Public Accounts — Issue No. 4 — Tuesday, November 19, 2013 (HTML)

ICBC Salon, Morris J. Wosk Centre for Dialogue
580 West Hastings Street, Vancouver, B.C.

Present: Bruce Ralston, MLA (Chair); Sam Sullivan, MLA (Deputy Chair); Kathy Corrigan, MLA; Marc Dalton, MLA; David Eby, MLA; Simon Gibson, MLA; George Heyman, MLA; Vicki Huntington, MLA; Greg Kyllo, MLA; Norm Letnick, MLA; Mike Morris, MLA; Linda Reimer, MLA; Selina Robinson, MLA; Shane Simpson, MLA; Laurie Throness, MLA

Officials Present: Russ Jones, Acting Auditor General; Stuart Newton, Comptroller General

2. The following witnesses appeared before the Committee and answered questions relating to the Auditor General’s draft Financial Statement Audit Coverage Plan for Fiscal Years 2014/2015 through 2016/2017.

3. Resolved, that the Committee endorse the three recommendations on page 3 of the Financial Statement Audit Coverage Plan for the financial years 2014-15 through 2016-17, as required by sections 10 and 14 of the Auditor General Act. (Sam Sullivan, MLA)

5. The following witnesses appeared before the Committee and answered questions relating to the Auditor General’s Report Audits of Two P3 Projects in the Sea-to-Sky Corridor (July 2012).

• Dave Duncan, Assistant Deputy Minister, Highway Operations, Ministry of Transportation and Infrastructure

• Patrick Livolsi, Regional Director, Ministry of Transportation and Infrastructure

• Gregg Stewart, Manager, Crown Contaminated Sites Program, Ministry of Forests, Lands and Natural Resource Operations

6. The Committee recessed from 12:02 p.m. to 1:05 p.m. and from 2:31 to 2:43 p.m.

7. The following witnesses appeared before the Committee and answered questions relating to the Auditor General’s Report Audit of the Evergreen Line Rapid Transit Project (March 2013).

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


CONTENTS
Page
Auditor General Financial Statement Audit Coverage Plan	103
R. Jones
J. Reid
B. Gilhooly
S. Newton
Auditor General Report: Audits of Two P3 Projects in the Sea-to-Sky Corridor	116
R. Jones
B. Faulkner
C. Thomas
D. Duncan
G. Stewart
M. Macfarlane
S. Newton
Auditor General Report: Audit of the Evergreen Line Rapid Transit Project	142
R. Jones
C. Thomas
A. Farrell
K. Volk
B. Gilhooly
S. Newton

B. Ralston (Chair): Good morning, Members. The first item on the agenda is the Financial Statement Audit Coverage Plan For Fiscal Years 2014-15 Through 2016-17.

Those of you who are not as familiar with this process will, I think, appreciate the Auditor General's brief explanation of the purpose of bringing the plan before us. It's required by the Auditor General Act and sets out, essentially, a workplan that this committee approves by motion, assuming that it agrees with it. The next step for the Auditor General is then to take the approved plan before the Finance and Government Services Committee, which, because his office is an independent one, sets the budget for his office.

It's a two-step process, but this is the first step. Certainly, we'll hear a presentation. You're welcome to make inquiries about the plan or any concerns you have about the plan, although I think it is relatively straightforward and rolls from one year to the next with a few nuances but not a lot of change. It doesn't mean that there's not room for questions, of course.

With that, perhaps I can then turn it over to the Auditor General, and we can begin.

R. Jones: Good morning, Chair, Deputy Chair and Members. Yes, as the Chair has mentioned, we're going to take you through a report that's very different from what you saw yesterday. This is what is called our Financial Statement Audit Coverage Plan.

As you are probably aware from the orientation session, about 60 percent of our work is in the financial area of the office. This plan will set out for you what we plan to do for the next three years in terms of our coverage and coverage by the private sector companies that also audit some of the public sector entities.

We're required by our act to bring this plan before this committee and get your approval for the coverage. We've been doing this now for, I think, 11 years, if I'm not mistaken. This is the 11th one that we've brought before the committee. That's since our current act was put in place, and this is the first one that I've presented to you.

The purpose of it is to get your approval so that when I go to the Finance and Government Services Committee in three weeks to get our budget appproved, this forms a fairly large part of our budget ask. It is a very important piece. Hopefully, if you do have some questions, feel free to ask us, and we'll try and explain to you why we have in here what we have in here.

As I mentioned, this plan has been prepared in accordance with the requirements in the act and is a key document for our budget. It is also designed to meet Canadian generally accepted auditing standards in order to allow me to form an opinion on the summary financial statements for the province, so it serves a couple of very big purposes.

As you may recall, the coverage levels do not vary greatly from year to year, for those that have been on the committee before. For those that haven't, we don't tend to change too, too much. We do cycle through some of the various entities on a three- to five-year basis. But normally, from year to year, we keep it fairly static.

I expect the plan will be carried out within the budget envelope that we had last year — very similar. That's a good thing in these tight times.

I will be pleased to answer any questions regarding the reasons for the plan level when we're done our presentation.

With me today I have on my far left Bill Gilhooly, who is the assistant Auditor General. He's responsible for our financial portfolio. Right beside me is Jason Reid, who's an executive director in our financial portfolio.

I'm going to turn it over to Jason to take you through a brief presentation, and then feel free to ask us any questions that you have.

J. Reid: Good morning, Chair. Good morning, Members. You'll have a copy of the plan in your materials, which I will refer to a few times in the presentation.

The annual audit of the summary financial statements is the largest audit performed in the province, and it provides assurance on whether the financial statements present fairly the financial position and operating results of the province. The opinion on the summary financial statements is the Auditor General's alone, but in British Columbia the audit of the government reporting entity is accomplished through the combined work of the Office of the Auditor General and private sector audit firms.

The act requires the Auditor General to audit the ministries and other agencies that form part of central government. However, most of the other organizations and trust funds comprising the government reporting entity are audited by private sector auditors.

This plan is a three-year rolling plan which sets out our involvement in the audits of those government organizations and trust funds.

B. Ralston (Chair): Jason, could you just explain what the government reporting entity is, just for those who may not know that term of art?

J. Reid: Sure. The government reporting entity comprises all of the ministries of government, and it also comprises all government organizations which are con-
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trolled by government. That would include Crown corporations, school districts, colleges and universities, health authorities.

J. Reid: The act requires we produce a plan. However, such planning is also required under professional assurance standards. These standards require that we have an appropriate understanding of the business processes of the government reporting entity to ensure that information contained within the summary financial statements is complete and has been fairly presented.

This knowledge comes from the audit of the consolidation; the audit of the accounts of central government, including ministries; the audit coverage of government organizations as detailed in this plan; and also through our performance audit work.

Today we are seeking three approvals. We're seeking approval for the proposed coverage in appendix A of the plan. We are seeking approval to continue as the direct auditor for ten entities where our involvement has exceeded five years. This is detailed on pages 13 to 15 of the plan. And we're seeking approval to continue as the auditor of three entities that are outside of the government reporting entity. This is detailed on page 16 of the plan.

This plan reflects the audit coverage required to meet professional requirements under generally accepted auditing standards and will allow the Auditor General to sign the audit opinion on government's summary financial statements.

The selection process is risk-based and aligns with assurance standards specific to the audit of group financial statements. These standards required us to be involved in the audit of all significant components of the summary financial statements. This plan details the range of levels of involvement used to gain the knowledge of organizations and sectors during our overall audit of the summary financial statements.

The extent of direct and oversight involvement required is based on judgment and assessments of risk at both the sector and government organization level. We essentially define three levels of involvement in the coverage plan.

A low or limited level of involvement means a private sector firm is appointed auditor of the organization or trust fund. Professional requirements are met, for example, by communicating with the appointed auditors on our intended reliance and directing or reviewing audit work as required. Our involvement with these organizations may vary as risks emerge or issues arise.

An oversight or moderate level of involvement means a private sector auditor is appointed the auditor of the organization or trust fund. However, we conduct extended procedures to better understand the business and risks and to determine if the audit work will be sufficient to enable us to rely upon it. This includes attending audit committee meetings, reviewing the appointed auditor's audit plans and reviewing the year-end audit files.

A direct or high level of involvement means the audit is conducted either by staff of the Auditor General or through a private sector firm under contract with our office. In either case, the Auditor General is responsible for the audit and signs the audit opinion. Direct audit involvement provides us with the greatest depth of understanding of the business.

In determining our level of involvements, we consider audit coverage at the sector level in order to monitor sector-level issues. To monitor sector-related issues, we rotate our involvements through organizations within a sector over time. For example, in the school district sector we rotate our involvement from one school district to another over time.

We also consider the unique risks associated with each organization when determining audit coverage. If an organization is designated a significant entity under the assurance standards, we must maintain at least an oversight level of involvement indefinitely.

The provisions in our act to request approval for extending direct involvement beyond five years recognizes the need to maintain inherent audit risk where necessary. In this plan we have to balance the benefits achieved through auditor rotation with professional standards that require us to maintain appropriate knowledge and experience as required to fulfil our mandate.

For audits that exceed five years, including ministry audits, we employ senior staff rotation and other safeguards as required by assurance standards to ensure that objectivity is maintained. In the preparation of this plan, we review each appointment exceeding five years and consider if rotation to a private sector firm would be appropriate.

In this year's plan there are no audits where our direct involvement has exceeded five years and where we plan to rotate back to a private sector firm. For the ten entities listed on pages 13 to 15 of the plan, rotation to the private sector is either not feasible or will have limited benefits at an increased cost. The rationale for appointments exceeding five years, as I noted, is documented on pages 13 to 15 of the plan.

Now turning to the coverage level, this table on this slide is on page 10 of the plan, and it summarizes our planned coverage for the next three years for entities covered by the plan for fiscal years 2015 through to 2017. This table is a rollup of the more detailed plan, which is included in appendix A of the report.

The first column shows the type of entity, the second column shows the number of entities for each type or sector for the fiscal year '14, and the remainder of the table shows our plan coverage by entity, fiscal year and level of involvement for the next three years, going out.
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As you can see, the totals and our level of involvement do not change significantly between years. As in previous years, our highest level of involvement is in the Crown corporation group. We require this higher level of coverage in this sector as the risks are not as homogenous within this sector as compared to other sectors.

Another way to view our coverage is in terms of percentage of government expenditures. Although the Auditor General has an oversight or direct involvement with only about one-third of government organizations, this actually equates to about 84 percent of government entity expenditures. As many entities are selected based on magnitude of risk to the government reporting entity as a whole, they also tend to be more significant in terms of expenditures.

For the next few slides, I'll just highlight some of the changes that have occurred in each of the sectors.

In the education sector, in fiscal 2014-15 we plan to end our direct audit involvement with school district 36, Surrey, and school district 54, Bulkley Valley, and take on direct audit involvement with school district 39, Vancouver, and school district 93, the francophone school district.

In 2015-16 we plan to end our direct audit involvement with school district 35, Langley, school district 61, Victoria, and school district 83, North Okanagan, and take on direct audit involvement with school district 48, Sea to Sky, and school district 71, Comox Valley. Also, in 2017 direct audit involvement with school district 53 begins.

Over the plan period we also have oversight involvements with three to four school districts. These rotate from one school district to another school district, generally on a two-year basis.

In the advanced education sector, we plan to rotate our direct audit coverage from Simon Fraser University and Douglas College to the University of Victoria in fiscal year 2015 and from Camosun to Vancouver Community College in fiscal year 2016. We also have an oversight involvement with seven or eight other universities, colleges and institutes, which we rotate over the term of the plan.

For the health sector, there have been no changes to audit coverage from the previous plan. We will continue to directly audit the Vancouver Coastal Health Authority and have an oversight involvement for five health authorities, as they're very significant, and also one hospital society for the duration of the plan.

The last sector is the Crown corporation sector. The changes over the coverage plan include…. The B.C. Health Services Purchasing Organization is being wound up in fiscal 2014, so it'll drop out of the plan after that. Destination B.C. was created last year, and we will directly audit this organization up until 2017, or the duration of the plan. We also plan to continue our oversight involvement with Partnerships B.C. for the duration of the plan.

For non-GRE entities, we plan to continue our direct involvement with WorkSafe B.C. by engaging a contractor, which was a change that was made in last year's plan as we had previously conducted that audit with our own staff.

Each year we consult with organizations impacted by changes to the plan, and all of those that have been consulted are aware of the proposed changes in audit coverage. After approval of the plan by the committee, we will issue formal communications to all organizations impacted.

In this slide we discuss the budget implications. As Russ noted, as the changes in coverage are generally small and incremental, the impact of this plan is expected to have negligible impact on our budget. However, in this slide we do note a few potential risks to our budget which are unrelated to coverage plan changes.

Government organizations are now required to account for contributions under a Treasury Board regulation for restricted contributions. However, we are required to report on the summary financial statements on a different basis — that is, without the regulation. This change has increased audit work for both our office and private sector auditors, as we have to assess certain transactions against two different standards.

Also, the way in which government conducts business continues to be more and more complex. For example, the use of public-private partnerships significantly increases the complexity of government's management of capital investments and operations.

There are also two significant new accounting standards that are on the horizon which will increase the level of effort both for auditors and for government. Those two are: liabilities for contaminated sites and, also, changes to the standards for financial instruments, a few years down the road.

That concludes our presentation, but we're happy to answer any questions that committee members may have.

B. Ralston (Chair): I have a couple of people on the list already — Linda Reimer and Selina Robinson. Would anyone else like to get on the list? Okay. Anyone who doesn't want to get on the list?

L. Reimer: Thank you for your presentation. I'm going to assume that everyone appreciates the work you do, and so my question is with respect to the audits that you're conducting and the audits that you've budgeted for.

What happens if an entity requests that you do an audit? Has that ever happened? And how does that impact your budget, then?

R. Jones: We do get a number of requests to either stay on as auditors…. As Jason mentioned, we have a five-year rotation with most of our financial statement
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audits, and in a number of cases we do get requested to stay on as auditors. We try and accommodate those requests where we can.

All brand-new organizations…. For instance, Destination B.C. this year is a new one. We try and find the resources to audit all new entities. It's always a juggling act. It's sort of like a private sector firm. If they get a new client, they try and figure out how to resource it. We try and do the same.

One of the things we have done in the past year, as Jason noted, is move WorkSafe B.C., which was an audit that we did directly, to a contract basis, where we're still the auditor, but we have one of the major firms doing the audit for us. That freed up some resources to allow us to do organizations such as Destination B.C. and to continue our work on a couple of others beyond our five-year time frame.

S. Robinson: I appreciate that with the scope of organizations, it's quite the challenge to cover all the bases. What caught my attention was around the school districts.

In between the rotation, do you ever respond when there's sort of a red flag in between, where there's been some concern among the public around how things are playing out in a school district, and then respond accordingly? Or do you stick to the rotation?

R. Jones: Well, as Jason mentioned, one of the new audits that we're going to be taking on is the francophone school district. It wasn't one that we had originally put in our plan, but in my conversations with the Ministry of Education and just thinking about the various school districts that are out there, we sort of said: "This is a different one."

This is very different from regular school districts because it impacts the whole province, and it's probably something we should take on. And we were asked by the ministry to maybe take a look at doing that one because it wasn't in our plan.

S. Robinson: Actually, I was referring more to where…. I'm thinking of school district 43, which is the Coquitlam school district. There has been some major concern, certainly around the public, speaking to some of their financial accounting and how things sort of went sideways for them.

I'm wondering if that would be the kind of thing where you might say, "Well, perhaps we need to take a look," even though it's not in the rotation. Is that something that would raise their profile for you to look at?

R. Jones: Absolutely. And in a number of cases we will actually go in and do special work around, say, financial management controls, if requested by the board. We have done that in a couple of the school districts.

B. Ralston (Chair): Langley does come to mind, in that respect, I think. There were some difficulties in financial controls, and you went in directly. Is that correct?

G. Heyman: I might know the answer to this question if this wasn't my first year on Public Accounts, but perhaps your answer will help me understand how you choose to do a direct audit or an oversight audit.

I note that there are some significant entities that you are providing only oversight for, and I'm interested in why it may be that you did five years of direct audit. One of them is Fraser Health, which is being looked at for a variety of budgeting issues. Another one is Community Living B.C., which had some significant question around expenditure practice. And B.C. Hydro, of course, which has major issues around how they actually account. All of these are oversight only.

I also note that after this year there will be no audit whatsoever of Pacific Carbon Trust. I know you did a different kind of audit of Pacific Carbon Trust recently, and we'll be discussing that later. But I'm interested in the rationale in those examples.

R. Jones: Certainly. I'll start off, and I'll let Jason actually talk to you about Pacific Carbon Trust, because he was the lead auditor on that one, and why we decided not to continue with that.

For organizations such as B.C. Hydro, B.C. Lottery, we have a very significant oversight role. One of the reasons that we don't do it ourselves is because of the expertise that is necessary in order to do an audit of B.C. Hydro or B.C. Lottery.

Lottery Corporation — the private sector firm that has done that audit for a number of years does some extra processes in terms of verifying draws and whatnot that we just don't have the ability to do. They actually have their own — what would you call it? — audit software that reruns the draws every time they occur. We don't have that ability to do that. They do a very good job.

We do oversight. We look at their audit programs and review their files, and we're happy with the work they're doing. And the same with B.C. Hydro. They are very, very large. We don't have the ability to do them, but we do significant oversight on both of them to ensure that the audits are done properly.

We do have the ability, as you realized, to go in and take a look at other issues within those organizations, and we have done in the past with B.C. Hydro. We're currently doing a follow-up on deferral accounting on B.C. Hydro, which will be coming out in the new year.

CLBC. We did that audit for a number of years. The issues there are not so much a financial statement issue as
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other things that have come up in the press. We do have the ability to go in and do other work if we feel it's necessary, as far as a performance audit might go, at CLBC.

G. Heyman: Just before Jason speaks to Pacific Carbon Trust, should I assume, then, that you have kind of a sliding scale of involvement in oversight?

R. Jones: Yeah, I guess…. I'll try and describe for you what we mean by an oversight, and I'll take Fraser Health Authority as an example.

They have six audit committee meetings a year. We would attend all six of those meetings. We go into the firm that's doing the audit, which I think is, currently, KPMG. We will look at their plan, we will look at their work throughout the year, and we'll look at the final financial statements and audit work they've completed.

We spend a couple of hundred hours on each one of those, making sure that all of the issues that we think should be covered are being covered by the audit firm, and we have a very, I think, good relationship with the audit firm throughout the audit, throughout the year. So it's not like….

That's what our oversights are on all of these organizations. We attend the audit committee meetings. We do that work on each one of them. For CLBC we do the same thing. It's a fairly intense amount of work that we do. It's just that we don't have our staff doing the work in those entities.

G. Heyman: How might it differ in B.C. Hydro, if it's, as you said, a more significant level of oversight?

R. Jones: In terms of B.C. Hydro, we attend all the audit committees as well. It wouldn't really increase the amount of work. It's just that B.C. Hydro is a bit bigger, so we might spend a bit more time there, but we also do go in and do extra work if we think that there is extra work needed. As far as the amount of due diligence we do around the work that the firms are doing, it's pretty much the same in every single oversight we do.

J. Reid: I guess to answer the question about PCT, when we're looking at audit coverage, we consider what types of risks there are in an organization. Depending on the types of risks that exist, it really influences our decision regarding involvement. Some risks — for example, a complex financial system — would really influence us to have a direct audit coverage.

For example, Transportation Investment Corporation, which has just recently become operational, has very complex IT and financial systems around the tolling. That's an organization where we have a direct level of audit coverage because we feel we need to be directly involved to understand those risks.

Pacific Carbon Trust. We did have a direct audit coverage involvement with them since inception. However, when we looked at the risks of the organization in terms of financial audit coverage, we realized that the risks that exist in Pacific Carbon Trust relate more to the outcomes of their specific projects, and those are risks we really don't get to in the financial audit.

In terms of financial risk, from a financial management or financial statement perspective, PCT is actually very non-complex, so we didn't see justification for continuing that involvement, and we deployed our resources elsewhere. However, in terms of ongoing monitoring of the risks that we've identified — which are on the agenda for tomorrow, I believe — follow-up of those risks would be done through a performance audit rather than a financial audit involvement.

M. Dalton: Going back to auditing school boards, are they chosen…? You mentioned about Conseil scolaire. That is red-flagged there. But just looking at the numbers, I would've…. Can a school board be expected to receive an audit, like, once every 15 years? Or is it more of an ad hoc basis? How do you go forward with auditing the school boards?

R. Jones: Well, the school boards have the pleasure of having us come in probably once every 15 years, yes — if they look at it as a pleasure. What we're trying to do, because it's such a large population of audits…. They vary significantly from very large ones down here in the Lower Mainland, of course, to smaller ones in Salmon Arm, up north.

Each one of them is very significant to us in different ways. It's amazing. Even though we first took a look at school districts and said, "Well, it's a homogenous population; they all do the same thing," they actually don't. There are significant differences depending on which school district you go to.

We take a look each year. What we also do is we take a look at the management letters from the firms that are currently doing the audits to see if there are any significant issues they've raised. We also look at the work that's being done by the auditors in various parts of the province. If we see some that we think we would like to go and take a look at, then we put it into our plan. We just want to keep abreast of everything that's going on across the province in terms of education.

You may have significant, say, First Nations involvement in one part of the province that you wouldn't have in another, so you've got different types of education that's being delivered and various ways that it's being delivered. We want to keep on top of that.

It also helps inform us of any performance audits that we might want to do in the education sector. So, yeah,
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probably once every 15 years.

M. Dalton: I'm just trying to understand the five-year audits a bit better. My understanding in the past was that you had an audit, and it would be for five years. The books were closed, and you're reviewing. But just in looking over your presentation, it appears that it can involve the past and tracking with them in the present and the future. Is that correct? And you have staff with them, going through that entire period? How does that exactly work with the five-year audits?

R. Jones: The five-year audit rotation actually dates back a few years to when the institute of chartered accountants brought in a rule where they…. For publicly accountable companies that are traded on the stock market, there was some concern for a number of years that there wasn't enough auditor rotation. So the institutes then brought in a rule that sort of said every five years you had to get a new auditor. When our act was brought in, that was put in to our act.

Since then the rules have been…. They've gotten less prescriptive around that. Now the partners are allowed to rotate every seven years, and the firm can still continue to do the audit. So what we've done is, in some cases, after five years we do rotate off. But if we think the organization still warrants our oversight, we will continue doing oversight work.

In some organizations like CLBC where we decide we don't need to do that anymore, we would just attend the audit committee meetings on an oversight basis as well. In other cases, we just don't do anything more.

M. Dalton: So you stay with that organization, essentially, and audit them for five years, every year.

M. Dalton: And it's not just looking back at a package of all their books. It's year by year.

N. Letnick: Thank you for the presentation and the work that you do. My only question has to do with the budget implications. In the slide it talks about, in the report, potential risks to the budget, and you outline what they are.

Given that budgets are very tight these days — all budgets — would that not be better read "potential risks to the program"? In other words, you have to live within your budget, and if it turns out that something comes up, you'll have to cut one of your priorities as opposed to going back to government and asking for more money. Is that how it works?

R. Jones: I would say that is how it works. We don't see that there are any risks, going forward for the next three years, at this point in time that would significantly impact the budget ask that we have for this portion of the work that we do for our office.

