Public Accounts — Issue No. 5 — Wednesday, November 20, 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 Report An Audit of Carbon Neutral Government (March 2013).

3. The Committee recessed from 11:13 to 11:24 a.m.; from 12:03 to 1:00 p.m.; and from 1:40 to 1:45 p.m.

4. The following witnesses appeared before the Committee and answered questions relating to the Auditor General’s Report Health Benefits Operations – Are the Expected Benefits Being Achieved? (February 2013).

• Lindsay Kislock, Assistant Deputy Minister, Health Sector Information Management/Information Technology

6. The Committee continued its consideration of the Auditor General’s Report Health Benefits Operations – Are the Expected Benefits Being Achieved? (February 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 Report: An Audit of Carbon Neutral Government	155
R. Jones
M. Sydor
T. Wood
J. Mack
C. Trumpy
D. Muter
Auditor General Report: Health Benefits Operations: Are the Expected Benefits Being Achieved?	189
R. Jones
L. Hatt
L. Kislock
G. Cookson
M. Gaston
S. Newton
Other Business	210

B. Ralston (Chair): Good morning, Members. We're dealing today with…. Our first report is An Audit of Carbon Neutral Government, which is dated from March 2013. Although there has been, I note from listening to the media and reading the newspaper this morning, some change in the method by which this program will be delivered, it would appear — and I suppose the government witnesses can confirm this or not — that the essence of the program will continue to be delivered, although in a different way. We'll leave that for them to speak about.

This morning our first report is going to be our audit of carbon-neutral government. Climate change, as you know, is seen by many as the major environmental issue facing us today. The 2007 throne speech announced government's goal to become carbon-neutral by 2010. In order to achieve carbon neutrality, public sector entities would have to purchase carbon offsets.

Activities to assist government in meeting its goal are facilitated through the Ministry of Environment's climate action secretariat and through what was the Pacific Carbon Trust.

We carried out our audit to determine if government achieved its objective of creating a carbon-neutral public sector by 2010. Our conclusion was that government has not met its objective of achieving carbon neutrality.

There were three major reasons for that that we've outlined. Criteria are not in place to evaluate whether government as a whole has taken sufficient actions to reduce emissions. The second one was that PCT has not purchased creditable offsets. I think you'll find in our presentation today we spend a fair amount of time discussing that. Then the third one was that reporting on achievements needs to be improved.

We've provided, in our report, six recommendations that we believe will assist government in reaching their commitments that were set out in the Greenhouse Gas Reduction Targets Act. Regardless of where Pacific Carbon Trust ends up, we still believe that those six recommendations hold true.

With me today I have, to my immediate left, Morris Sydor, who you've seen, the assistant Auditor General in charge of environment and a number of different areas in the office, in our performance group; and Tanya Wood, who was on this audit with him. I'm going to turn over the podium to Mr. Sydor.

M. Sydor: Good morning, Chair, vice-Chair, committee members. And good morning to all those listening to this broadcast, especially those who may be listening at 8 Bastion Square.

Tanya was obviously one of the auditors on this audit. She will be making a presentation. She will be summarizing the results of this audit and will be available, obviously, afterwards to talk about the results of the audit.

T. Wood: Good morning. The beginning of the presentation may reiterate some of what the Auditor General just spoke about.

Human-induced climate change, due primarily to fossil fuel use and land-clearing activities, is seen by many as the largest threat to the global environment today. In 2007 the province committed to reducing B.C.'s greenhouse gas emissions, a key initiative being the carbon-neutral public sector commitment, beginning in 2010.

As Russ just spoke about, carbon neutrality involves measuring emissions, reducing emissions where cost-effective and purchasing offsets to balance the remainder, thus achieving net zero emissions.

Public sector organizations pay the Pacific Carbon Trust $25 per tonne of emissions they generate. Pacific Carbon Trust has used these funds to purchase offsets by investing in emission-reducing activities.

In 2011 government announced it had achieved its goal of becoming carbon-neutral for 2010. The purpose of our audit was to determine whether government had achieved its objective of a carbon-neutral public sector.

To answer this, we did ask three questions. The first one was: has government established reasonable procedures to allow public sector organizations to determine their GHG emissions, and have they taken sufficient actions to reduce those emissions? Two, has the Pacific Carbon Trust purchased credible offsets? Lastly, has government evaluated and reported on the achievement of its objectives?

First, we found that government established reasonable procedures to determine emissions. However, it had not established criteria to evaluate whether sufficient actions had been taken to reduce those emissions.

Secondly, we found that the Pacific Carbon Trust had not purchased credible offsets.

Lastly, we found that government had reported on efforts to reduce emissions and its progress in achieving a
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carbon-neutral government. However, the PCT had not provided sufficient information about the costs and quality of its purchases.

We found that the climate action secretariat had provided reasonable tools and procedures for public sector organizations, as well as training and oversight to help ensure emissions data was complete and accurately recorded. However, while public sector organizations are reporting their emissions and the steps taken to reduce their emissions, the climate action secretariat had not developed criteria to evaluate whether reduction efforts are sufficient.

There is no requirement for government to set emission reduction targets for the public sector. Without having clear emission reduction objectives, efforts to reduce emissions over time may be limited.

Our second question considered whether the Pacific Carbon Trust purchased credible offsets. Our audit focused on two key challenges here. The first was ensuring that offset projects would not have happened anyway — that is, without the incentive of the offsets. The second is ensuring the offsets are not overstated, which involves ensuring baselines are properly determined and conservative. The baseline is an estimate of what would likely have occurred if the project was not undertaken.

Offsets must also meet B.C.'s emission offsets regulation and be validated and verified by accredited agencies. We expected the Pacific Carbon Trust to ensure the offset purchases supported credible projects. We found that the Pacific Carbon Trust did not purchase credible offsets.

We looked at two projects, the Nature Conservancy of Canada's Darkwoods forest carbon project and Encana's underbalanced drilling project. These represented nearly 70 percent of the offset requirements for 2010.

Projects are required to show that offsets were considered as part of the decision to implement the project. Neither project had met this test. In addition, both projects had baselines that were not properly determined.

The first project, Darkwoods forest carbon project. In 2008 the Nature Conservancy of Canada purchased Darkwoods, which is a 55,000-hectare forest in southeastern B.C. Darkwoods represents significant habitat for at least 19 species at risk, including grizzly bear and the endangered mountain caribou.

This project included the key assumption that if the Nature Conservancy of Canada had not acquired Darkwoods, the most likely purchaser would have been a liquidation harvester with little regard for environmental protections. This became the hypothetical baseline scenario for the project.

We found that the assumptions used were not conservative, which resulted in overestimating the emission reductions and overstating the carbon offsets generated by the project.

As well, we found the Darkwoods baseline did not recognize the legal constraints on the project area which were imposed by the federal ecogifts program.

This graph highlights three potential baseline scenarios in the project plan: liquidation logging, sustained yield and historical practice. The project scenario represented the Nature Conservancy's actual forest management plan. The number of offsets generated from the Darkwoods project was the difference between the project scenario and the liquidation logging scenario. As previously noted, this resulted in an overestimation of the emission reductions.

We found limited support for the scenario in which a buyer would follow unsustainable forestry practices. We assessed that the most likely purchaser would have been a certified logging company that would follow sustainable forestry practices such as those in the middle scenario, referred to as sustained yield.

Ultimately, we concluded that the conservancy had a legal constraint on what it could do with its property because the property was acquired in part utilizing the federal government's ecological gifts program. To stay within its legal obligations, the conservancy is restricted to the historical practice baseline. This scenario is shown on the graph there.

The second project we looked at was the Encana underbalanced drilling project, which resulted in emission reductions by reducing gas flaring during drilling. The gas is recovered, not flared, and then streamed directly into a pipeline for sale.

The emission offsets regulation requires proponents to consider the financial implications of their proposal. Because this project generated revenue from the sale of the captured gas, we expected Encana to show that the project was not the most financially attractive course of action. This was not done.

Preliminary information provided by Encana to the Pacific Carbon Trust on their project costs and gas recovery levels showed that the project was projected to be more economical than the historical practice of flaring. The financial analysis was not completed because the Pacific Carbon Trust approved the protocol and did not require financial aspects to be considered. The Pacific Carbon Trust does not have the authority to approve protocols.

It was a combination of factors which led to this outcome. For example, the regulation allows for considerable flexibility; therefore, we expected to find clear supplemental guidance in the key risk areas, such as additionality and protocol development. Instead, we found draft guidance that was not required to be followed.

As part of its due diligence, the Pacific Carbon Trust hired consultants to review key aspects of these projects. This work identified credibility issues, but the Pacific Carbon Trust did not ensure these were satisfactorily addressed before purchasing the offsets.

Also, the Pacific Carbon Trust was dependent on these
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projects because the B.C. marketplace was limited in its capacity to deliver needed volumes.

Lastly, the climate action secretariat did not provide the oversight we expected to ensure the offset purchases on behalf of government were credible.

Our third finding relates to whether government was evaluating and reporting on the achievement of its objectives. We found the government had reported on efforts to reduce emissions and its progress in achieving carbon-neutral government. There was a 6 percent increase in emissions between 2010 and 2011. Government attributed this increase in energy consumption to overall colder temperatures in 2011, consequently reporting a 3 percent reduction.

Overall, the reporting did not sufficiently address the risks facing public sector organizations in their continued work towards reducing GHG emissions.

We also found that the Pacific Carbon Trust did not provide sufficient information about the cost and quality of its purchases. The Pacific Carbon Trust is restricted to purchasing offsets generated in B.C. and paid more than record rates for both projects.

So as a result of our audit we did make six recommendations, directed at government, the climate action secretariat and/or the Pacific Carbon Trust. For example, we suggested government establish public sector emission reduction targets.

Other key recommendations included the climate action secretariat providing stronger oversight of the offset program, the Pacific Carbon Trust enhancing its own due diligence and improvement to reporting practices.

Any concluding remarks from Mr. Jones before I turn it over to the government, the auditee?

B. Ralston (Chair): Okay. I've got James Mack, who's the head of the climate action secretariat; David Muter, who's the acting CEO of Pacific Carbon Trust; and Chris Trumpy, who, in this role, is the chair of the board of directors.

J. Mack: Just by way of introduction, my name is James Mack. I am the head of B.C.'s climate action secretariat. We are a small office within government, reporting to the Minister of Environment, that primarily looks for a whole-of-government approach across the climate action file. We also have specific obligations related to the carbon-neutral government commitments.

I did want to note the Chair's remarks at the beginning about yesterday's announcements, which are accurate. The government has confirmed the policy intent of the legislation and the regulations that set out carbon-neutral government.

It confirmed its policy objectives of climate leadership — that the public sector would lead through action in reducing its own emissions and would continue to buy offsets. It did announce that after several years of running this program, the scale-up capacity needed to get a new industry, a carbon market in B.C., has been accomplished.

They have announced a new way of doing things, which is a more modest-resourced program that will reside within my office. I'm happy to answer any questions, as well, if there are questions related to that activity.

Just in terms of turning to the presentation, what I'd like to do…. I think, likely, most people are interested in getting to the questions and answers, so I'm happy to speak specifically to the presentation. But I think I'll make a few opening remarks and then leave it to questions and answers on the contents of the slides.

The first one I'd like to note is that this all started in 2007 with the Speech from the Throne that challenged British Columbia to show leadership — by government, but by all British Columbians. As noted in the Auditor General report in 2008, we introduced legislation about being a carbon-neutral government and set out in the legislation and regulations how we would achieve those objectives.

Of an interesting note for those not familiar with the accomplishment, a little-known fact is that immediately in 2008 core government said they'd be carbon-neutral for travel. And just as an example of how this works, since 2008 government travel has been reduced 60 percent. It's an emissions benefit. It's also a cost-saving benefit to taxpayers. And it has been a very concrete way that we can show leadership and discipline in the agenda.

We need to travel to serve British Columbians. So what do you do with that remaining 40 percent? We asked the Pacific Carbon Trust to go out and to invest in innovative emission reduction projects around B.C. that would complement that. And we achieved those objectives in 2008 and 2009.

So 2010 was our year to be a carbon-neutral public sector, and I would just say, as someone who works with my peers internationally, that it is a bold objective. It is, to be frank, not one that's been accomplished by other governments, at least in North America. It involves every school, university, college, hospital, core government and Crown corporation to measure their carbon footprint, take actions to reduce their emissions and, as is well noted in the audit, work through the Pacific Carbon Trust where they have remaining emissions to reduce them elsewhere in B.C.

How that works in timing is that we began that measurement exercise in 2010. In 2011 we effectively announced our results, both in terms of our first announcement on our entire footprint and the PCT — the
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first announcement of what we've invested in, in British Columbia by way of offsets.

It is, as an example, as someone who has completed a weight-loss program, the first time you step on the scales. I've reduced my caloric intake, and I've exercised, but it's the first time I step on the scale and see where we are.

As a rough number, it's around 750,000 tonnes. If you think of us as a government entity, that makes us the fifth-largest emitter in B.C. and sets a very strong bar when we begin negotiations with industry, small businesses and families about what they can do.

It's also a commitment that's been noticed by Washington, which has made a commitment to be carbon-neutral. They've given themselves more time. They'll do that by 2020. And it has been noted, as well, by companies in B.C. like Helijet, Harbour Air, Coast Hotels and others who've made similar commitments to show that they're part of the team.

In 2011, very late in the year, we also recognized some concerns with the program and launched a public engagement exercise primarily focused on a critique that the balance was off between efforts to reduce our own emissions and efforts to offset. In 2012 the government announced what's called a carbon-neutral capital program to provide funding to education so they're, in effect, made whole.

They're still carbon-neutral. The PCT still purchases offsets, but they receive dedicated funding to help reduce their emissions. I'm happy to talk about the results of those and other investments we've done.

You'll note that in yesterday's announcement the government signalled a policy interest to expand that program and is looking at those announcements in Budget 2014.

