchboard operator are abandoned before the switchboard operator can answer.

The Department has not established goals, objectives and performance indicators for the Newfoundland Student Loan Program. While the Student Aid Annual Report is a comprehensive and detailed document, the information provided in it cannot be utilized in monitoring performance because the Department has not established goals and objectives to compare the information against. In addition, the Department is not compiling performance information such as the length of time it takes to process an application for a student loan or the length of time it takes to process appeals.

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3.17 Monitoring of School Boards

In 1996 the school system in the Province was reorganized with the dissolution of 27 church run school boards and the creation of 10 new English language school boards and one French language school board. The 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. In the 1998-99 school year there were 365 schools with an enrolment of 97,400 students.

In the reorganization process, the Province decided to eliminate the existing debt of the 27 school boards as at 30 June 1996. As a result, in March of 1997, the Province paid the 10 district boards $24.2 million to retire existing long-term debt and operating debt as of 30 June 1996. However, this did not completely eliminate the deficits as the boards operated from July to December 1996 and additional deficits arose. In March of 1999, the Province paid an additional $1.2 million to five school boards to cover these additional operating deficits.

Our review of the financial position of the 11 school boards did not identify any significant problems with the exception of School Board #7, Burin Peninsula School Board, which had an accumulated operating deficit of $1.5 million as at 30 June 1999 which is comprised of a $700,000 deficit in 1996-97, a $400,000 deficit in 1997-98 and a $400,000 deficit in 1998-99. In addition, this Board was unable to provide us with audited financial statements for the year ended 30 June 1999 at the time of our review in November 1999.

Using 1995-96 as the base year which was the last full year that the former 27 school boards operated, school board provincial revenues have declined by $27.0 million, including $18.5 million in teaching services grants and $8.5 million in other revenues. The total revenue per pupil increased by 7% from $4,796 in 1995-96 to $5,137 in 1998-99.

Using 1995-96 again as the base year, school board expenditures declined by $25.3 million, comprising $17.8 million in instructional, $5.3 million in administration, and $2.2 million (net) in other expenditures. Expenditure on instruction per pupil increased 9% from $3,841 in 1995-96 to $4,173 in 1998-99.

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3.18 A Review of the Multi-Materials Stewardship Board

On 15 January 1997 Government implemented a Beverage Container Control Program in which consumers pay a deposit on beverage containers and receive a refund upon returning the containers to one of the 37 established depots in the Province. In addition to paying refunds to consumers, deposits, along with proceeds from the sale of collected containers, are used to support the operating costs of the Beverage Container Control Program. All excess monies are to be paid into the Newfoundland and Labrador Waste Management Trust Fund to be used to provide funds for Government-approved waste management initiatives.

In June 1996, Government established the Multi-Materials Stewardship Board to manage the Beverage Container Control Program and the Waste Management Trust Fund. In 1997, the Multi-Materials Stewardship Board entered into an agreement with Newfoundland Beverage Recovery Inc. to operate, maintain and manage the Beverage Container Control Program on behalf of the Multi-Materials Stewardship Board. Newfoundland Beverage Recovery Inc. is a not-for-profit corporation established by the beverage industry for the purpose of carrying out the responsibilities of this Agreement.

Under this Agreement, distributors of beverage containers remit the deposits to Newfoundland Beverage Recovery Inc.. The Newfoundland Beverage Recovery Inc. holds all excess monies until directed by Government to pay the funds into the Waste Management Trust Fund. As of 31 March 1999, net assets of Newfoundland Beverage Recovery Inc. totalled approximately $7.0 million. In July 1999, Cabinet directed that $3.0 million of the $7.0 million at Newfoundland Beverage Recovery Inc. be transferred to the Waste Management Trust Fund to be used for the purpose of supporting community-based environmental initiatives, such as community clean-ups, recycling and environmental education programs.

Our review indicated that the Multi-Materials Stewardship Board is adequately monitoring the management of the Beverage Container Control Program. However, several significant issues were identified during our review. For example:

In 1996, Government established target recovery rates for beverage containers sold at 50% for 1997, 60% for 1998, 70% for 1999, and 80% for 2000. Our review in November 1999 found that the target recovery rate has stagnated at approximately 50%. A consultant has recently been contracted to review the effectiveness of the Beverage Container Control Program.
Under the Agreement between the Multi-Materials Stewardship Board and Newfoundland Beverage Recovery Inc., the Board has the right to inspect and audit all the records of the Newfoundland Beverage Recovery Inc. The Board has not exercised its right to inspect and audit those records as they relate to expenditures. This is significant since annual expenditures are approximately $8.0 million.
The Newfoundland Beverage Recovery Inc. is not submitting an annual budget and work plan for program activities for approval of the Board as required under the Agreement between the Newfoundland Beverage Recovery Inc. and the Board.

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3.19 Newfoundland Government Sinking Fund

Sinking funds are a pool of cash and investments accumulated by the Government during the life of a debenture, which will be used to pay off that debenture when it matures. Some sinking funds are mandatory because of a requirement outlined in the debenture issue while others are voluntary. The Province has been maintaining sinking funds for many years.

The total amount of cash and investments in the sinking funds varies each year as Government uses cash and investments to retire some debentures while contributing additional cash to sinking funds to repay other debentures.

As at 31 March 1999, the Province had accumulated $1.02 billion in its sinking funds which will be used to retire the $5.6 billion in debenture debt. Of the $1.02 billion, $571 million are mandatory while $449 million are voluntary. The Province maintains these voluntary sinking funds even though there is no legal requirement to do so. Government has still not conducted any cost-benefit or other analysis to determine whether it is making optimal use of its cash resources by maintaining $449 million in voluntary sinking funds. This raises the issue of whether this is the most efficient use of cash given the Provinces borrowing requirements.

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3.20 Sale of the Nain Banker

In my 1997 Annual Report to the House of Assembly, I reported on the four middle distance fishing vessels which had been constructed by the Marystown Shipyard Limited in the 1980’s and which were operated by four corporations created solely for that purpose.

In 1995, three of the four middle distance fishing vessels were sold. The Belle Isle Banker and the Makkovik Banker were sold to Norwegian interests and the Funk Island Banker was sold to local interests. The fourth remaining vessel, the Nain Banker, was leased to the Fisheries and Marine Institute of the Memorial University of Newfoundland.

In 1997, the Nain Banker was leased to the Torngat Fish Producers Co-operative Society. In 1999, the Nain Banker was sold to the Labrador Fishermens Union Shrimp Company Limited.

As at 31 March 1999, the Provinces involvement with the four middle distance fishing vessels has cost approximately $30.7 million.

In March 1998, there was a public proposal call for the purchase and/or lease of the Nain Banker. However, in evaluating the proposals, the Board used criteria which was not disclosed in the proposal call and gave preference to bidders who met the undisclosed criteria. Specifically no preference criteria as to where the catch would be landed or where the successful bidder would be based were included as part of the information package accompanying the 1998 request for proposals; however, such criteria were used in awarding the lease.

Three proposals received in 1998, one at $1.5 million and two at $1.1 million, resulting from a call for proposals for the sale of the Nain Banker, were eliminated based in part upon financial constraints associated with a required buy-out of the lease obligation. The vessel was sold in March 1999 to another company for $1 million, only after the referenced lease buy-out had been completed. There was no indication that the three bidders with bids higher than the one accepted were contacted.

