2011 Legislative Session: Third Session, 39th Parliament

SELECT STANDING COMMITTEE ON PUBLIC ACCOUNTS

MINUTES AND HANSARD

MINUTES SELECT STANDING COMMITTEE ON PUBLIC ACCOUNTS

Monday, June 27, 2011

9:00 a.m.

Douglas Fir Committee Room

Parliament Buildings, Victoria, B.C.

Present: Bruce Ralston, MLA (Chair); Douglas Horne, MLA (Deputy Chair); Spencer Chandra Herbert, MLA;
Kathy Corrigan, MLA; Guy Gentner, MLA; Randy Hawes, MLA; Vicki Huntington, MLA; John Les, MLA;
Joan McIntyre, MLA; Lana Popham, MLA; John Rustad, MLA; Shane Simpson, MLA; Ralph Sultan, MLA;
John van Dongen, MLA; John Yap, MLA

Officials Present: John Doyle, Auditor General; Stuart Newton, Acting Comptroller General

Others Present: Susan Sourial, Committees Research Analyst

1. The Chair called the Committee to order at 9:05 a.m.

2. The Committee considered the Auditor General's Report: Follow-up Report: Updates on the Implementation of Recommendations from Recent Reports.

3. The Committee recessed from 10:02 a.m. to 10:09 a.m.

4 The Committee considered the Auditor General's Report: Audit of the Academic Ambulatory Care Centre Public Private Partnership: Vancouver Coastal Health Authority.

5. The Committee adjourned to the call of the Chair at 11:57 a.m.

The following electronic version is for informational purposes only.

The printed version remains the official version.

REPORT OF PROCEEDINGS
(Hansard)

select standing committee on
Public Accounts

Monday, June 27, 2011

Issue No. 17

ISSN 1499-4259

[ Page 449 ]

MONDAY, JUNE 27, 2011

The committee met at 9:05 a.m.

[B. Ralston in the chair.]

B. Ralston (Chair): Good morning, Members. You have an agenda before you, and we're going to deal with two reports today. The first one is the poetically named Follow-up Report: Updates on the Implementation of Recommendations from Recent Reports.

I'll turn it over to Mr. Doyle or Mr. Macdonell. I'm not sure who's going to present. Then we'll hear from Mr. Newton as well.

If you could go ahead, please.

Auditor General Report:
Follow-up Report: Updates on the
Implementation of Recommendations
from Recent Reports

J. Doyle: Thank you, Chair. Good morning, and good morning, Members.

As you know, I follow up on all the reports six months to one year after publication. The follow-up primarily consists of agency self-assessments regarding their progress against the recommendations that have previously been made and also those endorsed by this committee.

This particular publication contains a new form of follow-up, which is called a progress assessment. This is where we have reviewed the agency self-assessment to confirm its reliability. The details will come out in the presentation. Overall, I'm very pleased with the progress that agencies are demonstrating and reporting in regard to implementing recommendations.

With me today I have Mike Macdonell, an executive director within the office. He'll make a brief presentation regarding this follow-up report.

Thank you, Mike.

M. Macdonell: Good morning, Chair, Deputy Chair and Members.

We've been told by legislators that it's not enough for the Auditor General to issue recommendations and just hope that they'll be acted upon, and in the office we share that point of view. Our staff invest considerable time and energy and have pride in their work, and we want to know that our efforts are making a difference.

Following up is critical to ensuring that our work has a positive influence and that British Columbians receive full value for our services. So for this reason, beginning in October 2008 and on a semi-annual basis thereafter, we've followed up with the organizations we've audited and asked them to provide an update on their progress.

We have four forms of follow-up. The first is the action plan. Within three months of publishing the initial report, organizations are asked to provide an action plan describing how they'll implement the recommendations and by when. Often we're able to publish action plans in the initial report, but if not, they're posted on our website once received.

In our second form of follow-up, within six months to a year of when reports are issued, agencies are asked to provide self-assessments of the progress they've made in implementing our recommendations as well as other plans going forward. We publish these submissions unedited and in their entirety so that readers can assess for themselves whether or not progress is satisfactory.

To be clear, these are management's representations. While we read each update and in some cases discuss them with the entity, they're not audited in any way, and we offer no assurance concerning their fairness, completeness or accuracy. We expect that most recommendations will be cleared during this initial follow-up. Subsequently follow-ups may be required on outstanding recommendations or certain key recommendations that have not been satisfactorily addressed.

A third form of follow-up involves assessing the organization's self-assessment of all or certain recommendations to confirm their reliability. The results of a progress assessment are published in the next available semi-annual follow-up report. Our spring 2011 follow-up report included our first progress assessment as a follow-up on our December 2008 report entitled How Are We Doing? The Public Reporting of Performance Measures in British Columbia.

The fourth form of follow-up involves auditing the self-assessment of certain recommendations. We have yet to select any submissions for this level of examination. The results of progress audits would also be published in the next available follow-up report.

Our latest follow-up report, published in April 2011, contained the self-assessment updates on five reports with 33 outstanding recommendations. Two of the five reports were initial follow-ups; the other three, subsequent follow-ups. The auditor organizations reported that 94 percent of our recommendations have had been actioned at least to some extent. For us, this is both encouraging and gratifying.

Twenty-one of the 33 recommendations, or 64 percent, were fully or substantially implemented, or the organizations chose to take alternate action to address the recommendations. Thirty-three percent of the recommendations have been partially implemented. No substantial action was taken on only two.

[0910]

We've issued six follow-up reports since October 2008. Over this time 90 percent, or 410 of the 454 recommendations issued, have been fully or substantially implemented or alternate action taken. Forty-one, or 9
[ Page 450 ]
percent of our recommendations, have been partially implemented, and no substantial action has been taken in only 3 of the 454 recommendations issued.

S. Newton: Just a couple of brief comments. I'd like to thank the Auditor General for the follow-up report. From my perspective, periodic assessments or follow-up in recommendations help ensure that programs have considered the information in the Auditor's report and have acted appropriately.

The program or ministry is in the best place to determine the appropriateness of the actions. They're best positioned to balance the resources they have available, the recommendations of the Auditor, as well as the requirements of their program in meeting the recommendations. Sometimes that means they follow the recommendations verbatim. Other times they find alternate ways to meet the recommendation. And sometimes doing nothing might be the best case.

I'm happy to see that of the recommendations, the percentage of those that are completed or have had action on are quite high. That shows some dedication on the part of the program. As well, it helps indicate that the Auditor General's recommendations were in areas of benefit to the programs themselves.

If there are specific questions related to any of the follow-up reports, those are best addressed to the program areas that were audited.

B. Ralston (Chair): Over to members of the committee. Questions?

Interjections.

B. Ralston (Chair): I don't think that the presentation was that clear, was it?

V. Huntington: When the self-assessments are done, what prompts you, and how long does it take to go and do an assessment of the self-assessments? How long does that take, and is there a point at which you feel you have to go in? What triggers that?

J. Doyle: Thank you for the question. What triggers it is a need to go in and just reaffirm that the representations we've received from the entity are in fact valid. We are marshalling our resources within the office so that we can do more of these as we go forward. I don't want to get into a situation where I'm just checking that people are doing the right thing when they've already said that they are.

What I do is have an internal risk process which looks at how important this particular series of recommendations was and especially what the impact would be across the system, and then I would go in and have a look.

Part of your question was also how long it takes. Well, it doesn't take as long as the initial review, because what we're seeking — and this is a very important point — is the documentation maintained by the entity itself regarding its progress and how it has dealt with things. We expect them to actually have the information available, which we could then just peruse and consider.

It's not an audit. It's a review that we're actually undertaking. So we would just do a reasonableness check to see whether or not the self-assessment that they presented and that we've published previously is in fact reasonably valid.

The process that we went through went smoothly, but I would emphasize the need for entities to keep documentation about how they have actually completed recommendations and to what extent and how they've actually reached their conclusion around progress.

V. Huntington: I have a number of questions, Mr. Chair. Can I just proceed?

B. Ralston (Chair): Well, let me just check and see if there are other members who have questions. Perhaps we'll have the second one, and then we'll alternate so that you get some kind of a flow of questions there.

[0915]

V. Huntington: I would like to ask one question with relation to the SFU and BCIT self-assessments. Then I'd like to go back to a few on the oil and gas when there's time.

I'm not sure which agency I should be asking the question of, but I'm interested in the difference between SFU's attitude towards the recommendations from the Auditor General and BCIT's attitude. I note that the Auditor General wants to go back and discuss some of his recommendations with SFU, but is there something at the base of their difference in approach to the issues of security especially?

J. Doyle: I think there may be something different. Quite what it is, I think I should leave SFU to present about.

What I will say is that I was sufficiently disturbed by the tone and content of the responses that I asked the audit team to go back and have further discussions with the university. Those took place. They took place after publication, so they're not included in this document. But they did take place.

There were three areas that we were particularly concerned with: recommendation 3, which is about detailed wireless standards; recommendation 7, which is looking at the use of ad hoc and peer-to-peer networking; and also password control. I can't remember from memory the recommendation number for password control.
[ Page 451 ]

What we found in those first two is that in fact future work has been done. In the discussion that the CIO had with my senior staff, we're more satisfied now with the work that's actually being done in SFU to address those particular recommendations.

We will follow up again in October to make sure that we're fully satisfied with what they're saying. It may well feature as a review that we undertake at some time in the future just to make sure that in fact our expectations and their expectations mesh.

When it came to the password control, SFU is of the view that regular password changes are not required. I totally disagree with that stance. We asked for evidence to suggest why password control would not be required, and they provided us with some academic papers. I'm still unconvinced that password control is not an essential feature of good, robust security and IT networks.

Every document that I can find when I do research in this area says to me that appropriate password changes and password policies should be in place — not draconian but appropriate and fit for purpose. That doesn't seem to be the stance that's being adopted by SFU at the moment.

We will continue to have these discussions with them, and we'll be able to report back more wholesomely in the October publication.

V. Huntington: If I could just make a comment. As I was reading through, it struck me that SFU had almost a naive understanding of what its institution may be producing in terms of scientific research discussions between the peers. I just got a sense of naivety, almost, on their part.

I hope that at some point in these discussions they can be convinced that much of what they do, especially at the pure science level, is important — probably economically and strategically important — to Canada. It is not something that should be left to….

Well, I don't agree that they should not be taking your recommendations seriously, and I'm glad to see that the office is pursuing them. I guess that's my comment on those two institutions. It's interesting that BCIT seems to understand the economic importance of that level of security more than SFU, which makes more sense, actually.

But Mr. Chair, I do want to come back to oil and gas, if that's possible.

[0920]

B. Ralston (Chair): Okay, sure. There'll be time. I'll ask Kathy if she has a question.

K. Corrigan: I wondered: if we have a follow-up report in here, including a self-assessment, can we conclude that that means there won't be a progress assessment or a progress audit? In other words, if we're getting a report here, does that mean the work, at least for this time period, is finished, or would you wait to do a report if there was going to be a progress assessment or a progress audit? Would you do that work first, before reporting back to the committee?

J. Doyle: Thank you for the question. This is the self-assessment. From the self-assessment, I form a view as to what further work needs to be done. When we've done that further work, we publish it in the same document so that you can see it happening. Each time I publish this report and it has been discussed at the Public Accounts Committee, I've made the same request. That is, if you have a particular area that you would like me and my staff to go back and have a look at, then you're very welcome to suggest it.

As you'll appreciate, at the end of the day I know it's my call to decide which ones we would go into. We do propose to do some more progress assessments, and we do propose to do a progress audit at some time in the not too distant future. But the fact that we've done one and we're going to do one will actually appear in the document. It wouldn't be something we would flag in advance, necessarily.

B. Ralston (Chair): Vicki, back to you now, seeing no other questions.

V. Huntington: If I could go to the oil and gas outstanding recommendations. I hope at some point you do go back and consider progress reports on all of their fully or substantially implemented self-assessed statuses. I'll ask a general one first.

Mr. Chair, is this committee…? Can we ask for briefings from organizations such as the Oil and Gas Commission on progress with regard to these recommendations?

B. Ralston (Chair): I don't know the answer to that offhand. I suppose we'd have to consider what the administrative implications would be for the committee and probably discuss it with the vice-Chair. We could get back to you.

