Public Accounts — Issue No. 6 — Wednesday, February 8, 2006 (HTML)

2005 Legislative Session: First Session, 38th Parliament
SELECT STANDING COMMITTEE ON PUBLIC ACCOUNTS

Present: Rob Fleming, MLA (Chair); John Yap, MLA (Deputy Chair); Iain Black, MLA; Ron Cantelon, MLA; Randy Hawes, MLA (by telephone); Joan McIntyre, MLA; Mary Polak, MLA; Bruce Ralston, MLA; John Rustad, MLA; Diane Thorne, MLA

Unavoidably Absent: Harry Bains, MLA; Adrian Dix, MLA; Norm Macdonald, MLA; Ralph Sultan, MLA

Officials Present: Errol Price, Deputy Auditor General; David Fairbotham, A/Comptroller General

Others Present: Josie Schofield, Committee Research Analyst

1. The Committee approved its agenda for today’s meeting.

2. The Committee considered various Retention and Disposal Applications by the Public Documents Committee
Witness
• Gary Mitchell, Provincial Archivist

3. Resolved,

4. Keeping the Decks Clean: Managing Gaming Integrity Risks in Casinos, Report 5 (July 2005)
    Witnesses:
    • Errol Price, Deputy Auditor General
    • Russ Jones, Assistant Auditor General, Natural Resources
    • Wayne Schmitz, Director, Health Sector, Office of the Auditor General
    • Derek Sturko, Assistant Deputy Minister, Gaming Policy and Enforcement Branch, Ministry of Public Safety and Solicitor General
    • Vic Poleschuk, President & Chief Executive Officer, British Columbia Lottery Corporation
    • Brian Lynch, Vice President, Casino Gaming, British Columbia Lottery Corporation
    • Terry Towns, Director, Corporate Security, British Columbia Lottery Corporation

5. Resolved, that the Committee endorse the recommendations contained in Report 5, Keeping the Decks Clean: Managing Gaming Integrity in Casinos.

6. Auditor General Review of Partnership BC’s Project Report, Achieving Value for Money: Abbotsford Regional Hospital Care Centre Project (February 2005)
    Witnesses:
    • Morris Sydor, Assistant Auditor General, Health Sector
    • Ken Lane, Director, Office of the Auditor General
    • David Woodward, Associate Deputy Minister, Ministry of Health
    • Larry Blain, Chief Executive Officer, Partnerships British Columbia
    • Mike Marasco, Vice-President, Partnerships Development, Partnerships BC

7. The Committee accepted the Auditor General’s review opinion of Partnership BC’s Project Report, Achieving Value for Money: Abbotsford Regional Hospital Care Centre Project.

8. The Committee met in camera to consider its First Report to the House this Session.

9. The Committee met in public session.

10. Resolved, that the Committee adopt its First Report as amended to the House this Session.

11. Resolved, that the Chair present the First Report to the House as soon as practicable.

12. Mr. Bruce Ralston, MLA, gave notice of the following motion:

    That the Committee instruct the Office of the Auditor General to conduct a complete direct examination of the assumptions and entire business case used for the contract to construct the Abbottsford Hospital

13. The Committee adjourned at 1:36 p.m. to the call of the Chair.

REPORT OF PROCEEDINGS
(Hansard)

SELECT STANDING COMMITTEE ON
PUBLIC ACCOUNTS



CONTENTS

		Page

Records Retention and Disposal		137
	G. Mitchell

Auditor General Report: Keeping the Decks Clean: Managing Gaming Integrity Risks in Casinos		137
	E. Price
	R. Jones
	W. Schmitz
	D. Sturko
	V. Poleschuk
	B. Lynch
	T. Towns

Auditor General Review of Partnership B.C. Report: Achieving Value for Money: Abbotsford Regional Hospital and Cancer Centre Project		151
	E. Price
	K. Lane
	L. Blain
	D. Woodward
	M. Marasco

Draft Committee Report to the House		164

Other Business		165

Chair:	* Rob Fleming (Victoria-Hillside NDP)
Deputy Chair:	* John Yap (Richmond-Steveston L)
Members:	* Iain Black (Port Moody–Westwood L) * Ron Cantelon (Nanaimo-Parksville L) * Randy Hawes (Maple Ridge–Mission L) * Joan McIntyre (West Vancouver–Garibaldi L) * Mary Polak (Langley L) * John Rustad (Prince George–Omineca L) Ralph Sultan (West Vancouver–Capilano L) Harry Bains (Surrey-Newton NDP) Adrian Dix (Vancouver-Kingsway NDP) Norm Macdonald (Columbia River–Revelstoke NDP) * Bruce Ralston (Surrey-Whalley NDP) * Diane Thorne (Coquitlam-Maillardville NDP) * denotes member present

Witnesses:

Larry Blain (CEO, Partnerships B.C.)
Russ Jones (Office of the Auditor General)
Ken Lane (Office of the Auditor General)
Brian Lynch (British Columbia Lottery Corporation)
Mike Marasco (Partnerships B.C.)
Gary Mitchell (Provincial Archivist)
Vic Poleschuk (President and CEO, British Columbia Lottery Corporation)
Errol Price (Deputy Auditor General)
Wayne Schmitz (Office of the Auditor General)
Derek Sturko (Ministry of Public Safety and Solicitor General)
Terry Towns (British Columbia Lottery Corporation)
David Woodward (Associate Deputy Minister of Health)

R. Fleming (Chair): Welcome, everybody, to this morning's Public Accounts meeting. Committee members and guests, we have a few items of business on our agenda today, including two reports before us.

The first item is — we're very pleased to have Mr. Gary Mitchell back with us — several resolutions for records retention and disposal. If I could get a motion to approve the agenda, we can begin this morning.

R. Fleming (Chair): Mr. Mitchell, thank you for being here. The floor is yours.

G. Mitchell: The public documents committee, over the last quarter, has reviewed five records retention schedules for five functional areas of government. We are pleased to recommend these schedules for your review. They cover records relating to vital statistics, Pharmacare services, liquor control and licensing, security programs out of the Ministry of Public Safety and Solicitor General and the archaeology branch of Tourism, Sport and the Arts.

We have delivered to the Clerk of Committees copies of the schedules for your review, and I would be pleased at this time to answer any questions relating to the process or to the records in general. Certainly, we'll entertain any specific questions you would have when you review the schedules.

R. Fleming (Chair): Thank you. Committee members, if there are any questions…. In fact, we have the actual, physical boxes of the documents themselves — not that I'm recommending anyone inspect them at this time. But we took them from the warehouse using the robotic arm that we discussed in a previous meeting.

Also, I just want to mention that Mr. Mitchell's comments from our previous Public Accounts meeting are captured in the draft report that you probably noted and that will be submitted to the Legislature in the upcoming session. I think that's an ongoing piece of work that this committee and members of the executive of government may wish to pursue in legislation at a later date. So thank you very much for that.

R. Fleming (Chair): It's moved, then, for discussion. Any discussion on the resolutions?

R. Fleming (Chair): Next item of business is the report from the office of the Auditor General: Keeping the Decks Clean: Managing Gaming Integrity Risks in Casinos.

We have witnesses this morning from three parts of government. The Auditor General's office will begin, and I think Errol Price will introduce both Russ and Wayne from his office. Then we will move on to the ministry for their perspective, and then finally to several individuals from the B.C. Lottery Corp. who are with us this morning.

I would suggest by way of format that we hear all the presentations. They all have PowerPoint presentations, and we can ask questions of any of the three organizations at the end.

Auditor General Report:
Keeping the Decks Clean: Managing
Gaming Integrity Risks in Casinos

I'm sitting in today for the Auditor General. Wayne is attending a meeting of the Canadian Council of Legislative Auditors in Quebec City. This will actually be the last meeting of its kind that he attends after close to 25 years with that community. A lot of corporate memory will be lost to that community.

The legislative auditors meet every January or February in conjunction with a financial statement symposium that focuses primarily on the audits of public accounts. Incidentally, this meeting takes place in Victoria every second year, by popular demand. I guess you can see why, just looking out of the window.

The audit of the public accounts is the largest single piece of work for every auditor general across the country, certainly at the provincial level. I'm not quite sure about the Auditor General of Canada. This annual meeting discusses issues of common interest regarding audit approaches and accounting principles, etc. Bill Gilhooly, who was with Wayne at last week's Public Accounts Committee meeting, is also attending. B.C. will be presenting a session on how we went about auditing the expanded government reporting entity as it incorporated the financial statements of school districts, colleges, universities and health authorities, etc.

Our practice is to bring one or two staff members to observe each Public Accounts Committee meeting. Part of their professional development, we think, is to ex-

perience firsthand the excitement and drama of one of these meetings. Today sitting in the gallery — full gallery — at the back is Chris Thomas. Chris is a chartered accountant who has been with the office for a couple of years. Recently Chris worked on our review of the Sea to Sky Highway improvement project value-for-money report and currently is involved in a similar piece of work in connection with the Canada line.

Sitting by Chris is another Chris — Chris Rolfe, a lawyer who has joined our staff as our legal adviser. Chris joined the office in January and will be available to audit teams across the office to provide advice on legal issues and will also be involved directly in some of the risk audit work that we do.

Moving to the gaming report, at the table with me are Russ Jones and Wayne Schmitz. Russ is an assistant Auditor General responsible for our natural resource, environment and transportation work. Russ had overall responsibility for this audit on casinos. Wayne was the audit director responsible for the field work on the gaming audit and is one of our most experienced risk auditors.

We do have a brief presentation about the audited findings, conclusions and recommendations. As the Chair said, there are other presentations as well, so I'll keep my remarks brief. As you know, part of what we do is examine how well government manages its programs and responsibilities. In doing so, we help legislators assess the performance of government and look for opportunities for government to manage better.

We thought we should look at commercial gaming in B.C. That comprises casinos, bingos, lotteries and horse racing. It's a large industry in terms of both employment and government revenues — more than $800 million in the current year to the province and municipalities. That complete industry was too big to look at in one audit, so we decided to focus on how well B.C. is managing its casino business.

Casino gaming growth has been outpacing other forms of gaming in recent years. The government's casino gaming business affects many citizens, involves a great deal of money and, based on experience in some other jurisdictions, can attract dishonest individuals and organizations.

We decided to examine how well government is managing gaming integrity risks in casinos. Over all, although we identified several possible improvements, we concluded that the government is adequately managing the gaming integrity risks.

With those few words of introduction, I'll now ask Russ to take you through our presentation.

R. Jones: Good morning. This presentation is going to deal with our audit of whether the government is adequately managing gaming integrity risks in British Columbia. We carried out the audit because, as Errol as mentioned, casino gaming has become a significant component of the commercial gaming that's done in the province and a significant contributor to provincial revenues.

First off, I'd like to begin with explaining what we considered gaming integrity to mean. Gaming integrity means that error, criminal exploitation and employee dishonesty in casinos are minimized. That sort of sets up what we consider to be gaming integrity.

This morning I will briefly describe for you the context of the audit, and then we'll present the purpose and scope, overall conclusion, background. Then we'll get into looking at the findings, conclusions and recommendations of each of the four questions that we addressed in the report.

By way of introduction, commercial gaming — which includes lotteries, casinos and bingos — is a significant industry in British Columbia. Casinos are a major component in terms of employment and revenue generated for provincial and municipal governments. In British Columbia responsibility for ensuring gaming integrity rests with two different government organizations — the B.C. Lottery Corp., which is charged with managing and conducting casino gaming, and the gaming policy and enforcement branch, which is the Ministry of Public Safety and Solicitor General, which is responsible for regulating casino gaming in the province.

There are three potentially significant consequences for government if it fails to adequately ensure gaming integrity in casinos. These include…. Unsavoury individuals may become involved in the industry, posing a threat to patrons and increasing the level of crime. The other threat: a large number of patrons may stop visiting the casinos if they are not satisfied with the fairness of what's going on, and that will impact government revenues. The government may not receive all the revenue that it's entitled to.

The purpose of our audit was to assess whether the government adequately manages gaming integrity risks in casinos. Specifically, we sought to learn whether the provincial government is adequately ensuring that casino industry participants meet high standards of honesty, that the casino gaming equipment operates fairly, that casino gaming activities are conducted honestly and that government is receiving its correct share of casino gaming revenue.

Our audit focuses on the period between September 2004 and January 2005, during which we carried out our work. We also focused on the 19 casinos that were in operation during that time period. We didn't look at the community gaming centres which had only recently started to get slot machines in them, but we scoped those out.

Over all, as Errol pointed out, we concluded that the government adequately manages gaming integrity risks. We found that adequate steps are taken to ensure the following: that the casino industry participants meet high standards of honesty, the gaming equipment operates fairly according to approved standards, the gaming activities are conducted honestly and government receives its correct share of casino revenue.

We also think that in order to further strengthen the process and mitigate risks, some improvements can be

made. We think that BCLC, B.C. Lottery Corp., can make improvements, which include the reporting it provides to its board of directors on the results of its operational gaming audits and strengthening the surveillance function in the casinos.

We also think that GPEB, the gaming policy and enforcement branch, can improve its casino participant registration, casino equipment certification and audit and compliance functions and that government should confirm that the highest priority of the general manager of GPEB is to ensure the integrity of gaming in B.C. We'll get to all of these improvements as we go through the detailed findings.

Now, a bit of background for everybody before we look at the detailed findings. As mentioned previously, commercial gaming in British Columbia is a significant industry. BCLC, the Lottery Corp., estimates that industry is responsible for 8,500 direct jobs and more than 5,000 indirect jobs. Over the past few fiscal years the provincial government's share of revenue from gaming has increased significantly. During the 1999-2000 fiscal year, provincial revenue totalled $525 million, and during the 2005-2006 fiscal year it has increased to $811 million — a significant increase.

Casino gaming consists of up to 22 casinos and is an increasingly important part of commercial gaming. Twenty-one casinos operated during the 2004-2005 fiscal year. BCLC's casino gaming revenue has increased dramatically from $445 million in 1999-2000 to $893 million in 2004-2005, and that's net of prize payouts. So it has increased significantly.

The nature of casino gaming is also changing. While the number of table games has remained the same or relatively unchanged over the last few years, the number of slot machines has grown. Casino gaming activities are spread throughout the province in all regions, with the heaviest concentration, as we would expect, in the lower mainland. Local government's approval is needed before a gaming facility may be located or relocated within its boundaries. They receive a portion of the gaming revenues now, which is 10 percent of net revenue from community casinos and 1/6 of the net revenues from any destination casinos. In 2004-2005 host local governments' share of casino revenue totalled $53 million.

The key legislation for gaming in British Columbia is the Gaming Control Act and the gaming control regulations. The legislation describes the roles and responsibilities of the two key organizations: the British Columbia Lottery Corp. and the gaming policy and enforcement branch. What I'll do is take you through some of the responsibilities of GPEB and BCLC.

