2000 Legislative Session: 4th Session, 36th Parliament
SELECT STANDING COMMITTEE ON PUBLIC ACCOUNTS
MINUTES AND HANSARD

MINUTES SELECT STANDING COMMITTEE ON PUBLIC ACCOUNTS Tuesday, June 27, 2000 8:30 - 10:00 a.m. Douglas Fir Committee Room Parliament Buildings, Victoria

The following electronic version is for informational purposes only.
The printed version remains the official version.

REPORT OF PROCEEDINGS
(Hansard)

SELECT STANDING COMMITTEE 
ON PUBLIC ACCOUNTS

TUESDAY, JUNE 27, 2000

                                                  * Denotes member present

 

Clerks:

Craig James  Kate Ryan-Lloyd

Committee Staff:

Kelly Dunsdon (Committee Researcher)

[ Page 1547 ]

The committee met at 8:36 a.m.

R. Thorpe (Chair): We'll get started here, and we'll start with the committee discussion on follow-up reports. Do we want to hear something from the auditor general's office on this?

P. Gregory: The office, I think, for follow-up, has been operating in keeping with the arrangements set out by the Public Accounts Committee. We've now provided the committee with a number of follow-up reports, which include representation from management on the status of recommendations and the activity that's taken place on them, as well as a report from our office resulting from our review of those representations.

After meeting with the Chair and Deputy Chair -- I think the Deputy Chair has been consulted -- we've now put a summary on the front of it, which tries to identify how many recommendations were in our report, how many were in the Public Accounts Committee reports and what items remain outstanding.

I have with me this morning Morris Sydor, who is coordinating our office efforts around this. I think the committee was going to consider the reports listed on the agenda today and determine whether it felt progress was satisfactory or whether it would like to call witnesses in relation to these reports.

R. Thorpe (Chair): Thank you, Peter. Arn, did you have anything to say on the follow-ups at this time?

A. van Iersel: No, thank you, Chair. I don't have anything myself.

R. Thorpe (Chair): Okay. So we'll just run through this. Does anyone have any questions at all with respect to the follow-up and the way they're on the agenda? We'll start with the Vancouver Island Highway Project. Does anyone have any questions on that follow-up report?

E. Gillespie (Deputy Chair): Where would I find that in my package?

R. Thorpe (Chair): Where would you find that in your package?

E. Gillespie (Deputy Chair): Loss reporting, Transportation and Highways, no dealer-add social service tax.

R. Thorpe (Chair): Kelly, this has been circulated to everyone -- right?

E. Gillespie (Deputy Chair): Okay, then maybe it's here.

R. Kasper: This morning.

R. Thorpe (Chair): Pardon me?

P. Calendino: This morning, Rick.

R. Thorpe (Chair): When was it circulated, Kelly?

K. Dunsdon: Done last week.

R. Thorpe (Chair): We seem to have a mail breakdown; that's "mail." Perhaps while people are looking through their paper, I just have one question. Somehow I got mine, but I seem to be the only one who has a copy. Do you have one, Jack? Jack has his. Okay.

Under the alternative action, could someone provide some details on that?

E. Dolhai: This is Endre Dolhai; I am a senior principal with the office. There are a couple of alternate actions in both the Crown corporations governance one and this one. That basically is a recommendation the committee has made that the various parties appear in front of the committee by October 1999, and that didn't happen. I guess subsequent action is proceeding with the follow-ups and what's happening now; that's how we have dealt with that.

[0840]

R. Thorpe (Chair): Thank you. Do people have the Crown corporations governance follow-up report? It's because while they're getting copies of the Vancouver. . . . There seems to be a real hit-or-miss here on who has reports and who doesn't have reports.

Perhaps to assist members, Endre, if you or Morris have the follow-up on the Vancouver Island Project, maybe you could give a quick overview on it and talk to it, and we'll deal with questions that way.

E. Dolhai: Okay, I'm looking at the summary sheet, which indicates the summary of the status of recommendations. The total number of recommendations that our office had was four, and the Public Accounts Committee had three. Out of those, our four and the Public Accounts Committee's three recommendations, two were implemented, and they do not require any follow-up. There are two that remain partially implemented. The alternative action I already talked about.

Following this summary sheet we have a sheet entitled "Recommendations and Their Status," and it gives further details about the recommendations that are not fully implemented. Both of those recommendations that are not fully implemented are broad recommendations that will take some years to fully implement. We listed the recommendations there, and we listed the ministry's comment -- or overall comment; there is a lot more detail behind these overall comments -- and their response. Basically what it says is that the ministry has a number of initiatives that are ongoing to implement these recommendations.

R. Thorpe (Chair): Thank you, Endre. Based on what your office has received and heard from this reporting ministry with respect to these issues, do you believe and is it your sense that we are making progress as per the recommendations of both the auditor general and the Public Accounts Committee?

E. Dolhai: Oh definitely. Progress is being made, and they are heading in the right direction.

R. Thorpe (Chair): And you will continue to monitor these in our semi-annual follow-up procedures. Is that correct?

[ Page 1548 ]

E. Dolhai: Well, if that is the wish of the committee, maybe. I don't know whether it would warrant a six-month basis, because it's going to take them some time to implement, probably maybe a year from now or. . . . But we'll be happy to monitor in whichever way the committee would like us to do it.

R. Thorpe (Chair): Unless I'm off base, I think it was the wish of the committee that there be an ongoing six-month review -- March and October of each year -- just so that, whoever the committee members are, they can be kept aware. As things get completed, they will go off the slate.

P. Gregory: I believe that's the process that we've agreed on with the committee.

R. Thorpe (Chair): If there are no other questions with respect to this project, maybe we could move on to the Crown corporations governance follow-up.

[0845]

E. Dolhai: We have a similar summary. I hope all of you have that summary now. We start off with one recommendation; we made one broad-based recommendation. And the Public Accounts Committee made six recommendations.

Out of those, there are four that require further follow-up. One of the six recommendations that the Public Accounts Committee made has been fully implemented. Our recommendation and three of the Public Accounts Committee's recommendations have been partially implemented. The alternative action is what I said before, about them appearing in front of the committee in October. All of these four are listed on the following page.