My inclination would be to say that we wouldn't want to multiply those kinds of appearances endlessly, because I think that would become unmanageable for this committee. But it's something that the vice-Chair and I can take up.

V. Huntington: Could I just say, then, as a comment that I find, in going through many of these reports, that there are issues within the report that I feel this committee should be following up on, even if it's on a broad-based, strategic level. I just sometimes wonder if this committee ought not to be more deeply involved, as other public accounts committees are, in following
[ Page 452 ]
up on the underlying issues that arise out of some of these reports.

I think there would be value if we were to start looking at some of those, not outstanding issues but issues that are pointed out but not, perhaps, dealt with as fully as some members of the committee might like to see them dealt with. I would like to be able to follow up, for instance, with ministries to see for ourselves how some of these recommendations are sitting within the ministry and how they're being utilized.

We receive fairly little detail in terms of how ministries respond to the recommendations. There are occasional ones where I'd like to know more. I don't see why the committee couldn't start to look at some of those broader implications. That's my sense of it, as you and the vice-Chair consider it.

B. Ralston (Chair): We'll consider that. I think we're more an oversight committee than purely an administrative committee.

V. Huntington: But that is oversight, sir.

B. Ralston (Chair): We'd begin to intrude upon the area of direct management, as opposed to oversight, so there may be a legitimate concern there.

[0925]

But as I say, that's something the vice-Chair and I could take up.

V. Huntington: All right, then. With recommendation 4, on page 9, which the Oil and Gas Commission says is partially implemented, the recommendation was to develop and implement an independent audit program. The commission says it has established contracts with third-party environmental companies to provide investigation services for compliance, but it will "evaluate the need for periodic independent audits as a good management practice."

I don't know if the commission members are here at all today. Those contracts with third-party environmental companies — are those companies completely distinct from the oil and gas firms? Or do any of those companies that are doing independent assessments have contracts with oil and gas firms in the area as well as the contract with the Oil and Gas Commission? Is there a conflict in any way with those independent assessments?

B. Ralston (Chair): Mr. Doyle, is anyone from your office able to answer that question at this time?

J. Doyle: It's a very good question, Chair. My guess is that there's a small pool of qualified people to actually conduct this work. As a consequence, you sometimes find different players acting in different roles at different times during Oil and Gas Commission operations. So it's not beyond probability that they would be similar players, simply because it's a small pool of talent that could actually conduct this work.

V. Huntington: I guess I would sense that this is an area where a ministry ought to be doing more of this work, where it can maintain its arm's-length independence. If the Ministry of Environment was looking at some of these evaluations, aside from Energy and Mines and the Oil and Gas Commission…. Unless you do have — and all of us know this — real independence of those assessing authorities, you don't necessarily get good value for your dollar.

The other issue is the workplan to manage the risks on the legacy sites. There seems to be a deep reluctance by the Oil and Gas Commission to take a good hard look at the legacy sites. Now, does the Auditor General's office or the Ministry of Finance know why that is? Is there a fear of assuming risk that they have not had anything to do with in the beginning? Or is the government just going to allow these legacy sites to sit there with nobody paying any attention to them? If I read this recommendation, there is a true reluctance to get involved in them.

J. Doyle: Another very good question. We're not sure why there is a reluctance to conduct this work. The story is that these sites have been left unattended. They have no owner. Therefore, by default, they have come to the province, and the province has assumed responsibility for the clear up and tidy up of them. They've been around for a long time.

There aren't a great deal of them. Forty-odd is a number that comes to mind. But the costs of cleanup could be substantial. Money is collected from the industry to put into a trust fund, which is then deployed to actually do the cleanup of these particular sites.

I can think of no rational reason why that cleanup shouldn't move ahead and be dealt with in a reasonably quick time if there is any issue around the impact of those environmental problems within those sites flowing out into other parts of the environment.

[0930]

If the risks are all contained within the site — and I can't think of any that would be, logically, having had some discussions with environmentalists and so on in regard to this — then there is a good reason to do it when it's appropriate. You could wait.

But in the nature of these things, one plot of ground does impact its immediate locality and then further. So I would have expected to see a little bit more energy being put into, first of all, the identification, clarification of what is required and then actual remedial work being done.

That's from my perspective. It is an issue that we did discuss in some detail with the Oil and Gas Commission
[ Page 453 ]
when we conducted the work. When they came here and presented it, they explained they were going through a systematic program of looking at these areas. That's my recollection of what it was that they said.

The only way to find out for sure is either for me to do additional work in this area or for them to actually make a presentation to this committee to explain their operational plan, if you like, in regard to these sites.

G. Gentner: I do somewhat concur with the member for Delta South, in that over the weekend…. I don't know if many of you spent it watching the affairs in Ottawa — the filibuster and the endless discussions. It was quite remarkable how parliamentary democracy works. I take it comparatively to what's happening in our Legislature and the limited amount of accountability, through almost a no-estimates situation, where we can hold the government accountable.

It seems to me, hon. Chair, that the only means at our disposal is…. More responsibilities, therefore, will be foisted on the Auditor General, who seems to be the only agent of opportunity for us to hold the government accountable. For that reason alone, I agree with Vicki, and I think there are some follow-ups that we should take as a committee and hold the government accountable.

I think, too, that on recommendation 4, it goes beyond that. The government did put some emphasis on the Ministry of Environment by giving it the ability to order an audit on the performance of the commission. But that still is tentative. That is, it may. It's not by statute. Therefore, I ask the Auditor General: is that what your expectation was? It fills the need of a partial implementation of your recommendation?

J. Doyle: No. My expectation was that the commission would conduct audits of the individual drill sites to ensure that all the work that was necessary to be done had been done before the operator vacated. I'm concerned about the words that are in that particular section. I'll read them out for the record: "The commission will evaluate the need for periodic audits as a good management practice."

Unfortunately, to me that sounds like an audit. Checking that something is done which is required to be done is an optional extra. I actually think it's not an optional extra. It's something that should be a normal part of business.

I will go back now that I've read that particular piece and ask them exactly what it was that they meant. As there are still items outstanding, I will be coming back to this committee with progress on these particular recommendations in October.

G. Gentner: Just a quick supplementary. If I have it correct…. I know if I indulge the rest of the members with this situation or my understanding….

I thought we left the Oil and Gas Commission report sort of hanging. I thought it was quite incomplete on behalf of our committee. I thought we were going to spend more time on it. There are these incidences where they should be flagged. I think that with the boom-and-bust aspects of that industry, it's somewhat quite removed from my consciousness here in the Lower Mainland.

I would like to see a further follow-up on what's happening in the oil and gas situation. Also, we know how it's changing with shale gas, etc. So I hope this won't be a file 13. Hopefully, it will be a live file, and we can revisit it upon further investigation by the Auditor General.

[0935]

J. McIntyre: Before I begin, I can't resist refuting…

B. Ralston (Chair): Please do.

J. McIntyre: Thank you, as you know me, after these years.

…comments from the member just before me, Guy Gentner for Delta North. We have one of the last elaborate sets of estimates, I think, of most jurisdictions in Canada. We have formal debate, and I think it's over a hundred hours of debate on estimates. So I don't want to leave that comment hanging — that the government of British Columbia doesn't have a proper estimates session.

To my question. I think it's a pretty good record that about 90 percent of these recommendations out of 450-plus are either fully or substantially implemented. But I did have a question of the Auditor General. There's still about 9 percent, or about 40, and then I think even in the follow-up there are still some that are partially implemented. Do you have a sense that that is sort of in the works?

Some of these may be longer or more difficult to obtain, but do you have a sense that there's some work being done on them, or have they been abandoned? I know this is a very general question, because they're scattered through different ministries and through different reports. Especially since, as I say, 90 percent are well on their way, do you have a sense that this is just a bit of a lag?

J. Doyle: That's a really good question. The simple answer is that work is being done on all the recommendations except one or two. The issue is always around how quickly that work is being done to meet the artificial timelines of my reporting cycle, which is after 12 months and then every six months.

It would be fair to say that some of the earlier recommendations were written in such a form that it would be very difficult to actually complete the whole recommendation within a reasonably short period of time. So
[ Page 454 ]
I take that into account when we look at satisfactory progress or otherwise.

What you'll see there is that the bulk of those outstanding are in fact recent reports that work is being done on. I've got to be aware, and I'm sure the committee is aware, that my recommendations aren't the only things that are in front of different entities or different ministries. Therefore, as the comptroller general said earlier on, they've got to be fitted in somehow to that block of work.

Having said that, the ones that I've identified in the form of recommendations I believe are important are issues that need to be addressed, and the entity has agreed that they need to be addressed. Therefore, I would expect reasonable progress and reasonable resources to be allocated to them.

So I would continue to expect some slowness in regard to some recommendations, particularly the seismic safety ones, for example. They were multiple period–type recommendations that need to be looked at, and a lot of work is being done in that area that moves towards it but doesn't get us over the substantially complete position, but action is being taken. There are plenty of other examples of that.

Overall, I'm reasonably satisfied. But while I started going through some of the words that are used in the submissions by the entities, it makes me want to go back and start asking further questions, particularly the one I've just identified. The phraseology of that seems to imply rejection or non-acceptance, and I'm sure that's not the case. But that's what they've written, so I need to go back and ask questions.

K. Corrigan: I'd like to thank the member for Delta South for bringing up the issues with regard to the self-assessment conducted by the B.C. Oil and Gas Commission — really helpful questions.

I note that with regard to recommendation 4, it's pointed out that section 10 of the Oil and Gas Activities Act provides authority for the Minister of Environment to order an audit of the performance of the commission in relation to the protection of the environment.

I'm not asking the Auditor General about any work that is being done, but I just wanted to clarify that…. For example, you were talking about doing some follow-up work on this one. Is that a recommendation that would be within your mandate to make — that the Ministry of Environment should order an audit of the performance pursuant to that section of the act?

[0940]

J. Doyle: I'm not sure that I would actually recommend to a ministry to conduct an audit. It seems to me that an audit should be conducted on a cyclical basis.

The fact that the power exists, in my view, should be…. The rationale for the power to exist is that something will be done with it over a reasonable period of time.

I would have thought that the Ministry of Environment would want to know that the Oil and Gas Commission operations were effectively managing the environmental outcomes, because the Oil and Gas Commission has unique powers in regard to the environmental outcomes that it can overview.

My expectation was that it shouldn't be necessary for me to make a recommendation. They should actually have a plan where they would conduct it on a cyclical basis and get feedback. Whether that basis is every three years or longer, I'm not sure.

In three years time, if I was looking at this and no action had been taken, I think I might observe and comment that a power exists that has not yet been utilized. If that were the case — and I'm sure it won't be — I see no reason why I couldn't comment on the fact that that power exists. But what I would be doing then is actually conducting my own performance audit on the environmental impacts and so, if you like, would have taken over the role envisaged in the amendment to the legislation.

B. Ralston (Chair): I had a question myself. Page 10, recommendation 7 concerning the Oil and Gas Commission. As I recall the report, one of the concerns expressed was that the amount of security taken from operators for wells was pretty financially minimal.

This response suggests that…. It says: "The current focus of the program is to monitor industry activity and request security where financial risk is increasing." It seems, in the way it's written, that that is prospective. Has any additional security actually been taken? Or are you able to answer that?

J. Doyle: If I could just ask a question of my staff.

Chair, we've recently finalized the audit of the Oil and Gas Commission. It's one of many that I have done over the last couple of weeks.

My impression was that there was an entry in there, on the face of the financial statements, in regard to deposits, but I can't remember the details. Can I ask the indulgence of the committee to come back with that information? It will be a public document at that stage because the Oil and Gas Commission would've published its financial statements.

My recollection is that on the face of those financial statements you will see an increase in the deposits that have been made.

B. Ralston (Chair): Perhaps you could circulate that section of the financial statements with, at least, an explanatory note that relates to this recommendation so that we might, rather than just simply reading the financial statements, have your explanation as well.
[ Page 455 ]

J. Doyle: Yes, Chair.

V. Huntington: This will be my last comment and question. It's in relation to recommendation 5, on page 9, for the Oil and Gas Commission.

This goes back to my concern that…. I personally feel that every member on this body, this Public Accounts Committee, should be looking at the job in a non-partisan capacity.