The audit itself — I would just say that I think it's a matter of the public record. In the government response, there are areas where we have disagreed both on fact and opinion with the Auditor General's office. In strong language, the government's response rejects the conclusion in relation to those two offset projects.

I would like to focus on, though, that we've found the recommendations all helpful and, during the conduct of the audit, tried to take some efforts to make progress while the audit was ongoing. Again, there are specific examples in the PowerPoint.

Definitely, we've looked very seriously at these in terms of how we can improve the program today and how we'll improve it in my office. Those include findings like around clarity of the role of my office, where we've acknowledged that the Auditor General has found areas where we do need to be more clear, formalize procedures and take more action.

I would just like to set that by way of tone, and if the committee is interested in specifics, I'm very happy to do that.

C. Trumpy: Just by way of introduction, up until recently I was the chair of the Pacific Carbon Trust. With government's announcement, that is no longer the case.

B. Ralston (Chair): Oh. You aren't anymore? I thought you were. As of yesterday?

C. Trumpy: As of government's decision. I think there was a gap between the decision and the announcement of yesterday. Wes Shoemaker is now the sole director and chair of the corporation.

In a previous life I was a deputy minister for the province — relative to this audit, both Finance and audit. So I've had quite a bit of experience with audits, both performance audits and financial audits that the Office of the Auditor General is responsible for.

I guess it's fair to say that over that time I have been involved in lots of discussions with the Office of the Auditor General. In some cases we've agreed on things, and in some cases we haven't agreed. But I do respect the role of the office and the job that it does. It's important that independent officers of the Legislature like the Auditor General exist because they help hold us accountable, and that's an important part of our system.

I think at the outset of this audit we were looking forward to constructive recommendations coming from the office to help us improve. We were new. Now that we're phasing out, I guess, we don't get into a middle-aged part of life. But we knew we had stuff to learn. In fact, I think we've made lots of changes and improvements over the time that we did exist.

But I think it's fair to say this was a tough audit. It was tough for the office, and it was tough for us, as sort of part of the audit universe. There were disputes over facts. We would dispute some of what you heard earlier. There were disputes over interpretations and disputes over roles that, from my perspective, were never resolved. That has sort of led to the response that we made when the report came out.

My view is that the audit fundamentally represents a difference in position taken by experts. On the one hand, we had independent expert advice looking at these projects. The office went in and looked at it and applied their expertise. The experts reached different conclusions. No surprise, perhaps — we'll stick with our experts. The office has a different view. I guess some of those differences of opinion and differences of fact should come out today.

I would say that my experience with this audit is that it sort of leaves me with a couple of questions in terms of how this could have gone better, perhaps not with a different outcome. There are some things in the way the audit got done — not this particular audit…. But this particular audit led me to wonder about the way audits,
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generally, are done.

I know that's beyond the scope. If the committee wants to get into that discussion, I'd be happy to offer some ideas. If the committee doesn't want to, I'm going to send a letter off to the Chair and Russ, in any event, and see where that goes.

I think Mr. Muter just has a few comments with respect to the recommendations as they apply specifically to the carbon trust.

B. Ralston (Chair): Sure. I mean, there is a deck of slides. It might be helpful to members just to take us through those slides quickly, given that you've taken the trouble to prepare them.

D. Muter: Thank you, Mr. Chairman. Maybe we should go through the slides one by one, James and myself.

J. Mack: David and I will pass back and forth, as the recommendations relate to both organizations.

On slide 2. I think I summarized this in the opening remarks, but again, the legislation is clear on the obligations, and this is consistent with how other entities are carbon-neutral. You measure, you take actions to reduce, and then where you can't reduce or you need more time, you invest in other emission reduction projects or offsets and report on those results.

In slide 3, the government's overall response…. Again, I mentioned it very quickly. I think we, in all cases, found the recommendations useful and have tried to take actions to move forward from those. But again, on the matters of the two offset projects, our position is that we rejected the conclusion that we are not carbon-neutral.

The second bullet is that the design of the system is one where the government chose not to establish credibility itself in terms of offsets but to basically rely on a third-party independent. This would be a firm — KPMG is one of them; there are other examples — that, effectively, as a neutral third party, will attest to whether that offset does comply with the regulation and is in fact an offset.

As we've noted, those experts have confirmed that. We're more than happy, again, to talk about the actual offsets and the evidence, but our position is that we need to rely on a third-party, independent expert, and we've done so.

Slide 4. The first recommendation is around working with the public sector organizations to ensure reasonable actions to minimize…. I'll note in this one, just as an example, a small example on a disagreement.

The Auditor General's conclusions were that we had not established targets — and he was unable to evaluate progress. There is a section in the legislation called setting targets for government. Effectively, it lays out two obligations for us in that and, basically, that we have to take actions to reduce our emissions. The design of the system…. Effectively, the target is zero, and you get there through reducing your emissions — or offsets.

We did find the Auditor General's…. To show how this works…. We disagreed with the lack of targets, but we did agree in the value, in terms of measuring the reductions over time. We've incorporated that in our future reports, and our response says quite specifically that we'll look at our progress in line with B.C.'s provincial targets, which are a 33 percent reduction by 2020.

I have examples here of projects where we've worked to reduce emissions. I would just mention that these are very successful projects, and I think we've got a growing sense that it's a good direction for government.

In particular, the University of Northern British Columbia pursued a biomass system funded through an early — what I call a kickstart — program that we had on capital. As a result of that, they've been able to reduce emissions, lower energy costs, provide training opportunities for the students and were recognized as the most sustainable project in North America, which they shared with Harvard. As an example of a result of this program….

I've seen these students at UNBC. For them to share the stage with Harvard is kind of a big deal. It was actually quite a cool project. They're very proud of it, and we're proud now to have a carbon-neutral capital program that's doing those similar activities in the K-to-12 sector in B.C., moving forward and hope to have more opportunities there.

On slide 5, recommendation 2: "...supplementary guidance to the…regulation be finalized and adhered to." This was, we felt, a solid finding that the Auditor General had made. They looked at our 2010 year. Again, it's our first year. There are powers in my office to basically set rules.

An example of how this would work. Forestry is, obviously, an important sector for B.C. When we started, there was a lot of disagreement around what the math would be, as we looked through these. We have a director in my office who issued what's called a forest carbon offset protocol. I highly recommend that no one read it; it is a huge accounting and science exercise. But it sets a common standard so that you can't have two different sets of math when you do projects in B.C.

We recognize that we need to do more on these things. It was an early-day finding, and we thought that that was useful. We learned a lot when talking to the OAG about how difficult it was to be clear on those roles and responsibilities on the guidance. And we've done work since then.

D. Muter: Maybe just by way of opening, I'll start by saying that, overall, as a business that was established not that long ago — 2008 — we've tried to focus on how we might improve our business and look for outside expertise to guide us in that. In that light, the recommendations that the Auditor General has provided for Pacific Carbon Trust were quite helpful to us in improving our business.

On this specific recommendation to PCT — to better manage offset purchase risk, ensure due diligence is satisfactorily analyzed, concluded and documented — we've taken some action already and implemented some changes to our process to address this.

We asked Deloitte and Touche to review our business processes with a specific look at due diligence and risk management across all the offset projects that we purchased and make recommendations for improvement. They provided us with 20 recommendations. We asked them to come back and do a follow-up review against us on our performance against those recommendations. They've commented that we've made good progress or completely addressed 16 of their 20 recommendations.

We've also adopted an enterprise risk management approach for our entire business, including our offset purchases. We're using a risk registry that's provided to us by the Ministry of Finance — their risk management branch — that we've adapted to our business. We found it's quite helpful to apply that to our business.

We've included monthly reporting on all of our offset projects to ensure that projects are on track to meet the emission offsets regulation. And we do a year-end internal audit of every single offset project that's been delivered to us to confirm any lessons learned — how we might change our business process that's going forward.

In conclusion on this recommendation, we're going to…. Well, it doesn't apply anymore. It says there we'll continue working with other industry experts. But as you've heard, that's going to change over to James Mack's office going forward.

Recommendation 4 — again, similar to 2 — speaks about the "stronger oversight to ensure that offsets purchased on behalf of government are credible." Again, this was one…. To be clear, it's the Pacific Carbon Trust's job to purchase the offsets. They are the ones that exercise that authority on behalf of government. We have what I would refer to as a systems role. Remember, too, that the legislation is designed with the long-term goal that there may be other entities regulated to buy offsets in B.C. That's currently not the case, but in the design of the system, that's definitely a policy option.

We have an ability to access information related to offsets and, again, to set forward-looking rules on how those are done and to work with the professional community. We have been working, during and since the Auditor General's recommendations, to try to formalize these procedures. I would say, candidly, that this is an area that we need to improve. We definitely learned a lot talking to the OAG about our state of readiness on that on day 1, and we've taken that recommendation to heart.

D. Muter: On this recommendation, we've already applied some changes to our processes on this. What we've done now is adopted a policy of publishing all offset purchase prices on an annual basis. You can find the individual purchase price for each offset project on our webpage for each year that we've purchased offsets for.

We also have provided on our webpage details on how we negotiate the purchase price of each offset project, the framework and the considerations we apply, on looking at the value of each individual project and the risk of each individual project. That framework, the outline of it, is included for the public on our webpage.

We've negotiated each individual offset price in order to get the best value we can for our public sector clients. We look at the individual risks of a project, the other co-benefits that come with it, what other comparable projects there might be to that project that might provide better value at a better price, and we negotiate on that basis. Going forward, the publication of offset purchase prices will be under the climate action secretariat.

J. Mack: The next slide, recommendation 6, reporting on carbon neutrality. The audit focused on the carbon-neutral 2010 year. During the conduct of the audit we'd issued the report on our 2011 year and since have reported, as well, on 2012 — I'm trying to remember what year it is — so we're finalizing our 2013 year. I'd be happy to provide copies to members who have interest.

Our carbon-neutral report does try to address this recommendation in terms of the comparative benefits and the comparative level of effort and results in terms of reducing our emissions and in purchasing offsets. So our hope is that our measure of reporting to date has fully responded to this recommendation.

I would flag, too, that there's a whole other section of this around how you actually measure. On emissions and carbon footprint, there's quite an active professional community. We have engagement mechanisms where we seek these out as a group of peers and improve our measurement efforts and work with others, including the business community and local governments, who are now stepping up to this challenge.

As a final note, we anticipate, with local governments who've made their own commitments…. We're seeing a strong take-up by local governments in terms of their own actions on their corporate emissions. We are trying
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to share with them our lessons learned, both in terms of our experience as well as the finding of the audit, in how to improve those systems.

I think if you go to slide 10, that'll say that I'm finished. At the risk of sounding poetic, the summary slide, we are the first carbon-neutral government in North America. We have found that, as I said…. You know, stepping on the scale, my weight wasn't where I wanted it to be. We've tried to take actions moving forward.

I would say, as the head of the secretariat, I hold my office — and I know David does the same to his — to a high bar. It is of leadership, and so we are seeking to be the best. In that sense, I hope we've given information about how we've tried to take the recommendations to heart — not to take away from the disagreements around facts and matters of professional opinion.

I'm happy to answer any questions on the matter of the audit. And as I mentioned with yesterday's announcement, I'd be happy to answer questions on those as well.

G. Heyman: I'll have, perhaps, a question in a little while about the actual measures that were taken to determine whether the offsets were credible, because I think that goes directly to your claim that we are the first carbon-neutral government. If the offsets, in fact, aren't credible, I think that calls your claim into question.

But let me begin by looking at the comment that government has not yet established criteria to evaluate whether government as a whole is taking sufficient actions to reduce emissions and whether any actions that are being taken are sufficient.

My question is: for the climate action secretariat, what criteria did you use to determine that it was better to purchase offsets to achieve a goal of carbon neutrality? Notwithstanding the fact that there are many real experts and self-proclaimed experts in the field, the whole question of offsets is, in many ways, highly controversial and continues to be, to the point where some people question whether you can actually claim carbon neutrality on reductions that are projected many years into the future.

Set that against the other possibility that was before government in the climate action secretariat, which was instead of investing in offsets, investing in real, tangible measures to reduce carbon emissions in public institutions and buildings by any manner of introduction of energy-efficient technology, which would lead, I would think, to a number of benefits to taxpayers.

For one, it's a capital investment in facilities that taxpayers actually own, as opposed to facilities that are owned by the private sector. It's arguably a greater job producer and an opportunity to train and develop skills in new industries in British Columbia, which also returns money to government, and it directly improves the buildings and the energy efficiency of government facilities. I'm not even dealing, necessarily, with some of the other processes like travel.

What methodology did you use to determine that it was better value for money to taxpayers to invest in offsets rather than simply invest in actual emission reduction in the public sector in British Columbia? Following your response I would like to hear a response from the Auditor General — the Auditor General's opinion about value for money for the taxpayer in B.C. through this whole program.

J. Mack: I'd like to start just by recognizing and agreeing with your point on the policy debate about the role of offsets. I think in my presentation here…. I don't wish to try to convince members about whether a policy objective is the right one or not the right one. I do happen to do that a lot, so I'll sort of resist the temptation. But I think it's a good debate.

B. Ralston (Chair): Generally, the purview of the Public Accounts Committee is not oriented towards policy. We're looking at assessment implementation. So it's not really a forum for policy debate, although we do touch on it. I'm sure you know that, but I just wanted to remind members of that as well.

Just to say I think that's a good debate to have: which are the right policy tools to pursue action? As a simple measure in terms of how my office…. And I don't want to sort of evade the question, but just to say that that is a good policy discussion to have, and there are respected policy thinkers who disagree with the choice to pursue offsets as a policy. Again, we engage in those policy debates.

In terms of how my office enters into it, to be very clear, we deliver on the wishes of the Legislature and of the government. In fact, the legislation directs us on this matter. There is a section of our act titled "Targets for carbon neutral public sector." It puts two legislative requirements on us.