B. Ralston (Chair): Maybe just to follow up on that, in the last couple of years, as I understand it — because I was on the Finance and Government Services Committee for a long time — your budget was basically zero increase for a number of years. So you're not coming forward each year and asking for more, at least as I recall.

R. Jones: That is correct. In this current ask we will not be asking for any additional amounts for our operating budget as such.

R. Jones: We have approximately 115, and of that, we have about 60 to 65 in the financial area.

L. Throness: Okay. Is there a contingency factor in your plan to respond to unanticipated situations? If it comes out in the press that somebody has embezzled 10 million bucks, do you have enough room in your plan to jump in there and audit that group?

R. Jones: We tend to be pretty nimble. I must admit it would be really nice if those requests came at the time of year when we actually have a few more people available than we would normally have, but we're usually pretty nimble. What we tend to do is just….

With financial statement audits, it's a little more difficult because we do have definite year-ends that we have to meet. In terms of the financial statements for government, it's March 31. For school districts, it's the end of June. So there are certain times of the year when we are busier. But so far we've been able to juggle as best we can and respond to requests as we get them.

R. Jones: Yes, they can. Or they can ask us to do the audit. If asked, we would certainly take it into account and take a look at it. Whether it's from the government side or from the opposition side, if we're asked to take a look at something, we certainly take it very seriously.

L. Throness: Even direct involvement audits or the high-involvement audits that you do of the 19 entities involve some contracted auditors. How many audits does the Auditor General actually do with its own staff? It would be a portion of the 19, I would imagine.

R. Jones: I think we actually do approximately 17. And we have all the ministries, of course, that we look at.

L. Throness: Okay. Is it possible with 150 staff, in any meaningful way, to exercise oversight over 150 organizations and, I would add to that, the 80 that are subsidiary organizations? In a sense, you're depending so much on the work of others — contracted auditors. If they do a bad job, they could sully your name. Or if they do a bad job, you could give your stamp of approval to an agency which does not deserve it. Is there a risk there for the Auditor General?

R. Jones: There is a risk. When we're trying to decide the level of involvement, we take a look at the risk of the organizations that are out there. As you are well aware, there are a number of very small ones that, from a financial statement standpoint, wouldn't cause us any concern.

There are others where there is definitely a risk. One of the things that we do to try and mitigate that risk is meet on a monthly basis with all of the major firms in the province to discuss issues, to discuss things that have come up that everybody should be aware of when they're taking a look at the financial statements of the various organizations. So we have a very close relationship in terms of working relationships with these firms, ensuring that everybody is on the same page.

I guess the other safeguard that we consider out there is the fact that the institute of B.C. — the CPA group that it's now called — does go out and do practice reviews of the firms. We rely on….

R. Jones: We do. We place a lot of faith on those reviews to ensure that there is good work out there.

L. Throness: Okay. And one more question. You're auditing three non-GRE entities. How are those lucky groups chosen?

R. Jones: WorkSafe B.C. is the largest of the three. Historically, we've looked at that organization for a long, long time. Even though it is outside the government reporting entity, it's closely tied. Right?

R. Jones: There are a couple of foundations. There's the public sector employee services fund, which is just one we do, and school district 35 foundation is one we work….

R. Jones: Yeah. We were asked to do that. Because we do the audit of the school district, it just made sense to do the foundation as well.

B. Gilhooly: I just wanted to follow up on your question about how we keep track of the audit quality. When our act was written back in the 2000-2003 period, that was the time when audits' quality was suspect in the world stage with issues like WorldCom and other big audit failures like that. One of the reasons I think the audit coverage plan was written for it is to help ensure audit quality is maintained in the GRE.

That's why when we go out and look at auditor working paper files and go to audit committee meetings, we're not just looking at what the risks are out there. But we're actually reviewing the auditors' files to ensure they're good quality and can be relied upon for sign-off on the public accounts, which is the summary consolidation of all that whole process.

That's some of the sort of history in how our legislation came to be and why we have this plan today, which I think is quite unique in Canada as well.

K. Corrigan: I wanted to ask about two entities that have had their status changed since last year, and those are Emily Carr University of Art and Design, and Partnerships B.C. Emily Carr was scheduled to have limited involvement, and that's been changed this year to have oversight involvement, and the same with Partnerships B.C. I'm wondering if you could enlighten us a little bit about why those changes were made.

R. Jones: Partnerships B.C. We've been sort of on and off with Partnerships over the years. I think one of the reasons we wanted to get back involved in oversight is because they have such a significant impact on a lot of the infrastructure projects that are undertaken in the province. While we can look at the website and see what's underway, it's much more informative to be at the table at the audit committee meetings, to actually hear the discussions and whatnot, just to keep us informed.

It wasn't anything significant in terms of concerns over the financial statements or anything. It's more to keep us
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up to date and keep us involved in the whole P3 area in the province.

J. Reid: For Emily Carr we changed our plan to have an oversight level of involvement. Each year when we look at the plan — because it's a three-year rolling plan — if circumstances have changed, we'll make an adjustment to the outer years of the plan, which are now a year sooner, in the following year.

For Emily Carr the reason we decided to increase our involvement is that they're undertaking a project to have a new campus. The risk profile has increased, and we felt an oversight level of involvement would be appropriate to monitor those risks.

K. Corrigan: Thank you. I have two more questions I wanted to ask about. One is just an observation, I guess.

My understanding — and maybe you could confirm this — is that when you're looking at school boards, you will have a direct involvement when there are some risks or concerns identified. But the sort of rolling every ten years or whatever is the oversight piece so that school boards won't expect that they're going to have direct audits done regularly over every ten or 15 years unless there is some reason that your office feels that that needs to happen…. Maybe just confirm that.

When we're looking at our coverage in the school district sector, we do look at a number of risks, but we're also trying to have what we call representative samples. We're trying to have a certain number of school districts that are larger in urban areas and some school districts that are in different geographical areas and are facing different types of risks.

While we do consider particular issues that may be occurring in a school district, we also have to balance that with having a representative sample. Based on that, we couldn't take on every problem school district and still achieve the objectives of the coverage plan.

The way we do that is if there's an issue in a particular school district, we may be addressing that issue not through the coverage plan but through a performance audit or a governance piece of work.

K. Corrigan: Just a follow-up on that. I'm not clear, then. If my school district, Burnaby school district, had no issues that you could see, you could still end up deciding to do a direct audit for a few years, then. That's what you're saying.

K. Corrigan: So seeing a direct audit does not necessarily mean that there are problems. Okay.

My last question. I wanted to ask about the second last slide, page 6 of your handout. You talked about the potential risk to the budget, and I'm wondering if you could just expand a bit more.

One of them was liabilities for contaminated sites, and I'm wondering what level of significance that is — a little more information on that. Then the compliance with two different standards — could you give us a little more information on that as well?

R. Jones: One of the things, unfortunately, in our profession is that the standards continue to change on a regular basis. Each time they do, they bring some significant accounting challenges. The one that Jason highlighted, the liability for contaminated sites, is one that will require a bit of extra work to be done by most organizations across all sectors, whether it's public or private.

In that case, when there's a new standard that comes in, we always find there's a bit of additional advice that we end up having to give our direct-audit clients and, as well, work with the firms, with their clients, to make sure that everybody is handling it the right way.

Financial instruments are another very big one. It is supposed to come into being April 1, 2015, so it's still a little ways away. However, it could have some significant implications on the summary financial statements of the province. It's one that we'll be working through with the comptroller general.

A number of other standards are coming, as well, that will cause additional work to be done by the various organizations. And where that happens, one of the things we try and do is ensure that our advice is sought for any of the concerns they have and any of the problems they have in terms of the accounting for it. It does cause us some extra time.

The two different accounting policies revolve around what we call government transfers and how they're handled. The summary financial statements handle them in accordance with the public sector accounting standards, and the various public sector entities out there such as schools, health authorities and whatnot handle these transfers under the regulation that government put through. They're very different in the way that they are accounted for.

As a result, when we go to consolidate the entities into the summary financial statements, there's a bit of work done to come up with what the difference is.

B. Ralston (Chair): Just for the non-initiate, can you explain what the source of the change in accounting standards is? It's not something that you initiate, as I understand. There's a Public Sector Accounting Board. Perhaps you could just explain that again for those who might not be familiar with it.
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R. Jones: Right. For senior governments and all public sector entities in Canada, there's a group called the Public Sector Accounting Board that sets accounting standards for those organizations. There is what we would call a separate handbook that sets out the accounting standards for public sector entities. I happen to be on that board at the current time.

It is what is recommended for governments to follow. It is not something that we can mandate governments to follow, but it is recommended practice that's seen as best practice across the country.

V. Huntington: Most of my questions have been asked. But in that regard, is that what the restricted contributions regulation is?

V. Huntington: And is there still tension between the comptroller general and your office with regard to the standards?

R. Jones: There are continuing discussions between my office and the comptroller general's office, yes.

V. Huntington: I must say that was one of the more interesting discussions we had last time, when we got into the detail of what that tension was. And it's big.

Are you satisfied with the seven-year rotation for the involved partner within the financial sector? Did you find that seven years is too long?

R. Jones: I'll have to be very careful here. I don't know if seven years is too long. I think what a lot of the organizations are now finding is…. I think you've seen it in the last couple of years, where one of the health authorities, which had been with one of the firms for years and years and years, decided to switch.

It's always good, I think, to have somebody new come in and take a look. It is also a bit more expensive when you do that in the first year of any changeover. I think there's always sort of a weighing as to which is the best route to go, cost versus benefit.

From what I understand, there is a bit of a move afoot to do a bit of a different process in looking for new auditors now, where it's going to be more of a request for interest, and not based so much on audit fees as on what can the firms bring to the table. It should be interesting to see how that goes.

Each of the firms out there is very, very good. But it is nice to get some rotation. That's why we tend to rotate off some of these. We think it's good to have us there for awhile. Then it's always good to rotate to another firm.

V. Huntington: I'm assuming your office can't issue some sort of instruction. But is the comptroller general's office able to advise the entities that they should be looking at rotations on a regular basis?

S. Newton: Our office doesn't advise them regularly. It's pretty much a commonly understood practice that that's what you would do. I think that's when Russ was talking about the institute and the requirement. That's best practice, and the expectation on our part would be that that would happen. We agree with even the Auditor General's rotation through. It makes a lot of sense.

R. Jones: Just a follow-up to that, if I may. We do oversee the appointment process as well. For instance, if Lottery Corp is looking to do an RFP because the term of KPMG, say, has come to an end, they will let us take a look at the proposals that have come in and advise them on which is the best route to go.

D. Eby: A couple of questions. The first, just looking at your annual report for the previous years and trends, it looks like your office is doing fewer direct audits year over year. For example, in '11-12 you did 26 direct audits, I read, and then in '14-15 the proposal is 19. And there seems to be a matching increase in oversight, roughly, from 20 audits to 28 from '11-12 to '14-15, and a slight increase in limited audits as well.

Is this a policy decision that your office has taken: to do fewer direct audits and increase the lower overhead audits — I guess, if I can describe it that way — in terms of your work?

One of the things we took a look at…. Because previous Public Accounts Committees were concerned that we were spending too much time in some of the organizations, we took a really, really hard look at some of the not marginal ones but some of the ones where there was maybe less risk and where it was more difficult for us to continue to justify going beyond the five years, such as CLBC. So we've cut back on those.

But we've kept all of the direct audits that we think we need to be in there to have the coverage we need for the summary financial statements. Then, of course, as I
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mentioned, most of those we kept an oversight on anyway, because we felt they were at least significant enough that we needed to be involved at some level, which was the oversight level.

D. Eby: So the rationale was that this committee was concerned that you were spending too much time auditing particular organizations?

R. Jones: They couldn't…. Yeah. There was concern that we were spending…. We couldn't justify our direct involvement in terms of…. You heard us describe that we need to be in these organizations to be able to allow us to give an opinion on the financial statements of the province.

At the time we were having pressures in terms of getting the financial statements done in the March time frame, because we need a great deal of people to be able to do that. We were, in a number of cases, having to hire ten to 15 contractors to help us get through that busy time period in April, May, June.

So we took a really hard look to see how we could actually get more efficiencies within the office and keep our budget down without coming to the Finance and Government Services Committee and asking for more money and yet give us still the coverage that we needed.

D. Eby: So you're satisfied that we are still getting the coverage that we need with this shift?

R. Jones: I certainly think we are. We're certainly meeting our professional obligations. When I look at the oversight work that we do and the direct audits we do, I don't have any doubt that we've got the right coverage.

D. Eby: Then one other question. As the Advanced Education critic, I've been visiting a lot of colleges and universities, and these institutions provide 42 separate reports to government, 16 of them financial, every year. They are very heavily scrutinized. Yet I note in your plan a significant increase in oversight and direct audits of post-secondary institutions in the province. I'm just curious about why that's happening.

As anyone who's — I hesitate to use this word with present company — "endured" an audit knows, it takes a lot of staff time, and it takes a lot of energy to get auditors the information they need. This is money taken away from students and education. So I'm curious about the reason for what looks like a shift to increase auditing of universities and colleges when they're already heavily overseen.

R. Jones: Jason was just pointing out to me that in the audit coverage, we're still only doing a direct audit on two universities and colleges each year, which is similar to what we've done in the past, and our oversight is fairly similar as well. I don't think we've really increased a whole bunch. We may have rotated off of one or two and on to a new one, like we're taking on University of Victoria very soon.

Usually what we try and do is do a direct involvement in one university and in one of the colleges just to give it some balance. Currently we're doing Camosun, and we're rotating off that and doing, I think, a different college in future years.

M. Morris: One of the things I'm always cognizant of, especially with government and large organizations, is the risk factor in how you determine what your audit schedule will look like. Do all the government entities that you audit, or any of the agencies that you audit, operate with a unit-level quality assurance program or something that risks them out — that you have access to that information or that you consider that information in your risking process? It's a huge entity out there, with 150 various groups.

B. Gilhooly: Thank you for your question. Generally speaking, the larger and the more complex the organization is, the more you'll see more standardized processes for managing risks and risk information that comes to the audit committees for discussion and active management.

For the smaller organizations — the less complex ones — in general, you'll see less active risk management in a formal way. Either way, the audit process is also risk-based, so the information we collect to do the audit, both the formal information and through the interview process on the audits…. That's how we get the key information about the business risk, the IT risk, the different categories of risk.

I'd say the overall framework…. There isn't really, from what I understand, a broad one in government. I think the comptroller general might speak to you about what the government-centric risk management process is, but as far as the broader community, I'm not aware of one. There definitely are differences based on each institution's capacity, and it's usually based on size and the type of people that they can recruit that have an active interest in that area.

S. Sullivan (Deputy Chair): Just one question about the distinction between a GRE and non-GRE. At what point does an organization go outside of the GRE? What is the definition?
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R. Jones: There are very definite factors that you look at to see if government actually has control over the organization or not. Each year the comptroller general's office revisits each entity that is out there to determine whether or not it still meets those qualifications.

If a new entity is formed that we think may be in, or may not be within, the government reporting entity, both our office and the comptroller general will take a look at it, assess it against these criteria that are in the public sector accounting standards and make a determination.

R. Jones: It's not judgment. It's a pretty thorough analysis, and we both usually agree.

S. Newton: Some of the factors that you would consider are members on the board and the ability to control, sort of, board decisions; the ability to affect an organization's capacity to earn revenue and pay its bills or make significant operational decisions or the effect on those operational decisions. There are quite a few. On balance, they're taken together. You wouldn't have: "We've got four out of six; it's this way."

As the Auditor General has said, we have a lot of dialogue around this throughout the year. We meet regularly on this and other issues. Usually the in or out is a fairly straightforward one for us to get through.

S. Sullivan (Deputy Chair): The one that I'm uncomfortable with is…. When I saw this Conseil scolaire, I thought: "Well, there's a lot of tension between the government and the school. I don't like the look of that one." Then when I heard that you had actually been asked to look at them, it makes me a little bit concerned that, you know…. I know that it's a big burden for the agency. It might be a little…. They do seem to have a lot of trouble with making their own ends meet.

I'd certainly feel much more comfortable if you…. Because that was part of the routine. I'm just wondering: is there another explanation?

R. Jones: Well, in our discussions with ministries and, in general, when we're trying to determine what we should be looking at in our Financial Statement Audit Coverage Plan, we ask for information around…. In any sector where there might be what I might call outliers or…. Organizations that are slightly different have a slightly different mandate, might operate slightly differently, and we might see that it's maybe a bit more complex.

One of the risks we look at is complexity. So the francophone school district, obviously, is very different than most school districts and is a bit more complex in terms of how it delivers education across the province. It really wasn't one that we had given a lot of thought to before, until that was raised with us that this is slightly different than the rest of the ones that we tend to look at.

As we do whenever we come across something that's new and different, we take a look at whether or not we think it would be worth us getting in there to do the financial statement audits, to assist the board, possibly, in terms of their transition over to these new accounting standards. We took that into account as well. We thought it might be slightly different for an organization that's provincewide in terms of how they're adopting the standards. It was more from that aspect than anything else.

If we thought there was something that we should be looking at as far as performance goes, we would put it into our performance audit plan. This was strictly…. It's part of the overall school district model that we have, and it was one that we thought warranted us getting in there to help them out.

B. Ralston (Chair): Just to summarize, then, it's not punitive or investigative.

R. Jones: It is not punitive. It's not investigative. When discussing with the deputy minister at the ministry, he just pointed out that it was slightly different than the others and asked if we thought about that when we were taking a look at our financial statement audit coverage.

When we go and talk to the deputy ministers and whatnot in each of the ministries, we take them through what we're going to be doing as far as our financial audit portfolio goes each year, just to get their sense of whether we're covering everything we should.

S. Gibson: Again, my apologies for being delayed. I was trapped — surrounded by sheep, goats and cows this morning.

My question relates to how you evaluate yourself. Is the Public Accounts Committee your main instrument of self-evaluation? If not, what complements that in terms of, at the end of the year, how you measure your own success? This is not identified in the report, but I think it's implicit in what you have written here today.

R. Jones: Well, we do have an annual service plan and annual report that we produce, which has key performance indicators in there that we have audited by an outside audit firm.

One of the things, in the financial area, that we do is after every audit that we complete, we send a survey to each of our clients to get their feedback on how well we're doing. I mean, it is basically a self-assessment, but we do
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rotate that through the office to each of the audit teams to sort of say: "Here's where the client sees that we're doing a good job. Here's where it says we're not doing so well, so this is where we need to do some improvement." Very similar to what the private firms do. I think they do that with all of their major clients as well.

We get a lot of very valuable feedback from those surveys. We at our executive level in the office take that very seriously and act upon it as soon as we get those surveys back.

S. Gibson: I think that's of interest to us, perhaps just to know in general. I don't think we want to be given more paper, but I think the satisfaction that you receive to some extent relates to what we're doing here.

One other supplementary — perhaps non-supplementary — question. How does the factor of surprise relate to your work as auditors? The nature of surprise: as opposed to, "We're going to be doing an audit," you suddenly do it in a surprise factor. Can you comment on that? I know there are two paradigms that you work with.

B. Gilhooly: In the financial audit area, I think it's more like a commodity. The boards are getting a commodity, an audit opinion, some assurance regarding the financial representation. So in terms of audit quality and client relations, we strive to operate on a no-surprises basis. You might be thinking, perhaps, of the banking industry internal audit sort of function where we might just show up and close all the cash registers and start some work. But we're not in that sort of business.

The comptroller general may want to speak to what our internal audit arm of government does, but we generally, as Russ said, try to operate on a client relations, no-surprises basis. That's some of the information that we get fed out through these surveys. People like myself are judged on the quality of the relationships that we have with the boards and the senior management staff, so I take them very seriously.

R. Jones: I think one of the other things that we strive to do with all of our clients is make sure that if they do have a concern or a question around how they're implementing new standards or if they have a question around, "Can I account for it this way or that way?" to please come and talk to us before they do it so that everybody is on the same page.

We give them our advice. Whether they follow it or not is up to them, because in most cases there's usually a couple of ways that you can go.

We want to make sure that we're sort of their first source to come to if they have an accounting issue that they need to have dealt with, and we want to make it a very friendly atmosphere for them, not a punitive one.

B. Ralston (Chair): Since it's been touched on, I just wonder, Stuart, if you could talk a little bit about — it's obviously not under the purview of this committee; it's under your direct control — the internal audit function of government, just to help members better understand the array of scrutiny that entities face.

S. Newton: Internal audit, actually, is not under the comptroller general's office anymore. It changed a couple of years ago. I used to be the head of internal audit, and one of the issues with internal audit was creating a level of independence.

In discussions with the deputy minister at the time, as I moved into this role…. I think it started before I moved into this role, so it was kind of like talking about it before I was told I was going. That was: ensuring internal audit wasn't accountable to the comptroller general's office. That would allow internal audit the freedom to look at things that were financial without having me interfere with them.

What internal audit is, is it actually reports to the associate deputy minister within the Ministry of Finance, which is currently Cheryl Wenezenki-Yolland. Chris Brown is the assistant deputy minister for internal audit. Their mandate is to essentially be — and it's similar to what happens in private industry — the eyes and ears of the board. They do a risk assessment across government, look at areas of high risk and then go in, either announced or unannounced — getting back to the surprise aspect.

I think most of the work that internal audit does is now along the lines of governance and how well government's objectives are being met. There's a lot of what the Auditor General's office was describing as far as good plans; making sure everybody knows that they're coming, no surprises; agreement on the criteria so that when there's an evaluation, everybody understands why it's good or bad — and working with the client to do that.

That level of oversight is there. There are other levels of oversight within my office. There is a continuous controls monitoring group that does transaction testing across government for payments out of our financial system and provides information back to ministries, where they may have concerns or issues related to control.

They also provide information to a forensic investigation team that I have as well, who would then look at, if there were problematic transactions: is it really a problem? Is it a mistake? Is it a structural issue, or did somebody do something quite specifically purposefully? We'll follow through either directly on those or more broadly if we have to inform other agencies.

The Auditor General's office gets a complete and regular update as to where we're at with those as well, and I'm assuming that informs your risk assessment as well as we go forward.
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B. Ralston (Chair): Thank you. I didn't know that about internal audit, so that was good to ask the question.

S. Simpson: One of the questions I have is how your office feels it gets impacted by potential implications of the core review going forward over the next couple of years.

We had, today, the minister announce the end of the Provincial Capital Commission, that it's being wrapped up, and announce the end of the Pacific Carbon Trust, as it's going to get folded into the ministry — without a lot of explanation at this point about what that actually means, including the minister not being totally clear about what happens to the $30 million that's been sitting in the carbon trust and whether it goes back to government general revenues or if it will still be used in some fashion for the objectives of the trust.

They talked about 90 agencies in government that are similar to that that the minister anticipated would be affected in some way by core review decisions. He made those comments today — as well, of course, as what happens with the ministry. That has the potential to make some significant changes as the government pursues its objectives related to the core review.

Has there been any thought on the part of your office as to whether that creates implications or questions for how your work proceeds, I guess not necessarily immediately this year — but maybe — but in the next couple of years, after we've seen some of the effect of this as those changes get implemented? I'm curious as to whether there's been any consideration of that or any thought about how the implications of core review changes may affect your office's workplan.

When the core review was announced, it of course was one of the things that we put into our performance planning side of things, probably more than the financial statement side. You're correct: in terms of government policy impacting how organizations are set up and delivering their services, it's something that we would probably look at more in our performance planning.