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3.21 Belleoram Scallop Hatchery

In 1995, Cabinet approved the redevelopment of the former provincial fish plant in Belleoram into a scallop hatchery. This initiative was based on a need for scallop spat (seed) to promote scallop development in the Province, as recommended by the Department. 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.

At the time of our review in relation to this years report item, the Department indicated that Cabinet had been updated on the situation with the hatchery and that support had been expressed to attract a private sector company to buy or lease the facility.

In our 1998 report item, it was indicated that as at 31 March 1998, a total of $1.5 million had been spent in capital and operating costs relating to the hatchery. Essentially all of this funding was provided either by Government directly or through Federal/Provincial agreements. The amount of investment had increased to $1.8 million as at 31 March 1999.

A review of information maintained at the Department at the time of our 1998 review indicated that net sales totalled $5,000 and that production targets were expected to be 7.5 million spat for 1995, the first year of operation and 15 million spat in 1996, the second year. Actual production was approximately 3 million spat in 1995 and was similarly low for 1996. As part of our update review, we determined that production had increased to 5 million spat for 1998; however, this is still less than the original estimated production capacity of 15 million.

The Department also provided that while production of seed for 1999 was expected to total approximately 5 million, the provincial seed requirement for the next two to three years is likely to be 2 to 3 million. In addition, at a 5 million production level, and at an average sales price of $0.035 per seed proposed by the Department, annual gross revenue would be only $175,000. The annual operating budget for the hatchery is higher than this amount, which would likely result in deficits.

In July 1999, the Department prepared a Divestiture Information Package relating to the proposed sale of the hatchery. The Department indicated that it was decided later not to release the package.

In the same month a report was prepared by the Departments Aquaculture Branch. In the report, it was proposed to continue financial support for the 1999/2000 year and to develop a plan to privatize the Belleoram Hatchery by April 2000.

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3.22 Sale of Assets

The Department of Fisheries and Aquaculture has a primary mandate to promote the ongoing development of marine fisheries and the aquaculture industry in the Province. Over the years, the Department has made a significant investment in infrastructure in relation to this mandate, through the construction or acquisition of various fisheries related facilities. In recent years, the Department has continued its divestiture effort relating to many of these facilities.

Information provided by the Department indicates that in excess of three hundred major assets have been subject to the divestiture process, with in excess of one hundred assets remaining under Government ownership. Assets subject to divestiture included marine service centres, fish plants, middle distance fishing vessels, community stages, bait sheds and slipways. Assets such as community stages, bait sheds and slipways were in most instances transferred for nominal amounts to local community groups. Two major categories of assets which sold for amounts other than nominal value are marine service centres and fish plants.

Marine Service Centres

Specific direction and terms of reference for the divestiture of Marine Service Centres were established by the Lieutenant-Governor in Council in January 1997. The divestiture process provided that the incumbent lessees were to be given the option of making an offer to the Department of Fisheries and Aquaculture for the purchase of the respective Marine Service Centre.

Four of the five Marine Service Centres reviewed were sold to incumbent lessees at negotiated prices. The fifth Marine Service Centre was sold as a result of a public request for proposals. In the five cases reviewed, the Department of Fisheries and Aquaculture generally complied with the direction provided by the Lieutenant-Governor in Council. In all cases, the sales price was significantly less than the appraised values and the capital cost as recorded by the Department.

For the four MSCs sold to the incumbent lessees at negotiated prices, departmental officials indicated that an acceptable price was based upon the judgment of the Governments Divestiture Committee and the particular circumstances surrounding the facility. If Government had called public proposals with the condition that the lessees had the first right of refusal, an acceptable price could have been established through a public proposal call which could have been used as a minimum acceptable offer in negotiations with the current lessee.

Fish Plants

Specific direction and terms of reference for the divestiture of the fish plants were established by the Lieutenant-Governor in Council in May 1990. The divestiture process provided that the incumbent lessees were to be given the option of making an offer to the Department of Fisheries and Aquaculture for the purchase of the respective fish plants. If a negotiated price with the lessees could not be reached, the Department of Fisheries and Aquaculture was to call a public proposal for the sale of the fish plant. The five fish plants reviewed were vacant; therefore, there was a requirement for a public proposal call. Four of the five fish plants reviewed were sold as a result of a public proposal call and accordingly complied with the direction of the Lieutenant-Governor in Council. Amounts received by the Department of Fisheries and Aquaculture for the five fish plants were significantly lower than appraised values.

The Lawn Fish Plant

The fish plant in Lawn was sold to an unsolicited bidder without the benefit of a public proposal call. As a result, this sale did not comply with the direction of the Lieutenant-Governor in Council which required a public proposal call. In addition, a review of departmental files disclosed that six other unsolicited expressions of interest had been received prior to the sale of the Lawn fish plant.

Authorization by the Lieutenant-Governor in Council for the sale of the Lawn fish plant included a requirement that the Department of Fisheries and Aquaculture receive a written commitment from the buyer regarding capital investment and employment levels. A letter was received from the purchaser indicating plans for investment of $300,000 over five years and disclosing the current average weekly employment level; however, sale documents did not include any commitment as a condition of the sale. An official of the Department indicated that there has been no follow-up to determine the amount of capital investment to date or the recent employment history of the fish plant at Lawn.

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3.23 Aquaculture Program

In my 1998 Annual Report I commented on the issuance of a loan guarantee to an aquaculture licensee. Governments involvement with this aquaculture licensee is estimated to have cost the Province a total of $9.3 million in loans and loan guarantees as of 31 March 1999. Despite the infusion of $9.3 million from Government, the licenses financial position has deteriorated significantly.

Of the $9.3 million, $2.8 million is owed to Enterprise Newfoundland and Labrador Corporation and $6.5 million relates to a loan guarantee. Government paid $5 million of the loan guarantee in March 1999 and expects to pay the remaining $1.5 million in 1999-2000. It is unlikely that Government will recover any of the $9.3 million.

Although Government initially had security in place for these loans and loan guarantees, Government relinquished some of its security in favour of other creditors in an effort to keep the company operational.

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3.24 Legacy Nature Trust

On 22 March 1999, Government announced in its 1999 Budget Speech the establishment of the Newfoundland and Labrador Legacy Nature Trust. The trust was to be established as a non-profit agency with a mandate to raise funds nationally and internationally to finance conservation projects in Newfoundland and Labrador. In the 1999 Budget Speech Government made a commitment to contribute $1 million to the Trust.

On 12 March 1999, Government issued a special warrant for $1 million indicating that these funds were urgently required for the Newfoundland and Labrador Legacy Nature Trust. On 31 March 1999, a cheque for $1 million was issued and recorded as an expenditure in Governments fiscal year ended 31 March 1999, thus increasing Governments expenditures by $1 million and reducing Governments cash by $1 million.

It concerns me that Government has circumvented the Financial Administration Act by issuing a cheque for $1 million on an urgent basis on the last day of the fiscal year to a Corporation which did not exist. I am also concerned that this cheque was in the possession of Government officials for 43 days before it was deposited. When it was finally deposited, it was held in a bank account used for bid deposits which accompany public tenders, a purpose entirely unrelated to the nature of the cheque.

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3.25 Newfoundland Farm Products Corporation

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. Over a ten year period from 1987-88 to 1996-97, the Corporation incurred average annual operating losses of $4.3 million.