[0945]

My concern about wanting to go under some of the recommendations and follow up within the ministries is not one to attach blame. It's one to assure the public that we are taking a good hard look at some of the impacts and reasons for the recommendations that come from all of these reports, but it's also to satisfy ourselves and the public that the issues are indeed being handled appropriately and are being corrected in a manner which complements the appropriate expenditure of government funds.

I think this recommendation 5 and the breadth of what it actually means is a perfect example. Here we have a recommendation that the Oil and Gas Commission should be developing some opportunities, some method of looking at the cumulative impacts of their decisions. And we have here a reply that suggests that not the environmental assessment office, which is the expert and controls the expertise and access to experts to look at cumulative impact assessments…. We have here the beginning of a cumulative impact assessment process undertaken by the Oil and Gas Commission, whose expertise is subsurface values.

But here they are developing an assessment method to review surface values for which they have no expertise, and they are taking on a role that would normally, in the public mind, be that of the environmental assessment office. They are taking on this role so that they can guide "operational application reviews and permitting."

Now, I think every member of the committee should be concerned about the implications of that change to what the public understands is the role of the environmental assessment office. Are we convinced that this is the appropriate way to proceed? Are we convinced that the assessment values that they determine are not skewed in the direction which would be normal, because the values of the Oil and Gas Commission are very different than the values of, say, the environmental assessment office?

I think the role of this committee would be to say to the Oil and Gas Commission and to the Ministries of Environment and Energy and Mines: "Please come to this committee and explain to us how this assessment process is appropriate and will protect the surface values that it's intended to protect. What is the independent authority that's overlooking that assessment process?"

I just see that there's no other committee in the Legislative Assembly that has the authority that we do — or that sits. The environment committee doesn't sit, and it could, I assume, have the authority. But we're the only committee that can do this. I really hope that you and the vice-Chair do consider whether we should be broadening our activities somewhat so that our mandate can be properly serving the public. That's just my comment — to the members opposite as much as to the Chair and to the opposition members.

This isn't an issue of partisanship. It's an issue of determining the value of the process being undertaken, in this instance by the Oil and Gas Commission and the government. This process is out of the public mind and out of public understanding, and there is nowhere but this committee that we can force this knowledge to come forward and then understanding be reached that we're satisfied that the impacts are going to be appropriately assessed — or not.

I just think we need to consider that our authority does lead us and can lead us into a deeper discussion of some of these issues.

B. Ralston (Chair): Thank you. There is a strong current of opinion in public accounts committees across the country that these committees function best when partisanship is lowered. Sometimes that's not always possible.

But certainly, I think you make a valuable point, and as I say, that's something that the vice-Chair and I might and will consider, particularly in relation to the Oil and Gas Commission.

[0950]

R. Hawes: I just have a question of the Auditor, and it's with respect to your chart here that shows the percentages of completed, partially completed, etc. It's reasonable to expect — in fact, it happens — that from time to time ministries reject the odd recommendation and say: "Frankly, you're not right." Do they fit into the small number that haven't — the 8 percent or the 6 percent or the 1 percent…? If there is a recommendation that the ministry says, "No, we can't accept that recommendation," are those instances included within that small percentage that haven't been acted upon?

J. Doyle: Thank you, Member, for the question.

Yes. For example, there's one there on government's post-secondary expansion — 25,000 seats by 2010. The recommendation was that the ministry should have an understanding of the costing of programs to be able to use that understanding in the block funding approach. The ministry said they didn't need an understanding of the costing for academic programs in order to provide a block grant.
[ Page 456 ]

We actually didn't understand where they came from in regard to that, because we didn't say: "Change the funding system so that it matches the costing system." What we said was: "You need an understanding of the costing system in order to fund incremental changes." That's what the 25,000 seats were all about — incremental changes.

To come back to your question, yes, there are occasions when entities do not agree with a recommendation, and we include them in this. It's a rare situation, but it does occur.

R. Hawes: Now, do they stay forever? Do they stay as a recommendation that's not acted upon just forever?

J. Doyle: This is going to be a rolling, three-year report.

R. Hawes: So you could at some stage, in fact, look at it and say: "Well, the government was right, and we'll just take that out altogether. We won't carry it forward." Is that right?

J. Doyle: I don’t think I went as far as "the government was right," Member. What I said was that we will continue to monitor these on a rolling, three-year basis.

R. Hawes: There could come a time, then, when the recommendation was no longer necessary?

J. Doyle: Well, we would no longer report the recommendation as being "no action taken," and therefore it would disappear from that table that you see in the document there.

Could I emphasise how we deal with situations when an entity says: "We don't agree"? We actually go through quite a detailed process — at least, we did in the last two years — of, first of all, sharing the facts that we've picked up. Once we've agreed on the facts, and that's a formal clearance process, we then go back and provide a draft report with recommendations, and we go through a process of clearing the recommendations and the body of the report.

We ask for comments on tone, content and the recommendations. Indeed, a very recent experience was: "We don't think these recommendations are going to work, but if you reword them in this way, you'll get the same outcome, and they're likely to happen." That was feedback that we got from the particular ministry. I agreed with them. We changed the wording of the recommendations, and they were then endorsed and deemed to be appropriate. So there is a discussion, and we're trying to avoid the situation when recommendations are not accepted.

If I strongly believe that a recommendation is required, regardless of whether or not it's accepted, it will still feature in the report because I think that's important, and it's part of my role. But I haven't bumped into that particular situation in any extreme way for a while, mainly because the evidence that we have collected is quite clear as to the recommendation. Also, I think that I have noticed within ministries and different areas within government a desire to actually do the right thing and to make sure that the changes that are necessary are actually brought about and put into place.

[0955]

So it's a case of there is separation. There is a conflict from time to time — or tensions, as I would like to express it — but there isn't outright disagreement normally. Occasionally there will be, and on those occasions, we tend to document why that would be the case.

B. Ralston (Chair): Spencer, and I think this'll be the last question. We'll have this question and a brief recess, and then we'll set up for the next report.

Go ahead.

S. Chandra Herbert: The Auditor made mention of 25,000 seats by 2010, the post-secondary expansion. I'm just wondering: that was a very curious…. It sounded to me like there was no financial data behind that goal in the block funding, etc. Could the Auditor General speak a little bit more fulsomely about what happened there, what government said, why they didn't need those numbers and what the final outcome was? That just seems odd that there would be a goal like that but without financial numbers to back it up.

J. Doyle: I'll read from my briefing document. Whilst I have a vivid memory of the situation, I'd rather get on the record the exact words.

The actual recommendation was: "The ministry should establish a process to determine, and periodically review, the actual cost of delivering programs by institutions, and then use this information to better inform its block funding decisions." Within the body of the report there was some discussion in regard to why that was in context with what happened.

"The ministry made it clear, from its initial response to its commentary in the follow-up, that it did not find this recommendation to be either useful or actionable." That's a straight quote. "Indeed, the recommendation does not make sense in block funding environment, given the manner in which the ministry has framed its response: to wit, that the OAG has recommended that each and every educational program at all post-graduate institutions must be individually costed."

That was their interpretation of it. However, this interpretation is not in line with the arguments presented in our report.

Neither the recommendation nor the supporting narrative suggests that detailed costing is required
[ Page 457 ]
for all programs. Instead, the report notes that better information is required in order for a more rational allocation of resources between different institutions. Therefore, we still perceive our recommendation to be valid and have not yet received an appropriate response.

S. Chandra Herbert: Thank you to the Auditor General for the answer there. I, too, find it troubling that the ministry would argue that it wasn't useful or actionable — the suggestion that the ministry should have appropriate information around financial costs of seats at university and to suggest that it does not make sense in a block funding environment.

If we're going to give universities a goal of how many seats they should have, one would assume that the funding provided through government would also support that goal or at least have some knowledge of how those two things line up.

Does the Auditor General have any thoughts on follow-ups, or is this just basically that the ministry has said to forget it and that government is not interested in following this any further? Where do we go next with this? How do we take this further?

J. Doyle: Chair, this particular report is entitled Government's Post-Secondary Expansion: 25,000 Seats by 2010. We're now in 2011. It's on our list of projects or audits that we should consider as we roll forward: whether or not that whole thing was achieved.

Just so that the members are aware, I'm from an academic background as a CFO in a large university. I would agree that I don't want to know the precise details of costing for every single little course and every single lecture and so on, but I need to have very good and strong understanding of how the costs flow within an institution. If I'm going to expand the number of students that I have, I need to be able to argue for changes in the way that the block funding works in order to be able to ensure that I'm set up to succeed as I go forward.

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It would be my intention to have this on our list. Whether we can actually go back and do the work or not would depend very much on the resources I have available and the current risks and exposures that I identify as we go forward.

L. Popham: I just wondered if the correspondence that Mr. Doyle read into the record was available in hard copy or something that could be forwarded to the committee.

B. Ralston (Chair): I think they said they were his briefing notes. I'm not sure whether he wants to share them with the committee or not. That's up to him.

J. Doyle: Chair, I'm just reminded that the ministry's response is actually on the record already in the actual report. Hansard would cover our analysis, as we've just mentioned it. It's all immediately available, and all that documentation — the report and so on — is available on my website. Should the member need any assistance, then I'll be more than happy to arrange for that link to be provided.

B. Ralston (Chair): Thanks.

Well, on that helpful note, we'll conclude this one. If we could take a recess of a couple of minutes just to set up for the next one, but please don't go away.

The committee recessed from 10:02 a.m. to 10:09 a.m.

[B. Ralston in the chair.]

B. Ralston (Chair): We're now dealing with the Audit of the Academic Ambulatory Care Centre Public Private Partnership: Vancouver Coastal Health Authority. That's a report that was issued in May 2011.

There are a number of presenters here, although I gather that there's an agreement that not all of them will speak, but they will be here available to answer questions.

So I would just like to briefly put those names on the record: Bob Faulkner, the director of the Office of the Auditor General; Sarah Clark, who is the chief executive officer of Partnerships B.C.; Susan Tinker, vice-president of partnership services, Partnerships B.C.; Duncan Campbell, chief financial officer and vice-president, systems development and performance, Vancouver Coastal Health; Brent Alley, executive director, Lower Mainland facilities management; Suzanne Saatchi, general manager, Jim Pattison Outpatient Care and Surgery Center, Lower Mainland facilities management; and Manjit Sidhu, assistant deputy minister, financial and corporate services, Ministry of Health. Welcome to everyone.

Perhaps we can first begin with an introduction from the Auditor General, Mr. Doyle.

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Auditor General Report:
Audit of the Academic Ambulatory Care
Centre Public Private Partnership:
Vancouver Coastal Health Authority

J. Doyle: A public-private partnership, or a P3, is a contract between a public sector entity and a private sector entity to provide assets or services. Some of the more common P3 projects include hospitals, bridges, highways, new types of technology and new government buildings.

In this province P3s have become an increasingly prominent procurement vehicle for government. Because of this and the considerable dollars often attached
[ Page 458 ]
to these projects, we took our first major look at P3s in this particular audit. The partnership was between Vancouver Coastal Health Authority and a private consortium called Access Health Vancouver.

Because this was one of the first P3 projects undertaken and because the P3 actually occurred some time ago, although it's currently in progress, our recommendations are not so much about the P3 itself as to make recommendations for future P3s or for P3s that are currently active. They are forward-looking, in other words.

The goal is to provide guidance for future P3 projects to ensure that government, which would normally assume most of the risks associated with these major projects, can distribute appropriately the financial, technical and operational risks between both the private and the public sector partners, thereby achieving the desired cost reductions and higher-quality results commonly associated with P3s. Because P3s are widely used and often represent significant dollars, my office will be looking at other P3s in the near future and for the next period of time.

I have with me today to make the presentation Bob Faulkner. Bob is a director of financial audit within the office. I also have Mike Macdonell, who is going to handle the technology. I'll now turn over to Bob to provide members with a brief overview of our report.

B. Faulkner: Good morning, Members. I'll provide the committee with a brief presentation on our audit report. My plan is to give a little background on the project, discuss the objectives and scope of our audit, highlight the key findings in each of the four criteria we assessed and, finally, to summarize with our recommendations.