The no-action is: "That the government activate the Select Standing Committee on Crown Corporations and refer to it matters that would allow the committee to provide the oversight role necessary to ensure that Crown corporations are accountable for setting and meeting objectives." On the other three that you see on the following sheet and our own one. . . . Our broad recommendation is still not fully implemented, and that's listed. And then three of the recommendations that the committee has made are listed there as well.

R. Thorpe (Chair): Does anyone have any questions?

J. Weisgerber: I'm wondering if there is some action that the committee can take to encourage the committee on Crown corporations to be activated. Obviously that's a decision that lies within the government or with the Chair of the committee involved. But it would seem to me, given events as recent as today, that a number of people may very well like to speak to Crown corporations in much greater detail about their activities and the way they operate their business. But I don't know how a committee like this can take action or provide encouragement to the government to move on its commitment to have an active committee. I'd certainly welcome, perhaps from the members opposite, any suggestions that they might have as to how this committee could achieve that end.

R. Thorpe (Chair): Does anybody else on the committee want to make any comments?

P. Calendino: Well, I'll make a comment.

R. Thorpe (Chair): Good.

P. Calendino: I think that within the mandate we don't have that much power to impose any action on the government, other than making recommendations, and the committee has already done that. We have made the recommendations, and the government in power decides how quickly and how appropriately those recommendations can be implemented.

R. Thorpe (Chair): Well, it is part of a report of this committee, and it should be the will of this committee on how it wants to act. If the committee so instructed, I guess the Chair could approach the Government House Leader to ask if they have any intentions of activating that. But I would need the direction of the committee to take such action. So if the committee would like to provide that direction, I'd be pleased to pursue it.

M. Coell: I think I understand what Mr. Calendino said. But I think it would be worthwhile for the Chair and the Deputy Chair to write and ask the government what its intentions are, as we've made one recommendation; we're at the process of reviewing those recommendations. So I'll make that a motion, to write and request a response to the recommendation.

R. Thorpe (Chair): Mr. Calendino -- any discussion?

P. Calendino: I would like staff, first of all -- the Clerk, the office of the Clerk -- to look into the mandate of the committee and to determine whether such action would be within the mandate or would go outside of the mandate, set some precedents that we really shouldn't get into. Before I will vote for that, I would like that answer here.

R. Thorpe (Chair): Mr. Coell, why don't we get you to very clearly put forward your motion on this issue.

M. Coell: Well, I would recommend that the Chair and the Deputy Chair write the House Leader and ask for an update as to where the government is on this recommendation that is before us.

[0850]

R. Thorpe (Chair): That motion is in order, and we've had it seconded by Mr. Weisgerber. Any other discussion? Yes, Steve?

S. Orcherton: What's the motion? I'm confused. There's been two things, and they seemed a little different. What is it?

M. Coell: The government was going to have a Crown Corporations Committee, and it hasn't done that as yet -- just an update as to when they intend to do that.

S. Orcherton: Where do you get that the government was going to have a Crown Corporations Committee? There's a provision in the rules that govern the House that there could well be a Crown Corporations Committee, a select standing committee. Is that what you're talking about?

[ Page 1549 ]

J. Weisbeck: There is a standing committee.

S. Orcherton: Yeah, but it's not activated.

J. Weisbeck: That's the question we're asking.

R. Thorpe (Chair): The committee has not been activated.

S. Orcherton: My experience here, as limited as it is, is that generally those are discussions -- whether to activate a committee or not -- that take place between the respective House Leaders of the opposition and the government. There's a number of committees that are up and running. And as we well know in this committee, which sits in any event, time constraints are difficult. So generally, in my experience, there are discussions between the House Leaders on the viability of that. I'm not sure that it's our role to take on that initiative. I think the discussion should ensue, but I'm worried about where we, in terms of the Public Accounts Committee, sit on doing that.

M. Coell: I'm not making a recommendation. I'm just asking if we could have an update -- as we've had an update here on a number of other issues -- as to whether the government intends to or not. I'm not making a recommendation that they do; we've already done that.

R. Thorpe (Chair): Let's be very clear here that it was a recommendation of the Public Accounts Committee to the government: "That the government activate the Select Standing Committee on Crown Corporations and refer to it matters that would allow the committee to provide the oversight role necessary to ensure that Crown corporations are accountable for setting and meeting objectives." That was a recommendation that came out of this Public Accounts Committee. I've conferred with the Clerk, and the motion is in order.

D. Zirnhelt: Assuming we have no advice to the contrary, the recommendation stands. And it is, it seems to me, quite innocent. . .

M. Coell: It's part of the report.

D. Zirnhelt: . . .to ask for an update on progress. In my view that's quite in order, and unless somebody says the committee can't do that, then that's fine. If the motion is to ask for a status report on that recommendation, then I don't think we need any further discussion.

M. Coell: Oh, that's what you're asking for.

R. Thorpe (Chair): Is there any other discussion?

P. Calendino: As the wording of the current motion is different from the original intent, I can say that I don't have a problem with an update.

R. Thorpe (Chair): No other comments or questions?

Motion approved.

R. Thorpe (Chair): Executive severance practices.

M. Sydor: PSEC sent in a fairly detailed response in this particular case. There were a number of attachments provided that supported their response and the status of the recommendations. In summary, if I can just go over those, our report had seven recommendations, and the Public Accounts Committee report had three recommendations.

When we look at all those today, either they've been fully implemented or there was action taken that in fact implemented the recommendations, but maybe in a different way. So the status today is that the recommendations in both reports have generally been met and implemented. As far as we can see, there are no outstanding issues at this time.

[0855]

R. Thorpe (Chair): Does anyone have any questions or comments? Thank you very much, Morris. I guess that concludes our review on these follow-up items.

Okay, the next report we're going to look at and consider is the draft committee report on the management of woodlot licence programs.

D. Zirnhelt: I just want it noted that I've absented myself, and I've requested that somebody calls me when you get to the next item.