A new Board of Directors was appointed in November 1996 and given the mandate to pursue privatization of the Corporation. In October 1997, the sale of the St. Johns processing operation to Integrated Poultry Limited, a consortium of local chicken producers, was concluded. The processing operations in Corner Brook were closed by Government in April 1997.

Financial and other assistance has been provided by Government to Integrated Poultry Limited since 1997 as follows:

In 1997, Government provided $8.5 million in operating and capital grants to Integrated Poultry Limited.
Under the terms of the Purchase and Sale Agreement and the subsequent Share Purchase Agreement, Integrated Poultry Limited was to pay $2.0 million to Newfoundland Farm Products Corporation for $1.4 million for inventory and $.6 million for operating losses incurred when Newfoundland Farm Products Corporation was jointly managed by Government and IPL.

On 4 October 1997, $500,000 of the $.6 million due to Government for operating losses incurred when Newfoundland Farm Products Corporation was jointly managed by Government and IPL was repaid. As at March 1999, the remaining $1.5 million was still owing to Government. In January 1999, Government and Newfoundland Farm Products Corporation agreed to restructure the repayment terms on the $1.5 million note receivable from Integrated Poultry Limited. Repayments were originally due to commence in January 1999 but have been restructured to be repaid over a 12 month period, commencing in January 2000.

In October 1997, Government provided a $10.0 million term loan guarantee to Integrated Poultry Limited. In December 1998, Government increased the $10.0 million loan guarantee by $1.5 million for a total of $11.5 million.
In October 1997 Government provided a working capital deficiency loan guarantee for $1.0 million.
In December 1998, Government also issued a new loan guarantee in the amount of $400,000 which has since been repaid.
In April 1999, Integrated Poultry Limited requested Newfoundland Farm Products Corporation to provide the initial financing up to $1.7 million to purchase a grain shipment. Newfoundland Farm Products Corporation paid for this shipment by borrowing $1.5 million from a bank as authorized by the Lieutenant-Governor in Council. This loan was guaranteed by the Province. In May 1999, Integrated Poultry Limited repaid the $1.5 million to Newfoundland Farm Products Corporation and the related loan guarantee by the Province was canceled.
In October 1999, IPL requested Newfoundland Farm Products Corporation to provide financing for another shipment of grain. In November 1999, the Lieutenant-Governor in Council authorized Newfoundland Farm Products Corporation to borrow up to $1.7 million to purchase the grain shipment. This loan was guaranteed by the Province. The loan is to be repaid by 31 May 2000 from the proceeds of the sale of the grain to IPL Processing Limited and/or other customers as deemed appropriate. At the end of our review, Newfoundland Farm Products Corporation had borrowed $1.4 million towards this grain shipment.
In October of each year, Integrated Poultry Limited is to remit an annual loan guarantee fee, in the amount of 1% of the outstanding loan guarantee, to the Department of Finance. In March 1999, Integrated Poultry Limited did not have sufficient cash to pay the loan guarantee fees of $110,000 which was owing from 1998 and the 1999 loan guarantee fee of $126,000 which was to be billed in October 1999. At IPLs request, Government agreed to receive monthly payments of $20,000 commencing 1 April 1999 until both amounts due are paid in full. Our review disclosed that monthly payments of $20,000 were received from April 1999 to September 1999 and totalled $120,000.

In preparing its 31 March 1999 financial statements, Government determined, in December 1999, that it will most likely have to honour its $12.8 million loan guarantee for Integrated Poultry Limited. As a result, included in the Provinces liabilities in the Consolidated Revenue Fund Financial Statements for the year ended 31 March 1999 is a provision of $12.8 million for possible losses on the $12.8 million loan guarantee.

During 1998-99, in order for IPL to obtain financing, Government relinquished a portion of its security on the assets of Integrated Poultry Limited.

On 15 December 1999, the bank demanded payment, by 7 January 2000, from Integrated Poultry Limited for its loans and issued a notice of Intention to Enforce Security. As a result, on 16 December 1999, Government paid the $11.5 million under guarantee to the bank and for the $1.0 million guarantee, elected to require the bank to realize upon its security and to notify the Government of the amount of any deficiency up to the $1.0 million guarantee. On 20 December 1999, Government demanded payment of the $11.5 million from Integrated Poultry Limited and on 21 December 1999, Government issued a notice of Intention to Enforce Security to Integrated Poultry Limited.

In late December 1999, Government and the bank formed a secured Creditor Committee and on 10 January 2000, Government, the bank and Integrated Poultry Limited signed a Forbearance Agreement which will expire on 31 January 2000 unless it is extended. The purpose of this Agreement is to allow Integrated Poultry Limited the opportunity to continue its search for new equity or other investors, without being subject to further action by Government and the bank with respect to exercising their security in the interim, as well as to operate in the manner permitted by the Agreement. Under this Agreement, if Integrated Poultry Limited is unsuccessful in restructuring its debt or attracting a new investor, Integrated Poultry Limited has agreed that it will not oppose Government and the bank should they choose to realize upon their security by requesting the Courts to appoint a Receiver.

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3.26 Management of Crown Lands

The Department of Government Services and Lands is responsible for the management of the Provinces Crown lands. Crown lands comprise approximately 95% of the Provinces land mass and as such is one of the Provinces most significant natural resources. The management of Crown land is assigned to the Lands Branch of the Department of Government Services and Lands. This Branch is comprised of three Divisions: Crown Lands Administration, Surveys and Mapping, and Land Management. The Branchs responsibilities include processing land applications, preventing unauthorized use of Crown land, resolving conflicts in land use and ownership, producing a map inventory of land in the Province, and developing land use policy and management plans. Our review of the Departments management of Crown land indicated the following:

There is no comprehensive and complete land parcel identification system for all land in the Province and therefore, Government does not know the extent or boundaries of Crown lands in the Province. As a result, it is more difficult for Government to effectively manage and plan the use of Crown lands, and Governments land allocation and designation processes are more extensive and time consuming.
The Province does not have comprehensive land use policies to facilitate a co-ordinated approach for land use within Government. As a result, planning for land use within Government is fragmented and covers only small areas of the Province. Discussions with Departmental officials indicated that a comprehensive land plan for the entire Province is not practical due to the significant costs involved. However, it would be prudent for Government to complete comprehensive land plans for certain areas of the Province including those areas where potential for conflict over land use exists.
The following observations were noted with respect to application processing:
- A review of 22 selected land applications indicated that, in general, applications are being processed in accordance with legislation and Departmental policy.
- A recent Departmental report on the Crowns Land Division recognized a number of areas that cause delays in the application process that could be improved including the process for referring applications to other Government departments and agencies and the process of referring applications from the Government Service Centres to the Regional Lands Offices.
- Information maintained in the Departments system that tracks the progress of an application is often inaccurate. This reduces the usefulness of the information to monitor the status of applications. Discussions with staff in the Regional Offices also indicated that they do not generally review the reports available from the system to monitor applications nor do they generally monitor the status of applications.
A sample of 30 dispositions of Crown land indicated that for the sample selected, adequate information, in the form of appraisals performed either by the Municipal Assessment Agency or by Departmental staff, was available to support the fair market value assessed on the property.
The Land Management Division does not maintain adequate information on cottage lot developments, including the status of the lot sales and the associated costs and revenues. Accurate and complete information on status of the development and associated costs and revenues would enhance information available to Management for the monitoring of existing developments and the planning of future developments.
Companies that have approved status under the Economic Diversification and Growth Enterprises Act (EDGE) have been approved to lease certain Crown land at $1. Although Departmental officials were aware that a number of EDGE companies had leased Crown land at $1, they could not provide us with any information regarding which EDGE companies had leased this land, what land had been leased, or what the land was being used for. The Department of Industry, Trade and Technology, who are responsible for administering the EDGE program, also could not provide us with any of this information. Thus, there has been no monitoring of the status of this land or whether these companies still have eligible EDGE status. We also noted that there is nothing in the agreements between Government and EDGE companies to address what would happen to this land if the company lost its EDGE status.