By way of background, the Academic Ambulatory Care Centre is an 11-storey facility on the Vancouver General Hospital campus. From the early planning stages in 2002 the project was identified as a potential public-private partnership. Vancouver Coastal Health was the project owner. Planning was done in cooperation with the UBC Faculty of Medicine, as the centre is a key component of the UBC medical school program.

The project went through a full public procurement process, resulting in the signing of a project agreement with the successful proponent in 2004. The P3 partner was Access Health Vancouver, a consortium of private companies with expertise in financing, design, construction and operations. In November 2004, at the completion of the project agreement, a public project report was released. It was titled Achieving Value for Money: Academic Ambulatory Care Centre Project. The report was prepared by Partnerships B.C., based on information provided by Vancouver Coastal Health.

The starting point for the audit was this project report. We selected three assertions in the report that we assessed as key measures of success in achieving value for money. Our objective was to assess how successful the project was in achieving its key value-for-money assertions.

We developed four criteria to assess the value for money to date. Has the project delivered on the design and construction so far? Are there effective procedures to monitor the progress of the P3 contract? Are key stakeholders satisfied with the outcomes to date? Does the contract allow for flexibility and learning, to improve future outcomes? We didn’t go back and assess the strategic decision-making or the procurement process — for example, the underlying assumptions in the business case or the evaluation of the RFP to select the P3 partner.

In the next four slides, I'll discuss our key findings under each of the criteria.

Our first criterion focused on construction of the facility. Was it completed on time and on budget? We found that the first was met and concluded that the scheduled risk was effectively transferred. However, we concluded that the project was not completed on budget. The project report disclosed an estimated capital cost of $95 million. Although Vancouver Coastal Health was unable to provide documentation to support the amount, we were informed that the amount was based on the net present value of Vancouver Coastal Health's expected payments to the P3 partner.

[1015]

The final capitalized value in Vancouver Coastal Health's financial statements was $123 million. This represents a $28 million, or 29 percent, increase over the $95 million estimate in the project report. Two main causes were identified. First was $11 million in project variations or change orders. Our conclusion was that Vancouver Coastal did not have a clear understanding of the user requirements before going to the market, which resulted in a significant number of project variations.

The second was a change in the discount rate used. In calculating the $95 million, we were informed that the discount rate used was the P3 partner's weighted average cost of capital. For the financial statements, the discount rate was Vancouver Coastal's own incremental cost of borrowing, which was about 1¾ percent lower. The lower discount rate resulted in a higher net present value.

The P3 partner is responsible for the operations and maintenance of the facility for the term of the agreement, while the facilities and property management division within Vancouver Coastal are responsible for monitoring the results. We found that Vancouver Coastal Health had an effective process in place to monitor the general performance of the P3 partner. This included monthly reporting, facility user meetings and satisfaction surveys.
[ Page 459 ]

As a key measure of the effectiveness of the P3 partner's management of the facility, we planned to assess the results of the performance-based payments over the first three years of the operations. We found that the project agreement did not have a performance structure that was subject to reductions for non-performance, as was asserted in the project report.

The project agreement does have a multiple-step process to address instances of non-performance, culminating in Vancouver Coastal performing the work and recovering their costs from the P3 partner. However, under a good-practice, performance-based payment structure, the P3 partner is incentivized to perform well, as monthly performance is measured against criteria and the payment is reduced when standards are not met.

One of the objectives of any project is to meet the needs of users. Therefore, we wanted to assess how users, both internal and external, viewed the completed facility. For internal stakeholders — for example, clinicians, medical school staff — there were a number of mechanisms to monitor satisfaction. As noted previously, there were facility user groups and annual satisfaction surveys. Overall, we concluded that although satisfaction levels varied, the overall feeling of the internal users was positive and showed an improved trend over the three years.

As P3 projects are a relatively new method of procuring public facilities, we expected that satisfaction with external stakeholders — for example, government agencies, legislators and the public — would also be measured. However, there was no mechanism to engage external stakeholder satisfaction.

Our final criteria was to assess the flexibility in the project agreement and how the province is able to learn and improve from experiences from the Academic Ambulatory Care Centre. We found there are a number of provisions in the agreement that allowed for flexibility. These included formal processes for variations, sharing of some risk through recalibration at intervals and provisions for changes within the P3 structure.

In terms of mechanisms to share lessons learned, we noted that Vancouver Coastal Health led the project while key government stakeholders — the Ministry of Health and Partnerships B.C. — observed through the process. Since the project was finalized, Partnerships B.C. has developed a number of mechanisms to provide technical support at various stages in P3 projects. We were informed that a number of lessons from this project have been incorporated into templates used in more recent P3s.

We also noted that representatives from the provincial health authorities have established a Health Authorities Infrastructure Planning Council to facilitate discussion of P3 projects across the health sector.

In terms of specific changes in the project agreement, we noted two key amendments. Both impacted the monthly payments to the P3 partner. In both cases we were unable to assess the accuracy of the amendments as there was no documentation to support the changes.

This sort of segues into our recommendations. This P3 agreement is now well into its operational stage, so we focused, as John mentioned, on recommendations for future P3s.

Our first recommendation is that key project documents be retained. Given the long-term nature of P3s, these agreements will likely outlast the original project team members. Therefore, proper documentation of all key decisions is crucial.

Second is that the projects should include contingency budgets. One of the issues with the Vancouver Coastal Health budget process was that there's no recognition that changes or variations would occur. A contingency budget as part of the upfront approval process recognizes that not all design and construction risk can be transferred to the P3 partner.

That project implementation plans should be prepared is our third recommendation. These represent good practice in project management. They're comprehensive documents prepared at the outset of the project that guide the public sector project team.

[1020]

Our fourth is that project reports be independently reviewed. The project report is a key public accountability document. During the audit we were unable to substantiate several key aspects of the report. An independent review would provide the public with a level of confidence in the accuracy of the information being reported.

Following up on the previous recommendation, the public sector agency which is directly responsible for delivery of the program should sign off on these project reports.

Our final recommendation is to establish formal requirements at key stages of P3 agreements. P3 agreements are long-term arrangements that commit the province contractually for multiple phases, from design and construction through operations and maintenance. Publicly reporting at key milestones in a P3 project's life cycle would be of interest to a number of stakeholders.

D. Campbell: While we're getting set up, I'd first of all like to thank you, Chair, hon. Members and Auditor General, for the opportunity to discuss this report today.

I would like to introduce you to the witnesses and supporting staff today. On my left we have Manjit Sidhu, assistant deputy minister of Ministry of Health; Sarah Clark, chief executive officer for Partnerships B.C.; and Suzanne Saatchi, who is the general manager of Jim Pattison Outpatient Care and Surgical Centre. In the rear we have Brent Alley, who actually took over from the leader at that time, when this P3 was con-
[ Page 460 ]
structed, and myself, chief executive officer and VP of systems development. This area reports directly to me at Vancouver Coastal.

I have been CFO at Vancouver Coastal since February 2008, and I am proud that our financial performance and financial frameworks have increased dramatically over that time. I would like to thank Auditor General John Doyle, Russ Jones, Bob Faulkner for a very professional, a very thoughtful and very collaborative audit that we went through as part of this process. I certainly concur with the remarks that he made today.

What you will hear is that this was the very, very first P3 partnership in B.C. and that we did learn from this. A hundred percent of the recommendations, as I understand it, have been put into play in future projects. Unfortunately, we didn't have a chance to do a second one. We did the one and only, and we're sitting here. Also, as part of our Lower Mainland consolidation, we do have a consolidated group that actually deals with all health care issues and facilities and P3s and all our different ways of getting buildings built in one particular area.

I'm going to just move on to the next slide. This is a picture of the building. As Bob said, it's a big building. It's 11 storeys. It's got a lot of space. Probably what's more important to us is that it houses 40 clinics that were separated before. We now have in one place a one-stop shop. It was also important to have a place where a faculty of medicine could train the residents and students for the future. We have close to 200 physician offices and a thousand staff working on that site.

It is a very, very busy place. We have approximately 600,000 patients per annum that actually go through that site, which is just under 2,000 a day. It officially opened in 2008.

[1025]

I have just shared the timelines, because it does span quite a long time. Financial planning started in 2001. We went for requests for expression in 2002. We basically closed — financial closed — in October 2004, and construction began in August 2008.

Many, many firsts: first health care private partnership in B.C., purpose-built, integrating health care research and academic teaching. This is really a leading-edge facility. It certainly was the first large-scale out-patient centre and has helped us reduce the amount of in-patient pressure that we have at Vancouver General Hospital. And it's first of nine. So there have been another eight since this P3.

This just basically sets out how the agreement works. VGH owns the building and operates. Private partnership accounted for delivering the facility, and no payment is made until the facility is ready for occupation. We make payments at Vancouver Coastal subject to reductions if standards cannot be met.

We will come back to that point. Bob is quite correct. It is absolutely in the contract, but it is a lot more difficult to achieve than we can do in our agreements today.

Moving on. If you go around that building, you'll see that it is very well maintained by the private operators. It has a very high satisfaction rate amongst the people that use it. It has an 84 percent satisfaction rate. It enables us to actually have one-stop shopping. So a person can come and have the diagnostics, meet their doc, go to clinics. As a CFO, looking at the value for what we get, we would be paying 40 percent more than competitive market rates today, based on the deal that we got out of this P3.

Certainly, we have learned lessons from this project, and they have been incorporated into subsequent projects. We have worked very closely with Partnerships B.C. and the Ministry of Health to make sure that what we're saying in this report actually reflects the big changes. As a CFO, I know that our capital processes across the province have increased very strongly over time.

Next page. This really gets to the point in terms of the accounting treatment. The initial value was $95 million, as Bob correctly states — variations of $11 million. The biggest chunk of that was the decision to expand the medical school after the decision to go ahead was done.

It's very important to recognize that we did not know at that time that the medical school was going to be expanded. The deadline for the RFP proposals was November 17, and the medical school expansion was announced in January 2004. This was a piece of information we just did not have at our disposal, and it did make us have to make some changes and improvements.

The variation of $11 million. We'll come back to that in terms of what's in there. The biggest gap is really the discount rate, which is really a technical accounting issue. It's a non-cash…. We didn't pay another $16 million for this building. It's very important to understand that. This was how we treated it under the rules of the office of the comptroller general at the time, and that's how we were asked to treat it. In the end the total came to $123 million, as stated. Certainly, we could have done better in terms of how we dealt with some of the variations.

Moving on to the next page. I just wanted to put it another way. You know, really what we were asked to do was…. We weren't asked to buy this building; we were asked to lease it over a period of time, over 30 years. In essence, what this turns out to, in actual costs, is that at financial close we were committed for 30 years to pay $14.58 per square foot for this facility.

[1030]

We did make an amendment on October 1, 2004, where we had to find some money to…. Sorry, I'll take that back. Amendment 1. We had the opportunity to actually lock in our interest rates, just like we could in a mortgage world, at a lower rate. This helped us bring down our rates to $13.38.
[ Page 461 ]

We then, in amendment 3, incorporated $4 million out of the $11 million variation, basically paying it over 30 years, over time. So basically, we got back close to the rate that we were going to pay for that building. It allowed us to use the gap that we had to pay for it over a longer period of time.

What I would say is that the Auditor General is absolutely correct. We did not have enough contingencies in our plan. It forced us, when these changes came, to actually look for creative ways of trying to deal with the lack of capital, the lack of funding at the time.

We would not do that now. That is absolutely clear. We would not do that. We would, first of all, have more, clearer contingencies, and then, also, the whole process for scope changes and sign-off has been drastically improved.

This is just really the payment mechanism. We pay our rent over 30 years, once the building is completed. We had, as I said, $11 million in variation; $7 million was paid up front. A big chunk of it was paid for by capital from the Ministry of Health for the medical expansion, and our foundations kicked in some money as well. The change from the original budget payment stream is about 7 percent, or $12 million.

Next page. I think it's very important to say that the current environment is quite different. We have a very strong project board structure. I can certainly thank Minister Falcon and Deputy Minister John Dyble for bringing to Health the rigour of Transportation, in terms of how we dealt with all projects in terms of capital and the rigour that it's put through in terms of any changes or any issues relating to scope.

I know from all the other projects we do that there is a very strong focus from the ministry and from the project boards to improve governance and accountability. Certainly, we would not do a project today without a level of contingency reserves for certain unknowns.