K. Dunsdon: I went through this quite briefly at the last meeting two weeks ago, but I'll go through it in more detail this time. In November '99 the committee received evidence regarding management of the woodlot licence program. This draft report is the fifth report of the committee for this session. Copies of the draft report were distributed at the last meeting on June 13.

Since the draft report was distributed, I've received comments back from the office of the auditor general and from the comptroller general. The copy that you have in front of you today actually has those changes underlined, just to draw your attention to them. You'll see that the format of the report is a little bit different from the last draft that was handed out. This will be put into a more attractive format once the report has been finalized.

Just to give a brief overview of the report, the introduction on page 1 gives a background to the woodlot licence program, including a description of what a woodlot licence is and the origins of the program. The goals of the program are discussed on page 2. In evidence received from the Ministry of Forests, the committee heard about the program goals and raised some concerns that the goals may not be understood by all stakeholders. Those concerns are raised in this section, along with a description of the ministry's recent communication efforts.

Expansion of the program begins at page 3 of the draft report. In 1994 the government undertook to expand the program by offering an additional 500 licences. In 1996 the target was reduced to 350, and that target has been met. Members will recall that there was a lot of discussion in November about the social, economic and environmental benefits of the program, particularly in relation to the decision to expand the program in the mid-1990s. Included in this section is a brief description of the Bakewell and Gillespie studies which were done in 1988 and 1991.

Administration of the program is discussed at pages 4 and 5 of the draft report. There is a discussion in here about

[ Page 1550 ]

the Forest Practices Code of B.C. Act, the planning requirements contained in it and its associated regulations. There is also a discussion of the costs of the program and the government's efforts to streamline the planning requirements in order to reduce the administrative burden.

The auditor general's report also touched upon some very specific issues, including woodlot licence transfer, woodlot size, woodlot licence top-up policy and cut control policy. Those are discussed at pages 6 to 9 of the report.

R. Thorpe (Chair): With respect to the woodlot licensee transfer policy, unless I read it incorrectly, the report we received yesterday or the day before from the ministry, I thought I read that this policy, where we made some changes here, has been forwarded to ministry executive. In the report I received from the Ministry of Forests, it says that the policy is awaiting the approval by the minister. Why are we not saying it's awaiting the approval by the minister?

K. Dunsdon: Yesterday I had an e-mail from Al Waters of the Ministry of Forests, telling me that the policy was actually forwarded to the executive in April 2000. So I thought it would be appropriate to change that just to reflect that.

R. Thorpe (Chair): But in the letter we received dated June 7 from Doug Konkin, executive director of operations division, on page 1 of that report with respect to this, it says: "The policy is awaiting approval by the minister."

K. Dunsdon: I guess I should clarify with Mr. Waters whether there's a difference between forwarding it to executive and awaiting ministerial approval. That may actually be the same thing, but. . . .

[0900]

R. Thorpe (Chair): Is there anyone here from Forests?

A. van Iersel: We haven't invited anyone from Forests to attend. But as Kelly says, I did see comments from the Ministry of Forests through Al Waters, who is the forester responsible for the program. So I would second Kelly's suggestion that we get back to Mr. Waters and clarify what the correct wording should be.

R. Thorpe (Chair): Well, yeah. I'd go along with that as long as everybody realizes that I have a document here, dated June 7, that clearly says the policy is awaiting approval by the minister.

A. van Iersel: I understand.

K. Dunsdon: Okay. Just continuing on with the specific issues, the current size restrictions on the size of woodlots are also explored in this section. Currently the maximum size is 400 hectares at the coast and 600 in the interior. There have been concerns that the restricted size hinders the achievement of program goals. These concerns were raised both by the auditor general and in the recent forest policy review.

Top-up of woodlot licences is examined at page 8 of the report. The auditor general had recommended that granting of top-ups should be linked to good management practices by licensees and achievement of program goals. The ministry had submitted to the community that it disagrees with this recommendation because the principles of administrative fairness require that top-ups be granted to all who qualify under the Forest Act.

A brief section about the ministry's cut control policy is found at page. . . .

R. Thorpe (Chair): Just a second on the top-up, if I could. . . . The ministry does not agree with the recommendations put forward by the auditor general's office. Does the auditor general's office have any comments on that?

P. Gregory: I have with me Mr. Russ Jones, who is the senior principal who undertook the work, and perhaps he would comment on that.

R. Jones: Good morning. The reason we brought it up was mainly because we thought that the top-ups were not being given out based on need for extra hectares for some of these woodlots and that some of the woodlots that were already making reasonable returns were getting additional top-ups when they could have been segregated into another woodlot instead of adding on to a woodlot. So I still don't agree with them.

R. Thorpe (Chair): And that's the way it is, I guess.

A Voice: Yeah.

R. Thorpe (Chair): Okay. Peter, do you have any other comments?

P. Gregory: I don't, no.

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

Does any committee member have any questions? No? Thank you very much.

K. Dunsdon: The selection process, the process the ministry goes through in selecting licensees -- there's a discussion of that starting at page 10 of the report. When the committee met in November, there was a lot of discussion about the selection process for licensees.

Committee members also remember that there were some letters received from individuals in the Prince George area on that topic. Those letters expressed concern about the fairness and the complexity of the application and selection process. They also expressed concern about the perceived advantage that registered professional foresters have in the application process.

Evidence was submitted to the committee regarding the occupational status of woodlot licensees, which indicated that many list their occupations as farmers, ranchers or loggers. However, committee members were concerned about the complexity and the objectivity of the criteria applied in the selection process, and this is reflected in the report on pages 12 and 13.

Compliance with the Forest Practices Code -- there's a discussion of that beginning at page 13 of the report. There's a

[ Page 1551 ]

description of the legislation that licensees must comply with and the penalties applied if compliance isn't occurring. Committee members were concerned about the accountability of licensees for ensuring that promises made in licence applications and planning documents are carried out. Members heard about work being done by the ministry to monitor compliance with commitments made in applications, licence agreements and management plans.

