Chair:	* Rick Thorpe (Okanagan-Penticton L)
Deputy Chair:	* Evelyn Gillespie (Comox Valley NDP)
Members:	* Pietro Calendino (Burnaby North NDP) Hon. James Doyle (Columbia River-Revelstoke NDP) * Hon. Helmut Giesbrecht (Skeena NDP) * Rick Kasper (Malahat-Juan de Fuca NDP) * Steve Orcherton (Victoria-Hillside NDP) * Erda Walsh (Kootenay NDP) * Murray Coell (Saanich North and the Islands L) * Gary Farrell-Collins (Vancouver-Little Mountain L) * John Weisbeck (Okanagan East L) Jack Weisgerber (Peace River South Ind)
Clerk:	Craig James
* denotes member present

[ Page 1079 ]

The committee met at 10:09 a.m.

R. Thorpe (Chair): Good morning, ladies and gentlemen. We'll get started, and as I understand it, the first item is the corporate accounting system, CAS. We will ask the auditor general's department to make the first presentation. From there, we'll move into the debt management issues.

G. Morfitt: In previous meetings, the committee has looked at the first part of this rather large report, entitled "Report on Government Financial Accountability for the 1997/98 Fiscal Year." This was report No. 2 for the '99-2000 fiscal year. So the first part of this report has been dealt with, and just as a side note, we'll be coming out very shortly with a current report on the public accounts for the '98-99 year.

However, in regard to this particular report, there are two areas that the committee hasn't discussed, and they're on the agenda for this morning. The first one is the corporate accounting system, where we've done updates for the committee on the status of the system over several years. This will give the committee an opportunity to determine just how the system is operating currently. The second area is the provincial debt and our reporting of debt trends and circumstances as they exist at the present time.

[1010]

On page 113 of the report, there's an introductory section where I comment on the need for government programs to have effective operational controls. In this regard, my office has reviewed on a multi-year basis, as I've mentioned already, the implementation of the government's new corporate accounting system. With me today is Keyvan Ahmadi, who you've met before, who has headed up the review of the corporate accounting system along with two other members of my staff. I'll turn things over to Keyvan to provide our remarks leading up to any other remarks that government officials might have on this matter.

K. Ahmadi: The report of the auditor general on government financial accountability for the year 1997-98 contains the report on the corporate accounting system on pages 115 to 133. I will give you a thumbnail sketch of the history behind this system.

The government approved the development of the corporate accounting system ten years ago. It took four years to implement the general ledger and accounts payable in a handful of ministries. In 1993 the government attempted to develop an interface to connect all the other ministries to the central accounting system. That attempt failed, and it had a setback on the progress of the project for three years or so. Until 1996, there was very little progress made in developing this corporate accounting system for the government. The government kept using the old central accounting system that it had.

Since April of 1996, the project has seen substantial progress. In 1998 a new interface system was developed, which is referred to as the CAS generic interface. It linked ministries to the general ledger and accounts payable, thus terminating the need for the use of the archaic central batching system that the government used to have as an accounting system. The government is now looking at the second phase of implementing CAS.

We have been reporting on the development of CAS in the last five years, and in this year's report we looked at the CAS generic interface, which is the main part of the project at this point, and also the beginning of phase 2 of the CAS project.

Jamie Orr, who managed this review, is making the presentation.

[1015]

There have been two main events since our 1998 report -- or between that report and this one. On April 1, 1998, the CAS generic interface was implemented, linking all the non-CAS ministries to the government's general ledger and accounts payable systems. On April 1 of this year the primary objective of phase 2 was met, when the Ministries of Forests and Transportation and Highways implemented CAS Oracle software.

Good progress was also made on the other phase 2 objectives. Our purpose in this report was twofold: first, to review the controls over the CGI to determine whether only authorized transactions are accepted, all transactions submitted are accounted for and transactions are processed accurately. We reviewed the process control procedures from the time a transaction is submitted by the ministry until processing is complete and the ministry has been notified of the status of the transaction. We also looked at some computer environment controls, but not all -- not those shared with other government systems.

Our second purpose in the review was to report on the status of phase 2 with reference to objectives set out in the phase 2 project charter. What the CGI does. . . . The CAS general ledger and accounts payable use Walker software. The majority of ministries did not use Walker, and all the financial transactions must go through the CGI. As well, the CGI is used to generate payments for a significant number of program expenditures. The ministries compile data from their own financial systems and then transfer it via the CGI, the CAS payment production facility and/or the CAS general ledger. The CGI encrypts the data prior to transfer and decrypts it once it has been transferred, and then converts it to the format accepted by the Walker software. After processing, reports are sent back to the ministries providing the status of all the transactions submitted.

Our process control objectives are authorization, accuracy and completeness. We're looking for assurance

[ Page 1080 ]

Looking at authorization of transactions, we found that the encryption and transmission procedure prevents unauthorized transactions from being submitted. Only encrypted data is accepted for transmission. Once encrypted, the data is protected from interception and manipulation by unauthorized parties. The encryption also positively identifies the sender, as a unique encryption key is provided by CAS to each ministry. Only the ministry can submit transactions.

Encryption is a control working to prevent unauthorized transactions from entering the system. The review by ministries of the reports received from CAS provides a detective, or after-the-fact, control to discover any unauthorized transactions which may evade the first control. We concluded that there are sufficient controls over the authorization of transactions but noted that both CAS and the ministries have responsibility for maintaining these. CAS is responsible for the computer system, and the ministry is responsible for limiting access to the encryption key and for reviewing any reports received from CAS. No agreements existed between CAS and the ministries to spell out the responsibilities for each party. We believe this lack of clear communication is a weakness, as either party may believe the responsibility for certain action lies with the other.

Regarding accuracy, we found several procedures in place to ensure that data is accurately processed and that transactions are valid. Totals of dollar amounts and other fields are generated before encryption, then compared to the same totals generated after transmission and decryption. A difference indicates that the data has been corrupted or is incomplete, and the ministry is then contacted and asked to resubmit the file. Each file of data transmitted is given a sequential number, and the encryption/transmission software tracks these numbers. If a file is received out of sequence, it is not processed, and the ministry is notified. This ensures that duplicate files will not be accepted and ensures that missing files are identified.

Once files have been accepted, there are two levels of edit checks to detect invalid data. A pre-edit ensures that the batch of transactions can be processed by the CGI. A failure at this stage will cause the entire batch to be rejected. Main edits perform further checks on the content of each transaction. These are carried out by comparing information contained in the submitted transaction to that in the master data banks. For example, the payee as submitted will be checked against a list of authorized suppliers to government to ensure that it is a valid supplier. Another example would be checking to ensure that an amount consists only of numbers. A review by ministries, already mentioned, of the reports received from CAS provides a detective control over accuracy as well as an authorization. We also reviewed a sample of the edit checks and found that they performed substantially as expected. We concluded that there were adequate controls over accuracy but again noted that there's no formal division of responsibility between CAS and the ministries.

[1020]

Our recommendation was that the CAS office should formally sign an agreement with each ministry clearly outlining the responsibilities of each party for establishing and maintaining effective controls over data and processing. The agreement should include responsibility for controlling access to the encryption keys and for reviewing reports of the transactions submitted. It should also include the responsibility for ensuring the integrity and validity of the databases used by the CGI and its edit checks, and it should include the responsibility for reviewing all rejected batches and transactions reported and resubmitting them if appropriate.

Moving to computer environment controls, the actual process is carried out in the information technology and services division, or ITSD. We have not addressed the environmental controls at ITSD common to other government systems. What we looked at were the organization and relationships around the CGI, the control over changes, physical security and disaster recovery. Under the organization, the CGI user group represents both CAS and the ministries. Responsibility for specific actions and the service provided by CAS are dealt with by this group. A review of minutes showed that questions on the service being provided were still being dealt with and discussed up to the time of our review.

We noted that CAS, as a division of the office of the comptroller general, shares responsibility with the ministries for control over expenditure transactions. As well as its own responsibility, CAS also provides ministries with services to assist them in meeting their own responsibilities. We feel it is important that the responsibility of CAS, in regards to its own obligations and as a service to ministries, be clearly understood. Therefore we are recommending that in the agreement already mentioned, the level of service to be provided by the CAS office to the ministries should be clearly defined.

Changes to be made are discussed and agreed to by the user at the regular user group meetings or through e-mail and are only documented in the minutes of those meetings. We believe that proposed changes should be documented and agreed to in writing to avoid misunderstanding. Once completed, they should be accepted, again in writing, by the users. We determined that there is proper segregation

[ Page 1081 ]

We have little to say on physical security. The CGI operations are located in the CAS office. System hardware and processing are in the care of ITSD at another location. Any work in progress at CAS, such as programming changes, is in electronic form and is backed up regularly.

[1025]

A quick review of the status of phase 2. Currently the B.C. government is using a mixture of ministry systems and CAS. At the time of writing this report, in May of 1999, the only CAS accounting functions in use were the general ledger and accounts payable modules, both of which use Walker software -- March of '99. Oracle Financials software was selected for the project accounting, asset management and purchase order functions and cleared in phase 2. CAS management intends to convert the general ledger and accounts payable modules to Oracle Financials software, as well, once the year 2000 challenge has been met.

Initially, the ministries using Oracle will continue to update the general ledger and make payments to the CGI as if Oracle were a ministry system. This will be the case until Oracle replaces Walker as the general ledger software. Several ministries will still be using their own non-CAS system on January 1 of the year 2000. This system is common to all these ministries and has been reported to be ready for the year 2000. Thus there is no immediate pressure to move these ministries to CAS. Both Walker and the Oracle software are reported to be year 2000-ready.

The objectives for phase 2 were set out in the project charter. The first one was implementation of CAS in the ministries of Forests and Transportation and Highways by April 1, 1999. This objective was met. These ministries successfully implemented Oracle as scheduled.

The second one was creation of a foundation for a truly governmentwide financial accounting system. To meet this objective, phase 2 must conform to government information technology standards and strategies, while having the ability to meet the needs of the ministries currently using CAS Walker or the CGI. It must be able to accommodate changes and reorganization programs between ministries. It will also have to accommodate future electronic data interchange and other electronic commerce as the government moves toward electronic delivery of services. The post-implementation review required for any significant system acquisition should help to determine whether this objective has been met.

The third objective was implementation of a corporate asset management system. This objective has been at least partially met. The system was implemented on a stand-alone basis in the Ministry of Small Business, Tourism and Culture earlier in the year. I understand the Ministry of Environment, Lands and Parks will be testing an integrated version in the next few weeks. It has not yet been implemented at Transportation and Highways.

Now a look at the future. In 1996 the CAS independent review identified two major threats: the obsolescence of the old central batching system and the year 2000 issue. CAS, in its development of the CGI and phase 2, appears to have dealt with these threats. However, the realization that the opportunities for efficiency savings, better control over financial transactions, faster public reporting and efficiencies in business processes will not be achieved until all the ministries are using a common financial application. The comptroller general recommended an accelerated two-year implementation plan of Oracle across all ministries.

Because a significant amount of the work of phase 2 has been done by contract staff, there is always a danger that valuable knowledge and experience could be lost if CAS cannot retain its contractors. The same applies, to an extent, to CAS's own staff. Accelerated implementation will increase the CAS personnel requirements, but we believe it should also help by providing rewarding work for both contractors and staff. We also believe it is important that the momentum achieved in the last two years be maintained to achieve the benefits already referred to.

That ends my presentation.

R. Thorpe (Chair): Thank you, Mr. Orr.

Mr. Bourne, are you making any comments?

[1030]

A. van Iersel: This morning I've invited Renate Butterfield from the CAS office to join us and give us a presentation in terms of our response to the auditor general's findings. Mr. Howard Thomas, who normally joins us, is currently in eastern Canada working with five other provinces who have chosen Oracle, as we have, as the system moving forward. We have handouts; we don't have an overhead presentation. This morning we chose to use hard copy, if that's acceptable.

Let me first say that I'd like to thank the office of the auditor general for their review. These are very beneficial. It's five years in a row that the CAS project has been looked at, but in the ministry we do believe that this is one of the most important systems to government, so we're very happy for their counsel and advice. I guess my interpreta-

[ Page 1082 ]

At this point I would like to turn it over to Renate, and she'll walk the committee through what has been done.

R. Butterfield: Good morning. I want to go through a little bit broader explanation of what CAS is really all about, and then I'll respond specifically to the recommendations made by the auditor general.

First of all, the generic interface, which was largely the subject of the auditor general's review, is really only one of five pieces of CAS. It's a very important piece of CAS, and as the auditor general said, it's a critical component. We feel even more strongly about that -- that it is the critical component within CAS because it really is the government's payment engine.

The other thing I wanted to mention is that although the millennium change is going to be the subject of discussion in future weeks, I really wanted to let people know here that this millennium change has truly benefited both CAS and the ministry program systems that feed into the generic interface, because it has truly heightened an awareness as to the payments that have to be made and the impact of year 2000 on them. At this point in time we're recognized as a mission-critical operation, so again, that heightened awareness, I think, has helped everyone.

The next slide depicts the five systems of CAS where the CGI, or the generic interface, is really at the heart of it. Currently, as Jamie indicated, we have non-Walker or non-Oracle financial systems out there. They're primarily still in about ten ministries, those being the group of Education-Advanced Ed; Labour; Environment, Lands and Parks; and a host of other smaller organizations. Together with those ministries, almost every program feeder system that has a financial component goes through the generic interface.

MSP and Pharmacare payments, foster care, day care and senior supplements -- all of those go through the CGI. In addition to that, we have two on-line environments. People can enter transactions either through Walker or through Oracle on line, get information through the payment engine, cut their cheques and update the general ledger. We have another system that actually facilitates the chart loading and the budget loading. Then, on the tail end of that, we have a repository. So we capture all the information along with all the cheque numbers. It's in a data repository, a data warehouse, for access for multi-year trend analyses and that. We have information going back for the last six years in that repository.

CAS is really a collection of those five integrated systems. What we are planning to do is phase out the Walker component, as Jamie said, and have everyone go through Oracle for their on-line processing and still maintain that generic interface so that program payments, like MSP, can continue to have their payments made.

The year 2000 really has been the catalyst for ministries to truly exercise their program systems and the financial component of that. In fact, they have done independent tests over the course of this year. Each one of them has done a test to ensure that they can make payments come January 1, 2000. In doing that, they've also tested all of their error-handling procedures. So although those don't have formalized procedures in place right now through service-level agreements, they have gone and exercised them. We at CAS have thoroughly gone through and tested this generic interface all the way through. As well, the Action 2000 committee has gone through and put an independent piece of software in front of it and tested it to make sure that we can make payments through January 1, 2000. It has passed.

[1035]

The transaction reports, as well. . . . When the auditor general did his review, we were looking at November-December of '98, and that gave ministries about five months in which to actually exercise their processes. At this point we're 18 months into it, and they do review these on a more regular basis. The last point on that slide is that we are putting those pieces in place that do designate to the ministry and to ourselves who is responsible for those controls over the data and the processing.

Recommendations 2 and 3 really have to do with doing the edit checks. Do you have a valid account code? Do you have a valid vendor? How do you handle those rejected transactions? Again, we have a working model in place. It's been there for the last 18 months. Actually, we do sporadically check these files to see if there is an abnormally high rejection rate, and we will contact the ministries if we see anything abnormal.

We have established a good working relationship with our ministry contacts. Oftentimes, if they do find that they're not sure as to what to do or they have a really unusual rejection message that they have trouble deciphering, they will call us and we will work through with them.

Their old system was report-based, so the only way that they got notification that something went wrong. . . . Their cue was a report, a thick report or a small report, put on their desk. That changed when we put in the generic interface to an electronic means. So they get a file that they need to look up to see what transactions have been rejected. And they've been doing that on an ongoing basis. But there's a definite need for a formal process. So we will be putting these items within our service-level agreement and having all the ministries sign off on them before the new fiscal year starts.

The fourth recommendation has to do with functional changes to the generic interface. And those functional

[ Page 1083 ]

[1040]

The last recommendation that the auditor general made had to do with disaster recovery, and we currently have a business continuation plan, of which the disaster recovery plan for the CGI is now a component. In the event of any type of disaster, we have clearly outlined procedures as to how to get the system back and operational. Whether that's a fire next door to where we're housed or that's a smoking hole at 4000 Seymour, where all of our systems are, we have those disaster recovery procedures in place. The ones for the CGI and Walker have been tested with ITSD's plan in August of this year. They essentially assume that it was a smoking hole at 4000 Seymour, and they moved the files to the hot site, which is in Philadelphia.

Our disaster recovery plan for our Oracle Financials is going to be tested in the mid-November time frame. So those pieces have not had a formal test done to them.

With our business continuation plan, we do have all of the steps now outlined formally as to what would happen should a disaster occur, not only to bring the systems back up but also to bring the business back up and to make those payments out to vendors. We've had two reviews. The last one was done together with the Action 2000 committee.

In addition to that, each ministry has given us what they feel are the most critical payments that need to be made, both on line and through the generic interface. Together with provincial treasury, actually, over the last few weeks we have compiled that list, and that list is going to go back out to the ministries to say that based on all of the information we have gathered, these payments would be the ones that. . . . There are certain payments that are the ones that would go out first in the event of a true emergency. Those ones actually would be payments to the school boards, payments to the hospitals and payments to seniors on a seniors supplement. But at this point that still has to be reviewed by each of the ministries.

With respect to moving away from Walker and the other financial systems that are in government today, we have successfully implemented six organizations into Oracle Financials. Our seventh one is the Ministry of Attorney General, and they're live in five days. They've already entered their commitments in. They're just ready to cut their first payment on November 1.

The only other ministry that had an issue with year 2000 was the Ministry for Children and Families on some of their small accounts receivable functions, their programs. They will come up onto Oracle Financials, using an accounts receivable module, on November 1, and then we'll put up all the financial operations for Children and Families in April of this year. We're actively working with a host of ministries. The remaining ministries are all on the other financial system. It's called TSC. It is a homegrown, customized application, and they're the largest users of those systems. Environment, Lands and Parks, Education, Advanced Ed and Labour will come onto Oracle Financials in the April 2000 time frame.

[1045]

A. van Iersel: Excuse me, Chair. I just wish to correct the record. It's 2001.

R. Butterfield: Oh, did I say 2000?

A. van Iersel: Yep. No problem.

R. Butterfield: In addition, just where we sit as a province. In the last 18 months we've been part of a very exciting initiative, one where. . . . There was no one on staff who knew anything about Oracle Financials as an enterprise-wide financial system. We have gone from knowing zero to becoming a leading-edge implementer. In fact, at the last Oracle users conference just last month, we gave three technical papers to a worldwide audience, and we are now an Oracle reference client on how to do things and how to implement this Financials package for hundreds of users in a short period of time.

In addition to that, Arn mentioned that there are six provinces that are moving to Oracle Financials since we've chosen it. Actually, we've had lots of discussions with both Quebec and Ontario, and they have also chosen to go the route of Oracle Financials as their financial management system. We certainly feel that that is wonderful in terms of leverage with Oracle as a corporation and certainly to discuss common issues and common approaches to problems and using one vehicle for handling that. Right now, Mr. Thomas is actually meeting in Toronto with those other five provinces to discuss those.

That concludes my presentation. Are there any questions?

R. Thorpe (Chair): Thank you, Renate. Arn, did you want to make any further comments?

[ Page 1084 ]

R. Thorpe (Chair): Who has questions?

E. Gillespie (Deputy Chair): I have to say that I'm pretty impressed that between the two presenters, you've taken something that I know absolutely nothing about and certainly presented it in a very interesting way. You show the impact and the importance of this new program. I have a couple of questions about it. The first is that the auditor general's office made a comment about realizing some financial return or some financial savings out of all of this. I'm just wondering if you will make a comment on what kind of anticipated savings you would see out of using a totally integrated system like this.

My second question is: given that there are other provinces that are going to be using the same kind of a system, will it make it easier to compare practices among the provinces?

R. Butterfield: To answer the first question first: definitely. Especially, I know, with Quebec there's a little bit of a language barrier, but we've already had initial discussions with them. They have the same issues that we do. Contract management is an issue for them; having a common approach to procurement. . . . Those are all issues that we all as provinces face. So certainly we'll be able to work with them on some of those objectives. Reporting -- there's another area where everyone has essentially the same reporting requirements whether they're operational, financial management or to yourselves as a Public Accounts Committee. They're very similar.