The gaming policy and enforcement branch is the regulator of gaming in the province. As regulator, GPEB's key responsibilities include the following. They ensure the overall integrity of gaming; develop, manage and maintain the government's gaming policy; establish public-interest standards for gaming operations, which would include extension of credit, advertising, activities allowed and policies to address problem gambling; investigate the conduct, management, operation or presentation of gaming at a particular gaming facility; administer and enforce programs for the licensing of gaming service providers and registration of gaming workers; certify the technical integrity of gaming equipment; and monitor compliance by gaming service providers and gaming workers with the Gaming Control Act — the regulations and conditions that are found in the licences and registration.

British Columbia Lottery Corp. is an agent of the Crown, and it has the authority to conduct and manage casino gaming within British Columbia. BCLC's responsibilities, according to the Gaming Control Act, include making sure that commercial gaming facilities operate according to government policy. Corporation standards, policies and procedures is a huge policy book that these operators have to abide by. They set up operational rules of play in all gaming facilities. They manage contracts with the gaming service providers and ensure compliance with that. They transfer net proceeds from commercial gaming to the province. They ensure that there are problem gambling programs in the gaming facilities, and they locate, relocate or make substantial changes to gaming facilities.

During the remainder of the presentation I'll review the answers to the four questions that we posed. The first question dealt with the honesty of the participants in the casino gaming industry. We found that the government does adequately ensure that those who participate in the industry meet high standards of honesty. Specifically, the gaming policy and enforcement branch has implemented well-designed processes to collect the information needed to assess applicants' suitability. They provide adequate guidance to its investigators for assessing applications. They ensure that its investigators are qualified and free to make impartial assessments. They ensure that all applicants are background checked, using appropriate sources of information such as police systems, banks, credit bureaus, and they adequately monitor to ensure that on an ongoing basis those people working in and providing services to casinos continue to meet the high standards of honesty.

However, we did find, unlike gaming workers and key corporate personnel who are rechecked after three years and five years respectively, that GPEB, gaming policy and enforcement branch, and B.C. Lottery Corp. key employees are not rechecked. One of the things we also found was that some of the B.C. Lottery Corp. employees who helped to ensure gaming integrity in the casinos but who do not spend a whole lot of time there do not have their backgrounds checked by GPEB.

To improve, we think that GPEB could or should require that key employees of the gaming policy and enforcement branch and the Lottery Corp. reapply for registration using the similar time frame criteria that is currently in place for the gaming workers and service providers and require that all B.C. Lottery Corp. employees that help to ensure gaming integrity in the casinos are also registered.

The next question deals with whether the equipment operates fairly, which is rather important. For this second audit question we concluded that the government adequately ensures that gaming equipment does operate fairly. The equipment is purchased only from approved suppliers that have been background-checked and registered by GPEB. Gaming equipment is only used in casinos after it's been independently tested against approved standards and it's been tested by the B.C. Lottery Corp. quality assurance group and certified by the gaming policy and enforcement branch.

However, we did find that the technical standards used to check gaming equipment were not specifically adapted to British Columbia. We also found that GPEB did not have sufficient evidence to support its reliance on the independent test facilities and on B.C. Lottery Corp.'s quality assurance staff that test the gaming equipment used in B.C.

To improve, we think that GPEB should ensure that technical gaming equipment standards specific to this province are developed and approved to govern the functioning of gaming equipment in provincial casinos and that they need to obtain additional assurance to support their reliance on the gaming equipment testing done by independent test facilities and by the B.C. Lottery Corp. quality assurance group.

For our third audit question we concluded that the government adequately ensures that gaming activities are conducted honestly. Approved policies and procedures have been implemented governing key casino operations to ensure honest gaming activities, and adequate mechanisms exist to ensure that the policies and procedures are consistently followed. This includes the work of the B.C. Lottery Corp. staff stationed at casinos, casino surveillance operations, B.C. Lottery Corp.'s ongoing operational gaming audit program, GPEB's annual casino audits and GPEB investigation of incidents that pose a potential threat to the gaming industry.

However, we did find that while the B.C. Lottery Corp. policies and procedures require that surveillance staff be certified under its surveillance certification program, the program has not yet been fully implemented. Also, seven of the casinos did not yet have current surveillance system component plans approved by B.C. Lottery Corp. In addition, the Lottery Corp.'s website information describing the odds to win for each of the slot machines deployed in the casinos was not current and had last been updated in February 2003. The overall results of BCLC's casino audit program and the state of casino compliance with policies and procedures were not being communicated to the board of directors regularly.

To improve, we think B.C. Lottery Corp. should fully implement a certification program to ensure that surveillance personnel meet minimum standards of proficiency. Also, all casinos should have approved surveillance system components in place. We also think that the Lottery Corp. should ensure that its website information is up to date on the slot machine odds of winning and that the board of directors be informed regularly of the results of the operational gaming program audits that are done.

In the case of the policy and enforcement branch we found that in the course of doing its work, the branch's audit and compliance group relies on B.C. Lottery Corp.'s casino systems, such as the casino management and Casinolink systems. However, it really hadn't yet directly assessed whether such reliance is warranted. We also noted that there is frequently a significant delay between the branch completing its casino audits and the issuance of its reports. In addition, we found no accountability reporting by GPEB to the Legislative Assembly on the state of gaming integrity.

Lastly, we noted that the general manager of GPEB has the responsibility both to ensure the integrity of gaming and horse racing in the province through regulatory and enforcement activities and to advise the government on broad policy standards and regulatory issues. Some matters on which advice is given might affect the achievement of the government's economic and fiscal policy priorities for gaming, so in our view it's possible that at times these two responsibilities might be in conflict, making it difficult for the general manager to take strong enforcement actions, especially if they potentially have a negative consequence on government's economic and fiscal priorities for gaming.

What we think should happen is that GPEB should formally evaluate key B.C. Lottery Corp. systems relied upon by its audit and compliance group when doing their annual casino audits, produce more timely audit reports and report annually to the Legislative Assembly on the state of gaming integrity in provincial casinos. We also think that government should confirm that the highest priority of the GPEB's general manager is to ensure the integrity of gaming in the province.

Our final audit question was to look at whether or not the province got the correct share of revenue from the casinos. We concluded that government adequately ensures that it does receive its correct share of casino revenue; controls have been implemented, which help to ensure that all gaming activities are recorded; cash is safeguarded at all times from loss; gaming revenue is accurately recorded in the accounting records at Lottery Corp.; and government's share of casino revenue is collected.

Just before I turn it back to Errol, I'd like to say that we'd like to thank the Lottery Corp. and the gaming policy and enforcement branch for all the cooperation and assistance we received during the audit. It certainly helped make the audit go smoothly.

E. Price: Now, we're happy to take questions. Chair, you suggested that it might be good to hear the other presentations, so over to you.

R. Fleming (Chair): Maybe we'll take questions if they're just of an informational nature, and then we'll hold the major questions until the end.

R. Cantelon: What are the consequences for the casinos not having the surveillance? I'm quite surprised that seven lacked full implementation. What happens? Are they fined or just told to get up to speed by a certain date?

W. Schmitz: B.C. Lottery can probably answer that in more detail, but generally they all have surveillance equipment in place. The plans would more be to indicate how they're going to improve the casino surveillance equipment over time. As you may be aware, digital equipment is the state of the art right now, so in some cases they would have older equipment. B.C. Lottery wants to make sure that they have a plan in order to get to the higher level. B.C. Lottery would be working with those casinos in order to get a proper plan in place.

W. Schmitz: I would say not that significant at the moment, because they do have surveillance equipment in place.

R. Fleming (Chair): Diane, I saw your hand. Is this something you want to wait until after the presentations to ask?

D. Thorne: Well, perhaps for a couple of them. I did have one specifically around…. I'm just wondering: how long do the casinos have to meet these new requirements? I mean, is there a fairly rigid time frame?

W. Schmitz: I think, as you'll find from the presentations that are going to be made, in all cases….

W. Schmitz: Yes. I believe in basically all cases they are acting and, in many cases, have fully implemented.

D. Thorne: I mean, the surveillance one is certainly one of great concern. That's over a third of the casinos that didn't have a plan in place.

My name is Derek Sturko. I am the assistant deputy minister, gaming policy and enforcement branch, which is part of the Ministry of Public Safety and Solicitor General. I'm also the general manager referred to in the report. It's sort of a dual position, but it's referred to as general manager in the legislative framework.

I also apologize in advance. Like probably everybody else in the room, I'm in the midst of — or finishing, hopefully — one of those cold-flu bugs. If I lose my voice, my apologies.

I'd also like to acknowledge the fact that my boss, Deputy Solicitor General David Morhart, is in attendance today as an observer.

I guess this is, in a sense, the beginning of the response to this report. I'm going to do two quick pieces. One will be to do with context. I think it's important to set up for folks, collectively on behalf of the British Columbia Lottery Corp. and gaming policy and enforcement, a little bit of contextual information about the industry and then, secondly, to deal specifically with the nine recommendations of the 13 that dealt with my organization's responsibilities.

Just so it is clear, all 13 recommendations were aimed at the two respective organizations. While some of them will have implications that fall down into the casino as well as the gaming industry generally, it's really incumbent upon our two organizations to respond and make those recommendations happen.

So quickly, by way of context — some of this was referred to earlier in more general terms — this is now about a $2.2 billion industry in the province. There are 50 gaming facilities operating today in the province — bingo halls, racetracks, casinos. There are over a thousand types of gaming equipment operating in the province, and all of those have to have been certified and confirmed that they are doing what the standards that come with them and the published operating procedures say they're doing.

Over 250 companies are directly or indirectly involved in the business. That's everything from Great Canadian Casino Co., which is the biggest service provider on the casino side, down to the guy who provides bingo paper and the people who provide janitorial services. They are all, in one way or another, scrutinized before they get involved in the industry. About 14,000 employees are now involved.

On an annual basis we do about 550 audits of the industry. That will include every casino on an annual basis, every bingo hall and commercial community gaming centre on a biannual basis, all the major ticket raffle licensees and so forth on an annual basis, and some others on a more as-needed, ad hoc basis.

The way the industry works, just for clarity. There are, in fact, five kinds of groups involved. There's my operation. Russ went through several of the functions

that my office performs. There's the British Columbia Lottery Corp., which is generally responsible for operational activities other than horse racing. The corporation contracts in all of its delivery mechanisms with what we call service providers — companies that provide day-to-day services on a contractual basis. This sets up a relationship where a whole host of companies begins to get involved — Great Canadian Gaming Co., for example.

We license private sector companies to conduct and manage horse-racing activities. Finally, my office also licenses about 10,000 charitable organizations a year to conduct gaming events — 50-50 draws, ticket raffles, the big hospital lotteries and so forth.

So it's quite a comprehensive industry now, and there's quite a host, as I've been trying to show you, of companies and individuals and organizations involved. As I'm sure you're aware, they're allowed a variety of provincewide and nationwide lottery products. Of the 50 facilities: 18 casinos operating, 25 commercial bingo halls and four community gaming centres. Community gaming centres are essentially bingo halls into which the Lottery Corp. has introduced a small number of slot machines — usually somewhere between 50 and 100 slot machines. This is done in consultation with the local community. It provides an alternative form of entertainment in those facilities.

There are six horse racetracks operating in the province. You're probably familiar with two or three of them. There are a couple operating in the interior as well, which operate very, very minimally — anywhere from two to ten race days a year. There are 19 teletheatres. Some of these are in pubs and bars; some of them are in casinos or at racetracks. And as I said, 10,000 licensed gaming events…. These are all those charitable events you see.

The chart up there tries to give you in one snapshot an image of where gaming is allowed. So across the top axis you have locations — casinos, bingo halls, racetracks and so forth. On the left-hand side you have the forms of gaming that have been authorized. So if there's a star in that cell…. For example, lottery products are probably the most frequently available product. They are available in casinos and are authorized to be available in bingo halls, racetracks, etc., whereas some of the others, like slot machines, are available in much fewer locations.

That's just to give the committee a sense about the scale and scope of how much gaming activity goes on and where they're authorized in the province. According to the most recent stats, 91 percent of British Columbians have gambled. These are 2005 stats. Now, that might be buying a lottery ticket; that might be going to a casino on a daily basis. Eighty-five percent do so routinely. That means once a week at least, and almost 40 percent — 39 percent — do so on a weekly basis.

So a pretty big impact on our broad British Columbia community. The most prevalent gamblers? Pre-retirement seniors have the highest incidence of gambling. Youths just past the age of minor are the second, and first nations citizens have the third-highest incidence of gambling.

Russ alluded to some of the numbers around money. This diagram around gaming revenues shows you, for the last two full fiscal years, how much money government took in from gambling. In the last full fiscal year it was just under $819 million at the end of the day. This year it will probably exceed $900 million.

The portion coming from casinos is a growing portion of the pot. This is partially due to a revitalization of that part of the industry. It's partially due, obviously, to the introduction of more slot machines and partially due to a lot more awareness activity around the attractiveness and so forth of B.C.'s facilities.

Where does that money go? This next diagram gives you, in excruciating detail, where that money goes — again, for the last two full fiscal years. Of the $819 million that government took in last year, it put about $133 million into the hands of local organizations and communities — charities, all kinds of organizations. It put $53 million into the hands of local governments in which casino gaming is hosted. It put $4 million back into the horse-racing industry and so forth — $147 million targeted directly to the Health special account. Going back into community is a big chunk of it, and going into consolidated revenue, about half of it.

Just to quickly reiterate, the two key organizations named in this report are the gaming policy and enforcement branch and the British Columbia Lottery Corp. I won't run through that big, long list.

What I will point out, though, is that as far as my operation is concerned, the three primary parts of my operation that were touched upon by this audit were our registration activities, which is registering people, companies and equipment; our audit activities, which is auditing both the compliance of commercial gaming facilities with standards and expectations, as well as auditing the role of the British Columbia Lottery Corp. in those activities; and finally investigations, which is the fact that every time there's an allegation or a hint of wrongdoing, we will go and investigate, either independently or in cooperation with the appropriate law enforcement agencies, what has been alleged to determine if any action or sanction is required. As I mentioned, I think there are about 3,500 of these a year now.

I will just quickly touch on the recommendations — again, the nine that were directed at my operation. The first one had to do with background checks of both British Columbia Lottery Corp. and gaming policy and enforcement branch employees. We fully agree with this recommendation.

When we introduced the Gaming Control Act in 2002, we introduced the notion that both key Lottery Corp. employees and key GPEB employees would be cleared. Clearance is a one-time event. You have the same scrutiny done to you, but it's only on a one-time basis. So we are going to move to the model where every employee of my operation…. It will be exclusively and extensively across the whole organization.