[0905]

R. Thorpe (Chair): If I could just make a comment here, the words "significant promises" and "significant commitments. . . ." Perhaps one of the things we could do in follow-up of audits is get a clarification or a better understanding of what significant means. And how is significant interpreted? And who interprets what significant is? When I read it, I just think it's a little loose.

P. Calendino: To say the least.

E. Gillespie (Deputy Chair): I believe it's explained later on in that sentence -- for example, licence transfers, approvals to acquire timber processing facilities.

R. Thorpe (Chair): Yeah. I personally just have an issue. So little promises don't have to be kept? A promise is a promise; a commitment's a commitment. I think we have to be very, very careful in some of these interpretations. Perhaps that does provide the clarification. But I'd just like to suggest a little bit more work in the follow-up on that, if we could.

K. Dunsdon: Silviculture requirements are discussed at page 14 of the report. Part 6 of the woodlot licence forest management regulation outlines the silviculture responsibilities of licensees. On this, committee members expressed concerns about the need to place more priority on monitoring compliance with those requirements.

Information collection and reporting issues. . . .

R. Thorpe (Chair): Just one second there -- sorry, Kelly. With respect to monitoring, when I was reading this, I just wondered: what do we see as monitoring? And are we really looking at periodic audits? Is that what we're looking at for monitoring? Or do we see someone kind of looking over people's shoulders all the time on this type of thing?

R. Jones: Our concern when we were doing the audit was the fact that the ministry wasn't out there even ensuring that the minimum requirements for silviculture were being met. So what we were encouraging them to do was for them -- they say it takes anywhere from seven to ten years for these trees to get to the free-to-grow stage -- to be out there on a regular basis taking a look to make sure that that was actually happening.

They say now that they have incorporated that into their plans. We'll check that when we're out there and see if it has been. There were a number of these woodlots where the data was very old, and they hadn't really checked to see whether the silviculture obligations had been met.

R. Thorpe (Chair): Do you think the words "periodic audit" would be better than "monitoring"? Or do you have an opinion on that?

R. Jones: I think monitoring is a good word, because that is something that the ministry does on a regular basis on other types of tenures. I think monitoring probably suits the bill here.

R. Thorpe (Chair): Okay. Thank you.

K. Dunsdon: Information collection and reporting issues, pages 15 and 16. This section talks about the ministry's collection of financial and performance information and the reporting of that information. The focus of the committee's work in this area was really on the collection of financial information, because committee members were advised that information about all direct and indirect woodlot licence program costs funded by the ministry has not been systematically tracked. The ministry has since advised that this information is being tracked in districts on a sample basis, and using this information they've provided estimates regarding costs of the program during the 1999-2000 fiscal year. This information has not been audited by the office of the auditor general.

The committee also expressed concern in November about the need for better performance measurement in the woodlot licence program -- especially the need to finalize the draft program evaluation framework that's been developed by the ministry. That's discussed on page 16 of the report.

R. Thorpe (Chair): With regard to that, I don't know if anyone else noticed that in the Ministry of Forests report we received yesterday or the day before, on page 7 one of their performance measures -- No. 2 -- the increase in the amount of Crown land reserved for expansion in hectares. . . . They actually have no measurement reported there. Again, I would just ask that in our follow-ups. . . . If we're going to have a performance measure, we should have something that's quantifiable.

[0910]

K. Dunsdon: On page 17 of the report there's a brief discussion of the forest policy review report that was issued in March of this year. That report contained some recommendations regarding the woodlot licence program as well, including a recommendation to double the number of woodlot licences over the next ten years and to increase the maximum size of woodlots.

The draft report wraps up at page 18, with a brief summary of the benefits of the program and the challenges it's facing in the way of administrative streamlining.

R. Thorpe (Chair): Where did we get the words on page 18, in the last paragraph: "Resource constraints currently being experienced by the ministry will no doubt impact its ability to carry out the work necessary to implement these improvements"? Where does that come from?

K. Dunsdon: It was a common theme when the committee members were discussing the report. There were lots of questions about the cuts to the budget for the ministry. Previously in the report there was a discussion about how the funding had decreased quite a bit from 1998 to '99.

R. Thorpe (Chair): Are there any other questions or comments? Arn, have you any comments? Are you okay with everything?

[ Page 1552 ]

A. van Iersel: No. I'm fine with these changes, subject to the one clarification.

R. Thorpe (Chair): Subject to one clarification. Peter?

P. Gregory: We've had an opportunity to review it, and we are fine.

R. Thorpe (Chair): Everyone else is okay with it. Okay. Thank you.

K. Dunsdon: What about the recommendations?

R. Thorpe (Chair): What about the recommendations? Very good, Kelly. Where are the recommendations? Have you drafted any recommendations?

K. Dunsdon: What I did this time, like I did last time, was try to highlight the areas that members were concerned about, not wanting to step in and actually make the recommendations. So what I did was put in bold all of the areas where there was a lot of discussion and also that related to the auditor general's recommendations. There were 19 of those recommendations, and hopefully that will be a starting point for forming some recommendations.

R. Thorpe (Chair): Yeah, they were bolded, basically, after every section -- were they not?

K. Dunsdon: Yes.

R. Thorpe (Chair): So what we're now asking is: do we endorse all of those recommendations? Are there any other recommendations? And you would summarize those at the end in a recommendation page. Is that correct?

[0915]

K. Dunsdon: Uh-huh.

R. Kasper: So the reference to recommendations -- it's worded "your committee" or "the committee." That's the kind of preamble you've used in the highlighted sections?

K. Dunsdon: Yeah, those are just statements in the body of the report. They could be translated into recommendations with the appropriate wording. Normally they start with: "Your committee recommends that. . . ." They generally relate to the auditor general's recommendations.

R. Kasper: Like on page 13 it says: "Committee members urge the ministry to ensure. . . ." On page 14: "The committee recognizes that the program has faced resource challenges." You know, I don't have a problem with the wording. It's not hard nose. It's just "go with the flow," I guess.