With respect to return on investment, we are definitely going to be able to see, to realize, some streamlining of businesses processes. Arn, did you want to. . . ?

[1050]

Now, as has been mentioned, those savings are not going to be realized until everybody's on the same system, because where the savings come from is the decommissioning of the old system as well as the reinvention of the various basic processes -- accounts receivable, accounts payable -- and having everybody do it the same way and the most efficient way. We're tying that in with some other work that we're doing on benchmarking financial practices. So we hope, in two year's time, to report back to Treasury Board and to you that we realized those savings.

R. Thorpe (Chair): Let me just follow up on that. So in your return-on-investment criteria, what objective did you set for yourselves?

A. van Iersel: Well, the minimum objective was that the investment would be fully recovered over time. There would be a positive net present value which was achieved. As I say, we assumed $7.5 million, which allowed. . . . It was based on, I believe it was, a 5 percent saving in administrative practices across the various ministries and the corporate systems.

R. Thorpe (Chair): I think I heard you say that you'll do your post-audit at the end of the implementation. Surely, though, in developing such a program, you would have established time-phased objectives so that you would be able to measure whether you were going down the right road or not and whether you were going to achieve your objectives. In fact, have you established various benchmarks for going along? What post-audit processes are in place to ensure that we're achieving the objectives in both efficiencies and returns that we anticipated?

A. van Iersel: Yes, Chair, we have a CAS implementation plan which spans the full range of time till all ministries are on. In terms of post-implementation reviews, that work is already underway. My own internal audit branch did a post-implementation review of the implementation in Forests. In Transportation and Highways, that audit study is nearly complete. It's pointed to some things that we need to improve. As I said, we have a target for ourselves in terms of the savings that we will realize, but we're not there yet. So we will monitor as we go along, as various pieces are brought into play.

R. Thorpe (Chair): When will you share that information? Or are we going to have to wait till the end? Are we going to have to wait for two or three years to get that information? Or are you going to share it as you go along -- the good, the bad and the ugly?

A. van Iersel: Well, I presume, Chair, that the auditor general will continue to treat CAS as a priority and do another follow-up audit in a year's time. So we would be happy to report as part of that. As I say, we also have an audit report which is done by my office, and we can share that at the appropriate time as well. It's not yet finished.

R. Thorpe (Chair): I think that the committee would be interested in that at the appropriate time.

Do you have both the human and the financial resources within that plan to achieve all of the objectives? Do you have any human or financial restrictions in achieving your objectives?

A. van Iersel: Yes, there are restrictions, or limitations, to our budget. We believe we have sufficient resources at this time to meet our plan -- which is a three-year plan, in essence. We are always a little nervous -- I have to admit

[ Page 1085 ]

[1055]

A. van Iersel: I think things have changed a lot. If you go back to the origins of the corporate accounting system when we first introduced Walker, you have to go as far back as the early 1980s. At that time we were trying to get all ministries on a Walker platform. I was not in the office of the comptroller general. I think I was comptroller for the ministry at that time. We did not have the successful implementation of Walker, and the auditor general had referred to that. I'm new; the CAS team is new. Since the introduction of Mr. Thomas and the new staff, we've had an amazing turnaround in terms of the support for CAS. Actually, you've helped in this committee -- but also from ministries. The ministries are now asking to come on, and in fact the challenge we've had in the last 12 months is that ministries are saying: "I want to go on earlier than when you're telling me I can go on." So from a ministry acceptance point of view, I'd say that's a 180-degree change from what it once was.

In terms of financial software, we're not implementing Walker. We've gone to the most up-to-date software, the most recent release from Oracle Financials. That was done by competitive tender in January of 1998. I'd like to think our choice of Oracle has been sort of solidified by what we've told you is happening in other jurisdictions. Six out of ten provinces are now choosing Oracle as their system, including all the three majors: ourselves, Quebec and Ontario. I think it's a lot different from what it once was. We had some problems four years ago, but the problems -- knock on wood, perhaps -- have largely disappeared, and as I say, there's a real demand for the system. There's a real interest in solving it, in terms of re-engineering and so forth. So I'm very excited about it. Perhaps I didn't convey that when I made my remarks, but this is a very important project to my office and to the ministry and to the government. I'm very happy for the resources that we've put into it.

M. Coell: Just following up on that, I think what I was looking at is: is there light at the end of the tunnel? I think that for any staff to be working on a project for ten years and not have the success that you saw that you needed ten years ago. . . . I think that's the problem that I was seeing.

R. Butterfield: I think what we've done differently, especially over the last two and a half years, is that we've broken things into manageable chunks and we've made each of the targets achievable. So we haven't had anything that has been more than six months where we've actually done something and shown that we've achieved a goal. I think that in the past, not only were the time lines too long between successes, but also the funding commitment wasn't there from the Treasury Board side. We did go to Treasury Board this year, and we do have capital, dollars, to make it happen over the next two-and-a-half-year period. I think that's been instrumental.

I think our first two pilot ministries -- the really big ones, the Ministry of Forests and the Ministry of Transportation and Highways -- are advocates for us and have helped us along the way, in having everyone else want to come onto Oracle. I know that Transportation and Highways, as an example, has changed its whole way of doing business. They are largely project-focused. With their existing Dun and Bradstreet system -- or even with Walker, for that matter -- they could not drive their business out on a project-by-project basis. Right now they have everyone begin at the project level and make sure that all of the finances are accounted for on a project basis. So they've truly changed their business process. I think that beginning to see that business process change has also helped us.

[1100]

A. van Iersel: The cost of implementing Oracle Financials will be $30 million -- okay? That's the cost of the various software licences and everything else we need. In addition to that, the CAS office has to maintain the existing Walker environment until it's fully in place, plus support the Oracle system. In total, when you include all that over a five-year span, I believe that the figure is around $75 million. Just to make sure everyone understands, that includes the cost of running the existing system, which we had, anyway, at about $10 million a year.

S. Orcherton: Just to follow up, is that $75 million all-in? Is it staff training and everything all rolled into one package, so that at the beginning of April of 2001, the total cost to government to move to this integrated system is $75 million?

A. van Iersel: Yeah. As I say, that includes the support costs. It depends on whether you're talking about the capi-

[ Page 1086 ]

S. Orcherton: So will your view. . . ? I mean, it's kind of guessing at what the future will bring. But a $75 million outlay and a conservative estimate of $7.5 million in savings suggests to me that, conservatively -- it may be less than that -- cost recovery on this new system could be achieved in ten years. Will we potentially be moving to a new system inside of that ten years, given the way technology changes?

A. van Iersel: Given what we're going through now, I hope the new system beyond Oracle is a ways away. Part of this decision will depend on how the Oracle product itself evolves. What led us to Oracle was that Walker was not maintained as one of the lead systems that's out there. The current situation is that there are three contenders for government business. One is PeopleSoft, and the others are SAP and Oracle. Those are the three that generally put in bids for government operations. As I say, six out of ten have chosen Oracle. The question will be: in ten years time, will Oracle still be the best product in the market, or reasonably close, such that it doesn't make sense to convert further?

I guess I should say that these are not static systems; they continue to evolve. It would really be a matter of whether or not there are sufficient reasons out there to try and change again that would make us want to consider the extra costs of conversion. We're not planning that way. If Oracle continues to be one of the three main practitioners, I don't see that conversion is necessary. I suppose I'm being honest here in saying that probably nobody figured that Walker would be surpassed by the three current leaders in the industry. If that answers your question. . . .

S. Orcherton: It does, to a degree. It just causes me a great deal of concern, given how the technology does change. So what I need. . . . We have a system here that we're spending $75 million on. In April 2001 it's up and running ministrywide, governmentwide. We have a good picture of where our public accounting system is at any given point in time. That's good news, I think, for everybody in British Columbia. But what causes me some concern is that things do change, and people do get onto new ideas of how accounting programs could be operated inside government. I'd like to have some sense of surety that your view is that over the next ten years at least this will be an adequate system for government.

[1105]

So that's where, as a plan, we're heading.

R. Thorpe (Chair): With some respect for your visionary powers, I wish you well in predicting the future. But I guess my real issue here is that it seems that governments tend to get locked into programs, and then seven or ten or five years down the road a light goes on, and somebody says we have to switch something. My question is: since we all know technology is changing at a rapid pace, what are we doing in cooperation with our supplier, Oracle? What kind of partnership are we working to keep this process up to date and current? How are we doing that? Is that part of the plan, Arn?

A. van Iersel: Yes, Chair, it is, and in fact, as we've mentioned, that's why Mr. Thomas is not able to join us today. We are trying to establish a Canadian provincial jurisdiction Oracle users group. That initiative was taken by our CAS office, with Howard Thomas spending days on the phone arranging meetings with these various provinces. It allows us, as a Canadian jurisdiction, to try and tell Oracle what our needs are. No system is perfect, so we have some desires in terms of the evolution of Oracle and how we will use it. We want to get our colleagues in Ontario and Quebec, plus the others, to support those changes -- establish, in effect, a super user group, which will petition Oracle.

As Renate has mentioned, we're already attending Oracle users conferences in the United States, presenting papers in terms of our implementation expertise and what we see coming down. So it is very much a partnership. In addition to working with our colleagues in other jurisdictions, both Howard and I have also met with the Oracle Corp. themselves, indicating that we want this to be a long-term relationship and that we want to see continued development of the product to avoid the problem that happened with the Walker software many years ago. That's our method of making sure that the software stays current with our needs, consistent with what everybody else is doing. So I'm fairly comfortable with that.

S. Orcherton: One other question: what will look different in terms of what we have to deal with around budgets in British Columbia in April of 2001 with the new system in place, as opposed to what's in place today? What will we as legislators see that's measurable in terms of the deliberations we have to make around budgets, estimates and the debate and discussion that ensue from it?

A. van Iersel: Things are already underway in terms of various changes that we have. In the diagram, you'll

[ Page 1087 ]

Both Howard Thomas and myself -- and I know that Renate shares this -- agreed that when we introduced Oracle, we would make maximum use of the software, avoid customization of the software, which is often a thing that jurisdictions get into, and try and use the strengths of Oracle by re-engineering what we do, as opposed to tailoring the code to match our existing processes.

Things are already underway in terms of reporting, in terms of production of payments and information. Just to let you know, on the chart of accounts, just to be careful, we've added two fields that we haven't fully designated yet, to allow for potential additional uses. The code, the chart of accounts, hasn't changed in 20 years, so we decided that now is the time to change it along with a new system to allow us to meet future information demands. We can code additional information into the coding lines. It's quite a powerful system.

[1110]

S. Orcherton: So it's a system that will deliver information in a more timely way. The accuracy at the end of the day will be the same, though. Is that right?

A. van Iersel: I think the accuracy will be better, because it'll be less reliant on ministry subsystems, and we won't have to separately capture data that is not in existence in the detailed ledger that. . . .

S. Orcherton: So it will be more current.

A. van Iersel: It will be more current. It should be more accurate.

M. Coell: You mentioned Crown corporations. I wonder if you could just elaborate on whether the Crowns are coming into the system, whether there is capacity within the system to handle them if they do, and a time frame for that.

A. van Iersel: We've been talking to a number of Crown corporations. Some of the more recent Crown corporations, like B.C. Assets and Land, have used Oracle for accounts receivable. BCBC, for another example, is already an Oracle user. When Walker was introduced, a number of Crown corporations went to Walker. I think B.C. Rail was one of those. I understand that B.C. Rail is now considering coming onto the Oracle platform.

We don't have a mandate. We haven't asked for a mandate to go out there and convert all the Crown corporations to Oracle. That's something we're trying to do in terms of informing them of what our decisions are and where a new system is coming into play in terms of. . . . If they think we need a new system, we're recommending Oracle and building on the licence that we've already bought. We're encouraging, at this point; we're not mandating.

M. Coell: If the Crowns were to use Oracle, would they also go through CAS? What I'm looking for is: will that system as a whole have the capacity to bring them on?

A. van Iersel: In terms of Crown corporations, they are stand-alone systems. Unless they are relatively small, we would not include them in our environment. That would be too taxing in terms of our computer horsepower and so on. We prefer that those organizations -- as they always have -- run Oracle software, but in their own environments.

M. Coell: I wonder if Mr. Morfitt could maybe comment on my question.

G. Morfitt: . . .whether CAS has the capacity to incorporate the Crown corporations data. Arn doesn't think so.

K. Ahmadi: As a system, it may be able to, but at this point I don't believe it is.

M. Coell: I guess what I'm looking for is a comment. Would that be beneficial, from an auditor general's point of view, for the British Columbia accounting system as a whole?

K. Ahmadi: There are two sides to this: one is the question of homogeneity and consistency of dealing with an accounting system. That part of it, obviously, is a benefit. On the other hand, the question of dependability on one system creates some problems that have to be taken into account.

R. Thorpe (Chair): By your last comment there, are you raising a red flag on dependability, or. . . ?

K. Ahmadi: I am only just referring to that as a matter of fact, because that is the question with any system that is used very widely by one group, especially the software in the world of technology that is very, very much in competition and that has grown so fast and so quickly that. . . . We haven't actually given an evaluation to this. It's just a matter of fact.

R. Thorpe (Chair): I just don't know how you get to a matter of fact if you haven't done an evaluation on it.

[1115]

[ Page 1088 ]

A. van Iersel: I just want to say that I believe what Keyvan is suggesting is that in effect we would be putting too many eggs in one basket in terms of having them all in the same operating environment -- for one thing.

I think the other thing he's saying is that while I've made a commitment this morning that I believe Oracle is the system for the next ten years, others may have a slightly different view in terms of my colleagues out in the Crown corporations. So we're all in effect putting our faith in one particular system or another. I'm very confident with Oracle, as a number of Crowns have also said the same thing. But no one is sure. No one can predict accurately what will happen in ten or 15 years -- whether Oracle maintains its pre-eminence in the industry.

The other thing we have to remember here this morning is that the way we do business in the ministries and so forth is different than the way many of the Crown corporations do business. B.C. Hydro, for example, being obviously an enterprise, follows different accounting policies than we do. So even if we were technically able to run the environments out of one location, in effect they would not be on the same system, because we do things slightly differently than they do.

R. Thorpe (Chair): The budget process review panel recommends that government's periodic financial statements be prepared using a standard government accounting policy. Is CAS capable of giving us that consolidated, timely information based on the recommendations of the Enns study?

A. van Iersel: Yes. In terms of the year-end process, moving to one system will expedite the production of the year-end financial statements for ministries and other bodies that are included in our entity. With respect to Crown corporations, as I say, they follow slightly different conventions. So while we are working on getting their information electronically, it does have to be adjusted to conform to our policies and for preparation of the summary in that way.

R. Thorpe (Chair): But I think Enns also said "much more timely quarterly reports," as opposed to just year-end reports. Does this facilitate that?

A. van Iersel: Yes, it does -- for the same reason, in the sense that it allows a much more automatic rollup. As I say, it's one set of books, one consolidated chart of accounts. So it will improve the timeliness and the accuracy of information on whatever reporting period we set.

R. Thorpe (Chair): One of the areas that the late Chair had worked extensively on was performance measurements. Does this new corporate accounting system -- an Oracle system -- have that flexibility to incorporate performance measurements as a management tool, so that this information can be provided on a timely basis to those managing the finances of the province?

A. van Iersel: As I mentioned, in the chart of accounts we have two vacant fields right now. One of the options for using those vacant fields was a tie-in to performance measurement. This was actually something I had discussed with Mr. Gingell in his office one time, trying to find out what he needed as a user of financial information. We get mixed advice in terms of whether you should mix non-financial information with the rest of the financial information in the system. The way we're leaning right now is that the performance measurement should be a separate system that is maintained by the ministries. There would be a link to the various program elements that are defined in the chart for each ministry. But you wouldn't mix the two; that seems to be the predominant pattern in this.

R. Thorpe (Chair): If I understand, what you're saying, Arn, is that the one system would feed the other system. Is that correct?

A. van Iersel: Yes.

R. Thorpe (Chair): So have we built or are we building the performance measurements as part of the Oracle systems?

A. van Iersel: It's part of the project plan. There will be cross-reference to the performance systems, but the performance data won't be in Oracle itself.

R. Thorpe (Chair): Will it be totally functional and completed by the year 2001, like the rest of the systems?

A. van Iersel: I think it may take a little more time. It depends on the ministries' ability to generate suitable performance measures and their ability to get their systems going.

R. Thorpe (Chair): Do we have a timetable for such implementation?

A. van Iersel: That's beyond the CAS project in terms of my responsibilities.

R. Thorpe (Chair): Who is responsible for that?

[1120]

R. Thorpe (Chair): So I take it that right now, that's not on the front burner.

A. van Iersel: I can't say.

R. Thorpe (Chair): Could you check and let us know?

A. van Iersel: Yes.

R. Thorpe (Chair): The other thing that I just want to talk about is: is participation optional, or has it been mandated to every ministry?

A. van Iersel: That's an interesting question, Chair. As I said, we're trying to overcome the issues that were in

[ Page 1089 ]

R. Thorpe (Chair): I guess that goes back to Mr. Coell's comments earlier that we seem to be talking about this stuff forever. At what point in time is someone. . . ? Who is the champion of this program at a senior level within government?

A. van Iersel: For clarification, are you referring to the CAS system?

R. Thorpe (Chair): Yes. Who is driving that at the senior level of government?

A. van Iersel: The Deputy Minister of Finance and myself.

R. Thorpe (Chair): And it's still optional.

A. van Iersel: At this time, it is optional. But there's no need to mandate it, because everyone has indicated that they want to come on. Our problem is the reverse, in the sense that ministries are saying that they want to come on earlier than our resources permit.

R. Thorpe (Chair): Was the proposal that went to Treasury Board to approve the accelerated expenditures an optional part of that approval, or did it have to be mandated? Was that an optional part?

A. van Iersel: It assumes that all ministries come on by 2001, as we've described, and we see no reason why that won't happen.

R. Thorpe (Chair): Steve, do you have a question?

S. Orcherton: Yeah, I do. Actually it's really a question for the committee and for all those here. I was wondering how I was going to deal with this issue, and I've decided the best thing to do is just to raise it. It flows out of a question you asked just a few minutes ago, Chairperson, around the budgetary review process. That question was detailed in a document that I think probably all members of the committee have. I don't know whether the witnesses have the document or not, but it's a document entitled "Lines of Enquiry."

On two of the topics that we're dealing with here today -- the issues around the corporate accounting system and the issues around debt management -- your question, Chairperson, was verbatim from that document. I don't know whether the other committee members or the witnesses have a copy of it or not. As I said, it's entitled "Lines of Enquiry." It has been prepared by the office of the auditor general. At least in my mind, I think it challenges to a great extent the integrity of this committee. We're here to ask questions of witnesses, ask questions of the auditor general, ask questions of those in front of the committee about very important issues.

I am extremely uncomfortable with having lines of inquiry prepared by the auditor general to ask questions in respect of the auditor general's reports on matters that are before the committee. It causes me a great deal of concern; it strikes me as exceedingly odd. If these questions are ones that the auditor general felt important enough to have asked by the committee of witnesses and the auditor general's office itself, it strikes me as exceedingly odd that those issues would not be dealt with in the reports by the auditor general. This causes me a great deal of concern.

I don't know if other members of the committee have a copy of this lines of inquiry document or not. It strikes me that in engaging in this kind of process, where the auditor general drafts questions for the committee to ask of the auditor general, we are straying way off in a direction that I am exceedingly uncomfortable with. I think the committee has a responsibility to ask questions, and the auditor general has a responsibility to deal with a whole variety of issues in terms of the reporting from his office. But this is, in my view, highly inappropriate. Maybe the committee should have a discussion on this. I'm very uncomfortable with this process that we're involved in.

R. Thorpe (Chair): Thank you for your comments. It's my understanding that this has been a process that has taken place over the years. Some members may want to shake their heads on that, but I was informed by the former Chair that this was a process that had been in place before. One of the benefits that I see in getting some of these questions -- and it's up to individual members to use their discretion on what questions they're going to ask; you're right on that point -- is that it brings us up to date with some of the most current thinking on what may or may not have gone on.