A great majority of the employees of the Lottery Corp. will be scrutinized on a routine basis — a minimum of every five years. What this means is background checks, criminal-record checks, financial history checks and so forth. We'll have a small amendment to the Gaming Control Act, hopefully in the coming session, to make that final change.

The second recommendation had to do with which BCLC employees were being registered. We do, at the moment, a small number of key employees in the corporation. Some of the people sitting in this room, for example, have had their backgrounds checked and so forth. We will extend this in essence to any employee — and this will go beyond casinos, by the way — who has the capacity to impact the outcome of the game.

In essence, if you are part of the Lottery Corp.'s on-line gaming system and you have the capacity to impact the outcome of that game, you should be caught in this mix. Or if you're a key employee located at a casino or a bingo hall who has the capacity to impact the outcome of a game, you should be brought into the fold. That's basically the model we've worked out. Obviously, there are certain employees that have no impact on the game, and we won't — at least for the time being — make any move in that regard.

The third recommendation, regarding certification of equipment. We have been employing industrywide international standards. The recommendation is that we move to having a B.C.-only or a made-in-B.C. kind of standard, and we've accepted that recommendation. We've already put in place a B.C.-based technical standards document just last month for all game equipment other than the on-line gaming stuff. That one is under development. Sometime this month — and hopefully by the end of this month, or no later than — we'll put up the on-line e-gaming equipment certification standard.

The difference between what we're doing now and what will be done as a consequence of these new standards has a lot to do with how gaming is delivered in B.C. more than it does with specifically how the equipment operates. To a degree, a slot machine is a slot machine is a slot machine. Up here in British Columbia or in Las Vegas, they're essentially operating the same way — right? But in British Columbia we have some additional and extensive operational links, I guess. For example, there are links to all of the Lottery Corp.'s headquarters for all of the slot machines. It's those additional elements that we're building into the B.C.-only standards. So we'll make sure everything is up to those standards.

There was a recommendation regarding getting additional evidence to rely on the independent testing facilities. Right now we use independent testing facilities to evaluate BCLC's equipment. I mentioned that there are a thousand types of equipment in operation right now. Trying to have our staff do that on a day-to-day basis…. First off, we don't have the expertise, and secondly, we don't have the capacity.

What we do is employ independent testing agencies to do this. What we've done is that for the coming fiscal year, we'll be in compliance with — and I hope nobody will ask me exactly and specifically what this means — the International Standards Organization's highest-level standard for quality assurance for gaming equipment in the coming fiscal year.

Number five is that we should periodically review the work of BCLC's casino quality assurance group, support the branch gaming equipment tests. Again, we have adopted a review process. We've hired an independent agency to go and test the work that BCLC's quality assurance group does. We already do this to a small degree every time quality assurance work is done, but what we're now doing is making this a more routine, regular and formal part of our processes.

The sixth recommendation that affected us is that we should produce more timely audit reports. We've adopted a standard of one month for all commercial gaming activity so that within one month of us completing our audit work, both the Lottery Corp. and the gaming facility in question will be advised of the outcome of that audit. We have, in fact, now implemented that standard. Just for the members' information, we've actually extended that to all of our audit work on the charitable gaming side as well. So we've had a one-month standard for the entire audit function.

The seventh recommendation is that we obtain more direct evidence to support our reliance on BCLC's automated casino reporting system. Russ mentioned some of this stuff earlier on — some of the technical equipment that is managing and monitoring the way money is managed. We are doing some work in the field right now, which we will be completing by the end of March to in fact fully implement this recommendation. So this one's not done yet, but we've adopted it and accepted it as recommended.

Probably the most difficult one for us to address was the recommendation concerning my position. This was that the integrity of gaming should be confirmed as the primary responsibility of my position. One of the reasons we felt this was difficult was because in fact that's what the law says. The law spells out that my job's number-one function — and the employees who work for me — is to ensure the integrity of gaming.

Just to add to that, our response to the recommendation reaffirms that. The Solicitor General in September of last year wrote to the Auditor General to again reconfirm that the number-one priority of my position, putting every other priority that we may have as a government employee, is to ensure the integrity of this industry.

The final recommendation that related to my operation was that my branch produce an annual report to the Legislative Assembly. Again, we've accepted this recommendation. Our target is to have the '04-05 annual report — in other words, the fiscal year that ended ten months ago — tabled this session, hopefully by the end of March, and to have the '05-06 report, which will be for the one that will end in eight weeks, tabled by

the end of June. That may have to be tabled with the Clerk, I understand, but to have a three-month window at the end of each fiscal year by which we have reported on the previous year….

So we're doing a catch-up this first time, and then we'll do the second one within three months. That covers the context and the recommendations we were asked to address.

R. Fleming (Chair): Thank you very much, Mr. Sturko. I'll ask B.C. Lottery to make their presentation, and then we'll move into questions, so we might have you back to get your views again.

Good morning and welcome, Mr. Poleschuk. Good to have you here. I'll just turn it over to you to introduce the people that you're with today and to start your presentation.

My name is Vic Poleschuk. I'm president and CEO of the British Columbia Lottery Corp. I'm most pleased to be here today with my colleagues Mr. Brian Lynch, who is our vice-president of casino gaming, and Mr. Terry Towns, who is our director of corporate security, to both present and answer any questions on the Auditor General's report.

Firstly, let me say also that BCLC is very pleased with the Auditor General's report, especially the very positive findings. We have either implemented the Auditor General's recommendations or are in the pro-cess to do such for all the BCLC recommendations.

Since assuming responsibility for the conduct, management and operation of casino gaming in 1998, BCLC has committed to not only ensuring the effective conduct in management of casino gaming but also transforming the industry by improving the quality of the product being offered to our players and improving the overall standards of operations with our casino service providers.

Our mission at BCLC is to provide responsible gaming entertainment generating income for the public good. For casinos in British Columbia, this means providing high-quality casino facilities that offer a broad range of entertainment options to our players; safe and secure casino facilities; fair, honest and fun games for our players; and responsible and integral gaming practices that, above all, maintain and protect the integrity of casino gaming, including ensuring that we offer our products in a responsible manner to our players.

I think — just to take a moment here — that sometimes a picture is worth a thousand words. These are the casinos of the 1997-1998 era, which would certainly be low-standard both in terms of quality and in quality of operations compared to the casinos that you'll see emerging on the landscape today in British Columbia, which are new facilities — broader entertainment amenities, but most importantly, new technologies, new games, new systems, with the integrity to be able to run the industry properly. For those adults who choose to make a personal decision to participate in casino gaming as part of their entertainment choices, we want to provide them with a highly entertaining, fair, secure and competitive experience.

As we look ahead, we look forward to continuing to work in close cooperation with our colleagues at GPEB, with our private sector business partners and within government gaming policy to continually improve the quality of casino gaming offered here in British Columbia in terms of providing fun and entertaining games with a high standard of operational integrity and excellence, thereby ensuring the integrity of the industry and the continuing income to government for vital government charitable and community programs.

I will now turn the presentation over to both Mr. Lynch and Mr. Towns to address the specifics of the Auditor General's report.

B. Lynch: I would just like the opportunity to introduce myself. My name is Brian Lynch. I would like to give you some of my experience to show that there is a level of integrity in our business. Although being relatively new in British Columbia and Canada, I retired from the RCMP after 26 years as an inspector. In the early '90s I spent three years with the federal Solicitor General negotiating policing contracts on the first nation policing policy.

I was brought in as the executive director of security for Casino Regina when it opened up — prior to its opening — and received about a year and a half of training with the management consultant firm of Holland International, which has been responsible for the startup of many casinos internationally. Finland, Sweden, Spain, Portugal, Belgium are some that I'm familiar with, as well as the first casino in Manitoba, Casino de Montreal, and the latter one, of course, being Casino Regina. I was promoted to vice-president of operations and ran Casino Regina from an operational point of view for four years prior to being recruited to British Columbia, and I have served five years with Vic as the vice-president of casino gaming here.

I'm going to pass it over to Terry to give the presentation with respect to the auditor.

T. Towns: By way of introduction, I'm also a retired RCMP inspector. Those are not the only employees we have. I spent 29 years in the RCMP, and most of that time was in the organized crime and drug area. I've been with B.C. Lottery for the last five years.

The recommendations to BCLC are numbered in the Auditor General's report as numbers six through nine. Mr. Sturko has responded to the other recommendations, and I will respond to the ones that were directed at BCLC.

First, let me say that BCLC is pleased that the Auditor General report finds and confirms that people who work in the gaming industry meet high standards of honesty, that gaming equipment operates fairly in B.C.'s casinos and that gaming activities are conducted honestly. The government ensures it receives its correct share of gaming revenue.

Recommendation six was that BCLC update the public information on its website pertaining to the odds of winning at slot machines. This has been completed. The new update went onto the website, plus there were brochures put at every casino and gaming centre in the province in September. We're currently refreshing that brochure again for the second time, and the new one will also go up on the website and at the facilities once it's printed.

Recommendation seven was that BCLC report regularly to its board of directors the results of the operational gaming audit program and each casino's state of compliance with prescribed policies and procedures. I can confirm that the quarterly reports are currently being presented to the audit committee of the board of directors of BCLC on audits of all casinos, bingos and community gaming centres in the compliance of each individual facility. That's been done for the last two quarters.

Recommendation eight: that BCLC implement the surveillance certification program at the earliest possible date. I am pleased to say that the curriculum and training manual have been developed in conjunction with casino service providers. It's currently in its final draft, and the implementation of that curriculum and training manual will take place in March of 2006. The casino service providers will deliver the training based on the curriculum and training manual. We're currently in the contracting phase with the B.C. Justice Institute, which will deliver the examination and certification of surveillance operators. Implementation of exams and certification will commence for the next fiscal year.

I want to also indicate that BCLC has tried to implement this program before. We looked for a commercial training package that we could purchase. No such package exists. We looked in both Canada and the United States. So we've developed this in conjunction with the Justice Institute. This has been a lot of work, and I'm pleased to say that we're very far along the line now. The final piece will be the certification of the operators themselves.

Recommendation nine: that BCLC ensures that all casinos have approved surveillance system component plans in place. I can tell you that now all surveillance system component plans in all 19 casinos — 18 casinos and the Fraser Downs racetrack — have been completed.

I think at this point we'll go straight to committee members for their questions of any of the presenters today and begin there, although there may not be any. It was so thorough, and the recommendations have been dealt with.

B. Ralston: A couple of questions. Just looking at government revenue, it would seem that from 2001 to 2005 government revenue from gaming has increased approximately 80 percent. Included within that number it would appear that revenue from slot machines has increased approximately 100 percent, from $300 million to $600 million.

It would seem that the increase in revenue from slot machines is a substantial part of the increase in government revenue from gaming. I guess my question is about — I'm not sure who would answer this; perhaps Mr. Poleschuk, since that seems to be his responsibility — the type of slot machines that are found in casinos in other locations in British Columbia. I understand that the industry standard now has moved to a video form of slot machine rather than the mechanical form. First of all, perhaps I could confirm that before I go further.

V. Poleschuk: I'll address it from a broad perspective. Perhaps Mr. Lynch can talk to the detail on the games.

Our attempt is to provide an industry standard casino floor to our players — industry standard being what you would typically find in casinos all across North America. So if our players go across the border into Washington State, or if they go down into Alberta, Ontario, Quebec or Las Vegas, they will see virtually the same type of floor. The industry is moving to a higher mix of what are called video slot machines, which are games that have multiple games and features on them. Our casino floors today still comprise a combination of reel-base slot machines as well as video-base slot machines.

B. Ralston: Given that the industry standard would appear to be moving to video slot machines, I guess I have a question. This is related to the scope of the audit about the fairness of the machines. According to Howard Shaffer, who is the director of the division on addictions at Harvard Medical School, slot machines have a different impact on the brain than other forms of gambling. Because the video form is faster than the mechanical form, they hold the potential to behave in the fashion of psychostimulants like cocaine or amphetamines. Colleagues of his have compared the brain scans of people high on cocaine with people out gambling. Similar neurocircuitry is lighted up in both sets of images. The article goes on to talk about the fantastic profitability of these kinds of video slot machines.

I guess within the scope of fairness of the machine, what steps have you taken to analyze that prospective danger? I think the literature will show that the percentage of gambling addictions that arise, arise specifically from slot machines. They don't have the same social safeguards that other forms of gaming do where you play them in a group — like the poker channel, I guess, or something like that.

You're an individual confronted with a machine, in the case of slot machines. What steps, notwithstanding the revenue potential here, are you taking to ensure that the games are not only fair to the casinos but also fair to the prospective customers?

D. Sturko: If I could take a crack at that one. Mr. Poleschuk might want to add something to this.

One of the responsibilities that my branch does have is the province's responsible gambling strategy, including the problem gambling program. We have in place a comprehensive effort to identify and deal with people who have gambling addictions.

I'll just use one or two examples to try and lay out what I mean. For example, on site now at two casinos we have actually placed a couple of our problem gambling counsellors. Amongst their functions is to work on a full-time basis with the staff and patrons of those casinos to help identify and provide opportunities for treatment to anybody who may have a gambling addiction. Once again, the vast majority of people who go to these facilities…. They do it as a form of entertainment, but there are instances where people who do have an addiction problem will go to casinos or other forms of gambling.

The other side of the coin, though, is that, in fact, it is not our legitimate, regulated forms of gaming where the highest levels of addiction arise. It's actually in the unregulated circumstances — people on the Internet and so forth — where much higher incidences of problem gambling occur. There is no protection for those individuals.

In addition to having the identification and so forth methods, we have treatment services and resources available on a free, confidential basis to these people. There's a whole package in place — right? There's the entertainment, but if people do have a problem, we've got a package of resources and services available to help them.

V. Poleschuk: Better than 95 percent of the adult population, not just in British Columbia but in the western world, can participate in gambling and do it for fun and recreation and do it within a responsible manner. Up to 4 percent have the potential for problems, and on average, between half and 1 percent have very serious problems with gambling.

Our goal in British Columbia is to make sure that our players are well informed and that they make healthy choices about their choice around participation in gambling for entertainment purposes. Every slot machine in British Columbia, be it reel-based or video-based, has messaging on it — instantaneous messaging that reinforces responsible play, that asks questions about whether you've been at the machine long enough. We see this as an area that we will have to continue to improve and provide not just best practices but industry-leading practices to ensure that, in fact, our players are playing in a healthy, informed manner.

B. Ralston: I'm talking specifically about the video form of slot machines, so I guess…. Do you see the necessity to take any steps within your mandate, if that's appropriate — or Mr. Sturko — to introduce further regulation of the video form of slot machine? I'm not talking about the other forms of gaming that might encompass 95 percent of the adult population, as you say. I'm talking specifically about the video form of slot machines.

Obviously, as you're aware, some municipalities have made the decision to not permit slot machines within their casinos. Given that it's the industry trend, I'm wondering what steps, if any, you see to take to limit the introduction of those machines.