P. Calendino: Would you want to see a standardized form?

R. Thorpe (Chair): Do you have a recommendation that you'd like to put in, Rick?

R. Kasper: No, no, no. I'm just a member of the committee. I look to other members for guidance.

R. Thorpe (Chair): And perhaps some of those are looking to you for guidance.

J. Weisgerber: We need a little Kasper language in there.

R. Thorpe (Chair): Kasperitis.

A Voice: We've had enough of that.

R. Thorpe (Chair): Scrap it. Does anyone have any. . . ? Are people generally. . . ?

M. Coell: I'd just suggest that Kelly go back and just standardize and draft the page of the recommendations. I think none of them are very controversial; they're all pretty common sense.

E. Gillespie (Deputy Chair): I didn't bring my auditor general's report with me, but you said there were 19 recommendations in that report. I think I've counted 12 or 13 bolded areas in our report. I think it would be suitable to accept the recommendations of the auditor general and then, if there's anything additional, to put them in as committee recommendations.

R. Thorpe (Chair): Yes, Mr. Kasper?

R. Kasper: Nothing.

A Voice: He was seeking guidance.

R. Thorpe (Chair): And he received it.

Well, if there are no other comments on this, then Kelly would take the guidance of the committee and prepare that. We'll finalize that at our next meeting -- okay?

Okay, we're going to move along to the consideration of the auditor general's report, government financial accountability for 1998-99, part 2, financial management. Peter, over to you.

P. Gregory: My understanding is that the committee today was going to be considering the section on provincial debt. I have with me Keyvan Ahmadi, and with him is Peter Bourne, who will speak to this section.

K. Ahmadi: Good morning. The auditor general's comments on the report of the provincial debt begins on page 83 and runs to page 104 of the "Report on Government Financial Accountability for the 1998-99 Fiscal Year."

Four topics are discussed in this section. We begin by looking at debt measures and indicators. We will then look at how the impact of funding of Skeena Cellulose on total provincial debt was. After that, we will discuss debt sinking fund, and finally we will comment on the government's debt management plan.

[0920]

On page 87 of our report you will see a 20-year graph showing provincial debt over the years 1981 to the year 2000. Twenty years ago total provincial debt stood at about $7 billion. At March 31, 1999, the fiscal year upon which we are

[ Page 1553 ]

reporting, total provincial debt stood at $32.4 billion. The chart on the screen shows that in the ten years ending March 31, 2000, debt will have doubled from $17 billion in 1991 to a projected $34 billion as of March 2000.

With this little history behind us, I have here with me today Peter Bourne. Peter will take us through the four areas, or the four topics that I mentioned earlier.

P. Bourne: As Keyvan mentioned, the first section concerned debt measures and indicators. Each year since the 1991-92 report on the Public Accounts, the auditor general has commented on the government's reporting of debt and has made several recommendations concerning the reporting of debt. Over the years we have promoted the reporting of the ten debt measures and indicators you see on the screen. They're also shown in exhibit 5.1 on page 85 of our report.

The first three items are measures of total debt. Items 4 and 5 are discussed as measures of the province's financial well-being. Items 6 and 7 relate to the cost of servicing the debt, and the final three items are indicators which refer to the annual change in debt.

Over the years the government has improved its reporting of debt. Government now reports to some extent on these ten measures and indicators in its annual debt statistics report.

We will now look at some of these indicators. It should be noted, however, that these measures should not be looked at in isolation. You cannot judge whether the province's debt situation is good or bad by looking at only one or two indicators. It's only when the indicators are looked at as a whole, and preferably as a trend over several years, that you can judge whether debt is affordable and sustainable.

The first measure is total provincial debt. On the screen we show a reconciliation between debt as shown on the summary financial statements and total provincial debt as described in our report. You can see that debt, as presented in the summary financial statements at the end of March, 1999, stood at $31.3 billion. However, according to the debt statistics report, the provincial debt at that date was $32 billion. In our calculation, the total provincial debt was $32.4 billion.

Our total debt is calculated as if all entities were fully consolidated in the summary financial statements, and it includes debt guarantees. The first reconciling item is included because the summary financial statements only include commercial enterprise debt, which is borrowed through the central government's fiscal agency loan program. The $0.5 billion amount represents the debt of modified equity enterprises such as B.C. Hydro, which was not borrowed through central government. The $0.2 billion reconciling item represents government guarantees of debt -- mainly student loans and mortgages.

[0925]

The difference between the $32 billion of debt as reported in the debt statistics and our calculation of total debt arises because we have based our calculation on a reporting entity which includes the SUCH sector. Most of the SUCH sector debt is already included in the summary financial statements. However, the government excludes the additional $0.4 billion of debt of schools, universities, colleges and hospitals which was not borrowed through central government. The only significant difference in the measures and indicators that arises because of the SUCH sector entity issue is in the debt-to-revenue figure. I will discuss this difference on the next slide.

Two other measures of total debt are debt to revenue and debt per capita. The first debt to revenue is calculated by dividing total debt into total annual revenue. This indicator shows how many years of revenue it would take to repay the debt. Between fiscal '98 and '99, this ratio increased from 95 percent to 98.2 percent. Thus, during fiscal '99, the debt grew at a faster rate than revenue.

As noted in the previous slide, the debt-to-revenue figure is the only indicator which changes significantly because of our use of the expanded SUCH sector reporting entity. The debt-to-revenue figure shown in the government's debt statistics 1998-99 report is 102.3 percent. That figure implies that it would take a larger portion of the government's annual revenue to repay the debt than what we have calculated. The reason our figure of 98.2 percent is lower is that we include approximately $1.7 billion of additional revenue of the SUCH sector in the denominator of our ratio.

Debt per capita shows the average amount of debt owed by each British Columbian. At the end of fiscal '99 the figure stood at $8,082, which is an increase of 5.6 percent from the previous year. The increase in debt per capita implies that the rate of increase in debt has been higher than the rate of increase in population during fiscal '99. On page 90 of our report, you'll see a five-year debt-per-capita bar graph.