From a financial planning standpoint, now knowing, as you mentioned, that Pacific Carbon Trust may be rolled into the ministry, it could impact windups in terms of a corporation no longer being around, and we'd have to do the accounting for that. That would go into our financial accounting plan.

Looking at all of the impacts it might have in the financial accounting area of core review decisions is something that we take very seriously. As soon as an announcement is made, we take a look at, first of all, whether it has a financial statement impact — as the comptroller general will do as well — and then we'll get together and talk about it and see where we're going with that in terms of financial statements. We then throw it into our performance planning cycle, as well, to see if there's something we maybe should be taking a look at in the future.

S. Simpson: As a bit of a follow-up to that, then. Of course, I anticipate over the next period of time we'll hear some announcements, but many of them will take some time to be implemented, and the impacts won't be immediate, I assume, though some of them will be.

Would it be reasonable for us to expect that you may be coming back next year, as you get your rolling three years of budgetary issues, and be talking about additional efforts that you may need to make and, of course, the resources, potentially, that are required for that as we kind of look at how these changes might affect either the financial or the service side and what that might mean for your responsibilities?

R. Jones: I think it would be safe to say that we will definitely take a look at any of these impacts and, within the current resources we have, take a look at whether or not we're able to deal with them within what we currently have. If we felt that it was necessary to come back and say, "Yes, we're going to need an extra four or five people" — or whatever — we would certainly do that at the Finance and Government Services Committee probably. At this point I think it's a bit too early to…. But we will try and look at it within the current resources we have. We're pretty nimble.

G. Kyllo: You indicated that you guys will quite often be participating in vetting different contracts that come forward for private auditing firms. What would be the annual fee for a large school district, as an example, that they would typically pay?

R. Jones: I would say for a large school district it could be between $40,000 and $60,000. For smaller school districts — there are some really low ones out there — like $5,000, $6,000.

G. Kyllo: So in a year where the Auditor General undertakes that audit, is there a fee for service, or do they get a freebie in that particular year?

R. Jones: They do not get a freebie. We do not get the money. We would come in and try and charge a similar amount as what the previous firm was charging. When we do, the school district would get the same bill that they would have gotten from the private sector auditors, and all of that money flows back to the consolidated revenue fund.
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G. Kyllo: Great. One other question was: when you're doing the audits, do you look at efficiencies of administration or standardization of different software, say, within the school districts, or are they all kind of independent?

R. Jones: We do take a look at that. There could be a lot more, I think, standardization. Right now there are a lot of different systems out there in the school districts, a lot of very old systems out there in the school districts that could use some updating.

R. Jones: There are some opportunities, and in a number of the management letters that we issue to the school districts, we will often talk about how improvements could be made to the systems that they currently have.

There's a suggested motion. I'm going to ask the Deputy Chair if he will move the motion that's suggested to endorse the three recommendations on page 3.

S. Sullivan (Deputy Chair): I move that the committee endorse the three recommendations on page 3 of the Financial Statement Audit Coverage Plan for the financial years 2014-2015–2016-2017, as required by sections 10 and 14 of the Auditor General Act.

L. Reimer: I do. Is this a requirement? Is this a standard practice — that we approve in order for you to move forward with your budget?

B. Ralston (Chair): It is. The next step is…. If this motion passes, then the group goes before the Finance and Government Services Committee, and that's where the budget is set. Independent officers — their budget doesn't go through the Legislature in the same way. They go to the Finance and Government Services Committee. They'll make their budget pitch there.

The basis for their budget pitch is: "This is the work that we're going to do. The Public Accounts Committee has signed off on it, and this is how much we anticipate we're going to need to carry out this program of work." It's part of the process.

B. Ralston (Chair): I'm going to suggest, then, that we stand down for a moment before we move to the next report, which is Audits of Two P3 Projects in the Sea-to-Sky Corridor. We'll let the staff make the transition.

B. Ralston (Chair): We're now going to deal with the performance audit of the Auditor General entitled Audits of Two P3 Projects in the Sea-to-Sky Corridor. I'm going to turn it over to the Auditor General to provide some opening comments.

Auditor General Report:
Audits of Two P3 Projects
in the Sea-to-Sky Corridor

R. Jones: Thank you, Chair, Deputy Chair and Members. To my left I shall introduce who I've brought today. I've got Bill Gilhooly on the far end again. He's still here. We get involved in everything. Then I ha ve Bob Faulkner next to him and Chris Thomas. Bob was the person in charge of the Sea to Sky project, and Chris was in charge of the Britannia mine one.

These are two P3 projects that we took a look at, ones that had been in operation. Before I speak specifically about the reports, I'd like to state that we have an ongoing interest in P3s and alternative service delivery mechanisms, and we will be continuing to take a look at those over the next few years. This is in part because B.C. has sort of led…. I mean, they have led the way in terms of P3s in Canada. Now everybody, it seems, across Canada has joined in and has some sort of P3 going on in their jurisdiction.

B.C. has been involved, and so have we, in the P3 area since 2005 — when we got involved. We've completed a number of reviews and audits that looked at different phases in a P3 life cycle, and we'll continue to do so.

For the committee's information, both these gentlemen to my left…. There's a group in Canada called the Canadian Council of Legislative Auditors, which is all of the Auditors General across the country getting together two to three times a year to discuss issues and whatnot. We have set up a separate committee that takes a look at infrastructure across Canada in terms of what the issues are and how each of the audit offices is dealing with them.

The mandate of that group has actually now been expanded to include asset management in general across Canada. So we're looking at P3s, which is part of the infrastructure projects which aren't P3s necessarily. But it's a very active group, believe me. They meet a few times a year.

In addition, there's a number of accounting issues associated with these types of arrangements — ASDs
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and P3s. The Public Sector Accounting Board, which I'm on…. We have now decided that we're going to do a project around P3 accounting in the next couple of years to try and get some sort of guidance for the people in Canada to use. There currently isn't really a lot of guidance around how to account for these types of arrangements. The board has decided that we're going to take a look at that.

Back to these reports. There are two audits here of public-private partnerships — the Sea to Sky Highway improvement project and the Britannia mine water treatment plant project. We selected these projects as they're both several years into their operations.

We haven't really looked at any of the operational phases of projects before, so we thought these would be two good ones to take a look at. And we had already been involved in the Sea to Sky one, back when the original project was put forth, when we took a look at the value-for-money proposition that Partnerships B.C. and the Ministry of Transportation came out with at the time they were developing the project.

We wanted to assess how well the projects were meeting the key objectives set out at the beginning of the projects, and in both audits we found areas where the projects were fully achieving government's goals as well as some areas where we thought there was some room for improvement.

Now I'll turn it over to Bob Faulkner to take you, first of all, through the Sea to Sky one, and then Chris will take you through Britannia mine's. Then we'll take questions after we get the ministry's response — the government's response as well.

This presentation provides a summary of the office's report Audits of Two P3 Projects in the Sea-to-Sky Corridor. As Russ mentioned, I'll present the results for the Sea to Sky Highway improvement project audit. Chris will follow with the presentation of the Britannia mine water treatment plant audit. We'll provide a brief background for each project, discuss our audit objectives, highlight some key findings and finish with a summary of our recommendations.

The first of the two audits in the report examines the Sea to Sky Highway improvement project. The Sea to Sky Highway, or Highway 99, extends for 95 kilometres. It passes through coastal mountains and connects a number of communities between West Vancouver and Whistler. In June of 2005 the province entered into a P3 agreement with a group of private companies called the Sea to Sky Highway Investment Limited Partnership.

Under the agreement, the Sea to Sky partnership agreed to design, build and finance about two-thirds of the highway improvements. The ministry was responsible for managing the improvements on the remaining one-third. The partnership will also operate and maintain the entire highway for 25 years.

In December of 2005, six months after the P3 agreement was signed, the ministry released a project report entitled Achieving Value for Money — Sea-to-Sky Highway Improvement Project. It provided details of the P3 arrangement. It also listed the ministry's key project objectives. These included improved highway safety, improved reliability for users, enhanced highway capacity, and completion of the highway improvement on time and on budget.

The Sea to Sky partnership completed the major improvements to the highway in time for the 2010 Vancouver Olympic and Paralympic Winter Games. They continued to maintain and operate the highway as per the P3 agreement.

We carried out this audit to determine whether the Ministry of Transportation and Infrastructure effectively transferred design and construction risk to the private sector partners, developed appropriate contract governance and management methods, is effectively managing the Sea to Sky Highway concession agreement, and is able to demonstrate that it's achieving its key objectives for the project — namely, enhanced highway safety, reliability and capacity.

We modelled our audit objectives and criteria on guidance from the U.K. National Audit Office — specifically, their framework for evaluating the implementation of private finance initiative projects. We also considered guidance from our office's past work on P3s.

In terms of key findings, in regards to our first criteria, we concluded that the design and construction risks of the project were effectively allocated between the province and the private sector partners. To determine this, we examined whether the project was completed to the specifications of the P3 agreement and consistent with any approved change orders.

We found that the private sector partners had completed the project on time. We also found that the ministry had appropriately managed its design and construction risks in accordance with the risk allocation set out in the 2005 project report and within the terms of the contract. Finally, we found the project's construction phase to be on budget, with the final costs being consistent with what the ministry planned for the project and within the scope of approved changes.

In regard to our second criteria, we concluded that the concession agreement, with a few exceptions, has been effectively managed. We observed that the ministry was providing adequate resourcing, including dedicated contract management staff and relevant training and external consultants to support their internal expertise. We also observed a good working relationship between the ministry staff and the private sector partners and strong contract management mechanisms to support good
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highway management. However, we did note three areas for improvement, which will be discussed in the recommendations section.

In regards to our third criteria, we concluded that the ministry was not able to demonstrate its success to date of achieving its longer-term objectives for the project. We found that the ministry did not know if it was meeting these key objectives because it was not measuring, monitoring or reporting on them.

Effective accountability for major public sector projects such as the Sea to Sky Highway P3 requires timely, relevant and reliable performance reporting to its stakeholders. Otherwise, there is an increased risk that lessons will not be learned, that future contracts will not be well managed and, equally important, that these projects will not provide value for money.

I'll just touch on our recommendations from this project. As a result of the audit, we had five recommendations. The first is for the Ministry of Transportation and Infrastructure to review and approve all changes in the P3 ownership structure, as allowed under the concession agreement, for the remaining life of the project agreement.

During 2010 the private sector ownership changed. We found the ministry did not conduct a detailed analysis of this sale — something it is able to do under the terms of the concession agreement. Because government is a long-term partner in any P3 arrangement, contract managers need to ensure government's best interests are reflected in any proposed ownership change.

Our second recommendation is for the Ministry of Transportation and Infrastructure to ensure that all key project documents are identified and accessible for the full term of the concession agreement. The ministry was unable to provide us with some of its key construction documents, such as segment completion sign-offs.

Given the long-term nature of the concession agreement and the likelihood of turnover in key staff over the life of the contract, it is important that project documentation be managed and maintained. Without such documentation, the ministry risks being at a disadvantage when managing and negotiating with its private sector partner.

Our third recommendation is for the Ministry of Transportation and Infrastructure to review the Sea to Sky Highway concession agreement and all other existing P3 contracts to assess the financial impacts of switching from the PST to the HST and recover any possible overpayments.

During this audit we found an issue related to the possible overpayment of sales tax. When the province introduced HST in July of 2010, the ministry did not adjust contract payments for any PST included in the annual operations and maintenance costs. Instead, it applied the HST to the PST-inclusive payments. The ministry did not analyze the monetary impact of the tax change, resulting in a risk that it was paying both taxes to its private sector partner.

Our final two recommendations are in response to our audit work on the accountability for key objectives. We found the ministry did not know if it was meeting its key objectives for the Sea to Sky Highway improvement project because it was not measuring, monitoring or reporting on them.

Our fourth recommendation, then, is for the ministry to measure and monitor the achievements of its main objectives for the project.

And our final recommendation is for the ministry to report publicly on how well it's achieving its value-for-money and risk transfer objectives outlined in the concession agreement. By measuring, monitoring and publicly reporting on key project objectives, the ministry can demonstrate whether the project is achieving the expected value for money.

This information can also help assess the effectiveness of the P3 approach for future highway procurements.

I'll turn it over to Chris to summarize the Britannia mines water treatment plant audit.

C. Thomas: Thank you, Bob. Thank you, Members. The second audit in this report examined the Britannia mine water treatment plant project, located at Britannia Beach approximately 50 kilometres north of Vancouver on the Sea to Sky Highway. This former copper mine operated from the early 1900s until 1974. At its peak it was the largest producer of copper in the British Empire.

Mining operations exposed the naturally occurring underground sulphides to air and water. The ensuing chemical reaction causes concentrated acidic, metal-contaminated water, called acid rock drainage, to form.

Before the province took action in 2005, water flowed untreated through the mine and into local waterways and Howe Sound. Led by the Ministry of Forests, Lands and Natural Resource Operations, the province initiated the Britannia mine remediation project with the primary goal to reduce the site's environmental impact.

The Britannia mine water treatment plant is a key part of this project. In 2005 the province entered into a P3 agreement with EPCOR Britannia Water Inc., the successful bidder on a contract to build, finance, operate, design and maintain the water treatment plant. This is the only provincial government project to date where the treatment of contaminated water is being managed through a P3 contract.

EPCOR's contract covers an initial 20 years of water treatment, from 2005 to 2025. However, to manage the ongoing acid rock drainage problem, government will need to continue operating the water treatment plant for as long as groundwater and surface water continue to flow through the mine or until other technologies are developed to treat the water.
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The Ministry of Environment is the regulator of the water treatment plant, and it issued a discharge permit stating the acceptable levels of metal concentrations that can be in the water before it is released into Howe Sound. The province set these levels in consultation with the federal government, since both jurisdictions have legal authority concerning water pollution.

We carried out this audit to assess whether the provincial government's objectives for the Britannia mine water treatment plant project public-private partnership are being met. To do this, we sought to answer two questions. First, did construction of the treatment plant meet the government's objectives? Second, are the government's financial and environmental objectives being met?

We based our objectives, similar to Sea to Sky, primarily on guidance provided by the U.K. National Audit Office's A Framework for Evaluating the Implementation of Private Finance Initiatives. We also considered guidance from our office's past work on public-private partnerships.

The focus of our audit was the Britannia mine water treatment plant project P3. However, because the government is monitoring the long-term effectiveness of this plant by measuring environmental changes in the context of the larger Britannia mine remediation project, it was also necessary to review the progress of this remediation work.

In regards to our first criteria, we concluded that the construction of the plant met government's objectives. To determine this, we assessed whether or not EPCOR met the specifications, costs and timelines contained in the project agreement. Overall, we found that design and construction risks were appropriately managed and consistent with the risk allocations in the contract, and that EPCOR met all requirements under the P3 agreement and started treating water two months earlier than required.

In regards to our second criteria, we concluded that government's financial and environmental objectives with the plant are substantially being met. The ministry has good processes in place to manage the P3 contract. The actual costs of operating the water treatment plant are close to what was budgeted for the project, and the plant is meeting the water quality requirements and staying within the level of metal stated in the permit issued by the Ministry of Environment. However, we did note three areas for improvement and developed recommendations to aid government with these.

Our first recommendation is that the Ministry of Forests, Lands and Natural Resource Operations obtain periodic independent verification of EPCOR's water quality testing results over the remaining life of the agreement. We expected the ministry to have a process for verifying the results of EPCOR's water quality testing. Instead, we found that the ministry relies on EPCOR's self-reported results. This presents a risk of overpayment, because EPCOR is paid according to the volume of water it processes and its ability to meet the water quality requirements.

The project agreement includes a clause providing government with broad rights to conduct audits and verify results, but these provisions had not been exercised by the ministry at the time of our audit.

Our second recommendation is that each of the ministries develop and use a clear and concise method of maintaining records of key decisions about interpretations of and amendments to either the Britannia mine water treatment plant project agreement or the environmental permits. We found that while both ministries have substantial project records, they have not always documented their key decisions about the changes to the project agreement and permits.

It is important to maintain the history of key decisions because of the long-term nature of P3 agreements. During the life of a P3 arrangement, key staff often move to other work or leave the organization, which makes retention of key documentation essential to supporting future team members.

In addition, the government risks being at a disadvantage when managing or negotiating with its private sector partners if it does not maintain a history of key interpretations and decisions regarding these agreements.

Our third recommendation is that the ministries work together to develop long-term plans and timelines for meeting their goal of closure of the contaminated site under the Environmental Management Act. At the time of our audit, the Ministry of Forests, Lands and Natural Resource Operations prepared annual project plans to guide the remediation efforts. However, we found that neither that ministry nor the Ministry of Environment had longer-term plans and timelines that tied into these annual plans.

These types of long-term linkages are necessary for the Ministry of Forests, Lands and Natural Resource Operations to demonstrate how its annual plans will work towards the long-term goals of meeting the closure requirements under the act.

As part of our regular follow-up of audit processes, both of these audits were provided self-assessments and reported on as follow-ups in April 2013. A number of the recommendations for both reports have been fully or substantially implemented, while some of the broader recommendations continue to be worked on.

As further work in the P3 area, the office completed an audit of the Evergreen line rapid transit system in the spring of 2013, and that audit is the next topic on the agenda for this morning.

D. Duncan: Good morning, Chair. My name is Dave Duncan. I'm the assistant deputy minister for the highways department for the Ministry of Transportation and Infrastructure. I have with me this morning Patrick Livolsi. Patrick is the regional director for the south coast region for the highways department for the Ministry of Transportation and Infrastructure.

I'll be presenting the ministry's response to the Sea to Sky Highway improvement project audit, after which I'll be handing it over to my colleagues here to provide the response to the Britannia mines improvement project audit.

First off, I'd like to take this opportunity to thank the committee for the opportunity to be here today and present our response. I'd also like to take a moment to thank the Auditor General and his staff for their work with us on the Sea to Sky Highway improvement project audit. We have an excellent working relationship with Auditor General staff, and we always very much appreciate their involvement in our projects, their feedback and input and then the areas for improvement.

In the highways department we have 48,000 kilometres of road, and we're responsible for the operation of all that road inventory. With such a large inventory, highway construction projects and operations and maintenance are a core part of our business. Feedback and input from the Auditor General about ways to improve our management and oversight practices are always appreciated and give the opportunity to continue to strive to improve on that.

Just a brief summary. Again, the purpose of the audit was to assess how effectively risk was transferred between the province and the concessionaire partner and private sector partners on the project. It was to review how effectively managed the Sea to Sky concession agreement was and then, lastly, to determine the level of demonstrated achievement of the project's key objectives — namely, highway safety, reliability and capacity improvements.

We were, I think, very grateful for a number of pieces of very positive feedback from the Auditor General's staff — namely, the conclusion that the construction risks between the province and the private sector partners were effectively allocated; the feedback that the concession agreement, with few exceptions, was being effectively managed; the observation of good working relationships between both the ministry staff and private sector partners, which is something we're very proud of, and the observation that that was supported by monthly meetings.

Then finally, the conclusion: that the ministry had dedicated staff and resources to this agreement and that those staff had been trained and supported by hired consultants.

In addition, feedback that the project was completed on time and within budget was very much appreciated. The private sector partner added a number of additional enhancements to the project that benefit both safety and reliability, including 20 kilometres of additional passing lanes, 30 kilometres of rumble strips and enhanced pavement markings, an additional median barrier, wider shoulders, stronger bridges and better intersections — all things that improve the reliability and safety of the corridor and the project.

In addition to the overall positive results, the Auditor General and his staff made important recommendations in, really, two key areas for focused ongoing improvement. Those two key areas are the measurement and public reporting on key project objectives relating to safety, reliability and capacity and then, secondly, the processes around records and change management in the contract.

The first recommendations: first, that the ministry measures and monitors its main objectives for the project and then, secondly, reports on how well it's achieving value-for-money and risk transfer objectives outlined in the concession agreement.

The ministry and the concessionaire both regularly monitor performance measures around safety, reliability and capacity. We can confirm that traffic statistics indicate a trend of reduced incidents and reduced severity of road closures.

As you can see on the slide attached, the trend on accidents and crashes in the years leading up to the project construction was in the range of 217 incidents per year. You can see that during the construction period and in the period following completion, accidents are down significantly — in the range of about 146 per year. We've seen a 33 percent reduction in incidents and crashes on the highway corridor since the project was completed, which is a significant reduction from the previous original baseline.

It's interesting to note that over the same period we've also observed a similar reduction in major road closures. We've seen a 36 percent reduction in road closures during that period of time. We certainly are tracking statistics, and we're able, through those statistics, to show that we're seeing a reduction in both incidents and closures.

Thirdly, on capacity, both the ministry and the contractor are reviewing and tracking travel times on the corridor, and we can confirm that travel times between Vancouver and Whistler, after completion of the project, have dropped by approximately 15 minutes from the period of time prior to the project being completed.

Then in terms of capacity, we can also report, based on discussions with communities along the corridor, as well as based on feedback from our development approval staff, that qualitatively, there's also an observation of increased development activity along the corridor after the completion of the project.

I think, all that being said, while we have good data,
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the observation by the Auditor General that we can do a better job of publicly reporting and making that information available is very well taken, and the ministry is working to do that.

Commencing in 2014, we will be annually publicly reporting our traffic safety data as well as available reliability and capacity data. I think that was a fair and good observation by Auditor General staff, and we're going to act on that recommendation.

In terms of contract records and change management, recommendations already summarized by the Auditor General — including making sure that ministry staff and the provincial staff review and approve all changes in P3 ownership structure; ensuring that we track and retain all project documents, including as-built drawings; and then the recommendation to assess the financial impacts of any tax changes — were the key recommendations in that area.

Again, we were appreciative, too, that the Auditor General staff found that, overall, the ministry's management of the contract was generally good. The ministry will ensure that any proposed contract changes are fully assessed in relation to both tax and ownership moving forward.

The ministry will also ensure that all records are completed and appropriately tracked and logged. The records that were identified as not being in the files have been acquired since the audit. They are now in our files.

In addition to ensuring that we properly assess any proposed contract changes, we're developing procedures currently for the project. Those will be finalized and in place by the spring of 2014.

Again, in conclusion, the Sea to Sky Highway project is a project that we are incredibly proud of in the ministry. It has achieved, I think, very impressive safety improvements, very impressive travel time savings and reliability improvements. We're just very proud of the project and what it has done along the corridor.

We're grateful for the feedback of the Auditor General. We're committed to continual improvement, and we will continue to develop a strong working relationship with our contract partners and continue to move forward to effectively manage the Sea to Sky Highway project concession agreement.

G. Stewart: Good morning, Mr. Chair and members of the committee. First off, I'd like to just thank everyone for inviting us here. We're pleased to be able to present on behalf of the Ministry of Forests, Lands and Natural Resource Operations.

This presentation is specific to the Britannia mine water treatment plant public-private partnership. The presentation also includes the Ministry of Environment, as the audit report included recommendations to both ministries.

B. Ralston (Chair): Just before you go, perhaps you could just introduce yourself and your position, and Mr. Macfarlane as well, just for the record.

G. Stewart: Sure. Gregg Stewart. I'm manager of the Crown contaminated sites project with the Ministry of Forests, Lands and Natural Resource Operations.