[1125]

G. Morfitt: Yes, I'd be happy to do that, Mr. Chair. The provision of lines of inquiry is something that's done in most jurisdictions in Canada by the auditor general for the benefit of the public accounts committees in the provinces and nationally, and it has been the case for many, many years. Some years ago we discussed among ourselves -- the committee, at that point, and the auditor general's office -- what were the best ways for the office to assist the committee in doing its work. One of those ways was to provide a list of possible questions that the committee may or may not want to ask the witnesses when they come to speak to the committee. It was to give committee members an opportunity to think about what some of the most important issues that were brought out in the auditor general's report were and to make sure that they were covered off by the witnesses and, if they hadn't been covered off by the witnesses, whether there were matters that the committee members themselves would then like to ask.

[ Page 1090 ]

There were four topics raised at that joint session: helping new legislative members to the committee -- how they could be best helped; helping members be better prepared and more effective in asking questions or delving into issues; making sure that the PAC was more effective in its results at the end of all of the discussions -- making sure they were reporting out well, and so on; and the input that public accounts committees should have to legislative auditors' planning and budget -- that is, the offices of the auditor general.

I spoke to Mr. Thorpe some weeks ago about the possibility that this committee might spend some time discussing each of these four areas. We had a chance, back in Quebec City, to talk about them briefly, but let's talk about them in the context of this committee for this province. I hope that that might be the case, and sometime in the future that could happen.

Provision of lines of inquiry by my office to this committee is completely at your discretion. If you would prefer that my office not do so, we will not do so.

E. Walsh: I just want to make mention of this. I also have to concur with my colleague, one of the reasons being that I think it takes away the line of questioning that one may otherwise wish to pursue. I too have a concern that any lines of inquiry brought forward by whoever the presenters are do in fact do this. I also feel that it is inappropriate and that it does put a question of credibility onto the committee, because I feel that, as legislators and as people on the committee, we should in fact be able to ask questions that arise as a result of the reports. Last week there was also a line of inquiry that apparently you have been in possession of, and for last week's meeting that we had, which none of us. . . . At least I know that this side of the committee was not given a copy of it. That also concerns me somewhat. But I do feel that the questions that arise out of a committee should come from the members and not from those people that we have making presentations to us. This is the only way that we can ensure the credibility and integrity of the committee.

[1130]

Also, I think it's very important for all taxpayers in British Columbia. When you read this report and you want to ask a certain number of questions, so be it. Lines of questioning do not stop or prevent anyone from pursuing any line of questioning they want.

With respect to the budget process review panel, if you read this report and had not been prompted -- and I was prompted by the auditor general's input -- to see how this would dovetail with the Enns report. . . . I think that's worthwhile. I think that's beneficial to this committee, and I think it's beneficial to all British Columbians that we see how some of these things are going to tie in. From time to time we have to rely on the expertise of those who have a total vision of all the different things that are going on -- because I'm sure that you have to deal with other things besides your public accounts work.

So when things come to the committee, they go to the Clerk. The Clerk generally gives them -- under all circumstances, I'm advised -- to the Chair and to the Deputy Chair. Distribution is up to the individual members after that.

Mr. Farrell-Collins, do you want to say something?

G. Farrell-Collins: Yeah, just briefly. Perhaps I'm not as exercised by this, the fact that the auditor general gives us some help in forming responses to issues that are in some cases very technical, that in some cases the auditor general's office has spent months, if not years, looking at.

I believe that members of this committee can make up their own minds as to whether they want to ask a question or not ask a question and whether or not they have questions that aren't included in lines of inquiry that they wish to ask. I've never seen a case in this committee where the Chair has cut members off and refused to allow them to ask any questions that they want to. So I don't see any limit being placed on anyone. There's a series of optional areas for members to pursue if they wish. It's designed, in my opinion, as an aid to the committee, as a way to help focus on those issues that the auditor general and the office of the auditor general, in doing their job, have found to be the most critical or most crucial -- perhaps areas which need further probing in the intervening period between when the report was done and the time that we're closing the loop on the accountability here in the committee. So I don't feel threatened by that.

In fact, I would request that anybody in the public who's got any questions on reports from the auditor general and who wants to submit them to members of the committee for consideration, do so. I think that we should look for as much information as possible. To turn away and close a door on probably the most knowledgable area of expertise with regard to the report is odd, if not irresponsible. I think members are mature enough to ask questions they think are relevant and to not ask questions they don't think are relevant. If we don't like what's here, then don't ask it. If we do, ask it. If you've got other questions, ask them. I don't think any member here should be threatened by any of that.

E. Gillespie (Deputy Chair): I want to say how much I appreciate the comments of the auditor general with respect to the general view of what public accounts committees need in terms of support. The practice of offering lines of inquiry is, in my experience of this committee, new over the last two meetings. I guess I have some questions about where these lines of inquiry come from and what they're expected to generate. So I think it is something that the committee as a whole does need to discuss in terms of the kind of support that we need and where we would like to secure that support from.

[ Page 1091 ]

Yes, auditor?

G. Morfitt: Sorry -- just to mention that these lines of inquiry or similar lines of inquiry have been provided for quite some time; this is not new. But as I said in my remarks, we're at the service of the committee absolutely. If it's a concern or if the manner in which they're provided can be adjusted or if in some way we can serve you better, we'd be delighted to do that.

[1135]

Mr. Orcherton, you had some comments you wanted to make.

S. Orcherton: The reason I raise this is because I feel very strongly about this question. I feel strongly because I think this committee has historically had a great deal of integrity around its deliberations and in reviewing reports from the auditor general. I think the auditor general's office, as well, is held in high esteem by the public and has a great deal of integrity associated with it. I'm concerned that having lines of inquiry which are provided for some members of this committee and perhaps not others -- some people are witness, others perhaps not -- goes a long ways beyond what one member suggested as being helpful in aiding the committee. It goes to what I view as the integrity of the auditor general's office and starts to focus the committee on lines of questioning.

I have no dispute with any of the questions that have been laid out in this "Lines of Enquiry." What I am very concerned about is having the auditor general give a series of questions in terms of a line of inquiry on reports that the auditor general has been involved in. It raises to me a scenario where the auditor general prepares a report and then the auditor general is put in a situation where he's asking himself questions that could well have been answered in the report. It just causes me a great deal of concern -- what's going on. I mean, I don't think there's any problem with asking the question in the next item that we're going to deal with is around debt management. As is quoted here, it says that the province, through the numbered company in B.C. . . .

R. Thorpe (Chair): Perhaps we should deal with the issue that we're dealing with now. We can deal with debt management when we get to debt management.

S. Orcherton: I am dealing with the issue. The issue that I raised and put on the table is the line of inquiry that's being embarked upon by members of this committee and supported through documents provided by the auditor general. By way of example, I have no problem with the question around: has a numbered company in B.C. acquired a majority ownership interest in Skeena Cellulose Inc.? The government's been classifying Skeena's debt as a commercial debt. How much has the government loaned to Skeena? How much of the government's debt has the government guaranteed? And how much of Skeena's debt is not guaranteed by government? And the list goes on in respect to that question.

Now, I think it's an absolutely appropriate question for this committee to be asking. I have to question, however, the appropriateness of the auditor general in putting this question in terms of a line of inquiry for some members of this committee to consider asking the auditor general. It raises in my mind questions around the integrity of the office. And it's not.. . .

G. Morfitt: These are not questions you're supposed to be asking of me. Just to clarify: these are not questions to ask of me. These are questions to ask of government officials. I just wanted to clarify.

S. Orcherton: Thank you for that. The issue before us is the government financial accountability documents, 1997-98, prepared by the auditor general. There's a number of government officials being brought forward to deal with those questions, and this is one of the questions that's been posed for consideration, for this committee to ask of those individuals. The auditor general has prepared a report. Now the auditor general is providing questions in terms of a line of inquiry in respect to the report that's been presented. I have no problem with the questions. I have a great deal of problem with the process that we're involved in here. I think that with respect to the auditor general, it attacks the credibility of that office. I don't think that's a good thing. I think that we need to maintain the credibility.

[1140]

R. Thorpe (Chair): Apparently you didn't hear when the auditor general said that this has been a historical practice in British Columbia. It is a historical practice in Canada, and it's a historical practice in other jurisdictions. I note with interest your desire to ask the questions on the debt part, and we can look forward to you asking those later.

Mr. Farrell-Collins, do you want to make some comment here?

G. Farrell-Collins: Yes, if I can. I think this is much ado about nothing, quite frankly.

S. Orcherton: That's your opinion.

G. Farrell-Collins: Of course it is my opinion. It's coming out of my mouth; therefore it's my opinion, I assume. I haven't been on the committee a long time, but I take the word of the Clerk and the Chair and the auditor

[ Page 1092 ]

I'm not upset about the auditor general providing some guidance on general lines of inquiry. Every report is full of them. That's what the report's all about. The auditor general reports to the committee, and it's in the report. If the auditor general, at the request of the Chair of the committee over a number of years, has offered narrower guidance, further guidance, to committee members in areas that they may find interesting or that can use some greater scrutiny, that's great. I don't see how that affects the integrity of the office of the auditor general. That's the auditor general's job. That's what we ask the auditor general to do. It certainly doesn't affect the integrity of the committee. It's not as though it's coming to one side of the House and not the other; it's coming to both sides. We get them on our side. I assume that on your side, the Deputy Chair would pass that information to you, just as an administrative process.

S. Orcherton: Have you got a copy?

G. Farrell-Collins: Yeah, I've got a copy. We've all got copies. They're sitting right here in front of us. So if that's a problem -- that there's a lack of flow of that information to some members of the committee from the Deputy Chair -- then that's something that members might perhaps want to take up with the Deputy Chair. But it's certainly not something that concerns the committee as a whole. If members would rather receive that directly from the Clerk's office, then I'm sure the committee can make that arrangement so that members from all sides of the House are secure in the fact that the Chair or Deputy Chair is passing on to them the information they need to do their jobs. It certainly doesn't affect the integrity of the office of the auditor general. That's the auditor general's job. It's our job to decide what questions we want to ask, when we want to ask them and how we want to ask them. That's what we seem to be doing, so maybe we should just get on with it.

R. Thorpe (Chair): Did you want to say something, Evelyn?

E. Gillespie (Deputy Chair): I would further suggest that the Chair and Deputy Chair, the Clerk, the comptroller and the auditor general meet to discuss this and other issues about support for the committee.

R. Thorpe (Chair): Thank you. We will do that. Getting back to. . . .

P. Calendino: Mr. Chair.

R. Thorpe (Chair): Oh, sorry, Pietro.

P. Calendino: I didn't want to get into this fray, but I've been on this committee for three and a half years. You have mentioned that this has been a longstanding practice, and I'd like to object to what you've said. If this a longstanding practice, this is only the second time in three and a half years that I've seen the auditor general giving questions to members of this committee. Last time we asked for questions; this time it's a surprise to me. I don't even have a copy of those questions.

G. Farrell-Collins: Well, ask the Deputy Chair for them.

P. Calendino: Just a moment -- okay? When you have the floor, you speak. The Deputy Chair may have had the questions, but they came this morning. I say that this process has not been much different than for a minister in estimates making up questions for his own party members to ask him. They are leading questions. They are things that the auditor general should probably stay out of, because they're digging into things that he may have left out or may have decided not to put in because there was no relevance to the report. We are all elected legislators. I think we have enough staff that can assist us in making up questions, and we have enough intelligence ourselves to ask questions. It does put into question, somewhat, the integrity of the auditor general when he has to ask himself questions about his own reports.

[1145]

P. Calendino: Yeah.

R. Thorpe (Chair): Thank you very much. There's one thing I want to make clear here. I don't know, on your side. . . . I know that when the late Chair was here, when he received lines of questioning from the auditor general, he shared them with us. That's what he did.

I can't deal with what happens on the other side of the House, but I have to -- and perhaps as the Chair I shouldn't say this, but I am going to say it. . . . I take it as a personal insult to this committee that people are questioning the integrity of the auditor general for doing his job, which has been a longstanding job in British Columbia, has been done across Canada and is done in other jurisdictions.

These are guides -- and that's all they are -- for lines of inquiry. For people to continually attack the integrity of the office and of all the staff, I believe, is a significant error in public confidence in the province of British Columbia.

G. Farrell-Collins: I'd like to ask Mr. Calendino whether or not he received this document.

P. Calendino: I don't have it with me.

G. Farrell-Collins: I'd like to ask the Deputy Chair whether or not she received this document and whether or not she forwarded it on to Mr. Calendino.

E. Gillespie (Deputy Chair): I'm quite prepared to answer the question, but I think we're actually going beyond what we ought to be doing in this committee.

G. Farrell-Collins: I think we might have found the problem. That's why I'm asking the question.

[ Page 1093 ]

G. Farrell-Collins: I see.

R. Thorpe (Chair): Can we perhaps agree on maybe two more comments? Then we should be moving on with the rest of the agenda. I know I have some other questions -- my own questions, I might add -- with respect to this report.

Hon. H. Giesbrecht: Hon. Chair, you've sort of deviated from the impartiality of chairing a few times, so it's going to be a little bit difficult to cut this off. But now that we know that some of the questions that have been asked from time to time are canned -- and I do have a copy of the questions here. . . . I notice, though, that one of the reasons that I came, because. . . . I thought we were going to deal with the public sector report, and I'm excluded from that. But I did come, because I did see eight questions out of 18 dealing with Skeena Cellulose. That confused me. I thought I should at least be here for that.

What I'm suggesting. . . . You've already offered and the Deputy Chair has offered that you're going to get together and discuss this issue. But I would say that sometimes, in particular this case, the questions do focus on a particular issue which is fairly sensitive in terms of my area of the province. Given that it focuses quite heavily on that, I would submit that there might be some questions about whether or not the office of the auditor general should be making these lines of inquiry. I think that's the issue -- and don't cloud it with a whole lot of other stuff. I make the comment to the member over there as well.

So let the Chair and the Deputy Chair and the Clerk's office and the auditor general get together and make some decisions about whether or not lines of inquiry are acceptable.

R. Thorpe (Chair): Thank you for your inputs.

S. Orcherton: Just very briefly, because I'm encouraged that the Chair and Deputy Chair are going to sit down and have a discussion with the parties involved in this. Let me be very clear, Mr. Chair. My opening up this discussion was not to attack the integrity of the auditor general's office or the integrity of the public accounts system. It's unfortunate that you view it as that. Rather, I opened this up because I'm concerned about the integrity of this committee, and I'm concerned about the integrity of the auditor general's office. I'll leave it at that.

It's unfortunate that you've taken on this issue, Mr. Chair, as somewhat of a personal affront to this committee and to the integrity of the auditor general. That indeed was not my intention. Rather, I'm concerned about maintaining the high level of integrity of both this committee and the auditor general's office.

R. Thorpe (Chair): I thank you for your comments, and I'm sure Hansard will be very clear on the issue.

Could we move back to this item? I have a couple of questions, please. In the auditor general's presentation, you made the statement that there was no formal division of responsibilities. It's been a while now that we've been on the subject. Has a formal division of responsibilities, as you highlighted in your report, been worked out between all of the parties on the new Oracle system that we're moving forward with?

[1150]

R. Thorpe (Chair): Did the auditor's office want to say anything? Are you okay with that?

K. Ahmadi: Sure. The reference was to the formal service agreement -- not that the responsibilities are not clear, but there wasn't a formal agreement at the time that we looked at this.

R. Thorpe (Chair): Well, thank you. That leads right into my next question on formal agreements. What is the status of the formal agreements?

R. Butterfield: There are formal agreements with each ministry, but they do not include the specific items that were listed as part of the CAS generic interface. Those are the ones that are being updated at the present time and will be in place for March 31 -- the end of this fiscal year.

R. Thorpe (Chair): So do we have in place. . . ? Does your office have in place, then, an aggressive timetable to make sure that all of those formal agreements are in place? What procedures are you using? As you bring new people on, are those agreements formalized before they come on board?

R. Butterfield: We have a two-step process. The first step in bringing any ministry on is to put together a memorandum of understanding that outlines the responsibilities as you're implementing. Once a ministry is implemented, then we work with the ministry on service levels, both in terms of responsibility as to what each party needs to do as well as the service level of system availability and all of the mechanics behind that.

R. Thorpe (Chair): Is there an audit process involved in that whole procedure?

R. Butterfield: I don't believe there is -- formally.

R. Thorpe (Chair): Is that something that an internal audit would be looking at?

A. van Iersel: Yes, from time to time. As I say, they are just about to finish the audit in Transportation and Highways and in Forests.

R. Thorpe (Chair): Does anyone else have any questions in this area? Pietro, do you have a question in this area?

P. Calendino: Yes. Just going back to your line of questioning on the cost of the system, the figure was $75

[ Page 1094 ]

A. van Iersel: Yes, those estimates do include upgrades. I can't emphasize enough that when we talk about $75 million, it's in two parts. One is the capital component, which is the cost that we have to pay Oracle for the rights to use their system. It's roughly half the cost. The other half is the maintaining of that system by our staff, in terms of keeping it running and so forth. So it's not a $75 million capital charge; it's half capital and half operations and maintenance, which is what we're incurring and have incurred ever since we went to Walker. It's now going to be done under a new system, but the same charges have always been there. It's not $75 million in new expenditure that was never there before, if that could be clear.

R. Thorpe (Chair): Does anyone have any other questions, then, in this area? Well, I'd like to thank everyone for. . . . I'm sorry, Mr. Coell.

M. Coell: I was reading a document the other day that was produced for the Hon. Andrew Petter on information and privacy in the corporate sector, and I just wonder whether you could outline for me the safeguards -- or checks and balances -- for individual and corporate privacy in this system.

R. Butterfield: Everyone who has access to the system has. . . . Their responsibilities are limited to their operational function. So an accounts payable clerk will only have access to a certain portion of the system and to certain individuals.

With regard to information and the privacy of. . . . Like our corporate vendor file -- those kinds of things?

M. Coell: Yes, that's what I mean.

R. Butterfield: Everyone has an ID, and an audit trail is done for everything that is touched in the system. That vendor file does not go outside of provincial employees.

[1155]

R. Butterfield: No.

M. Coell: Okay. Thank you.

R. Thorpe (Chair): Seeing no other questions, I would like to thank you, Renate, for your insight into this fascinating subject. I wish you and the staff all the best at implementation. Thank you to the auditor general's staff for their input into this. Thank you very much.

I'm now wondering if we could take a five- to ten-minute break. Originally, we were going to break for lunch, but we have one witness that has time commitments. If we could maybe take a ten-minute break, then we could hear from Mr. McFarlane, if that's acceptable to members of the committee. Let's resume at, say, 12:10. That's a little bit longer than ten minutes.

The committee recessed from 11:56 a.m. to 12:18 p.m.

[R. Thorpe in the chair.]

R. Thorpe (Chair): Who do we have presenting first?

A. van Iersel: Chair, with your permission, Lawrie McFarlane is one of our witnesses who has to disappear early. He came in on his holidays today for the committee. If that's satisfactory, Lawrie is here to speak about the financial management plan.

R. Thorpe (Chair): Thanks for coming in on your holidays.

L. McFarlane: Chair, there's nowhere I would rather be.

I thought that if I could, I would give a brief summary of the financial framework that the government is working within. There are a number of officials here who can deal with some of the technical matters that are raised in the report. In particular, I notice that Skeena is an issue of interest to the committee, and we could deal with that momentarily. What I want to do, if I could, is try to put what is in this report around financial management into some kind of public policy framework. What this report basically says is that debt has increased over the last ten years and that the government has not met its financial management targets. If I was a member of the public reading this report and not going into the details, those are the two take-away messages that I would take away here.

[1220]

Those kinds of questions by and large tend not to appear in a report of this kind, which is by its nature -- and appropriately so -- of a summary nature, looking at what the bottom lines are, if you like. But those are the public policy questions that governments face when they have to deal with those issues. Can we afford the debt we have? The interest bite right now is about 9 cents. The federal government pays about 27 cents -- I think it is -- on its debt, and it was up in the 50-cent range some years back before they corrected their deficit position. So if you look across the country, I would say that in that sense, a case can be made that we do not have an unreasonable crowding out.