After significant effort by staff of the Department a list of EDGE companies that are leasing Crown land at $1 was provided to us. A comparison of this list with those EDGE companies that have had their status revoked indicated that all of the companies that are leasing Crown land for $1 still have EDGE status.

Monitoring procedures to ensure that the lessee has adhered to the terms of the lease with respect to type of development and period to complete development, is usually limited to sending out affidavits to individuals, after five years have lapsed, which the individual completes to attest to the fact they have adhered to these terms. We also noted that some of the Regional Offices are not even sending out these affidavits. As a result, the Department cannot determine whether Crown land is being used for the purposes intended when the land was authorized for disposition.
Although a review of a sample of leases indicated that billings were properly prepared and recorded in the accounting records, we noted that for those leases where title to the land will only be transferred to the lessee after the lease is paid off over 5 years, the Department has only recorded the current portion or 1/5 of the balance owing in the accounting records.

We noted weaknesses with respect to the collection of accounts. More specifically $1.3 million or 48% of the accounts receivable at 31 March 1999 of $2.7 million were in excess of one year overdue. The Department does not monitor these accounts nor does it perform any regular collection activity.

The Province has been developing an implementation plan for the establishment of geographic information systems (GIS) throughout Government. These computer systems will allow users to collect, manage and analyze large volumes of data related to geographically referenced data and information. The Department has converted information from the manual Crown Titles System into a digital format for use in a GIS system. However, the Department has been completing the development of this system without an approved Provincial Geomatics Strategy in place. In addition, we noted that the system that was converted contained incomplete Crown Titles information and outdated information with respect to base mapping. As a result, the new digitized information is also incomplete and outdated.

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3.27 The Western Health Care Corporation

The Western Health Care Corporation was constituted under the Hospitals Act Constitution Order. The Corporation is responsible for the management and control of the operations of acute and long term care facilities in the western region of the province of Newfoundland and Labrador.

In our report to the House of Assembly for the year ended 31 March 1996 we reported on the results of our review of the Western Memorial Hospital Corporation. In 1996, we concluded that the Western Memorial Hospital Corporation had significant weaknesses in all areas reviewed.

Since our original review in 1996, the Western Health Care Corporation has made improvements in the financial management of the Corporation. These include the improved timeliness of year end financial reporting and the reduction in inappropriate expenditures for employee benefits and travel. However, there are areas that need to be addressed as there are still significant weaknesses. These include:

Although the Corporation has been provided with $20.9 million in additional funding during 1998-99, there remains a deficit of $19.4 million as at 31 March 1999. This is comprised of the 1998-99 operating deficit of $3.1 million, a $700,000 capital deficit and a $15.6 million deficit relating to severance pay and annual leave accruals. The $15.6 million will have to be funded as it becomes due. The additional funding of $20.9 million was not intended to continue as part of the annual government contribution.

Expenditures continue to increase at a faster rate than Provincial funding. As a result, deficits will continue to occur unless the Corporation reduces expenditures or the Government increases funding. As at the time of our review (November 1999), the Corporation is projecting a deficit of $15.7 million in 1999-2000 excluding depreciation, severance pay and vacation pay.

Although patient receivables have declined since our previous review in 1996, the percentage of amounts considered collectable has decreased. In 1995, the Western Regional Memorial Hospital estimated that it would collect $766,000 or 64% of the $1.2 million owed to it by former patients. However, in 1999, the Corporation estimates that it will collect $689,000 or 49% of the $1.4 million owed to it.
One particular area of concern is the amount due from employees for travel advances and salary advances. These amounts have been advanced to employees as a part of the normal operations of the Corporation; however, the failure to subsequently collect or account for these advances has been a significant weakness.
Controls over capital assets are not adequate. Capital assets are not physically identified, listed, costed or counted periodically.

Although the Corporation has a computerized database to record maintenance for significant equipment, this database is not kept up to date or monitored to determine which equipment requires maintenance. Maintenance contracts are not listed or monitored to ensure that contracts are renewed as required. As a result, we could not determine whether all equipment is properly maintained.

The inaccuracies of the computerized inventory records as evidenced by the significant number of differences between the computerized records and the physical counts indicate that controls over inventories need improvement. Our test counts identified variances that could not be reconciled to Corporation records.

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3.28 Peninsulas Health Care Corporation

The Peninsulas Health Care Corporation was established in January 1996 and operates under the authority of the Hospitals Act. Its operations are governed by a Board of Directors comprised of 18 members appointed by the Minister of Health and Community Services. Our review indicated the following:

The Corporation has incurred deficits each fiscal year since it was established in 1996. The deficit, including non-shareable expenses, as reported in the Corporations audited financial statements was $700,000 in 1996-97, $2.3 million in 1997-98 and $2.0 million in 1998-99.

In 1997, Government approved a $20 million health stabilization fund for 1997-98. This resulted in the Corporation receiving a one time payment of $966,000 which was used to reduce the 1997-98 deficit to the reported $2.3 million.

When Government approved the payment of $966,000 from the health stabilization fund, it was expected to eliminate the Corporations projected deficit of $889,000 in 1997-98. However, the Corporation experienced difficulty in following its financial plan and as a result, it continued to incur a steadily increasing deficit for the 1997-98 fiscal year. As indicated above, the deficit for 1997-98 was $2.3 million.

In 1998-99, Government provided an additional $40 million to eliminate the accumulated deficits of the regional hospital boards as at 31 March 1998. The Corporation received $3.9 million of this amount toward its accumulated deficit of $8.4 million at 31 March 1998. The remaining accumulated deficit of $4.5 million at 31 March 1998 relates to severance pay and annual leave accruals which Government will not fund.

Also, in 1998-99, an additional $10 million was approved as one time funding to health care boards. The Corporation received $1 million of this amount; however, it still had an unfunded deficit of $2.0 million for 1998-99 which increased the accumulated deficit of $4.5 million to $6.5 million.

The Corporation does not have either a database of maintenance performed on capital equipment or a listing of maintenance contracts relating to each significant piece of capital equipment. As a result, records at the Corporation are not readily available to demonstrate that all significant pieces of equipment are properly maintained.
In the past two years the Corporation has undertaken a number of studies to address human resource issues such as sick leave, employee moral and communication problems. This is particularly significant since human resource costs represent 76% of the Corporations expenditures.

The Corporation is having difficulty attracting and retaining salaried doctors. When the Corporation has to retain the services of locum doctors, there are extra costs. For the year ended 31 March 1998, the Corporation spent $741,000 more than it budgeted for locum doctors and $500,000 less than budget for salaried physicians. As a result the Corporation spent an additional $241,000 providing the required service.

Sick leave, including replacement costs, cost the Corporation in excess of $2 million in each of the past two years. This represented approximately 91,000 hours in 1997-98 (1996-97: 87,500 hours) or 116 hours (1996-97: 115 hours) per full-time position.