M. Macfarlane: I'm Mike Macfarlane. I'm the director of the land remediation section for the Ministry of Environment.

G. Stewart: For a little bit of context, the Britannia mine is a former copper mine located at Britannia Beach about 50 kilometres north of Vancouver on the Sea to Sky Highway. The mine operated from 1900 to 1974. In those years it was considered to be the largest producer of copper in the British Empire. The mine also had the distinction as being the biggest point source of metal contamination in North America. Acidic mine water containing heavy metals was directly discharged into Howe Sound.

The water exiting the mine is now treated using the best available technology. Water now meets strict permit thresholds to ensure environmental protection. Before treatment it is estimated that five million cubic metres of untreated acid rock drainage entered into Howe Sound every year. That's equivalent to 2,000 Olympic-sized swimming pools of contaminated water.

The purpose of the audit was to assess whether provincial government objectives for the Britannia mine water treatment plant are being met. This included answering the following questions. Did the construction of the treatment plant meet the government's objectives? Are the government's financial and environmental objectives being met? The audit resulted in two findings and three recommendations, which we'll move into.

The two key findings of the Auditor General's report included: the construction of the water treatment plant met government's objectives; secondly, the government's financial and environmental objectives with the plant are substantially being met, although the Ministry of Forests, Lands and Natural Resource Operations and the Ministry of Environment must still prepare long-term plans and timelines to show how they expect to achieve their desired outcomes with the Britannia mines remediation project, which is an initiative that includes the water treatment plant as a key component.

Just also, I'd like to mention that the scope of the audit included looking at other remediation activities taking
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place at the mine in addition to the P3 water treatment plant.

As I mentioned, the Auditor's report contained three recommendations. They are that the Ministry of Forests, Lands and Natural Resource Operations obtain periodic independent verification of EPCOR Britannia Water Inc.'s water quality testing results over the remaining life of the project agreement — as the province was perhaps relying too heavily on the results that EPCOR was providing the government on testing.

Secondly, that the Ministry of Forests, Lands and Natural Resource Operations and the Ministry of Environment each develop and use a clear and concise method of maintaining records of key decisions about interpretations and amendments to the Britannia mine water treatment plant project agreement and permits, respectively.

The third recommendation was that the Ministry of Forests, Lands and Natural Resource Operations work with the Ministry of Environment to develop long-term plans and timelines for meeting their goal of closure of contaminated sites under the Environmental Management Act.

Moving on to government's response on the recommendations. With respect to recommendation 1, the Ministry of Forests, Lands and Natural Resource Operations will follow up and obtain periodic independent verification of EPCOR Britannia Water Inc.'s water testing results. The ministry has contracted a report that has developed a staged-audit approach that will be implemented soon.

The first stage includes a site visit, review of available information, assessment of permit and project requirements and determination of what equipment is in use at the water treatment plant. The second stage is the completion of the audit itself, based on the findings from stage 1.

The first stage was completed by a consultant in February 2013. The second-stage services will be posted to an RFP on B.C. Bid in late 2013 or early 2014.

I'd just note that the ministry and EPCOR have established a good and very professional working relationship in the management of this P3.

I'm going to turn it over to Mike Macfarlane now, from the Ministry of Environment, to talk about the remaining recommendations.

M. Macfarlane: On the second recommendation, the Ministry of Environment is committed to ensuring that all our statutory decisions are made in a fair, predictable and transparent manner that is effective to both stakeholders and the regulated community as well as to decision-makers within the government.

Parallel with the initiative of the Auditor General in auditing the Britannia projects, we had underway the development of a statutory decision–makers book for all decisions related to permits and approvals by the ministry. That was made available to staff in 2012, and late last year a statutory decision–makers training workshop was held here in Vancouver.

To accompany those documents, we've recommended, as well, that decision-makers prepare a reasons-for-decision document. Those will be tiered, depending on the nature of the decision, whether it's a dog kennel or a mine. Those decisions will find a basis for tracking the decisions made by the decision-maker, the various aspects taken into consideration, and provide a repository for future decision-makers to reference.

The Ministry of Forests, Lands and Natural Resource Operations is committed to continuing to review the efficiency of managing the partnership with EPCOR and to provide the value of the expenditures on public funds. A concise method will be developed to ensure the documentation of those.

In terms of from the Ministry of Environment, we have in the past and will continue that any of our decisions related to the Britannia mine are published to the Britannia remediation website.

In terms of recommendation 3, that the Ministry of Forests, Lands and Natural Resource Operations work with the ministry to develop long-term plans and timelines to achieve the closure of the Britannia mine under the Environmental Management Act, an overall closure plan has been developed since 2009, and a set of objectives that are supported by specific tasks continue in the annual reports.

The investigation and remediation of the site is ongoing. As you might understand, it's a very large, complex site with more than a single input. The investigation must be compatible with both the provincial requirements as well as the federal requirements, even the implications of the federal Fisheries Act.

The work on the investigation and remediation continues to date. We have basically implemented an environmental monitoring program to measure changes in the current water quality in Howe Sound and in the receiving environments to look at progress and effectiveness in the recovery of those areas.

We do recognize that given the complexity and constraints of the site, we may not be able to achieve all of the management objectives at the site.

I think we have a video clip that there has been significant progress in terms of the effectiveness of the water treatment plant, which this video will show on the summary.

It's very unusual that we are able to get media footage related to the success of one of our projects.

B. Ralston (Chair): Great, thank you. That was interesting, for sure. So that concludes your presentation?

The Ministry of Forests, Lands and Natural Resource Operations and the Ministry of Environment are in general agreement with the Office of the Auditor General recommendations and are actively addressing the recommendations. We'd like to acknowledge the work of the Office of the Auditor General in undertaking a detailed and thorough audit of the public-private partnership of the Britannia water treatment plant.

B. Ralston (Chair): What I'm going to suggest in the questions is that we divide them up and do Sea to Sky first and then do Britannia second. I think that'll make the transcript a little bit more comprehensible for those people who may want to read it later on, and it'll make the questioning a little bit easier.

K. Corrigan: I'm glad to hear that there is work for P3 accounting guidance. I know I've had discussions with the Auditor General's office before, and I have concerns about many P3s. The nominal costs are much higher than what was expected under public sector comparators. It's only when you apply what is often a very hefty discount rate and the money that is attached to risk transfer that they appear to be competitive, so I'm really glad to hear that.

One of the things that I hope the Auditor General's office will do, which has not happened to date, is to take a good look at the methodology that is being used and look at the issues of discount rate and the levels of risk transfer that are attributed to P3s. I'm glad to hear about the guidance. That's great.

I guess I'll start with…. I know that other people have questions, so I can come back to that. This is kind of a small one, but it piqued my interest — this issue of the change from the PST to HST. I note from the audit report:

"We found an issue related to the possible overpayment of sales tax. Payments to the private sector partners included the PST, consistent with the concession agreement. When the province introduced the harmonized sales tax in July 2010, the ministry did not adjust contract payments for any PST included in the annual operations and maintenance costs. Instead, it applied the HST to the PST-inclusive payments.

"The ministry did not analyze the monetary impact of the tax change, resulting in the risk that it is now paying both taxes to the private sector partners."

"The agreement did not anticipate a change in tax laws, such as the HST. Consideration of the relatively small sums involved indicated that the cost benefit of such a negotiation would be unlikely to result in a net gain to the province."

Can I read from that that the contract provided that the PST was going to be paid and that when it was gone and was replaced with the HST, the province was still required to pay the PST in addition to HST, which means double payment, and it's because of the inflexibility of the contract, which would have to be renegotiated, that that happened? In addition, can you give me some idea of how much money we're talking about?

D. Duncan: I think the first thing to note is that the HST came into effect in July 2010, and the vast majority of the project costs were undertaken prior to that. Obviously, construction was complete before that period, and of course, the vast majority of the payments annually made to the contractor relate to the construction activities, which all took place prior to HST coming into effect. So the portion of contract payments that would be…. And obviously, the HST is now no longer in place.

So it's a three-year period of time that we're looking at. Over that sort of three-year period of time the contract payments…. About 85 percent of the payments would be related to the construction debt-servicing costs. You're looking at probably in the range of about 15 percent where the payment would be related to ongoing operating and maintenance costs. Of that 15 percent, you're probably looking at in the range of 20 percent of that that might be PST-able. It's 20 percent of 15 percent, and so the number that we'd be talking about in terms of the overall payment is a relatively small number.

When we reviewed that over that period of time, it was considered that, based on the contract provisions and the likelihood of recovery, the costs associated with working to renegotiate those costs was not consistent with the quantum that would be recovered. At the end of the day that was the decision made.

K. Corrigan: Just a follow-up. I'm wondering how much that was worth. You've confirmed, I believe, that the contract provided would have had to be renegotiated, in other words. It didn't contemplate the fact that there could be tax changes, so the province is paying extra because of that. I'm just wondering if you could attempt to tell me how much that cost the province.

D. Duncan: I'll have to follow up on that in terms of the actual quantum. I know that it's a small portion of a small portion, but in terms of the specific number, I'll have to follow up on that with you.

K. Corrigan: Well, we're paying somewhere in the range of — what? — 60-some-odd-million dollars a year for this contract. The government must have taken a look at it at the time in order to evaluate whether or not it was worth trying to renegotiate the contract and decided it wasn't. So I would presume…. And this was mentioned in the Auditor General's report, so I would have expected for this question to have been able to have been answered
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today. Have you any idea? Are you talking $10,000? Are you talking $100,000? Are you talking $1 million?

D. Duncan: I don't have the specific numbers with me today. I'll have to follow up on that.

K. Corrigan: Would it be possible to get those back before the end of the week, while we're meeting?

B. Ralston (Chair): Or perhaps we'll have to have Mr. Duncan return before the committee to provide that answer. Anyway, let's continue.

K. Corrigan: Okay. I have questions about the issues that were raised with regard to safety, reliability and capacity. From page 22 of the report, it looks like there are payments made for safety and reliability. The Auditor General raised some questions about the data that was involved with that.

I'm wondering if you could let me know what we're talking about in terms of how much is being paid to the contractor for those payments for safety and reliability. I'm looking back. I've got the original value-for-money report, the table that was on page 14. It shows on that table payments for availability and volume. Availability looks like it's in the range of $50 million a year, and volume is about $10 million a year. Then performance payments are in the range of a little over $1 million a year.

Where do these payments fit in within that framework, and how much are we talking about?

D. Duncan: The monthly availability payment for the contract is in the range of about $4.4 million, and availability is measured using travel time measurements as a proxy for the proportion of time that the highway is open and available for use. As I said, that's in the range of approximately $4.4 million per month.

There is a monthly vehicle usage payment in the range of about $1 million a month. Now, that ranges throughout the year based on the number of vehicles that use the corridor daily. Then finally, there's an annual safety payment. That annual safety payment is not monthly; that's annual. That's in the range of about $1.1 million annually, and that is based on a comparison of safety statistics for the highway measured against other comparable corridors.

K. Corrigan: If I could follow up. I can come back to this. So $4.4 million for availability…. What the Auditor General said: "As a result, we concluded that the province is not effectively measuring and reporting on highway reliability." And on $1.1 million for travel time, the Auditor General says: "There is no mechanism within the concession agreement to measure capacity…." That's not the time one. But there is a time one as well, and then safety.

So the Auditor General has said that the information upon which the decision would be made whether or not the contractor qualifies for those payments is not there. How is it decided that those payments should be made?

D. Duncan: On the availability payment, again, it is paid based on a measurement of travel time. That measurement is made by the contractor and provided to the ministry, and then the ministry does its own independent verification as well as a quality assessment of the data provided by the contractor.

In terms of availability, there was initially an automated system proposed for the measurement of travel time. That automated system hasn't to date functioned as intended, and the contractor is accommodating that by conducting more manual measurements.

Improvements are being made, and we do expect the automated system that measures travel time to be back and in place starting next year. But in the period of time when the automated system hasn't been working as expected, the contractor, as I mentioned, has been making manual recordings of travel time and providing that to the ministry. The ministry has been doing its own checking of that as well as its own independent travel time measurements.

Then on vehicle usage, we do have traffic counters that measure vehicles both south and north of Squamish. Those counters are active and in place.

On safety, the ministry works with the RCMP as well as other safety authorities to record and track accident data, and there's a well-established system for doing that. The ministry is tracking that data and working with the contractor to assess the safety payment on that basis.

K. Corrigan: I actually find it quite surprising and disconcerting that millions of dollars are being paid out monthly and that the data that was supposed to be available is not data and that the contractor is being allowed to provide that data.

Now, I know you've talked about some checks, but I have concerns. I wonder if the Auditor General has any further comments on these questions, or the staff.

K. Corrigan: Well, the fact is that these very large payments are being made on a monthly basis that are supposed to be dependent upon evidence that the objectives in this project are being met. We find out that the objectives are not, in my view, being properly evaluated, and we're relying on the contractor to tell us that they are. The mechanisms that were supposed to be in place in the contract that were talked about — the electronic sensing equipment is not working. Yet we continue to pay, as taxpayers, $4.4 million a month, $1 million and another $1.1
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million. I have real concerns about that.

B. Ralston (Chair): If you look at the bottom of page 22, Mr. Faulkner, the conclusion of the Auditor General was: "As a result, we concluded that the province is not effectively measuring and reporting on highway reliability."

I guess the question is, given your conclusion: what's your response to continuing payments for a measure that's not taking place and that you've described as unreliable?

B. Faulkner: To clarify that recommendation, we're talking about the objectives set out in the project report. So in terms of the objectives in the 2005 report around safety, reliability, capacity, I think we need to clarify that that's different than the actual payment mechanisms.

The payment mechanisms are one way to measure. As an example, the safety payment mechanism is measuring some safety metrics with that highway in comparison to an average for a number of other highways across the province.

When we were looking at the objective, we asked: "Well, has safety on the Sea to Sky Highway improved?" The payment mechanism doesn’t measure that, and that's fine. The contract was set out to set a payment amount, and I think, taking a step back, that we didn't find any issues with the payments that were being made to the P3 partner.

What we did say is that you need to measure the broader objectives which some of the payments can be attributed to. But I think there are other issues within how you would measure those objectives — safety, as an example — rather than comparing it to other highways. If safety is going up or down in comparison to other highways, it doesn't really tell us if Sea to Sky is safer now than it was before.

B. Ralston (Chair): Forgive me for intervening once again, Mr. Faulkner. I don't find your answer responsive to the question.

On page 22 the report clearly says: "The concession agreement also includes a 'highway reliability' performance payment." In the next paragraph you go on to say that "the province is not effectively measuring and reporting on highway reliability." So the link between non-measurement and payment is very clear, yet you seem to have not responded to the question.

Mr. Chair, I think what I would clarify is that in our report we looked at the manual process that was put in place when the electronic recording was not working, and we were happy that that process was working. It's a manual process, but it's still a control. We were happy that the process being followed was effective in measuring the reliability.

B. Ralston (Chair): But that's not what the report says, Mr. Faulkner, at the bottom of page 22. Just take a moment and maybe read it quietly to yourself. The last sentence says the opposite of what you just said, so I'm confused here. I don't think you're giving a response that addresses my question.

B. Faulkner: I'll just take a moment, then. So you're referring to the last sentence, Mr. Chair?

B. Faulkner: Mr. Chair, I think all I can say is that the electronic monitoring wasn't working. That's a statement of fact. I think everyone would agree to that. Out of that, in the broader terms of the objective, we concluded that because that wasn't working, the manual process wasn't as effective a method of measuring that one objective — and therefore our conclusion.

B. Ralston (Chair): I guess the question then goes…. You go on to talk about achieving value for money on page 23. Where the measurement is not effective, it would still appear that a payment is being made. What is your view of making a payment when the measurement that the money is supposedly being paid for is not being measured? What's your comment on that?

R. Jones: I think the key here is that we believe that the automated system would be a more effective way of measuring the reliability. In the absence of that, the system that was put in place to measure the reliability of the corridor…. They had to put a workaround in, which was this manual system. It's not as effective as what the automated system would have been. But in looking at that manual workaround, and in answer to the amount of money that's going out to pay for the reliability, we were confident that the province wasn't making payments that shouldn't be made now.

R. Jones: Because the workaround did give enough information to make those payments. It may not be as effective as the automated system would have been, but we were happy that they put enough controls in place to allow them to make the payments.

B. Ralston (Chair): But further in your report…. This
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will be my last question. I'll turn to others. I apologize for intervening here, but when there's such a lack of a direct response, I feel obliged to at least draw the committee's attention to it. "The current lack of monitoring and reporting on the key objectives of the project makes it impossible for the ministry to report effectively on whether it is achieving value for money."

I guess, given that conclusion, I would have thought you would be expressing some concern that payments were being made, given that the measure, according to the contract…. These contracts are not negotiated overnight. They're very detailed and take a lot of legal time, as you know. When the objectives set out in the contract are not being met, why was a payment on behalf of the province still being made, and why wouldn't you have a concern about that?

B. Faulkner: I think, Mr. Chair, the key differentiation is that the three objectives that we looked at weren't each directly attributed. We looked at the objectives in the project report in 2005. They weren't each directly attributed to a payment mechanism as the only measure of whether the objective was being met.

Safety is a prime example, as I spoke to earlier, but reliability as well. Reliability under the objective, I believe, is improved travel time predictability for highway users. That's directly out of the 2005 report. That's what we looked at as: are you measuring, monitoring and reporting on that objective?

The travel time payment was one aspect of our overall look at that objective. As I said and as Russ was able to better communicate than I, the method being used to measure that payment is not as effective as the method that was initially envisioned, but we did look at the underlying process and felt that there weren't any overpayments.

S. Simpson: My questions come back, again, largely around value-for-money questions and relationships to the operator. In recommendation 5 you recommended the ministry report publicly on how well it's achieving its value-for-money and risk transfer objectives outlined in the concession agreement.

As was pointed out by the Chair, the report is pretty explicit in saying that the current lack of monitoring and reporting on the key objectives of the project make it impossible for the ministry to report effectively on whether it's achieving value for money.

When I look at the response of the ministry to this and how they responded, they responded by saying, I believe, that references to…. "As described in response No. 4, the ministry will report on indicators that demonstrate how the safety, reliability and capacity objectives of the project have been met."

In part of the response, when I look at response 4, particularly on the capacity question, the ministry says that they believe…."The ministry has heard from communities in the corridor that they believe there have been economic development benefits and community growth as a result." There's some belief but no suggestion that there's any clear evidence here, and that's a good thing. Then, the ministry talks about analyzing and reporting that enhancement.

My first question then is: does the Auditor…? Do you have confidence that that response — which, essentially, says that we'll get around to looking at those indicators — that in fact there are the tools there to do the value-for-money assessments in a more empirical way that you've raised concerns about in this recommendation No. 5? Do those tools exist? Are you confident they exist? Are you confident in the response of the ministry that he says refer to recommendation 4?

R. Jones: Thank you, Member. As you were speaking, I was thinking back to the original value-for-money premise that was put out when this project was undertaken.

I think one of the things we have to remember is that the value-for-money premise that was put forward was based on allocating value-for-money savings to these three areas of safety, reliability and capacity. When coming up with what the value-for-money proposition was for this project, it was allocating a certain amount of savings through savings in travel time. There was an assumption made that because people save time travelling on the corridor, it resulted in X dollars of savings — the same with safety, the same with reliability.

This is sort of going back to the previous question a bit. When we looked at the payments, we were looking at: were there mechanisms in place for these payments on performance? We were happy that the manual controls that were put in place allowed them to make the payments.

Now we're talking about something that's a bit different. What we're saying is there isn't a mechanism in place that would allow the ministry to report publicly on the proposed value-for-money savings that this project was going to deliver in terms of, I don't know, whatever savings you get from getting to Whistler and back quicker or through less accidents.

Those were the value-for-money propositions that were talked about in the original project. Because there are less accidents, this is what it's saving the taxpayers, I believe, and the same thing with travel time. Because there's less travel time, here's the benefit you get. Because the roads are open more often, here's a dollar amount that you can allocate to reliability.

They're sort of two separate things. What we're saying is that we don't think there's the information available for that latter part, for them to make the statement: "Here's what we've saved because of these things." We don't think
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they have the information to effectively do that.

S. Simpson: To follow up on that, when I go again to page 23 of the report and the issue around achieving value for money — and you talk about the current lack of monitoring and reporting on key objectives to the project that makes it impossible for the ministry to report effectively on whether it is achieving value for money — you go on to say: "As the Sea to Sky Highway and other early highway-type P3s move into the operations phase, it is important that the ministry measure whether it is achieving value for money in order to assess the effectiveness of the P3 approach for future highway procurements."

The response of the ministry in terms of the recommendation around value for money was to refer back to those three categories of safety, reliability and capacity, I believe.

The question then is: as you lay out in this report, where you say the ministry needs to have the ability to measure whether it's achieving that value for money in order to assess the effectiveness of this approach for future highway procurement, considering Sea to Sky may be the most significant P3 highway project we've seen in some time — since the Port Mann was not a P3 — does the response of the ministry satisfy your comment about the ability to get at assessing the effectiveness of these projects around future procurement?

B. Faulkner: I would say yes, it does. I base that on some of the audit work we did, when we asked around the measurement for the key objectives. We concluded that they weren't measuring, monitoring and reporting. When it got down to some of our more detailed interviews, the information is available within the ministry, and the question was pulling it into this particular P3 project and using it to measure the key objectives, including the third one in terms of capacity.

Not to say it would be easy. They would need to establish a baseline and then continue to measure, monitor against that baseline. So it can be done. When we asked for that information, it was not available.

S. Simpson: I have one last question on a somewhat related matter but not entirely. I guess the observation I would make is that what the report says provides certainly less confidence than the comments that you're making today. What's on the page here suggests, in fact, that you're not confident that that exists.

I want to go back to page 21 of the report where you say:"During 2010 the private sector partner ownership changed. We found the ministry did not conduct a detailed analysis of this sale, something it is able to do under the terms of the contract. Because the government is such a long-term partner in any P3 arrangement, its contract managers need to ensure government's best interests are reflected in any proposed ownership change."

Could you speak a little bit to that? I know that in the non-profit sector, for example, where I've seen contractual agreements around employment groups and that, they've been very specific in saying: "We want to know who the staff are in key management positions. We want to know who these people are and look at their resumés and ensure that we have confidence in those individuals who are your leadership group in any given agency." Presumably that same work is done with the private sector operator around key personnel and satisfaction that they bring what the government wants to the table to do this.

It doesn't appear that there was due diligence done around the change of ownership. Could you elaborate on your concern around that?

B. Ralston (Chair): Is your question, then, to the ministry or to the Auditor General?

S. Simpson: It's to the Auditor General, but I'd be happy to hear a response from the ministry as well.

B. Faulkner: I think our concern was the provisions of the agreement did allow for the sale of equity ownership in a P3, but it did give the province a right to review that proposed change. I can't speak specifically off memory as to whether they…. I don't believe they had a right to deny it, but they had a right to review it. That review was not conducted, and that would be our concern.

R. Jones: I agree with Bob. I think in any sale of something like this, it's critical that the government perform some due diligence around who the new owners are. These are long-term agreements, there's a lot of money involved, and I would expect to see that done.

D. Duncan: I think one of the key points was that this was a change in equity partner ownership. The major contractor responsible for the delivery of operations on the highway network was not changing. So Miller Capilano Maintenance Corp. is the company that delivers day-to-day maintenance services, and that component of the contract team was not seeing any change; nor was there any change in any of the construction or engineering partners. This was an equity partner, and so I think there was confidence that the work on the road was going to continue.