One is that we must be carbon-neutral for years and years. That means that we have to effectively purchase offsets or reduce our emissions to zero. The other requirement, which is very important, is we must pursue actions to reduce our emissions. Each public sector organization must pursue actions to minimize its PSO greenhouse gas emissions.

In that sense, the short answer is that we were directed by the Legislature to pursue both elements of that agenda. And we've, in our view, done so.

To speak on the emission reduction side, the government, as well in 2008, when it set the legislation, noted to be carbon-neutral in 2010…. The government did direct us, with again what I'd casually call a kick-start program,
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formally titled the public sector energy conservation agreement. We partnered with B.C. Hydro and FortisBC.

The government contribution was a commitment of $75 million into the public sector to get started in reducing our emissions even in advance of knowing what our whole footprint was. There are some success examples against that. We have continued to take actions within our capital budgets across government to pursue those.

There is an increasing evidence base in B.C. of the value of those investments in reducing emissions; reducing energy costs, which help operating budgets; and other things that we didn't anticipate, like learning outcomes for students and university students.

It has become a mild platform for our export markets, where foreign governments come to see what a B.C. company can do, and if it's in a B.C. university or a B.C. hospital — I didn't know this when we started — it tends to carry some weight. I would agree with you on the value of those reductions.

We agreed with the Auditor General, and we agreed previous to the audit, in the public engagement, that there is a question of balance, and the government is committed to do more in terms of reducing its own emissions, but in terms of the balancing act, that was requested of us by the Legislature.

I guess the last point I'd make is, as a policy…. There's a charge on the public sector of $25 a tonne, which is in addition to the carbon tax. Our policy approach set by government is not to dictate solutions but to use a market mechanism. That's a choice that my office has implemented.

So $55 a tonne basically helps a public sector organization identify two things. One is: is this a reasonable investment that makes sense? And secondly, it helps them defend against what I would call unreasonable investments — high-cost measures to reduce emissions that, in the current market, wouldn't be reasonable.

We've used, again, as directed by the government and the Legislature, a market-based approach. I think the Auditor General had a view that there was a need for defined reduction targets, and we've tried to incorporate that in our path forward.

G. Heyman: I was interested in the Auditor General's comment about value for money to the taxpayer, and maybe I'll focus the question. I am interested in your general thought on that, but maybe I'll focus the question a bit more in terms of one of the recommendations, which was that measures be put in place to identify and address barriers to greenhouse gas reduction faced by public sector organizations and whether, in your opinion, sucking money out of public sector organizations, directing them to the private sector, is in fact a barrier.

We did identify the fact that, in our view, there should be a target set, as was indicated earlier by government members. Provincially, the province is looking for a 33 percent reduction. How much of that should the public sector match? Is there an expectation that the public sector also reduce its emissions by 33 percent? Nothing like that was in place.

What we were looking for was some sort of identification by government as to how aggressive it expects public sector organizations to be in reducing emissions. Ultimately, that's what's required — a reduction in emissions, in terms of the carbon that's being emitted into the air.

If we look at it globally, there have been billions and billions of dollars spent on offset projects, and each year we keep recording the fact that the amount of carbon in the air keeps going up. In fact, it was recently reported that 2012 was the highest level we've ever recorded, so all the offsets that have been purchased as a policy tool have not been totally effective.

I think if we look back, we've seen that there have been issues similar to the ones we've raised with these projects internationally, in that the number of projects has been found to not be additional, to overstate the amount of offsets that are available. So our expectation was that government would try to identify for organizations the level to which it expects them to concentrate on the reduction aspect rather than continuing on with maybe doing minimal efforts for minimizing and then just paying the $25 for the tonnes that exist that need to be offset.

We were trying to see: does the government expect the public sector to match the provincial target that it has in place? That's what was missing. So we still think that for an organization to get a clear sense of what government's expectations are, there needs to be a target, and that's why we have that recommendation.

J. Mack: Well, I think I would just like to acknowledge the policy debate around the role of offsets and the effectiveness of offsets. I'm not here to convince members about policy choices, but again, I'm frequently known to engage in these discussions outside the office. I take that as a point of view.

I would like to flag that almost every government that has taken action on climate change has some form of commitment of reducing its own emissions. Most have, in fact, set targets. Few have actually done anything meaningful to implement them.

Our policy approach was actually by using a price that in fact allows for the thousands of capital planning and management decisions that happen across the pub-
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lic sector to respond to that level of effort. Again, that's a policy choice.

I'd be happy to…. Well, actually I should avoid criticizing my colleagues in other jurisdictions, but there are many examples of targets that have not been met. So I would just say that there are good debates on both sides — the value of corporate emission reduction targets without strong policies to meet them and, likewise, the use of offsets.

I would mention that we do concrete measures on reducing emissions. All new public sector buildings are built to a LEED gold requirement. That's a standard that was almost unique when we created it. The government of Alberta, as a signal, has implemented a similar standard to LEED silver for all their public sector buildings, I think within the last year. The city of Vancouver has incorporated those requirements.

That is a real concrete measure that the government has put in place so that this 2 percent turnover of buildings we see are built to a standard that we can assess against, looking forward. That's an example of what we've done.

We have behaviour change programs, what we call green teams in every public sector organization who work on the behaviour change element. I would mention there are 300,000 employees who work for the broad public sector. So this is an outreach mechanism we have around the small actions like turning off light switches and setting energy efficiency defaults on your computer. There are reams and reams of evidence of these actions that we've taken that have resulted in real change.

Each public sector organization works with us. They talk about what measures they've undertaken. They're transparently reported. It is a significant undertaking. The recommendation that we should do more, we accept. I think that we have continued with efforts like the carbon-neutral capital program for the education sector. It is a recognition by government to do more in terms of reducing its emissions.

B. Ralston (Chair): Certainly, I appreciate your wish to explain what the climate action secretariat is doing. It seems to me that the audit — and maybe members want to address this in their questions — was focused not on the difference between two policy choices. But having made the policy choice to pursue offsets, the report directs itself as to whether that intention has actually been carried out. The clear conclusion is that the major two projects didn't provide credible offsets. That seems to me that's more an issue of implementation; it's not about policy choice — just so that my remarks have not been misconstrued.

R. Jones: Just for the interest of the new members on the committee, I just want to emphasize that one of the things our office cannot do is comment on policy decisions. What we can look at is: are there any unintended consequences of those decisions? But we can't comment on policy. So within the policy that was chosen, we have, as the Chair has mentioned, taken a look at: were the choices within that policy decision…? Did they result in good value for money?

G. Heyman: I appreciate that, and I understand that this isn't, strictly speaking, a value-for-money audit and that I'm now pushing the line here a little bit. I'm not questioning the value of market pricing, that there's more than one way to market price the public sector.

My point is that we're the Public Accounts Committee, here on behalf of the people of British Columbia, and it seems to me that even within the context of not questioning a policy, it's legitimate to look at value of money for the public of British Columbia when the door has been opened so wide.

L. Reimer: Thank you for this very detailed report. I have been a little bit confused in reading the report. To give you an example, on page 18, where it says that there is "no requirement for public sector organizations to have GHG emission reduction targets," yet on page 12 here it says that we "passed the Greenhouse Gas Reduction Targets Act that put into law B.C.'s targets for carbon reduction." I found those two statements very contradictory.

I'm also from local government, and I saw the good work that the city of Coquitlam did to reduce its greenhouse gases. So when I saw the recommendation regarding public sector organizations, I wasn't certain that we got or local government got enough credit in this particular area. I don't know if you have any comments in regards to that or not.

The other issue that has struck me throughout this whole conversation…. The recommendations were great, and I think the ministry really appreciated the recommendations set out by the Office of the Auditor General, but it struck me that there are possibly different standards being used amongst us all to determine whether or not an offset purchase is credible. As an example, with the Darkwoods project, it was called the verified carbon standard, and in Encana's case, the requirements of the emission offsets regulation were utilized.

I guess I would ask the Auditor General…. There are standards that are out there internationally. I guess I'm wondering what standards you're utilizing. And in moving forward, if you're to audit the government again on this sort of thing, is there going to be that discrepancy again between what standards you're using and what standards are being utilized by our ministry? It would be nice to operate all under the same standard with respect to offsets.
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R. Jones: I'll pass this over to Morris, since they were involved in the application of the standards in the audit and what we used.

M. Sydor: Yes, there were a number of questions there. I'll try to recall them all.

First of all, with regard to local government, local government is not part of the public sector that's measured in terms of purchasing offsets for carbon neutrality. That's why there's no reference to that.

The second part you mentioned was that you see a contradiction between us saying there are targets in place for B.C. and no targets for the public sector. There's no contradiction. The target for B.C. is 33 percent. That's for overall British Columbia, all the industry that's out there. The expectation is that you, I, industry as a group will reduce our emissions by 33 percent. As was discussed earlier, for the public sector there's no target. There's a balancing that's in place.

In terms of the difference between our expectations and the ministry's, there is none. Our report is quite clear that what we looked at was whether the projects follow the requirements of the EOR, government's regulation. Do they follow government's regulation? Even though Darkwoods was validated to VCS standard, it still had to meet the expectations of the EOR. That's what we assessed the projects against, and as we commented in our report, both projects failed that test.

M. Sydor: The Encana case. That was a protocol that was endorsed by Pacific Carbon Trust, and as we indicated, Pacific Carbon Trust did not have the authority to endorse protocols. But within that, as well, it had to meet the expectations of the EOR, so as well, we looked at the construct of that project and whether it met all the requirements of the EOR, and it failed that as well.

So both projects we assessed against EOR irrespective of the basis on which the protocol was developed.

D. Eby: Slightly different questions. I was captured by the opening letter from the Auditor General, in particular the paragraph where he says:

"Of all the reports I have issued, never has one been targeted in such an overt manner by vested interests, nor has an audited organization ever broken my confidence, as did the senior managers at PCT by disclosing confidential information to carbon market developers and brokers.

"The orchestrated letter-writing campaign from domestic and foreign entities which followed this disclosure demanded considerable staff time and resulted in the delay of this report. I cannot sufficiently express my surprise and disappointment that a public sector entity, with a fiduciary duty to the people of British Columbia, chose to expend its time and energy in this manner, rather than addressing the concerns raised in the audit — and that they did so with the knowledge of their governing board."

Then today in the presentation we learn that you've hired a private auditor, Deloitte and Touche, to provide a second audit for which you've fulfilled 16 of 20 recommendations — hired at public expense — when there's already an auditor in the room that has provided an audit with which you don't agree, which is fully public and which this committee was set up and established to ensure accountability to.

C. Trumpy: The member asked a fairly…. That's a fairly wide range. I'll deal with some elements of that. Dave Muter will deal with some of the other elements of that.

With respect to the Auditor General's letter which talks about fiduciary obligation, I'd respectfully disagree with the Auditor General's view on fiduciary obligation. I think the fiduciary obligation of a board of a Crown corporation or of any entity is to that entity. I would not want to downplay the other role of the taxpayer here, but I think the obligation of a board of directors fiduciarily is to the corporate entity. I think that is set out in governance policy framework around any Crown corporation or any entity.

With respect to the use of Deloitte Touche, the Auditor General's audit focused on two specific audits, and the Auditor General came up with five recommendations. Our processes that we use as an entity are much broader than the things that the Auditor General looked at.

Frankly, as this audit evolved, we undertook a number of steps to satisfy ourselves or to question whether what we were hearing from the Auditor General were things that we should be acting on before the report came out. The work Deloitte was doing was to make our processes better. I think we as an entity have an obligation to try to make our processes better and improve our processes.

With respect to the comments around disclosure of information, I think the committee needs to understand that the way this procurement process was structured by government was to require the PCT to have verified and validated projects coming from outside parties. We were not set up to actually have the capacity — or the expertise, frankly — to do that work, to verify and validate.

When the Auditor General came back to us and said, "We have questions on specific…." We got our preliminary recommendations, and we needed answers to questions. We went out to the project proponents with those questions. That, unbeknownst to management — and perhaps management should have known…. The expectation at the office was that that information was confidential. At the meeting that that information was shared it was not identified as confidential.

We went out. We got the feedback from the proponents. We passed that back to the office. As a result of that exchange, there was a lot of anxiety that started to build in that expert community, and they started to contact
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the office directly.

I think the Auditor General in his letter expressed some very strong views. I recognize that. I think there is again a difference of opinion and perspective with respect to his comments.

D. Muter: Maybe just a couple of details on how Pacific Carbon Trust conducts its business in general to all offsets and the emission offset regulations.

We purchase offsets that follow a standard, as has been mentioned. It's the emission offsets regulation. Under that standard it removes us as the purchaser from having any authority over defining credibility of offsets. We look to the defined third-party accredited experts, who provide an opinion for us on whether or not the offsets are credible. We look to have that opinion provided to us before deciding to purchase or not purchase.

In the case of both the Encana and the Darkwoods projects, we did receive that positive statement of assurance from multiple third-party accredited auditors. When we saw the draft findings from the Office of the Auditor General, we were challenged. They were different findings. They were asking us to look at the facts and provide a response to any errors that we saw in those. As we saw, it's the difference between accredited third-party auditors that are named under the emission offsets regulation as being the ones we should be paying attention to as a standard, compared to the opinion of the Office of the Auditor General.

It was a challenge for us. We sought to find answers to provide the Office of the Auditor General with facts and information from those third parties to respond to those differences of opinion. We were, as the auditee, trying to engage with the Auditor General to respond to the gaps that we saw in that difference of opinion.

D. Eby: There are a number of issues that your responses raise. I appreciate that it was a wide-ranging question and a number of concerns raised by the Auditor General. Now, the first, I think, and probably the most important for this committee, is just to get to the heart of this understanding of the Pacific Carbon Trust in terms of to whom the duty was owed.

You say that there was a fiduciary duty to the Crown corporation. Well, it would be my understanding that the duty is to the shareholders, which would be the people of British Columbia. So I guess my question is: when you read this report and you felt you had a duty to protect the Pacific Carbon Trust, was that the people of British Columbia, the shareholders, or was that the employees of the Pacific Carbon Trust? Or was that the board of the Pacific Carbon Trust? To whom did you feel you owed that fiduciary duty?