Inefficiencies in management information systems relating to the consolidation of the three predecessor hospital boards in 1996 continue to exist. The Board continues to operate two accounting systems, two inventory systems, two payroll systems and two leave systems. The Corporation is not realizing the economies of scale associated with having one headquarters office to provide all required administrative and accounting services.

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3.29 Health and Community Services Boards

On 1 April 1998, Government transferred programs for community services from the Department of Human Resources and Employment to the Department of Health and Community Services. Effective this same date, Government directed that community service programs including Child Welfare, Community and Corrective Services and Family Rehabilitative Services, be integrated and delivered under the health and community services boards.

There are four health and community services boards in the Province comprised of St. Johns, Eastern, Central and Western regions. In addition to the programs transferred from the Department of Human Resources and Employment on 1 April 1998, the health and community services boards provide traditional community health services including health promotion and protection, mental health, continuing care and immunization services.

The financial position and operating results of the four health and community services boards deteriorated significantly in 1998-99. For example, deficits after non-shareable expenses in 1998-99 totalled $8.7 million before additional funding of $2.3 million was provided by Government in April 1999. In 1997-98, the four boards reported a net surplus after non-shareable expenses of $1.2 million. Furthermore, total net assets of the four boards decreased from $5.4 million in 1997-98 to $1.5 million in 1998-99.

In addition, the four boards are projecting deficits totalling $11.8 million for 1999-2000. This $11.8 million does not include increases in severance and vacation pay which are expected to further increase the deficits. The Department has committed to providing additional funding of $4.0 million to help fund these deficits which will effectively decrease the projected deficits to $7.8 million.

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3.30 Monitoring Hospital Boards

From 1 November 1994 to 1 January 1996 the Government of Newfoundland and Labrador established eight regional health care institutions boards to administer health care facilities in Newfoundland and Labrador. These boards took over the facilities previously administered by many small local boards.

All eight boards incurred deficits after non-shareable expenses in the 1998-99. Deficits ranged from approximately $700,000 for Central West Health Care Institutions Board to $9.0 million for Health Care Corporation of St. Johns.

During 1998-99 the Province provided the boards with an additional $10.0 million to help alleviate the 1998-99 deficits as there were significant deficits in 1999. Despite the additional funding, the boards continued to incur significant operating deficits and only one board, Central West Institutions Board, was able to keep shareable expenditures within the available funding. In addition, our review indicated that all of the boards are projecting significant deficits in 1999-2000.

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3.31 Sale of Marystown Shipyard Facilities

Prior to the sale of the shipyard operations, Marystown Shipyard Limited and Vinland Industries, [A Limited Partnership] operated facilities owned by Newfoundland Ocean Enterprises Limited (NOEL). All three companies are 100% owned by the Government of Newfoundland and Labrador.

Operations at Marystown were reported through Marystown Shipyard Limited, with fabrication operations being reported through Vinland Industries, [A Limited Partnership]. All significant capital assets at the facilities were owned directly by NOEL rather than by the operating entities.

Governments involvement with the Marystown shipyard facilities began in 1966 with the construction of the shipyard. The shipyard became operational in 1968, with the fabrication/offshore service facilities being added in 1993 at Cow Head. Both facilities are utilized for construction of new vessels. Shipyard operations include main hull assembly as well as repair and refit work. The fabrication/offshore service site is used for assembling deck houses and superstructures for new vessels as well as fabrication, repair and service work for offshore semi-submersible rigs, most notably relating to various projects connected with Hibernia development, including work related to the Gravity Base Structure, commonly referred to as the GBS.

In the fall of 1996, Government decided to divest itself of the facilities at Marystown and Cow Head. We were informed that a divestiture information package was prepared and distributed to several companies in the international steel fabrication sector. In June 1997, Friede Goldman International Inc. expressed interest in purchasing the facilities and on 24 September 1997, a Memorandum of Understanding was signed between Government and the company specifying the basic outline of an agreement by which the Province would sell the facilities.

On 22 December 1997, an Asset Purchase Agreement was signed between Government and a new company, Friede Goldman Marystown Ltd., later renamed Friede Goldman Newfoundland Ltd. (FGNL), transferring all of the facilities assets to this company in exchange for 1,000 of its common shares. The net book value of the assets as disclosed in the audited interim financial statements of Newfoundland Ocean Enterprises Limited as at 31 December 1997 was $61 million ($86 million cost less accumulated depreciation of $25 million).

On 1 January 1998, a Share Purchase Agreement was signed between Government, Friede Goldman Marystown Ltd., Friede Goldman Canada Inc., and Friede Goldman International Inc., to sell all shares of Friede Goldman Marystown Ltd. to Friede Goldman Canada Inc. for $1.

Not all the conditions included in the sales agreements have been met. In particular, reports relating to man hours of work for the calendar year 1998 and net after tax profits for the 12 months ending March 1998 were not submitted in accordance with agreement provisions. The report relating to man hours of work for 1998, due to be submitted by 28 February 1999, was never submitted although a Cabinet Committee was provided with this information verbally by company officials in March 1999. The report to indicate the net after tax profits, due to be submitted by 30 June 1998, was not submitted until May 1999.

The Share Purchase Agreement does not require that information provided by Friede Goldman Newfoundland Limited on man hours be audited or otherwise independently verified. The Agreement does provide that the company must retain related information and that Government and its representatives shall have access to such information upon reasonable request and on reasonable notice. Discussions with the Department indicated that the unaudited information provided by the company for 1998 was never verified by Government.

The sales agreements do not require Friede Goldman Newfoundland Limited to meet any employment or other requirements after the term of the agreements has passed, which is 31 December 2000. As well, there is no provision for assets, recorded at a cost of approximately $86 million at the time the agreements were signed, to return to the Province in the event the company does not comply with the agreements or if the company decided to divest itself of the facilities. In minutes of a Newfoundland Ocean Enterprises Limited/Marystown Shipyard Limited Board meeting held 5 September 1997, it was noted with respect to a discussion held with the Cabinet Committee established to oversee the divestiture, that The Cabinet Committee wants the terms of guaranteed employment extended beyond 3 years and wants to incorporate language covering the return of the assets to the Province in the event of certain occurrences. This was never included in any of the Agreements.

A divestiture information package was prepared and distributed to several companies in the international steel fabrication sector. While the Department did provide a copy of the divestiture information provided to the potential proponents, we were advised that no formal record existed as to whom the divestiture information was provided and the evaluation process followed for any proposals which may have been received.

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3.32 Newfoundland Government Fund Limited/strong>

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 Canadas 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 investors 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 investors 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 expired on 30 June 1998. As of 30 April 1999, Citizenship and Immigration Canada required the Corporation to finalize its investor listing to the maximum offering of 140 units.

Although the Corporation had raised $13.5 million under the Canadian Immigrant Investor Program to provide capital to businesses and commercial ventures in Newfoundland which meet the requirements of the Program, the Corporation had been unsuccessful in investing any of the funds as of October 1999. As a result, the Corporation has not complied with the Immigration Act (Canada) and Regulations. For example:

The Corporation has not invested any of the required 70% of the $13.5 million investment proceeds (or $9.45 million) in eligible business operations within nine months after the release of the proceeds from the escrow agent; and
The Corporation has not submitted its annual audited financial statements for the year ended 31 December 1998 to Citizenship and Immigration Canada as of October 1999 although they were required to be submitted by 20 May 1999.