That said, the contractual right is there to review any
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equity ownership change. That is a normal practice of business, and it's something that…. We did look at the equity partner change, but perhaps we're taking the Auditor General's feedback, and moving forward, I think in the spirit of improvement, we're going to look at that more carefully.

B. Ralston (Chair): We're at noon, I believe, so perhaps we can have Marc ask his question, and they we'll break for lunch.

M. Dalton: As far as traffic pattern, traffic numbers, what's been the increase since 2005 as far as a ratio? Do we have that information?

D. Duncan: Traffic patterns on the corridor have remained relatively stable. There has been, I think, a small growth in traffic volumes. I don't have the specific numbers in front of me. I know that south of Squamish the volumes are in the range of 10,800 to 11,000 per day. Traffic volumes north of Squamish are in the range of, I think, 9,000 to 9,200 per day. That's sort of the metric that we're seeing currently.

I don't have at my disposal the volumes prior to construction. There's likely been a small increase. The most marked increase has been in travel time savings, again in the range of 15 minutes for each user of the highway, and then of course the significant safety improvements as well, in the range of a 33 percent reduction in accidents on the highway.

M. Dalton: If there was even a 10 percent increase in traffic, then that would be more pronounced as far as the ratio when you consider the accidents and all that. So it's been about 33.

Just the discrepancy — I know we've talked about the safety — between OAG and the ministry. I'm hearing that it's not being reported as far as the accidents and the safety measures, but yet you have these measures being put down here as far as the number of accidents. If you can address that — how you actually have the figures, and then the OAG is saying that that's not the case.

D. Duncan: Sure. I think that we have good statistics on both the safety performance of the highway…. We have good statistics on the reliability performance and the travel time savings. I think the points of the Auditor General's staff around the availability of the automated system are well taken, and we're working hard with the contractor to improve that. However, in terms of payment to the contract, you know…. In the absence of that, I think a good manual system has been developed.

I think when we looked at the report, and in working with the Auditor General's staff, the most important takeaway was…. You may have the statistics, and you may have the information. Of course, as a manager of a very large road inventory, we track all of those metrics for our entire system. We obviously specifically focus on this corridor because of the concession agreement.

The takeaway that I took from the Auditor General's report was: "You need to do a better job of publicly reporting on those statistics." We've taken that to heart. We're developing that currently, and starting next year we will do a better job of reporting.

The information is available to the public, but it's not as user-friendly as would be appropriate in a fit-for-purpose sort of release of information. I think that was the key takeaway that we took from the Auditor General's report —"You need to do a better job of publicly reporting on that" — and we've taken that seriously and are working on it.

B. Ralston (Chair): I'm going to suggest, then, that we stand down for lunch and reconvene at one o'clock.

B. Ralston (Chair): I'd like to call the meeting back to order, continuing discussion of the Audits of Two P3 Projects in the Sea-to-Sky Corridor.

Before we begin, I did want to make a comment about the schedule. We have not only this report to finish — and it looks, from the number of questioners I have on the list, that it'll be a while — but the Evergreen Line Rapid Transit Project report and then, finally, Striving for Quality, Timely and Safe Patient Care: An Audit of Air Ambulance Services.

What I'm going to suggest to those who are here for the final one, the air ambulance report, is that at two o'clock we'll maybe do a time check. If we haven't finished this one and we still have the other one to do, I think at that point we will, subject to what committee members may have to say, let those people leave. We'll have to reschedule them for another day because I don't think we'll get to them, and I'd rather not have them waiting around for another couple of hours. I'm sure they would probably concur with that sentiment.

With that, then, I have a list here. I'm going to read it, just so that we're clear. I've got David Eby, Mike Morris, Simon Gibson, Greg Kyllo, Selina Robinson, Vicki Huntington, Laurie Throness and George Heyman. That should keep us going for a while.

D. Eby: I saw, on page 19 of the report, the notation that capital costs increased almost $200 million, from $600 million to $795 million, while over the term of the agreement the operating costs correspondingly decreased. I wonder if the ministry could explain the reason for that shift from operating costs to capital in this
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project.

D. Duncan: The reason revolves around…. It was a revised interpretation of accounting standards during the period of the project.

The P3 accounting guidelines were developed by the office of the comptroller general. As we applied the interpretation of those accounting standards, that resulted in the capital costs being increased from $600 million to $795 million and then, as mentioned, a corresponding decrease in operating costs.

There was no change in physical work. It was just a change in accounting interpretation.

D. Eby: In terms of what would show up in the provincial budget, the operating budget, we would see a decrease in the annual operating costs, but the provincial capital budget would be increased. So if you were hoping to claim that you had a balanced budget, this would take a significant amount of weight off of the provincial operating budget and offload that to the capital budget. Is that what the effect of this would be?

S. Newton: There are two effects. There will be an initial switch between operating and capital, but that capital does get expensed over time as amortization into the future. So what you would get was an initial change where it moves from operating to capital, but then we also are increasing operating expenses over time for the bleeding out of that capital as it's depreciated.

D. Eby: Okay. To the Auditor General, then: is this your understanding of these accounting standards as well — that this was required under the accounting rules and that this is all an appropriate shift?

R. Jones: Yes, we agree with that. The increase was actually due to the work that we did at the time.

Then the next question I had was in relation to the contingency fund and the $56 million worth of change orders in the project. I note that the contingency fund was worth 10 percent of the total project and that the Auditor noted that these contingency funds are appropriate business control mechanisms.

I guess my question really focuses on the provincial capital standard, which is the standard that requires a P3 unless the public option is clearly better, and how that contingency fund would be calculated for in a public option versus a P3 option — whether that would be the same contingency fund in both calculations.

I guess what I'm asking is: did this project go 10 percent over budget in a way that would have made a public option clearly better?

B. Faulkner: I think that under either option, contingencies are best practice in capital contracts. Maybe the ministry can speak more to contingencies.

Just recollecting back to the public sector comparator, they generally will have a fixed capital cost, and the underlying assumption would be that within that, there would be irregular contingencies — whatever builds up to their estimated capital cost.

D. Eby: I thought the whole point of having a P3 was that the risk of overages was borne by the private operator. So if you're going to go 10 percent over budget, the private construction company, in this case, would be bearing that overrun, whereas if you do an entirely public project, the risk is borne by the public. So how is it that the contingency would be the same in both?

B. Faulkner: We didn't look back to the public sector comparator as part of this work. I'm not sure that the contingency would be the same dollar amount. A contingency is just best practice in capital construction.

R. Jones: I was just going to add that one of the things with P3 projects is that you do transfer an awful lot of the construction risk. In fact, you try and transfer most of it. But in some cases, as the construction is occurring or as the project is going along, there may be something that the government may want to change in terms of what was in the original contract. Usually when that happens, it's at the government's cost. So it's always good to have that contingency in there.

D. Eby: In the Evergreen line report, which we'll be discussing later this afternoon, the difference between the public option and the P3 option was about 1 percent, just over 1 percent. I wonder, in this project, Mr. Faulkner, whether you recall what that difference was, because I'm curious about whether this shift into the capital cost that was required by your office as well as the $56 million contingency fund use would have pushed this into the realm where a public project would have been clearly better.

B. Faulkner: I'd refer back to Project Report: Achieving Value for Money from 2005. That's where the value-for-money assessment…. I'd have to look through it. But the one thing with the Sea to Sky is that the actual public sector comparator was the preferred option, as opposed to the P3, when they did the value-for-money analysis.

B. Faulkner: Under the project report, the preferred financial analysis favoured slightly the public sector comparator. The benefit was driven out of the incremental user benefits, which were noted on page 22 of that report.

B. Faulkner: …that drove reduced travel time and safety improvements. They used, I believe, a standard transportation economist to quantify it, to come up with a dollar amount for incremental benefits that would then put the P3 option as the preferred option.

D. Eby: So this project cost $56 million more than was originally anticipated as a result of the contingencies, and there was a shift of $200 million in the capital cost. What I'm wondering is…. That seems like a lot of money that may not have been accounted for in the original comparison.

B. Faulkner: The contingency amount was built into the budget. The budget that was….

B. Faulkner: It was built into the overall budget for the P3 option. The change from $600 million to $795 million…. When you look at the amount that was paid to the P3 partner, it didn't change. So the actual cost, based on the agreement, didn't change. What changed was the accounting allocation of those payments between capital and operating.

D. Eby: So what you're saying is that both would have been a wash in terms of that original comparison between the P3 and the public.

M. Morris: Looking at the value-for-money aspect of this to the Ministry of Transportation, I know there are a lot of metrics available through ICBC and through the RCMP and the police forces that police those stretches of road there. Your chart indicates that there was a reduction in accidents, but I know from my previous life that death on the highway is a very expensive proposition and is devastating to a lot of families.

I'd be curious to see whether your metrics indicate how many fatalities — whether they've dropped and by what percentage they've dropped. There's significant value for money just in that alone.

In addition to that, the number of accidents that cause personal injury and the payouts from ICBC and other insurance companies and whatnot — again, if there's been a reduction from that. I think that's part of that value proposition that needs to be indicated in the metrics that you have.

D. Duncan: Thank you, MLA. We do track the three different types of accidents that both ourselves, the RCMP and ICBC have worked to develop over time. There are accidents that result in fatal injuries, accidents that result in serious injuries and then accidents that result in property damage only. We're tracking all three of them.

We roll them up into one for the purpose of easy presentation, but I can confirm that all three categories are seeing reductions. Probably the easiest one to see…. Fatal accidents are less frequent. They're obviously tragic when they occur, but they're less frequent in nature. The best measure is probably to look at injury accidents to track the change over time. We've seen a drop of approximately one-third in injury accidents on that corridor, so it's very good news.

S. Gibson: I think most of the areas I was going to query have been addressed. The only thing I was going to ask about was with regard to the documentation. The analysis shows that some of the documentation was not provided — the sign-off documentation, some of the record-keeping. I was wondering if you could explain: was that haphazard or just unforeseen? It appeared like a concern that the Auditor General's office had. That's my only question at this time.

D. Duncan: Thank you, MLA. We do have detailed records for the project, and we're confident that we have a good system. As I understand, the records that were primarily at the heart of this were as-built drawings. They are surveys that take place after construction is complete to verify the works in the field. Those drawings commonly come later on.

That being said, it's very important to see those records come into fruition and, echoing the Auditor General's previous comments, especially when you see personnel change over time. I think we take to heart the recommendation that it's extra important, given the longevity of these contracts. These are 20-plus-year contracts, and that makes it extra important that the records be maintained.

It's obviously important on every project, but with these contracts that are alive for so long, it's additionally critical. We've taken that to heart. We've secured the documents that were identified as being not in place, and we're putting measures in place to ensure that that's improved upon.

S. Gibson: A quick supplementary, then. These are all CAD drawings, essentially. It would seem to be a simple matter to have it a dedicated site for them to allow
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the Auditor General to simply access them. They're not physical necessarily, but they can access them and say: "Okay. Here they are, Auditor General. Here's the link. You can go and find them that way." That's just a suggestion. It might be a way to expedite that communication process so that they can access them in a timely manner.

S. Robinson: I have some questions about the achieving key objectives component, and I just want to make sure I understand.

The safety payment is based on comparing Sea to Sky Highway safety results with the average of four other highways. So that's the current highway to four other highways, not the previous Sea to Sky.

S. Robinson: So its current performance to four other highways. Does that mean that the accident rate can't be any worse than the average of four other highways?

S. Robinson: Or does it have to be better? It's different to say better than before or no worse than the average of four highways, so I'm trying to make sure I understand the distinction.

D. Duncan: It has to be better than the combined average rates of four other highways that were felt to be comparable.

S. Robinson: If I understand the question that the Auditor's asking — a different question that the Auditor's asking — it is: has safety actually improved on this highway based on comparing it to previous accident rates? I note in the report that the response provided by the ministry was that "motor vehicle accidents on the Sea to Sky Highway decreased from 217 in 2004 to 124 in 2011." That's on page 12. Then they go on to say that it's a 40 percent reduction in accident rates. Then in the presentation, in 2011 there are 146 motor vehicle incidents and a 33 percent reduction.

D. Duncan: Thank you for that. The accurate numbers are the 146. We receive accident statistic updates through the RCMP and through ICBC on a quarterly basis. It's possible that when we provided the previous response at 127, we received additional information subsequent to that. So the 146 is the correct number for 2011.

S. Robinson: Was this the expectation when the project started, that it would reduce? Because when you have objectives to increase safety, you can increase safety by reducing by 1 percent. You could argue that that's an increase in safety. I'm assuming it was going to be more than 1 percent. So were there targets when the project first started for how much to increase safety?

D. Duncan: In the contract it was, as we've discussed, assessed against other comparable highways. In the original contract analysis in the business case, there would have been some analysis of projected safety benefits. That's a standard practice. I don't have that information in front of me, but in terms of measuring actual safety, we always look to see what the actual results are. I believe we've achieved our objectives.

S. Robinson: So will you be reporting out compared to the initial business case? Will you be comparing these results to that when you manage to get to reporting it out to the public? Will you be bringing that back to say: "We intended to increase safety by reducing 25 percent of the accidents, and we've accomplished that" or "We were aiming for 40 percent, and we're still not there"? Will that be part of the public, I guess, accountability?

D. Duncan: I think that's a fair expectation, and we'll look to ensure that that is assessed.

S. Robinson: I have one other set of questions, if I might, Chair, around how we're measuring capacity.

If I understand correctly, right now it's direct observation and self-reporting by the private partner that's actually doing that assessment. They're assessing capacity. Or do we have an independent third party that's doing some of that capacity assessment?

D. Duncan: In terms of travel time capacity, the contractor is currently taking direct measurements in the field and providing that to us.

We're doing two things with that. One, we're undertaking a quality assessment of their provided documentation, and then we're doing our own independent measurements to independently verify the results they're providing. That will remain in place until the automated system is back up and running next year, at which time we will continue a quality assurance program to ensure that we're satisfied with those results.
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V. Huntington: Just a couple of comments. I, too, would like to see the figures on the HST-PST analysis. I think we should have those in front of us at some point.

You mentioned that one of the sort of benefits of the project itself was that we received fairly significant enhancements, and you listed some of those enhancements. You said that those enhancements fell within the scope of the budget.

Now, are those $56 million of change orders part of those enhancements, and is that what's meant — fell within the scope of the budget?

D. Duncan: The original procurement created a competitive process around the quantum of work that would be done within the contract. The enhancements that are defined were part of the procurement process. I don't have information in front of me in terms of what the $56 million had to do with, but I do know that the improvements were part of the competitive procurement process.

V. Huntington: I wish I could go back to your earlier comments, because I thought you said things like the medians and the…. There were about four items that you mentioned that were sort of received on top of your expectations for the project. But you're saying all of those enhancements were in fact part of the procurement contract itself.

D. Duncan: Yes. The additional improvements that I summarized were beyond the baseline that was set in the original contract provided for in the DBFO agreement.

V. Huntington: How much did those cost? Was there a surplus going in to these improvements? Were they the change orders? Subject to those change orders? How much did the improvements cost? Surely the partner wasn't going to provide them free of charge, I'm assuming.

D. Duncan: The improvements were all funded within the capital allocation that's been summarized in the report. The improvements form part of the competition that each of the bidders who were bidding on the project bid against. They were competing on the basis…. Rather than competing necessarily for lowest price, they were competing on: for a price, what quantum of improvements they can place on the road. So it was part of the competitive process.

You also said that one of the decisions to go with the P3 and not stay in-house as a ministerial project was that it was based on the analysis of the incremental benefits, such as the safety and the amount of time it takes — those incremental benefits that you analyzed as a justification.

Would those benefits not have occurred anyway? I'm assuming that the project wouldn't have gone ahead in-house without those benefits attached to it. Is that not the case?

D. Duncan: As I understand it, the original public sector comparator and the P3 model would have been evaluated based on the same scope. In order to make a value-for-money assessment, you would have to base them on the same scope. I think the user benefits that derive from the additional improvements were seen as a benefit of the DBFO model.

V. Huntington: I find that somewhat difficult to understand. If those benefits, the reason why one would build a major road, were an expected increase in safety, an expected decrease in the time taken to travel…. Are you saying the P3 analysis showed that it would be a better benefit in each of those cases than if it had been done in-house? I'm not quite following the decision process.

D. Duncan: Those details would all be in the original business case that would have predicated the procurement decision. I don't have that business case with me today, but all of the details that would…. Procurement model selection is part of the business case process, so as part of the original business case, those variables would all have been reviewed. Again, as I said, I don't have the business case with me today.

B. Ralston (Chair): Just before you continue, Mr. Thomas wanted to add something.

C. Thomas: Having looked at the original value-for-money report, the Sea to Sky Highway was procured in a very specific fashion. They took the public sector model and decided — you know, designed — what they would build, and that formed the baseline for the improvements that they would receive. They then offered that same payment stream to public sector proponents over the 30 years and based the competition on what extra improvements they would get over and above the baseline for the same amount of money that the province planned on spending in the original design-build and funding of the arrangement.

The competition wasn't based on who could do it for the least but on who would give the most for the same amount of money.

One other. When there's a project such as the Sea to
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Sky Highway, which…. Possibly wrong, but it was basically a government policy decision, was it not, in the face of the upcoming Olympics? So when you have a policy decision of that nature, is your cost-benefit analysis on the necessity of the project and the value for money of the project the same as if it were a project that was sort of on the long list of projects that were necessary over time? How do you move in and assess a decision that is more based on policy than need?

D. Duncan: As I recall and think back to the communications at the time, I think the project was clearly communicated as being delivered based on its merits in terms of benefits received from the project over and above the impetus related to the Olympic Games. As I recall it, that was obviously an important event, but the need for the project was there, irrespective of the games.

That corridor, the Sea to Sky corridor, was notorious and identified as one of the rural highways in British Columbia with one of the poorest safety records and the highest and most serious nature of accidents. The project, at the end of the day, was about improving safety, improving reliability and improving travel time on that corridor, and the benefits of the improvements made stand on their merits, irrespective of the Olympics.

V. Huntington: The 217 versus 146 — is that 217 based on the model of four highways, or is that the previous number for the old Sea to Sky Highway?

D. Duncan: So 217 accidents is the total number of accidents in 2005 on that corridor, so those are actual crashes on the Sea to Sky corridor in 2005.

L. Throness: In my duties as Parliamentary Secretary for Corrections, I toured a corrections facility in the Lower Mainland that was built under a P3 arrangement. Officials pointed out to me there that because they are operating the facility over a very long period of time, they have installed higher-quality things than they would otherwise.

Is that also true for the Sea to Sky Highway? Can you comment on the quality of the construction there? Is it of a higher quality than would otherwise have been built under a public-only option?

D. Duncan: Looking at the project to date, the highway has stood up very well since opening. You know, small things like the pavement markings…. The pavement markings have been of the highest quality that we've seen anywhere in the province. The pavement condition, both through the communities and along the corridor, has remained of high quality.

We deliver high-quality works also on our conventional contracts, so it's difficult to provide sort of a quantitative comparator there. But we're very, very pleased with not only the quality of the work but the innovation. There are some structures and some strategies that were used to deal with the difficult areas that were of the most innovative nature — cantilevered bridges out over railroad tracks and things that were very unique.

L. Throness: Okay. A few questions for the Auditor General that may only reveal my ignorance. Who owns a P3 project? Who owns the Sea to Sky Highway?

L. Throness: Okay. And if a private partner is putting up the money to finance the construction or reconstruction of it, what do they put forward to the bank as collateral? They can't put up a highway that's not theirs. How do they raise collateral on a P3 project if they don't own the project?

R. Jones: I would assume part of it is based on the contract that would be in place with the province guaranteeing payments over the life of the contract.

L. Throness: What would happen if a private operator went broke for some other reason? What would happen to the project? Would the province have to step in?

R. Jones: You'd have to look at each one of the individual P3s, because each one of the agreements is individualistic to that project. From a couple that I remember seeing, there is a clause within the contract that if something happens to the original proponent, the province has the right to seize what has gone on so far, find a new proponent to come in and fix it and cease payments to the bankrupt one.

L. Throness: Okay. And one final question. P3 is fairly new, at least in modern times. Have any of our modern P3 projects completed their entire scope of project yet?
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G. Heyman: Just a quick question on the reliability factor and the payment that's to be made for reliability. Was a particular method of measuring reliability contained in the contract with the concessionaire?

D. Duncan: I don't have the specific contract clause in front of me. As I recall, it's a calculation. Availability is measured as a proxy for preventing unauthorized closures, and that is measured through travel time along the corridor. But I don't have the specific details of how the calculation is undertaken in front of me.

D. Duncan: As I recall, there is a methodology specified, and I can provide those details to the committee.

B. Ralston (Chair): I think we can decide that. He's already…. I think there's one issue that needs further explanation before the committee, on the HST and GST. There has been some detail asked for there. So we probably can address that issue at the same time.

Going back to the report on page 22 and looking at the safety measure, the department has spoken of three measures of achieving gains through this process — safety measure, reliability measure and capacity enhancement measurement. But I want to ask the Auditor General whether he still stands by, in light of what we've heard from Mr. Duncan, his comment in the report. Just let me read it for the record.

"Whether safety has actually improved on the Sea to Sky Highway as a result of highway improvements and ongoing management is not known, however, because this is not being measured, despite the fact the data does exist to allow this kind of measurement." It would seem to be a fairly emphatic refutation to claims that Mr. Duncan has made here about linking the highway to safety improvement.

Can the Auditor General explain that statement? I think it's pretty straightforward that there's a flat disagreement with Mr. Duncan — and explain why.

R. Jones: At the time that we were doing the audit, we asked for the information to support this performance measure, and it wasn't available to us. Since then, the ministry has demonstrated that they do have the information available. As we have stated here, the data does exist. It was just that at the time we asked for it, it wasn't available to us.

B. Ralston (Chair): Just let me follow up, then. What it says is not that it wasn't available. It says it's not being measured. So presumably, you have years of payments on this measure even though, according to your office, it wasn't being measured. Would you not have a concern about millions of dollars being paid on a measure that is not actually, according to your words, being measured?

R. Jones: Again, I think in this point on the page here, there are two separate issues being addressed. In the first one the payment is based on the comparison to the other four highways. They did have that information available to be able to make those payments. What we were saying is because one of the objectives that is related to the value-for-money proposition, which is to improve the safety of the Sea to Sky Highway, primarily through improvements in the highway's design…. We were saying that at the time when we asked for that information related to that objective, it wasn't available to us.

B. Ralston (Chair): Can you tell me what the other four highways were that are deemed comparable?

D. Duncan: The other four highways are Highway 1 from Sicamous to Pritchard, Highway 1 from Langford to Nanaimo, Highway 1 from Horseshoe Bay to Hope and Highway 97 from Marguerite to Strathnaver.

B. Ralston (Chair): So what is being compared in each of these cases, then — the total number of accidents in those stretches of highway over, I guess, a calendar year? Is that what's being compared?

D. Duncan: The per-kilometre accident rate, which is a measure of accidents per million vehicle kilometres travelled to the accident rate on those four sections.

B. Ralston (Chair): Okay. I want to look now on page 23 at what's called capacity enhancement measure, and this a question to the Auditor General.