C. Trumpy: I think the fiduciary duty, in my mind, was owed to the corporate entity, and our shareholder is the Minister of Finance. The government established the Pacific Carbon Trust to deliver credible offsets.

D. Eby: So when questions were raised about the credibility of the offsets, the duty was to protect the Minister of Finance?

C. Trumpy: When questions were raised about the offsets, I think our first duty would have been to ensure that the offsets were credible. We did not take lightly the concerns of the Auditor General. What we wanted to do at first was ensure that we were satisfied that the offsets we had purchased were credible. We were satisfied. Now our duty is to defend those offsets as being credible.

D. Eby: I guess, Mr. Chair, I'd just like to invite the Auditor General to respond to any of what Mr. Jones has heard, and then pass on to the next member.

M. Sydor: Thank you. With regard to the comments that Mr. Trumpy made, he's mistaken when he says that Pacific Carbon Trust staff were not aware that the information was to be confidential. We had a meeting where we discussed findings. We subsequently sent them the package of information, and along with the package of information we sent them a note that we had expected them not to distribute that material, that we would do it on our own and talk to those third parties. In fact, as part of the audit, the organization did sign an understanding that they would keep information confidential. That was not done with regard to our findings.

With regard to the corporation and the board's responsibility, it's not limited just to the corporate interest. When you go back to the board's policy and procedures documents — which, in my understanding, was completed just last spring — in fact there is a section in there that talks about the integrity that the board is expected to exhibit. Part of that does talk about the responsibility to the corporation, but it also talks about the fact that the board has a responsibility to the public interest.

The difficulty we had when these letters started coming in…. They weren't random letters. It was part of an orchestrated campaign that was initiated by the developers, in coordination with Pacific Carbon Trust staff. We noted that.

The information had been sent out to those groups. Again, somebody asked: "Is this information confidential?" The response was: "No. We don't have to hold it confidential."

We find that in regard to the public interest the staff were actually siding more with the project developers and the third-party interests than with saying: "What do we need to do to protect the public interest?" I'm not entire-
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ly in agreement with the comments made by the chair. I don't know that he has a complete understanding of how the things transpired at that particular time.

More telling, the intent of Pacific Carbon Trust was to delay the release of the report until late in the mandate to minimize the time available to implement radical change. That was the message that was provided to the board by the staff of Pacific Carbon Trust. I don't see a reference in there to the public interest. How does delaying the report to minimize change enhance the ability of Pacific Carbon Trust to conduct its business in a fair and equitable manner and receive value for money from taxpayers?

B. Ralston (Chair): Perhaps you could just clarify by what means the release of the report could be delayed. My understanding is that when the report is provided confidentially to the auditee, there's a period for comments. Are you suggesting that staff sought to extend the time for comment in order to delay the ultimate release of the report itself?

M. Sydor: Thank you, Mr. Chair. This goes back to a time before the report was even released. This was at a time when we were clearing the findings. Our process is to give Pacific Carbon Trust staff our findings, and then they would come back and discuss the issues with us. We normally are able to do that with auditees in one or two meetings.

In this particular case, the meetings tended to be set maybe two weeks apart. We would get a letter from Pacific Carbon Trust saying: "We have some concerns about what was raised, and we need an immediate meeting." I remember one case where we identified four days in the following week when we would be able to get together. Well, in fact, the meeting was not scheduled for two weeks down the road.

We found that the meetings were being spread out. The meetings were not accomplishing adequate clearance of the information. Subsequently we found that in fact there was this intent to delay the release of the report.

So the tactics to delay the release of the report actually were in place before we had drafted our report. We came to a point where we said: "We've had enough meetings. It's clear that there isn't an intent on the part of Pacific Carbon Trust to actually clear the findings with us. We need to move to the reporting stage." At that point we started to move to drafting a report.

B. Ralston (Chair): Mr. Trumpy, do you want to respond? I know Mr. Muter was not the CEO at the time. I'd requested that Mr. MacDonald, who was the CEO at the time, appear before the committee. I couldn't get agreement with the Deputy Chair for that to take place. But I think what Mr. Sydor has said demands a response.

D. Muter: Maybe I'll begin, Mr. Chairman. At the time of this audit process I was not the CEO. I was managing director at Pacific Carbon Trust. I was involved in Pacific Carbon Trust and, specifically, was the lead technical response at this audit at that time. So I am familiar with what Morris is speaking of, and I can provide some comments and thoughts that are, hopefully, helpful for the committee.

First of all, on the confidential material, when the draft findings were presented to us, this was a meeting where we were provided with a slide deck and were asked in the meeting: "Could you, Pacific Carbon Trust, respond to any errors that you see in this content, any gaps that you see in this content?" As we did see numerous errors of fact and a difference of opinion between what was presented and what we had seen from independent accredited third parties, we saw it as our job to go forth and provide to the Office of the Auditor General response to those differences and response to those facts.

The content that was presented to us in that meeting was given to us in a printout. There was no discussion of confidentiality at that meeting; there was no disclosure on that content that we received on confidentiality.

We immediately took that content, and, as it was directed to the third parties — the auditors who had already reviewed these projects, the project proponents and the other consultants associated with the projects — we sought to get the information from those parties, and we did so that very day.

It was, I believe, the following Monday that we received an electronic version of the material that the Office of the Auditor General had presented in that previous Friday meeting, and that did include a disclaimer of confidentiality.

By that time, we had already — as we had thought was the intent of the Office of the Auditor General — gone to those third parties and asked to get the information for the Auditor General. It was not with intent that we shared confidential information. We were pursuing answers to the questions that the Office of the Auditor General was seeking. It was only to those third parties that were associated with the projects — that were specifically identified as parties that the Auditor General was looking for this information….

I think, in regards to some of the other comments that Mr. Sydor has made…. As we've said, this was a challenging audit process. I'll just back up as a beginning part. As an organization, we work with auditors on a regular basis. This is something that's core to our nature as an organization. Every single offset project that we purchase has to be audited twice, both a validation audit and a verification audit.

We talk to these auditors on a regular basis. We have a great deal of confidence in auditors generally and sought that from the Office of the Auditor General. It was a challenge for us when we saw conclusions from the Auditor
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General that were different from the conclusions of accredited expert auditors on greenhouse gas projects that had already been provided to us.

In the presentation, Morris indicated that the meeting times were taking a long time, that there was a slow process. Perhaps two thoughts for the committee that are, hopefully, helpful. In the presentation that the Auditor General gave us of their initial draft findings, it was a slide deck. It was — I forget how many slides — I believe, close to 80 slides. We were asked by the Auditor General to not ask questions during that meeting. We were asked to hold our questions and provide them later on.

As the content was presented to us very, very quickly — in fact, on the Encana project there was only about ten minutes to present roughly 30 slides — it was difficult for us to follow the thinking of the Office of the Auditor General — difficult for us to understand the basis of their conclusions, the facts they had considered and how they considered them.

Coming back to seeing those different facts and how we would help the Office of the Auditor General, our response to them was: "You presented this. Help us understand. How did you come to that conclusion as the auditor on this project?" The response back did take several meetings. These are very technical projects, looking at multiple project reports. We didn't feel that we had the chance with the Auditor General to ask and answer questions in a constructive, back-and-forth manner.

I think the other point I'd share with the committee is that we're a small organization. At the time, we were less than 20 staff, and we had a responsibility to provide part of carbon neutrality for government's 770,000 tonnes in that year. If you compare us to our peer group, we're one of the ten largest offset providers in North America, and we're significantly smaller than any of our peer group who's doing that in North America.

We don't have a lot of resources to respond to an audit like this, so in balancing our meeting time with the Auditor General against our responsibilities to achieve offsets for carbon neutrality, we were not able to meet with them every single day throughout the week.

This was a challenging audit. I think it could've been done better. I wish we would've had a chance to ask and answer questions initially up front, and I wish it would've been more constructive with the third parties to receive and have an ability to respond to some of these questions as well.

M. Sydor: Yes. To go back to that meeting, yes, we did have a fairly extensive slide deck, which is why we asked them not to ask questions. The reason why we weren't able to get through the Encana presentation — I think we had 2½ hours scheduled — was because in fact questions kept popping up.

We do have a process that we follow, and we were following our regular process. The intent was: "We're going to explain what we found and why, the rationale for our conclusions. Then we'll give you the package. You can take it away and come back with responses." I mean, it's quite telling that Pacific Carbon Trust staff weren't able to respond to the questions without sending the packages out to five or six different groups.

The time it took — I think it could've been carried out more effectively. I'm not sure there was an intent on the part of Pacific Carbon Trust to try to get this project completed on a timely basis. Certainly, once we saw the information that was passed on to the board about delaying the release of the report, and this presentation came in, in the middle of these meetings — you know, that's what we were dealing with. As I indicated, that's why we had to wrap up.

There's also the phrase that Pacific Carbon Trust uses quite frequently: "double audit." There's an expectation that the project is audited twice. That's not actually the case. There's a misinterpretation that people may get.

If we look at a project, it's very similar to a service plan and an annual report. We have the service plan that says, "Here's what they're planning on doing," and then we have an annual report that says: "Here's what's happened. Here are the results we achieved." Those are two separate documents. There's one audit of that annual plan, the project plan, and there's one audit of the verification report. There are two separate audits. There aren't two audits on each document, so the extent to which these examinations are carried out…. There may be a misinterpretation, so I just wanted to clear that up.

I think there's also a reference about the great confidence that Pacific Carbon Trust puts in the organizations. There are risks associated with carbon offsets. The CDM program, the United Nations Clean Development Mechanism program, learned that. A study was done in 2007 that showed that 40 percent of the projects that had been certified were not additional.

The United Nations, through the CDM program, expanded its audit group to look at what was going on. They ended up suspending four firms. There were 26 firms that were licensed to carry out this work. They suspended four of them for poor practices. Four out of 26 doesn't sound like very many. It's a large number, but those four were responsible for 70 percent of the offset projects that had been certified to that time. So that's the sort of environment we were looking at.

We were also looking at Rainforest Alliance and the SmartWood program that was verifying these projects. It also has issues with its audit capability. It's been reported publicly. So there are risks associated with third-party verifications. We don't have Arthur Andersen around anymore. It has long gone.
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Just before I turn it to other questioners…. We're not making findings here. This is not a court or anything like that, but it was stated by Mr. Muter that at the initial meeting the staff of Pacific Carbon Trust were not advised that the presentation was confidential. Only subsequently were they advised, when the presentation was forwarded electronically a couple of days later. Do you have any comment on that?

M. Sydor: Yes, at the end of that meeting we said: "Please don't distribute this material. We will clear the material with third parties according to our timelines." That was our expectation. We normally lead the clearance process, not the auditee. We had expressly indicated: "We don't want this distributed. We want to hear your feedback first, and we will take those pieces that relate to different third parties." What happened was the entire package was sent out to groups. So they would see information that didn't relate to them at all, because the package covered a number of elements.

R. Jones: Yeah, I was going to follow up a bit on what Morris was saying. Our normal process is…. When we take draft findings to a client, we give them to them so that we can find out whether there are any factual errors or things that we still need to go back and double-check. In this case it sounds like that maybe wasn't understood at the time.

What we do like to do is…. We want to find out whether or not these initial findings are correct or not. We go out, we get the information, we come back, and we make our findings available to the client and say: "Tell us where there are problems or where you think we're incorrect." Then what we would do, as Morris has said, is go back to those organizations where the auditee points out that we may have made some errors and double-check to make sure we did get the right facts. So it is something that we like to do, and we should do, because we're the ones that are coming up with the findings.

B. Ralston (Chair): Was there anything different about your normal procedure in this audit than from any others? Certainly, Mr. Trumpy, as Deputy Minister of Finance, would be very familiar with this process of sharing the findings and looking for an agreement on common facts before proceeding further in the audit.

R. Jones: I was not involved directly in the audit, but from my discussions with the audit team, it appears as though we followed our normal process.

M. Sydor: Yeah, I just want to add to that, Mr. Chairman, just by way of substantiation. I am wrapping up a project right now in the health sector. We had a meeting a while ago with the health CEOs. I have a meeting later this afternoon with another health agency that's not in government but that is going to be affected by the audit. I have another meeting scheduled towards the end of the month with another group that's affected by this audit.

Our process is to clear the findings with government. But the individual findings that relate to other organizations — we will discuss those. We don't rely on the auditee to take the information and distribute it to a broad spectrum of groups.

K. Corrigan: I was actually going to turn to the findings of the report. But I'm just going to ask a couple more questions on what we've been talking about, just for clarification in my own mind.

Mr. Sydor, essentially what you've said is at that meeting where the deck slide was presented and given, presumably, in a hard copy to the Pacific Carbon Trust leadership…. At the end of that meeting you asked that the information be kept confidential and your office would distribute the information to third parties on, basically, a need-to-know basis, I guess, and the appropriate parties.

After that, then, the information was distributed sort of holus-bolus to a number of different parties. Then after that, the Pacific Carbon Trust leadership signed an agreement that they would not disclose that information. If that is the case, did they let you know at that point that they had, in fact, disclosed that information?

M. Sydor: No, the agreement wasn't signed later. It's an early part of our process. We exchanged documents. We identified at Pacific Carbon Trust what their criteria are. As part of that, there's a requirement to keep information confidential. We, through our legislation, are required to keep the information confidential, which is why we try to limit the distribution of even preliminary findings. We don't want that going out to parties that aren't really affected by it or have no interest in it.

The confidentiality requirement is something that would have been cleared up near the beginning of the audit. At this particular meeting we did indicate that we want to clear the findings with those parties ourselves so that we can just clear the facts that relate to them. Then subsequently when we sent them the slide deck, we again said: "Please don't distribute this information to others."