D. Sturko: In terms of the regulatory structure that sits around these machines, we have taken additional steps. Mr. Poleschuk referenced the messaging that comes across the screen. We have a requirement and an obligation on the service providers, in addition to the actual slot machines themselves, to make messaging and resources and opportunities available to people throughout the facility.

Walking into the bathroom, you encounter messaging to remind you that if you have a problem, here is a chance to do something about it.

We have introduced new responsible gambling standards into the province, which have become a condition of the registration of all the companies providing services. These have introduced new obligations onto those service providers. For instance, if you go to Las Vegas, you won't find a clock in a casino. Soon you will in British Columbia. They are required to introduce clocks around the facility to remind people just how long they've been sitting there.

At the end of the day, though, there's only so much we can do. There is a portion of the population with addictive tendencies, and we could never absolutely guarantee they will never step up to a slot machine. All we can do is try to put the best programs, opportunities and training in place to help identify them and to have available those services and programs to help them preferably avoid getting a problem but certainly help them overcome the problem if they get one.

B. Lynch: If I might comment. As one jurisdiction in Canada, we're quite small in reference to the number of machines we purchase — in particular in the United States and Europe, where most of the machines are manufactured. We have had discussions with other jurisdictions to talk about problem gaming messages and issues with not only video but reel slot machines — and having time clocks come up on the screen to show how long individuals have played that particular machine without a break. They have been tested, actually, in Atlantic Canada — in Nova Scotia.

The problem is that these huge manufacturers…. It's difficult to change their point of view and manufacture these games. We as an industry are trying to get the jurisdictions in Canada to put pressure on those manufacturers. Certainly, we as one jurisdiction couldn't do that, but if we are able to gather all of the

jurisdictions in Canada — you know, where we have 100,000 games that we're purchasing — we might have the ability to make some changes.

The other issue is that probably within five years reel-type games will not be available in the market. I suspect that they'll be downloadable games. A customer will be able to actually come in and choose what game they wish to play at which denomination level they wish to play, etc. The reality is that probably within five years or more there won't be any reel games. They will actually be all video-downloadable. I think we have to find some other mechanism to deal with the addiction right at the slot machine. Certainly, we're looking at those options.

V. Poleschuk: If I may have Mr. Towns comment on one of those programs that we are currently running in the marketplace today.

T. Towns: We have a self-exclusion program at all our gaming facilities, where you can self-exclude yourself. You sign a consent form, and on that form we also have another piece to it where you can…. If you give us consent, we'll refer you to a problem gambling counsellor. We initiate that from the outset with that particular individual, if they consent to do that.

Right now we have those self-exclusion programs set up at every gaming facility.

J. McIntyre: I just wanted to put on the record that I was very impressed with the report. I have to say I don't know very much about this industry. I was very impressed when I read both the Auditor General's report and the fact that we have so well matched the four goals that you set out to examine. Then it seems that the industry would indeed have responded very positively and favourably and have many of the recommendations in place already, as we speak. I was very impressed.

I guess I just have a question for Mr. Jones. I know that the B.C. Liberal government brought in the Gaming Control Act to strengthen the integrity and streamline the operation for efficiencies. I guess my question is: have we all been moving in the right direction? Has this been working? Are we moving forward in a very positive and satisfactory way, from your perspective as the auditor?

R. Jones: I've been around the gaming industry for a while. Since I've joined the office, we did a report a number of years ago when the Gaming Control Act wasn't in place. This is certainly a step in the right direction. It has certainly put some, I think, parameters in place that help the province run gaming in a good fashion. Before the act was there, it was a federal act that governed how gaming was run in the province, and there weren't really a whole lot of rules and regulations around it. The province did the best they could, but now this seems to have brought some structure to it, so I think it's moving in the right direction.

M. Polak: I'm not sure who is most appropriate to direct this question to, but I'm wondering how the role of local governments has changed as we've gone through that process of seeing the Gaming Control Act in effect. Certainly, in my community of Langley we have a new casino, and it's being very well received. It had a different process involved in seeing that casino come to fruition than maybe some in the past.

I wonder if you could comment on the role of local government and how that plays out.

D. Sturko: If I could just add a comment about the act as well. I mentioned, as I began my presentation, that it was the registration, audit and investigation functions that were primarily the subject of this audit. None of those had any legislative teeth before. They were all kind of done by policy before the act came into force. We now have the actual strength of law to act on these matters — right?

In regards to local governments, in the old days, if you will, under the former model the corporation or its predecessor organizations…. It's only relatively recently that the corporations that conducted casinos and bingo could do what they wanted and could place a casino here, or whatever there, and weren't really bound to necessarily get local government approval. That changed with the act formally but changed a little bit before that informally.

What we've now got is essentially a model where local governments in a sense have veto power. If they do not want a new gaming facility, the corporation has no authority to introduce it into that community. It doesn't apply retroactively. You can't kind of undo something that's already there.

It also, though, set up a second feature, which is revenue-sharing. Because the local government now gets essentially 10 percent of what government brings in, it's a pretty lucrative business, and it's also very powerful in terms of what you can do in your community. If you think about the community of View Royal, which I think multiplied a number of times its revenue stream as a consequence of that casino — based prior to it, it just had its tax base — that's a pretty big, positive impact on a community — right? So I think there's been both the veto power–local control and the positive consequences of money into the community.

M. Polak: I've got a couple more, if that's all right. I'll try to be brief.

Now, you mentioned the old days. Going with that theme, I was trying to look through the report and see sort of what are the old days. Many of the reports go back to '99. The first slot machines, if I recall…. I recall the big Surrey incident, Great Canadian — all that big…. Everybody was concerned. It was a huge change. That was '97, I think.

V. Poleschuk: The first slot machines would have been installed in late 1997, early '98, and that was with some of the issues around the city of Vancouver and the corporation and the city of Surrey.

M. Polak: Okay. So then that is going to lead me to a question. The graphs here don't really go back past '99, but if you take a look actually at the report we reviewed last time at Public Accounts, it has a table that gives net income for gaming. The biggest jump — I thought perhaps it was slots, but I guess it isn't, given that…. The biggest jump — and it's like almost 57 percent compared with, I guess, in and around an average of 8- or 9-percent growth in every other year…. There's a growth of about 57 percent in net income from gaming from '98 to '99. It just struck me: what would account for that in that one year? I mean, that's absolutely…. Compared to an average of 7 or 8 percent in the other years….

D. Sturko: In 1997 the government of the day ran a request-for-proposal process and sought destination casinos and destination bingo hall applications. A number of destination casinos and one destination bingo hall emerged out of that process. It would have been '98 or '99 when they were all starting to come on line. It's probably a big chunk of it, if not….

M. Polak: Okay. That accounts for that. So it wasn't slot machines per se; it was more the whole….

D. Sturko: It's probably a number of factors, but I imagine that RFP process starting to come alive…. Maybe some slot machine….

M. Polak: Is that actually accurate? It just seems like a…. I mean, I shouldn't say that. I'm sorry. I don't mean to question the integrity of the Auditor General's office. It just seemed that the others are all pretty consistent. You know, if you average it out, you go up to 11 or 12 or whatever. If you average it out, it's about 8- or 9-percent average growth per year in net income, but all of a sudden that '98 to '99 is 56.9-percent growth in net income in one year.

V. Poleschuk: If I may, in 1997 there were zero slot machines in the province of British Columbia. Gaming policy was effectively changed by government at that point in time, and we started the rollout of slot machines into casinos. In 1998 we were formally given the responsibility under our banner, and through '98-99 we started that first-phase rollout into some of those not-so-nice facilities.

D. Thorne: Well, coming from Coquitlam, I know some of the people on the podium there. We've certainly had our troubles, or whatever you want to call it, in Coquitlam over casinos and bingo halls in the last ten years, and we inherited the Surrey casino when they didn't want it anymore. We now have, I think, 1,000 or 1,200 slot machines — right?

One of the things that has come out of that in Coquitlam is that there have been workshops held and recommendations made around harm reduction issues, as the gentlemen I'm sure remember. I'm wondering: has there been any action taken or any forward movement around the institute for problem gambling — you know, the recommendation based on the Alberta model? Has anything happened at all in that?

D. Sturko: We have, in fact, not taken that specific action. We have, though, put in place a…. I've referred to a responsible gambling strategy and kind of a three-year plan tied to that strategy. The strategy has as its objective three primary goals. One is to actually reduce the incidence, which is not an inconsequential challenge — to try and address this issue before people get the problem. The second one is to provide good service, and the third one is to change the way we actually deliver programs in casinos.

We have a whole host of activities. These are up on our website, by the way. They're all publicly available. What we're doing is starting to engage a broader base of the community into the work. We know that the province has the lead on this, and the province has some responsibility to step up. But there are a lot of beneficiaries from this industry, including local governments and service providers. We established a partnership to build a bigger base of resources — I guess, for lack of a better way of saying it — to get aggressive on this stuff. That will be awareness and research and so forth.

We have joined down a comprehensive research path, though, because your question is really more about research, I guess. We have joined both the national and the international research tracks, so we do some of our own research in the province. We're also part of a number of studies. Two examples — one is in the lower mainland. In four lower mainland communities we have sort of a social-economic impact study going on. It's a five- or six-year study. We're looking at: what did the community look like socially and economically before the casinos got there? Then how did they change over time as the casinos existed? We do a prevalence study. Every five years we check on the incidence, I guess, of the problem-gambling problem.

Our tack is to try and build on all the various community organizations that have benefited. I guess I could mention one other. We're also doing some preventative stuff working with the city of Richmond, Richmond Addiction Services, the Richmond school district to develop a grade-nine-based resource — not a piece of curriculum, because the curriculum is already so full — to be made available to help youth that age understand what this can lead to if you take those steps.

So it's a comprehensive plan, but we're not doing an independent agency; we're doing it as part of an organized package.

D. Thorne: Okay. So one other question I had, and it may be totally not the right place to ask it, is: why does the destination casino host community get such a bigger percentage than the community casino or….? Well, of course the bingo gaming centres are a whole…. That's another question. But what's the difference?

D. Sturko: When the destination casinos were established in 1997 and beyond, it was a different model. They were destination-oriented complexes — community centres, convention centres, hotels, casinos, etc. — whereas, as Vic pointed out, the old model of casinos were kind of like boxes. So the consequence and the impact on the community was much bigger, but also the investment was much bigger. The province at that point made a decision to make a higher payment to those communities.

D. Thorne: How is the Coquitlam casino any different, with a convention centre now — well, you all know the changes — comparing it, say, to River Rock?

D. Thorne: But the community is benefiting so much more in Richmond than in Coquitlam. It just doesn't seem fair.

Is there a study going on to look at that — the difference — or is it up to the community itself to initiate a change there?

D. Sturko: No, it will be up to us to initiate a change. It's a contract between government and the local government. As the contracts expire, we'll engage in a conversation.

D. Thorne: And that is part of the plan, to be part of the conversation with the communities.

D. Thorne: It is certainly being talked about at the community level, you know. I'm wondering. You're also….

V. Poleschuk: If I may, for clarification, the Richmond casino gets the same share as Coquitlam.

V. Poleschuk: The riverboat in New West was approved in 1997. There are, I think, three that are grandfathered in the province that are under the old revenue model. All of the new ones are under….

D. Thorne: So even though the riverboat is gone, the new casino out in Annacis or wherever it is out there — Queensborough — is still considered a destination casino.

My third question, just quickly. I still keep hearing rumours that the branch is looking at allowing VLTs into bars. Is there any truth to that rumour?

V. Poleschuk: By the way, I think that you would find, certainly, both sides of the industry here, from the regulators' side and the operators' side, in full 100-percent agreement with that policy decision. It is the right policy decision for our province.

J. Rustad: Just a couple of comments and then a question around it. It's interesting, because it's been mentioned a couple of times about revenue — gaming revenue, net revenue, around…. The growth between 1997 and 2001 was just around 100 percent.

Between 2001 and the time of the latest reporting here it's been about 45 percent. I find it interesting, the jump in growth. Obviously, the revenues from there are pretty significant, and there are huge benefits, as we saw from the slides, to the community groups and organizations where that revenue goes.

Something that was brought up was around the research across provinces. One of the stats I find very interesting is that when you look across provinces, B.C.

really has the lowest rate of gaming devices per capita, at about 2.5 per thousand, compared to all the other provinces, which is an interesting fact in itself, but I'm wondering….

I guess the question is to the Auditor General's office. In a lot of reports that they do, they do comparisons across Canada as to how we stack up. I'm wondering whether you've thought about going that road with gaming in B.C. versus across Canada and then, of course, to our other distinguished people we have here from the gaming corp., whether or not you've done any research or looking as to how we stack up to other provinces in comparison to gaming and issues around gaming.

E. Price: If I could just answer that first. I think maybe my colleagues will be able to answer specifically in terms of some of the comparisons with other jurisdictions. In the course of developing our audit criteria, we certainly looked at standards and audits that had been carried out in other jurisdictions to make sure that what we were looking at as audit criteria were sort of acceptable across the board, but in terms of the specific analysis that you're suggesting in terms of the incidence of gaming or the machines, that wasn't something that we looked at in the course of our audit.

V. Poleschuk: We regularly do comparisons to our other Canadian colleagues across the country in all of the forms of gaming. British Columbia continues to enjoy a moderate position in respect to gaming. We still rank eighth on a per-capita basis on gaming expenditures per adult in our province. We have the lowest penetration of electronic gaming devices of any province in Canada. At the same time, we're looking to provide equally the high level of gaming entertainment. So we have a model that focuses on fewer but better destinations where gaming can take place.

I. Black: I actually just want to kind of bridge the comments and questions of Member Rustad and Member Ralston. It's pertaining to the topic of slot machines, particularly the evolution to the more electronic ones.

As has been pointed out, the first one was introduced back in about 1997 or so, which coincided with the revenue growth that Mr. Rustad referred to — about 107 percent over the ensuing five years. Just as a minor point of clarification, the growth from '02 to '05, those four fiscal years, was actually only 34 percent, not 45 percent — as a point in passing.

The reason I bring this up…. Given that we currently do have the lowest ratio per capita for the electronic gaming devices, about 2.5, and relative to other jurisdictions such as Saskatchewan and Manitoba, which are currently almost four times that at about 9.1 and 8.8 respectively, and given some of the concerns that Member Ralston has brought up, my question is: is there any thought of changing that mix that would put in jeopardy that rather, relatively speaking, safe position of those devices within the mix in the model that you've talked about? Or are we going to continue to lead the nation in being very cautious with the implementation of those devices?

D. Sturko: I think the model will continue to be cautious, I guess the word is. The corporation has developed and laid out an organized, comprehensive business strategy. They've got a rollout plan, which is now well underway, particularly in the lower mainland on the casino side. It's got, obviously, a mix and a balance between things like meeting the demand of the marketplace while also addressing the social responsibility issues, etc.