The reality is that these projects do have some scope changes. For example, we expected, as part of this project, to use our sterile process department in Vancouver General Hospital to pick up the sterilizing equipment for the centre. As we got close to it, it became quite clear that this would just totally overwhelm us. So there are some real things that happen as you go through these projects.

Document control — absolutely. This is one area that we have got onto. We have it now in our systems. We have a whole process which is now built into an ARCHIBUS project management process and, obviously, one that's going to evolve over time.

Bob Faulkner has correctly said that as you move from project to operations, quite often the project teams move on, and the documentation control, in our case, did not follow as well as it could. This would not happen.

The question of more effective performance language and project agreements — absolutely right. Now, if the building isn't available, you don't get paid, whereas if we had a much more…. We had a process that worked, but it was much harder to actually get to.

I know, having worked on some of the contracts for some of our service providers, that having this availability language in all our contracts has really helped us focus performance in real time so we don't end up going through dispute resolution mechanisms.

[1035]

Certainly, the capital project teams are now much more experienced. For example, Suzanne, who worked for Vancouver Coastal, now has the pleasure of running the Jimmy Pattison outpatient facility out at Surrey Memorial. Peter Goldthorpe is the leader for our Lower Mainland consolidation work, which incorporates Vancouver Coastal, Providence Health, PHSA and Fraser Health. We basically have this group in one place.

I think those are our strong learnings, and I know that Partnerships B.C. has built these linkages with other non-health areas as well.

Certainly, a key point — the last one — is on refining the accounting treatment. The accounting treatment is very clear now. We don't have discounted cash flows. We end up with the value that's in the contract, the capital value. It goes into accounts. It's simple. The rules have changed. They're much more transparent. We wouldn't be talking about the $16 million if those had been in place at the time.

I'm pleased to say that we've come a long way within the spirit of learning and growth. I'm sure there'll be some others areas that we can grow and improve on, and we shall.

The recommendations and actions. I'm not going to go through these in any detail, other than to say that 100 percent of them have been covered in full. Probably the only one that needs a little bit of work is the last one, in terms of long-term monitoring outside — for the public and other areas. We don't do that for our other non-P3 projects. Obviously, we're going to need to work together to make sure that all P3s and other capital projects are reported in an open and transparent way.

B. Ralston (Chair): Before I open for questions, any other comments from any of the witnesses? Anyone want to add anything? We'll leave it to questions, then.

I'll turn to questions by members. Kathy Corrigan is first. Anyone else? Just let me put together a list here. Anyone else want to get on the list? That'll do for the time being.

K. Corrigan: I wanted to ask some questions about what the numbers are when they're not discounted. That, to me, gets a clearer picture of what we're actually paying for this project. I know that discounting is important in risk transfer and so on, but I wanted to get an idea of what the numbers are, because there's been a change.
[ Page 462 ]

I have, from an earlier lifetime, a comparison of the cash flows for this project over the life of the project — a comparison of what it would have cost to do it publically and privately — that was provided by Vancouver Coastal Health. The numbers that were provided — to do it publically would have been, over the life of the project, $89.903 million. The Vancouver Coastal Health figures provided to me were that the payments over the life of the project in the P3 model were $203.446 million — so considerably more, more than double to be a P3 than publically. That's provided by Vancouver Coastal Health to me, and I can give you the numbers if you want them.

But my question is…. According to this report, there has been a change, and the cost of the project went up. I note that that new number of $123 million is net present value. I'm wondering if, perhaps, Vancouver Coastal Health can now tell me: does that mean there is a change? If so, how much are the payments going to total over time under the terms of the contract? I assume it's up from $203 million because there's a change.

[1040]

D. Campbell: I'd like to just pick up on that one. I'm not aware of this study, so I would appreciate if we could share it. Certainly, I'd be happy to have our staff look at it and come back to you.

In essence, the rental is based, as we have in this presentation, with an escalation. I don't have those numbers in front of me — how much, if we do.

S. Saatchi: I have nothing that would match $203 million.

K. Corrigan: I'll provide the figures that Vancouver Coastal Health provided to me — absolutely.

I wonder: if we don't have the figures today, would it be possible to find out what the revised numbers are, the payments? I don't need the public sector comparator ones. I already have those, and presumably, those wouldn't change. Or maybe they would, actually.

I would be interested in finding out what those cash flows are for each year and the total that comes out of that, from now to 2035. Is it possible to get that? I'd appreciate that.

D. Campbell: Yes, it would be possible. We will provide that to the House.

K. Corrigan: I have several questions, but I'll do it however you want me to.

B. Ralston (Chair): Let's have one follow-up now, and then we'll move to others. We'll come back.

M. Sidhu: I was just going to comment that we need to be a little bit careful in making these comparisons between a number like $200 million and a number like $89 million. They're two different models.

The traditional procurement is where government pays all the costs up front. Government finances the whole construction in this model. In the P3 model it's completely different. The P3 proponent designs, they build, they finance, and they maintain. So that stream of payments — the $200 million stream of payments — is a completely different stream than the $85 million number that I believe was quoted.

I just think we need to be careful in making those comparisons.

B. Ralston (Chair): I think the Auditor General has commented in earlier reports that it's very difficult to make a distinction between the stream of construction and the stream of maintenance, particularly when they're included in one contract. I'm sure that's something that you'll address when you report back to us.

K. Corrigan: Just as a follow-up to that — and I do have a different question — the number that I was quoting, the $89.9 million, was a public sector comparator provided by Vancouver Coastal Health of the cost of the design, building, operation and maintenance of the project. That was done early on in order to compare what it would cost to do it publicly and privately.

I'll share the figures that you provided to me.

My question is for the Auditor General. I appreciate this report, Mr. Doyle. I think it's a good report, and I appreciate the work to take a look at P3s.

I'm disappointed, though, that you chose not to, as you say, "examine decisions made at the project planning or procurement stages related to the business case, procurement options analysis or procurement process" — because, for example, in one section you do look at the cost of borrowing and how the cost of borrowing to the private sector in that smaller piece is higher.

I think that that's part of the really important work — or could be a really important part of the work — to evaluate whether we are getting good value for money in P3s or not, because the question of whether or not it costs more to do it publicly or privately would be very worthwhile.

I'm wondering if you could explain a little bit about why you chose not to do that kind of work in addition to the great work that is contained in this report.

J. Doyle: Thank you for the question. What we've got…. If I can use the analogy of P3s as an elephant. We're going around the elephant and looking at it from different perspectives. This is the first report on P3s. It was deliberately chosen to be one that was undertaken some time ago, and we're looking at outcomes.
[ Page 463 ]

We're going to be looking at each different part of P3s. We will cover that aspect that you just described, but not in this report.

[1045]

If we did everything for every P3, I don't think we'll get as much out of the whole process as if we selected the projects that we're going to go through and go through each one in turn.

The thought of actually being a probity auditor, which is someone that starts at the beginning of the project and works their way through the whole project, is one that I am considering at the moment. It's a role that traditionally Auditors General have not done. Usually a probity auditor would be brought in by the management of a project or maybe the shareholders of a project to actually monitor it as it goes on. But it is one that I'm considering. It does take a lot of resources, though, given the gestation time of some of this work.

So the simple answer to your question is: I'm sorry you're disappointed, but if you wait a little while, you'll actually see the other aspects that you're talking about coming forward to the PAC. But it'll be different projects, not this one.

K. Corrigan: I know you don't talk about future work, but I'm going to try anyways. Could that, for example, include looks at the value of risk transfer in a project, or could it look at the choice of discount rates — the stuff that goes into the upfront decision about whether or not to proceed with a traditional project as opposed to a P3?

J. Doyle: Those are all very good suggestions. Thank you.

G. Gentner: Two questions. I have a lot of questions, but I want to begin, first of all, by doing some housekeeping. Frankly, to deal with a report with this, which is substantial, I think really needs a line-by-line analysis to weigh every word. It is such a valuable report, and it has many implications as to the direction of how we are not only financing projects but maintaining them.

Now, to the Vancouver Coastal Health. Regarding what was up on the screen on page 7, the actual costs, this was an add-on to what I received yesterday. Was the Auditor General aware of this actual cost table here?

J. Doyle: Which one are you referring to?

G. Gentner: On page 7. That wasn't my understanding.

B. Ralston (Chair): I believe that's a late addition to the presentation. That wasn't circulated on Friday.

J. Doyle: I hadn't seen it before. I saw it for the first time a few moments ago.

G. Gentner: Do you have any response to it? Does it mean anything to you?

J. Doyle: What it means to me, I think, if I interpret it correctly, is that it presents the view that the cash flows per square foot are roughly the same as originally intended. That's what I get out of it.

G. Gentner: And you had this information before today?

J. Doyle: We knew that.

G. Gentner: Okay. On page 9, again from the Vancouver Coastal Health, there's also been a change on recommendations, action 6. Originally it was "needs discussion with government." All of a sudden it's been said here that it's been addressed. How did you, within a fortnight or two, decide you can now say that Partnerships B.C. has addressed the issue?

S. Clark: I can answer that. Working with the Vancouver Coastal on its responses, they weren't aware that within our service plan we had responded to our board's direction last year — that now that we have a number of these health facilities coming into service, we can focus more on not only the design and construction and the lessons learned through those periods as well as the planning, but we can now get good operational data. So we're preparing our methodology for doing that, and our board has requested that by this fall.

G. Gentner: I guess it's a great turnaround.

Now to the questions, if I may.

S. Clark: You can look at that. It is published in our service plan that was released earlier this year.

G. Gentner: I'm interested about the change of scope. I just find, if I have it correct, that…. The contract was let in December '03, and the changes were made how much later? Was it the following month or two?

D. Campbell: The deadline for RFP proposals was November 17. The medical school expansion was announced in January 2004.

[1050]

G. Gentner: I just find it very unusual that within a couple of months a significant change was made — after the contract was let, so to speak. Who is responsible for that change, and was there no correspondence with Partnerships B.C. on this change of scope?
[ Page 464 ]

Secondly, would it have changed the RFP had the whole enchilada been revealed in November?

D. Campbell: I'm going to ask Brent Alley to respond to that. Thank you.

G. Gentner: I just find it unusual that in two months we make this significant change without the authorities knowing about it.

B. Ralston (Chair): Perhaps could you just clarify that the announcement itself was a ministerial announcement, or was it at the deputy minister level?

B. Alley: The announcement was at the deputy minister level and was something that was in the works but was not contemplated at the time the scope of this project was developed.

G. Gentner: Unbelievable.

B. Alley: I think that, as Duncan outlined, there were several other changes that came along to affect the overall cost of this project. But just to answer directly, yes, it was a large change in magnitude, but it hadn't been contemplated in the scope of the project at the time.

G. Gentner: Would it have changed the RFP process and the bidding?

D. Campbell: I can answer that. It would not have changed the process. We didn't build a bigger building. We just had to put more into this building. We would have included that in the scope, and it would have come back at a higher amount. It wouldn't have changed the RFP bidding process.

B. Ralston (Chair): We move to John Les now.

J. Les: Public-private partnerships are about nothing so much as transferring risk from the public sector to the private sector proponent. That, to me, is one of the key foundations on which the entire P3 initiative rests. I guess I would consider myself somewhat disappointed that recommendation 2 talks about ensuring that contingencies are set aside in all of these projects — disappointed that that recommendation was made, and secondly that it was so readily accepted by Vancouver Coastal.

If a project is properly conceived and crystallized, in the first instance, there should be no contingencies. Those risks as to construction and design ought to all be transferred. To say that "not all design and construction risk can be transferred" may be true in some cases, but I would certainly hope that as a matter of course in P3s, that statement would not necessarily at all be true.

I think that contingencies are a hangover of the old design-bid-build days and ought to have little if any place in a P3 world. I would appreciate some comments from both the Auditor General's office and from Vancouver Coastal Health, or from Partnerships B.C.

B. Ralston (Chair): Who wants to tackle that one first? Big-picture question there.

S. Clark: I agree with Mr. Les around the type of contingency. In a P3 a lot of the design and construction — a majority of them — are transferred. There are some risks that are maintained by the owner, some risks that are better managed by the owner, but you can't get as good value through the competitive process, such as an archaeological risk, for example. That may or may not be there, but you don't necessarily want the private partner to hold a lot of contingency for that.