In addition, the Corporation has not complied with the Confidential Offering Memorandum. For example:

The Corporation has never distributed unaudited interim financial statements to investors by 28 September of each year;
The Corporation did not submit the annual audited financial statements to the escrow agent in time for distribution to the investors by 30 April of each year;
The Corporation has not maintained the required 20% of the subscription proceeds ($2,700,000 up to 30 September 1999) in a repayment account for investment in Canadian liquid securities. At 30 September 1999, the balance in the Corporations repayment account was $1,651,088; and
The Fund had still not exercised its rights as permitted under the Offering Memorandum to have the Escrow agent enforce the requirement that investors make the minimum required deposit and pay the balance within the required time frame.

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3.33 Royal Newfoundland Constabulary

On 2 December 1997, a Select Committee of the House of Assembly was appointed to enquire into the arming policy of the Royal Newfoundland Constabulary, and report its findings to the House of Assembly by 31 March 1998. As a result of the recommendations of the Select Committee on the Arming Policy of the Royal Newfoundland Constabulary, members on operational duty were permitted to wear sidearms commencing 14 June 1998. To provide specific direction to members on the control and usage of firearms, the Royal Newfoundland Constabulary issued a revised Firearms Policy at this time. As of November 1999, 620 firearms were maintained by the Royal Newfoundland Constabulary.

One of the recommendations of the Select Committee on the Arming Policy of the Royal Newfoundland Constabulary was also that a firearms audit acceptable to the Minister of Justice be performed annually and submitted to the House of Assembly. To comply with this recommendation, the Chief of Police requested my Office to conduct an audit of firearms. Our review indicated the following:

Control Over Firearms and Ammunition

The Royal Newfoundland Constabulary has established policies to provide for the management and control of its firearms and ammunition. Controls over firearms at the Royal Newfoundland Constabulary have significantly improved since our review of this area in 1996. Our review, however, identified a number of areas that require improvement. These include the following:

The firearms and ammunition inventory system is not accurate. Our testing of this system indicated that not all firearms are recorded in the system and certain firearms recorded in the system had already been disposed of.
Although the inventory system is a perpetual system (i.e. it is updated on an on-going basis), we determined that required adjustments, including dispositions and internal re-assignments of firearms and ammunition, are not always made on a timely basis. As a result, information on firearms and ammunition inventory is not always accurate and up to date.
Segregation of duties over the purchasing, accounting and custody of weapons is not adequate. The same individual performs a number of incompatible duties including ordering and receiving of firearms related inventory, maintaining control over both the physical inventory and the inventory information system, and conducting annual inventory counts without any other officials present. Improper segregation of duties may result in errors or unauthorized transactions not being detected.
In reviewing procedures for the annual physical count, we found that there is no documentation maintained on the results of the count or reasons for any required adjustments between the physical count and recorded inventory. In addition, discussion with Royal Newfoundland Constabulary officials indicated that although adjustments are made to the inventory system, there is no independent review or authorization of these transactions.

Adequacy and Compliance of the Firearms Policy

Our review indicated that the revised Firearms Policy of the Royal Newfoundland Constabulary is comparable to that of the other Canadian police jurisdictions and covered similar issues pertaining to the use and control of firearms.

Our review of compliance with the Firearms Policy indicated that members are not always complying with the policy. For example:

Some of the plain clothes members on operational duty do not always wear sidearms as required by policy.
Although policy requires that unloaded firearms be secured in the members personal firearms storage locker at Royal Newfoundland Constabulary facilities or in other approved locations when the member is not on duty, non-compliance with this policy is regularly observed during monthly inspections.
Monthly inspections of service firearms are not being conducted as required by policy.
A significant number of Royal Newfoundland Constabulary members have not requalified in firearms training every 12 months as required by policy. In addition, a significant number of members have not received use of force training as required by policy.

Although Use of Force Reports are required to be prepared by members and reviewed by supervisors to monitor members compliance with Firearms and Use of Force Policies, we noted that Use of Force Reports are not always being completed and when they are completed, they do not always contain all required information such as member name and type of force used.

In addition, Use of Force Reports are not always submitted to the Use of Force Review Board on a timely basis.

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3.34 Municipal Debt

The Department of Municipal and Provincial Affairs is responsible for matters relating to local government, municipal financing, property assessment, urban and rural planning, infrastructure development and engineering, and the coordination of emergency planning for municipalities.

Total municipal debt is comprised of debt owed by municipalities to the Newfoundland Municipal Financing Corporation and to banks. Newfoundland Municipal Financing Corporation is a Crown corporation created by the Municipal Financing Corporation Act to provide long-term financing for the capital requirements of municipalities through the issuance of securities and relending the funds to municipalities. The debt incurred by municipalities is used to finance such infrastructure projects as water and sewer systems, and roads. The majority of this debt is cost shared between the Province and the municipalities involved.

Our review disclosed that serious concerns remain with respect to the level of municipal debt, the ability of municipalities to administer this debt, and the monitoring of debt by the Department of Municipal and Provincial Affairs. Specifically, our review disclosed the following:

The Department could not provide us with the amount of total municipal debt as at 31 December 1998 for the 290 municipalities in the Province, including the three cities. At the time of our review, the Departments records indicated the amount was in excess of $497 million. Our review of the database of information containing data on total municipal debt revealed that the information was inaccurate and incomplete. Our testing included a review of available audited financial statements for the year ended 31 December 1998 as well as a review of information submitted by the various chartered banks. In comparing this information to the database, several differences and omissions were detected.
While total debt is increasing, municipal debt financed by the Newfoundland Municipal Financing Corporation is decreasing while the municipal debt financed by chartered banks is increasing. Newfoundland Municipal Financing Corporation debt has decreased from $445 million as at 31 December 1994 to $330 million as at 31 December 1998, a reduction of $115 million.

While municipal debt financed by chartered banks is increasing, the Department does not maintain complete and accurate information on this debt. As a result, the Department does not know the total financial condition of all municipalities.

Provincial assistance to municipalities, which includes funding for debt servicing costs (principal and interest) and municipal operating grants, has been decreasing while municipal debt costs are increasing. Assistance and infrastructure funding has decreased from $133 million in 1994-95 to $110 million in 1998-99.
Although total debt to the Newfoundland Municipal Financing Corporation has decreased by $115 million over the last four years, arrears to the Newfoundland Municipal Financing Corporation have increased significantly from $10.8 million as at 31 December 1993 to $19.2 million as at 31 December 1998. Since the Department does not have information on all municipal debt at chartered banks, they do not know the extent of arrears, if any.
For those municipalities for which taxation information was available, mil rates for property taxes ranged from 2.5 mils to 17 mils, water and sewer rates ranged from $30 to $420 per household, and poll tax rates ranged from $20 to $300.
The existing Municipalities Act outlines a framework of accountability by municipalities to the Department of Municipal and Provincial Affairs. Municipalities are not complying with this framework. For example, most municipalities do not submit their annual budgets by the statutory deadline of 31 December. In addition, 12 municipalities had not submitted the required 1997 financial statements at the time of our review. Financial statements for 1998 were not due to be submitted to the Department by the municipalities at the time of our review and therefore were not generally available. The Department should enforce compliance with the Municipalities Act so that it will have the information that is required to monitor the financial condition of the municipalities.