I think you will see some cautious, slow evolution of this industry in the next little while, as opposed to a massive, rampant growth to try and get to the targets of Saskatchewan or Manitoba.

I. Black: Where they do have the VLTs in the bars, by the way. I was there when that happened.

D. Sturko: That quite supports those numbers — right? In the jurisdictions that have VLTs in pubs and bars, often the majority of the numbers are actually in non-gaming facilities, so they're not quite comparable.

I. Black: It's also devastating to the sections of society that can least be afforded the downside of gaming.

D. Sturko: Yes. One of the things that we like about the model we have is that it is, as the Auditor General has found, well controlled. We know who's there, who's delivering service, who's managing the money, who's coming in the door and who's going out the door. We have capacity to identify problem gamblers and to control, as is appropriate, the environment in which they sit.

The problem gamblers or people who want to spend their money, even if they're not problem gamblers, are going to find a way to spend it. If we don't have the casino for them to go into, they're going to go on the Internet, or they're going to go down to Washington State or Alberta or wherever. They're going to find an outlet for their interests.

If we provide a viable entertainment alternative and deal with the social challenges it brings with it, that's the model that we're looking towards.

V. Poleschuk: If I may just add one quick comment to it. I think that we will continue to what I'll call transform the quality of our properties that are out there today. You will see changes. You'll see changes as we close older, not-so-nice properties and bring in new properties that will be a little bit bigger and have broader entertainment with not necessarily a whole bunch more gaming activities associated with it, with a view that we get our properties to a point where not only will they be attractive to those adults who choose

to play here in the province, but they'll also be attractive to those who are coming into our province and are here for other reasons. In fact, if they wish to enjoy a casino experience, then they can participate in a casino as good as the ones they would find in their home jurisdictions.

J. Rustad: I'll be quick. Actually, what I wanted to say to the Auditor General's office…. I liked the report. I had to admit that it kind of gave me a chuckle with the title, Keeping the Decks Clean. It made me kind of think about a deck of cards or perhaps even a deck of a former prominent politician.

What I wanted to say was that I thought the report was good. It emphasized the fact that the gaming industry is healthy and strong. Thank you for your work.

R. Fleming (Chair): Thank you for that comment, and to all our presenters: thank you for being here.

R. Fleming (Chair): It's moved. Is there any discussion on that? Seeing none, then, all those in favour?

R. Fleming (Chair): Okay. I just recorded your vote in favour of the recommendation, so thank you.

R. Fleming (Chair): We'll just take a minute or two to stretch here before the next report is introduced.

On to the next item, which is the Auditor General's review of Partnerships B.C.'s report, Achieving Value for Money, Abbotsford Regional Hospital and Cancer Centre. Errol Price will introduce staff from his office who are going to present first. Then we will have the Ministry of Health's views on the matter and then a couple of executive members from Partnerships B.C.

Again, I think we should probably go through all the PowerPoint presentations and then direct our questions to any of the three groups that are here — okay?

Auditor General Review of
Partnership B.C. Report:
Achieving Value for Money:
Abbotsford Regional Hospital
and Cancer Centre Project

E. Price: The focus of the second item is the review that we carried out on Partnerships B.C.'s value-for-money report on the Abbotsford regional hospital and cancer centre project. I'm assuming, as we get into the discussion, the focus will be not only on our review but on the underlying value-for-money report. We're pleased that this is on the agenda today, because we think it is good that legislators have the opportunity to discuss the major public-private partnership projects that are emerging in British Columbia.

I believe that Partnerships B.C.'s report on the hospital project was the first of its kind, and the fact that the report incorporated an opinion from the Auditor General with respect to the report contents, I think, added to the uniqueness of the report.

There is, on the first page, inside the front cover of the report, a letter from the Auditor General that explains why we carried out this review of Partnerships B.C.'s report rather than carrying out a direct audit. We had been planning to carry out a direct audit of the project, which would have resulted in a direct report to the Legislative Assembly similar in concept to the gaming report that we've just discussed.

However, as we started that work, we found that Partnerships B.C. was planning to produce its own comprehensive report on the project up to the finalization of the project agreement. We felt that if we'd proceeded with our direct audit, there would have been considerable duplication, so we shifted from a direct report to what is called an attestation report, whereby we provide an opinion on management's written assertions.

This also provided an opportunity for us to put into practice what we've been promoting for some time. We believe that when those responsible for significant government initiatives report directly on their performance and when such a report is subjected to review by an independent body, the result is better accountability to legislators and the public.

I believe this concept was discussed at this committee's last meeting in connection with our work on building better reports. That initiative is focused on the annual performance reports of ministries and Crown corporations, but the underlying concepts are relevant to any public report by management.

With respect to the Abbotsford report, we think that the additional rigour adopted by the report preparers, which comes from knowing that the report is going to be subjected to independent scrutiny, has the added long-term benefit of strengthening the process for future reporting on public-private partnerships and other alternative service delivery arrangements.

We believe our involvement in these value-for-money reports can add significant credibility and quality and is a step forward in improving the openness, transparency and timeliness of reporting to legislators and the public on significant government initiatives.

Having said that, I want to stress that this piece of work, as well as the review that we carried out recently on the Sea to Sky Highway improvement project and that we're currently carrying out with respect to the Canada line project, represents somewhat of an experiment for the office. When we've completed the Canada line work — that will be the third project of this type — we do plan to step back and assess whether those who receive and use the reports agree that to our attestation we're adding value.

What we plan to do today is give you just a brief presentation that will focus on our review opinion, with a bit more information about why we did the work, why it was a review opinion as opposed to an audit opinion, how we went about our work and on what the opinion focused. We then plan to hand over to Mr. Blain, who will focus on Partnerships B.C.'s report and the underlying project.

I have with me to my left, Morris Sydor, who is our assistant Auditor General responsible for our work in the health sector, and across the way there is Ken Lane, who led the fieldwork team on the review of the Abbotsford project value-for-money report. Both Morris and Ken have a wealth of experience in our risk-auditing work. Ken is going to deliver the presentation, so I'll hand over to him now.

K. Lane: Good morning. In our presentation today we want to highlight for you some aspects of the work we did in preparing this review opinion.

Let me start, before discussing our review pro-cess, with some history. Financial statements and audits of them have evolved over many decades. These statements are quite standardized, so auditors' opinions on them are both brief and standardized. The norm for most large organizations, including government organizations, is to have audited statements. Review opinions, which give a lower level of assurance, are used for specific purposes and specific audiences. Because audit is the norm for financial statements, anything but an audit opinion must be so marked.

Broader examinations of performance have a shorter history than financial examinations, having begun during the 1970s. Over their short life they have been variously called comprehensive, value-for-money, performance and risk audits. There are not yet any standardized non-financial measures of performance, so most such examinations until recently have been what we call direct. That is, after carrying out an examination, the auditor also writes a customized report describing in detail his or her findings.

However, for many auditors the eventual goal has been performance reporting that follows the financial statement model. The reason, as Errol mentioned, is better accountability, and this idea underlies our work on building better reports, which you discussed recently.

We've been in the forefront in Canada in testing the idea of financial-style attestation reporting performance, where management prepares a report, and the Auditor attests to the quality of the reporting. We've attested to the specific performance reports for Workers Compensation Board, now called WorkSafe, and also for the public guardian and trustee. As Errol mentioned, Abbotsford Hospital is the first of what will soon be a series of three opinions on P3 value-for-money reports.

As mentioned, we originally began work on Abbotsford hospital as a direct audit and found that PBC was planning to issue its own performance report and decided to try an attestation approach. As a precaution we continued to collect the information we would need if a direct report became the only option.

At the same time, using our experience in financial attestation, we developed the essential elements we would need for an attestation report. One such element, standard and financial work, was an engagement letter which laid out the expected form of our report along with the commitments we would need from management before we could consider issuing an opinion. In thinking about what form our attestation would take and what kind of examination we needed, we were also guided by our experience with financial statements. For example, as an aid to readers, our goal was to have a relatively short opinion and one that retained as much as possible the basic structure of a financial opinion, with which many readers were familiar.

However, as we continued our work, one great difference became apparent. Financial statements are about the past. Transactions have already happened, amounts have been paid and goods delivered. With sufficient audit effort, it's possible to have a high degree of assurance about a financial statement. However, a report such as AHCC's, which is written in the first days of a multi-year contract, is essentially about the future, where we believe it's impossible to give a high degree of assurance.

Accordingly, we concluded that the appropriate level of assurance to give on this report would be analogous to a review opinion on a financial statement — that is, an opinion on the whole document but at a moderate level of assurance. I mentioned whole document. We dismissed the option of what's called the piecemeal opinion, where we give a high level of assurance on some parts of the report and a lower level on others, as being more confusing than helpful to the reader as well as to us. In practice what we're finding is that reaching a review-level conclusion about the future requires as much effort as reaching an audit level of conclusion about a past-oriented report.

As to the review work itself, we took a two-track approach. We reviewed each draft of the report as PBC created it and gave feedback as to explanations we felt weren't clear or were not supported by the available evidence and as to missing information that should be

included. In parallel with this, we were also developing a general understanding about the project. To develop this understanding, we followed normal examination procedures — for example, reviewing major documents, reviewing calculations and quantitative models, and, very importantly, discussing major decisions with those who had been instrumental in making them.

Both sides of our work came together once PBC had prepared a final draft of their report. For each major assertion in the report, our review team assembled the evidence relating to the assertion and documented their conclusion that the assertion was adequately supported. The team then had their work reviewed by an advisory committee made up of senior executives of the office and outside advisers and received their agreement that the report merited what we would call a clean opinion. Finally, before the report was issued, an office executive reviewed the team's evidence files in detail and signed off on them.

I'd like now to walk you through the review opinion itself. As Errol mentioned, first we should comment on the covering letter. This is not a standard feature of review opinions. However, because this approach to ensuring accountability is so new, we wanted readers to understand what they were looking at. The covering letter sketched out the history of our work, as we've mentioned here — how we started with a direct audit and moved to attestation — then went on to highlight and concur with a key phrase in the report, which said: "The ultimate success of the project will be contingent on the successful implementation of the next stages of the project…." It's a very important point. Finally, we commented that this is an experiment that we hope will prove to be fruitful.

The review opinion itself. It follows the standard traditional structure of a financial statement opinion — again as an aid to the reader. The first paragraph defines the purpose, which is to assess whether the report "fairly describes" the work to date on the project.

The second paragraph sets out the standards we followed in our work and the criteria we used in reaching our opinion. The third paragraph explains why a moderate level of assurance is the appropriate one. The final paragraph is the opinion itself — as we said, a clean opinion. Its rather convoluted syntax — nothing has come to my attention — is the standard auditor's language used to express a moderate level of assurance.

Finally, attached to the opinion is a list of the criteria we applied in judging the report's content and presentation. We looked to see if the report was (1) understandable — that is, that the assumptions and judgments were clearly stated; (2) accurate — that is, assertions were free from significant misstatements; (3) rational, as we wanted to see that cause-and-effect relationships were clearly described and were plausible. The fourth was completeness — no relevant facts or cause-and-effect linkages were omitted. The fifth, an important one in a future-oriented report, was that it was qualified appropriately — that is, that the uncertainty, which inheres around assumptions and predictions, was clearly described. The final criterion was relevance — that is, the overall presentation. For example, what was included — how much emphasis was given to different parts of the report — was consistent with the stated objective of the report.

That concludes our presentation. Thank you for your attention. Having told you about the review opinion attached to the report, we will now make way for Partnerships B.C. to tell you about the report itself.

Welcome to Larry Blain and Mike Marasco. While that's being distributed, I'll just ask Mr. Blain to lead us into the next section.

L. Blain: Thank you very much. Good afternoon. I'm here today with my partner Mike Marasco, the vice-president of partnerships development with Partnerships B.C., and David Woodward, who is associate deputy minister in the Ministry of Health. My name is Larry Blain. I'm the CEO of Partnerships B.C.

I would like to go through a presentation which is just to bring you up to date on the Abbotsford hospital project and to go through the content of the value-for-money report and some of our findings in that report.

First of all, the idea of producing a value-for-money report was an initiative of Partnerships B.C. Our intent was to raise the level of disclosure around major capital projects, and I believe that we are reporting out at a level of disclosure which is unprecedented in Canada. We have now produced six of these reports, and we're working on a seventh. I think you have heard that the Canada line, RAVCO, is working on a report for their project as well.

What I'm going to report on today is, first of all, to give you an overview of the project. Then in the report there's a description of the level of competition and the competitive process we went through, a summary of the final public-private partnership concession agreement, and an assertion of the expected benefits and the results of having pursued a partnership solution.

The idea of working with the Auditor General…. As has been mentioned, we had intended to produce our report. The Auditor General had expressed an interest in doing an audit. We worked together to work out a methodology where we could proceed together. The ultimate conclusion is that the opinion of the Auditor General indicated that our report fairly described its content.

The Abbotsford regional hospital and cancer centre project. I'd like to give you a brief overview. As you can see from the project vision and guiding principles, all of the partners of the project have had a single vision to work from since this project has been underway. This has enabled a strong partnership and a commitment to providing the highest-quality state-of-the-art facility within which the most modern, technology-advanced public health care can be delivered.

A few examples of what the new facility will deliver. All health care services delivered by the public

sector will minimize the need for people to travel to access services; will provide one-stop, state-of-the-art treatment and diagnostic equipment; will provide new and enhanced programs and services, including specialized obstetrics, youth-focused health care, chemotherapy and radiation therapy; and will also provide an efficient, healthy and inviting environment for patients and staff.

This, if nothing else, is a picture of our report and the Auditor General's letter.

An overview of the transaction itself was that the financial close for the P3 agreement with our private partner was reached on December 7, 2004. Our commitment is to at least make our best efforts to produce our value-for-money report within 60 days of financial closing, so that would be February 7, 2005, which we did. As has been mentioned, the OAG review is attached to our report. Then later in February we put the whole concession agreement in its entirety on our website.

Highlights of the report. First of all, the project — the regional referral hospital that will serve more than 150,000 Abbotsford residents and more than 330,000 people in the Fraser Valley. The total — $355 million estimated capital cost, including equipment. The private sector partner, which is Access Health Abbotsford, will assume for building the facility to specifications…. The Fraser Valley regional hospital district is contributing $71 million to this capital cost, and the Fraser Health Authority is contributing $4 million towards equipment costs.

We estimate that there is a net present value of a $39 million positive economic benefit expected to be achieved over the life of this project. Between the spring and summer of 2008 there will be a three-month commissioning period for the health authorities to move in their staff and ensure that each and every piece of equipment — light fixtures and everything else — is working perfectly and that staff are well oriented before the facility opens.