D. Muter: Thank you, Mr. Chairman. Yes, I think, what I've said before…. This was a challenging audit. In that meeting it was not at all my understanding that there was an obligation for us to keep that material confidential.

D. Muter: I was there personally at that meeting, as was our former CEO, Scott MacDonald.

I guess the context we took from that meeting was that there was obviously a clear misunderstanding or difference of opinion on how the emission offsets regulation should be applied, how we applied it and the requirements we have as the offset purchaser. When the draft findings made comments about PCT purchasing credible offsets and PCT determining credible offsets, we looked at that very obviously and said: "That's not the way the emission offsets regulation directs us to conduct our work."

That's a question that's of a third-party accredited auditor. We see a difference there. It's an error of fact in the deck that we saw from the Office of the Auditor General, and we sought to correct that by bringing that specific accredited auditor's information to the Office of the Auditor General.

At no time did we go to any party that was not part of those two projects or participating in those projects. It was the auditors for the validation, the verification report, and the specific project consultants for each of those projects. It was limited to only those parties that needed to see that information in order to respond to what we saw as a difference of fact between the draft findings from the Office of the Auditor General and what we had seen from those accredited third parties.

R. Jones: I was just going to let the members know that this isn't an unusual situation that arises. In a number of audits…. One that I can particularly think of was when we were looking at the Canada Line. We had some major disagreements with the auditee over information that was being given around ridership and whatnot.

In those cases, what we try and do, and we probably should have done in this case, is get all the parties together to try and clear the facts that we disagree with, because it doesn't make sense to have both of us going and trying to clear where we think there are errors or differences in opinion.

In hindsight, probably it would have been better to get together as a group and take a look and clear these facts. Normally we do it on our own, as we've stated, in terms of any errors or factual challenges to our reports.

K. Corrigan: I'm sorry. Because I'm at the other end of the table, I'm not sure who I'm speaking to. Is it Mr. Muter? Is that right?

K. Corrigan: Okay. Thank you. Mr. Muter, then, do you disagree with the statement that Mr. Sydor made that at the end of that meeting it was requested that you do not distribute the information? Do you remember that comment?

D. Muter: That was not my understanding from that meeting. I don't remember that comment at that meeting.

K. Corrigan: What about the fact that there was a confidentiality agreement signed?

D. Muter: There's not a confidentiality agreement signed. I don't think that's what Mr. Sydor indicated. There's an engagement letter that we receive that indicates at the very start of the audit process that there is an audit beginning, and it defines — in the appendix, I believe — an obligation of confidentiality for the Office of the Auditor General and describes the nature in which they, overall, will conduct their business.

At the meeting in which we were presented with the draft findings…. My understanding from that meeting was that Mr. Sydor was looking for answers to differences in fact. So my understanding from that meeting was consistent with the engagement letter, that we were expected as the auditee to bring forth the information that he was looking for.

R. Jones: I was just going to mention to the members that, much like we do with financial audits, when we send out engagement letters or a notice of examination for performance audits, what we try and put in those letters is our expectations of the client and what their expectations should be from our office in terms of information and confidentiality and the process.

You know, normally we don't have a concern around the information being kept confidential because we purport to the client that we're going to keep it confidential, and we expect the same from the client coming back to us. That is, I think, if I'm not mistaken, set out in that notice of examination.

K. Corrigan: Well, I'm sorry, but Mr. Sydor said earlier.... I think the statement was that Pacific Carbon Trust, or some person representing Pacific Carbon Trust…. I
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thought the words were "signed an understanding" that there would be confidentiality.

Do you want me to stop? Or do you want me to go on to the actual…? I have some questions about the actual….

B. Ralston (Chair): I think we probably should move on, because we've got a number of questions. We can come back to it.

S. Robinson: Very interesting dialogue right now. But I want to go to recommendation 1 — if I can just get into some of the details around targets in particular.

I noticed in the response from the Ministry of Environment that there's a line sort of towards just before we get to recommendation 2. It says: "In support of this recommendation, the climate action secretariat will take greater efforts to promote emission reductions across the public sector."

I just want to get back to how much of a reduction. The analogy used before in terms of the diet-exercise analogy, which I thought was very interesting in terms of helping us all sort of appreciate the challenge….

You could do tons of exercise but eat 25,000 calories a day and really not achieve anything. So you need to have some targets. We're going to reduce our calorie intake by this much and exercise that much, with the expectation that I'm going to achieve this goal — which I think are sort of change-behaviour, goal-oriented actions.

That is how it works. I'm going to train for a marathon. I'm going to do X, Y and Z so many times a week in order to get there.

When you talk about promoting emission reductions, I would like to hear about some targets. What do you have in mind?

J. Mack: I'd just say, in terms of our different interpretations of facts in the audit…. The Auditor General has given us a recommendation that to assess our progress, we should have targets — that we should be at a reduction of X, Y and Z over time.

To cut to the chase, in response to that recommendation what we've said is that we will assess our progress in line with B.C.'s provincial emission reduction targets. So in a way, we can assess whether we are showing leadership on the reduction side by looking at the 33 percent goal. We have tried to move forward from that recommendation.

Recognizing that my office's job is to implement the legislation…. The legislation has a section that's called "Targets for carbon neutral public sector."

Again, I acknowledge that we can disagree about whether the Legislature made the right choice, but the fact is the Legislature, in section 5(1), says, "Each public sector organization must be carbon neutral for the 2010 calendar year and for each subsequent calendar year," which means that they have a choice of reducing their own emissions or, if it's cost-effective, purchasing offsets.

As a rule of thumb as we've looked at it, we expend an amount on offsets. We would not be able to achieve equivalent reductions with that investment within the public sector. We've been able to find lower-cost reductions elsewhere. Taking full note of the disagreement on that choice, the legislation at this time does not differentiate between the value of us reducing our emissions and the value of an offset.

The second point is that the legislation complements that by saying that "each public sector organization must pursue actions to minimize its PSO greenhouse gas emissions."

Our intent, in terms of my office, was to just respond to the Auditor General, saying: "Our interpretation of the direction we receive from the Legislature was that the target in fact is zero, that your choice with the PSO is to reduce its emissions or purchase offsets. There is not a target here for us to follow. We do, in fact, show evidence of making efforts to minimize emission reductions." I'm more than happy to give specific examples of that.

But we recognize that other governments have made a different choice. I think we were referred by the audit team to examples in New Zealand, where they have pursued a different choice. The government of Canada has targets to reduce its corporate footprint. It has directed Environment Canada not to use offsets in that case.

We have acknowledged the choice. We've taken the recommendation that would help, and we now do talk to PSOs around assessing their reduction in line with the recommendation. But at that time, we had looked at this in accordance with the legislation.

S. Robinson: If I could just follow up. In essence, what you're saying is that people can…. If we use the diet analogy, the 25,000-calorie-a-day diet is fine as long as you just exercise 22 hours a day.

J. Mack: If I can respond. I'm often taught to not use metaphors because they end up coming back to haunt you.

I would just say that the government is committed to do both — to reduce its emission and to purchase offsets. The question becomes around finding the right balance.

I think that as legislation, what we have said — and this may have limited…. We felt an obligation to respond in the scope of the 2010 year, which I would remind you is our stepping-on-the-scale year. We had evidence of reductions we'd achieved.
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I mentioned government travel. We have solid evidence of a 60 percent reduction in emissions from government travel from 2008 to 2010.

I do not have the ability to reduce that number to zero right now, so offsets play a good role. It is up to a taxpayer and the Legislature to assess the balance of whether that should be greater.

In 2010 we could not show a trend because it was our first time on the scale. We have taken the advice of the Auditor General to heart and included more analytics. We transparently noted our emissions went up, by the way, in 2011. We looked at that.

As an example, for those who remember, the Olympics in 2010. It was a warm year, so we tried to provide an assessment of: is their performance in 2011 a fact of not enough effort, or is it a fact that we needed more energy to deal with a rising temperature?

We recognized two things. One is greater efficiency, correcting for temperature, but not sufficient level of effort. The government was very honest about that and has doubled down its efforts in that.

In terms of the balancing act between offsets and reductions at the time of the legislation, it doesn't give me a direction on the balance. It relies on a market price to do that.

Following on the audit, the government has made a policy direction to consider a reduction target in line with the provincial reductions.

My question is actually: if the climate action secretariat is going to make greater efforts to promote emission reductions across the public sector, how do you plan to measure that? In subsequent audits how will you report out on those efforts?

J. Mack: We issue a report each year. It's a public report that explains our carbon-neutral government accomplishment. It lists the emissions for every single public sector organization as well as our corporate footprint.

We can now look at the 2010, the 2011 and the 2012 years. We can show you our corporate emission levels, and we do there. We can assess the progress.

Our finding as a government is that we're not satisfied with the level of emission reductions we've achieved. There is a government commitment to do more to achieve greater results. An example of that was the announcement of a dedicated capital program for the education sector and recent announcements, yesterday, to explore expanding that program in consideration of leading into next year's budget.

The second one is that the results across PSOs are different. We can show transparently where those occur.

There are examples. The Surrey school board, for example, has a population increase in students. In that sense, we find it very appropriate that their emissions go up. They also happen to be highly successful in becoming efficient in their emissions.

Putting a binding target on them as a policy choice could lead to absurd consequences, where we actually face an absolute target for a school which, to deliver its primary objective, needs to increase and has increased energy needs. Again, this is a policy choice of government to allow market mechanisms to enable those choices and make that work across the public sector.

We do have, now, a sense of the real results in reducing emissions. We have, in my opinion, a comprehensive portfolio of the actions taken, down to every public sector organization across there, and we can provide those analytics to assess their progress over time.

L. Throness: A question for Mr. Mack. Your bold disagreement with the Auditor General is the first that I've seen in this committee. Such a bold disagreement, in my view, needs to be backed up with a strong argument in order to be authoritative.

The Auditor General gave detailed arguments why the purchases of PCT's main offsets were not credible, but in the ministry's response all I see is "an appeal to experts," "validated and verified by independent, accredited third parties," "arm's length from government," and so on.

If you want to out-credible the Auditor General, why would you not respond with arguments instead of assertions?

J. Mack: The government's response…. Again, the emission offsets regulation makes a choice, as does the legislation. It is possible to have a government choose to establish the credibility for the offsets that it buys. That would be a policy choice.

The government has chosen a policy where we actually try to create an arm's-length relationship, knowing that in fact, the government has a legislative objective to achieve carbon neutrality. So to protect itself from the decisions that it makes, it has established an arm's-length Crown corporation and professional third parties who will make attestations to the fact. In recognition of that, we chose, in the response, to mention the fact that we've relied on these third parties in making those attestations.

But we are prepared…. I would say that, with the Pacific Carbon Trust, if there is an interest in going through the matters of evidence on those two projects, we're happy to do it.

The government's response chose to stand behind the work of those third parties in making that determination.

B. Ralston (Chair): I think the question was pretty clear, and I take it you have an interest in those kinds of
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responses.

L. Throness: It might be interesting to get a written response on the arguments against the Auditor General at some future point.

C. Trumpy: Well, if there are specific questions on specific elements, we can respond. But just as a general comment, the response that's included in the Auditor General's report is, at certain levels, circumscribed by the Auditor General. They limit what the government can respond to.

On this particular audit — as has been the case, from my understanding, in a few recent ones — they're looking for government's response with respect to recommendations, not with respect to audit content. So when you see the response with respect to the audit in the report, we're guided by that direction from the Auditor General.

L. Throness: To the Auditor General, then: could they have responded with arguments rather than assertions? Would you have accepted that?

R. Jones: I'm not speaking for the previous Auditor General. But speaking for myself, if there is a recommendation, as far as I'm concerned, that there is a disagreement with, then I see no reason why there shouldn't be an argument put forth.

L. Throness: Okay. My second question is to the Auditor General. Just for the record, how many letters did you receive in this little campaign that went on?

M. Sydor: We started receiving letters on August 9. We had one then. Then the bulk of them starting coming in on August 28, and it ran until about October 10. Well, I see one here on November 6. So the letter writing went on for about a two-month period.

I think we had about 11 organizations and maybe two dozen letters in that time period. A number of these organizations had nothing to do with either of the projects.

L. Throness: The fact that there was this letter-writing campaign sort of mirrors the global debate around this issue. Yes, there's some science. There's also a lot of politics and a lot of ideology and, in my view, some flimflam.

I think that gives me unease. It seems to me to undermine the credibility of the government and of the PCT on this issue.

My final question is: what will happen to the PCT now that it's no longer? Will the sign be taken off the door and the staff be accepted into the ministry? What happens to it?

J. Mack: The government's announcement yesterday has, I guess, two broad components consistent with the government's statements around core review. It reaffirms the policy intents of government in terms of climate leadership, in terms of having a carbon-neutral public sector. To be clear, in that announcement it acknowledges that the government will continue to purchase offsets.

On the second part, the announcement acknowledged that we were starting a new business sector. Many firms didn't have these business lines when we announced the challenge in 2007. There was a significant amount of what we would call business development work that required capacity for the Pacific Carbon Trust.

In looking at the trust, the assessment was that for the purposes of delivering carbon-neutral government — you know, 750,000 tonnes-ish of offset procurements — the government felt confident that the private sector has developed and is able to work in that space. So they, in the first instance, have reduced the amount of resources in this program.

They have identified…. David had mentioned earlier that, on paper, the Pacific Carbon Trust has 18 positions. We've been recognizing that that workload decreases over time. The government will be creating five positions under my office to do that offset procurement.

The business development role is viewed as a goal that's been largely accomplished. The technical issue of procuring offsets and working with third parties will be done by five individuals within my office.

I guess you mentioned about the sign on the door. The Pacific Carbon Trust has been instructed to complete the 2013 procurement year, so there is a time of what I would call business as usual. Our procurement year has happened for 2013, and we reconcile the books at some point between March and June of next year.

You will see a Pacific Carbon Trust. They will maintain their relationships. My office will start afresh for the 2014 year and begin that outreach. And I would say, as earlier, that the government has committed to the recommendations, so my office will implement the recommendations as well.