This is, I think, one of the three measurements that purport to demonstrate value for money. What is said here is, and I'm quoting just for the record: "There is no mechanism within the concession agreement to measure capacity enhancement, and we found the ministry is not measuring or reporting on the enhanced capacity objective it identified for the Sea to Sky Highway improvement project."
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B. Ralston (Chair): Is there a payment related to so-called capacity enhancement, then?

B. Ralston (Chair): In the three objectives set out in considering whether the public is receiving value for money, back on page 22 — safety, reliability and capacity…. It, then, would seem to be a bit misleading if there's a measurement for capacity yet it doesn’t result in a payment, or not, whether it's carried out or not. Is that correct?

R. Jones: Again, Chair, the capacity enhancement measurement relates to that objective which was in the original value-for-money premise, where it said $131 million in total would be gained by these highway improvements through these three objectives. What we're saying is that the ministry doesn't have anything in place at this point in time to be able to effectively report on whether or not that value-for-money proposition is being met.

B. Ralston (Chair): Just let me get that straight, then. Part of the reason for proceeding with the project was that there would be $131 million in enhancements, yet on this particular one — one of three — there's no ability to measure that. So there's no way of demonstrating whether or not, at least on this part of the value-for-money proposition, there's been any result at all. Isn't that right? Is that what you're saying?

R. Jones: Yeah. What I'm saying is that the value-for-money proposition, of course, is over the entire length of the project, which is 30 years or whatever the agreement is for. We didn't see anything in place when we did the audit at the ministry that would allow them to report on the value for money of that at this point in time or over the….

If they were to put something in place now, they might be able to get there, and I'm sure they're working on that. But at this point in time there isn't anything that would allow them to report out on that value-for-money proposition that was in the original project plan.

B. Ralston (Chair): Then, to Mr. Duncan: the Auditor General says he thinks that you're working on a measurement of capacity enhancement. Is that true?

D. Duncan: We are working on a measure to enable us to report out publicly on safety, reliability and capacity. Capacity is one measure, as I understand, from the original project objectives. Capacity is actually not a measure of highway activity. Capacity, as I recall, is a measure of adjacent development activity, whereas safety and reliability are both highway measures.

So the $131 million being referred to is actually a combination of the net present value of benefits, which would include all three of those. Capacity is just one measure.

Highway reliability and safety are more readily quantifiable because of the nature of the metrics of travel time and motor vehicle accidents. Capacity is, I think, a more challenging metric to measure, and we will certainly look at that. That's one of the reasons why it's not one of the payment metrics.

B. Ralston (Chair): Given that it's something that's referred to in this process, was there anything negotiated in the original contract that purported to measure capacity enhancement?

B. Ralston (Chair): I mean, it sounds like…. It's described as improvements accommodating "economic development and community growth along the corridor." So it's kind of a spinoff mechanism or an attempt to measure economic activity that's derived from building the highway. Some economists talk about an ability to do that by investing in a public project. It generates a certain level of subsequent economic activity.

Was there anything in the contract where a mechanism was agreed on to make that measurement?

D. Duncan: Contract payments were based on availability, reliability, safety and traffic volumes. There is no contract payment mechanism that relates to adjacent economic development activity or capacity. Because there are so many other variables outside of the highway that affect and have influence over that metric, it was felt that the on-highway metrics, which include travel time, traffic volume and safety, were more a appropriate basis for measuring payment.

B. Ralston (Chair): Then, given that this measurement — that's what it's called: a measurement — is so nebulous, why was it even referred to in the $131 million alleged future benefits? Do you know why? Wouldn't it have been more straightforward or honest just to leave it out?

D. Duncan: I would have to confirm the basis of the $131 million net present value. But generally speaking, net present value is calculated on quantifiable metrics, not qualitative metrics, and so I would assume that every metric in that $131 million net present value has a quantitative element to it. But that would require confirmation.
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I had one more question about the equity sale. You've explained that you did not investigate the sale. In some of the contracts there's a provision for recapture by the government of part of the increase in value when there is an equity sale. Was there such a provision in this contract, and if not, why not?

B. Ralston (Chair): What was the value? Do you know what the value of the share sale was?

B. Ralston (Chair): Okay. Those are the questions that I have on this section. Then we can move to the Britannia mine water treatment plant, and I'll take speakers on that.

K. Corrigan: I have a few more questions. I wrote down earlier on this issue of the reliability measurement…. And just to be clear, the availability and the reliability measurement — is that the same thing? We've been talking about it as the same thing.

I believe…. And I'm sorry. I apologize, but I can't identify who's speaking because I have people in front of me here. It's all fine. But in an answer before lunch I wrote down that what was said was that a manual system with regard to the reliability measurement "is being developed." Can I just get confirmation about the timelines of when this manual system has been…? It has been developed? The words used were "is being developed."

D. Duncan: A manual system is currently in use. An automated system is being developed, and we expect the automated system to be available next year.

K. Corrigan: Okay. Thank you very much. What is the manual system? How does that work?

D. Duncan: The manual system involves taking manual travel time measurements on a statistically representative number of time frames on the corridor, and it actually involves driving the corridor and taking the travel time measurements from that drive.

K. Corrigan: And that work is done by the contractor and then provided to the ministry. Is that correct?

K. Corrigan: Okay. Thank you. I wanted to go back to the issue that, actually, the Chair was talking about, which is the secondary sale or the equity sale.

D. Duncan: A large portion of risk — the design risk, the geotechnical risk and the construction risk — is during the construction phase. There are operating risks that exist on a project like this over the operating term, including winter maintenance and things of that nature. But in a budget of this type, a lot of the risk is during the construction phase.

K. Corrigan: Right. And in either a P3 or in a design-build or, in fact, a traditional contract, that risk could be transferred to the construction company — right? — or to the concessionaire, in either case.

K. Corrigan: But my understanding is that when you're comparing the private sector and the public sector option, what you do is you transfer…. You have a large chunk of the money that is believed to be transferred to the private…. There's risk transfer.

Yet what you've just said is that you can transfer the risk, whether it's publicly or privately done. So I'm wondering how much the risk transfer was in this project. What was the quantity that was attributed to going to the private sector partner? Do you know what the number is?

K. Corrigan: But it's probably in the range of $60 million to $70 million — something like that?

K. Corrigan: So essentially, whatever that amount is — and I would expect it is something in that range of $50 million to $60 million — what it seems to me you're saying is that, really, it's not fair to penalize the public sector project because risk could be transferred in the public sector project — the same amount of risk.

D. Duncan: The public sector comparator would have been developed based on a conventional design-bid-
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build methodology. In our conventional major design-bid-build contract template, we have a fairly conventional approach to risk transfer. So that is the risk transfer assumption that would likely have been applied to the public sector comparator.

K. Corrigan: Are you telling me that there is no more risk assumed to be transferred in a P3 as opposed to the public sector comparator?

K. Corrigan: Well, what I'm saying is that there is an assumption that a fair amount of risk is being transferred in the P3 and there's a big chunk of money that's attached to that, which disadvantages the analysis for the public sector comparator.

You've said that risk can be transferred, whether you do it publicly or privately — that most of the risk is in the construction phase. So it seems to me that there's an unfair analysis going on there. But that's fine. I've made that point, but I don't understand why it would be any different.

I wanted to just talk about the actual payments that have been made, because I've got the actual payments to the concessionaire versus what was assumed, year by year, in the original analysis that was done in the value-for-money report and the work that went into the value-for-money report.

B. Ralston (Chair): Do you have an extra…? I mean, if you're going to ask him questions about it, I think, in fairness, you might want to have him have a copy so he could have that in front of him if he's answering questions about it. Perhaps the Auditor General might want to have a copy as well.

K. Corrigan: What I'm going to… I'll just tell you the numbers I get, and you can get a chance to look at it in a few minutes. I've added up eight years of payments.

What the value-for-money report said the payments to the private sector were going to be over that time was $319.9 million — I've done my math quickly on this piece of paper — and that the actual payments are $368.3 million. So my question to the Auditor General is: did you take a look at what the actual payments were, and did you have any concerns or do you have any comments on the fact that the actual payments have ended up being significantly higher than what was originally estimated?

B. Faulkner: We, as part of our audit process, looked at the payments and didn't have any concerns. We didn't look back to the documentation in the project report. We looked to the contractual obligations within the project agreement and did not find any anomalies.

K. Corrigan: So are you saying, then, that what has happened is that because of whatever is in the contract, which I haven't seen, for some reason the projected amount of costs, the government's own projection on costs…. For some reason, we are almost $49 million too high compared to that. Is it something to do with the contract?

B. Faulkner: Without knowing sort of the source of the numbers, it's hard to say. The only thing I could say is that part of it could have been the change orders, which would not have been reflected in the project value-for-money report that was produced in 2005.

K. Corrigan: Where I got those numbers from…. You can see it. I've had somebody put a table together for me. Where the numbers came from was the numbers that were in the original value-for-money report, which was based on the government's numbers — Partnerships B.C. and what's come out of Public Accounts every year for the last several years. I've been keeping track of it.

For whatever reason, we had a project which came in under every measurement, even that which is most favourable for a P3, as being very iffy about whether or not it should be a P3. In fact, we have payments that are significantly higher than that analysis. I don't have it with me, because I've just given it up. Also, remember that the comparison, the public sector comparator versus what it was expected to cost under the concessionaire, was actually, I think, about $350 million less.

I'm very concerned about the methodology, which is why I've asked the Auditor General if we can take a look at methodology. We're paying $350 million or $400 million more. It's only when you add the discount rate and the risk transfer that you end up being even close. So when you start adding extra costs on as well, and then we look at some of the stuff we've asked about today, it makes me concerned about whether or not we are experiencing good value for money.

B. Ralston (Chair): I think you're beginning to stray into some of the general principles of P3s, so I'd ask you to endeavour to confine your questions to this specific report and the specific issues that are before us.

On the resale of the project. The Chair has talked about the fact that you can put into contracts about resale. It
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seems to me that on one of the earliest projects, which was the Abbotsford project, there was a resale. Then in subsequent projects there were provisions put in some of the contracts to say either that you can't resell it or that if you do, then government should get some benefits. I'm assuming, because this contract was sort of halfway in between — it was one of the earlier, but not earliest, projects — that that was something that we learned. Maybe we could have done better from what we learned later. Is that correct?

R. Jones: I would tend to agree with that. I'm sure if you chatted with someone from Partnerships B.C., they could give you a more definite answer on that.

B. Ralston (Chair): I think Mr. Duncan's point was that he didn't know the answer to that question.

K. Corrigan: I think the reality around the world is that because the risk is in the construction phase, what we find is that these things, once the construction phase is over, become a bit of cash cows and they're very, very lucrative to sell. I have concerns about our ability to have control over who it is that is running these contracts.

B. Ralston (Chair): What I'm going to suggest now is we move to discussion of the Britannia mine portion. I'm going to form a new list of questioners. Anyone on the government side want to ask questions? Anyone want to ask questions on Britannia mine?

L. Reimer: My question had to do with the testing of the water. I noted that you had indicated in your response this morning that it was a February 2013 visit. Then you're going out to RFP late in 2013.

We're just talking about water testing. Is that correct? I'm wondering why the length of time. Or am I missing something?

G. Stewart: The length of time in moving forward on getting an audit going? Is that…?

L. Reimer: No, we're talking about independent water testing. You mentioned that there was a visit to the mine in February 2013 and that an RFP would be issued for water testing late 2013. I was just wondering why the gap in time.

G. Stewart: We had an independent consultant develop the report that looked at all the elements that we needed to look at for a thorough audit of the water quality. Our program operates such that we have a number of summer projects. I have limited staff, so we're busy in the field with a number of high-priority projects. We have the report in hand, and we're getting around now back into the office to undertake sort of administrative work that would reflect getting an RFP posted and getting the audit done.

S. Robinson: I'm just looking for some specifics on the periodic independent verification of EPCOR's results. I just want to quantify what "periodic" means.

G. Stewart: We're probably looking at water quality results a couple of times a year.

G. Stewart: They provide us with…. They are paid on a monthly basis, and their payment is based on the volume of water treated. We would see analytical results submitted on a monthly basis, and they have to meet certain permit conditions. Those analytical reports would include volumes of water as well as the end result after they've been treated — the analytical results that meet discharge requirements under the permit.

K. Corrigan: I sometimes express concerns about whether we're getting value for money on P3 projects, because of some of the methodology. But my belief is that in this particular project, despite some questions I'm going to have, we are getting good value for money. I think it's one that makes sense when you look at the numbers. But I do have a couple of questions. And I love the little clip that was brought. It was great. It's a good-news story.

But I do have a couple of questions. The first one is about remediation. Essentially, it seems to me from reading the report that what is happening is water is evaporating, going up, falling and coming down through all this stone and so on and the various channels, and it gets back to the water, and it's being treated on the way down.

But we're having a circle, which means that we are continually having to treat the water. The ultimate plan is to remediate the area. Otherwise we're going to have to just keep on doing this forever, which is probably fine. But we are paying a fair amount of money for it.

The report says that there is a long-term goal for the Britannia mines remediation project, and the Auditor General says:

"We found that the Ministry of Forests, Lands and Natural Resource Operations and the Ministry of Environment have not developed longer-term plans and timelines for the broader remediation project. Long-term planning would allow the Ministry of Forests, Lands and Natural Resource Operations to demonstrate how it will work towards the long-term goal of meeting the closure requirements of the act."

I'm wondering if you could just tell me what the plan is for remediation.
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G. Stewart: Right. To back up a little bit, just so people understand, the primary objective of the P3 with EPCOR was to develop a partnership which would build, operate, finance and maintain a water treatment plant at Britannia.

It's a very extensive minesite. There are over 80 kilometres of underground workings. There's a glory hole at the top of the mountain which allows snow and other precipitation to flow through the mines, where this water collects heavy metals through oxidation. The water treatment plant has accomplished, then, knocking out about 90 percent of the loadings to Howe Sound. So overall, if you just looked at the performance of the water treatment plant, it would be a very successful project.

We have developed a number of diversion structures at the top of the mountain to try to direct water away from entering the minesite so that we treat less water. But there's infiltration. You know, this is a major watershed. There's lots of infiltration of water into the minesite. So it would be impossible to eliminate all seepage into the mine.

We're trying our best. We're using the best technology available now. It's a high-density lime water treatment plant. It's proven itself across the world in treating heavy metals. So unless there's a better technology that's discovered in years going forward, we will be continuing to have to treat water at Britannia, just like many other operating mines do in British Columbia.

With respect to long-term remediation plans, there are a number of other studies that are happening on the minesite with respect to other contaminated areas related to mine disturbances and past production.

I'll just, perhaps, turn it over to Mike. He can address it from a regulator's perspective.

M. Macfarlane: Yeah, the decision has been that basically the site will probably go through a risk-based closure. It'll never be restored to pristine conditions. So there'll be future obligations going forward for care and maintenance of the facility. That's given the cost analysis. In terms of the options available, it provides the least cost but the maximum return on the improvements at the site.

The site is broken into three major areas right now that are still under assessment. That includes Furry Creek watershed, the Britannia and Jane Creek watersheds and the foreshore, with an objective to basically continue to control sources of flow, whether it's contamination or leachate from the acid rock drainage, so that you minimize the impacts on the foreshore.

There have been, at various times, discussions with parties about potential redevelopment in some of the foreshore areas. The foreshore management plan would need to take those into consideration so that we don't end up with incompatible uses or end up restoring an area that then would be compromised by future development.

We recognize on these large sites that on the management goals that we set forward with the other agencies involved — such as DFO and Environment Canada and some of the watershed groups — we may not be able to meet those, given the technical constraints. And one of the options that's available is that if we hit an area where there's little return or increase in productivity that can be achieved, we would look to see whether or not in the watershed area that can be done more beneficially away from the areas where we have active sources.

B. Ralston (Chair): Just before we move to the next question, I think, given the hour and the rate of progress, the air ambulance people would be free to leave. I'm sure we're not going to get to that report today, because there's another intervening one before that. I apologize; I meant to do that a few minutes earlier. And we'll have to reschedule.

K. Corrigan: I appreciate that answer. As a follow-up to that, is it the belief, then, that there's a limit to remediation and, essentially, we're going to have to have a water treatment plant there forever? Is that correct?

G. Stewart: That's our understanding now, yes, based on our understanding of the flows from the minesite and the available technology. This is not uncommon in the world where we have sulphide-bearing ore bodies that are leaching metals into the environment. There are water treatment plants that are intended to go forever.

K. Corrigan: Okay. The only other question I had was about independent verification. That was one of the recommendations, that there be independent verification of EPCOR's — the private company's — water quality testing results over the remaining life of the project agreement. I understand that that is going to happen. Has that started happening?

G. Stewart: Yeah, I mentioned it was a two-stage process. We hired a consultant and developed a report that determined what elements the province should be looking at with respect to an audit. The next step will be to actually hire a company to undertake those audits on a periodic basis. That will happen late 2013 or early in the new year.

K. Corrigan: I'm sorry. I think you already answered that question. I was doing some other stuff at that point. Okay. Well that's the only question I have on that report.

D. Eby: The question that I have is about the suggestion in the Auditor's report that we have yet to develop longer-term plans for the site and, in particular, the treatment of the sludge that's derived from the water treatment plant.

The quote that caught my eye in the report was: "The
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sludge is transported into the mountains and disposed of in the open pits and glory holes of Jane Basin. The province selected this disposal site because any contaminated runoff from the sludge cakes should drain back into the mine, eventually ending up at the treatment plant."

I was wondering how much sludge there was. It seems like there's a permit for 60,000 cubic metres of sludge to be dumped back into the mine itself. I guess my question is…. In terms of long-range planning, filling the mine back up with the contaminated soil in the hopes — and this is the hope — that the water will run through and then back into the treatment plant….

I mean, to the member from Burnaby's question about us doing this forever: surely, there's a better and higher use for this sludge than dumping it back into the mine where it came from so that, hopefully, the contaminant levels get lower over time.

G. Stewart: Yeah, the waste product from lime treatment is a sludge. A high-density sludge is actually a very stable product, and it does not leach metals. The best location for that sludge was determined to be on the mine site at Jane Basin. It is deposited there a couple of times a year on a campaign basis.

What you will get from a sludge sitting in Jane Basin is a slight dewatering. That water quality is not off-spec, but it's just a very small amount of water that would be added to a huge influx from precipitation.

There were a number of options reviewed to where we could take this. We looked at hauling it somewhere else. We looked at the issues of trucks on highways, green gas emissions, and felt it was best to keep the waste product on the minesite. We feel it's actually a stable, safe location for it that does not add to any additional environmental liabilities.

D. Eby: So the sentence that says that "any contaminated runoff from the sludge cakes should drain back into the mine," that sentence from the report, is actually referring, in your opinion, to this dewatering. And it's a very limited….

D. Eby: Is there no opportunity for recovering the metals from these things and recycling and so on?

G. Stewart: It's been looked at for reuse. There have been people that looked at it for a building material. But right now we haven't found anyone that would be interested in taking it. I mean, it's not something that we would stop looking at in the future, but presently it doesn't look like there's an economic sort of use for the sludge.

D. Eby: My last question relates to the relative stability of the area. There's some suggestion that these sludge cakes are not particularly stable in the sense that they're not…. It's appropriate that they're mixed with rock from the site to reduce slope failure in the area. That was one of the advantages of putting it in with waste rock from the Sea to Sky Highway and so on.

I'm wondering about the work that you've done on slope failure and the risk to Britannia Creek that's discussed in some of those reports.

G. Stewart: Was that something in the report — that the sludge would facilitate slope stability?

D. Eby: That the advantage of dumping the waste rock from Sea to Sky construction and other projects in the area up on top in the glory hole as well as the sludge cakes would improve the stability of it.

G. Stewart: I don't know geotechnically if it would have a lot of difference. I'm not familiar with the source of that comment, so I don't know for sure. I would say that it may provide a minor amount of stability, but it's a very technically active area, Jane Basin. There's been a number of significant landslides, historically, in that valley.

I don't see anyone else on the list. I had a couple of questions about the need for independent verification of the results.

G. Stewart: The monthly payment to EPCOR varies depending on the volume of water that's treated. There's not an average amount that would make any sense. I mean, when we get into the spring season after freshet and snow melt, there's much higher volumes of water treated, so it changes on a seasonal basis.

B. Ralston (Chair): What's the highest month in terms of volume, what's the lowest month, and then therefore, resulting payments?
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G. Stewart: Per year? Well, again it varies — right? — depending on the year.

B. Ralston (Chair): Between what number and what number? What's the highest historic payment? What's the lowest?

G. Stewart: I can provide you with a table of that. I just don't have that in front of me.

Looking at the bottom of page 30 in the audit: "The ministry relies on EPCOR's self-reported results. This presents a risk of overpayments because EPCOR is paid according to the volume of water it processes and its ability to meet the water quality requirements. The project agreement includes a clause providing the government with broad rights to conduct audits and verify results, but these provisions have never been exercised by the ministry."

Can you explain why the ministry chose not to exercise those rights up until their now-professed intention to do so?

G. Stewart: No, I can't. I would say that the management of the P3 is still in its infancy, really. It may have been an oversight. We're certainly moving forward to doing that now, but I don't have a solid reason why that wasn't started. I think we felt, based on our close oversight of the project, that at that point we didn't feel that was necessary.

B. Ralston (Chair): The report was issued in July 2012, and presumably, as part of the audit process, there was discussion. You as the auditee would have been privy to the report and had an opportunity to make comments on it. So this concern of the Auditor General would have been known to you in advance of July 2012. Is that a fair statement?

B. Ralston (Chair): I think this was the substance of Linda Reimer's question as well. I'm wondering why it took from July 2012 until February 2013 to do a site visit. You're still looking forward to hiring a company to do the independent audit, and there's no timeline put on that.

Is that just the way, the amount of time it takes to do things in government, or is there no sense of urgency about this? Or, given that you don't know how much is paid per month, the ministry is not overly concerned about making these payments without independent verification.

G. Stewart: No, that's not correct. We're very conscientious about the expense of public funds. I think I indicated earlier that our summer field season is very busy. I only have three staff to manage 20 major projects that are similar to Britannia. It's a matter of allocating and finding the time to undertake this. It has nothing to do with our concern or ignoring a recommendation of the Auditor.

B. Ralston (Chair): Okay. The other issue is about remediation. This, then, is a kind of classic case of an orphan site, where the operator who reaped profit for half a century from the site is long gone, and there's no opportunity to recover any of the cost of remediation from the operator who conducted the mine through the permitting process on public land. Is that right?

G. Stewart: That's correct. There was a significant process in the '90s where the former owners were approached, and there was a political decision at that time to provide an indemnification, based on an exchange of $30 million. I think that was conducted by the Ministry of Environment — Jon O'Riordan at the time.

M. Macfarlane: The ministry issued orders against the past operators, which included Anaconda and the federal government. There was a settlement between the parties, where they contributed $30 million towards the overall remediation costs.

B. Ralston (Chair): Is there any estimate of the net present value of remediation costs for the site now?

M. Macfarlane: Well, I would caution that you're going to have the ongoing operation of that water treatment plant.

M. Macfarlane: Yeah, so you will have full capital replacement at some time of that and the ongoing O and M costs.
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B. Ralston (Chair): Okay. I guess that's an illustration of the challenge there.

K. Corrigan: Following up on your question, Chair, the full value, projected value, of the contract over the lifespan of the contract is $27.2 million plus the cash allowance items of $1.9 million.