When we talk about the contingency budgets, they are not large. However, they are produced from the risk exercises that happen during the business case process and are held, generally, by the Ministry of Finance in case they are needed for these risks that are retained by the owner.

B. Ralston (Chair): Anyone else on this one, then?

B. Alley: I can give one example from this project of one risk that was transferred from the private sector partner to the health authority. That was the development permit risk. The private sector partner evaluated that as having a value of $1.8 million. In other words, if we had left them with the risks, that would have been the cost they would have charged in the project.

[1055]

We took the risk on, and the cost was $900,000. It gives you an idea of how in some cases a risk is better handled by one party or the other. The outcome of the risk exercise is to determine not only what value the risks have but who's the best party to manage those risks.

J. Les: Just as a follow-up, then. When I'm reading through these documents here, on the $11 million addition to the project, the documentation suggests that a contingency should have been able to handle that. I'm not sure that I would agree.

Certainly, there was a change in scope — appropriate, in my view. We ended up with a better project and better value for money. I understand completely that if you've got an archaeological risk or you've got some other nebulous type of thing out there, a private sector proponent is going to have to assess some significant charges for it. But I don't believe that that $11 million change should be the kind of thing that would normally be treated as a contingency.
[ Page 465 ]

I mean, a few clearly defined contingencies, sure, to deal with those nebulous things, but contingencies as a matter of practice and as a matter of course, I think, just lead to an erosion of the transfer of risk.

B. Ralston (Chair): Any comment?

J. Doyle: I think that the member has made an excellent point. I think contingencies are part of a detailed process to look at residual risks that are there, and it's in that view or that aspect that we believe that contingency funds should be set aside. These are risks that have been left with government, or whichever entity is dealing with this, and aren't about the risk that's been transferred to the private sector proponent.

I think that the timing of the changes was unfortunate. It looks like the contract was let and then, within a very short period of time, big changes were required which were quite fundamental and cost $11 million. There were a number of different ones that were done.

What we're talking about here about contingency is covering off those risks that may exist that could be problematical for the project itself. In fact, there were no contingencies whatsoever in the project plan, and therefore, that led us to believe to some extent that the risk assessment and the risk analysis could be improved upon, which I think is a process that now does take place.

I think it's a very good point that's been raised. We're not talking about putting to one side a huge sum of money just in case we change the scope. We're actually talking about how to manage the project correctly and appropriately with the two partners in play.

S. Chandra Herbert: The question that I've got relates to something that was raised earlier around why the basic rent was changed. In the Auditor's report it speaks about the cost of the borrowing of, I guess, about $4 million in exchange for an increase in Coastal Health's basic rent payment and how the loan was given at 8.75 percent for the 30-year term when the government, had it borrowed from itself, could have achieved that at 4.7 percent — so a significant premium to get the loan through Access Health.

My question is: why did Coastal Health decide to go the route they did instead of borrowing from within government? Was that something government said: "No, you can't borrow from us"? Did they try that route? What happened there?

Also, to Partnerships B.C. my question would be: were they involved at this stage of the project? Did they advise this course of action? How were they involved then?

D. Campbell: It's a great question. Thank you, Member.

[1100]

In terms of the decision around the spending of the $4 million, it was a case at that time that no capital was available and that we needed to find this from within our operating funds. We would not have done that if we had a little bit of flexibility in the process.

The really good thing was that we managed to peg down our rental rates at lower than the initial cost, so it did create some capacity to deal with these particular changes, and we took that opportunity. We would not take that opportunity today. We do have a very close working relationship with the ministry, and we would deal with these, scope and other changes, through our capital and our board governance processes. This is one that we would not do again, for sure.

S. Clark: No, we were not involved in this. We were an observer through the procurement and helped with the value-for-money project report.

B. Ralston (Chair): Before we leave this question, Mr. Campbell, you said that you locked in a lower rate. On page 7, I think, that was the amendment No. 1. But I think what's being referred to is what you call amendment No. 3, where the $4 million was put into the lease and the lease payments were increased. That's the calculation of the 8.75 percent rate as opposed to the 5.37 percent rate — is that correct?

D. Campbell: I'm going to defer that to Brent Alley just to confirm that. But certainly, that $4 million and that impact that it had over a period of 30 years is the difference between $13.38 and $14.49.

B. Alley: That's correct, Mr. Chairman. What you'll see in this chart, in fact, was that the original lease rate that was proposed at the financial close was the 14.58. Unlike, apparently, in the way P3 projects are managed today, there was actually a hedge fund borrowing set up that would allow the P3 partner to guarantee the rate of 14.58 or less.

Vancouver Coastal had the opportunity to fix the rate at a lower rate should that occur between the close and later on in the agreement when the funds were locked in. They were then in fact locked in, in October 2004, taking advantage of a lower interest rate. That reduction in interest rate provided an opportunity for Vancouver Coastal to add additional funds to the project and still have a lease rate that was close to or lower than what was agreed to in the financial close. That was done through amendment 3.

B. Ralston (Chair): Okay. So the additional injection of the $4 million was then paid for at a higher rate, and that continues in the payments over the 30 years. Isn't that right?

B. Alley: That is correct.

S. Chandra Herbert: Thanks to Partnerships B.C. for the answer around being an observer around this process.
[ Page 466 ]

I'm curious if you might be able to tell me a little bit more about the creation of this report that the Auditor is checking up on. I understand that one of Partnership B.C.'s roles is to promote public-private partnerships, to enable and to help implement them. Whether or not this report that Partnerships B.C. put forward was in that vein, the promotion of P3s.... Or was it kind of a hands-off, "we're going to look at this from all angles and see whether or not this actually made sense in this circumstance"?

S. Clark: We were hired by Vancouver Coastal to assist them in writing this report, so it is part of the transparency and disclosure commitment that the province has around this type of procurement. We worked collaboratively with them to prepare the report and to present the information as provided through their procurement process.

S. Chandra Herbert: Just a follow-up on that. I guess my confusion here is that the Auditor makes notice of the fact that Partnerships B.C. was kind of behind the report.

[1105]

I don't want to put words in the Auditor's mouth, but my interpretation of it is that there were some missing pieces, some arguments that could not be substantiated by Partnerships B.C. based on the evidence that they provided, and argues that instead the Coastal Health should have been the ones writing the report.

So I guess my question might be to Partnerships B.C. and to Coastal Health: why did you choose to go this route of going through Partnerships B.C., and if, indeed, Coastal Health was collaborating on this report, why wasn't the evidence provided corroborated, in a sense, so that we could know if the arguments actually stood the test of time?

D. Campbell: Is it possible just to clarify which report we're talking about?

S. Chandra Herbert: Sure. I am going back to the 2004 report that the Auditor based his following study on.

B. Ralston (Chair): It's the initial value-for-money report…

S. Chandra Herbert: The initial value-for-money report.

B. Ralston (Chair): …that was prepared by Partnerships B.C.

S. Clark: Right. It was prepared by Partnerships B.C. on behalf of Vancouver Coastal, and the documentation provided to us in the information was from Vancouver Coastal. We worked with them and their advisors. They have Ernst and Young, for example, working on the financial modelling and the BTAA report as well.

We were not part of the direct project management office of this project, which is why we did not hold the long-term records. We were provided with the information from Vancouver Coastal to be able to prepare the numbers that went into the report.

S. Chandra Herbert: Thank you for that. Maybe this is a chance for Coastal Health to respond, but in preparing a report on the first P3, going through Partnerships B.C., whose mandate is to promote P3s, I'm just curious why Coastal Health was not able to provide that long-term information, change of scope, etc., to Partnerships B.C. What was the thinking behind that? If we want a hands-off look at this, does this actually make sense for the public? You'd want that evidence.

Then the second follow-up to that question to Coastal Health is: is it common practice to hire a group like Partnerships B.C., which wants to promote P3s, when doing a value-for-money project when there may be an equally compelling case that going public would have made sense? Why close the door on looking at all options, so taxpayers could get an idea if it was good value for their money under all circumstances?

D. Campbell: Well, I can't speak for 2004. I, unfortunately, was not there. I can talk for now. Now any proposal, whether it comes forward or not, goes through a rigorous governance process. There's a whole series of choices in terms of which route we go and how it gets funded and how it gets financed, and I'm sure that Sarah can talk a lot more to that.

All I can say from a financial governance point of view from Vancouver Coastal is we have improved the quality of our reporting, our board's representation and our review of all the documentation that came forward. For an example, we have just concluded successfully a deal with the regional health district of Powell River to replace the Olive Devaud building up there. We went through many different choices, including P3, before we got to this choice of where we are today.

I think from our perspective as custodians of the public purse and providers of health care, we are looking for the best value for money that we can find at that time. I cannot talk for 2004 in terms of how it developed. It was early. It was really a prototype of where we are today. What I know is that it's quite different today.

B. Ralston (Chair): Okay. I just want to review the list here, because I've got a number of speakers. I just want to let people know where they are on the list. I've got Shane Simpson, and then I'm going to Vicki Huntington and Ralph Sultan, and then Kathy Corrigan and Guy
[ Page 467 ]
Gentner have asked to ask a further question. Then I have Doug, the vice-Chair. And I put myself at the end if we get to that — okay?

J. Rustad: Bruce, John Rustad here. Can you add me to the list?

B. Ralston (Chair): Sure. I'll put you on after Doug, then. Good to hear that you're there. There's always a danger of falling asleep sometimes. That happened once to a member, I understand — who will go nameless.

[1110]

S. Simpson: The Auditor General, I think quite rightly, has said that part of the purpose of this report is to look forward and to look at the issue of P3s and how they've evolved and to look at where they're going. I appreciate that his office is going to do further work on other projects to continue to paint a complete picture as to how these projects have played out and to what degree of success they've been a good strategy for use of public resources.

The question I have is for Partnerships B.C. We have a series of six recommendations, and some of them, I see, are noted as standard practice. Could Partnerships B.C. talk a little bit about how it addresses those six areas? Some of the ones are standard practice. I accept that. I'm particularly interested in what the thinking is around No. 6 and the ability to add some transparency to this process.

S. Clark: Do you want me to go through each one?

S. Simpson: Sure.

S. Clark: Okay. In the document management side of things, that's part of having a good project management approach and budget for any type of project, be it a P3 or not. Part of the business case planning process for these types of projects or projects that are procured under other methods, part of the estimate that's prepared, is of the owner's cost and what the owner needs to implement them in a proper manner. That ties in to that side — and that they have a process put in place once they do begin the project, starting right back at the planning phase.

In the contingency budget side. We talked about that quite a bit, around when you're looking at risks transferred or risks retained, that there is a sufficient amount of dollars set aside in case those risks do appear.

In the project implementation plan. This would go with the comment on No. 1 around project management. For any type of project, especially when you have these larger projects, an implementation plan, as well as a functional program for implementation of the services in those facilities, is definitely needed to make sure — as the Auditor General has pointed out — that you have the program planned before you go and procure a building.

That's part of the standard practice, and Manjit can attest to that. There's a lot of planning that goes into these health facilities and transportation facilities, etc., when they are defined up front, prior to procurement.

Review of project reports. The third-party consultant firms that work on all these projects are part of those reviews, and we also have project boards, as was pointed out, as part of increased governance of these large projects, again signed off by the owners and signed off by the project boards.

In long-term monitoring, that's what we're looking for. We are developing that in conjunction with our board. When we look at how do we best monitor the success of the contract provisions in the implementation period and how we can get that fed back into the procurement process to make sure that the documents are always being updated, that is practice right now for the design and construction portions of the agreements.

We have been able to get good information from Vancouver Coastal for this project, as well as from Fraser Health for the Abbotsford hospital. As a result, we're able to update our documents in real time so that every new procurement is benefiting from lessons learned.

On the operations side, we do need a more formal reporting process, and that's what we're developing.

S. Simpson: Just maybe as a follow-up. This is to help my understanding of the role of Partnerships B.C. in this. In ensuring that these recommendations or other kinds of good practices are in place, is it the responsibility in our current structure for Partnerships B.C. to play the role of oversight here, to make sure that public entities that are entering into P3s in fact have all of these things in place and are moving forward in an appropriate manner? Is it Partnerships B.C.'s role to do that?