N. Letnick: Thank you to both parties for your presentations today and your discussion.

I just want to refer to a slide on page 5, finding 3 of the Auditor General. It says: "Government reported on its carbon neutrality…a 6 percent increase in emissions above 2010."

N. Letnick: That's right, or in the book, but basically, I just read it out — "Reported a 6 percent increase in emissions above 2010."

My question is actually for the Carbon Trust folks. Can you give us a longer perspective than one year? You were put together in 2007-2008. You actually started your work in, I imagine, 2009-2010. This government did.

We are, from what you tell us, a carbon-neutral government already. So I imagine if there are increases in emissions, that means that to offset that with your weight-loss program, you've had to have an increase in offsets to match those emissions and to be neutral. But in a longer perspective, are we actually seeing a reduction?

J. Mack: Just to make sure I'm clear on the question. The slide from the OAG reference has a 6 percent increase of our emissions from 2010 to 2011. As I mentioned, 2010…. And I will flag to my staff who are listening at home that I apologize for making the weight-loss metaphor, because I'll face that when I get back.

So 2010 was our year of stepping on the scale. I would flag as a lesson learned, for me personally, that potentially, we restrict ourselves too much to the scope of the audit which was on 2010. But we did find evidence of a trend line in 2011 and 2012.

I will flag to members of this committee and the public that it is hard to reduce your emissions. I just want to state that. The most common thing you do when you start is increase your emissions less than otherwise. So I would just caution…. People can make up their own minds about whether we've done a level of effort or not, but it is difficult to start something and see results immediately.

We have more children entering schools. We have fluctuating demands on the health care system. We want those services to function effectively. It takes time to make capital investments that realize a change. We saw, as a point of evidence, in 2010 to 2011 that that is factually accurate. Emissions did go up. It was not the result I would have hoped for.

We did, in our 2011 report, attempt to be transparent and show people that in fact, 2011 was a colder year than 2010. We did what we call weather normalization, and we talked to peer groups around that. What we found was correcting for the differences in temperature….

As a visual, you can remember what it was like in the year of the Olympics, when we kind of wanted things to be cold and the earth didn't help us out. So 2011 was a colder year. Emissions went up. We found evidence there of efficiency correcting for that but mentioned that we weren't getting there yet.

For 2012, what I would say is that we are seeing a greater efficiency and a flattening out. The 2012 year is an actual reduction. So 2010 to 2011 went up; 2011 to 2012 went down. Not back down to 2010 levels, but we fully anticipate that these results take time. We are looking at things like changing over energy systems in hospitals and doing retrofits that take time.

C. Trumpy: Just in terms of specific numbers, in 2010 PCT retired 750,000 tonnes. In 2011 that number went to 776,000, for the reasons that James articulated. In 2012 it was 770,000, so it has come off a bit but not lots.

B. Ralston (Chair): I have a couple more first-time questioners. Then there are a few members who want to have another series of questions. Vicki Huntington is next. I'm thinking that we would take a break around 11, but don't feel inhibited, Vicki.

V. Huntington: I want to go to some questions that revolve around duty and responsibility, public interest and just good, businesslike behaviour and practice. I'm going to quote something Mr. Mack just basically said earlier. He said it was possible to verify the credibility of the offsets, but there was a decision made not to — it's a policy — in an effort to protect itself — I guess that's the PCT — from decisions it makes. I find that just so difficult to accept from a responsible entity struck by government to do a job.

You also at some point said that the legislation or the regulation removes the authority of the PCT to validate, so that you have then decided to allow third-party validators to do the work in that regard. What that says to me is that there was a potential for a deliberate decision not to find yourself in a position where your decisions, the PCT's decisions were made responsibly and had accountability to the board, to senior executives. You could at all times point to the third parties if they made a mistake.

That comes back to the issue of due diligence. If there was no authority to validate, and I presume that that was your reading, I don't think the legislation anywhere, or the regulation, said: "You shall not validate." It probably was silent on the issue. If not, I'd love to know. But did that divorce you, then, from the responsibility to conduct due diligence?

In the face of the recommendations and the findings of the Auditor General's report, it would seem to me that the first instinct you ought to have…. Given that your entire process is to lean on third-party validation, would you not have wanted to confirm for yourselves that those validators were in fact doing the right job? We know from
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the statistics given through the CDM's investigations into its own controls that the third-party validators had huge problems doing the job effectively. Would your first instinct not have been to review the ability of those third-party validators to do the job properly?

J. Mack: If I can, I'll answer the question, with the help of David Muter. I'd like to first clarify. I may have miscommunicated or been unclear on some of those statements. The first one is in terms of what the legislation and regulation directs us. It doesn't remove our…. The point of protection is not to protect ourselves from criticism. The point I was making was that it is based on the offset whether a project that comes is, then, complying with the regulation. We've made a choice to rely upon third parties.

If I can give a parallel example, we've worked a lot with the state of California on their cap-and-trade regime. In that case, it would be the industry purchasing, and we would not want a system where the industry is obligated to purchase an offset but also gets to decide whether that is a compliant offset or not. So they, in their system, rely on third parties. These are audit firms, as mentioned, like KPMG and others.

I think the PCT board of directors did issue a statement in parallel with the government's response that did speak to the questions around: did they, in conducting their duty, apply some due diligence? I think I'll pass that to David on that point.

I would flag as well that we have, in fact, in the first instance, taken efforts to check into these processes. I'll ask David to summarize the steps that the Pacific Carbon Trust went in, which is in the board statement around working with those.

My office as well…. And this is a matter of the recommendations. It was a matter of our intent to start to work with that professional community. We have in instances…. Much like you may have concerns with an engineer who signs off on a structure, you can work back through their professional association and double-check their work. We've taken those steps, and we'll continue to work with that professional community.

If my comments led to those statements…. I don't want to misinform the committee around those obligations. I hope I've provided clarity, but I'll ask David to respond to the specifics about your question around, in the first instance, what actions you would take, and just ask him to provide that evidence.

D. Muter: Thank you, James. It's a good set of questions about what due diligence process the Pacific Carbon Trust follows and the role we see of the validation verifiers that are doing these audits of these projects.

I guess I'll speak to that second point first of all. James alluded to this. The regulation that we have in place says that those third-party accredited auditors have to have achieved accreditation by a standard. They've achieved an American National Standards Institute review. In the case of, specifically, Darkwoods, that's a witness audit, where the American National Standards Institute follows the Rainforest Alliance while they conducted their audit of the Darkwoods project to make sure that they were doing their audit in accordance with an international standard.

So there is somebody checking the work of these third parties and checking it against an internationally accepted standard, and we make sure that for all of our projects, that level of due diligence has been done by those third parties.

I think the other point you were making with regards to: do we take that at face value? Do we just accept that? Is that the extent of due diligence that we do? It's not. We conduct due diligence on all our projects. Right from the time we receive a proposal from the proponent, we look at what the nature of the project is; what the risks of the project are, in general; how they might come up as the project proceeds; and how we're going to get answers to those questions that we see on the projects.

Ultimately, we want to make sure that if there are risks, if there are questions on the project, we've satisfied ourselves, but more importantly, that a third-party accredited subject-matter expert has looked at it and provided an opinion for us on that topic.

As an example, the Darkwoods project. Before we even contracted to purchase it, we had seen the proposal from them that noted risks with it, specifically the risks that the Office of the Auditor General has presented today. One of the first questions we had on the proposal was: is a liquidation logging scenario likely? When I first started at Pacific Carbon Trust, it was one of the first questions I asked of this project.

Our due diligence process. What we do is ask that question of the project proponents, ask them to describe how they're going to answer it, and then we ask for a third-party expert to look at the evidence that's been provided in the context of that question and provide an opinion on it.

In the case of the Darkwoods project, on that specific example, we asked the question: how are you going to justify liquidation logging as a baseline scenario? The project proponent articulated: "Here are comparable examples. Here are examples in the region. Here are offers that have been occurring on the property for liquidation loggers to come in and purchase the property and do exactly that."

Rainforest Alliance looked at that evidence and provided in their validation report their opinion and how they considered that evidence. What we do as an organization is make sure that that loop has been closed. On our webpage, on our public registry, you can see that exact answer and that exact question asked of Rainforest Alliance — how they considered evidence on liquidation
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logging and their opinion that it was a sound baseline. It was a reasonable baseline.

V. Huntington: Just as a quick response to that. If you ask the question, "How are you going to justify liquidation logging?" and then you look at the evidence to that question, then everything…. You say: "Okay. The evidence to that question is fine, and therefore, it's justifiable that they look at that as a baseline." But nobody appeared to have looked at whether or not that was a legal baseline. So I don't know what levels you're expecting or anticipating from these offers of due diligence.

That aside — and please answer it in a minute — what I'm really getting at here is that there are emission offset regulations that, for whatever reason, do not appear to have been followed. I would like to get an understanding of what part of the regulation and the law the Pacific Carbon Trust did not understand, did not agree with and therefore would not abide by or would not require the third-party validators to follow. What part of the regulation and legislation didn't you get?

D. Muter: So I'll answer your first question on the baseline specifically. Was that a legally eligible baseline for liquidation harvesting? I believe that's your question on that one.

V. Huntington: Well, it appears to me from the Auditor General's report that it may not have been a legal baseline, given the actuality of the situation and the requirements on the conservancy itself.

D. Muter: The baseline is a hypothetical scenario that doesn't actually apply in isolation to the Nature Conservancy of Canada. It's a hypothetical scenario of what would happen should any entity buy that property. Given that it is private property…. There are multiple examples, adjacent examples, of liquidation harvesting happening, and there were offers on the purchase of the property, in addition to NCC's offer to purchase, to do exactly that.

So it is legally allowed in the area. It's private land. You can go in and cut down the trees over a period of time, as much as is feasibly possible. On that specific point, what Rainforest Alliance looked at was: if it is legally allowable, who else is going to do that, and is it reasonable to believe that that is a likely scenario? Given that there were adjacent examples, given that there was interest from liquidation harvesters on the property, they looked at that and decided that it was a reasonable baseline.

On your second question, I hope I understand the question you're asking. What part of the regulation didn't we understand or didn't we follow? I think what you've seen here in this audit is that it's a difference of opinion. What we have on every single one of these projects, both the Encana and the Darkwoods project, is a validation audit from an accredited third-party expert and a verification audit from an accredited third-party expert, under the emission offsets regulation that obliges us to look to those opinions.

What we were challenged with was that the emission offsets regulation says that we have to have an opinion from a subject-matter expert who has accreditation specific to greenhouse gas audits. We had that in hand. We had a different opinion, and we respect the perspective of the Office of the Auditor General. They are experts. This is not their subject matter expertise, though — on greenhouse gas offsets.

We were challenged with how to address that difference, and in the end, that is a challenge for us — to look at the independent Office of the Auditor General versus the specific regulation that we had to operate under.

The emission offsets regulation is pretty darned straightforward, and yet these projects did not demonstrate that they were capable of meeting the requirements in the regulation. That is what I don't understand.

Yes, there can be huge technological problems. Yes, there can be discussions and policy debates about how you would determine what a proper offset was. But at the bottom of it all there were regulatory requirements that were not met.

There's this continual effort that I'm hearing. Correct me if I'm wrong. I'm hearing: "It's not us. It's the third-party validators. We don't make those decisions; they have to make those decisions." As Mr. Mack said in the beginning: "We're protected from the decisions we make."

I don't know if you want to answer it. Perhaps the Auditor General's office has some comments, Mr. Chair, on whether I'm right, wrong or need to go home.

M. Sydor: Yes, I have some thoughts on this issue, in regard to some of the responses that I've heard from Mr. Muter. First of all, a comment that there were offers to purchase. There was actually one other offer that came in. There were only two offers on the property: one from NCC and one from another organization. And it was not a liquidation logger.

There were no bids from liquidation loggers. I think Mr. Muter said liquidation loggers did express an interest. Yes, they expressed an interest. What was the response from the vendor? "We're not interested in hearing from you." The vendor had no interest in selling to liquida-
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tion loggers. That was clear from the news releases that came out at the time. It was clear if you have a look at the sales brochure.

The sales brochure is a glossy document focusing on the ecological values and the scenic values of the property. Once you get to about page 8 or 10, there are two paragraphs on the fact that there is marketable wood on the property.

Now, with regard to the due diligence efforts that were carried out by PCT, the focus entirely has been on: "We rely on third parties." What PCT is saying: "We're relying on those people that are employed by the project developer. We are relying on those people that are paid by the project developer to give us advice." Whether that's the way PCT should carry out business is, I think, something they can consider, going forward.

He has not talked about the due diligence efforts that they carried out in regard to a consultant that they hired on their own. In our report, on page 12, we do talk about that. Third paragraph on page 12: "The consultant also looked at the project." This is the consultant hired by Pacific Carbon Trust. What was his assessment of the project? The words he used were that "the baseline represented rape and pillage of the forest." Those were not our words. Those were words that the consultant provided to Pacific Carbon Trust in regard to the baseline.

What else did he say? "When we talk about credible offsets, we looked at three elements. We looked at whether the projects were additional, whether they were conservative and whether they were real." Conservative is one of the key principles globally that is assessed. His view was that this project rated a 3 out of 10 for conservativeness.

In terms of the volume of wood which then results in the emission offsets that are available, his comment was: "Even the most aggressive forest practices would not be able to log every hectare identified as operable on the land base."

That's the due diligence that was being exercised, and that's the due diligence that was not exercised on the part of PCT. We paid for a project that is not credible.

B. Ralston (Chair): I know you'll want to respond, but I'd like to take a break and maybe come back with your response, Mr. Muter, and then we'll go to Mike Morris. So if we take five minutes…. We've just been at it 2¼ hours, so I think a short break is in order.