I'm wondering if it would be possible — if not today, then in the next few days, maybe before the end of when we meet on Thursday — to find out what the expected payments, the projected payments were that came up with that value of $27.2 million for each year and what the actual payments have been to EPCOR, given the concerns the Chair raised about EPCOR being paid according to the volume of water it processes and the fact that the audits have not been done to date, despite having the right to do that. Would that be possible?

V. Huntington: You mentioned that the ministry was involved in about 20 to 30 projects — four or five that you were responsible for. Are these all remediation projects? Are they P3s, or are a number of them P3s? Are some of them ministerial? Approximately what cost are we looking at?

G. Stewart: This is the only P3 that our program is dealing with at this time. Do we want to get into…? This is a bit out of scope.

So you're involved in 20 to 30 others. Are there other remediation projects that you have on the horizon?

We've been pushing Crown lands on a number of other high-priority sites as well, for which the Crown has responsibility.

B. Ralston (Chair): I think that comes to end of our discussion of this matter. I'm going to reserve the right for the committee to recall Mr. Duncan. I've had some discussion with the Deputy Chair, and I want to adjourn debate on the issue of approving the recommendations. We won't deal with that now. I think we'll probably have to have a more detailed discussion with the full committee before we act on any of those, if we do at all.

With that, we'll let those people go and then move on to the next report. We need to take a break to change over the personnel.

B. Ralston (Chair): We're now going to deal with the audit of the Evergreen line rapid transit project. It's a report from March 2013. I'll turn it over to the Auditor General.

R. Jones: Thank you, Chair and Members. Now we're going to take a look at a P3 that was in the planning phase. We just looked at one that was operating; now this one is back to planning.

The $1.4 billion Evergreen rapid transit line is scheduled to open in 2016 and will better connect those living and working in the northeast region of Metro Vancouver to the SkyTrain system. Because of the size and cost, it is essential that the government has information about costs, benefits and risks before deciding on a course of action. In this audit my office examined the planning phase of the Evergreen line by asking whether agencies effectively informed government's decisions about what they should build and the contractual arrangements they should use to build it.

Overall, we found that the scope and procurement options selected are likely the best ones to achieve government's objectives. However, we also provide some suggestions on how the planning process could have better informed the scope and procurement decisions.

This audit complements our previous P3 audits, and, as with our previous P3 work, the audit recommendations are relevant beyond this particular project and should be used by government whenever P3s are being looked at. They apply to the planning of major capital investments delivered through both P3s and traditional public sector contracts.

One of the things we did on this audit was import an expert in transportation. He was an expert transportation economist, and his name was Ray Winn. He sort of spearheaded the project with our office. He was from Australia. Bill Gilhooly on my far left and Chris Thomas on my left were the other two people involved in this project. I'm
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going to turn it over to Chris to take you through a summary of the report.

C. Thomas: As I’m sure you're aware, the resources available to government are never sufficient to meet all the demands for investments in infrastructure and improved services. As a result, government needs good information in order to make informed decisions to make best use of these resources. Government published the Capital Asset Management Framework in 2002 to provide a good guide to good capital management.

The $1.4 billion Evergreen rapid transit line now under construction in Metro Vancouver is an 11-kilometre-long extension of the SkyTrain system. Several government agencies played key roles in our audit. The Ministry of Transportation and Infrastructure took over lead responsibility from TransLink for this project in 2008 and jointly developed the 2008 business case recommending a SkyTrain extension.

Partnerships B.C. provided detailed guidance and expertise on P3 procurement and planning. It reviewed the 2008 business case and assisted Transportation with preparing the 2010 business case, which focused on the choice of procurement method.

The Ministry of Finance is involved for the developing, maintaining and updating of the capital asset management framework and for reviewing the information submitted to Treasury Board. You can see from this figure that the Evergreen line, appropriately in green, will connect Coquitlam, Port Moody and the northeast of Metro Vancouver to the SkyTrain system.

Seen here are the planned stations for the route. The line will run from Douglas College station through major centres at Coquitlam and Port Moody, then through a tunnel to Burquitlam before seamlessly connecting with the rest of the SkyTrain system at Lougheed Town Centre station.

The route chosen in 2008 is referred to as the northwestern option. That business case also considered a southeastern alignment along the Lougheed Highway corridor.

Our purpose in this audit was to determine if agencies fully informed government's decisions regarding what to build — choosing between SkyTrain, light rail and rapid bus — and the preferred route and also what type of contractual arrangement should be used in choosing between public and P3 procurements, while deciding whether or not a P3 option beyond the construction and financing of the project was viable.

We concluded that the responsible agencies did not fully inform government's decision about what to build. There were significant gaps in the information provided to Treasury Board in 2010 in support of the recommended SkyTrain option. Ultimately, our audit did conclude that the selected SkyTrain option is likely to best meet government's objectives. It provides greater capacity at a similar cost, integrates seamlessly with the existing rapid transit system and is a technology that is well understood in the Lower Mainland.

However, we relied on information not available to Treasury Board to reach this conclusion. We also found that the selected P3 procurement best meets government's policy objectives and was clearly supported in the information provided to Treasury Board.

The capital asset management framework is a good high-level guide, but the detailed tools and templates needed to fully apply this guidance have never been completed. There are gaps that need to be addressed so all agencies have consistent, detailed, quality guidance.

Agencies fell short of meeting the existing CAMF guidance in four key areas. Specifically, they did not adequately explain the risks, costs and benefits of the alternative technologies to SkyTrain — examples, light rail and rapid bus.

Indeed, the 2008 business case did not analyze and compare the option's risks. The assumptions underpinning SkyTrain ridership assumed significant future funding requirements and regulatory initiatives that would be undertaken by the province. For example, assumptions were made that the Broadway and Surrey SkyTrain extensions would be built by 2021, a nearly 50 percent increase in bus service to stations serving the Evergreen area, and assuming that measures would be enacted to significantly raise the cost of using a motor vehicle after 2021.

Also, wider transit system risks and dependencies such as impacts on key pinch points on the Millennium and Expo lines were not discussed. Nor was it discussed how agencies would define and measure performance of the system against the planned expectations.

Additionally, none of the agencies — Transportation, Partnerships B.C. or Finance — adequately documented their reviews of material that they provided to Treasury Board for the purpose of decision-making.

Regarding the decision to use a short-term P3, this was consistent with government's policy objectives. The business case made a clear case for rejecting a longer-term P3 based on the efficiencies from having the public sector TransLink subsidiary continue to manage and maintain the Evergreen line as part of the larger SkyTrain network.

The risk-adjusted cost difference between the P3 design-build-finance and the public sector design-build-finance was very small. Therefore, the recommendation of a P3 design-build-finance arrangement instead of a publicly financed design-build is consistent with the province's capital standard, which directs agencies to use a P3 arrangement for large projects unless the public sector alternative is clearly superior.

Even though the recommendation was logical and defensible, we found recordkeeping weaknesses. Transportation and PBC were unable to locate some elements of the analysis justifying the small difference in
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risk-weighted costs.

This is the first P3 arrangement in B.C. to not include a long-term operating and maintenance component, and the procurement decision was simpler than if a long-term P3 arrangement had been viable. Assumptions that we often end up talking about regarding discount rate were not applicable in this case because those questions become more critical when the public sector option is compared to a risk-adjusted cost in a long-term P3 arrangement. They were not key factors in this project.

Our recommendations were grouped into three categories pertaining to guidelines, documentation and oversight.

Recommendation 1 is that the Ministry of Finance "implement a project plan describing the scope, required resources, timelines and deliverables for updating the capital asset management framework to provide comprehensive guidance for public sector agencies on the information required to underpin capital project planning and how this should be documented and the type of oversight that should be applied to verify the information presented to government."

Recommendation 2 is that the Ministry of Finance, the Ministry of Transportation and Infrastructure and Partnerships British Columbia "document their project reviews so that the scope of these reviews and the analysis underpinning decisions are clearly described in their written records."

Recommendation 6 was that the Ministry of Finance, the Ministry of Transportation and Infrastructure and Partnerships B.C. improve how they assess and report on whether strategic options assessments and business cases have followed the guidelines of CAMF.

Our recommendations regarding performance measurement applied only to the Ministry of Transportation and Infrastructure. They are recommendation 4, that the ministry provide more detailed guidance on performance measurements so that business cases follow CAMF by including appropriate detail on performance indicators, targets and how these will be measured; and recommendation 5, that "the ministry develop and apply a detailed framework for measuring, managing and reporting on the performance of the Evergreen line."

The framework should describe the evaluation objectives and specific performance measures; methods for collecting reliable, meaningful information; how agencies will measure and manage performance and resource this work; and how the outcomes will be shared across government and the wider community.

Our recommendations pertaining to the transit and ridership benefits also apply only to the Ministry of Transportation and Infrastructure. They were: recommendation 3, that the ministry "provide more detailed guidance on its requirements for estimating ridership and the economic benefits of transit projects"; and recommendation 7, that the ministry "update its guidelines to make relevant comparisons with observed data central to justifying and explaining traffic and ridership forecasts."

The audit findings from this project point to the following potential future audits: future work in the planning of long-term P3 arrangements; to further work across other sectors on the adequacy of business cases informing government's major capital decisions; and also how well agencies are measuring performance.

We'll now turn to the Ministry of Transportation and Infrastructure. We have Amanda Farrell, who is the executive project director of the Evergreen line project. Perhaps you can introduce your colleague.

A. Farrell: This is Kevin Volk. He's the director of transit for the Ministry of Transportation and Infrastructure.

Thank you very much for the opportunity to talk to you today and provide an overview of the findings and recommendations of the audit and present government's response. I apologize that a number of these slides may look familiar.

The Evergreen line rapid transit project will bring the Evergreen line to the Tri-Cities. It's going to be the newest addition to the regional transit network. The line has been part of a regionally developed transportation plan for almost 20 years, and residents in the Tri-Cities have been waiting for rapid transit to link their communities, cut commute times and provide more transportation choices.

The northeast sector of Metro Vancouver has experienced rapid growth and continues to be one of the fastest-growing areas in the region. The Evergreen line will support goals of doubling transit ridership and reducing greenhouse gas emissions by increasing transportation choice and getting cars off the road.

As has already been mentioned, the Evergreen line will provide a rapid transit connection between Lougheed Town Centre in Burnaby, through Port Moody to Coquitlam.

Just a couple more facts on the scope of the project. As mentioned, it's 11 kilometres in length. It will have seven stations on opening day, and that includes six new stations and expansion of the existing Lougheed Town Centre station. Approximately 5½ kilometres of the alignment is elevated, two kilometres is in a tunnel, and 3½ kilometres is at grade. It will take approximately 15 minutes to travel from Douglas College station down through to Lougheed Town Centre.

The project budget is $1.431 billion, and funding partners include the federal government, the province and TransLink. Also, additional funding for the Lincoln station is provided by the city of Coquitlam, the owners of
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the Coquitlam Centre mall and P3 Canada.

The Evergreen line is scheduled to be open in the summer of 2016, and I'm pleased to say that we're on schedule and construction is well underway. Just to be very clear, the province is delivering the project in terms of designing and building the line. Once it's complete, it will be transferred to TransLink, who will operate the line as part of the integrated SkyTrain network.

As you can see on the slide, it's a seamless connection at Lougheed, so passengers won't have to get off the train. They can travel straight through to Commercial-Broadway.

Just to recap, in October 2012 a notice of examination was issued by the OAG to the Deputy Minister of Transportation, advising that a performance audit would be undertaken of the Evergreen line. The scope of the audit encompassed an assessment of whether responsible agencies effectively informed government's decisions on the scope and procurement of the Evergreen line and whether government policy guidance for capital project business cases is sufficient.

The audit particularly focused on two key Evergreen line documents. The first was a 2008 business case/strategic options analysis, and that was the document that determined that SkyTrain would be the technology chosen for the line and that the line would travel along the northwestern route.

There was then a subsequent business case in 2010, which updated some of the 2008 analysis and determined the form of procurement for the project.

As the audit report recognizes, the business case documents were underpinned by an extensive body of evidence. The project team shared more than 140 documents, including thousands of pages of technical information and analysis, with the OAG team, and we held many meetings with the OAG staff between November 2012 and February 2013.

In addition, the project team arranged for key experts involved during project planning to attend interviews with the OAG team, including on the subject of ridership, cost-benefit analysis and project estimation and procurement planning. We're very grateful for the collaborative relationship we had with the OAG team during that time.

Key findings covered scope and procurement decisions, stakeholder input and readiness to commence procurement.

As mentioned, government was pleased that the OAG agreed that SkyTrain technology and the procurement choice are likely the best fit for government's objectives. Also of note is that the OAG recognized that the stakeholder consultation was reflected in our documentation and that an appropriate project management plan was in place for the procurement phase.

The OAG has made a number of recommendations to strengthen the planning processes for major projects and to strengthen the performance planning and reporting for Evergreen line, and we are acting on those recommendations.

Moving to the recommendations, as mentioned, they're grouped into three areas: the first, relating to guidelines, documentation and oversight; the second, relating to performance measurement; and the third, relating to transit ridership and benefit estimates. Rather than running through them again, since we've just been through those, I'll move to the government's response to each of those areas.

First, perhaps, touching on opportunities to improve business case planning processes. We do recognize that opportunities exist to improve capital project planning processes, including business case development. The audit findings will be used to inform the processes now underway to identify opportunities to improve the effectiveness of the CAMF guidelines.

The Ministry of Finance appreciates the Auditor General's comment in the report that the CAMF provides a good high-level guide for project planning. It's also noted that not only Ministry of Transportation but other ministries with large capital portfolios have developed detailed guidance to support project planning in their respective sectors.

The observations in the audit report are being taken into consideration as part of the ongoing updates to CAMF as well as ministry's detailed project planning guidance for their respective sectors.

In particular, the Ministry of Finance has the following work underway. A risk screen implementation tool has been implemented to help ensure that the level of oversight and review is commensurate with the risk and complexity of projects. The deputy minister's industry infrastructure forum has been established, and that is a committee between government and the B.C. Construction Association. They have actually set up a special subcommittee to provide feedback on the CAMF update.

The deputy ministers committee on capital is also providing enhanced governance over capital planning, including the CAMF update.

Moving to the development of a performance measurement framework for Evergreen and for future projects, the audit report does note that progress has been made in building a framework to measure and manage the performance of the Evergreen line.

The objectives for the project were set in the business case in both the 2008 and the 2010 document. They're consistent. The objectives include increasing transportation choice, supporting growth management, supporting environmental sustainability initiatives and some specific procurement and project delivery–related objectives. The project has a large volume of data that can be used as a baseline for measuring progress.

So after we had done this work with the Auditor
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General, which concluded in March of 2013, the project team took a lot of our metrics and developed a draft consolidated plan. We did that in May of 2013.

During the summer of 2013 we also decided that we would put an RFP onto B.C. Bid and find some expertise in performance planning — it's a very specialized area — and to have some due diligence work done on what we've done. We hired a consultant in 2013 to come and help us with our work.

The measures that we have include binary measures, which is sort of yes-no. Was the project delivered on time, on budget? Does it meet performance requirements but also longer-term performance measures relating to ridership, and ridership increases over time relating to land use? Also of particular interest was how we address objectives such as reduction in greenhouse gas.

What we did with our consultant was establish a workshop with MOT transit branch, with key transit planners, because a lot of these metrics will not be known until the project is operational. We also included Partnerships B.C., because whatever we do for the performance measurement framework for Evergreen is intended to be rolled out onto other capital projects.

We did have a very productive workshop. We had a lot of good feedback from the consultant. I think we had fallen into a common trap of having too many measures, just measuring everything we could. They very much made us focus on measures that are readily available and can be measured over time and would be used to influence decisions in the future.

Many of our objectives will be tied to existing tools, such as TransLink's trip diary, and also we're going to work with TransLink. A lot of data will be available through the implementation of the Compass card, which will provide much more management information around how the system is used.

The final performance measurement framework is being completed now and will be presented to the Evergreen project board in January for approval. Our project board meets quarterly. We will report, in our management report, on progress on a quarterly basis, going forward. As I mentioned, the intention is that this will then inform the companion recommendation, which is that guidelines be developed by MOT for other projects and, indeed, for Partnerships B.C. to roll this out into other projects.

I'm going to ask my colleague to talk about some of the Ministry of Transportation transit guidelines.

K. Volk: Building on and looking beyond the Evergreen project, the ministry is continually updating its frameworks for business cases to align with best practices, the recommendations of the audit, CAMF guidelines and the requirements of our funding partners, such as the federal government.

For context, prior to the Evergreen audit being released the ministry and TransLink had already completed the technical analysis but not any business cases for potential rapid transit expansion along Broadway in Vancouver and on three corridors in Surrey. This analysis is available on TransLink's website, and it includes detailed ridership forecasts, costs and risks for a variety of route alignments and technology choices.

The Broadway and Surrey work aligned with the government of Canada and the province's requirements at the time, prior to the audit, that had been established to ensure defensible forecasts on ridership project impacts and project benefits. That work has not gotten to the shortlist stage yet, so no business cases have been done. It's at the stage now where the recommendations of this audit would apply to those types of projects.

To that end, our business case framework will be updated by the end of the year to reflect the audit recommendations and be ready to use on any future projects that would arise.

The main goal of the changes to our business case framework, of course, is based on the audit recommendations, and it's to ensure that we have all the processes in place to provide Treasury Board and all decision-makers with the information that they need on costs, benefits, risks and trade-offs so that they can make an informed decision on future projects.

Speaking to some of the other specific recommendations in the report, the ministry continues to modernize its guidelines on integrated traffic modelling tools, sensitivity analysis and calibration of traffic based on observed data. This is done in partnership with TransLink and with Metro Vancouver through the updating of the regional traffic model. This is done approximately every two years.

In addition, the ministry is conducting a best practices review of traffic forecasting methodologies for major transit projects in jurisdictions across North America, where we can compare the forecasted volumes in the planning studies to the actual volumes and, from that, develop strategies for reconciling the differences.

We've also made the following changes to our practices. Our value-added analysis and value engineering evaluations were updated in August 2013. Our project budget development policies were reviewed and updated in July 2013, and our reporting templates for use as part of the project approval processes are being updated to reflect decisions, support recommendations, to ensure that the paper trail always continues. This will also be completed by December 2013.

As a whole, we hope that these actions and these improvements will ensure that decision-makers, stakeholders and the public all have the tools that they need to have an informed and open debate about the choices to be made on any future project.
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S. Robinson: I appreciate the quick response — I have to say that this is, I think, our fourth audit that we've reviewed — and the number of projects that you've accomplished since March 2013. We haven't heard from others in terms of the speed at which you're addressing some of these shortcomings, so my hat's off to you.

I do have a couple of questions going back to the Auditor's report. What I'm concerned about in terms of the process…. It sounds like the ends were the right…. According to the Auditor General's report, it was the right decision, but the process of getting there was really what the concern was about.

It begs the question if this was evidence-based decision-making or decision-based evidence-making. I'm just curious, from the Auditor's perspective, which one it was. Do you have a perspective on how the process unfolded?

R. Jones: I think it was based on evidence that was there in all cases. Not all of the evidence ended up getting to Treasury Board, but there was sufficient evidence behind everything that was done that they did arrive at the right decision. Along the way — you're right — there could have been better documentation of decisions that were being made, and better information could have gotten to Treasury Board, where the final decision was made. But in the end, it ended up being the right decision.

S. Robinson: So is it by sheer luck that it was the right decision or that it was just partial evidence?

R. Jones: I think it was more around that there was partial evidence. As we've pointed out, there needed to be more documentation to help support the evidence that was going to Treasury Board to make the final decision. It was there. It just, in a lot of cases, never got to Treasury Board. It's a matter of documenting more, documenting it better and just making sure that the requirements in the capital asset management framework are adhered to.

S. Robinson: Okay, thank you. I have a couple of questions about some of the assumptions that were used to inform the decision. One of them has to do with buses serving the Evergreen stations — a 50 percent increase over the service levels assumed by TransLink in the 2008 business case. Has there been some analysis done in case that doesn't happen? At what point does this no longer make sense?

A. Farrell: I can start by speaking to that. The assumptions that we used were based on that the provincial transit plan would be implemented, and that includes that assumption that you just mentioned.

Kevin Volk can speak to progress on implementing the transit plan. That was government policy at the time. We certainly had a range of ridership. At the lower end of the range, the impact would be in the order of 10,000 passengers a day — from 70,000 down to 60,000. So even if you looked at that range, you still would have supported the SkyTrain decision.

In retrospect, it would be good to show that sensitivity on the face of the document. We had all of that information in evidence. It's not something that we documented or drew attention to. These are the assumptions.

I think that when we worked, particularly, with Ray Winn, who's a transit economist, that was certainly his feeling — that he would have liked to have seen a discussion of: "What if this? What if that? What is the range? What are the sensitivities? At what point along the spectrum does the case no longer work?"

We do have all of that information. The sensitivities don't affect the outcome of the decision, if that answers your question.

S. Robinson: Yeah, that's certainly helpful. The other question I have has to do with the 500 park-and-ride stalls. I want to know if you've been able to secure all 500 stalls. You did talk about how one of the outcomes is to get cars off the road. You and I have had this conversation before. What happens if you don't secure all 500 stalls, and what are some of the impacts?

A. Farrell: Okay, I'll talk about that. At the time of the 2010 study — and it's pointed out in the audit — we hadn't completed a parking study, and that's another finding in there. We did do a parking study, and that indicated that we should have 500 net new spaces along the Evergreen line on opening day, which we have done. We've made that commitment. It's in our environmental assessment certificate. We're making significant progress towards getting those 500 spaces.

One of the things that you and I have discussed is where those will be. In our funding agreement with TransLink it envisages that those 500 spaces will be distributed between Coquitlam Centre and Port Moody Centre, where the two West Coast park-and-rides are. You'll see that's mentioned in the audit too. Then also we would really like to get a significant number at the terminus of the line around the Lincoln and the Douglas–Lafarge Lake station so that people can access the line.

Now, I know that you have an interest in the potential for some additional spaces towards the southwest, around Lougheed and Burquitlam.

A. Farrell: That's not encompassed in our agreement
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with TransLink. I know that there will be continuing demand for park-and-ride. But on the question of: will we meet the 500 parking spaces? Absolutely, we'll meet that.

N. Letnick: I grew up in Montreal. I spent a lot of time in subways. In my limited travels around the world, I've found the best way to travel is through the subway systems, whether it's New York or Paris or other cities. Since becoming an MLA, I've used the subway system here, of course — a lot from the airport to down here. I even once went to Metrotown.

Anyway, my compliments to the system, and pass them back to all the people involved with providing this wonderful way of commuting around the city. Obviously, as the city grows, the system will also grow. As a user — a small user, obviously — I am very happy with my personal experience.

My question has to do with the Compass pass that you mentioned. The only reason why I'm bringing it up is because you mentioned it. Obviously, when it starts, most people who ride the subway will be paying for it because of the way the pass is instituted. But you also said that it would provide you with more information. I'm curious to find out: what more information will it provide you that you're not currently getting today with your other systems that you have, and how will that benefit the taxpayers?

A. Farrell: Well, the Compass card is obviously a TransLink project. It's not a provincially run project, but we do work very closely with TransLink. Right now it's very difficult to determine where passengers get on, get off, how they connect into West Coast Express, how they connect to a bus.

There will be a lot more management data that will help us determine ridership, where the riders are going, where you might want to make changes to the system, so I think there will be opportunities to influence decision-making through the operations.