Just a word about the governance of the project that we have been going through. Abbotsford Hospital and Cancer Centre Inc., AHCC Inc., was established in 2003 under the Company Act as a formal decision-making and contractual vehicle for the purposes of the partnership. I'm the chairman of that company. We have representatives from the Ministry of Health; other representatives from Partnerships B.C.; representatives from the Fraser Health Authority; the Provincial Health Services Authority, which represents the British Columbia Cancer Agency; and the Fraser Valley regional hospital district. The project is managed by a project team in Abbotsford, and it has representatives from all of the stakeholders.

One of the focus points in the report is the competitive process in selecting a private partner for the project. Expressions of interest. We made a request that was out in January, with responses in by May 2003. We had an RFP from May 2003 to May 2004. The preferred proponent was selected in December 2004, and the contract was signed at the end of 2005.

The proposal evaluation committee was a very extensive process. Representatives from the health authorities, the Ministry of Health and Partnerships B.C. conducted a rigorous evaluation of key aspects of the proposal, including clinical operations, efficiency and design, facility management services and human resources, construction, finance, partnering relationships, team integration and delivery, risk transfer and commercial considerations.

There were more than 240 health care professionals — doctors, nurses, administrators — in the Fraser Valley who worked with the project team to develop the plans for this new hospital and cancer centre. Many of these are the same people who participated in the evaluation process in addition to the engineers, architects and other advisers.

L. Blain: Thanks, Mike. I said that the contract was signed in December 2005. It was December 2004.

As part of our process with every project that we do, we have a process monitor who provides an opinion when the process is complete as to whether the process was transparent and fair. We had that in this case. Our process monitor, who was appointed to oversee the evaluation process, states in his report: "This movement from four selected proponents to one proponent was primarily the result of the intensely competitive RFP process run by the AHCC project team. The AHCC process included additional elements that strengthened the normal competitive process."

The highlights in our value-for-money report. We believe that very significant risks were transferred from the public to the private sector. The final agreement had all these risk transfers specified in it, as well as the output specifications as to what the private partner was supposed to deliver.

It specified the payment mechanisms and the annual service payments. It specified the nature of public ownership of land and the facility. It also specified the hand-back provisions that were going to be enforced at the end of the contract term.

Highlights of the report. The public-private partnership was going to deliver improved, enhanced patient care. We were going to have an expedited construction time line. I'll come back to that in a moment. There are innovations in the design. There's a significant amount of risk transfer, particularly in the construction schedule and budget and in the operational functionality. There is, as I mentioned, a $39 million net present value of positive economic benefit which we expect over the life of the contract.

To give some indication of the value of transferring construction schedule and budget risk to Access Health Abbotsford, our private partner, this slide shows the dramatic impacts that construction inflation has on current market conditions. Approximately half of the cost estimate changes indicated in our value-for-money report were driven by construction inflation. The other

half of the cost changes to the project was driven by additional features and increased scope that added to the scope of the project.

I think it's fair to say, in looking at this chart, that the amount of inflation in the construction sector exceeds everybody's expectations and exceeded our expectations of the amount of inflation — that we would be transferring the risk of that to our private partner. If anything, the point of this slide is to show that were we exposed to this inflation in our construction today, the cost of the project would be very significantly higher than it's going to be. Of course, all of this risk that's embodied in this chart has been passed to our private partner.

I want to take this opportunity to show you a few images of the new hospital and cancer centre so that you can see what an amazing project it is. This slide shows the architect's model and renderings, and we have a few construction photos as well. This is the largest construction project ever in Abbotsford and continues to generate jobs and economic benefits for the surrounding communities.

These are some pictures of the project under construction over the last year. The status of the project is that its scope has not changed. It's on schedule; it's on budget. Amazingly, there have been no net changeovers over the life of the project, which I believe is a very significant achievement that we have realized in this project, especially in the environment in which the project is being constructed.

D. Woodward: I don't have a specific presentation, Mr. Chair and members, but if it's okay, I'll make just a few introductory comments and then throw it open.

D. Woodward: The existing MSA Hospital — and there was a picture in Larry's presentation — was built in 1952. It was last upgraded significantly in 1980. This facility is now over 50 years of age and for all intents and purposes is becoming functionally obsolete, so it's clear that we have to do something.

A replacement for this project has been in the works as far back as the early 1980s, and there have been several stops and starts along the way for various reasons. In the meantime, the population has grown significantly. I think Larry referenced the regional population of 330,000. The current hospital is really straining to cope with the demand.

We're very excited that this new hospital is now being built. I'm particularly pleased that — touch wood — it's on time, on budget and on scope. Given everything that we're seeing in the public and private sectors around construction projects, that is indeed an admirable position to be in.

As Larry mentioned, the hospital will be commissioned in the spring of 2008, and we'll start taking patients two to three months after that as they get all the facilities up and running. It's going to greatly improve the services to the local communities but also to the Fraser Health Authority region itself. It will become a major regional referral hospital. Folks who have cancer who now have to go into Surrey or Vancouver will now be able to get their treatment locally. So this is going to be great for access and provision of service to local folks and to the regional population.

Two things really stand out in my mind around this project. One was the incredible amount of due diligence that was done upfront. This is a new project to me. I came in partway. The detail and the documentation and the consultation with the people who are on the ground providing the services and the care to the public were just unprecedented. I forget how many pages the document is. It's 1,300 pages or something like that — just a tremendous amount of detail upfront, which is really critical. These hospitals are expensive to build, and they're expensive to run. We have to make sure that we get it right at the beginning.

One of the things we learned from was the SARS episode. That really sort of snapped us to attention all across the country around infection control and infectious diseases and the pandemic that folks are talking about.

As a result of that, there was a significant change made to this project before it was built in terms of adding negative-atmosphere rooms. These are basically rooms that are vented directly to the outside so that if there is someone with a contagious airborne disease, it's vented straight outside, and it can't get back into the hospital.

There was also a change in the rooms. Initially, the plan called for about a third of the rooms to be four-bed wards — i.e., four beds in a room. You can well imagine that if you had someone with a contagious disease, that's not ideal for infection control. As a result, the design was changed, and we now have a mix of about 40 percent private rooms and 60 percent semi-privates, which have two people in them. Those were two important changes to the project that really make it a hospital for the future.

We're very excited about it and anxiously looking forward to May '08 when this hospital can come into production — I guess that's the right word.

Committee members, questions for the Ministry of Health, Auditor General or Partnerships B.C.

D. Thorne: I have a couple of questions for the Auditor General, talking about the scope of the report. In your slide presentation today you mentioned that the audit is the norm and that a review is the exception. The AG's department also stated in '03 that you were going to do a full examination of the business case. Why did that not happen?

E. Price: As I said in my presentation, I think it was primarily that as we started to approach that work, we found that Partnerships B.C. were planning to do their value-for-money report. We felt that report would likely cover many of the issues that we would have covered in our direct report. We felt that it had the potential to lead to duplication and that it was a potentially useful exercise for us to carry out, to work with management to provide an attestation on their report.

As I mentioned earlier, we recognize that this work is new for us. I guess it's fair to say it's probably unique across the country in terms of the work that legislative auditors do. It is an experiment, and we do need to step back at the end of the day to see whether the users of the reports, such as yourselves, feel that this approach is adding value.

That's essentially why we didn't proceed with our own work. We just felt that the information that would be contained in the Partnerships B.C.'s report would essentially be what we would look at.

D. Thorne: Okay. Further to that, I understand what you're saying, but I mean, their doing a report would be entirely different than the Auditor General doing a report — right? You're the watchdog for government. Essentially, if they're doing their own report, it's sort of like the police policing police — right? That's how it looks to outsiders.

Specifically, there's been some concern around the funding to the OAG's office and money available to do these kinds of reports. I'm wondering: if your office had secured more funding for the report, would you have done a more detailed examination or full audit, the way you said in '03 that you were going to do?

E. Price: No. In this particular case, the approach that we took was not a function of funding in any way. It was entirely a function of looking at what would be the most productive approach in this particular case. If we were to continue doing this line of work, then perhaps funding would become an issue. But in this particular case we were, in essence, taking resources that had already been assigned to do one type of work and using them to do a different type of work.

J. McIntyre: My question is sort of a general question which I'd like to direct to Mr. Blain, at Partnerships B.C. I've been very interested in this whole concept of these partnerships, these P3 arrangements, as I have a number of them in my riding. I represent West Vancouver–Garibaldi. We have the Sea to Sky Highway project, which in my mind has been enormously successful. We're underway there. It just won a national award, I understand.

I also have the Britannia mine, the remediation plant that's also a P3. Again from my perspective, after 20 years of inaction we were finally able, through government and through these partnerships, to address that, which in that particular case is a long problem.

I noticed in the report I read that you said that Abbotsford being sort of the first one and the first value-for-money report, there was some learning that came out of it, which you applied, I think, in particular to the Britannia situation.

I was wondering if you wouldn't mind just explaining, maybe, to the group as a broader context what you have learned out of this kind of value-for-money report and how that's applied to other partnerships and what successes we're having with this whole concept.

L. Blain: Sure, I'll be happy to. The way that we're organized at Partnerships B.C…. We have the core of our group focused on doing projects, but we also have what we call a centre of expertise, which is like a knowledge bank. We try and take everything that we learn on one project and make it available to the next project — Abbotsford being the first, along with the ambulatory care centre at VGH. They're the two we were working on in tandem at the beginning. There was a lot we learned about what the market would or wouldn't accept. There was a lot to be learned about how to run a smooth process. There was a lot we learned about project governance and how to have formal governance and keep track of what you're doing, how to accumulate your evidence so that you can then be in a position to respond to working with the OAG in that kind of situation.

I know that in the case of the Britannia project, which was a water treatment plant…. In fact, at the very beginning of that process we started off with the concession agreement from the Abbotsford hospital project, just as a starting first draft for the lawyers. You know, the more that you can give the lawyers and say: "This is the way we're going to do it…." You save yourself quite a bit of money by doing that.

The idea is to increase our expertise and also to lower our costs. Our business model is that if we spend a certain amount of money in developing a concession agreement on a project, we'll make that available for the next project at zero cost, just because it's in the public interest to use that material.

I'm just interested in the Sea to Sky, in particular. I note that was one — and I think the only one — that was done in a different fashion. Instead of saying, "We need XYZ," and having different consortiums bid on it, we said: "We have $400 million. What do we get for that?"

My understanding is that we've received millions and millions — I think over $100 million — of added benefits from the traditional procurement process. Are you looking at that as sort of a model going forward?

L. Blain: It's an interesting model, because the overall corridor objective for the Sea to Sky Highway exceeded the amount of money that the province was prepared to spend at the time. The government said that the budget would be X, defined over the length of a concession agreement — in this case 20 years. Then we invited the market to bid to that total amount of affordability, if you will, that the province was prepared to pay.

We ended up with additional economic benefits from that process that were very significant. In our recent report, on which we worked with the office of the Auditor General, the total incremental benefits above what we expected to get were a net present value of $130 million. Just to be fair, we ended up spending $44 million net present value more than our annual affordability ceiling, but on balance we think we got a very good deal for the province.

R. Fleming (Chair): We'll be happy to have you back for the Sea to Sky project when we receive the Auditor General's report for that.

B. Ralston: My question is for the representatives of the Office of the Auditor General. The Premier said not too long ago, prior to the election, that the Auditor General said we saved $39 million on the Abbotsford hospital. Mr. Blain has made the same assertion here today.

Given the very limited nature and scope of the review, isn't it fair to say, probably put at its strongest, that that statement is not accurate and is misleading or, at the very best, speculative, given the long life of this kind of a project of 30 years?

E. Price: I think that the review opinion, the review criteria that we used for looking at the report…. One of the key criteria is that information is qualified appropriately. I believe that in the letter the Auditor General had included in the report, there was a specific reference that the ultimate success of the project will be contingent upon the successful implementation of the next stages of the project.

So, yes. I mean, there is a lot of future-oriented information in the report, which was why we concluded that we weren't able to provide a high level of assurance.

B. Ralston: I appreciate you may feel uncomfortable with taking this position, but the Office of the Auditor General is an independent office and has an obligation to speak its mind when required to do so. So I'm suggesting to you that you and the office have an obligation as professionals where a misrepresentation of your position is made — and I take it that the Premier's statement and Mr. Blain's statement here today are misrepresentations of your position and that there is no certainty at all of saving $39 million — that accordingly, you have an obligation, according to your professional standards, to correct that and express that publicly. I'm asking you here in a public forum whether you're prepared to do that.

K. Lane: There was an assumption I'd like to comment on. I think you used the phrase "the very limited nature of the work." I think that's a misunderstanding of both the degree of the work that was done here and the degree of the work that it is possible to do. There is a belief. You talked about things we should correct in the public light, a belief that you can give a high level of assurance on the future-oriented document. We found no examples that say it can be done, and our conclusion is that it is not possible. This was not a lightweight piece of work. It was as extensive a piece of work as can be done.

On the second point — the misunderstanding of our report is what it's called — you referred to a public statement. I wouldn't want to say our reports are misunderstood all the time, but we do our best, both in direct reporting and in attestation reporting, to deal with the issue of understandability and clarity. It would be foolish of us to either demand of ourselves or of people we're reporting on and in attestation fashion to say: "You are responsible for public understanding of your statements."

If I could address Mr. Blain's phrasing. He's looking at me carefully because we have discussed this issue for many hours. He carefully described exactly what the statement says, that on a net-present-value difference, a comparison — and you have to think carefully what that means — the best information they had at the time of the report…. The P3 is positive over the public sector comparative.

We weren't pleased as an office when this was misunderstood. I believe it was misunderstood in public as $39 million. As I remember, one of the misunderstandings said: "…and we're going to take that money and put it into health care right away." I think what we're dealing with is the inherent difficulty of explaining the concept of using net present value as a way of valuing very complex projects. I don't see this as a misrepresentation but just a difficulty of communication and one that we discussed with Partnerships B.C. when we got to the next report we worked on.

B. Ralston: Perhaps if I might, then…. I have a question for Mr. Blain. The Office of the Auditor General has mentioned the public sector comparator. You're quoted in Canadian Consulting Engineer, January-February 2005, as saying the following about the public sector comparator: "Public sector comparators won't do you much good anyways, because I can make the public sector comparator as bad as we want in order to make the private sector look good." Given the view that you've taken of the public sector comparator, how can the public have any confidence that the comparison

that's been made in this ephemeral or elusive or, I would say, speculative $39 million…? How can the public have any confidence that it will in fact emerge over the life of the project?

L. Blain: Maybe I can answer that at two levels. First of all, I didn't say that. In April of 2003 I got a letter from the head of the Canadian Union of Public Employees stating that this was a quote of mine, and would I confirm it? I wrote him back and said: "I did not say that." Nevertheless, for the last three years I've seen that quote a number of times.