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3.35 Debt Relief Program

During 1996-97, the Department of Municipal and Provincial Affairs introduced a Debt Relief Program to assist municipalities in debt refinancing or debt restructuring. The Program is intended to assist municipalities in poor financial condition, determined by a comprehensive review of individual municipalities past performance in relation to financial activities, with consideration of other factors including economic conditions, taxing capacity, and out-migration.

As at 31 March 1999, Government had advanced a total of $17 million in Program funding to the Newfoundland Municipal Financing Corporation, to be held in a reserve for use in mitigating arrears with respect to municipal loans. The amount of the allocation is determined through assessments completed by the Department with final approval from the Newfoundland Municipal Financing Corporation. Of the $17 million in Program funding, approximately $6.1 million had been allocated to 13 municipalities as at 31 March 1999, leaving an unallocated balance in the reserve fund of $10.9 million.

Our review disclosed that:

Guidelines for the Program, defining the Programs objectives, organizational structure, processes, and expected outcomes have not been formally established. Draft Program guidelines did exist and were well structured; however, they were not formally approved by the Department. As well, criteria which would determine how much funding a municipality would be entitled to under the program, have not been well defined and properly approved.
We were advised that the draft guidelines were to be in effect for the period covered by our review; however, certain provisions contained in the draft guidelines were not complied with.
In April 1997, the Department estimated that it would complete a review of 170 affected municipalities by 30 October 1998. By January 1999, Departmental reviews had commenced with only 112 municipalities, with negotiations being finalized for only 47 of these 112. The Department indicated that the revised estimate for completing the remaining reviews is March 2000.
The draft guidelines indicated that the municipalities that will be targeted are those that spend more than 30% of their municipal revenues on debt. As well, it is indicated that order of priority will be given to municipalities with the highest debt to revenue ratio but priority may change to accommodate special circumstances. Our review indicated that the municipalities were not reviewed in this order. For example, of the 20 municipalities with the highest ratio, only 16 had been reviewed as at January 1999 while the review of the remaining 4 had not commenced.

One of the first reviews undertaken was for the Town of Harbour Grace, which was listed as number 153 on the June 1997 list of priority and which had a debt to revenue ratio of less than the 30% targeted under the draft guidelines.

The negotiated agreements which were signed with the municipalities required that the municipalities must meet certain conditions to access Program funding, including such conditions as raising municipal taxes and not applying for future capital works funding for up to 15 years. In the case of tax increases, the tax rates established by the Department are not consistent and vary by municipality.
Under the Debt Relief Program, a comprehensive review of each municipality was to be performed incorporating a number of factors, including past performance and the ability to raise revenues and service debt. The analyses completed by the Department did not typically address future capital works and funding requirements. In order for restructuring to be viable on a long term basis, it would be expected that these factors would be taken into account.
Our review disclosed that a detailed financial analysis was not completed for all municipalities which were reviewed and received funding. Of the 13 municipalities which received funding, the Department did not complete a detailed financial analysis for 2. These 2 municipalities were assisted under the Program with debt relating to water and sewer infrastructure projects which were only partially completed in the past. Due to the fact that the systems were not completed, the intended services were not being provided to the communities involved. Such systems are considered as dry lines.

For one municipality, the Department considered there was no need to complete a detailed financial analysis as it felt the town was in good financial position. It was indicated that the decision to assume the Councils share of the debt was based on principle rather than the financial position of the town as would be expected based on the draft Program guidelines and on the review of other agreements under the Program.

It is understood from discussions with Departmental officials that the 30% debt to revenue ratio identified in the guidelines was a target and was intended to identify municipalities in need of assistance. However, the lack of definitive indicators as to qualifications for assistance resulted in a process which was not transparent to the various stakeholders involved. In the case of assistance provided under the debt relief program, many municipalities did not receive funding even though their debt to revenue ratio exceeded the 30% identified in the guidelines. As well, many municipalities that did receive funding were left with debt to revenue ratios exceeding 30%.

Debt Relief Program agreements between the Department and individual municipalities were signed by the Department and the municipalities involved prior to receiving approval from the Department of Finance for allocation from the reserve fund. The Deputy Minister of Finance expressed concerns over such prior approvals in a letter to the Deputy Minister of Municipal and Provincial Affairs.

Monitoring and reporting mechanisms established to measure success towards achieving Program objectives have not been complied with. In particular, the Debt Relief Program Review Committee indicated to be in place to ensure the program objectives are met, did not hold regular meetings or keep related minutes. Also, although the draft guidelines indicated a need to monitor the action plans of the individual municipalities, there was no related monitoring strategy in place. As well, other than through ministerial statements, no periodic overview reports were made on the objectives of the Program for the House of Assembly and other stakeholders.

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3.36 Municipal Capital Works Program

Municipalities wishing to undertake capital works projects such as water and sewer or road paving must apply to the Department of Municipal and Provincial Affairs for approval under the Municipal Capital Works Program. Interim financing for approved cost shared projects is generally provided to municipalities by the various chartered banks. After completion of the project, the interim bank debt is then typically refinanced through the Newfoundland Municipal Financing Corporation or, in more recent years, through the chartered banks.

Total approved funding for the 1998-99 Program was $26.6 million. Individual projects approved will be financed by the Newfoundland Municipal Financing Corporation and chartered banks. Each year, Government provides grants to municipalities to help them pay the principal and interest on this debt.

Our review disclosed that:

Since Cabinet makes the final decision as to which municipal capital works projects are approved for funding by the Province, the information and support for the projects were not made available for my review.
Our review of the Municipal Capital Works Program indicated that there is no approved, written policy on how the Provincial and municipal cost shared ratios are determined for capital works projects. Prior to 1997, the annual cost sharing arrangements for municipal capital works projects were determined using a formula prescribed in the regulations under the Municipal Grants Act. These regulations were discontinued in 1996 with the intention that the formula for funding be replaced by departmental policy. This was never done.
Departmental officials informed us that the cost shared ratios depend on the municipalitys debt to revenue ratio. However, in 14 of the 20 projects reviewed, the approved cost shared ratio was not consistent with the ratio which would be expected using the criteria indicated by the Department.
The Department has completed its strategic plan and is currently in the process of developing operational plans for its divisions. Although officials did inform us that policies and procedures relating to the Municipal Capital Works Program are being developed, there was no indication that the calculation of cost sharing ratios would be consistently applied and based on a prescribed formula.

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3.37 Job Creation Program

During the fiscal years ended 31 March 1998 and 1999, Cabinet approved funding of $18.1 million for a special employment initiative known as the Job Creation Program. The purpose of this Program was to create short-term employment throughout the Province. The Program was administered by the following four departments: Municipal and Provincial Affairs, Works, Services and Transportation, Forest Resources and Agrifoods, and Human Resources and Employment.

Funding for the Job Creation Program was not part of the original approved budget for these departments. Instead $9 million was provided from the Provinces Contingency Fund, $2.6 million was provided through a Special Warrant, and $6.5 million was transferred from other Government programs.

To coordinate the implementation of the 1998-99 Job Creation Program, Cabinet established a Review Committee. This Committee consisted of the Minister of Municipal and Provincial Affairs, the Minister of Forest Resources and Agrifoods, the Minister of Works, Services and Transportation, a Member of the House of Assembly, and officials of the Department of Municipal and Provincial Affairs. The Committee was responsible for coordinating the implementation of the Job Creation Program, including all project approvals.