Items 4 and 5 from our list of debt measures and indicators are measures of the financial well-being of the province. The first is the ratio of debt to provincial gross domestic product. As shown on the screen, the rate of debt to GDP increased from 27.7 percent to 29.9 percent between 1998 and 1999. This implies that the debt grew at a faster rate than the provincial economy during fiscal '99. Page 91 of our report has a chart which shows the debt-to-GDP ratio for 20 years, ending with the fiscal 2000 figure from Budget '99.

In Budget '99, the government predicted that the debt-to-GDP ratio would be 31.7 percent as at March 31, 2000. However, based on the recent Budget 2000 report, it is now expected that the ratio will be a little less -- approximately 30 percent.

The second measure of financial well-being is the interest bite. This is a measure of how much of total revenue is taken up by interest costs on debt. As more money is used to pay interest costs on debt, the government has less money to spend on programs. The programs are said to be crowded out, hindering the fiscal flexibility of the province. For fiscal '99, we calculated the interest bite to be 7.5 cents out of each dollar of revenue. This is an increase from the previous year.

Items 6 and 7 from our original list of ten are measures of the interest paid on debt. In the summary financial statements for the 1999 fiscal year, debt-servicing costs were reported to be $2.358 billion. However, because government enterprises are not fully consolidated and the summary entity does not include the SUCH sector, the summary financial statement amount does not include all the debt-servicing costs of these entities. We calculated the total cost of debt servicing to be $2.477 billion -- a difference of $119 million. The effective interest rate is an indicator of debt management performance. The government reports that the effective rate of interest for taxpayer-supported debt is 7.6 percent for 1999.

[ Page 1554 ]

The last three of the ten measures and indicators relate to measures of change in debt. In order to understand how debt changed and for what purpose, it is useful to know the sources and uses of borrowings. In the past we have recommended that a statement of changes in debt be provided to explain why and from whom the province is borrowing.

[0930]

During the 1999 fiscal year, debt increased by $2.1 billion. Exhibit 5.7 on page 95 of our report shows a breakdown of this change in debt by entity. It should be noted that exhibit 5.7 is a very simple statement of change in debt, as it discusses only the overall changes in debt in each entity. A complete statement of changes in debt should include a listing of the sources of debt and the uses of current borrowing, such as for the operating deficit, for debt repayment, for investment, for lending, for warehousing or for capital spending.

The government has started to provide better information about changes in debt, particularly the sources of borrowing. We encourage it to continue and to improve the reporting of those changes, particularly the uses of debt.

The next section of the report concerns debt related to Skeena Cellulose Inc. Our main objective in writing about Skeena is to look at its impact on the province's total debt. We have not attempted to measure the total costs and benefits of the province's involvement in Skeena. During the 1998 fiscal year, the province decided to keep Skeena operating by providing loans and other guarantees to it. The province made its investment in Skeena through a numbered company, 552513 British Columbia Ltd. As a result, as at March 31, 1999, the province was the majority shareholder in Skeena with a 65.6 percent ownership share.

At March 31, 1998, the involvement of the province in Skeena increased total debt by $157 million. At March 31, 1999, this amount had grown to $220 million. Budget '99 had predicted that the debt related to Skeena would increase to $319 million as at March 31, 2000. The province's third quarterly financial statements predicted that the debt would be $295 million. However, more recently the prediction in Budget 2000 is that the debt will be approximately $284 million.

This next slide shows the source of the funds that comprise Skeena's impact on total debt as at March 31, 1999. I will also provide information as to how these amounts are recorded in the summary financial statements and in the debt statistics report.

As noted in the last slide, Skeena increased the total debt by $220.8 million as at March 31, 1999; $4 million of this money was loaned directly by the province. This amount is included in the summary financial statements as both an asset and a liability. The liability is included in public debt used for loans under the fiscal agency loan program, and the asset is recorded as a loan receivable for the purchase of assets recoverable from agencies.

Of the total, $124 million was loaned to Skeena by the TD Bank -- Toronto-Dominion Bank. This loan was guaranteed by the province. This amount is not recorded on the balance sheet of the summary financial statements; however, it is recorded in the contingencies and commitments note. The sum of the first two amounts is recorded in the debt statistics report as self-supporting debt of 552513 B.C. Ltd.

Now, $92.3 million was loaned to Skeena by the TD Bank without any provincial guarantee. Of course, this amount would not be recorded in the summary of financial statements at all. In the debt statistics report, however, this last amount is included in the total debt under the category of self-supporting, non-guaranteed debt. Footnote disclosure states that the debt may be payable by the minority shareholder, which is the TD Bank.

J. Weisgerber: Can I interrupt for a sec? I don't understand why that $92 million comes into the provincial calculations at all. Can you tell me?

P. Bourne: It's not in the summary financial statements, but when we prepare the debt statistics and when we prepare our own calculation of total debt, we assume that all the entities are fully consolidated, rather than on a modified equity basis. So that means that all of the assets and liabilities of 552513 would be brought in, rather than just the net income.

[0935]

J. Weisgerber: So the $92 million was loaned to the numbered companies by the bank, as opposed to part of the Skeena Cellulose debt?

P. Bourne: Yes, there was $4 million loaned directly by the province and $124 million loaned by the bank but guaranteed by the province, and $92 million was loaned by the bank and not guaranteed by the province.

J. Weisgerber: I'm confused. Does the numbered company own two-thirds of the shares, or is the numbered company the entity in itself?

K. Ahmadi: If I may, the numbered company is the majority shareholder. To account for the debt of the majority shareholder, you account the whole of the debt of the company that you're controlling. Then you show the liability for the minority shareholders separately, because of the control that you have on that company -- because the decisions are made by the majority shareholder company.

R. Kasper: Could I ask a question? My question is: does that approach or concept apply to other similar ventures that may exist?

K. Ahmadi: Yes, when they are commercially regarded as self-supporting corporations.

R. Kasper: So is it possible, without a lot of work, to perhaps supply a list where the application that has occurred in this instance, showing that the same accounting practice or methodology for reporting has applied to other ventures -- where the Crown has either had a loan guarantee or they've actually made a direct loan, and then where you have the private sector that has put in a loan or has financial interest -- and showing exactly what their interest is and where all of the obligation is listed, as you've done?