But I will give you a quote that you could use directly from me, if you would like.

B. Ralston: Well, the proceedings are being transcribed, so I'm sure you will.

L. Blain: I think an accurate way of talking about the public sector comparator — and I think that extends from Mr. Lane's comment — is that the public sector comparator is a set of counterfactual assumptions. It's assumptions about something that you don't do. It's not evidence of what you did do. It's counterfactual assumptions about what you did not do, and therefore it is subject to inherent uncertainties, because it is counterfactual. I think that's an accurate statement. We do the best job we can in the interests of public policy to explain what the benefits might be of doing a public-private partnership, and to do that we have to set up this public sector comparator.

It's a lot of work, and there are a lot of assumptions. We go straight down the middle on it. You know, the evidence is what the evidence is. As I said before, we're talking about expected benefits. I think there's still a public policy reason to go back later on in time and come back and review to see what the benefits were of this contract.

B. Ralston: Are you then saying that, given…? I take it you've moved from what was reported in Canadian Consulting Engineer, January-February 2005 issue. Are you now saying that you're not sure this project will, over the life of the project, produce any net benefit over a comparable project built by the public sector?

L. Blain: Based on the most comprehensive analysis that we can undertake and based on conservative assumptions, we think there are expected benefits over the life of the contract.

B. Ralston: Is it fair to say that it's more an article of ideological faith on your part, Mr. Blain, than anything based on fact?

L. Blain: I don't know what's ideological about a set of assumptions and an expected benefit.

M. Marasco: Can I just add to that? I think the graph we saw up on the slide earlier that showed the actual construction inflation that we've incurred over the last few years and are expected to incur through the remaining construction period of this project indicates that we've already achieved a significant amount of risk transfer that we modelled more conservatively than we've in fact experienced. I think the indications are to date that we probably exceeded our modelling expectations with respect to what we thought the private sector benefits might be.

However, I point out — and I think the Auditor General is clear about it — that this is a 33-year agreement. We're not into the operating period yet. The true final measure of value for money can't be made until that concession agreement is actually completed. Based on the evidence and research that we've completed today and the experience today in the market, it looks very positive, as predicted.

M. Polak: Just before I get to the question portion, I happened to phone my daughter last night, who's 18 and loves to know where I am every moment of the day. Actually, it's more for me to find out where she is. I told her that I was going to be home, probably on the five o'clock ferry on Thursday, and I would say the balance of probabilities points to reasonable expectation that I will be.

However, it is possible that I might get hit by a bus when I go out for dinner tonight, or some other horrible fate might befall me. Nevertheless, I was very confident in giving her that assurance. Was it a high degree of assurance? Well, I've done it a number of times — so yeah, relatively high. But I think I would probably couch it as "moderate," because I do know that given my new life as an MLA, there are a number of things that can change my schedule suddenly that I have absolutely no control over and, in fact, have happened to me before.

I tend to look at our glance into the Abbotsford hospital in much the same way. The judgment one must make in terms of the public is whether or not the assumptions being made are reasonable. If we are assuming we're going to save money based on the idea that great gobs of it are going to fall from heaven as a result of an earthquake that erupts a volcano and gold descends upon British Columbia, I would say probably not.

Again, that's the test. You can't crystal ball down to the nth degree. You can do it as far as is possible, and that's what we're asked to examine as members and as members of the public. That is the balance of probabilities or net present value or whatever you want to say.

I'm interested in a couple of things. First of all, the difference in the approach to design that was taken with this facility, because I know that there has been some evolution to that, and also, what kind of accountability measures grow out of a partnership of this na-

ture as we move into the operational phase. As we look ahead to that, what kind of accountability measures or, I guess, natural accountability outcomes will we see over the life of that operation for the 33 years?

L. Blain: I'd like to invite Mike to answer that, as he was the quarterback on the project and he was closer to it than I.

M. Marasco: Thanks. Your first question. The design innovations that we saw…. First of all, as Larry indicated earlier, we have created this know-ledge bank or centre of excellence, and one of the things we did before we even started down this journey is that we did a lot of research in the U.K. and other jurisdictions where they had actually done these projects. Some of the research we had done indicated that we wouldn't expect a lot of innovation on the design, so that was one of the things that we wanted to test for.

Looking beyond the architectural elements of it, looking more towards what it would do for our clinical operations and for the work environment that it created, because for those who are familiar with the operating budget of the Ministry of Health, the operating costs typically far, far outweigh the capital costs…. If we could encourage innovations that would, in fact, make us more operationally efficient — that was something we were after.

So that was our goal starting out. What we came back with…. Through the competitive process, we were actually delighted and couldn't understand why others hadn't experienced the same thing. The winning team actually ended up bringing in a clinical planner from Australia — a world-class clinical planner who delighted many of the 240 clinicians we had working on this project. I think, again, for those who have been involved in health care construction, they'll find that that's a very difficult thing to do.

We had a very nice, compact design that makes for efficient travel distances. The nursing pods were developed to our specifications, and we had some other innovations that not only dealt with clinicians but also support workers. They put the support space in the centre of the building — actually, above ground — so that support workers would have daylight to work in, which was a non-traditional, Canadian-type design, and we thought that was a benefit given the importance of retaining health care workers. Those are some of the design innovations, and it certainly disproved the hypothesis that we had drawn from the research that we had done elsewhere.

To your second question around accountability. Accountability goes through this agreement right from the day we signed it through to the end of the term. Clearly there is a significant amount of accountability around the development period in that we don't start paying anything other than feeding the RHD contribution in over a proportionate share of the construction progress over the term of the construction period, but we don't start paying any annual service payments until the facility opens and meets our task of commissioning, which today is scheduled for May 9, 2008.

For every day that goes by, there is a significant amount of money at risk that the private partner has, because they'll be paying interest on the $300-plus million that they will have borrowed at that point. We have every reason to believe that they will take the extraordinary precautions to make sure that the facility is delivered on time.

The second piece leads into the actual delivery of services. Again through the research and work that we'd done on this first project, we developed extensive performance specifications that describe how the services are to be performed, to what quality levels and to what timeliness standards, and we set up the mechanisms to measure those things.

This is a performance-based payment, which means that if the services are delivered to our specifications, they get paid. When they fail to meet our specifications, there are deductions in the payments made to them. Recognizing that this is health care and not a non-essential service, the health authority and the public always retain the ability to step in and take over and take corrective action, so we can always protect our patients and our ability to provide care.

J. Rustad: I've got a question, and I want to talk for just a moment before I get to this question. Mr. Ralston had brought up a couple of comments, particularly around ideology, and also used a statement which has clearly been pointed out as being false. It disturbs me because of the line of questioning and the comments around there, given the fact that both he and a number of members on this committee as well as significant members in the opposition caucus have received significant donations from the HEU.

That seems to be influencing a line of questioning around this, as opposed to asking the real question, which is: is this partnership working? Is this a partnership that has really provided a benefit in terms of innovation, in terms of the approach, in terms of, ultimately, savings? Is this a type of partnership and a type of approach that could continue to benefit further down the road?

The reason why I'm asking those questions, quite frankly, is that just recently in Canada we have been noted as having the best health care system out of all the ten provinces. The Conference Board of Canada has come out and said that. Consistently, there is an approach coming from the opposition side that seems to say that our health care system has problems. Well, you know what? We do have some challenges. We do need to see some improvements.

But the question I have is that when you have the best in Canada and you're being recognized nationally as having that, why there is always this process of wanting to run it down. I'm sorry, but that is, unfortunately…

R. Fleming (Chair): Please stick to the report. That would probably do us a lot of good.

R. Fleming (Chair): I also want to caution members not to ascribe influences or other things in terms of their line of questioning. People have the right to ask questions that they feel are relevant to the receipt of whatever report or item of business we're discussing. I'd just caution people on that. Thank you.

J. Rustad: Thank you. I'll try to get away from ideology-type questions, then.

Back to the question at hand, in terms of those three points that I was asking about: whether or not this type of model is something that we should be considering more of in terms of the potential savings, in terms of the benefits to the health system and in terms of the overall benefits to the people of the province.

L. Blain: P3s do not apply in every case. I think that for certain kinds of projects, particularly large projects that have significant scope for innovation, either in the design or in the construction or in the operations, where there are significant risks that we want transferred to the private sector — such as, in the case of Abbotsford, the construction price…. You know, in that environment it was an excellent risk to have transferred. I think there will be other applications.

We do a detailed business plan for each capital project, and if it looks like there is a very significant proposition, that we can achieve value for money, then we would go to the next step with it. If it doesn't look like there is a significant proposition, then we wouldn't.

There are a couple of projects where my board of directors looks at these business plans and says that they should go forward to the government or they should not. In a couple of cases they have looked at the business plan and agreed with us that this would not be an appropriate candidate for a public-private partnership because it just doesn't have the scope for innovation and for risk transfer.

I can't give you an exact number, but I would think that of the total capital budget of the province, if we ever had 25 percent of it as public-private partnerships, that would be an up-and-running program.

D. Thorne: I have a question for Mr. Blain, and actually it relates to that. Partnerships B.C. appears to have a dual mandate to deliver these P3s. But they are also supposed to advise government on whether — as you just were explaining — a P3 should be used, whether it would be appropriate. Would you agree that this is an inherent conflict of interest?

Your terms of success and your compensation depend on you delivering an increasing number of P3s. I'm just wondering: do you feel that this is, or could potentially be, a bit of a problem for Partnerships B.C. itself?

L. Blain: Part of our mandate and our vision statement is that we serve the public interest. We are owned by the province of British Columbia, and part of our mandate is to serve the public interest. We would be sensitive to that in everything that we do.

Our obligation to produce a value-for-money report at the completion of every project means that if we undertook a project where there was no value-for-money proposition and we had to produce the report anyway, it would look like we had not done the best thing for the public interest. So we are very careful in our business planning. Our board are all independent directors, qualified directors. They look at every business plan we do, and they say that they agree with us or do not agree with us that this should go forward on a commercial basis to the government.

I don't see the conflict. There are two sides to a market. There is the province, which has an interest in procurement on an effective and least-cost basis. There is also the private partners market, who need to be interested in British Columbia and want to do business here and want to do business with us. We have to attract them, so we have to attract both sides. That's not a conflict; that's our role.

D. Thorne: I think I'm specifically looking at the financial part of it — that your compensation is tied to increasing the number of P3s, and at the same time you're the group that single-handedly advises government on whether or not something should be a P3. As an outsider, to me it sounds like a bit of a conflict.

L. Blain: We have a human resources committee of the board of directors. They set our compensation levels based on whether we perform according to some predetermined criteria. One of them is: have we completed any public-private partnerships? Another one is: have we kept on all the schedules for all the projects that we have set? Another one is: have our clients, the ministries, given us a good review as to whether we're providing quality service or not?

There are a number of criteria. Another one is a productivity measure — without getting into the details — which measures whether we are cost-effective, whether we are minimizing project costs for government. I mean, there are a variety of things that we're measured on, and one of them is getting agreements done.

D. Thorne: I guess the answer to the question is that you don't see this as a problem or a potential problem.

R. Cantelon: This is a question of the assertion that there's a net-present-value benefit to the citizens of

British Columbia of $39 million, which the proponents of Partnerships B.C. have said, and has been reviewed to the Auditor General. So I have two questions on this — one to the Auditor General.

It has been suggested here today that this is a misrepresentation, a speculative figure, an inferred figure…. I strain to repeat legal words, but I'd like the opinion from the Auditor General — who I've heard to say that it was not a lightweight report.… Can you confirm, based on the assumptions you saw, that this is a reasonable, real representative value to the taxpayers of British Columbia?

K. Lane: I can certainly confirm that it is exactly what Mr. Blain carefully described it as. We've talked about how to describe this. It's a benefit in the neutral sense of the word. It's the result of careful projections, I would say, as to the long-term cost of two alternatives — one a contract and one…. The word "counterfactual" is too…. A hypothetical — the best projection that could be done. The difference, fairly robustly, is positively in favour of the P3, if all of the assumptions are correct.

I describe it as a useful tool for doing an analysis of looking at projects that have a very long tail. They're not just one-year projects. It is that. It is useful and, I think you might argue, an essential tool for making those comparisons. The comparison does come out with an economic benefit. I'd like to stop there and not try and oversummarize it as a benefit of saving anything like that because it's not…. The thing that's become clearest to me, in doing this work, is that a net-present-value dollar is not a dollar in your pocket; it's not a dollar that you members vote for. It is an analytic tool for comparing two streams of cost. It's a useful tool. We wouldn't want to denigrate it, but it doesn't translate into being in my pocket or out of my pocket.

R. Cantelon: If I may, Mr. Chairman. I think I understand what the concept is of net present value. It's not money you can spend at the drugstore, but it brings, in today's dollars, what the value throughout a 30-year program, I believe it is, would be. As such, then, that's a fair representation that you've looked at.

R. Cantelon: Then the question to the proponent is, of course…. This is very much how the ultimate success of the project — in other words, achieving this benefit — will be contingent on the successful implementation of the next stages of the project. So my question is: how is the project going? Are we on plan? Are we meeting our financial expectations? How is it looking so far? Is what you proposed coming true in fact? Are you on budget?

L. Blain: So far. We are at — would it be? — 50-percent construction completion.

L. Blain: So 40-percent construction completion. We are on schedule. As I mentioned before, there have been no net scope changes, no net variations. There have been some places where there has been a negotiation — a change here or a change there — but in every case it's been offset by a savings somewhere else. I would say that thus far we are totally on track and doing so in an environment which is much worse than we would have anticipated in the construction front from a cost point of view.

R. Cantelon: So your analysis, which projected a net present value of $39 million, would still hold up, in your opinion, if you were to redo that assessment.

R. Fleming (Chair): I had myself next for a question. I think the question was asked about Partnerships B.C.'s role as both a P3 proponent and P3 evaluator, so I think that answer was satisfactory.

I wanted to ask about the operations part of the agreement to Partnerships B.C. On page 25 there's a section here that talks about…. This, I guess, goes to the updating of the net present value at the various intervals where you will re-examine it as the track record accumulates. There's a sentence in here that says the specific administrative structure and procedures have yet to be finalized, but key functions will be to ensure that it's meeting its performance standards.

I'm just wondering that if those structures for evaluation aren't in place — haven't finished being contemplated — did that create any difficulty for asserting that the project will achieve value for money when the completion of the contract occurred.

M. Marasco: Thanks for the question. The structures have not been finalized on either the public or the private side at this point. We are still a couple years away from the actual implementation. However, the project agreement itself actually specifies the governance that will exist at that time. We can't name names in terms of the people who will actually occupy the positions, but there is an operating committee that has representatives from both the public side and the private side that will be in place. All of the performance specifications under which it will operate are also in place.

We recognize that two years isn't a long time when you're planning around health care, and they are underway right now, as we speak, in finalizing those structures.