One would be concerned, obviously, if the amount got much over the 9-cent or 10-cent level. At least, I would be

[ Page 1095 ]

Has the increase in debt over the last number of years been for purposes that make both financial and public policy sense? These are, at end of the day, the questions that the cabinet and the government have to answer, and they have to go to the people and defend their record on those matters. I don't have that responsibility. I can't take responsibility for whether or not those were good choices. But basically the choices over the last several years certainly have been to put more money into capital infrastructure. The government has doubled, over the last couple of years, the amount of money it spends on an annual basis -- from approximately $1 billion a year to a little bit over $2 billion -- on annual capital expenditures. Those go for things like ferries, RTP 2000 Ltd., schools, hospitals, road infrastructure, the Island Highway.

Those are decisions that the government of the day arrived at in the face of a deteriorating economy over the last couple of years. I suppose you might say that these are counter-cyclical expenditures, and so there would be a public policy rationale that I think the government would reach for there. Again, whether or not one accepts those arguments is, at the end of the day, a matter that society has to rule on.

If we look at the way that government has managed its financial affairs over the last three of four years. . . . In preparation for this meeting I had some summary analysis done that I want to relate to the committee. This puts in context some of the public policy issues that have confronted government over this last three- or four-year period that the auditor refers to in his report, when he talks about the government's failure to meet its financial targets. What are some of the reasons for that failure?

In the period '95-96 to '99-2000 -- the last four years, the period in which we're talking about -- we've seen real per-capita revenues in B.C. decline by 5.6 percent. Nominal revenues grew by 3.5 percent over that period. But real per-capita revenues -- in other words, per capita adjusted for inflation -- have declined over the last four years by 5.6 percent. This reflects some of the underlying weakness in the economy.

It reflects federal cuts in federal taxes. Members of the committee will be aware that B.C.'s tax system, like most provincial tax systems other than Quebec, uses the federal tax base as our tax base. So if the federal government cuts its taxes, they also cut ours -- at least, they cut our revenues for us. Throughout this four-year period we have reduced taxes in B.C. and suffered federal tax revenue losses equivalent to a billion dollars a year at the end of this year. So at the end of '99 we have a billion dollars less a year in revenue as a result of taxation alterations, both at the provincial level and at the federal level, than we had four years ago.

[1225]

On the expenditure side, how did we attempt to cope with those significant alterations in the availability of resources? Over the same four-year period, '95-96 to '99-2000, normal expenditures grew by 4.9 percent. This is a CRF expenditure base. As the committee is aware, we are in the process of converting to a summary account basis. But this analysis was done to correspond to the numbers that are in the budget. Normal expenditures grew by 4.9 percent, an average increase of 1.2 percent a year for the last four years.

I put it to the committee that there's not a case there for spending in excess of inflation or in excess of population. In fact, if you convert our spending over the last four years to real per capita, there has been a 4.2 percent decline in spending over this last four years -- real per capita. So if you take into account the number of people coming into the province over that period and you take into account inflation numbers, which thankfully have been fairly low, in fact we've spent less. We spend less money now than we spent four years ago on a real per-capital basis.

To give a little extra information about where some of that money has gone, the major grant programs that reflect Health, Education, Advanced Education, Children and Families have increased over that four-year period by 15 percent, or a total of $2 billion. The government has made an explicit public policy decision to pump money into the major grant programs to the major social safety net services: Health, Education, Advanced Education, Children and Families. Over that same period of time all other ministries -- 15 out of 20 -- had their budgets cut by a total of 13 percent, or almost $300 million. So at the same time that we have added money to the major social safety net programs, we have cut, on total average, all other ministries by 13 percent.

How was this done? There have been a number of successful, I would say, public policy strategies to try to manage spending over that period of time. We've had a tight collective bargaining framework. A zero-zero-and-2 framework with a few dents and holes in it has, I think, resulted over this period of time in public sector wage increases falling below the private sector average for the first time in a decade. We had a five-year deal with the BCMA that had a hard cap, and for a period of time before the courts struck it down, we had physician supply restrictions which prevented physicians coming from other parts of the country to B.C. We have K-to-12 grants based on population, on a formula. I think that's a rational way to budget. We have reference pricing in the Pharmacare program, which has saved somewhere between $40 million and $50 million a year. Again, it's very significant upward pressures there. We've had post-secondary grants which have been tied principally to provincial priorities. The government has been successful in introducing its public priorities into the running of the post-secondary system and has made clear that what it wanted was a rate freeze and

[ Page 1096 ]

Those measures combined explain the fact that we have, in relative terms, a small spending increase over the last four years -- as I said, 1.2 percent on an annual basis. It's over a 4 percent reduction on a real per-capita basis. I think, therefore, that when we look at the issue of whether or not the government has met its financial targets -- or why it has failed to meet its financial targets, because demonstrably it has failed to meet them -- it feels to me that the case that I believe would be deployed, if it were being deployed, would be that we have seen a deterioration in the economy. We have seen a loss of revenue both on the federal scene and in the cutting of provincial taxes. The government has made a conscious public policy choice to continue spending significant amounts of money on the social safety net, and it has made a conscious choice to continue spending significant amounts of money on capital spending to regenerate and sustain public sector infrastructure.

[1230]

I would also have to say that it should be noted that other jurisdictions are improving their position relatively, and ours is deteriorating. We should be concerned about the fact that although we have a beneficial position today, one would have to be concerned that we need to take whatever measures that are necessary to sustain that. In short, Mr. Chair, the perception that I think one may take from the report -- that the government has increased debt and has failed to meet its targets. . . . That perception is correct. The public policy debate that needs to occur around that is whether or not the choices government has made, which explain that, were good choices.

R. Thorpe (Chair): Thank you, Mr. McFarlane. You've made reference to a report that you had there, which you were looking at and taking notes. Would it possible for you to share that report with the committee?

L. McFarlane: Some of it was in the form of material that I pulled together for a different presentation, so if I could have the luxury of editing it a little bit, I'll give you all of the material that I just gave you.

R. Thorpe (Chair): Thank you very much.

G. Farrell-Collins: I agree with your opening comments, which are essentially that policy decisions have been made at the political level and that that debate is probably best had at the political level. So I'll try to keep my questions more focused on the facts and issues and, perhaps, get a sense of how the last number of years have looked from the perspective of Treasury Board, and of some of the challenges that this government has been facing.

Before I do that. . . . When you were reeling off your numbers, there was one number that I wasn't clear whether I heard correctly, and that was the per-capita revenue for the 1991-96 range -- not the nominal but the per-capita figure. I didn't get that one. I thought I heard that it was down 5.5 percent, but I wasn't sure whether that was in reference to the subsequent four years.

L. McFarlane: I don't have a per-capita adjusted figure. I only have a nominal figure, and that was 35 percent.

G. Farrell-Collins: So there's no per-capita figure? You haven't done one for 1991-96.

L. McFarlane: I don't have one with me. I can certainly get you one if you want.

G. Farrell-Collins: Okay. I'd appreciate that, because it helps to sort of close the loop on those figures.

One of the items that you mentioned as a success -- in your mind or in the mind of Treasury Board -- in controlling costs was the zero-zero-and-2 collective agreements that were signed or used as a guideline in negotiating collective agreements with the public sector. I'm wondering if you've done any quantifying of the total costs of those collective agreements, including productivity losses or gains, benefits costs or gains. . . . Zero-zero-and-2 is a very small part of the actual cost of a public sector collective agreement. There are other costs there. I'm wondering if Treasury Board has quantified those also.

L. McFarlane: We have an estimate of some of the factors that have been added. For example, the agreement with the B.C. Teachers Federation included the allocation of additional teachers to reduce class sizes. The agreement with the B.C. Nurses Union included an agreement to add additional nurses for the same kinds of reasons -- to deal with utilization. So we have costing of those facts, as far as we know them. Again, if you want that, I would be happy to give that to you. I guess you do get into an argument there, though, of whether or not those are collective agreement costs or whether or not those are service enhancement costs. You could argue that if there are more nurses, we're dealing with the issue of wait-lists as much as we are compensation.

[1235]

[ Page 1097 ]

L. McFarlane: We've quantified as much as we can. As I've said, I'd be happy to give you that material. Some of the agreements, as you know, involve what were called gain-sharing proposals. A fundamental part of the underlying premise of those negotiations was that in exchange for a low lift in the base salary, if improvements in efficiency had cost savings that could be worked out and proven at the end of a period -- not at the beginning but at the end. . . . If it was proven that there were those benefits, those could be shared back. We're not yet able to arrive at an estimate of what that part of those collective agreements is worth. But I'd be happy to give you, through whichever process is good for you, what work we have.

G. Farrell-Collins: That would be helpful. I have a couple of other questions that I want to ask.

You itemized, I think fairly clearly, some of the things that the government has done to try and contain costs, as they were facing a drop in revenues. You didn't mention some of the other fairly significant cost items that have come up and have been competing for funds from government and, in many cases, rather than being dealt with in one fiscal year, have been put onto accumulated debt. I think that probably is a factor in not hitting debt targets. I'm wondering if you can comment a little bit on some of those surprise liabilities, or whatever they were, that have come up and faced the government.

I'm thinking specifically, if I can itemize a couple, of. . . . Some of the cost overruns with the fast ferries, in the nature of $200 million or so, were something that we were at least told had been unexpected. There were certainly some fairly significant numbers around Skeena Cellulose, which I'm sure we'll get into a little later. There were also the costs of the convention centre, the money that's being written off for the convention centre project. I'm wondering if you've quantified those types of -- I don't know what you'd call them -- surprise liabilities or. . . . I mean, I don't know if there's an accounting term for that other than what I've used, but maybe there is one. If so, have you quantified those?

L. McFarlane: I think we have a quantification for all of the issues that you've mentioned. We could either give you some of those right now, or we could get that back to you. The expectation, nevertheless, for the. . . . I don't know if I'm supposed to get into the current year. Am I supposed to get into the current year?

G. Farrell-Collins: You can answer it any way you want.

L. McFarlane: The issues you've raised affect the current year. I would say that we're still confident we'll meet our targets this year.

G. Farrell-Collins: Okay, then let me take you up on your offer to give us an indication. You said you have quantified it, and you can give it to us now or later. Do you have some rough figures now that you can give us?

L. McFarlane: The projects you've mentioned. . . . I think the government has already made public what it has written off for the convention centre, and I think it's about $75 million. On what the cost of the overrun was on the fast ferries, I haven't heard any new figures that suggest that that figure is wrong, so I think it sounds like it's about $450 million instead of the $220 million or so that was originally forecast. The Skeena stuff will. . . . If it's acceptable, we can get into that momentarily. I'm not aware, quickly, of other huge unexpecteds. There will be some small ones, but unless you catch me off guard, I can't think of any.

[1240]

I want to ask a little bit about. . . . You made a comment with regard to one of the reasons for the drop-off in revenues in the latter four years -- years '96-97 to 2000. You mentioned a number of times the deterioration in the economy as being a factor and certainly that is the case. Refresh my memory if I'm wrong, but I seem to remember that the first time government started to talk about that as being a factor was towards the middle of 1997. That was when the downturn in the Asian economy started to be observed in a very broad way by the world as something that was going to be more than just a little blip.

Certainly there were a number of years before that -- the '95-96 and '96-97 years, not to mention the years previous to that, the other four years that you mentioned -- where targets weren't hit either. Are there other reasons why those targets weren't hit, aside from the downturn in the Asian economy in the last couple of years?

L. McFarlane: I think I gave the two principal reasons. There's a deterioration in revenues caused by tax-cutting, both at the provincial level and at the federal level. That in itself is worth at the end of this year, as I said, a billion a year. That's huge; that's -- what? -- 5 percent of our revenue base. And there's the downturn in the economy and the corrective measures or offsetting measures that government chose to take in the face of that -- in particular, additional capital spending.

G. Farrell-Collins: Isn't it true, though, that in that first period of time that you itemize -- the '91 to '96 range -- we saw nominal revenue increases of about 35 percent? That is fairly significant. I'm trying to recollect my store of knowledge on that. It seemed to me throughout those years that as revenues were increasing above what government expected -- in fact, in virtually every one of those years, revenues came in substantially higher than what were forecast in the initial budget -- spending seemed to creep up to hit that range. All along, we still saw -- despite that 35 percent increase in nominal revenues -- a fairly significant increase in accumulated debt and again, throughout all of those years, never hit those debt management targets once. That's my recollection. Are there other factors there that I'm not aware of? We talked about the downturn of the economy in Asia in the last two years. But certainly from '91 to '97, British Columbia had a fairly significant growth in its economy, which was reflected in the revenue increases.

[ Page 1098 ]

So if there's a flag here, I believe it would be whether or not the measures that have been taken over the last two or three years to deal with the downturn in the economy -- and in the face of falling federal revenues -- are sustainable. Is the economy going to come back fast enough to recover the debt track that we should be on? If it's not, what measures are going to be taken to correct it?

G. Farrell-Collins: Yeah, I guess those are all very good comments. I think that is the challenge that faces government now, and one needs to look at that. But I guess my reading of current economic theory is that people still believe in a business cycle. Everybody pretty much accepts that there are cycles to business; they come and go. There are good years and bad years, and generally revenues to government are reflective of that. Again, these aren't choices that you or your staff made; they're government choices.

[1245]

But I guess, in looking at it, one has to try and decide what the target is that we're actually shooting for, because it seems to me that it's easy, as a marksman, to aim at a target. If you hit it, you can say: "Yes, that's where I was aiming." It's all just as easy to take aim at a target and, when you miss, say: "Well, I actually wasn't aiming there anyway, and maybe that wasn't the best place to be shooting." As I've been here since 1991, that's the story I've heard each and every year in the budget. There are always great arguments and reasons for why we didn't really mean to hit that target or why we missed that target in the first place, to the point where it gets to the state. . . . It doesn't really matter what you say the target is -- not you, but what government thinks the target is or says the target is -- because whether they hit it or not, there will be a reason why they hit it or why they didn't hit it.

That, I guess, comes to my next question, which is the argument that was made, I think, by the auditor general -- and you highlighted it but didn't remake it -- that the debt-to-GDP ratio is perhaps not the best target that one wants to pursue over a short period of time. Perhaps one needs a longer-range look at debt-to-GDP ratio. Perhaps it's better to look at trends in debt-to-GDP ratio relative to the business cycle. Are you decreasing your debt in the good years, and are you increasing it in the bad years? I can guarantee that governments tend to always increase them in the bad years. The more difficult part is whether they're being decreased in the good years. I think you highlighted that with the chart on page 109, in saying that in those good years the debt-to-GDP ratio remained flat. Whatever the reasons may have been, there was really no serious attempt to get the debt under control, despite it being repeated year after year in the House and in budget documents that it was a goal of the government.

I guess that comes to my last round -- or my last couple of issues for this round, anyway. Where do we go from here? We've had eight years where we've never hit the debt target once. We've had eight years and five different debt management plans in various connotations, different names. That ship has been relaunched more times than just about anything. Where do we go in building credibility around debt? We can argue whether or not the government has set or established credibility on the social side with building schools or hospitals or roads or infrastructure, and that will be something for the public to decide. But, I guess, from Treasury Board's point of view, where do we go? What's the next step? How do we begin to restore confidence amongst the public -- taxpayers, international bond-rating agencies, whoever -- that when a Minister of Finance in British Columbia stands up and says, "Here's what we're going to do," there is going to be an effort to actually deliver on that? What's the next step?

L. McFarlane: Just as a point, the government did meet its target two years ago -- 21.2 percent. It actually improved on the target that it had published for that year. So it's not been an unbroken trend, but it is a trend downwards.

Clearly we're starting out -- or at least one would hope -- on a new business cycle. We came very close to balancing the CRF and also the summary. But the CRF in '97-98. . . . I think $153 million was the deficit in that year. That should have been the end of the cycle, and we should have begun a new cycle. We should have closed it out with a balanced budget, and now we face a new cycle. We have added to our debt stocks and our deficit stocks with a downturn in the economy. I think what the financial markets will be looking for, now that we are seeing a recovery. . . . We are seeing a recovery, although it's not as powerful yet as one would hope, because Japan hasn't come back as fast as we would like it to. I think that what the markets will say now is: "All right, we'll give you that. But you'd better get your act together now, and you had better reduce your debt stock now that the economy has turned around, and we need to see the measures that come with it." That's what the markets will say.

[1250]

[ Page 1099 ]

[E. Gillespie in the chair.]

L. McFarlane: This is outside my direct area, and we have the ADM of provincial treasury with us, and. . .

G. Farrell-Collins: I'm glad to hear from him too.

L. McFarlane: . . .you could go there.

I have heard nothing over the last year that tells me that the financial markets will not lend to B.C. or will not continue to lend to B.C. at good rates. I think we need to be careful with our language here. We are not in a position of creating alarm or anxiety in those markets. We have a sufficiently strong position relative to the other provinces that that is not an issue.

I think the point that you're making is a longer-term one, that we have a trend gap. Some of the other provinces are improving their fiscal position. We have not improved our fiscal position either relatively or absolutely, and you cannot continue to do that.

B. de Faye: Hi. I'm Bob de Faye. I'm the ADM of provincial treasury, and I think I can just simply echo some of the comments that Mr. McFarlane made. We've had no impediment whatsoever in pursuit of our borrowing program. It's on track; we're at 75 percent of our borrowing for this year. While there are indications that we have, as a credit, underperformed somewhat, equivalent credits like Ontario, which is also AA- and which is also the second-highest credit in Canada. . . . The actual spreads themselves, interestingly enough, in the last few months have been coming in. So relatively we've been performing a bit better.

I should also take the opportunity at this time to introduce, to my left, Mr. David Morhart. He's executive director of the debt management branch. I don't know whether David wants to elaborate further on my comments or not.

D. Morhart: I think that in general, the relative merit and our ability to fund is based on our credit rating. And because we still have the second-highest credit rating, that's confidence in the market itself. We have investors calling us every day looking for paper, especially as we head into the Y2K crisis. They're looking for top-quality credit, and that's very much to our credit. As Bob has mentioned, our relative spreads over Canada's have come in over the last nine months, and this is something that we're very pleased about. I think that people are recognizing that the government has put out a five-year framework to help manage the debt-to-GDP ratio. They've talked of a 22 to 27 percent range. That, to rating agencies, is acceptable for this credit level and something that we believe is achievable. Because of that. . . . I think that investors are giving us credit for that and that the markets are recognizing it.

[1255]

D. Morhart: That's correct.

G. Farrell-Collins: I think everybody hopes that continues, because that costs us money.

The issue you raised about the five-year fiscal framework and the debt-to-GDP targets. . . . I perhaps would argue that that has been a great indication to the markets. I don't know how they can accept those figures as being firm targets, given the past record. Perhaps we'll start to hit them regularly and people will feel more comfortable with them. But there is a whole range of issues around those margins, and perhaps, as you mentioned earlier, the somewhat stilted recovery in Japan and the Asian market is probably starting to have a bit of an influence on that, too, as people feel it perhaps doesn't look as dark as it did previously. But who knows what's in the minds of bond-rating agencies from day to day?

I thank you. Perhaps other members have questions too.

S. Orcherton: First of all, let me thank you for the presentation. It's interesting to see that one of the things that we're suffering from here is the tax cuts, really, in terms of a billion dollars less revenue coming in. I certainly wasn't apprised that that was, indeed, the number that we've been wrestling with. . .in terms of dealing with some of these questions.

When we talk about debt, we're talking about how much money we owe. You mentioned some of the things that have been embarked upon -- building schools, hospitals, roads, infrastructure, ferries and all kinds of different projects that are out there -- that in totality, when all added up, equate to our debt. Is there any calculation in regard to the asset side of that?

[R. Thorpe in the chair.]

We often talk. . . . In a personal circumstance, certainly in businesses, when there's a debt in place, there's an asset.

[ Page 1100 ]

L. McFarlane: We do publish figures in our debt statistics that attempt to take account of at least part of the asset base. I believe that we include the schools and hospital sector. I'm not sure that we have all of the Crown corporations, like B.C. Hydro, for example. But if you could give me a minute, I'll give you that information. Can we continue and I'll come back?

R. Thorpe (Chair): Yes. Steve, do you have any other questions, or can we move on? And when he has that information. . . .