R. Thorpe (Chair): Just one second. Arn wanted to make a comment here, please.

A. van Iersel: In the public accounts, we distinguish between commercial and non-commercial Crowns. Other

[ Page 1555 ]

commercial Crowns would be B.C. Hydro, ICBC, B.C. Lottery. The list is a little longer, but if you look on, I think, page A67 of the Public Accounts, they are provided there.

As Keyvan has mentioned, our policy in terms of the consolidation for commercial Crowns is not line by line. We do it on the basis of our equity in that corporation and adjust from it. That's accepted practice under the Public Sector Accounting Board guidelines, and we've been doing that for a number of years. So when you look to our financial statements, we don't take the total debt of B.C. Hydro or what not and put it in our summary of financial statements, although in some cases we are lending money to B.C. Hydro through fiscal agency loans and what not.

This case is somewhat unique, in the sense that there is an outside interest, and you don't have an outside interest in B.C. Hydro or ICBC. In this case, there is some debt that pre-existed our coming into the corporation, and that is the minority debt. We own, as has been said, about 68 percent of the entity. The TD Bank owns the other 32 percent. It's not appropriate for us, in our minds, to record that debt on our books. But for purposes of disclosure in the debt statistics report -- there has always been a difference between the summary accounts and the debt statistics report -- we do disclose the total debt of the corporation for anyone that might be interested in knowing what the total liabilities of Skeena Cellulose are.

R. Kasper: Maybe I wasn't clear. Are there similar circumstances? You just said that this is unique. Are there similar circumstances where you do have a clearly defined private interest involved?

K. Ahmadi: No. I don't know of any other, in fact.

R. Kasper: All right.

J. Weisgerber: Mr. Chairman, just a final question. Is there some suggestion or some implication that the province would ultimately be responsible for that debt -- that TD Bank loan that's not guaranteed?

[0940]

K. Ahmadi: There isn't a direct suggestion that there is responsibility or guarantee, but as the majority shareholder and the decision-maker for that corporation -- the debt to a third party, then, though it is not guaranteed, it is usual to be taken as the whole debt of the owner.

J. Weisgerber: Is that because decisions made by the majority shareholder. . .

K. Ahmadi: That's right.

J. Weisgerber: . . .may require them to discharge the debt of the minority shareholder?

K. Ahmadi: Indeed.

R. Thorpe (Chair): Carry on, Peter.

P. Bourne: In the debt statistics report, the debt of 552513 B.C. Ltd. is recorded as self-supporting debt rather than taxpayer-supported debt. Now, 552513 B.C. Ltd. was classified in this manner based on the belief that it would become profitable within a reasonable number of years.

Our office is monitoring the profitability of Skeena Cellulose to determine whether it should be reclassified in the future as taxpayer-supported debt.

The next section of our report discusses the issue of sinking funds. In general, sinking funds are investments set aside to repay debt. This issue is important because on June 1, 1999, the government changed its sinking fund policy. Up until June 1, 1999, the government contributed annually to sinking funds for debt issues which were greater than $20 million in par value and greater than five years in duration.

However, as of June 1, '99, the government has stopped making annual sinking fund instalments on all new and existing CRF debt issued for direct operating and capital financing purposes. This new policy affects approximately $19 billion of the $34 billion in debt outstanding as at March 31, '99. The remainder of the debt continues to accumulate sinking funds. Our office did not make any recommendations flowing from this section. However, we did wish to provide information about the reporting of sinking funds and the recent change in government sinking fund policy.

When we discuss debt, we often refer to the net debt. Net debt refers to the debt repayable, less sinking fund investments held. For example, in the summary financial statement debt notes, the gross debt is reported, but from that amount we deduct sinking funds. This smaller net debt figure is then reported on the balance sheet.

The total of all sinking funds disclosed in the March 31, '99 summary financial statement notes is $4.6 billion. In some instances the government may also certify or defease debt. This occurs when there are sufficient investments in a sinking fund to make all future interest and principal payments on that debt. The debt liability and sinking fund assets are then removed from the balance sheet. The amount of this unmatured but defeased debt is disclosed in a note to the financial statements. As at March 31, '99, $1.5 billion in debt has been defeased for financial reporting purposes.

Our report also disclosed some of the pros and cons of having sinking funds. One good reason for maintaining sinking funds is that they create a smooth repayment schedule for the debt liability. This is particularly helpful if the province needs to reborrow the funds at the end of the debt term, and interest rates are high. Having a sinking fund would mean that the province could reborrow less than the full amount.

The second good reason for having sinking funds is that they reduce shifting of the intergenerational debt burden. Providing for the repayment of current debt with current tax dollars means that future generations will not have to pay for the consumption of current taxpayers. However, since the government currently borrows to make its sinking fund instalments, there may still be an intergenerational transfer of the debt burden.

This brings us to a negative aspect of sinking funds. If the government has to borrow to make its sinking fund payments, as it currently does, it may not make economic sense to borrow money simply to invest it. The final negative aspect of having sinking funds is that they can be costly to maintain. The Ministry of Finance and Corporate Relations determined that the annual cost of maintaining sinking funds was approximately $10 million.

[ Page 1556 ]

[0945]

R. Thorpe (Chair): Are you suggesting by that that there's a way to save $10 million? Is that what you are saying?

P. Bourne: Well, by eliminating some of the sinking funds, there is a possibility of reducing the costs. I don't think that the full $10 million could be saved, but some could be saved.

R. Thorpe (Chair): I guess we'll let Treasury make comment on that at the appropriate time.

P. Bourne: In the final analysis, the government decided to stop making its annual sinking fund instalments on direct government debt. The government will use other methods to manage the repayment of its debt -- for example, by ensuring that only a certain amount of debt matures in any one year. The debt statistics 1998-99 report also stated that this would decrease the government's need to borrow by $400 million during fiscal 2000. However, this has no effect on the net debt reported, as lower debt is offset by lower sinking fund balances. Credit rating agencies have stated that the discontinuance of sinking fund instalments should not affect B.C.'s credit rating.