I guess that's my question for Partnerships B.C. and, sort of in a related manner, to the Auditor General: is it an appropriate thing to have a single entity within government which would have that responsibility to provide that oversight on these kinds of projects?

[1115]

S. Clark: I would answer that a lot of these practices that you were looking for have come forward not just from Partnerships B.C. but from ministries within the province, such as Transportation, such as Health, and from experienced capital implementers, and they are policy of government. Our role within projects is that we are a service provider, and we take varying roles within the projects. Quite often we act as procurement manager on behalf of the owner's organization. But we do feed back into central government our observations
[ Page 468 ]
and recommendations around policy of implementation of capital projects, as do other bodies.

B. Ralston (Chair): Mr. Doyle, did you want to add a comment?

J. Doyle: My only observation is that all these projects should be well documented. Every key decision should be capable of review at a later stage and at the time the decision is actually made, and the application of good records management should be a given. I found it particularly disturbing at the time…. And it is history, but I did find it disturbing that we couldn't find documents for the conduct of this particular audit and we couldn't find explanations of dollar values for this particular audit.

Using a concept I have shared with the committee before that I like to call the ripple effect, I would expect that to never happen again, certainly for any new projects that are occurring, but also there may need to be some catch-up if there are perceived gaps in the record for other projects. I do not wish, for example, to come to this committee with a subsequent report with exactly the same issues when it could have been dealt with appropriately and we have seen that the recommendations have been accepted.

It's sort of forgivable if it has already happened and the information can't be collected. It's still a finding that we would report, but as I say, on a perspective basis going forward, we would consider these significant projects with significant citizen funds being involved in them. They should be beyond reproach when it comes to documentation. I would say that for all of government, but particularly in this particular area, and I don't think anyone in the room would argue with that. So the question now is moving forward and making sure that becomes a reality.

B. Ralston (Chair): Okay. Did you want to respond?

M. Sidhu: Mr. Chair, I just wanted to add that the Ministry of Health does have a role in oversight. It's not all just left to Partnerships B.C. An example of that is that we have a capital asset management framework that comes from the Ministry of Finance. In accordance with that framework, all major capital projects have to have a detailed business case, and that has to be submitted to the Ministry of Health for review before that project is considered for capital funding. There is a rigorous process that all of the projects go through. There's due diligence done on project scope, on cost, on schedule, on risks — all of that kind of thing. All of that due diligence is done up front.

I'm talking about current practice. Project business cases are thoroughly reviewed by the Ministry of Health and the Ministry of Finance as part of that due diligence. The Ministry of Health establishes a project board for every single major capital project with representation from the Ministry of Health, the Ministry of Transportation and Infrastructure, from Partnerships B.C. and the health authority. So we do have an oversight role, and we take that role very seriously.

B. Ralston (Chair): Thank you. I suppose the difference here is that when you have a contractual arrangement that extends out 30 years and you're well beyond the construction stage, it's likely that if renegotiation or litigation or disagreement arose, you'd want to have very good records in order to protect your position. I think that's different from a traditional procurement for sure. Certainly, at a seminar that I went to in one of the hospitals in Ontario, they said that the contract was about six feet high in terms of paperwork, so I'm sure…. I think they kept all that, obviously. These are very complex contracts.

[1120]

V. Huntington: This is an example — well, for me — of frustration. I mean, there are so many questions that should and could be asked just related to the project itself, let alone how Partnerships B.C. is now monitoring or providing templates for further projects. It's difficult to know even where to start or what's the most important question.

If I go back to my first comments to the committee, if we're going to be receiving further reports from the Auditor General's office on various aspects of P3s, then one would hope that at the end of receiving these reports we could have a meeting that would look at the total recommendation on how P3s are conducted and managed in the province. This committee would be able to go through with Partnerships B.C. and the Auditor General what the status of that management practice is.

All of us have seen the arguments from the public about P3s, good or bad. When you see difficulties in management of the P3s, then we aren't doing anybody any service if we don't assure ourselves and the public that they are being managed appropriately on the broad scale. I would like to suggest that when we've received these other reports, we do come back and take a look at the whole and examine it in depth because without oversight, I think each ministry that enters into these large projects is going to fall into the same problem areas without having major expertise sitting at their table.

In speaking with friends in the banking industry that deal with projects of this size, they just say that the actual review of the bid itself requires somebody with the expertise of industry in order to know precisely how the bidder is really dealing with the numbers in his response to the RFP.
[ Page 469 ]

So the level of expertise required is enormous, and oversight, in my opinion, is desperately needed. If it doesn't come from Partnerships B.C., a central agency responsible for developing the templates for how these projects go forward, then I think the province will consistently see this type of problem developing.

I'd like to ask just one or two questions in relation to a couple of the issues specifically on the project. I'd like to know who approved the overrun, the $11 million variation. Where was that approved in the process and by whom? Was it by the ministry, by the minister? Who approved that overrun?

D. Campbell: I'll start, and then I'll hand over to Brent. Certainly, when the medical school expansion came into being, the ministry approved and provided us at that time a certificate of approval for the capital part.

Then there were some changes which we had relating to sterile processing and others which our foundation stepped up and paid for. That would have been approved within Vancouver Coastal's internal management processes.

It really is a combination of both. But the bigger proportion, which was really driven by the change in the medical school expansion, and some of the scope changes were approved by the Ministry of Health.

V. Huntington: Did Vancouver Coastal's board approve it?

D. Campbell: I cannot answer that question. At that time the approval level was $5 million for the management. It's now cut right down to about $2 million. So I would doubt that it was approved at the board level.

Brent, you might be able to add to that.

B. Alley: Mr. Chairman, what I could add as a comment was that the additional $4 million that was borrowed from Access Health was approved by the CFO. What the board approved was a lease-rate cap, and because it was within the lease-rate cap it was considered appropriate for the CFO to approve that at that time.

[1125]

V. Huntington: Did the board know that the CFO was approving that?

B. Alley: I don't know that.

V. Huntington: So we don't know whether or not…. There's no documentation to show that the board or the minister understood that an additional $11 million was being anticipated in the project.

B. Alley: I don't believe there's any record of that. I think to acknowledge that the new process…. Vancouver Coastal Health does acknowledge that if we were to do this project in today's world, we would actually have gone back to Treasury Board with a change of this size. At the time this project was being implemented, that wasn't a requirement.

V. Huntington: I think, just as a comment, this is what….

B. Ralston (Chair): There are a number of other questioners. I don't want to cut you off, but if you could pose the question, please. I've got about six or seven other questioners, so I do want to keep moving.

V. Huntington: Well, then I'll jump to one in particular.

Project agreements and reports. Is there a requirement that these be public? And to what extent does proprietary information colour the public version of the report or agreement?

S. Tinker: There's not a government policy requirement, as far as I know, to make project agreements or project reports public, but there is a general undertaking by Partnerships B.C. to be as transparent and to disclose as much as we possibly can.

Our disclosure guidance document is posted on our website so the public can see what it is we're undertaking to disclose from the projects. On our website, for every project, the request for qualifications for the project is there. The request for proposals is there, as well as the project agreement, the contract itself, and then the project report. Also, the reports of the fairness adviser are posted there and then any media releases that have been attached to the project.

In terms of information that's taken out, there is a process for the project agreement itself of going through the project and redacting it to a freedom-of-information standard. There's some commercially confidential information that is removed and protected, but it's very limited.

V. Huntington: This is off this particular one, then. I've been attempting to get a project agreement and a report for, say, the South Fraser perimeter road, which is already going through design changes and applications for amendments to the table of commitments, and that agreement and that report have not been made available to me.

I don't understand where the levels of transparency start and end here.

S. Tinker: It's a matter of timing there. The SFPR project report is under review with the ministry. I believe it's set to be released very shortly, and then the project agreement would be released at the same time, although
[ Page 470 ]
I believe the project agreement was released under an FOI request already.

V. Huntington: Is it on your website, then?

S. Tinker: No.

V. Huntington: I was told it would be available to me in November. That's why I ask: what is a proprietary process that would take this many months in order to document…?

S. Tinker: Yeah, it's just that the review of the project agreement and the development of the project report took longer.

V. Huntington: So that review….

B. Ralston (Chair): Vicki, I'm going to interrupt. I think you're pursuing another issue there.

V. Huntington: Well, I was just jumping into that because I had a few other questions on this.

B. Ralston (Chair): Well, I think I've been reasonably generous with questions.

V. Huntington: Yes, you have.

B. Ralston (Chair): There are a number of other questioners. Ralph Sultan is next, so I'll put you on the end of the list, if we have time.

R. Sultan: I think the report tells us this is a great project. The clients using the project are very happy with it. The capitalized cost changes were in part attributable to changes in the scope of the project, not to general miscalculations of what the actual cost of putting the thing up would be.

While I share some of the questions that I'm sure the member for Delta South raises, legitimate questions, I wouldn't want a reader of this transcript to suggest that I, at least, think that this project was a troubled project. Far from it.

My question really relates to the fact that, as the report clearly points out, the biggest variation in the capitalized value of the project had something to do with the discount rate used in computing a present value. I have three questions. I'll just string them together in the interests of time, Mr. Chair.

B. Ralston (Chair): Everyone else does.

[1130]

R. Sultan: Who actually incurred the interest rate risk? Secondly, who actually borrowed the money? Was it the Access Health Vancouver crowd? Was it Vancouver Coastal? Was it the province of British Columbia? Thirdly, because the interest rate attributed in this discount calculation went down, the capital cost went up. Does this suggest that as the interest rate environment improves, there's a penalty to the authority or to the government in proceeding with these projects? That, on the face of it, is what it suggests.

Borrow money more cheaply, and it's going to cost you more money to build the project. Something is logically inconsistent there to the casual reader. Could you please explain?

J. Doyle: Thank you for a very good series of questions. The first thing I should say is….

R. Sultan: If I could just maybe interject a p.s. My apologies for interrupting, Mr. Auditor General.

B. Ralston (Chair): The Chair is prepared to let you do that.

R. Sultan: Is the cost being reported in fact a real cost, or is it a nominal, hypothetical paper exercise?

J. Doyle: That is the point that I'm trying to raise. It's a good point.

The way the original report described the value of the building, at $95 million…. It was described as the net present value of the cash flows associated with the annual lease payments. To put that into English for the rest of the group, basically money is being paid out each and every month to the builders of this particular building. All that money discounted back to current values gives you a number which, if you paid over that number today, would be the same as those payments spread over 30 years.

The two numbers…. That's what is called a net present value. It was $95 million. The actual cost of the building, which is the phrase that you used a couple of times…. I actually don't know what the cost of the building is, because no one has told me. The way the valuation works is: what is the net present value?

Now, there are three components of cash flows that need to be considered, and only one is being considered in the discussion that we're having at the moment. I'll forget all about the day-to-day operation of the building, because that's operating costs, and it's got nothing to do with the capital value of the building. The three components are these.

The lease payments that are being made by Vancouver Coastal. These were where this dollar value per square foot payments that were being made by Vancouver Coastal — the sum of all of those. I don't know what that totals up, but I know the net present value is about $123 million at the moment.
[ Page 471 ]

The second component is the physician offices. Those physician offices pay rent, pay something directly to the organization that actually built the building. Therefore they're excluded from that calculation of $123 million.

The third component. The ground floor consists of retail outlets, and as part of the agreement, those retail outlets, the rent from them, goes directly to the builder of the building. Now, if you added in those rental flows from the physician offices and from the ground-floor retail spaces, that would add an extra $38 million to the value of the building.

The question that no one has asked but perhaps I can try and answer is: what is this building worth to the people that actually built it and put it there? It's worth the cash flows that come to them in the way of repayments of their finances, their interest and any profit margin that they have.

[1135]

At the moment, if you look at the net present value, it stands at $123 million plus $38 million. What's the cost of building the building? I don't know.

Now, "they borrowed the money," is the answer to your question. There's no debt on the books of the province. They carry the risk, if you like, of interest rate risk — in the way that I think we both mean it — because they've got this fixed flow of funds coming in their direction, which they would then utilize to pay all their liabilities over the 30-year period.

J. Rustad: To the Auditor General: my question is around the capital and the capital management over time. I guess the first question I have around this is: as part of this project, because it is basically a lease situation, the actual capital is carried and ultimately paid for over a period of time. Is that correct?