K. Volk: Not only will you have to tap in every time you get on at a station; you actually have to tap out as well. There will be very clear information about the volumes that are entering and exiting at each station.

N. Letnick: Right, so how will that new information help to improve service or reduce cost of service at the end of the day?

K. Volk: What it will do for TransLink in general is give them a very clear understanding of the ridership patterns, especially on the SkyTrain system — how many people are using the stations and when they're using the stations. It will allow them to tailor their service needs to exactly what their customers are wanting.

M. Morris: Just comments more than anything else. The results of the audit, I think, show that everything was done with good intentions and whatnot. In my world, there's more than one way to skin a cat. It depends on….

B. Ralston (Chair): That's back when you were the head of the Trappers Association?

The hon. member was the head of the Trappers Association at one point. He knows what he's talking about.

Anyways, audits are a process of continuous learning and improvement for the various agencies and whatnot. When I first read the audit, there were some deficiencies that were eyebrow-raising. But I'm really impressed, as Selina was saying, at the speed with which you addressed a lot of those deficiencies, jumped on it. I think you've done an admirable job there. It's a good project, and you've got some good bones around it, so thank you.

D. Eby: In the audit report there was a discussion again about how it was determined to go with the P3 rather than an entirely public project, or which type of P3 to select. The discussion says that there was a narrow margin of 1.75 percent that suggested it should be a P3, but then the Auditor concludes that MOTI and PBC were unable to produce the documents showing how this was calculated.

You weren't here earlier when one of my colleagues was discussing the need for rigour around these kinds of calculations. Have you found these documents, and were you ultimately able to produce them? Or was this just something that went awry?

A. Farrell: In the document that we produced, on the risk analysis there were two differential risks. One was around a schedule. We had a spreadsheet on that, and what the auditors would have liked would be more backup to the spreadsheet.

In terms of the other differential risk, there are a num-
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ber of scope changes. That was more based on experience. What we had to do in that case was produce…. We had risk workshops with experts who have worked on many of these projects in the past, who come to discuss and deliberate. We produced those experts. We did not produce specific documentation other than the risk report itself — but no backup.

D. Eby: To the Auditor General, here again we see less documentation, I guess, at the least, than we would hope for in this really important decision about whether or not to partner with a private company or to do this on our own. I hope this pattern is not missing you in our discussion that this is something of concern, certainly to the member from Burnaby and myself.

I hope that your office will be having a look at this — in particular that a group of experts would come together, and there would be an expert, informed judgment on a billion-dollar project. It seems very by-the-gut rather than by sort of an empirical method. If you have any comments on that, I'd love to hear them, but I simply wanted to note that we seem to be seeing a pattern here.

R. Jones: Thank you, Member. I would say that we would just like to encourage government and all the organizations, whenever they're getting involved in a P3, to ensure that there is adequate documentation to support these decisions. It's fine to sit down and have the chat, but it's also good to have the documentation there.

B. Gilhooly: If I could add to that, in all the work we've done on P3s over the last six, seven, eight years, there are a few consistent themes that have been flowing through. One is lack of key documentation. We think, as was said earlier today, that because they're very long-term arrangements, you really want to capture those key documents and know where they are in case there's a change in the project agreement or you have to open up the agreement for discussion.

Also, understand what you're measuring your performance on, the outcomes of the project objectives, which in many cases you won't know until the end. That's when you can finalize what the value-for-money assessment is for the project.

It's really important to know what you're measuring and have the right baseline information that you're measuring from, going forward. I think the ministry and Partnerships B.C. have been working on that, from what I'm hearing. We haven't actually talked to them yet, but it sounds like they're looking to gather the right types of information. That will be helpful later on, when they're saying: "How are we doing against the original plan?"

S. Simpson: Just a simple question here, because I'm trying to understand this, and I'm sure you can explain it to me. We have here what is not a more traditional P3, because it doesn't have an operating component to it. It's closer to a design-build model. And presumably, the difference here is the financing.

S. Simpson: Generally, it's accepted that, probably, public financing can be got at a somewhat better rate than private financing, that there's some advantage in public financing. It doesn't have the operating component of a more conventional P3 to get that return and to share some of the risk on that side.

Can you explain to me, then, what are the components here that say that this design-build-finance — but not operate — is a better model or a more economic model than a public design-build project?

A. Farrell: Absolutely. In the case of Evergreen line, we looked at a design-build versus a design-build-finance. In earlier iterations of the P3 analysis it would tend to be a design-bid-build, which would introduce more interfaces and more risk. But we decided that that wouldn't be realistic, that if the ministry was to procure this itself, it would do it as a design-build. That immediately shrank a lot of the interfaces where a lot of the risk is. It's why you see that they look so much closer than most other analyses come out.

With the financing, there's only a slice of financing in the DBF that we're doing, and it really acts as a much larger holdback, with the idea being that you only pay the full amount to the contractor when they've finished the work on time, to specification. There is a lot of good evidence that P3s come in on time. There's a very, very strong motivation for the contractor to finish on time, because if they don't, they have to pay the financing costs.

The two main benefits are the discipline around schedule and, also, that it tends to limit scope changes. That's just an anecdotal result. You know, what I can tell you is that there's an awful lot of rigour.

Every single month when we come to write our progress payment cheque to the contractor, because we need to know that the bank is advancing funds, we have a monthly meeting with the lender's technical advisor, with our own independent engineer, with our quantity surveyor. We tour the site. We verify that the materials are there, and then we only pay 64 percent of what's there. So we have a lot of security. The balance of that payment will only be made when the system reaches substantial completion and meets our performance requirements.

In addition, what we have tried to do on the Evergreen line is capture some of the benefits…. You know, it would be nice if it had worked as a long-term concession, but it didn't work as a long-term concession, because it's integrated into the system. So we've tried to capture some of the other benefits of a long-term P3 without it being
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a long-term P3.

When we reach substantial completion, we will hold back $40 million until the system has proved its performance. It has to prove a certain level of performance for 120 consecutive days before we return that payment. If they don't meet that requirement within a year, then they're subject to losing up to all of that $40 million. So we've structured it in a certain way to try to get the maximum benefit from the financing.

S. Simpson: A follow-up question, which is to the Auditor General. Is your office satisfied that that series of protections and that rigour that has just been spoken about — as we move forward through the construction, the completion of this project — and the assessment and the tools that are in place are going to be satisfactory to accomplish the objectives of the ministry?

R. Jones: I would say that they certainly seem to be very, very good tools to have in place. You know, the proof is in the pudding. We'll see how it plays out to the year 2016, but it certainly makes, I think, the proponent want to make sure it's done on time. And also, doing the holdback to make sure that the system's working…. I think that's a very good thing to have in place.

S. Simpson: Maybe just one last question about that. It's just about other projects.

We talked about these holdbacks as they relate to this. Of course, in a publicly financed project, the actual design and build is done by private operators. The government doesn't do that. The government's just writing the cheque more directly.

Would the ability have been there, essentially, with those contractors to have put the same kind of rigour and holdback conditions in place as you've put in place in this circumstance?

A. Farrell: Well, a typical design-build would have a 10 percent lien holdback, yes. But then you're back in the same place as the design-build-finance, because there'd be construction financing to finance that holdback. Really, that's what the mechanism is. It would be no different. The cost of…. There's no equity in design-build-finance. So the cost of financing is really relatively low.

S. Simpson: So you could have accomplished it either way. But fair enough, the decision was made to do it this way. Fair enough.

K. Corrigan: I had just a follow-up on Shane's question. A few years ago the spread was several percent between public and private financing. I don't know what it was at the time that this contract was being negotiated. But I don't understand what it is about the private financing, the 2 or 3 percent difference, that would be overcome by any of the benefits you've talked about. You just confirmed that you could do the same kind of holdbacks of the payments if you financed it publicly as if you financed it privately.

A. Farrell: No, no. Sorry, that's not what I said. I said if you were holding it back from the contractor, the contractor would have to finance and bridge that gap between doing the work and getting paid. That's what construction financing is.

So if you wanted to structure a DB with a larger holdback, it's no different than a design-build-finance. You have to bridge it. You don't want to pay for what you're getting until you have it, and that's the concept.

A. Farrell: No, I'm saying that there's a benefit to government of only putting out, in this case, 64 percent of the value of the work in the ground and holding back the rest until you're satisfied that it's been delivered and it works, rather than paying for 100 percent of what you've got with just a 10 percent holdback, which is what a design-build looks like.

On an availability deal, which is the concession, in some cases you pay progress payments. In the earlier jobs, you didn't pay anything until you got the asset.

K. Corrigan: Okay, I get it. But it doesn't seem to me that there's any advantage, because you're saying, essentially, that the private financier, then, would have to finance the construction themselves.

K. Corrigan: They'd be paying the same amount. So there's no advantage, then, one way or the other.

A. Farrell: I'm saying that a design-build with a large holdback is essentially very similar to a design-build-finance. It's just through our contract with the design-build-finance, we've put some parameters around the financing and how it's going to be managed. We get to control that.

K. Corrigan: Okay. Originally…. I'm looking at the little chart that is in the Auditor General's report on page 16. It talks about a 2004 alternatives study, a 2006 business case and a 2008 business case.

Just for a little bit of context, that 2006 business case recommended light rapid transit, and that was a business case that was done when the project was essentially locally controlled, before the province took it back. Is that correct?
[ Page 151 ]

I'm wondering if the Auditor General had that business case for this analysis. My understanding is that several requests have been made by various local government people asking for a copy of that business case. What they're being told by the Ministry of Transportation is that they lost it.

A. Farrell: The 2006 business case of TransLink is on TransLink's website. It's in one of their governance reports. We certainly provided the Auditor General with the 2004 alternatives analysis and the 2006 business case and access, where we could, to individuals who had worked on those.

K. Corrigan: You're with the Ministry of Transportation — correct? Are you aware of what business case it is that has been requested? Is it the alternatives study? You're not aware of this. I'll have to check with somebody, then.

A. Farrell: Well, the 2006 business case is readily available on line. I could certainly help you with that.

The 2006 business case is available. TransLink has not been able to find the support for how the numbers and analysis were built up in that business case. What is publicly available is all there is.

K. Corrigan: Does the Ministry of Transportation have the support and analysis that's missing?

K. Corrigan: That was TransLink. You don't have it. So I guess the Auditor General didn't get a chance to see that. My understanding is that that analysis significantly favoured the light rapid transit option.

A. Farrell: The 2006 business case did favour the LRT option, and in those numbers there is a high-level breakdown of the capital costs in that document. Those were revised and reassessed through the 2008 process.

K. Corrigan: So between the time that it was a local project and it was taken by the province, there was a reanalysis, and suddenly the P3 option became a better option.

A. Farrell: That document did not speak to the procurement method. It spoke only to the technology choice, as did the 2008 business case.

A. Farrell: Exactly. It was only about LRT versus SkyTrain. It did not talk about procurement options.

Okay, I want to go to some of the comments. The Auditor General said on page 26 that a P3 arrangement was recommended rather than a public design-build arrangement because this is consistent with government policy about delivering large projects under a P3 arrangement unless the public option is clearly superior — which seems to me is a rather weak endorsement of the decision, particularly given some of the other statements.

For example: "We assessed whether the procurement decision had been guided by an appropriate guidance and oversight framework…. However, documented evidence of review and quality control was lacking…. We found that none of the three agencies involved in developing and overseeing the procurement planning was able to provide evidence of their review of the procurement analysis and recommendations in the 2010 business case. The standard of recordkeeping fell short of what was needed to understand and justify recommendations."

Personally, it doesn't bring much comfort to me as a taxpayer to hear that, essentially, the decision that it was a P3 is defensible in that you're supposed to do P3s. There may be some evidence, but we don't have the underpinnings of the analysis, and information was lacking. I'm not very comforted as a taxpayer.

I'm wondering if you have any response to that, or if the Auditor General would like to further comment.

A. Farrell: Can I just start with perhaps responding to that? First of all, we are working within a policy framework that includes the capital standard. The capital standard says that if a P3 is equal to or better than the traditional, we'll go with the P3. There was a small difference for the P3, but even if it had been an exact wash, we would have gone with the P3. There is evidence that there's been a lot of success in delivering projects in that way.

I would suggest, perhaps to give you more comfort,
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that we got exceptional results for our procurement. Those are outlined in our value-for-money report. We certainly got much, much stronger value for money than we expected at the business case stage — a very, very innovative proposal.

In terms of our documentation of our processes, we certainly accept that there's room to strengthen our processes, but I would like to assure you that the Partnerships B.C. process includes a peer review process for every single project. It hasn't typically been documented, and that's something that Partnerships B.C. will do in the future.

While staying on the Partnerships B.C. front, the business cases also go to the Partnerships B.C. board for review and approval. That is documented, and those documents were provided to the Auditor General.

In terms of the work with Treasury Board, when we do capital projects, we're assigned an analyst. We work with our analyst. We visit Victoria to go through our documents with the analyst and answer their questions.

The issue here was that those meetings happened, but we didn't document them. Certainly, for the Auditor, we can show dates when these meetings happened, but there's not a written record of those meetings. I think that is the basis of the concern. But I would not want to leave you with the impression that those meetings and those peer reviews did not happen, because they do on every major capital project.

K. Corrigan: So the value-for-money report for the Evergreen line has been done.

G. Heyman: Notwithstanding that the Auditor General's report found that the SkyTrain option was probably the right choice, as a member of the Public Accounts Committee — and all of us as members — I think the public would expect us to focus on the parts of the report that say things like, "Many of the best procurement practices that are clearly laid out in the government's own CAMF guidelines weren't followed" — and that there were gaps in the business case.

I think your acceptance of the points about documentation are important, and going forward we trust that that will happen. But I think we'd be having a very different discussion here if the conclusion of the Auditor General was that, in fact, the wrong option had been taken or, in fact, that the gaps in the procurement practice resulted in the P3 being a more expensive option than the public. So that's the point of all of this. I think it's important for me to join my colleagues in saying that.

But having said that, I have a specific question about the future. The Ministries of Finance and Transportation and Infrastructure, along with Partnerships B.C., in your joint response responded to recommendations 3 and 7 with respect to transit ridership and benefit estimates that: "The ministry agrees that there would be benefit in developing guidance to set out requirements for the estimation and validation of traffic and ridership demand and economic analysis and to ensure that a standard approach is taken across major projects."

You do say that that work will commence in the coming fiscal year, which means you haven't commenced it yet. I'm wondering if you can help us a little bit by talking about how you might frame a standard approach and any of the factors that would come to top of mind that you would include in such a standard approach.

K. Volk: The standard approach would typically be done through a business case framework so that when you've got your business case, there would be some descriptions around that as to the types of inputs and the standardization of inputs that would have to be put into that. Integrated into your business case would be things like best practices for forecasting ridership, sensitivity analysis and all the other issues that you mentioned there.

Our approach to having a standardized approach to that and to guidance would be upgrading our business case framework. I'm not sure if you need more details than that, or whether that's….

G. Heyman: If you had them, I would be happy to hear them. If you don't have them or if you think it's too speculative, then I would look forward to hearing them in the future.

Part of my curiosity is based around some of the observations around either ridership that occasionally exceeds expectations, such as in the early years of the Canada Line, or ridership that doesn't meet expectations, which we see in some other projects for a variety of reasons. All of these, I think, are the variables we're dealing with in the transportation system today, some of which are caused by the delay in approving new services or infrastructure while we wait for funding models, all of which actually affect ridership. But they don't just affect it at the time; they affect it going forward.

One of the observations, for instance, by the mayor of Coquitlam in a forum in which I sat with TransLink was that much of the regional planning they did was around transit-oriented communities. They were designed for single-car pads because they expected transit to service those communities — that was the plan — and when transit failed to materialize, people made other investment decisions. They bought a second car. They were committed to a different form of travel.

All of that goes to questions such as: in crafting a framework, do you think it's possible and would you plan
[ Page 153 ]
to include variables like the impact of uncertainties regarding travel service, delays in serving particular areas, transit pricing?

I think there's a general belief that the price of transit today is either at or slightly beyond the point at which people are disincented to take public transit. And there's major uncertainty around the future of carbon pricing in the region, which is intended to drive people out of their cars and toward transit along with driving people to less carbon-intensive options, both in industry and in home heating and a range of other variables.

Are those the kinds of things that you think you could build into a framework to help make the case for transit or to make the case for transit at a particular time or to prioritize or to help determine whether there'll be appropriate return on investment, both financially and from the intended purpose of having more people take transit and holding car ridership at its current level?

K. Volk: Certainly. And a big part of options analysis is dealing with sensitivities and with risk — sensitivity analysis to understand all the different scenarios that can occur, especially with economic issues. The price of gas is going to be a big driver in how people use transit, how land use develops, all of that.

Those types of sensitivities would be incorporated into a business case. It's just a matter of finding out and determining — and there's a body of knowledge there — as to which of those factors actually do have a large impact on the type of decision that you might make. But again, it goes back to the fundamental principal of giving the decision-makers the type of information they need to make a decision, and if that's of interest to decision-makers, then it should be part of it.

B. Ralston (Chair): It's about ten to four. I have four more people on the list: Vicki Huntington, Marc Dalton, David Eby and Greg Kyllo.

What I'd like to do is try and finish this today, even if we have to go a few minutes over. I know members sometimes make plans based on adjourning on time, so that might be an incentive to make the questions a little crisper, and hopefully, we can finish near four o'clock, if that's possible. It doesn't preclude anyone from adding themselves to the list, but your colleagues may view that somewhat skeptically.

When you say that the development of the performance measures and of the framework for the business case will be shared, inform other capital projects, do you mean within your sector or across the ministry?

A. Farrell: Across the ministry and across ministries. We're also looking at rolling this — Partnerships B.C. will roll this — onto, for example, major hospital projects, schools, other projects.

V. Huntington: I wonder if Mr. Newton could comment on that. These shortcomings are…. There is a theme. Are you involved in developing a more standard approach to these capital projects, which I think appears to be quite necessary and would reduce a lot of the recommendations that we continually see?

S. Newton: My office isn't directly involved, but Treasury Board staff is. They support the deputy ministers committee on capital and capital decisions.

The CAMF framework actually lives in Treasury Board staff, and they are actively engaged in steps to upgrade CAMF based on a lot of the work that's being done in relation to responding to this audit and developing better performance measures.

V. Huntington: I won't go on. I just would like to say I don't know whether it's the leadership in this section or what, but what's really refreshing for me — in spite of all the other questions, I've had great value, I think — is to see a lack of a defensive mode and trying to resolve what I think are legitimate concerns out of the Auditor General's office. And just fairly, if not easily, resolved — at least willingly resolved. I think it'll be a better process throughout government if we can get these frameworks in place faster rather than slower.

M. Dalton: The $1.4 billion cost — is that constant 2011 dollars? Does that also include the financing charges?

M. Dalton: And just the integration with the West Coast Express — are the stations in the exact same places?

B. Ralston (Chair): : Yeah, that was easy. David Eby, see if you can match that.

I note that one of the contractors on this project is SNC-Lavalin Pacific, and I know that this is a company that had some issues with the Canada Line, in particu-
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lar with labour practices and associated litigation. How does your model incorporate risks due to a company's practices?

Frankly, SNC-Lavalin has had some challenges of late, and I wonder how you incorporate elements of risk into your decision about who is awarded a contract and who isn't.

A. Farrell: Okay. That's a little beyond the processes of the business case, but absolutely, I could talk a bit about the procurement. The procurement process that we went through was very rigorous in terms of looking at the potential partners. We obviously had a competitive selection process, and we went through and looked at their financial records and that sort of thing.

In terms of the labour practices, obviously the consortium is called EGRT Construction, but SNC owns that. I can confirm to you that they don't have temporary foreign labour on the project. That's obviously a discussion we have with them. But in terms of the due diligence of the partner, we went through a full due diligence review of any risks associated before we entered into the contract.

G. Kyllo: We heard yesterday where the Justice Institute basically worked with the Auditor General in more of a collaborative approach. I'm wondering if in the development of the business cases, you may want to utilize the Auditor General to have a look at reviewing all the information to make sure that everything is complete — you know, in process rather than after the fact.

Another thought was…. You'd indicated a holdback that you have on specific projects, and we heard earlier where there were some projects where, after the fact, the Auditor General identified a lack of maybe drawings or different change order documents and that sort of thing. I'm wondering if you guys maybe turned your mind to including that as part of your holdback provision to ensure that all the documentation is complete at the end of the project.

A. Farrell: Yeah, in fact, we have. Our contract is a very comprehensive contract. It runs to, I shudder to say, nearly 3,000 pages. We've learned lots of lessons since we've put this contract together, and we are making sure that we acquire everything that we want to acquire before we pay out, because once you've paid out, we know it's very difficult to do that.

In terms of the Auditor looking at the business cases as they go through, I'm not sure of the practicality of that, but I know that one of the recommendations in the audit is that there is a tool, a CAMF checklist tool, that we tick off and take to our analyst to show: "Look, here's the section of CAMF; here's how it corresponds to our business case." I don't know if that goes any way to answering your concern.

G. Kyllo: Yeah. No, it's great. So preventive actions are already put in place in the form of a checklist to ensure that those things are not overlooked in the future.

We'll adjourn debate on the issue of recommendations, as we have with all the others. Unless there's anything else, then the motion adjourn would be in order.

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Chair:	* Bruce Ralston (Surrey-Whalley NDP)
Deputy Chair:	* Sam Sullivan (Vancouver–False Creek BC Liberal)
Members:	* Kathy Corrigan (Burnaby–Deer Lake NDP)
	* Marc Dalton (Maple Ridge–Mission BC Liberal)
	* David Eby (Vancouver–Point Grey NDP)
	* Simon Gibson (Abbotsford-Mission BC Liberal)
	* George Heyman (Vancouver-Fairview NDP)
	* Vicki Huntington (Delta South Ind.)
	* Greg Kyllo (Shuswap BC Liberal)
	* Norm Letnick (Kelowna–Lake Country BC Liberal)
	* Mike Morris (Prince George–Mackenzie BC Liberal)
	* Linda Reimer (Port Moody–Coquitlam BC Liberal)
	* Selina Robinson (Coquitlam-Maillardville NDP)
	* Shane Simpson (Vancouver-Hastings NDP)
	* Laurie Throness (Chilliwack-Hope BC Liberal)
	* denotes member present
Clerk:	Kate Ryan-Lloyd
Committee Staff:	Ron Wall (Committee Researcher)

Witnesses:	Dave Duncan (Ministry of Transportation and Infrastructure)
	Amanda Farrell (Ministry of Transportation and Infrastructure)
	Bob Faulkner (Office of the Auditor General)
	Bill Gilhooly (Office of the Auditor General)
	Russ Jones (Acting Auditor General)
	Patrick Livolsi (Ministry of Transportation and Infrastructure)
	Mike Macfarlane (Ministry of Environment)
	Stuart Newton (Comptroller General)
	Jason Reid (Office of the Auditor General)
	Gregg Stewart (Ministry of Forests, Lands and Natural Resource Operations)
	Chris Thomas (Office of the Auditor General)
	Kevin Volk (Ministry of Transportation and Infrastructure)

REPORT OF PROCEEDINGS (Hansard)

SELECT STANDING COMMITTEE ON PUBLIC ACCOUNTS

REPORT OF PROCEEDINGS
(Hansard)

SELECT STANDING COMMITTEE ON
PUBLIC ACCOUNTS