As the Department of Municipal and Provincial Affairs was allocated $11.1 million or 61% of the total approved funding of $18.1 million, we limited our review of the Job Creation Program to this Department. Total funding of $11.1 million allocated to this Department was approved by Cabinet under five separate Job Creation programs throughout the years ended 31 March 1998 and 1999.

The Departmental Review Committee at the Department of Municipal and Provincial Affairs consisted of the Minister of Municipal and Provincial Affairs and three Members of the House of Assembly. In addition, the Department assigned one of its staff as Job Creation Coordinator.

Departmental officials informed us that the Departmental Review Committee established the following program objectives:

to provide a short term employment response program;
to support labour intensive job creation initiatives;
to address the most pressing needs for families and others with no source of employment income;
to focus on areas of high unemployment where needs are most warranted; and
to leverage and combine with other programs and fundraising initiatives to supply materials and other non-labor related project components.

Departmental officials also informed us that:

of the total approved funding of $11 million, this Review Committee allocated $10.5 million to the 48 electoral districts;
the Job Creation Program was not publicly advertised;
it was incumbent upon each Member of the House of Assembly to advise interested project sponsors of available program funding; and
all applications for funding within an electoral district are reviewed and approved by that districts Member of the House of Assembly. These applications are then forwarded to the Departmental Review Committee to ensure projects meet Program eligibility criteria.

My review indicated that the Departments administration of the Job Creation Program is not adequate. In particular:

Project files lacked adequate documentation to support funding decisions and we were often unable to determine if approved applications met established eligibility and selection criteria.
Additional funding was advanced to project sponsors without project applications being completed and without adequate documentation on how previously approved funds had been spent and how the additional funding is intended to be spent.
In contravention of the Financial Administration Act, the Department made payments for the Job Creation Program from funds approved by the House of Assembly for Special Assistance to municipalities.
Although project sponsors are required to submit a financial report supporting total project expenditures before the final 25% funding installment is paid by the Department, these funds have often been paid to the sponsor groups prior to the receipt of any financial reports. In general, financial reports were not received by the Department on a timely basis.
The Department is not receiving adequate information from project sponsors to ensure that program guidelines were followed and that project funding was used for its intended purpose. For example, documentation to adequately support project expenditures in the form of invoices for materials and payroll records for salaries are generally not provided to the Department.

Ministers of the Crown are responsible for policy development and it is the responsibility of public servants to implement these policies and deliver the Government programs which reflect these policies. I am concerned about the manner in which the Job Creation Program is being delivered. For example, the Program was not publicly advertised and made available to all residents of the Province, funding for the Program has been allocated based on electoral district rather than the merit of applications or other objective assessment, and applications are not subjected to a consistent and rigorous review and evaluation prior to being approved.

I am recommending that Government review the manner in which the Job Creation Program is being delivered.

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3.38 A Review of the Tourism Component of the Canada-Newfoundland Economic Renewal Agreement

Of the $100 million approved under the Canada-Newfoundland Economic Renewal Agreement (ERA) in June 1996, $22.85 million was allocated to the Tourism Program. This was subsequently increased to $26.85 million which has been allocated among various projects. As of 31 March 1999, of the $26.85 million allocated to the Tourism Program, $20.95 million had been spent.

Our review of the Tourism component of the Canada-Newfoundland Economic Renewal Agreement indicated the following:

The Management Committee has complied, for the most part, with terms of the Agreement. Our review, however, identified the following weaknesses: advance funding for one project reviewed was provided before the project was formally approved by the Committee, eligible costs were not adequately defined in all third party contracts, all calls for tenders and announcements on the award of contracts were not approved by the Management Committee, and the Management Committee did not ensure that third parties complied with all relevant Federal and Provincial legislation.
The Department is not ensuring that all third parties comply with all contract terms including the submission of a three month cash flow when requesting advances and the timely submission of internally prepared financial statements and quarterly status reports.
The Department has not conducted any inspection or audit on third party records nor has it required any audited financial statements from third parties. As a result, the Department cannot demonstrate that all third party expenditures funded under the Agreement were eligible expenditures.
The Department is not adequately monitoring all projects as they near completion or as all ERA funds have been disbursed to the third party.
Although an Evaluation Framework has been established and some useful information is being provided through this Framework, adequate performance information necessary to evaluate the Tourism Program is not being provided by all of the implementing parties. In addition, since key performance targets were not included in the third party contracts there is no formal requirement for these third parties to provide this information. As a result, it will not be possible for the Management Committee to evaluate whether the objectives of the Agreement are being achieved.

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3.39 Labrador Ferry Service Equipment Repair

In March 1997 the Province signed an agreement with the Federal government to transfer responsibility for the operation of the coastal Labrador ferry service from Marine Atlantic to the Province. In exchange for assuming responsibility for the ferry service the Province received $349.2 million in December 1997, consisting of $340 million plus accrued interest. As part of the agreement, the Province also received the two ferry vessels used in the operation of the marine freight and passenger services (the MV Northern Ranger and the MV Sir Robert Bond), several parcels of land together with wharves and related facilities, and other equipment related to the operation of the ferry service including forklifts, fifth wheel trailers and diesel refrigeration units. The main terminal for servicing the equipment used for the coastal Labrador ferry service is Lewisporte.

In order to prepare for the 1998 ferry service season, the Province determined that repairs were required to the equipment it had received from Marine Atlantic. In February 1998, two tenders for the repair of the equipment were issued. The first tender was for the repair of forklifts, fifth wheel trailers, container handlers, a garbage truck, a backhoe, a van and an air compressor. The second tender was for the repair of 52 diesel refrigeration units. Both tenders, with the exception of some minor repairs to the van, were awarded to the same contractor. Total payments to the contractor relating to the two tenders were $250,000 and $77,000, respectively.

A further related contract was issued for the provision of various services relating to the former Marine Atlantic premises in Lewisporte. Total payments to the contractor relating to this contract were $226,000.

Tenders

The Department of Works, Services and Transportation did not comply with the Public Tender Act and Government policies relating to the repair of equipment at the Lewisporte ferry terminal. For example:

The successful tender for repair of the forklifts, fifth wheel trailers, and other ferry terminal equipment was $11,134. The final cost to complete the work specified in the tender, plus additional work completed by the contractor on the same equipment, totalled approximately $250,000. Change orders relating to this tender were not issued in accordance with the Public Tender Act.
The successful bid for the tendered repair of refrigeration units was $34.75 per hour. However, most of the work was completed at a rate of $42 per hour with some at $52 per hour. The final cost to complete the work specified in the tender totalled approximately $77,000. The Department had no authority to increase a tendered rate of $34.75 per hour to $42 and $52 per hour.
The Department of Works, Services and Transportation contravened the Public Tender Act when it did not call public tenders for various other services relating to the former Marine Atlantic premises in Lewisporte. These services cost $226,000 over a six month period.

The Department of Works, Services and Transportation has weaknesses in its internal control procedures relating to purchasing and payments. Several weaknesses were evident in relation to the Departments payment of invoices including duplicate payment of invoices and payment for goods and services which were not in accordance with the contracts.

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Chapter 4

Update on Prior Years’ Report Items

This year we continued a process whereby our 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, 1996 and 1997.

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Table of Contents

Preface

Introduction

Chapter 1

Chapter 2

Chapter 3

Chapter 4

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