S. Orcherton: I'll wait for the answer and see if there's any. . . .

E. Walsh: Actually, I was going to ask something very similar to that. I was just going to ask what our debt-to-asset ratio is here in the province. I also note that in the auditor's report, the summary of provincial net debt key indicators doesn't in fact show any kind of breakdown for assets within the province. So I would also be very curious to know what the debt-to-asset ratio would be.

L. McFarlane: We'll try to answer some of that in a moment.

G. Farrell-Collins: I've got a couple of others if nobody else does. I just didn't want to dominate it.

R. Thorpe (Chair): Yes. Go ahead, Gary.

G. Farrell-Collins: Sorry. I didn't want to take the whole day. So if other members have questions, that's fine, but I do have some other ones. Tell me to shut up if you want to jump in and ask a question.

A Voice: I'd never do that -- never.

R. Thorpe (Chair): Would you please go through the Chair if you're going to do that?

G. Farrell-Collins: If you want to tell me to shut up, you have to talk to the Chair.

Interjection.

G. Farrell-Collins: Thank you.

Mr. McFarlane, you mentioned federal tax cuts and them having an impact on British Columbia. Can you tell the committee which federal tax cuts those were -- and roughly what years they came in -- that have affected provincial revenue? Are you speaking of federal income tax cuts, or. . . ? I don't recall. I may be dead wrong, but my understanding is that provincial income tax is based on the base federal rate. I don't believe that has changed in a decade. It seems to me that federal surtaxes have changed but that those don't become a factor in provincial income tax revenues. Correct me if I'm wrong, but that's my understanding.

[1300]

L. McFarlane: This is Doug Foster, who knows more about this, obviously, than I do. Doug is the. . . .

R. Thorpe (Chair): This is a very open process. This isn't estimates, so the more the merrier.

D. Foster: Which question did you want the reply to first? Was it. . . ?

R. Thorpe (Chair): Just identify yourself and speak into one of the microphones, please.

D. Foster: Which question? I was struggling with the how-much-is-on-your-balance-sheet question, and I didn't hear the. . . .

G. Farrell-Collins: Sure. I'm sorry. You're probably getting a whole bunch at once. I don't want to divert you from doing that, but the question I was asking. . . . In Mr. McFarlane's presentation, he mentioned federal tax cuts impacting on provincial revenue. I believe he was talking about income tax, but perhaps I was wrong. My understanding is that provincial revenues are based on the federal-base income tax rates and that there has been no change in those for about a decade, but that there have in fact been federal surtax changes, which in my understanding don't affect provincial revenue directly. Unless I'm wrong, which I. . . .

D. Foster: In terms of that, it's on your last calculation of what you owe the federal government -- it's roughly 51 percent, if you like -- that you calculate provincial. In fact, there have been changes on the federal side -- changes to basic federal and the surtaxes we talked about. But there have been some other things -- improvements to the credits system, family bonus, all those kinds of things that affect the federal base -- which get you down to the final calculation. We've seen a watering-down on the tax base. I don't have the exact numbers in front of me here, but I'm going to project it to in the order of about $300 million or so. That is in the order of magnitude we're looking at.

I just want to mention one point about the issue of federal cuts. There are principally two dimensions that come at provinces. When Lawrie mentioned earlier about cuts that we've seen over the last decade, a very important feature that often gets missed is that it's not just the federal tax system and the cuts to their tax base, but it has also been, in a former life, the EPF contributions -- or what we now call CHST. We were faced with an order of magnitude of some $700 million worth of cuts, cumulatively, that have taken place, if you were choosing 1994-95 as the base when

[ Page 1101 ]

G. Farrell-Collins: It would be seem to me, then, that that's where that billion-dollar figure is coming from -- the $700 million per year.

D. Foster: No, it's not. No, that calculation of the federal tax measures -- federal and provincial -- that Lawrie was alluding to was just dealing with the income tax base. Separate and quite apart from that is the development of CHST on that side.

G. Farrell-Collins: That's interesting. I'd love to see that calculation as it's broken out for that further.

D. Foster: We'll be happy to do that.

G. Farrell-Collins: Particularly, that's because I know that provincially there was an increase in personal income tax rates in the '92-93 budget, which to me would seem to offset to a certain extent any of the tax credit changes that the federal government made. I await to see the figures. Once we see the figures, then we know what we're talking about. I would certainly like to have a look at that and see how that all plays out.

D. Foster: If you will, I'd like to respond to the question on the stock of capital.

G. Farrell-Collins: Go ahead.

D. Foster: This is something that's been evolving over time. We've got this big load of debt showing on the one side of our balance sheet, but we've not been able to show what the assets that back up those things are. As I'm sure the committee has heard a number of times, our provincial auditor general has suggested that we look at that very topic -- that there is a bunch of assets out there and that we should move down a direction of capitalization. As committee members know, we've been moving down that track.

[1305]

I'm hoping that has answered a bit of your question; I think that as we get to the end of the evolution, it will. . . . You'll be able to pick up a set of public accounts and see, on the asset side of the ledger, the kinds of assets that back up and explain what that debt's all about.

R. Thorpe (Chair): I believe one of the questions that Erda Walsh asked was: do you have a ratio that you're working to or from or whatever? Do you have an answer to that question?

D. Foster: In terms of the assets -- that kind of a ratio mix. . . ? Debt-to-assets -- is that what you're asking directly?

E. Walsh: Debt-to-assets.

D. Foster: No, we don't use that.

R. Thorpe (Chair): If I could just follow up. We're into a discussion here about why we have all this debt. I think one of the concerns in this report is not why we have all this debt but how come we've missed so many of our targets. We can justify whatever -- schools, churches, hospitals, whatever we want to.

A Voice: Not churches. We don't pay for those yet.

R. Kasper: We might be in better shape if we did.

R. Thorpe (Chair): They may protest; you're right.

Back to the point of this report, the federal cuts, whatever. . . . Everybody is doing their fiscal management. They don't just fall out of the sky as big surprises, I don't believe. They're all part of our planning discipline, our management process. We know in advance; we work through those things. So my question is this: is there a consolidated debt management plan now?

L. McFarlane: There is a financial management framework in the current year, published as a budget paper with the current year's budget.

R. Thorpe (Chair): Let me ask that question again, Mr. McFarlane, because I don't think you answered it. Is there a consolidated debt management plan now? Do we have a plan of all of the different things that go into creating debt, from operating to capital? Is it all integrated, and are we managing towards something, or is there just this loose framework? Is there a consolidated plan?

L. McFarlane: There is a plan to manage the taxpayer-supported component, which is about $27 billion out of $35 billion -- something in that order of magnitude. That is what is contained in the budget plan, with the 22-to-27 percent debt-to-GDP ratio. That is the framework for managing taxpayer-supported debt. Crown corporations -- the commercial Crowns like B.C. Rail, B.C. Hydro, ICBC -- have their own plans, and government does not manage the affairs of those corporations directly.

[ Page 1102 ]

L. McFarlane: That's correct.

R. Thorpe (Chair): I believe the government has said that it endorses all of the recommendations of this report.

L. McFarlane: I believe they made a couple of qualifications, but generally, that's correct.

R. Thorpe (Chair): Okay. So I guess that, again, never mind that we've missed almost all of the targets. You point out one target that was hit. What are we doing to move towards the consolidated debt management plan that people have called for, that government has endorsed and that agencies are saying we need? Where are we in that process?

[1310]

R. Thorpe (Chair): Again, I'm not trying to get involved in the commercial activities of, say, B.C. Rail. That's the one you've examined. I mean, they're going to do what their plan calls for and what their board has endorsed. Hopefully, their board has endorsed it -- I'm sure. But I guess, as a taxpayer and as a concerned British Columbian, I'm very concerned about debt -- $2.6 billion a year in interest payments on a consolidated debt; $7.232 million per day. I'm concerned about the debt and the operating and the capital. I'm not getting a sense of where that coordination is. Then I take performance measures and factor that into it, and I just don't get a warm, fuzzy feeling.

Give me some direction. Are we moving that way? Who should we be asking those questions?

L. McFarlane: Starting from the broader question that you began from, I think government has not yet responded to the point in the Enns report about whether or not we should manage to a consolidated debt target. Enns is including the commercial Crown corporations. There's an argument that one should do that. There are also arguments that they should make their own business decisions and that they should make those decisions on the basis of where the market is at. I simply put that before you. I don't know that that decision has been taken.

With respect to the management of the taxpayer-supported debt portion, that is managed, as I've indicated, on the basis of attempting to keep that debt within a debt-to-GDP ratio. That ratio is 22 percent to 27 percent. Right now I believe we're in the 23 percent range, so we're toward the lower end rather than the higher end. If the question is whether that's the right range or whether or not government has the will power to enforce that, you have to ask that question somewhere else.

R. Thorpe (Chair): Okay. I have some other questions. But Steve, did you have a question?

S. Orcherton: Yeah. Actually, just following up on something that you said, Chair -- and that my friend across the way said -- in terms of the aim that's taken in fiscal management and those kinds of issues that we're discussing here today, and some comments made about duties. Do changes from the federal government and changes in revenue sources happen in a split second? They probably don't happen in a split second, but it's the interim period from when one takes aim, I think, and pulls the trigger at the target and the time the projectile is supposed to reach the target. . . . That is where the miss occurs.

Is that a fair characterization? You're planning down the road and then hopefully hit the target, but there's a series of circumstances that occur that actually shift the target and make it move. Is that part of the problem and part of the challenge that you try and deal with?

D. Foster: I'd very much appreciate responding to that comment, because like you, my eyebrows are up a little bit about the predictability of federal measures. If one looks at the federal budget from year to year, one finds that their projections have tended to be very short term -- mainly, the next year. You may find some longer-term fiscal bottom-line targets, but you won't have revealed before you the substance of potential tax cuts or increases that may be coming. The federal government is certainly not apt to share that kind of information with the provinces earlier, which is when we'd like to. . . . Just like the federal government, we start our fiscal budgeting process -- which we're in now -- much, much earlier in the year than at the time you hear the budget produced.

There comes a point when, like a supertanker, we've sort of committed ourselves to shooting at a target. When the federal budget comes down, again, the entire substance of the federal budget is not revealed to the provinces. It's just as much a surprise to officials who are sitting in the lockup as it is to others.

[1315]

[ Page 1103 ]

A final comment on the target I should make is -- and Lawrie alluded to it earlier -- that managing the numerator side of our debt, which is the debt, is one set of issues. It has its uncertainties about it. Managing the denominator side, which is the GDP, is even more difficult. You could find standing here today, that Statistics Canada makes a revision over the last five years which affects the entire denominator track; you don't have any control over that. So as you see in this year's budget, we've tried to make a target range in the hope that. . . . You're trying to make second guesses on what somebody else is forecasting about both the national and the provincial economy.

I'm hoping that brings it around just a little bit about the uncertainties.

S. Orcherton: Maybe one question, just following up on my prior one around assets and liabilities and tangible things that the people of British Columbia own versus the debt that we have. You made some comments about different agencies in government moving in that direction, trying to put a valuation, I guess, on those assets. The sense I got was that we're a long way away from that. Are we? In my lifetime, will I see exactly what it is that the people of British Columbia own versus the debt? Where are we on that?

D. Foster: The comptroller general could answer you best, but from my vantage point and looking at what I do, I think we will probably have seen the lion's share after the end of this year, once highways move to the balance sheet. They keep saying that the lion's share of the assets are recognized. You've heard about "prepaid capital advances," if you like, moving onto the balance sheet. I don't expect that. . . . I will make a projection. I think you'll see it before the end of your lifetime. We're really near the end of that tunnel.

S. Orcherton: Hopefully, you're hoping for longevity.

A. van Iersel: Chair, if I may respond to the question. Thanks for the referral, Mr. Foster. The capitalization of assets is something that's supported by both Mr. Morfitt and myself. We are in the final leg of the capitalization program. As Mr. Foster has mentioned, the last big asset class to come on was Highways, which was brought in on the budget this year. They're now managed by the B.C. Transportation Financing Authority. There's a few outstanding asset classes that we're still considering: forestry, roads, silviculture. In essence, the majority of them have already been captured, but it will take another two years to finish this off.

I want to make one remark, though. Even when we finish capitalization, we will still have considerable assets, in my mind, that will not appear on the balance sheet. The major source of those would be the Crown lands that make up the province. Our policy on those has been that we only include land to the extent that we have had to pay for it or exchange an asset for it. So we are just capturing a portion of the land base that obviously has some significant value. We'll never, as a company who starts from scratch and purchases all of its assets, be able to come up with a defendable -- I'll put it that way -- asset-to-debt ratio. We don't include a lot of the assets that obviously are within our domain but have never been quantified and that we're not intending to quantify into the future.

S. Orcherton: Two years -- it's encouraging to have that information. How do we sit right now? What does it look like?

A. van Iersel: In terms of. . . ? Sorry.

S. Orcherton: Assets versus liabilities.

A. van Iersel: As Doug has said, we don't track that measure yet. We're waiting until it's complete.

S. Orcherton: Okay. So you don't have any sort of indicators or anything?

A. van Iersel: No, I don't have it here. I could calculate it.

S. Orcherton: Okay. Fair enough.

G. Farrell-Collins: I'm just glad to hear that we still have a positive net worth. It's a good starting point if nothing else.

I want to come back, if I can, a little bit to the relationship between the federal budgeting procedure and the provincial budgeting procedure. I agree that for years, the federal government's budget was. . . . You know, you never knew when it was going to happen -- I mean, over the last 30 years. At times it was late in the spring. I'm not talking recent history, but in the last 30 years or so it was quite all over the place. I understand that for a period of time under W.A.C. Bennett, British Columbia's budget came in much earlier in the year -- January or February, if I remember correctly. That's probably too far back to be relevant.

[1320]

D. Foster: It really depends. I mean, there are two -- there are three, but let's concentrate on two -- particular elements that come out of a federal budget that B.C. pays a heck of a lot of attention to, at least on the revenue side. Because B.C.'s provincial income taxes are tied to the federal side, what we're interested in is what the federal government has to say about the national tax base. We know something about what we think is our share of the national tax base. But we have to guess on it in terms of: how big is the pie? We rely on the feds. There can be a lot of

[ Page 1104 ]

The federal government doesn't make its forecast at a provincial level. It cares more about the national. In terms of the tax and the impacts on provinces from taxes, from time to time we are able to get or try to drill down provincial splits. Again, that's not the focus of the federal government to figure out what it is by province, but rather what it looks like on the national. Provinces are left to try to figure that out based on their own predictions.

In the case of B.C., it's a little more complicated than that. I don't want to bore people with the accountancy of it. But we try to accrue personal income tax regardless of when the flow of payments comes; that's another element. We say: "Okay, fine. What is our share now, and what is it going to look like?" It requires us to do quite a bit of analysis to get there.

So back to your question. Officials of the federal and the provincial governments meet during the year in the summertime and in late November and into December to try to get updates about where our provincial and federal finances are looking and to do forecasts. Do we get information about federal measures? No. I can only recall one year when we got some element of the federal tax on the tax base. Certainly we got some CHST warning in earlier years when they were hitting us with the big cuts -- and that is the branch I work in. I don't expect to get a lot more grounded details probably until mid-February. It might just be not much earlier than their federal budget. Of course, there will be a scramble to see what that means for us. As I say that to you, I'm going to get phone calls from other provinces saying: "Well, if you've done the calculations, then help us figure out what we're doing."

G. Farrell-Collins: Would it be procedurally, for making this great country work better. . . ? Is there some merit in really opening up the budget-making debate? In other jurisdictions, for example the United States, the budget debate is very public; it's very open. Here we have our tradition of budgets being made in secret, of being delivered when the minister stands in the House. As far as having the federation function better, would it be easier -- if the federal budget were made in a more open fashion, a more public fashion -- if the provincial governments did the same thing? Would that help in getting better accuracy earlier on and having a more open discussion about it and, quite frankly, ensuring that provinces perhaps have a little bit of a say in some of those decisions?

L. McFarlane: It feels like -- the way the country works right now -- different jurisdictions are very jealous of the political benefits and losses to be gained from things like budgets. The likelihood that a federal government would share what it felt to be politically beneficial information with the provinces before the budget came down, in the current political environment, I think, is limited.

There is a variety of other issues that can't make sense from the point of view of communicating clearly to the public that we know what we're doing. We don't close our books here in B.C. for the year past until August or September. The reason we don't is because some of. . . . What I would say personally -- and I'll be criticized by my colleagues to the right here -- is that I feel our arcane accounting conventions cause huge amounts of uncertainty on our part. It leaves the public with the impression that we don't know what we're doing.

[1325]

G. Farrell-Collins: I don't know. There might be room in this new openness and putting all the risks in the budget that's resulted from the '95-96 process that allows for some of those ranges to be, if not. . . . You've still got to put up the target, but those risks are really what the range is all about, I suppose. Perhaps there's more agreement there than you think.

D. Foster: I think that's. . . . Yeah.

G. Farrell-Collins: I want to ask you a couple of questions, because you talked about Crown corporations. My colleague the Chair was asking about consolidated debt and debt management in a consolidated way. There were comments about how it may not make sense for commercial Crowns to have their debt managed from the central government. B.C. Rail is probably the prime example, and you raised that. B.C. Rail may choose to make an investment out there -- a significant debt purchase -- in order to, I don't know, buy another railway. I don't know. Who knows what they're going to diversify into next and what makes sense for B.C. Rail? I get that. I understand that there is some real logic to that argument. Then why is it that Treasury Board dictates to Crown corporations what the dividend is going to be?

L. McFarlane: Those are somewhat different. The ability of Treasury Board to dictate a dividend is an expression of the shareholder's entitlement to receive a return on an investment. You would assume that from year to year, depending on the financial position of the shareholder and also of the subsidiary -- B.C. Rail or B.C. Hydro -- someone needs to make that decision. I think that where an issue can be raised would be if the dividend decision could not be managed within the internal affairs of the corporation. I think that would be problematic.

Government has, over the years, been sensitive to the investment plans of corporations. There is some to and fro about that -- about whether or not the money should be repaid as a dividend or should be reinvested. There is a discussion about that. But in the few discussions that I've been involved in, it does not go to where I think ends might lead -- of saying that the government should go to B.C. Rail or B.C. Hydro and constrain their business activities in order to meet some broad government debt target. I per-

[ Page 1105 ]

G. Farrell-Collins: I think there's certainly some logic in the argument that with some Crowns. . . . I guess it's a progression along a spectrum. Some Crown agencies should be pretty much left to operate as a commercial entity, really, and make those decisions based on what's best for the Crown corporation itself. B.C. Rail is the one that always gets stuck out at one end. There are other Crown corporations that perhaps should be a little further along. I think of Forest Renewal B.C., which could probably have used a little more guidance along the way in the way they were managing their expenditures. I guess that's something that is a policy discussion or debate. I'm not sure there's a right answer; there's probably a degree of answers along there. That's something that we'll all probably have to look at.

There have been instances. . . . I'm thinking of the discussion that was public recently about BCBC and a demand for a $200-and-some million dividend, which caused the Crown some serious concern about how they were going to be able to manage that and whether or not that was forcing a fire sale of assets which was not in the long-term best interests of the taxpayer or the shareholder. Those are the types of debates that I think we need to have and that need to be out there. Certainly if one looks at the buildup in debt of various Crown corporations at the same time as the government has been changing not just the amount but the way in which the dividends are calculated. . . . I think of B.C. Hydro as an example. Hydro's debt has increased substantially over the last number of years at the same time as special directives from government have set dividends which are fairly high, in a historic trend.

[1330]

When does one in government make the decision that it's better to, you know, try and hit a target with the provincial government's numbers -- for whatever reason, whether political or strategic or financial -- and sacrifice the health of a Crown corporation in the process?

L. McFarlane: That's a fair statement of the public policy issues. I think what's incumbent on government is to see that those issues are worked out in a way that the interests of both sets of parties are heard. Certainly we've heard BCBC's interests articulated in a manner that. . . . I might have preferred that they find a different way to do it. But nevertheless, there's no appearance there, I guess, of an agenda being pushed down their throats. They have voiced their views. I think the shareholder does have different interests sometimes, a broader interest than the public that it has to deal with. But this is a balance, and you find the right balance by debate and discussion. There's not a theory here that works.