M. Coell: Can I just ask a question? Is the government using sinking funds to pay down this year's debt by $400 million? Out of the sinking funds -- is that what you're saying?

P. Bourne: No, they have to. . . . In order to put money into a pot of sinking fund assets, they have to borrow it. So there's no change in the net debt, because you have to borrow the money which goes into the gross debt figure. They're sort of added and deducted from the net, so you end up with the same balance as you would have.

M. Coell: You said that they were going to use other methods to manage debt repayment and then said. . . .

P. Bourne: Oh. No, it's a matter of timing your debt maturities. They're not going to use the sinking funds to pay off the current debt, no.

A. van Iersel: Just to clarify. In the past -- and we still do, for some occasions -- we had to borrow money to make sinking fund instalments. That's referring to the $400 million that would otherwise be required to place in the sinking fund. The sinking fund builds and, with investment earnings, ultimately repays the debt. But as has been described in their method of reporting, we take gross debt less sinking funds -- because sinking funds are assets -- to come to net debt.

By stopping the sinking funds for direct debt, we don't have go out and borrow that money anymore. In the past it was justified, in the sense that if you could argue there was a positive carry on the sinking funds that exceeded your cost of debt, that was a worthwhile thing to do. That's what Treasury's been looking at and will speak to in a few minutes, I believe.

P. Bourne: So the credit rating agencies said this would not affect B.C.'s credit rating. This will be true as long as money earmarked for sinking funds is not instead spent by the government on goods and services. This, in effect, would increase the net debt of the province, which could impact the credit rating.

The last section of the report on debt discusses the government's plans for managing debt. The government has produced several debt management reports. The first, in 1994-95, was titled "Debt Management Progress Report." In each of the last four years the debt report has been titled Debt Statistics. These reports were initially created partly as a vehicle for the government to monitor and publish its performance against its debt management plan, which was published in "Budget '95 Reports."

Since introducing its debt management plan in Budget '95, the government has changed its debt plan goals and benchmarks in three successive years, beginning in 1997. In Budget '97 the government changed the name of the debt management plan to the financial management plan and altered its plan goals. The plan goals were altered again in Budget '98, and in Budget '99 it appears that government may have abandoned its financial management plan altogether and adopted a new five-year fiscal planning framework instead. The five-year fiscal planning framework discusses revenue, expense and debt levels planned in the next five years. It only partially discusses previous debt goals.

[0950]

The next few slides show examples of changes to the debt plan since its inception. In general, the debt goals have become less specific, shorter in duration and less demanding to achieve. Exhibit 5.8 on page 101 of our report provides a table which compares the goals of the debt plans issued in Budgets '95, '97 and '98. On the screen we see that the stated length of the debt plan was reduced from 20 years to three years. The Budget '99 fiscal planning framework length is stated as five years. The goal of reducing the direct debt of the government has gone from eliminating direct debt over 20 years in Budget '95, to reducing direct debt over 20 years in Budget '97, to not being mentioned at all in Budget '98. The government direct debt significantly increased in recent years when it forgave loans to schools, post-secondary educational institutions, hospitals and public transit, and took over their debt.

The goal of managing the taxpayer-supported-debt-to-GDP ratio has also changed over the years. In Budget '95 the goal of the debt management plan was to reduce the ratio to 10.2 percent by the end of the 20-year plan. In Budget '97 the financial management plan goal was to reduce the ratio to 15 percent by the year 2015 and to cap the ratio in the short term at 20 percent. In Budget '98 this goal was changed to a range of 19 to 22 percent. This range was to stay in place until 2001. In Budget '99 the new fiscal planning framework states that the taxpayer-supported-debt-to-GDP ratio will now be between 22 percent and 27 percent over the next five years.

As can be seen from the previous few slides, the government has not been very successful at providing a debt plan with targets that it can meet. Two reasons for having a debt plan are (a) to achieve certain goals and (b) to be able to measure actual performance against these goals. Excessive modification or abandonment defeats the purpose of having a plan in the first place. It may also erode public confidence in the reliability of the planning process. Ideally, a plan should be

[ Page 1557 ]

long-term in nature. Short-term estimates and decisions related to debt, such as we find in the annual estimates or budget, should support the long-term plan's goals.

In summary, we believe the government should adopt some form of debt management plan with goals that are measurable and achievable, stable and long-term and supported by disclosure of the main assumptions of the plan, along with contingency plans that might exist should the main assumptions fail to be realized.

R. Thorpe (Chair): In the interest of having staff here from Treasury, I wonder if they could come up, and we'll quickly give them a chance to go through their report. Then we'll entertain any questions after that if we have time.

Thanks very much, Peter and Keyvan.

R. Thorpe (Chair): I guess we're going to have to. . . .

A Voice: We'll wait.

R. Thorpe (Chair): In that regard -- sorry about that, but the bells have gone -- next weekend is a long weekend. We generally would meet Tuesday morning. So we can attempt to wrap this up, I would like to propose that we get together either Tuesday afternoon or Tuesday evening. Does the committee have any objection to that if we work and find a room and send out the appropriate notice?

A Voice: I don't have an objection, but the scheduling might be difficult. We'll have to see.

R. Thorpe (Chair): But we'll make every effort, as long as we can agree on the objective?

A Voice: Uh-huh.

R. Thorpe (Chair): Okay. Then we'll let you know. Sorry about that, folks, but we've just run out of time here today.

I guess in that regard, Kelly, you'll report. . . .

J. Weisgerber: I was just going to suggest that perhaps next Thursday morning might make more sense.

R. Thorpe (Chair): That's also fine. Is Thursday morning more. . . ? Okay, we'll target for Thursday morning, July 6, 8:30 to ten. Some will probably not be able to make it.

We've also received a new auditor general's report, "Fostering a Safe Learning Environment: How the British Columbia Public School System Is Doing." So we'll take a few minutes after this, Evelyn and I, to get on the agenda, but we'll just generally try to clean up the things we're working on here.

The committee adjourned at 9:55 a.m.

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