B. Ralston: Mr. Marasco, you spoke of lessons from the United Kingdom. I understand that the guidelines for what are called private finance initiatives — that's the expression used there — in terms of procurement are where there is a single bidder. Lack of competition

is the result of a single bidder or perhaps two bidders where only one is credible. It is unlikely that the project will deliver value for money and should not proceed as a PFI or a P3. So given that this project proceeded with a single bidder only, I'm wondering about your comment. Because I understand that in the United Kingdom, under the rules, if there's only one bidder, it halts the P3 process and triggers a traditional public procurement process. So I wonder what comment you have on that lesson from the United Kingdom.

M. Marasco: I'm not sure exactly of the source. I think you might be quoting some guidance material from Her Majesty's Treasury.

I guess, first of all, we took great caution in our procurement process and started the process with an independent process monitor who oversaw our entire competitive process. I believe you saw the quote that he had provided in his final report. In fact, his final report is fully available on our website as part of our disclosure of all of our practices. In there he said that where we got to with this bidder was as a result of an intensely competitive process.

So we may have ended up with one at the very end, but we started with four strong teams, and thanks to the process that we've put in place, there was competitive pressure put on the final team in the homestretch because they had already spent a significant amount of money on preparing their bid. After we lost the second-to-last bidder as a result of them recognizing that they were not going to be able to produce a competitive bid and decided to cut their losses, they had to beat our affordability criterion and stick within our process, and that was exactly what they did. As a result of that, we had an intensely competitive bid that resulted in our having an innovative design and a project that we could say we expect to receive value for money from.

B. Ralston: Well, doesn't that violate general bidding procedures? You're saying that at the start line if there's four, then that makes it competitive, and even if there's only one at the end, that makes it competitive. But doesn't that violate general bidding procedures that require at least three bidders, to ensure competitive market conditions?

M. Marasco: Just one comment. Well, I guess in the opinion of…. The qualifications of the fairness monitor and process…. You can question them, but he's been a procurement lawyer specializing in procurement for a number of years and has quite a reputation, which is why he was chosen. In his opinion the answer was no. He believed that we had a very competitive process and that the process itself provided the adequate protections to protect public interest and ensure that we had a healthy competition.

L. Blain: I just wanted to say in addition that the bidders knew they had to beat our affordability line, and our affordability line was a good deal for the province. So when one dropped out towards the end because they just didn't see themselves winning and they had incurred enough expense, the other one knew they had to get under our line or there would be no deal. I think that is almost the same as in the United Kingdom, where you always get to one. And we would get to one, and if they couldn't get under our affordability line, then that would be it.

B. Ralston: But isn't the difference here that it's self-selecting? I mean, you're left with one at the end, and it's either accept that one, which exceeded the RFP budget target for capital costs as it was, which had already been pumped up…. So isn't that a self-selecting process? How is that, in any way, a competitive process?

M. Marasco: It was not self-selecting, and we did have alternatives. As a result of our process that we designed, based on experiences elsewhere, including the U.K., we had the option of actually using all the intellectual property that we had received from all bidders to proceed with the construction in a different manner. That was an option available to us. In our assessment and our evaluation of the bids, supported by the advice and oversight of our fairness monitor, we proceeded with the deal and reached financial close with the preferred proponent.

R. Fleming (Chair): A question just on the statistics in your report around construction costs rising. I know that P3 agreements are difficult arrangements to reach involving the two parties, involving the lawyers and structuring the agreement. They often…. I don't know how thick the final agreement is, but a few binders at the very least.

I read that from sort of the close of the RFP to the final contract is about a 19-month space in there. Just looking at the figures provided in the value-for-money report, over that time there was something like a 17 or 18 percent construction escalation. So on $355 million during that period…. That would add something like $60 million, $65 million to the cost. The line is shifting, I suppose, in this market from the timing of those stages. I'm just wondering if that factored in with the public sector comparator, where you have a much shorter procurement period.

M. Marasco: When we developed our modelling we had predicted increases in inflation. I started on this project in the late 90s, early 2000. I think we were carrying about 2¼ percent for construction inflation in our models. I think 2001 is when they started to climb. We experienced 3 percent that year, and subsequently it spiked. Now we're into double digits. Even the latest forecasts that were made last year, after we had reached financial close, were underestimating the activity we would have in our market and the shortage of skilled trades. As a consequence, our models way un-

derestimated the amount of inflation that our partner is now experiencing in the market.

So I guess what I'm saying is that if anything, the savings for this portion of the project, for the construction portion to date, have exceeded what we would have forecast in terms of our exposure to risk for inflation.

R. Fleming (Chair): I guess my question was focusing in on that period from 2002, I think, when the government announced it would construct this project according to a P3, until the signatures were inked on the final draft. Actually, that's longer than 19 months.

I think there's something…. This predates the P3 decision, but I think it starts at $211 million, and by the time the agreement was signed, you have a $355 million cost to the project. I'm just wondering what can be attributed to the fact of life that there is a protracted negotiation to conclude agreements of this complexity of perhaps 18 to 24 months.

M. Marasco: There were parallel activities going on during that period. One, as David pointed out, was that we had had another look at the hospital to make sure we were building a hospital for the future. We did a best practices review, and I believe about $46 million of that cost difference was due to these types of changes — the SARS enhancement, the increase in size of the hospital, those types of things — with the remainder primarily being related to inflationary costs. From 2002 through to 2004, when we had experienced another 18 or 19 percent inflation during that period, that was happening to coincide with it.

R. Fleming (Chair): Yes. If I have a follow-up, I'll get in touch with you outside of this meeting.

I just have one last question, which is about some of the methodology you've used. The experience with P3s is admittedly new, relatively speaking, in B.C. and in Canada. You sort of drew on the experience of the U.K.; I think Partnerships U.K. was used to match many of the methodologies that you developed.

At the start of the process, when you were developing the public sector comparator to see what a good comparison would be for value for money, you looked at the discount rate that they used for depreciation over the life of the project, and you landed at 6 percent, I think because it was the figure that Partnerships U.K. used.

They have shifted since 2002 to a more prudent discount rate of 3.5 percent. That changes the outcome of what your comparator would look like. I'm just wondering. For this project or others like it, has Partnerships B.C. seen the change that Partnerships U.K. has used, and are you moving to match that?

L. Blain: Sure, we've looked at it. The discount rate that one should use should be project-specific. Every project is different. The discount rate should reflect to some extent the riskiness of the project, so there's no fixed rate that one can use.

In the United Kingdom they do use a base discount rate of 3.5 percent now. What they've done is unbundled their total discount rate — without getting technical here. They've unbundled it into some of its component pieces, one of which is the 3.5-percent base rate to which they add risk in accordance with the nature of the project — just as we do. Their methodology is different, but we arrive at more or less the same place.

R. Fleming (Chair): Yeah. You've unbundled a lot more, I think. We'll take another opportunity maybe to get into that. As has been noted, there are going to be other projects that you've been involved with before this committee before too long.

B. Ralston: My question is for Mr. Blain. In an article in the Vancouver Sun, May 29, 2003…. I'm quoting you, and maybe this is inaccurate.

M. Polak: Mr. Chair, Member Ralston has spoken…. I think this is his third time. We're sort of going around the same bend, and it is getting rather close to time with respect to other items.

Unless there's a new line…. Testing his quotes is not really the purpose of this.

R. Fleming (Chair): I've got my eye on the clock as well. We budgeted 90 minutes for this item, and we're at about 75 right now.

I've never used a limit as to how many times people can speak, but as we get closer to the end of time, I'm going to urge members maybe to be considerate.

B. Ralston: What you said was: "Partnerships B.C. will keep a shadow budget to ensure client ministries involved in a P3 are getting a good deal." What is the status of those shadow budgets, and are you prepared to disclose them?

L. Blain: I actually don't recall that, but I'm not saying that I didn't say it. That sounds like something I would say.

What I think I meant was that we would maintain a public sector comparator, and we would also…. When we start out in the planning process and before we actually go to the market, when we go to the government, we have to have some indication of what we think the bids will be — just like when you put your house on the market, you have to have some sense of what the bids will be. We try and replicate different dimensions of that bid so that we can have some sense of what the bid will be. We call that internally a shadow bid. That's probably what I was referring to.

L. Blain: I don't think so because we don't want the people in the marketplace to know what we're thinking — about whether their bids are higher or lower than what we thought they were going to be. I don't know what public interest it would serve to disclose it.

B. Ralston: This process is well completed, and we're three years into it, so what's the competitive advantage? Given the escalation in construction costs, surely this is very stale information at this point.

M. Marasco: First of all, we did disclose it in total to the Auditor General's staff. So they had an opportunity to see the level of due diligence that we had undertaken. That's point one.

Secondly, if we were to disclose it, then the market out there would understand how we value risk and how we actually do our calculations in estimating that. Instead of this being a competition that will actually generate the best solution, it will be a competition of trying to find a way to match our numbers. It would serve no public interest at all.

M. Marasco: Absolutely, because the same methodologies that we use, that we learned from others and that we built on from knowledge and experience from the U.K. and Australia…. That's the proprietary nature of the knowledge that we've built up that's resulted in us developing models that allow us to do other projects. For us to disclose that would in fact weaken our position in the marketplace.

I. Black: Seeing as there is an insatiable interest in quotes this afternoon, let me run a couple past you. I have a question directed to our guests today to follow the end of these quotes.

"Public-private partnerships are very important to us, and we're stressing to find ways and means of funding anything."

Another: "You know, it seems to me that there's a tremendous opportunity in B.C. for us to take a look at public-private partnerships."

"At the same time, through public-private partnerships and other initiatives, we are looking for ways of ensuring that capital investment continues in this province, and the full burden of that capital investment does not fall entirely upon public spending."

I could go on. Those come from five different former NDP ministers: MacPhail, Farnworth, Petter, Sihota and Boone.

My question is: is there a fundamentally different approach to public-private partnerships today than in the 1997-2000 time frame when these quotes were made saying what a great job it is that you guys are doing what you're doing?

R. Fleming (Chair): On that note, I would like to thank all of our guests who presented reports today and spoke to them. We appreciate you being here and being available to answer questions that the committee has.

Oh, yes. A motion to accept the report from Partnerships B.C. It's moved. Discussion on the report?

R. Fleming (Chair): The next item we have is to consider our draft report to the House. I appreciate that people only had, maybe, 24 hours to have a look at it, but that should be sufficient. It's a fairly standard report, and it just details, in a summary fashion, the meetings and the wonderful time that we've been spending together over the past several months and some of the issues that we've had a chance to discuss here.

R. Fleming (Chair): The love is real. I didn't mean to be overly sarcastic. I'm very pleased with how our committee has been working and the chance to work with the Deputy Chair. I think the work of the committee is reflected in this report accurately. When we've scheduled time, we have been able to get through our business and to get through some of the backlog that was left to us from the previous parliament. I'll just open it up to comments that members may have about the report at this time.

J. McIntyre: I have two tiny comments, both of them related. You'll note that it is, I have to confess, on my continuing theme of some of the results being underplayed or downplayed a little. One of them is sort of a tiny….

J. McIntyre: Yeah, I will. I'm just about to. Sorry. One of them is just a tiny comment on page 11 — my page 11. It's in the….

J. McIntyre: No, it's under "Survey Methodology," and then it goes to "Survey Design" and then "Survey Results."

J. McIntyre: It's my page 11, but my page numbering was a tiny bit different, I think, because I melded two to save paper.

J. McIntyre: Yeah, it's under "Survey Results." Okay, page 12, just so everyone's….

J. McIntyre: No, it's still page 11 in this under "Survey Results," the last paragraph.

R. Fleming (Chair): Joan, sorry to interrupt you. The Clerk wants to say something about this item first. My apologies for not letting him do so earlier.

C. James (Clerk Assistant and Clerk of Committees): Sorry to interrupt. Traditionally, of course, parliamentary committees consider their reports in camera, and I always encourage parliamentary committees to consider their reports in camera. However, it has been the practice of this committee over previous parliaments to consider the reports in public session. That's entirely up to the members of this committee, but I do caution members that if they consider their reports in a public session and the report does contain a recommendation or other material which may compromise something, it could constitute a breach of privilege.

Having said that, it's over to the committee to decide how they wish to proceed.

J. Rustad: Actually, I'd like to make a recommendation that we go in camera to deal with this issue — not because there's anything in particular in this issue, but I think that precedent is the correct precedent to have in dealing with these reports.

B. Ralston: Just before we do that, perhaps…. I didn't understand the Clerk's comments about the potential breach of privilege. Maybe I'm just slow this morning, thinking about other things, so….

C. James (Clerk of Committees): Right. The committee's report to the House…. It's the House that should receive the report of the committee first, which would contain comments and recommendations and other suggestions. The public or other bodies ought not to receive the report first.

That being said, it could constitute a breach of privilege if a member were to stand up in the House and say: "Well, somebody out there knows all about this, but we haven't even received it in the House yet."

C. James (Clerk of Committees): It's a technicality, but just to protect the committee, I think it's important.

R. Fleming (Chair): A motion for the Chair to send the report to the House would be in order as well. Any discussion?

D. Thorne: This is just for information. I missed the meeting where this was discussed.

B. Ralston: I'd like to just give notice of a motion that the committee instruct the Office of the Auditor General to conduct a complete direct examination of the assumptions in the entire business case used for the contract to construct the Abbotsford hospital and cancer centre.

C. James (Clerk of Committees): If I could just advise the member of a procedural quirk in this place. On February 14, of course, the House prorogues, and that motion and this committee will lapse. So it will appear in the minutes attached to the transcripts for today, but if you wish to resurrect it at a subsequent meeting, it will need to be brought forward by yourself in the same formal manner.

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	a.	That the management of the retention and final disposition of the operational records of the Vital Statistics Agency, Ministry of Health, be in accordance with the records schedules, standards, and guidelines described in the Vital Statistics Services Operational Records Classification System.
	b.	That the management of the retention and final disposition of the operational records of the PharmaCare program, Ministry of Health, be in accordance with the records schedules, standards, and guidelines described in the PharmaCare Services Operational Records Classification System, as amended.
	c.	That the management of the retention and final disposition of the operational records of the Liquor Control and Licensing Branch, Ministry of Public Safety and Solicitor General, be in accordance with the records schedules, standards, and guidelines described in the Liquor Control and Licensing Operational Records Classification System, as amended.
	d.	That the retention and final disposition of the operational records of the Security Programs Division, Ministry of Public Safety and Solicitor General, be in accordance with the records schedules, standards, and guidelines described in the Security Programs Operational Records Classification System.
	e.	That the retention and final disposition of the operational records of the Archaeology Branch, Ministry of Tourism, Sport and the Arts, be in accordance with the records schedules, standards, and guidelines described in the Archaeology Operational Records Classification System.

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