G. Farrell-Collins: I think that's a very valid comment. I think you're right. That is a debate; that's something that should be debated. When you're the shareholder of, essentially, a subsidiary -- if you want to put it that way. . . . As a Crown corporation, one does have to make decisions. I would suggest that if there were some big crisis here in British Columbia. . . . Let's say we get whacked by an 8.0-magnitude earthquake in the lower mainland or something, and we need cash. Then one might go to some of the Crowns and say: "Look, let's start selling off some of these assets so that we can pay for the reconstruction."

The ground has moved politically recently, but I'm not sure that the lower mainland is shaking that badly. There hasn't been a real earthquake, and we haven't faced that crisis. I think there have been some decisions, which you highlighted earlier in your presentation, about the challenges that the government faced. The government made choices. In fact, the government has been upfront about that in the budget. The Minister of Finance of the day stood up last year and said that it was all about choices and that the government was going to grow its way out of the recession. One is eventually held accountable for those choices.

The real question, though, is: do you feel, from your point, technically -- not politically but technically -- that Treasury Board, in managing and trying to determine what's an appropriate dividend for Crown corporations to pay to the shareholder. . . ? Do you feel that there is an open debate? I don't want to cast aspersions on the government here; I'm just asking, for somebody who's on the inside who oversees that, whether historically there really is a good exchange that takes place as to whether or not dividends are appropriate and how that's going to be done.

L. McFarlane: I would say that in terms of dividends of a regular sort -- in other words, corporations that regularly pay dividends: B.C. Hydro, BCBC, B.C. Rail -- there is a well developed process there. It's full and it's frank. If you've met people like Mike Costello or Paul McElligott. . . . They can stand in their corner and fight their point of view, and they do it very effectively. So I would say that, yes, there's a full and complete examination of those issues. There's not always agreement, although I can't think of any decisions that have been taken on the dividend front over the last two or three years that I wouldn't be willing to defend.

You can find situations when the shareholder will say to a corporation: "We think we're in a line of business that we're not interested in staying in and that we should get out of it." You will find differences of opinion when that happens. The government sold B.C. OnLine despite some significant differences of opinion internally about whether or not that was the right. . . . I think it was the right thing to do. I think you'll find that there's never going to be consensus in those sorts of situations. You just do it, or you don't. But in the regular process of setting dividends, it's been my experience that Crown corporations know exactly how to voice their views, and they do it effectively.

[ Page 1106 ]

[1335]

L. McFarlane: I think that all I can usefully say there -- because it's a debate that feels to me is still going on -- is that you see highlighted there different interests, or competing interests. You see the interests of a Crown corporation looking at its asset base and saying: "We would like to stay in these lines of business." And you see government, as their shareholder, saying: "We understand that, but we also have some other things that we'd like to deal with." Those are two different and competing points of view. I don't think either is right or wrong, but there are strongly held views on both sides of that issue, and I don't think I'll help them by going into them.

G. Farrell-Collins: Well, that's fine. You probably aren't able to go into them, regardless, not being able to sit on both sides at the same time.

But what I heard, and certainly what was debated publicly, was not that they were trying to stay in a particular line of business but rather that if government and Treasury Board were asking for a dividend of that magnitude, it would result in the sale of assets at less value than could be achieved if that sale were done in a different way -- perhaps over a more protracted period of time or at a different time in the business cycle. It would seem to me that right now is probably not the best time to be selling commercial real estate across rural British Columbia. It would seem to me that the value of that commercial real estate is probably at its lowest level in a decade, if not longer, and that unless there's a real crisis, of financial proportions that demand it, that's an unwise long-term financial decision, despite the short-term need of a government to try and put some numbers together for a budget. I'm not going to engage in an argument about that with you, but I think the public can look at that and can evaluate it for themselves.

Now that the B.C. Utilities Commission essentially doesn't exist, for all intents and purposes, as far as setting rates, etc., do you feel that that has changed the debate around the B.C. Hydro dividend and how that affects their debt over a period of time?

L. McFarlane: I missed the point about the commission.

G. Farrell-Collins: The legislature has passed -- for three years now, I think -- a rate freeze on B.C. Hydro. Initially I think that was described as. . . . It was called a freeze, but really it was a cap. It ensured that rates wouldn't go above a certain level. When it became clear that the B.C. Utilities Commission was likely to lower the rates at B.C. Hydro in the nature of some 7 percent, government stepped in -- not this year but the year previous -- with Bill 6 and put a floor on that rate cap to really make it solid. That's resulted in more revenues to B.C. Hydro, which obviously affects the bottom line and affects their debt over a period of time.

One of the factors that the B.C. Utilities Commission was required to take into consideration when setting Hydro rates was that dividend -- what was an appropriate dividend to give to the province. There were certain special directives previously that the government had come in and set around those dividends to override what the Utilities Commission may or may not have decided.

Now not only are those special directives there, but the B.C. Utilities Commission has no control over setting Hydro rates. Rather, they're all set by cabinet. How does that debate take place in a rational way around what's an appropriate dividend for Hydro to pay and what is a reasonable debt for them to carry?

[1340]

A Voice: Yes, there was.

L. McFarlane: I think it was a 2 percent rollback, if I remember right, in response to the commission's views. So they didn't go unheard. I think cabinet has taken the view that it's not prepared to have it be the only voice.

G. Farrell-Collins: That's an interesting way to put it.

I want to deal for a minute, if I can, around the Ferry Corporation debt. This is a Crown corporation that some eight years ago had a debt of about $16 million. It now has a debt cap of $970 million -- unless it's changed again, that I'm not aware of. To me, that's a fairly significant increase in the debt carried by that Crown corporation.

L. McFarlane: I'm sorry. Did you say B.C. Ferries?

G. Farrell-Collins: Yes. I'm sorry. I thought I said B.C. Ferries; that's what I intended to say, whether I did or not. That is a fairly significant increase in debt, from $16 million to $970 million over about a seven- or eight-year period.

That discussion has to come up at Treasury Board. I mean, people have to be looking at that and saying that there's a role for Treasury Board in that scenario to look at that Crown corporation. If they're not dealing with it on their own. . . . I think in some cases the Crown corporations are very defensive of their fiscal position relative to Treasury Board. In other cases, I think there's a role for Treasury Board to step into that and say: "That's not a really good trend, you guys. What are you doing about it?"

[ Page 1107 ]

L. McFarlane: There are two or three public policy issues implicit here. It's quite correct that the government did, a good number of years back, move away from the earlier policy, which had been to keep B.C. Ferries' debt on the government books and to require the corporation to hold its own debt. I actually think that it was the right move in accountability terms and that by carrying that debt off-book, a false impression was created of the obligations of the corporation.

In the most recent budget, the government moved to dedicate to B.C. Ferries gas taxes collected, in recognition of the argument that the corporation is in a sense an extension of the highway system and that we use a similar methodology to fund TFA. Government certainly went to the ratepayers in 1996 or 1997 with rate increases which were highly controversial.

The position that I think government now needs to answer is: what is the right debt level for a corporation of this size to carry? What is the right cost configuration? Some decisions were taken recently by the corporation internally to trim administrative costs, and that was, I think, a recognition of a step in the right direction. I think, as the corporation sees its way through the conclusion of the fast ferry building program, that there will need to be an examination of the longer-term debt structure of the corporation. It's certainly been the view of Treasury Board communicated to the corporation that we need to have a sustainable debt structure and a sustainable internal financial framework, and we do not at this point. We haven't got there yet.

G. Farrell-Collins: I'm curious about the process that goes on within Treasury Board when the annual report from a corporation like B.C. Ferries comes out or when the request for a substantial increase in the debt cap comes across the desk, because to me, I suppose, the annual report is the last step in that alarm bell. Perhaps once the house is already burnt down. . . . It's like phoning the fire department then. But there must be several stages along the way where Treasury Board, in looking at that Crown corporation, if for no other reason than determining whether they're going to require a grant or whether they're going to be able to offer a dividend. . . . In analyzing their debt management plan, there must be some communication back and forth.

When do you get nervous? I'm not just talking about fast ferries. But what indication does Treasury Board. . . ? Do you get good information on that sort of stuff? If it is good information, are there some parameters? Is there a plan? Is there a range beyond which Treasury Board starts to ask questions of Crown corporations when their numbers go up and down?

L. McFarlane: The process that's gone on between Treasury Board and B.C. Ferries over the course of the last couple of years -- since clearly everyone's been concerned about the debt level -- has been to look at remedial measures. Those have included looking for rate increases, and that's become a difficult route to go back to, although realistically perhaps that should be in the future of the corporation. But that's not my call.

[1345]

To look at the alignment of routes, particularly in the southern Gulf Islands. There have been extensive consultations between the corporation and various user groups on the lower Gulf Islands. And when all those measures are taken into account, to try to arrive at a level of subsidy or support from government that's commensurate with the benefit that the taxpayer is receiving. As I've said, the policy shift that you've seen in the last year has been to try to move away from subsidies in the form of grants paid to a dedicated tax source, which seems to have more long-term stability associated with it. It also communicates the public policy goal that lies behind that level of financing, which is that we're trying to accept or work with the concept, the carry-forward, of the highway principle.

G. Farrell-Collins: I'm looking at all those examples you gave me of things that the government has gone back and tried to do or that the Ferry Corporation has gone back and tried to grapple with in an effort to contain costs -- to deal with their costs and manage their debt. Number one, you didn't raise the issue of curtailing or limiting or re-examining the capital plan. That wasn't one of the things you raised. I guess, first of all, I'd like to ask whether or not that's been a consideration. Certainly that's been one of the major drivers of debt growth at the B.C. Ferry Corporation. There has been a capital plan that was put in place six years ago, I think -- maybe longer, but certainly about six years ago.

L. McFarlane: Treasury Board and the corporation have looked at the capital plan. A number of decisions have been taken by the corporation along the way to look at other ways of satisfying that plan -- for example, to buy used boats, secondhand boats, rather than building new boats, and to look at different designs, perhaps, that are more accommodating to passengers as opposed to passengers and vehicles. Beyond that, it feels like we're getting into a detailed examination of the B.C. Ferries' capital plan, which I didn't come prepared to do. I don't want to mislead by giving weak or out-of-date information. I think your question is: are these public policy matters fairly on the table when these decisions are taken? It has been my experience in the short time I've been here that, yes, they have been.

G. Farrell-Collins: I wasn't asking for a detailed examination of the B.C. Ferry Corp capital plan. I was merely asking you. . . . You raised five actions that Treasury Board, along with B.C. Ferries, had been examining in an effort to deal with their fiscal situation, and of those you mentioned, one was not the capital plan. It seemed to me that that was a fairly significant driver of that increase in debt. Perhaps we'll see how the new ferry performs, and

[ Page 1108 ]

I'm more interested long-term, over a broader period of time, in one of the major Crown corporations in British Columbia and how the debt was able to rise -- from $16 million to $970 million and counting -- without major changes happening earlier on. The items that you've mentioned to me are: rate increases, which happened a couple of years ago; administrative cost cuts, which happened a month ago; trying to hold the line on collective agreements, which is always an ongoing issue, I think, at B.C. Ferries; a re-examination of routes, which happened two years ago; and the provision for some income from the gas tax, which showed up in this year's legislative session.

[1350]

L. McFarlane: Part of the reason why the things that I've talked about were over the last couple of years is that it's simply the extent of my own personal involvement. I don't have a memory that goes back beyond that, so I'm not good at reciting previous deliberations. As I've said, I didn't really come prepared to get into an in-depth examination of the interface between government and a particular corporation.

It was clear to me over the last year or two in the matters that I did talk about that those were on the table, in part because of the run-up of debt and the continuing requirements of the capital plan. You're quite right; I hadn't meant to leave that out, obviously. That was a significant consideration. It feels at this point that the government and the users of the ferries need some further discussion about what the appropriate measures are going to be? People want new boats. There's a feeling, I suppose, that the northern route boat is reaching the end of its useful life. It may not be compliant with maritime regulations much longer. Certainly I've not seen, as a public servant, much support on the Gulf Islands for higher rates. So it feels to me that there is a box here that the government is trying to deal with. I guess it's been my experience that when you come across very difficult matters, it sometimes takes longer than it should to get them dealt with.

G. Farrell-Collins: Well, I expect that's the case and probably will be the case. You mentioned -- you alluded to it earlier -- the rate increases as being perhaps not an option that the Ferry Corp has as much recourse to anymore, probably for two reasons: (1) political; and (2) they've probably reached the point of diminishing returns with the trail-off in users. So that might be as far as they're able to go in that well.

I have one last question, because I'm advised by the Chair that we should probably start to move on. It goes back to an earlier comment around revenues from the federal government. In particular, we were talking about income taxes. It seems to me that over a period of time we get these changes from Statistics Canada in data from two, three or four years ago. I think that was highlighted very briefly, or you mentioned it briefly, in your earlier comments -- where all of a sudden British Columbia ends up having to fork over some money or gets a cheque when they rejig all the numbers, as the information becomes more factual or more accurate.

Are there any looming liabilities we can see with the change that's existing right now -- or perhaps looming opportunities -- with the fact that the other provinces, particularly Ontario, have been through a very strong boom cycle in the last probably three years? Alberta, as well, and Quebec -- in some parts of it -- have been doing quite well. With that rapid economic growth in those provinces and the decline in British Columbia's economic activity over the same period of time, is there likely to be, at some future date, a recalibration of those numbers, where we may end up with a cheque or having to pay one out?

[1355]

The numbers do swing. We've recognized that historically. If you look way back in our years at how we budgeted and how the numbers actually turned out in '90-91 and '91-92, when there were turns in the economy, if you like, we missed in some of our projections. We've worked very hard in our own forecasting capabilities and with the federal government to get them to improve theirs. So we've tried to narrow our margins so we feel a little more comfortable, at a particular point, that we can sort of scope in, within parameters, how much we feel we're at risk of being lower or higher. We try to give our best 50-50.

So where I'm standing right now, for example, I've got a guess, based on our latest economic forecast, of where I think personal income growth was and how much everybody spent for 1998's taxes, but I'm not going to know finally, at the end of the day, until February.

I mentioned earlier that we accrue it, so we sort of, in a way, don't have to worry as much about the cash on that side. But corporate is a real. . . . Corporate is on a cash basis. That's a real crapshoot, because again. . . . We'll get our look at the federal tax base, and B.C.'s share, in November and again in February. You know, you can listen to people talk out there about how national profits are doing. I

[ Page 1109 ]

Is there a risk? As best as a forecast is. . . . You know, with the next piece of information about the national forecast and what other provinces are doing and what we're doing ourselves, we scope it in. Is there a big risk right now? Yes. You can still be surprised about where the numbers will go.

G. Farrell-Collins: Thank you very much.

R. Thorpe (Chair): I just have five quick questions. What interest bite is digestible, Mr. McFarlane?

L. McFarlane: Well, we're at about 9 cents right now. We've been in that range for a good many years. I think it was seven and a bit for a while. I think we're sort of in the 8.9 percent to 9 percent range, something like that. Looking at the experience that other jurisdictions have had -- and still have -- of huge bites, relatively speaking, that is not in itself a cause for alarm.

R. Thorpe (Chair): So 9 cents -- is that what you're saying?

L. McFarlane: I think if it stayed under 10 cents, I would have to say that that's manageable. I wouldn't want to see it up in the teens or twenties or thirties, God forbid.

R. Thorpe (Chair): What is our credit rating goal?

L. McFarlane: No one can answer that.

R. Thorpe (Chair): So we don't have a goal?

L. McFarlane: Well, no. Our goal, of course, is to maintain it. It's not in our hands. Bob, did you want to. . . ?

B. de Faye: Well, I think Mr. McFarlane has already said it. Obviously our goal is to maintain our present credit rating or improve it.

R. Thorpe (Chair): What is the total debt of Skeena Cellulose?

A. van Iersel: Now, we're dealing with March '98 and March '99 figures. In March '98 we actually loaned $3.1 million to Skeena. In terms of the guaranteed debt, it's $61.5 million. So there's sixty-four and a half million dollars. The next year's public accounts. . . . This is actually delayed in the sense that we've already tabled our next year's public accounts. On March 31, 1999, the fiscal agency loan went up $1 million, to $4 million, and there's another $124 million in guaranteed debt.

[1400]

A. van Iersel: Right now, in terms of the province's exposure, it's $128.4 million.

R. Thorpe (Chair): So is all of that guaranteed 100 percent by the province?

A. van Iersel: Most of this. . . . This is all guaranteed or a direct debt. As I say, $124 million is guaranteed, and $4 million is direct.

R. Thorpe (Chair): So we're on the hook. British Columbians are on the hook for. . . .

A. van Iersel: We're on the hook for $128 million. Now, there's additional debt on Skeena's financial statements which is not our responsibility. Okay? We are not the only shareholder. There are some pre-debts with the TD Bank. I believe that number, which was in the debt statistics report, is $92 million. So we're not. . . .

R. Thorpe (Chair): What percentage of Skeena do we own now?

A. van Iersel: It's 52 percent, isn't it?

G. Farrell-Collins: That's up for debate, I think.

A. van Iersel: The ownership is in three parts: the TD Bank; ourselves; and then there are some shares set aside in trust, I believe, for two years for the employees.

R. Thorpe (Chair): But we are the controlling shareholder?

A. van Iersel: We are the largest shareholder.

R. Thorpe (Chair): We are the controlling shareholder?

A. van Iersel: Yes, I believe we are.

R. Thorpe (Chair): With respect to the debt management plan, or lack of -- or whatever the correct terminology is these days -- are you confident, through your monitoring programs and the various reports, that we will hit the goal of a total taxpayer-supported debt of $26.183 billion for the period ended March 31, 2000?

L. McFarlane: We feel we may be ahead, but we don't expect to do worse.

R. Thorpe (Chair): What is your opinion, then, on the $8.538 billion of total self-supporting debt? Do we have the monitoring programs in place? How confident do you feel that we're going to achieve that target?

L. McFarlane: The same answer. We're confident that we'll meet that.

[ Page 1110 ]

L. McFarlane: I wouldn't have missed it.

R. Thorpe (Chair): Just so other committee members and witnesses know, we still have a few items to go. I would suggest that we will be meeting until 4 o'clock today, unless that causes serious problems for anyone. I think, for the committee, we should commit to that, because we've got a number of witnesses that have made commitments to be here. I think it would be the best use of their time. Is that a problem for anybody? We need seven for a quorum.

E. Gillespie (Deputy Chair): It appears that it is a problem. What I suggest is that we work quickly and complete our work by 3 o'clock or as close to 3 o'clock as possible.

R. Thorpe (Chair): Well, yes, we will work as quickly as possible, but we do have quite a few people here. You can't make it?

A Voice: I think we all have commitments after three.

R. Thorpe (Chair): We have the auditor general. George, do you have to make a report on the debt?

G. Morfitt: Oh, no. At this point in time, it would be my suggestion that we skip that completely. I think we've canvassed the matter very well -- unless the committee wanted it. I just assumed that we would not.

R. Thorpe (Chair): I think that, thanks to Mr. Foster, we've had enough accounting jargon for this afternoon. We'll give ourselves two minutes just while we change witnesses here. Thank you very much. I appreciate you coming.

The committee recessed from 2:03 p.m. to 2:07 p.m.

[R. Thorpe in the chair.]

R. Thorpe (Chair): Okay, if we could ask all of the presenters to focus in on what they believe to be the key issues. If we can focus in on those, I think that would be beneficial to all concerned. I guess we'll kick it off with the auditor general's staff, please.

G. Morfitt: This material we are now going to be dealing with is in the report entitled "1999 Follow-up of Performance Audits/Reviews." This is report No. 1 of the 1999-2000 fiscal year series from my office. There were six follow-ups in this report. We're going to be dealing with only three today, because we feel there's no need to readdress the other three, time having passed. Also, we're going to deal with the Ferry Corporation matters at a different meeting. So we're going to start off today with the follow-up on the trucking safety matter that we reviewed in 1996. At the table, from my office, is Errol Price, senior principal in my office. Many, if not all of you, have met Mr. Price before. I'll turn it over to Errol, and we'll just proceed.