J. Doyle: That's correct.

J. Rustad: The difference on a government-funded and -owned operation is that capital is borrowed, and our experience is that, unless we happen to be running surpluses, government will only make interest payments over a period of time — likely over the life of the project. Is that also correct?

J. Doyle: No, that's not correct. It would depend very much on the debt instrument that's being used. Some debt instruments — for example, the ones that are being used for the TIC — have a requirement for a sinking fund development, which would basically mean the money is put aside, once there are major cash flows, that would then accumulate in order to pay off the total amount of principal.

Sometimes arrangements are made a bit like the mortgage, so that when you make a payment, a little bit goes against the principal and a lot goes against interest. Others, it's interest-only for a while, and then there's a balloon payment, where you've either got to refinance the amount that's outstanding or you've got to pay the complete amount off.

J. Rustad: Okay. The reason why I'm asking that question is that, as we know, government debt over time has continued to increase. Often — particularly for hospitals and schools and those sort of capital projects that we undertake — the principal never seems to actually get paid down.

I'm raising that because that's a concern of mine over world financing, in terms of how capital has been managed by various countries and various jurisdictions. So the question I have is around the P3 process. In your opinion, is government more likely to actually see that debt retired as opposed to over a government-run process — or government owned and operated, the traditional procurement process?

J. Doyle: Within a P3 process the debt doesn't actually appear on the provincial books. The debt is actually incurred by a third party. What the province agrees to do — or an entity — is make a series of payments, over a period of time, that the person or the organization that's taken out the debt will use to basically manage its own debt processes.

The question doesn't quite work, because there is no paying off the principal by the province. There is no debt in the province. What there is, is a contractual liability to make a series of payments over a period of time, provided the counterparty continues to deliver on the building and make it available.

[1140]

Now, one of the big issues around P3s is that the debt can be accessed by counterparties at a different rate than the debt that can be accessed by government. Typically, government can get it cheaper than a counterparty, so there's a cost differential between those two. That's still okay, provided the risk transfer and mitigation processes equal that difference in interest rate spread. Providing that's the case, then in fact it's still value for money.

Where it proves problematical is when the gap is such that in fact you're just paying a premium to the developer because they can borrow the money at a rate that is cheap enough to cover not only all their expenses but also to create a profitable situation for them.

B. Ralston (Chair): Okay. We'll move on, then, to Doug.

D. Horne (Deputy Chair): Going back to two questions that were asked earlier that I'd like to explore just a little bit more, and that is that oftentimes when we do the financial analysis of these types of projects, the way that we look at them…. If you take a look at the addi-
[ Page 472 ]
tional costs from a capital standpoint of this project, it's based upon, obviously, the discounted rate as well as changes in scope — improvements, an additional elevator, piped air rather than bottled air, things like that.

The difficulty is that how we often look at these things is that we look at the way government would borrow the amount of money and the amount that we've paid in interest based upon the rates that we're paying in order to achieve the project. Obviously, in this committee we try to be as non-partisan as possible, and I can point to very significant projects by both governments in the past where the value at the beginning and the original project budget, and the budget and the cost of the project in the end, were two completely different things.

That goes to the heart of these private-public partnerships — the mitigation of those risks. One thing that I would say from this report, and it's very difficult…. The Auditor General mentioned the fact that the actual value of building this building is something that we're not looking at. But should government have built this building? It's a very intangible way to look at it, but could government have built this building for this price?

You know, we look at a $95 million value. I would hazard a guess that should government have tried or attempted to build this project themselves, we wouldn't have been looking at $95 million. Obviously, we had a significant scope change which resulted in 11 million additional dollars.

As the member for Delta South mentioned…. She talked about changes and overruns. An overrun is not a change in scope. An overrun is an additional cost — additional cost for steel, additional cost…. There are many, many risks that go into these types of projects. It seems like we've overlooked that entire aspect of this and the mitigation of all of that construction risk — you know, the occupancy…. There are many, many risks that go into building a facility of this type, so I'd just be interested in comments on that.

D. Campbell: I'd like to add a comment to that. The one thing that really struck me is that we don't see one number for overruns from Access Health. There was not one cent paid additional other than the scope changes in the plan. I think the point is absolutely valid.

I know, having looked at projects and bringing them back to our board, that we have seen overruns in probably 80 percent of our projects. We did not see an overrun on this. This was a scope change in the purest sense of the word. The discount rate is a completely different issue.

I do think that what we've got is certainty. We got it built on time. We got transparency in terms of how things were being done. It wasn't without its battles with the contractors and ourselves to make sure we did get what we paid for, and those things we need to manage very carefully in the future as well. But that was the one thing that really did strike me. We did not pay one single cent additional to Access Health for this building.

[1145]

R. Hawes: I just want to make a comment kind of similar to what Doug was saying. In your report, Auditor, it says: "Ineffective management of project scope and design risk transfer." In light of the fact that this was really a change in scope that resulted because of a change in the government's desire to see a medical facility, a teaching facility, built or expanded in this building, I really think that's a little harsh.

It would seem to me that as the first P3, this actually was remarkably successful. In looking at the recommendations and the way that they have been implemented, frankly, I think you should be commended. I think Partnerships B.C. should be commended, and I believe subsequent P3s have benefited greatly from the knowledge that was garnered through this process.

I know that some of us here at the table sat on the oversight committee for the Abbotsford hospital construction. It was a great project, and I think a subsequent review of that is going to show that. I know that many of the other P3s that we've entertained….

J. McIntyre: Sea to Sky.

R. Hawes: The Sea to Sky, as my seatmate says, was another one that was very, very successful.

I really have a little trouble where it says "ineffective management," because I don't see that here at all. I see, actually, quite effective management of this process. The only question that I would have would be with respect to the external opinion, I guess, of the users.

I think you've commented on that, Auditor — that you didn't see any kind of a process for getting opinions from external users. But I don't think they would be commenting on the construction of the building. They would be commenting more on the services provided within the building. I think that's completely outside of the scope of whether this P3 is a good project. That's a whole other process — when people want to comment on whether they got the kind of medical supervision or service that they expected.

So I don't see the value, really, in an external review of the building or the procurement method. I see value in external review of the medical services, but I think that happens within the ministry. That's a whole other process. I'll just leave it there.

B. Ralston (Chair): Did you want to comment, Mr. Doyle?

J. Doyle: I think the member makes some interesting points. I'd just like to go over a couple of them, if I may.
[ Page 473 ]

This is a 30-year project. Right at the beginning of the project a document was published, which was made available to citizens, about how much it cost, what resources were involved and how it would go forward. I think it quite right and appropriate to go and have a look at that to see how that actually played out over time. I think the member made a very valid point. A lot of the lessons that were learned in this particular project have now flowed on into subsequent projects and subsequent P3 operations. That's a very positive and a reasonable thing.

Because it's 30 years, and because people are really interested in how government demonstrates value for money — and I think they are interested — the transparency and the communication of how the project has been played out and where it is going, I think, becomes a fundamental issue. I still think that there is room for improvement in regard to all of that. If it's that good, it can be explained and made available for citizens to see. At the moment what we found were some pretty serious gaps in the record and also in what citizens actually were able to discern from documentation that was made available to them.

You'd expect me to take that stance, and I do so without any embarrassment. I believe that this kind of information should be made available, and good news should be spread around. Quite frankly, the people that work in the building rave about it. You can't get away from that. So that's fine. Let's make sure that the whole story comes out into the public arena.

[1150]

B. Ralston (Chair): There was a difference of opinion about the payment structure being subject to reduction when standards weren't met. I believe that Mr. Campbell had one view, and you had another view. In the spirit of lessons learned and devising contractual language for these lengthy contracts, can that difference of opinion be explained?

D. Campbell: I think we were pretty much on the same page. If we had to do this report again, we would have much more direct action related to provision of service. I know for sure that the plans that are in place now…. The language that is in place is much better than what we had at that time, which was more a dispute resolution mechanism. I'm pleased with the evolution of the language and of the performance management part of it.

B. Ralston (Chair): When you say the evolution of the language, do you mean that the evolution of the language in this contract has been renegotiated, or are you saying that in future contracts it will be different, and the unsatisfactory language in this contract is what you're stuck with for the life of the contract? Is that what you're saying?

D. Campbell: Yeah, that is what I'm saying. In future contracts they are much more specific. In ours, we do have a good relationship with Access Health. With good recommendations from the Auditor General around operational management and improving the performance metrics, I think we are in a good place to manage this contract all the way through to conclusion, even with this particular language.

B. Ralston (Chair): Mr. Doyle, do you want to say anything further?

J. Doyle: No. I agree with the view that has been presented. I think it's an example of where we found something that we didn't think matched up to the public pronouncements. Whilst it's water under the bridge now, I agree that the relationship with Access is extremely good, or is demonstrated to be very good, and it's unlikely that these provisions will ever have to be enacted, although it's always possible, as you know, in contracts.

B. Ralston (Chair): I do want to adjourn promptly at 12, but we do have a few minutes left, and I think I had some questioners for another time around.

K. Corrigan: I wanted to…. Maybe, because we don't have much time, I will just ask a couple of questions. I may not get the answer now, may not get the information now, that I would like to have, if possible, so I'll just list them.

I am wondering if it's possible to find out what the value of risk transfer was in this project, what the components were, and the breakdown of the various components — the value of the transfer risk. I was very interested in the fact that one of the risks that was mentioned was the risk of $1.8 million. You found out that you could manage the risk, and it only cost $900,000 to do it publicly.

It kind of raises the question: are we not just paying for the transfer of risk anyway? Yeah, you can transfer the risk, but the fact is that you have to pay for it, and you have to pay a premium for it. I'd be interested in the value of the risk transfer in this case and whether or not we can get a copy of the business case for this project.

Finally, on the value of P3s generally, I don't think anybody doubts that there have been some very good outcomes in this project. But it goes back to me. The question is: how much would it have cost to do it publicly as opposed to privately? That is why I was mentioning the figures that were provided to me.

I think the primary question is…. Yes, we can have beautiful projects, and they can provide lots of value for lots of people. But if you end up paying one-and-a-half to two times as much, or whatever the amount is, to do it privately, as opposed to publicly, then that is not good value for money. That's a concern that I have about these projects.
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So I'm asking about whether or not it's possible to get that information.

D. Campbell: We can certainly share that information. I'd just like to make one comment. It's very important as a finance person to see this. We are paying 40 percent less for this building than we would be paying for a comparable building today, and that is really part of the acid test of whether we got value for money, from a finance perspective. I'm really happy to share that information, but I really caution the member to make sure that we are looking at cash flows that relate to cash flows.

[1155]

As soon as you start mixing capital costs and operating expenses, which we do get from our annual funding letters, and we start adding that together, you start getting some pretty different discussions. I do provide this information, but with some caution.

K. Corrigan: Just on that. If it had been publicly designed, built and operated, you wouldn't be paying these payments. You would own the building.

A Voice: But you'd be paying interest.

A Voice: Yes. Interest.

B. Ralston (Chair): Anyway, I can see that the debate continues, so Mr. Doyle, perhaps you could have a concluding word, and then we'll adjourn.

J. Doyle: A very quick observation, Chair. I noticed in the original version of the presentation that Vancouver Coastal mentioned the 40 percent. I asked my team: have they had any analysis of that? It looked like an apples-to-oranges type of comparison.

Indeed, the market rates of office accommodation around the campus are higher — there's no doubt about that — but those rates include factors like the land that the buildings are on. That isn't a factor in the lease payments that are being made by Vancouver Coastal. Also, Vancouver Coastal has a discount, if you like, in respect to the cash flows that are being paid in respect to the commissions and also in respect to the retail areas.

My question is: please could I have that analysis so that I could look at it and we could learn from it in regard to subsequent P3 operations? I know this is not normally the forum where I ask for information, but I would be grateful for that. I'll happily share it with the committee afterwards.

B. Ralston (Chair): Mr. Campbell, is that something that you're prepared to undertake?

D. Campbell: Yes, it is, thank you.

B. Ralston (Chair): Okay. Well, with that, on that happy note, we'll adjourn. Thank you to all the presenters. And to the members, thank you.

The committee adjourned at 11:57 a.m.

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