B. Ralston (Chair): We were resuming with our next questioner, who is Mike Morris.

M. Morris: Just a couple of comments to begin with, I guess. One observation. The standard disclosure practice with information, particularly documents, is that the originator is usually the one — that's what I've grown up under, anyway — that authorizes the further dissemination of any information. I'm kind of wondering about your particular practice here.

I guess the statement I want to make more is that there appear to be some professional differences between your organization and the Auditor General's office. I would have expected that these differences would have been resolved to a level before it comes to this committee for our discussions over the outcome of the audit. I'm a little disappointed to see that that hasn't happened.

I guess on the other side of the coin, I also want to look at the fact that the Pacific Carbon Trust, or carbon offset program, is a new program, back in 2008. It's probably the first jurisdiction in Canada — is that right? — to be implemented. I do recognize the fact that there will be growing pains for such a program that this government has introduced and that there will be ongoing growing pains associated with introducing a new program, like a carbon offset program, for British Columbians.

I do recognize that fact, but I would certainly encourage Pacific Carbon Trust, or whatever we are going to be left with, to follow up on the recommendations of the Auditor General to make sure that we do have some credible benchmarks and measurements that we can use to further this program. I hope that's the case.

I think it's a very good program. I think that it's doing good things and that we are leaders across this country and in North America. But we do need to establish those credible benchmarks. I think the purpose of the audit is to help us grow and help us learn from any previous mistakes. Those are my comments.

D. Muter: Well, thank you for those comments. I don't think I heard a specific question there.

B. Ralston (Chair): Sometimes that's how it works here. But generally, you can comment on an observation if you want to. You don't have to.

D. Muter: Mr. Chairman, perhaps if it's helpful, I could go back, then, if there wasn't a specific comment. If I could go back, then, to the comments that Mr. Sydor made and help the committee with some further information related to those topics.

I've said this before. This was a challenging audit. What's coming out here, I think, is some of the explanation as to how Pacific Carbon Trust saw this as a challenge. We see a difference in what facts were considered by the Office of the Auditor General and what we had
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considered at Pacific Carbon Trust and what we had seen that had been reviewed by the independent third-party experts.

It appeared to us, in the draft findings, that some of the facts that were material to the greenhouse gas auditors, Rainforest Alliance, were not considered by the Office of the Auditor General. That was a challenge for us — to understand the basis of that. For example, Mr. Sydor has just indicated that the previous owner of the Darkwoods property didn't appear interested in selling to a liquidation harvester, that they exclusively were interested in selling to somebody willing to conserve the property.

That's not the fact that we looked at. In fact, in their public statements, the representative of the previous owner of the property…. I'll just read it for you: "Yes, we preferred a buyer who would maintain the unique beauty of the forest, but there was no restriction on who would be eligible to bid or not, and we wanted…fair market value." So that was a fact that we looked at. It's also a fact that the Rainforest Alliance validation auditors looked at, considered and questioned the previous owner on.

Another example. Were there bids from operations willing to go into that property and harvest the trees at that rate?

A couple of other points, again from the previous owner's representative: "We had calls from several timberland buyers who were known for liquidation logging, and we had some industrial timberland buyers looking at the property." Again, these are pieces of evidence that we understood and that the Rainforest Alliance validation auditors also looked at. So it was a challenge for us to see this difference in facts that were presented to us and that were considered by the Office of the Auditor General.

I think, then, the last point that I'd help the committee with…. Mr. Sydor brought up the consultant that Pacific Carbon Trust hired as we were conducting our due diligence on this project. Yes, I'd forgotten to mention that. We did hire a consultant who did review, at an early stage, draft documents that had been provided to us by this project.

This is part of our due diligence process, where we have a project that comes to us. It's very technical. It's on a specific topic matter. We will sometimes ask a third-party consultant to come in and look at it and help us ask and answer the questions.

In this case it was a professional forester who provided some of the comments that you heard from Morris. Those were draft documents that were provided by the project proponent. It was because of our due diligence efforts and because of those comments from that consultant that the project proponents found an error in their documentation and corrected their quantification. It resulted in a significant reduction in the emission offsets that were claimed by the project, specifically because of the work that we found and that error that we caught.

It was the final documents that came to address and answer, to our satisfaction, all of those questions that were raised by that consultant. So changes were made. That consultant spent roughly 25 hours reviewing documents. It wasn't a significant amount of time compared to Rainforest Alliance, who in the end reviewed the final documents over the course of over five months, I believe.

That's a good example of our due diligence process and how we ask, and receive answers to, our questions.

B. Ralston (Chair): I'm going back. These are second-time questioners — David Eby, Kathy Corrigan, Linda Reimer and Selina Robinson.

B. Ralston (Chair): Perhaps before we go to David Eby, then.... As Simon is a first-time questioner, I want to make sure we get him in.

S. Gibson: Well, I guess my little metaphor is: if you want to get a BA in popular culture, it's pretty easy. But if you want to get a PhD in astrophysics, it's pretty hard.

My question really goes to the heart of the word that you mentioned earlier — to "balance." The offsets are less demanding, less expensive in many ways. They're less rigorous. In many ways they're less tangible and less quantifiable in actual reductions than emissions.

My question is a very simple one. How do you strike that balance? Where is that balance? I think much of the discourse today has been, really, around the issue of balance, to be honest.

I would like you just to speak a bit to balance, because as you're hearing, there's some level of suspicion here, not necessarily from everybody. But just speak to that, if you would. I'd appreciate it.

J. Mack: Thank you for the question. On the first issue of balance, the government has done two things in its public statements. One is it has stated its intent to be a leader.

Secondly…. If we look, in particular just prior to the audit being initiated, we'd engaged with a public engagement exercise after we'd announced our first year of carbon neutrality, and we in fact asked these questions. The minister at the time was Minister Lake. He had made statements saying, "We don't expect to get it right on the first instance," and in fact talked specifically about level
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of effort in terms of reductions and offsets.

I'll just draw attention…. I know that sometimes a conversation about the facts and the conclusions can get tense, but in fact my office, right or wrong, looked at the legislation, which required PSOs to take actions every year to reduce their emissions but did not assign a level of effort.

Now, we did have a view at the secretariat that leadership would mean doing a level of effort similar to the provincial targets that we are all challenged to meet. But we recognize that policy direction. To be credible, one should pursue targets. In fact, in that instance, both from the OAG's recommendations…. We accept that, and the government has accepted it. We accepted similar recommendations out of the public engagement exercise — that we need to show the reduction effort as a priority, although the legislation, again, requires you to reduce but doesn't differentiate between the level of effort. That's the first one.

On balance, typically you face a choice. If you choose to show leadership — this would apply to a home, a business, a large industry or a government — you can choose to take actions to reduce your emissions over time. It takes time, and, I'll flag, it's difficult.

You can make a choice in the beginning to say: "What I can't reduce — because it costs too much, or the technology is not there, or I need time to do it — rather than wait, I will invest in emission reductions that are possible today." If the government's footprint is 750,000 tonnes, the provincial footprint is 67 million tonnes in 2007 and coming down, so the opportunities to take action now are greater. We chose that.

Clearly, over time the objective is to reduce the use of offsets as you're successful in your emission reduction objectives. To reference a previous question from another MLA, we are seeing, in my professional opinion, concrete signs of results in a very large emitting entity. Over time our objective would be to see a decreasing role of offsets. That's how you would instruct that balance.

D. Eby: There have been a couple times when I've really appreciated the frank assessment of the challenge around climate change from Mr. Mack — that this is a difficult thing for us to do — and I think that's why I am so challenged by the Auditor General's report.

The Pacific Carbon Trust was expected to produce over 700,000 tonnes of offsets in a very short amount of time to facilitate the claim that we had a carbon-neutral government. I wish that what had come out of our session today was: "Hey, look. We were setting up. This was a difficult time. We did the best we could — lots of room for improvement."

If you look at the report, on page 21 there's a very clear timeline. One of the core principles, I understand, that is key to the whole idea of offsetting is additionality. The idea of additionality is: this project would not have happened but for the purchase of the offsets. If you look at the timeline on page 21, you see that on the Darkwoods project, there'd already been an offer on the property; there'd been an appraisal for the ecological gifts program.

In fact, to me — and the Auditor General can correct me if I'm wrong here — it looks like they've drawn out that the Nature Conservancy of Canada had actually purchased the property in 2008, and it wasn't until January of 2009, which was nine months later, that the carbon offset project feasibility study began. My understanding in reading that is that we'd have to believe that NCC was looking at either selling or liquidation-logging the property, in order to understand these carbon credits.

Similarly, in Encana. April 2008 they've started this project of using natural gas in their wells to minimize flaring, and it's not till 16 months later that PCT has their first discussions about the project. I understand, as well, that Encana's business case was such that they were actually generating a significant amount of revenue from this change in their business practice, that they were going to do it anyway, unless they were willing to forgo that revenue stream.

My question is, first, to the Auditor General. Do I understand correctly that both projects appear to have been initiated — and in fact, the NCC project entirely completed; they purchased the property — even before the carbon offset discussion began? Then I'll have a follow-up question for the PCT.

M. Sydor: Yes, that's correct. Both projects were up and running before they started looking for offsets.

D. Eby: Then to the PCT: why wouldn't you just say that these were not ideal…? Why wouldn't you come to this committee and say, "Look, these weren't the ideal projects. The Auditor General has a point. They were underway. They were happening. They don't fully satisfy additionality," and tell this committee, "Now we have more to shop from. There are more opportunities for offsets. Things are better now," instead of insisting that these projects were somehow additional, when it seems very clear that they were not?

J. Mack: Can I just speak…? The first element of the question was on overall tone, and I sort of recognize that I'm not a perfect communicator. One of the things I would like to express to the committee, in line with the recommendations….

It is our objective, to state the fact, that we acknowledge that as a leader you do take risks, and you do push the bar. That's the intent. If leadership was easy, everyone would do it. We have tried to take efforts and seek advice on a carbon-neutral government program.

I hope what the committee hears is that where we've
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received recommendations, we have a real intent to improve on those. I would say that during the conduct of the audit where we could make changes, even during the audit, we attempted to do that. I leave that to the committee to come up to your own mind on whether we've done that effectively.

In the first instance, we do recognize that as a program we need to improve, and we are doing that and will continue to do that. I don't want to diminish that statement.

On the issue of the two individual offset projects, on the Darkwoods and Encana projects, I'll refer to David to answer on the view on those two offsets.

D. Muter: Maybe just to build on the tone, I think I'd comment that when I say there was a challenge, this was hard for us. We did not take this challenge lightly. We have a significant amount of respect for the Office of the Auditor General. It's because of that respect that we saw the challenge in addressing these differences.

To the specific examples that you're speaking of, the Darkwoods and the Encana projects. On the Darkwoods project, the parts that we looked at on this one, and one of the key pieces of evidence that was provided, is a sworn affidavit from the Nature Conservancy of Canada explaining their timeline and when they considered offsets. It differs from the perspective that Mr. Sydor has just provided.

B. Ralston (Chair): It's not Mr. Sydor. It's the written text of the report, page 21.

It indicates in early 2006 the Nature Conservancy of Canada made an offer to purchase the Darkwoods property. The requirements of the emission offset regulation are that the project had to have started after November 29, 2007, which in this case it did as the sale happened after.

I think the question you're asking is: did they consider offset value as part of their decision to proceed? Was this designed as an offset project initially? That is provided in the sworn affidavit from the Nature Conservancy of Canada.

The requirement isn't that they have to have had a deal with Pacific Carbon Trust that there was an interest in selling offsets, which they've said there was. They had multiple meetings with other parties about the potential to sell those offsets when they initially started investigating the potential to purchase this property.

B. Ralston (Chair): Was this affidavit provided to the Auditor General during the course of the audit?

D. Muter: My understanding is that it has been. I'd defer to the Auditor General on that topic.

B. Ralston (Chair): Well, I'm going to ask you then, given that you've referred to it, if you could produce a copy, and it'll be circulated.

D. Muter: On the next point, on the Encana project, the question the member was asking with regards to the financial value of that project. I think there are some important points to consider around what actually happened.

First of all, on the Encana project, this is the first time ever that this technology has been applied. The oil and gas commissioner of British Columbia has commented that this is the first large-scale application of this technology anywhere in the world. In the end, Encana lost money on this project, and it was with the value of offsets that they were able to achieve some of their financial returns.

There are significant risks with the technology. The thing is, if you look back at what's happened now, the actual activity of underbalanced drilling with natural gas, Encana was the first to do it. Nobody else who operates in that field uses that technology, as no one else was selling offsets at that time.

Since we ceased purchasing offsets from this project, they've stopped using that technology as it still faces significant technical risks. It was with consideration of the value of offsets that they were able to overcome those technical risks.

D. Eby: I'll wrap up there. Oh, there was…. Mr. Sydor, you mentioned that it was your belief that staff had instructed the board to delay your report, or that there was some kind of an effort to delay. It looked like you were referring to a document. Was there a document that you were referring to that you could produce for this board, or was it just something that somebody said to you that led you to believe they were delaying the report?

M. Sydor: It's just part of the summary of information that we have, but it came from a slide that was presented at a board meeting in October 2012.

D. Eby: Mr. Chair, I wonder if we could have that slide produced for this committee.

M. Sydor: I don't think I have that with me. I just have the summary of some of the points that I wanted to make sure I….

At the time this audit was being done, you've said that there was an affidavit saying that this did make the difference in the Darkwoods project. Did you let the Auditor General know that there was an affidavit? Did you talk about it? Did that evidence get to the Auditor General's office?

D. Muter: I think I'd let the Auditor General answer that question. It's our understanding that this was the result of a specific question that the Auditor General had asked and that the response provided was this affidavit.

M. Sydor: Mr. Muter said he has a copy of an affidavit. I ask what the date was. I'd like to see the document that he's referring to.

What we're talking about when we look at this is: what information was available to the validator to make the decision that the project should go ahead? One of the expectations of Pacific Carbon Trust, and I think this has been mentioned by one of the members, is that projects that begin before you seek offsets must show that they've considered and included the value of developing offsets as part of the justification for going ahead with the project.