E. Price: I've been warned to be quick, so here we go. What I want to do first of all is to give you just a little bit of history to set this into context. As you probably recall, trucking safety is a topic that has come up before the committee on a number of occasions.

In December '96 we reported the results of our original audit, which was of the motor vehicle branch. At that time, it was an agency of the Ministry of Transportation and Highways; now, of course, it has become part of the Insurance Corporation of British Columbia. Then in December '97 we initiated the first follow-up to this audit. At that time, we found that only four of the 23 initial recommendations arising from the audit had been fully implemented. The results of this follow-up were included in our June '98 follow-up report. Then in December '98 we initiated a second follow-up, and the results of this follow-up were reported in the 1999 follow-up publication that we're looking at today. This report showed the status of the 19 recommendations that had not been fully implemented at the time of our initial follow-up.

Then in February 1999 this committee met with representatives from ICBC to receive a further update on the progress the corporation had made in dealing with the recommendations. As a result of this meeting, the committee not only encouraged the corporation to ensure timely implementation of the auditor general's recommendations but also made three additional recommendations and requested that the corporation provide an update before the end of October.

Now, I want to take just a quick minute or so to remind you of the purpose and the results of the original audit. The audit purpose was twofold. First, we assessed the extent to which the branch's three trucking safety enforcement programs -- that is, the fixed weigh scales, portable weigh scales and carrier safety audits -- had been designed and implemented in a manner to achieve trucking safety in a cost-effective way. The second purpose of the audit was to assess the extent to which the branch had examined whether its three enforcement programs were the most effective alternatives in achieving trucking safety.

[1410]

What I'm going to do now is quickly go through the recommendations that are outstanding, and then we'll hear from the ICBC representatives as to the current status. With respect to measuring and evaluating program results, we had recommended that the branch define trucking safety,

[ Page 1111 ]

What we've got in this presentation and in those that follow is a little visual aid that uses traffic lights to show the extent to which the recommendations have been implemented. Green on the traffic light represents fully implemented, yellow is partially implemented, and red is not implemented. The corporation indicated that both of these recommendations have been partially implemented.

Regarding establishing trucking safety standards, we had recommended that the branch clearly communicate the relative emphasis that inspectors should place on educating the trucking industry about its responsibilities for safety versus strict enforcement of the regulations, develop clear guidelines as to when and how specific National Safety Code sanctions relating to carriers with poor safety records are to be applied, and institute a centralized monitoring function to ensure uniformity and consistency in the application of safety standards. The first recommendation had been partially implemented. The corporation did not accept the second recommendation and had not begun implementation, but some alternative work was in progress. The third recommendation had been partially implemented.

With respect to staff training, we had recommended that the branch review its curriculum to ensure that it reflected current and future position requirements. This recommendation has, we believe, been addressed.

Regarding removing unsafe trucks and drivers from the road, there were eight recommendations outstanding. First, we had recommended that the branch should identify the trucking universe it has responsibility to regulate, in order to determine an optimal level of resources to achieve the desired level of trucking safety, and as an operational level to maximize its use of current resources. This recommendation had been fully implemented.

Our second recommendation regarding unsafe trucks and drivers was that the branch should develop a comprehensive human resource plan to determine the number, type and location of staff needed in the future to provide services and ensure that existing and new staff have the knowledge, skills and abilities to meet the corporation's expectations. This recommendation had been partially implemented.

We had also recommended that the branch undertake a comprehensive review of previous facilities studies and implement relevant and cost-effective recommendations; find ways to monitor key border entry points, such as by constructing fixed facilities or introducing regular random deployment or portable weigh scales to increase the probability of intercepting a larger number of unsafe trucks and drivers; and find ways to operate key fixed weigh scales on a 24-hour, seven-day-a-week basis -- or, barring this, have regular random openings of key scales during off hours to increase the probability of intercepting a larger number of unsafe trucks and drivers. The first recommendation had been fully implemented; the last two recommendations have been partially implemented.

[1415]

Regarding looking for better ways to achieve trucking safety, there were five recommendations outstanding. The first three, covered on this screen, indicated that the branch should identify the most significant factors affecting trucking safety, with a view to ensuring its enforcement resources are deployed in the most effective manner; should make fixed and portable weigh scale personnel aware of the probability of detecting additional safety violations, through innovative targeting of worksites and truckers who are not wearing seatbelts or who are operating overweight vehicles; and should determine the feasibility of third-party audits as a means to increase coverage of the trucking industry. The first two recommendations had been fully implemented. The last recommendation was not accepted by the corporation and had not been implemented.

The last two recommendations for looking for better ways to achieve trucking safety call for the branch to consider how best to shift the focus of enforcement to moving violations -- it was further recommended that serious attention be paid to the U.S. model, in which this function and responsibility resides with law enforcement and police agencies -- and conduct a cost-benefit analysis of various brake-testing and weigh-in-motion technologies as a means to screen commercial vehicles at selected sites throughout the province. The first recommendation was not accepted by the corporation and had not been implemented; the last recommendation was fully implemented.

Now, the following four slides describe the additional recommendations made by this committee when it met to look at this subject back in February of this year. I'll refer to them by the numbers given to them in the Public Accounts Committee's follow-up report. So recommendation 11 of that report is a call for the corporation's motor vehicle branch to "implement the Partners in Compliance program in British Columbia as soon as possible, in order to improve the relationship. . .between the branch and the trucking community."

Recommendation 12 recommended that the corporation's motor vehicle branch "expand the hours of operation of portable weigh scales in order to increase the probability of intercepting a larger number of unsafe trucks and drivers."

Recommendation 13 recommended that the corporation's motor vehicle branch "consider whether information in National Safety Code profiles may be utilized to determine whether licensing and insurance can be obtained by commercial carriers in British Columbia."

[ Page 1112 ]

That was as fast as I could go.

R. Thorpe (Chair): Thank you very much. Does anyone have any questions of the auditor general's department? If not, we'll move to Mr. Stewart.

K. Stewart: Let me also introduce to you Paul Beardmore, whom I have with me. We thought that for the purposes of our discussion today we would undertake to update the committee in terms of those recommendations that were identified when we met with you last in February as being in progress and then specifically deal with each of the recommendations that was put forward by the committee. If that's acceptable, I'll continue on. I would like to add that in addition to the time frame that was given by the auditor general's department, I would point out that these programs transferred to the corporation with the motor vehicle branch in December of 1997.

There are a number of recommendations that I'd like to speak to, and perhaps I can do that in the sense of talking about the efforts associated with developing measures and measurement criteria for these programs. We are cognizant of the fact that we don't want to report these recommendations as being complete until they are fully implemented. So we still consider the issues of defining safety standards and measures and setting targets as in progress, because while we have set those in the organization, we have not yet completely implemented the processes for measuring those.

We have undertaken work in this regard. Examples would be that we have established what we consider to be base measures for the safety of commercial vehicles operating in British Columbia and used that as a baseline, then, to measure against the progress of these initiatives -- to ask: are they in fact improving or detracting from public safety and truck safety in the province?

[1420]

Another area that has been under some discussion with the auditor general and came up, as well, in terms of your recommendations was the relationship between the corporation and the trucking industry. To test that, what we undertook to do during the June time frame was conduct a number of in-person interviews with people who were participating in an international road check, where they were being stopped at the roadside and having their vehicles inspected. We asked them what they thought of the services that they were receiving from us. The nature of this questionnaire was, "What does excellent service in this industry look like to you," and then they described that. Then the question was: "How well do we meet that mark?"

I see some people smiling. . . .

G. Farrell-Collins: I was wondering if it was before or after the inspection that you were asking those questions.

K. Stewart: It was actually after and during. Just to give you an example, we interviewed 282 people who had been stopped at the roadside. We asked people how they felt they had been dealt with, and 78 percent of those who were inspected and 71 percent of those who were required to park and produce documentation felt that the outcome of that business transaction was a reasonable outcome. A number of those people would have received fines or warnings as a result of having been stopped. And 96 percent of the people who were inspected and 86 percent who were required to show documentation felt that they were treated in a fair manner. The message that they gave back to us was that they felt that the laws in British Columbia and the way in which the laws were being enforced were valid and accurate. What came across strongly to us was that they expect the people who are employed in this capacity to deal with them in a professional and fair manner. And that's been part of the messaging that we are sending back to our organization and which I'll speak to a little bit further later.

In terms of acting on recommendations from coroners' inquiries, associated with the auditor general's report were a number of outstanding coroner recommendations which we continue to work on. But in this specific instance, it was a recommendation that a process be set up within the organization to receive, act upon and report on the status of coroner recommendations. That has been implemented inside the corporation.

With respect to the recommendation of having inspectors focus on safety, the Insurance Corporation, in conjunction with the Justice Institute, undertook a fairly comprehensive task: to develop a curriculum training program for our inspectors. In addition to developing that, we reviewed it with the Attorney General's department, police services, because in our line of business we receive our authority to perform these inspection functions from the Attorney General, and the Attorney General is held accountable by the public to make sure that enforcement officials are adequately trained and are conducting themselves in a fashion that we would expect.

We currently have 48 staff who are new to the corporation undertaking that training. The training is one year in duration. It's not suggested they actually sit and train for a period of time, but we have it modularized such that they are working in the organization and are effective the first day. But the Attorney General requested of us that we ensure that those individuals don't work independently until the training program has been completed, and that's underway. We will have those people fully trained in the May to June time frame of this year.

[ Page 1113 ]

[1425]

I would speak to the fact that the corporation undertook in 1998-99 to develop a five-year plan for our weigh scale program, and we will be implementing that over the next number of years. Part of that was to examine all of the weigh scales that we have across the province for their effectiveness towards the program objective. What we found was that many of the weigh scales in the province weren't really contributing to the program in the way that we would have expected them to. Most significantly, they were impacted by changes in traffic patterns; the scale was put in place 30 years ago when the traffic patterns were different than they are today. Another serious area for us was urban encroachment, where we had weigh scales that had been on the outskirts of a town, the town had grown and now enveloped the weigh scale, and there was opportunity for people to avoid it, should they choose to do so.

As a result of that, we're undertaking a number of initiatives. That is, we've identified a number of weigh scales in the province for closure. Examples of that would be, if you are aware. . . . We closed the Pouce Coupe weigh scale that operated just outside of Dawson Creek, and we took the resources that were at that weigh scale and reallocated them to longer hours of service at the Dawson Creek weigh scale. Then we also took some of the resources and allocated them to the expanded operation of portable weigh scales in that environment. So in the Dawson Creek area we've expanded the fixed weigh scale, but we are now running a portable weigh scale ten hours a day, seven days a week. We haven't likely met some of the recommendations with respect to the variability of those, and I'll speak to that in just a minute.

With regard to the recommendation about monitoring key border entry points, we have had. . . . Virtually all of the entry points into the province of British Columbia are monitored by weigh scales. The one exception to that would be the Osoyoos area, where there is a border crossing and no nearby weigh scale. A number of years ago the Ministry of Transportation and Highways had made modifications to the intersection of Highway 3 and Highway 97 to improve traffic flow, but they also allowed for a facility, for the construction of a weigh scale. That site awaits only the construction of a building and the placement of a physical weigh scale deck itself.

When we took the program over, we initiated discussions with the town of Osoyoos to begin construction of a building. There was some reluctance on behalf of some of the populace of Osoyoos to accept a weigh scale there, so we undertook a consultation process with the people of Osoyoos whereby we have just, within the last little while, received a unanimous endorsement from the city council that we should proceed with that. We're in the design stages of it and expect construction to begin in the year 2000.

I would say that those elements of the people in Osoyoos that oppose the weigh scale continue to do so. We're now going through a discussion with the ombudsman's office with regard to the consultation process, but I'm confident that we will have a weigh scale there.

In conjunction with operating the recommendation around key border entry points and fixed weigh scales operating around the clock, we have, in addition, expanded hours of operation for two of our weigh scales and will do so for more as our trained staff come on board. To operate a weigh scale seven days a week with our current staffing and with our projected staffing requires us to have some people working alone, so they would man the weigh scale by themselves. Our planning assumptions that we made in this regard were that we would have the appointment of our enforcement staff, based on historical precedent, being done the day that they assume the role. As I had mentioned previously, the Attorney General felt some discomfort with having these people perform this role before they were fully trained. Therefore, that defers our plans for seven-by-24 operation for some of our scales until the May time frame.

We're currently operating three weigh scales seven days a week, 24 hours a day, that did not previously operate as such. Those are the Pacific weigh scale at the Douglas border crossing, encountering traffic that's coming up from and departing for the U.S.; the Golden weigh scale, which captures traffic that is coming from and going to Alberta; and also the Kamloops eastbound weigh scale, which is operating seven days a week, 24 hours a day, capturing all traffic that goes by it.

[1430]

We are expanding hours of our weigh scale operations, and we have undertaken work to allow us to introduce a degree of flexibility that's beyond what exists today -- and that has been to put in place new equipment to allow people to operate as such. We've also undertaken the development, in conjunction with the Workers Compensa-

[ Page 1114 ]

For example, in the last six weeks we've had two incidents where our inspectors have either been injured or assaulted. We had one gentleman who was sitting at the roadside in an emergency vehicle, with all of its lights flashing, in the Fort St. John area. We believe that because of the angle of the sun, an individual drove off the road and collided into the rear of the vehicle without ever having seen it. We've had that situation, and we've just recently had an instance where a bus driver and a commercial transport inspector got into a physical fight. The bus driver assaulted the transport inspector. Those incidents do happen. We just have to make certain, as we have people out operating in isolated areas, that we are dealing with the workplace safety issues.

I thought I might just speak about the Partners in Compliance program, which we spoke about previously and which Mr. Kasper raised with us in terms of the implementation strategies for that. We had been working on that through our commercial vehicle safety task force initiative that came from government to us. When we discussed the issue of the various recommendations we had before us under this umbrella, the stakeholders -- who were the people who had primarily participated in the original study -- assessed a low priority to the Partners in Compliance program.

However, as an organization, we feel that while it may not contribute significantly to increased safety, it's important to recognize those carriers in the province who are performing well and adhering to safety standards. As such, we've established a group within the organization that's meeting with stakeholders -- beginning today, actually, and completing by December 1 -- to discuss with them the implementation not just of a Partners in Compliance program, which. . . . The program derives its name from a program in Alberta, where carriers that represent safe carriers are provided the ability to forgo certain regulatory requirements, and they bypass weigh scales.

We feel that as an insurance company and as a regulator, we can offer more to them than that. So we're meeting with them, as I suggested, over the next month. We'll be undertaking to initiate our Partners in Compliance program based on their input, with a project team starting to implement in December 1999. I'm unable to tell you here today exactly in what time frame elements of that program would be up and running, but I would expect that it wouldn't be too far into the year 2000 before some of those elements were in place.

[1435]

With respect to portable weigh scales, I think I've spoken to this somewhat, but just to reiterate: we have established a phased approach to redirecting staff from fixed to portable scales. An example would be the Pouce Coupe scale, which has been closed, and portions of that resource have been allocated to expansion of portable services in that area. We've also done the same with a scale that would have been defined as being Midway, which is in the southern interior part of the province. We've converted that from a fixed scale to a portable weigh scale.

In those instances where we are closing fixed scales, I should mention that it's our objective, where at all possible, to allow the scale to continue to operate but to provide it as a service to industry, where they could self-weigh. They could weigh themselves and determine whether or not their axle weights are legal, prior to encountering enforcement personnel. We seek to make it simpler for the industry to understand whether or not they are in fact compliant with the weight standards that exist in British Columbia. We'll be converting more of our fixed scales over to portable operations in the year 2000, so we'll see progress in that area. Again, I wouldn't suggest to you that this would be complete within the next couple of years. It will be a phased implementation of this expansion of portable services.

One of the other questions you asked us was whether or not the National Safety Code profile could be used for licensing and insurance purposes. Just to refresh your memory as to exactly what the National Safety Code program is, the best way I could describe it to you is that it would be analogous to the driver penalty point system that we have in British Columbia for drivers. If a carrier is found to receive roadside infractions, we assign points to that. Once they've reached certain point thresholds, it indicates to us that this carrier is having difficulty complying with B.C. safety standards. That could generate a number of different actions, most of them directed at trying to assist the carrier to become compliant. If that is impossible or they are unwilling to do that, we ultimately have, through a quasi-judicial hearing, the ability to remove their National Safety Code certification, which is a requirement for being in business in British Columbia. However, at this point in time we are unable, under existing legislation, to tie National Safety Code profiles to licensing and insurance services.

One should recognize, as well, that we don't offer insurance services. We're not the only insurer in business. Many of our fleets that operate in British Columbia might be insured elsewhere. So if we were to refuse insurance services on the basis of a National Safety Code profile, what we would be undertaking to do is identify those who are only our customers, and not the customers of others.

However, what I would say is that the entire National Safety Code rating and audit processes are currently under discussion by B.C. and other Canadian jurisdictions. This is a somewhat contentious issue for us and other jurisdictions, because other provinces are implementing rating systems that may differ from ours, such that what constitutes a

[ Page 1115 ]

However, we are moving forward in British Columbia with continuing to define our National Safety Code program. We've made some significant changes to it in the not-too-distant past to very much improve what we think is the application process, to ensure that people understand what their requirements are for conforming to safety standards and doing that through the application process.

I would say to you, though, that we certainly expect to use the National Safety Code profile as one of the criteria for determining who should participate in the carrier recognition or the Partners in Compliance program that I've previously spoken to. We think that would be a very worthwhile endeavour in that regard.

[1440]

R. Thorpe (Chair): Thank you very much, Mr. Stewart.

If we could go to our resident expert. . . .

R. Kasper: I'm not an expert.

R. Thorpe (Chair): Well, who said we were going to you? [Laughter.]

Yes, Mr. Kasper?

R. Kasper: I've got a couple of questions here. Excuse me for my voice. When ICBC says that we cannot use the National Safety Code profiles and that's due to legislation, does ICBC look at that profile in determining one's insurance rate?

K. Stewart: Today the answer is no. The insurance system today is based not on your potential for causing a crash but, in fact, on your crash-history rate. So your insurance rates are determined by your loss experience.

R. Kasper: Okay. Now, when this matter comes to some conclusion. . . . I gather that there is going to be recognition of the use of that code -- right? -- as far as the profiles are concerned.

K. Stewart: Quite right. We use it in a number of fashions today.

R. Kasper: Would we see the reduction of insurance rates for truckers -- this would tie in with the variation of the Partners in Compliance program -- as further incentives?

K. Stewart: That's certainly one of the things that we think we can offer as an insurant and regulator -- to say that not only do we think that we perhaps, for these best carriers, might provide additional insurance products, if they would ask that of us, but that for that segment, insurance rates could be reduced for a specific fleet. We would also look to perhaps provide, to those people who were the best carriers, enhanced claims services, as they were people who would not normally have to participate in our claim services. So we might look at enhanced claim services as another benefit for the best carriers.

R. Kasper: What about the people who aren't the carriers but -- I've lost the term now -- the shippers, the companies that do shipping.

P. Beardmore: Shippers is the correct term.

R. Kasper: Is there any contemplation to embrace that group in part of this compliance and safety issue? I don't mean to pick on this area, but let's say a gravel pit. If you're going to get your product loaded on a truck and if they don't have proper scales at their location and it's all by eye and volume as opposed to weight, is there any way to embrace the shipping aspect of it? I know that has been a complaint by people in the trucking industry. They're in the business of moving product, and at the same time, they rely on the good judgment, honesty and integrity of the shipper that it is in fact this weight that they're hauling. In some cases, it's been shown that they aren't really hauling what they're supposedly hauling. Is there any way to embrace penalties or incentives for that group?

K. Stewart: We're certainly looking at the legalities and the ability to assess penalties to those who would purposely overload vehicles. As you suggest, this tends to be the gravel industry. We also see it as fairly prevalent in the logging industry, where people who are on contract for hauling wood from the forest sometimes feel that the people who are hiring them to move the product purposely overload them. The feeling is: "If I don't haul it, somebody else will." That's probably true, particularly in the downturn forest sector we see today.

[1445]

What we have been doing, Mr. Kasper, is that when we have become aware of those situations, we have met with the shipping representatives and the trucking industry to act as almost a mediator with them to say: "You've got a

[ Page 1116 ]

R. Kasper: Okay. Now in these areas where you've said these are measurements and evaluations of program results, and then you said that you don't really want to say that you've completed your task because you want to be able to monitor and measure the results, how long is it going to take to sort of measure the results? And is it being measured to determine that you've taken the proper course of action? Is that your rationale?

K. Stewart: It is indeed. What we want to make certain. . . . Some of the criteria that we have in terms of our measurement are things like crash reductions, reductions in the number of fatalities and injuries associated with commercial vehicles, and then there are also measurements associated with customer service, for example. We look at the crash statistics and view them and say: "Are the programs we are implementing having any impact on those objectives?" It's difficult to associate a real cause-and-effect relationship between something you've done and what's happening on the roadside. Part of that is putting in place what we think to be the appropriate measures, and we expect to have many of them in place in the year 2000.

R. Kasper: So people like myself or the public will get a view that there is something happening -- right? -- you know, in a public way. Then you'll have some statistical analysis to back that up.

K. Stewart: Quite right. We have some of that already today in terms of the number of crashes that involve commercial vehicles, but there are other things as well, such as the number of vehicles that are found to have safety defects when we encounter them on the road. We've seen a gradual reduction in that from the 20 percent that was found a couple of years ago. But I would say it's difficult to make huge change swings in that, so those are other things that we're monitoring as well.

R. Kasper: I don't mean to be a smart ass, but did you do the same monitoring -- when you put "complete" by acting on recommendations of coroners' inquiries -- to find out if those items were in fact the proper course of action? Were they monitored, and was the action that was suggested by the coroner the proper course of action? Because they may not be right.

K. Stewart: Yeah.

R. Kasper: Did you or didn't you or. . . ?

P. Beardmore: The recommendation -- if I'm correct in my recollection -- was not in fact down to specific coroners' recommendations. It actually related to. . .

R. Kasper: A process?

P. Beardmore: . . .a process in place to respond to coroners' recommendations.

R. Kasper: Okay. All right. I'm assuming you've got a monitoring. . . .

P. Beardmore: We would certainly apply the same sort of tests that Keith has spoken of to any of those recommendations, and hence that's why we've actually not accepted some of them.

R. Kasper: Well, the only thing I can say is that we've made some progress. But I just wonder: at what time during the year 2000 will we see a lot of this stuff signed, sealed and delivered -- right out there, in the public's face? You know, I can see where you want to have a rollout -- right? You want to have a program; you're going to have a rollout -- cameras, action, lots of publicity. But I just want to make sure that it's going to happen, hopefully, during my tenure in office. That's all.

So I note there is progress, and I'm sure you have sensed the committee's frustration -- right? Otherwise we wouldn't have kept making more and more recommendations to you. Thank you.

R. Thorpe (Chair): I have a couple of questions. What recommendations are you really having problems and difficulties implementing and are going to take you longer than you originally thought?

K. Stewart: I wouldn't suggest that we're having great difficulty with any of them. The issue of putting measurement processes in place for these program areas is a somewhat challenging undertaking. I think that when the auditor general made recommendations associated with implementing some of these areas -- such as operating certain weigh scales, etc. -- the complexity of the task may not have been well understood, and so no time frame was given.

[1450]

R. Thorpe (Chair): Yes, just following up on that, if I could, before I turn it over to my colleague, Ms. Gillespie. . . . Then, with respect to all of the recommendations for which you have status and progress, could you supply just a written report back to this committee, through the Clerk's office, of what a target date is for having those in-progresses completed?

K. Stewart: Yes.

R. Thorpe (Chair): There's no need, at this point in time -- unless committee members want you -- to come back. But if you could supply that to us, that would be helpful.

E. Gillespie (Deputy Chair): I had a question and was reminded when you talked about the $20 million. Have

[ Page 1117 ]

K. Stewart: I can say that as part of our strategic plan that we prepared for this part of our business, our estimate is that this program contributes something in the area of $26 million net benefit to the province. That's after the cost of running the program and after the cost that's borne by industry, in terms of dealing with it through fines and their time. The primary area in which those benefits derive to the province is through reductions in road rehabilitation. The commercial vehicles that are not operating within their defined weight limits cause much more road damage than a passenger vehicle would. It's an exponential relationship.

We also undertook to try and predict what the current pattern of. . . . We made some predictions that said: "Based on what we see today, if people were not to inspect vehicles, then we would expect to find that a certain number of them will crash, that the average cost of a commercial-vehicle crash is X dollars and that you're six times more likely to be killed in a crash involving a commercial vehicle than an automobile." So we used that as the criterion for defining the benefits of the program to the province.

We do believe that there are benefits to it, and we believe that the benefit of weighing vehicles is associated with road rehabilitation and of inspecting vehicles is road safety for those people who are driving on the road and who are sharing the road with these vehicles.

R. Thorpe (Chair): Anyone else have any other questions?

E. Walsh: I just want to say that I was on that committee when it went around, and I'm pleased to see the movement that's been made in implementing some of the recommendations. I do agree with one of the conclusions that the auditor in fact made, and that was the increase in the severity of accidents. The size of the motors in those trucks today is unfathomable, I think, for many people. And I think, thereby, that when they are in an accident -- for whatever reason, whether it be noncompliance with one of the safety issues or infractions -- that exacerbates the accident. So I would really. . . . One of them could be load weight.

A Voice: Physics.

E. Walsh: Exactly. And type of load.

Living in an area where we see a lot of truck traffic go through both the Alberta border and the U.S. border, I know that many suggestions have in fact come forward from the trucking community on. . . . Rather than having fixed weigh scales to have portable weigh. . . . It's really easy to find a back or a side road to skirt the weigh scale and find a way around. I'm looking forward, with great interest, to what other recommendations will be implemented. I think that many of these are in fact very beneficial to people that travel within the regions.

[1455]

R. Thorpe (Chair): Are there any other questions? If not, Keith, to you and Paul and Errol, thank you very much for bringing the committee up to date on your progress. We wish you well in completing your tasks.

To the committee members, we have one other group that's still here. Is it the wish of the committee that we stay until 3:30? These folks have stayed here; we've sent one other group off. It should take us half an hour. You're happy; we'll stay. We need three people over here.

E. Walsh: I'll make a phone call, and I'll have them hold for half an hour.

R. Thorpe (Chair): Thank you very much.

E. Walsh: I'll be two minutes.

R. Thorpe (Chair): Okay. If the next group could come forward. . . . Thank you.

We start at 12 noon tomorrow -- from 12 noon until four tomorrow.

I'm sure the auditor general's staff will follow the practice that Errol put in place -- to be concise and to the point. Thank you very much.

L. McAdams: I promise to be the soul of brevity.

R. Thorpe (Chair): We're striving for best practices today.

L. McAdams: Do we start?

R. Thorpe (Chair): Yes, please start.

L. McAdams: We're going to deal with the issue of executive severance packages.

G. Morfitt: Yes. And Les, why don't you just introduce yourself and carry right through.

L. McAdams: My name is Les McAdams. I'm a senior principal with the office of the auditor general.

In April 1997 we reported the results of our review to determine the extent of severance costs resulting from the termination of senior executives within government -- within ministries and within Crown corporations. In December '98 we asked both the Public Service Employee Relations Commission, or PSERC, and the secretariat of the Public Sector Employers Council, or PSEC, to provide us with a report on their progress in implementing the recommendations arising from our review.

[ Page 1118 ]

At the time, we concluded that most severance settlements within ministries and Crown corporations had been reasonable. However, we found that one in four pay-outs made by Crown corporations during the period we reviewed was excessive. I should note here that the majority of these payments were in WCB, and there was one in B.C. Transit.

[1500]

We reported that during the six-year period from January 1990 to November '95, ministries and Crown corporations paid approximately $13.7 million to 87 senior executives as compensation in lieu of notice. Within ministries the average severance package for 43 terminated senior executives was $133,250, representing an average of 15 months of equivalent gross salary and benefits. Within Crown corporations the average severance package for 44 terminated senior executives was $180,258. That comes out to an average of 16.3 months of equivalent salary and benefits.

For the ministries, we recommended that where working notice is not a practical severance option, PSERC's severance policy should identify alternative strategies. For senior executives at the deputy and associate deputy minister levels, government should consider strengthening measures to control double-dipping. As indicated by the green lights, both of these recommendations have been fully implemented. We also recommended that ministries provide terminated employees the option to receive either discounted lump sum payments or full salary continuance and that PSERC computerize all its employee severance information as soon as possible. Again, both of these recommendations have been fully implemented.

Moving to the Crown corporation recommendations, we recommended that for Crown corporations, the Public Sector Employers Council quickly approve the Crown Corporation Employers Association guidelines and require early submission of individual Crown corporation proposals. Both of these recommendations have been partially implemented. Legislation was enacted in July '97 providing for employment termination standards to be set by regulation, and these actually superseded the guidelines which had been approved. There has been some delay in submitting and implementing compensation plans because of fiscal pressures.

We also recommended that employment contracts should contain severance provisions that reflect common-law standards, to ensure that severance settlements are not too large. This recommendation has been partially implemented. The new employment termination standards reflect common-law standards, but these standards don't apply to contracts which were signed before May 1, 1997. This concern will obviously diminish with time.

We recommended that where severance arrangements are not covered under a collective agreement, Crown corporations should report annually to the Legislative Assembly about the number of severance arrangements negotiated in the previous year and the range of equivalent months' gross salaries that these arrangements represented. Both of these recommendations have been partially implemented. PSEC is gathering data on compensation and severance arrangements, but it doesn't appear to plan to report on behalf of the Crowns to the assembly except on request.

Lastly, we recommended that for Crown corporations, severance arrangements exceeding sector guidelines should require approval by the Public Sector Employers Council before finalization, and this recommendation has been fully implemented. PSEC reported to us that no such settlements happened up to the date of our follow-up.

That's a quick résumé of the follow-up on severance packages.

R. Thorpe (Chair): Gentlemen, are you going to make a presentation to us?

W. Scale: I wasn't planning to make a presentation. I'm Wayne Scale from PSERC. We've implemented the recommendations that the auditor general made, and I'm here to answer questions, basically.

G. Farrell-Collins: In the last point -- or second-last point -- that was made, I think the statement was made that the information around existing severance arrangements as they exist in current contracts is being collected -- that data is being collected -- but that there was no intent to report that to the Legislature unless requested.

L. McAdams: That is the information we have received from PSEC. Perhaps they could comment on it.

N. Macphee: Yes, I have just passed around a briefing book with some speaking notes. It contains the bill in that, to review this issue further.

The original plan when this Bill 20 passed, with the employment termination standards, was for the council to collect the information and then to release it publicly in aggregate form to suggest what the expense of severances was out in the Crown sector and, indeed, all the other

[ Page 1119 ]

[1505]

N. Macphee: No, the instructions from our council are to release the information once it's gathered and finalized and analyzed.

G. Farrell-Collins: What time frame do you think that will be?

N. Macphee: If you could just open up your booklet, I've listed here in response to each one of the recommendations. . . . I believe it's on the third page. This will give you an update on the current status of the severance collection information. If you look down at the bottom under the Crowns, 15 of 17 have reported. There are some clarification issues that we're going back to the Crowns on, just to make sure that there is no misunderstanding in what we think the data is and what they think they've submitted.

There are two others that are being finalized. One of the Crowns is going to be going through a number of terminations, and we're just waiting for that to be complete. That should be in a matter of a few weeks. Then we'll take that recent data, so we've got an up-to-date snapshot of what's happening out there.

In the K-to-12 sector we have 39 of. . . .

G. Farrell-Collins: Sorry, before you move on, while you're still on the Crowns, I assume that it's the Ferry Corporation, because. . . . Well, you don't have to answer that. I'll make the assumption that it's the Ferry Corporation.

What's the other Crown that hasn't. . . ?

N. Macphee: The two that haven't. . . . One is actually B.C. Rail, and we're just finalizing some material with them. The second one that hasn't reported yet, though they have advised us that the material is being prepared, is the B.C. Transit that's folding over into the municipal authority.

G. Farrell-Collins: Okay, thank you.

N. Macphee: On the K-to-12, we've had 39 of 60 school districts that have responded. For the remaining ones, often it's just a matter of some clarification and incomplete information which has arrived; it's not a matter of non-responses. I think the school districts that haven't responded are 13 of those that are remaining.

In the universities, we have four of six institutions that have responded. There are two remaining. With one there have been no severances, and the other one required an extension to November 15 because they're engaged in bargaining right now and just wanted a little extra time for administrative purposes. In the colleges, originally the Post-Secondary Employers Association was going to do the collection. They decided on November 30 that PSEC should do the collection, and so we have set a target date of November 5 for that information. The Health Employers Association is undertaking a collection in the health sector, and we anticipate a response to that in November. I suspect we'll have a report sometime very early in the new year with some aggregate information to go out.

In regard to the other two sectors, we consider the community social services sector to be very low risk. The compensation levels are not high. They are very few actual written employment contracts. I don't think there are any executive employees in that sector who would even be above $100,000 or even reach the ML9 limit that the auditor general identified as the kind of higher-risk areas. And in the public service, PSERC has taken responsibility for that information.

G. Farrell-Collins: Maybe I'm misunderstanding this, but is this a collection of severances that have occurred or severances that exist within contracts that are in place presently?

N. Macphee: This a collection of severances that have actually occurred.

G. Farrell-Collins: Is there any effort to look at what's outstanding as far as contracts that are in existence and the severance provisions that are in those contracts that may well be a problem. . . ?

[1510]

G. Farrell-Collins: So there are two extremes to this.

N. Macphee: Yes.

G. Farrell-Collins: One is actual, and the other is looming there, lurking.

N. Macphee: Yes.

R. Thorpe (Chair): When will the risk aspect that Mr. Farrell-Collins just talked about be completed?

N. Macphee: We expect it very early in the new year as well.

R. Thorpe (Chair): One of the things that I believe the staff of the auditor general said was that some of this work couldn't be done because of fiscal pressures. Did I understand that correctly? Could you explain that to me?

[ Page 1120 ]

N. Macphee: This is prior to the passage of Bill 20 by the Legislature. PSEC's process for managing executive and exempt compensation in the public sector would be for the Crown Corporations Employers Association to come forward and get approval from the council for kind of an umbrella of compensation principles for the Crown sector. Then, following that, each individual Crown would come forward with an exempt or executive compensation plan for the particular Crown itself.

What has happened is that we've had passage of the Crown Corporations Employers Association general compensation guidelines. But in terms of specific Crowns coming forward, some of them have come forward in draft form with their various proposals, but those compensation plans that are coming forward have less to do with severance and more to do with. . . . They're more a vehicle for dealing with executive compensation issues. That gets into a broader discussion on what the broader comparators are for Crown executives -- whether they should be compared to the owner of the Trump Tower or whether they should be compared, I guess, to the owner of a Mac's Milk franchise. Those are the kinds of discussions that are ongoing, and that process is still under discussion. It's in progress, but it's not moving toward the resolution of this issue, since in many ways it has been superseded by the passage of Bill 20. Those standards have already been established in all exempt executive contracts.

R. Thorpe (Chair): Anybody who wants can answer this question. Why does it appear to take so long for Crown corporations in British Columbia. . . ? In report after report when we deal with Crown corporations, it seems it takes forever to get something done. Why is it taking so long to get this project done with Crown corporations?

N. Macphee: I have no indication that there's any reluctance on their part. It's just a very time-consuming job when you're looking at going after these contracts and asking people to compute out severance information on our behalf. Some of it does get quite technical and quite detailed, and they have to go back through old files. So we are seeing a certain amount of administrative burden, but the responses are coming in.

R. Thorpe (Chair): You expect to have this completed by the end of February next year? Did I understand that?

N. Macphee: I suspect that very early in the new year we should have something to report back.

R. Thorpe (Chair): Do we have any idea how many contracts there are outstanding prior to 1997?

N. Macphee: No, we don't.

R. Thorpe (Chair): Is that part of the survey work you're doing?

N. Macphee: Not really, because when we talk about contracts of employment, there are two issues there. The first is the actual written contracts of employment. There are not a lot in the sector. I think the auditor general's report indicates that there's not a lot of written contracts.

The other part of the survey work which would be huge would be to go back to anybody who's an exempt or, I guess, a non-collective-bargaining employee and have to make a determination as to whether their contract of employment fell under a policy or a letter of appointment and whether there's been any changes. That would become a huge effort. We could engage in it, but it would tend to bog down the more effective things we want to look at, which are: are there actual severances out there that are violating the guidelines? And should we be collecting that money back?

[1515]

N. Macphee: Previous to the bill, there has been no kind of enforcement mechanism against it. This material here will start to show whether we're getting at that issue. The regulation itself says that if a terminated employee in receipt of severance becomes re-employed in the B.C. public sector, they have to return any severance that they're paid for that re-employment period. If they fail to do so, the government can actually reclaim it, because the bill designates or deems it to be a debt to government.

R. Kasper: Just as follow-up from that: does that include pension top-up? You know, if the pension is topped up as part of severance, would they have to pay that back?

N. Macphee: I would suspect it would be unlikely that any kind of pension top-up would be deemed as a severance. If it was given in the form of a severance. . . .

R. Kasper: No, but it's part of a package. You know, it's part of the early retirement package. It's compensation -- right? The severance is a top-up provision.

N. Macphee: As part of an early retirement program?

R. Kasper: No, severance. Then, if they have rights to a pension, part of that severance would include pension top-up. So if somebody was double-dipping and could get a pension out of it, plus the severance, would they have to pay back the severance component that went into the pension?

N. Macphee: Sorry. I'm probably misunderstanding this. Is that if they're also in receipt of a pension and a severance at the same time?

R. Kasper: Yeah. Well, they could be.

N. Macphee: The bill refers to it only as a matter of re-employment. They would have to be receiving income from re-employment in the B.C. . . .

[ Page 1121 ]

N. Macphee: Yes. It was specifically worded to prevent the situation where the person would be. . . . For instance, an employee of a hospital would be terminated, would go in receipt of a severance and then all of a sudden would be back contracting -- whether through a sole proprietorship or a corporation, contracting back to do similar work with the employer.

R. Kasper: Why is WCB so slow in responding?

N. Macphee: Actually, I've taken a very preliminary look at the WCB statistics. We haven't had a chance to make sure that we're comfortable with them. They have responded to our request.

Just a very rough cut on this is that I believe that in the auditor general's report they found out that the months per year of service was at a ratio of 1.6 for the higher income. That's now dropped, in the latest statistics we have for the year and a half since the bill's been in, to somewhere around one month per year of service. So it's back down to a much more reasonable level. But that's a very rough cut at this time.

M. Coell: I'm pleased with what I have heard today. I think this issue is a major credibility issue for politicians and the bureaucracy and where they meet. I'm encouraged by what I hear, and I look forward to seeing the final results.

G. Farrell-Collins: There's been some evolution in legal decisions over the last decade, probably -- but more recently the last five or six years, in particular -- around severances. The courts have started to stake out, through precedent, a range of severance. Are you comfortable that public sector severance fits within that range, given the direction that we can see the courts are going?

N. Macphee: I'm certainly comfortable that the figures I've looked at are within the court range. What we do when we get these statistics in is compare them against the court-ordered judgments, establish the range and make sure that there's at least some sort of precedent for those. If there isn't, then we will pursue other action. The real change in the common law, I think, has come with the case of Wallace v. United Grain Growers Ltd. before the Supreme Court of Canada.

Unfortunately, in that case it was a situation where Wallace really sought damages for the nature of his dismissal. Rather than the court awarding damages, they actually extended the notice period, saying it would be more difficult. When the auditor general's report came out, there was a very clear upper limit of 24 months in severance. But as a result of Wallace, we've seen some B.C. judgment awards where they're now up to 36 months. Now, those really are in situations of disputes over unjust dismissal. We'll have to kind of keep an eye out, I suspect, on just where those things will lead.

[1520]

N. Macphee: Yes, it would be.

R. Thorpe (Chair): Okay, thank you. No other questions? Thank you very much for staying around today. We appreciate it. We should have a motion to adjourn.

G. Farrell-Collins: Are we meeting tomorrow?

R. Thorpe (Chair): We meet tomorrow. We start at 12 noon, and we go to four. We're going to start with the travel presentation first.

The committee adjourned at 3:21 p.m.

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