If you look at the validation report, you will find no evidence of that. There is no information in there about the validator looking to see what information was available to show that offsets were part of the decision for going ahead.

The information we had, that we were provided by the board, was that, yes, they were thinking about it. There was no offset market available for forest offsets at that time. They gave up. Why did they purchase the property? Because several things came together at the same time. It was like the perfect storm for NCC.

First of all, the federal government initiated the nature areas conservancy program, and $225 million was put into that fund; $25 million was allocated to Ducks Unlimited; $200 million was in the hands of NCC, $185 million for its use and $15 million for it to distribute to other nature conservancies. The idea is that if you find a property, you put up half the money and you can get the other half from this fund.

The purchase for this property came about because they drew $25 million out of that particular fund. The vendor agreed to give an eco gift. The vendor substantially donated more than half the value of the property. His intent was to try to preserve this as best he could. We had an earlier discussion about the fact that he would sell to a liquidation logger to get full value. The real story is that he made a donation of more than half the value of the property. The Nature Conservancy had that, the $25 million from the federal money and took out a mortgage to fund the rest of the property.

They purchased the property in 2008. Offsets were not on the table when they purchased the property. There's nothing in the board minutes that shows a calculation that says: "Here's how offsets will contribute to the purchase of the property."

I would like to see the affidavit that Mr. Muter referred to. Does it come from that period? What does it actually say?

B. Ralston (Chair): We'll get a copy of the affidavit later. I don't know how we'll deal with that, but we can decide that then.

I was just going to say to the member that we will take a look in our audit file, as well, to see if we do have a copy of that affidavit.

K. Corrigan: Just a follow-up on that. I'm wondering if…. I don't know who answers the questions because I can't see down there. Who is answering that question?

I know we'll get it later, but just to tie this little bit up, do you recall what the date was of the affidavit? I'm particularly interested in: was it after the fact? Was it during the audit, or when was the affidavit done?

D. Muter: I've been able to find it. It's dated February 5, 2013, and we received a copy of this from the Nature Conservancy of Canada. It's our understanding, based on the cover, that it was provided to the Office of the Auditor General.

It is dated after the office had conducted their work and describes for them, as I understood, the question that they were asking about: "Did you consider the value of offset sales?"

I'll provide this for the committee. But I think there are two points. There's the fact that they provided this affidavit. There's the other point of what was considered at the beginning of the project and what was considered as evidence by Rainforest Alliance when they were look-
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ing at this. This has been stated publicly and reported on publicly. The Nature Conservancy of Canada, before the purchase and sale had closed, had been meeting with multiple parties about the potential to sell offsets, that it was with the intent to sell offsets that they were able to put together the financing for this project.

Mr. Sydor has provided some clarity on the financing structure. There was an ecological gift. That value is a dollar value that the previous owner receives. It's not a donation that they're giving. It's a dollar amount value that they're receiving for the property.

The Nature Conservancy of Canada also had some funds from a federal government program. What they didn't have — and this was described in the project documents — was funding to maintain the property ongoing. They had funding available to close the purchase. But then what do you do? How do you maintain your property once you get it?

The intent was to use offset sales after you've bought the property in order to be able to sustain your ownership of that property. It was with that understanding — that you can't just buy something and then forget about it; you have to manage it ongoing — that they needed a value stream, and it was with offset sales that they were able to put together the financing for that.

L. Reimer: So we know that these third-party accredited professionals are being used to validate in California, Australia, South Korea, I think, and probably a number of other countries, as well as Quebec.

I guess my question is for Mr. Mack. Given the announcement from yesterday, we're going to continue using third-party professionals — is that correct? — as part of our B.C. offset program.

J. Mack: That's correct. It's prescribed for that use, that in purchasing offsets we rely on those third parties to make those decisions. I would clarify. There will still be a due diligence role within government similar to what the Pacific Carbon Trust has done, and that will benefit from these recommendations moving forward.

L. Reimer: My concern is…. I really don't want to dwell on the past, but moving forward we want to make sure that we do things appropriately. Are these third-party accredited professionals, the ones you've used, fully aware of the recommendations out of the Auditor General's office? And do they understand the application of the emissions offset regulations?

There was something that Mr. Muter had said earlier concerning whether or not the emissions offset regulations were applied properly. That is the nature of my question moving forward. Do they have a clear understanding of the requirements of that regulation and the application of it?

J. Mack: I would just say, recognizing…. And I would mention, for the benefit of the committee, that the board of directors for the Pacific Carbon Trust did put out, in parallel to the government's response, some specific comments around how they dealt with these third parties as these concerns have come to light. It's the board's perspective on how they've tried to look at that. I'd be happy to go through that.

There is a recognition, back to the continuous improvement model…. We know — and the Auditor General saw these instances — of confusion in the system when we started. These individuals were basically new in their jobs, too, and were looking at it. There were moments — and the Auditor General's office had seen these — where you would see confusion around who was making what determination. We sought to clarify those as we dealt with them.

We fully recognized, as a continuous improvement, that there was confusion in clarity at the start of this program. We've done some work internally to try to formalize procedures and protocols.

We do have some abilities to work with the professional community. We work with the American National Standards Institute. We have an employee who participates in their process. So we will have an ongoing work program to work with them to improve that measure.

My concern, once again — and I expressed it earlier today — is that if there's another audit…. As an example, is there going to be a discrepancy between what our Office of the Auditor General believes with respect to offsets and what our third-party professionals believe? I want to make sure that, moving forward, we are able to sync those two.

J. Mack: I guess I would just flag that…. Moving forward with the program, I can't guarantee that two professionals will agree on everything. So we get down to a test of reasonableness.

In this case the PCT describes how they've gone through working with those third parties. As concerns were raised, they went back and had them done by other third parties and worked with other entities.

I do understand that the Office of the Auditor General had hired their own independent expertise to help them. I don't want to take away from the fact that they sought opinions and advice from people. But I would recognize that we've worked with the Verified Carbon Standard, which operates internationally.

They have looked at the Darkwoods project. The federal government did a procurement, in which they purchased Darkwoods as an offset project.

As David Muter had put forward, we are faced with a
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challenge where we disagree on matters of facts and evidence with the Office of the Auditor General. We have sought the advice of independent, accredited professionals, who are also audit firms in and of themselves.

We have chosen to reject the conclusions and to stand by that work, but we recognize that the real value here is to move forward. I don't want to take away from the message that, at a systems level, we fully recognize the issue of clarity and procedural accuracy in those roles and responsibilities, in particular in the first days of launching a program for the scope of this audit of 2010.

B. Ralston (Chair): Selina Robinson, Vicki Huntington. Then what I'd like to do, subject to what the committee may think, is try to conclude our questions on this report and then take a break for lunch.

Not to put pressure on anyone, but we're close to 12. We may go a little bit into the lunch hour, and then we'd just extend it. It would still be the same one hour but a little bit later start for lunch. If that's generally agreeable, rather than making everyone come back. Okay.

S. Robinson: In the name of expediency…. I have four questions. I think one answer to the four…. If I could just sort of get them out and then get one response.

I'm curious about the validators. I appreciate Linda Reimer bringing that up, because those are the kinds of questions that I have. I'm curious about how validators are identified and accredited, how they're selected. Who pays them?

I'm also interested in: when they review projects, what percentage of the projects do they reject? There was a selection of projects. Did they reject any projects that were presented?

The first one: how are they accredited? It's an ISO, International Standardization Organization, standard — ISO 14065 — by which they are accredited. That's by the American National Standards Institute. It's an organization like KPMG or PricewaterhouseCoopers.

In the case of the Darkwoods project, Rainforest Alliance and SCS were the validator and the verifier, who have achieved that accreditation underneath that ISO standard by the American National Standards Institute.

Just to give you some more detail on how that actually works, what an auditor would do…. What Rainforest Alliance would do in the case of the Darkwoods project…. They would put forth to ANSI: "Here's our expertise. Here's our internal business process and how we're going to conduct our work." They have to make sure that's in compliance with the standard.

ANSI then comes in and watches them through the conduct of their audit. So in the case of Darkwoods, the American National Standards Institute followed Rainforest Alliance while they were auditing the Darkwoods project to make sure they were applying the procedures accurately and correctly. The same thing happened for KPMG when they were auditing the Encana project.

They're accredited by an outside body. That outside body then does regular surveillance of those validators and verifiers. They'll come in on a regular basis and spot-check them. They then have to re-achieve their validation on a regular cycle. I believe that's every three years as well. So they'll go through that witness audit on a regular basis in order to maintain their accreditation.

The process of how they're selected was, I think, your next question. They're selected by the project proponent. They're paid for by the project proponent. And their report is provided to both the project proponent and Pacific Carbon Trust as the purchaser of the offsets.

The question about who's paying them. They do have to declare in their statement of assurance — and all of these statements of assurance are publicly available on our registry — their independence from either us as the buyer or from the project proponent.

They are paid in the same manner as when a corporation has a financial audit done on their financial statements. They're paying for that financial audit, but that financial auditor provides a declaration of independence in that.

D. Muter: Yes. How many projects have been rejected? In our process, overall, of all the projects…. There are multiple places where projects are rejected, both from the proposals we receive, the proposals that we've received and agreed could potentially look at and that then are rejected through a process or that are rejected by a validation or verification audit.

Overall, since Pacific Carbon Trust began and the offsets marketplace began here in British Columbia under the emission offsets regulation, it's roughly a 7 to 1 ratio. For every seven projects that we've seen proposed to us, only one has come through as a successful project in the end. And that's through multiple layers of us doing our due diligence to look at the proposals and rejecting them if they're not suitable, all the way through to validation and verification questions that get raised.

B. Ralston (Chair): Before you start, I've got Vicki Huntington and Kathy Corrigan. I think they probably want to ask a series of questions, so I think I'm going to change my mind, if you don't mind, and just break for lunch and come back at one.

R. Jones: No, I was just going to say that at the end I wouldn't mind sort of summarizing a couple of things.

Sorry to reverse field here, but I'm feeling that I don't want to pressure these people to wrap it up, and I don't think they'll be quick anyway.

B. Ralston (Chair): Good afternoon, Members. We're continuing our discussion on the report entitled An Audit of Carbon Neutral Government. I had on my list two final questioners, beginning first with Vicki Huntington.

V. Huntington: Thank you, Mr. Chair. I said that I would be brief, and I'm trying to assure Mr. Trumpy that I intend to be that.

I agree with comments made, especially from across the table, that this is a process that we should be able to be proud of. It is one of the first, and we would like it to be one of the best. I don't think it will become one of the best unless the recommendations as a whole are taken pretty seriously and that the controls that are needed are set up by CAS.

But given that CAS was supposed to be the oversight mechanism for PCT, who is now going to ensure that CAS is conducting itself appropriately?

J. Mack: I guess on two points…. The secretariat's role in terms of the system will still remain, so we will have abilities to work with these third parties and accrediting organizations in terms of dealing with their accountability as it goes forward.

We also will maintain abilities. For example, on the issue of forest carbon, we saw a potential risk that different people would use different math. We issued a director's protocol that effectively standardized how anyone in B.C. should approach this. Those roles will continue.

In terms of our accountability, I would say that I'm accountable to the minister, and the minister is accountable to the Legislature. That would be the primary mechanism. I would note that there are efforts, both predating the audit but improved since the audit, to improve transparency, in particular around issues of price, where that has changed. So we would commit to transparency and working with stakeholders and professional committees around that review.

But I think the main accountability for any government program would be through the minister to the Legislature.

V. Huntington: I have a feeling that the issues surrounding the work that you do are so complex that it would be very difficult for anything other than a specifically assigned committee to maintain any oversight. Could I ask, then: is the Auditor General intending on continuing a direct oversight or audit of the CAS as we go forward? I would sure hope so.

R. Jones: Thank you, Member, and I totally agree with you. We will be doing, of course, our usual follow-up, which hopefully will be a little more intense in the future than what we currently do. But we would be quite interested in providing, you know, advice and oversight for the CAS as it goes forward, just to ensure that things unfold as they should and to provide whatever help we can in that regard.

V. Huntington: What do you need from this committee to enable you to do that, or can you independently assume the role?

K. Corrigan: It's appropriate to refer to this document? We have it now — all of us? Is that correct?

B. Ralston (Chair): Perhaps I should just note that, then, for the record. Mr. Muter has provided a copy of a letter addressed to then Auditor General John Doyle, dated February 5, 2013, signed by John Lounds, who is the president and CEO of Nature Conservancy.

Attached to that letter is an affidavit of John Lounds, which was sworn the fifth day of February, 2013. That's the document you're referring to?

K. Corrigan: It is. Thank you, Chair. I was literally finishing off reading it. We did just get it a few minutes ago, as you called my name, so I haven't digested all of it. I guess the first question would be of Mr. Sydor.

We have this document now. Did you have this document, or is the first you've seen it?

M. Sydor: We did have a look in our binder. Yeah, we do have a reference to it, so it is part of our audit file. It actually came attached to another document we had asked for. There was reference to a feasibility study that had been done, again, around the time of the purchase. We actually asked NCC to provide us with a copy of that document. This document came attached to that study that we had actually requested.

K. Corrigan: Okay. Before lunch there was discussion about this document, and I thought at that time you said that you hadn't received this?
[ Page 184 ]

R. Jones: I'll address that, Member. I had mentioned that we would take a look in our file to see if it was there. I was going to, at the end, mention to everybody that we did have it. We looked at it. We took it into account in our formulating of our opinion. So we did see it.

K. Corrigan: Okay. This letter and attached affidavit, essentially, seem to talk a little bit about the timing and so on. I'd appreciate the Auditor General's or Mr. Sydor's comment on this. It looks to me, like on the issue of the timing, that the project would have gone ahead anyway — that's my interpretation on a really quick reading — but that the carbon credits were useful in that they go towards the nearly, it says, $8 million to fulfil its stewardship funding requirements for the Darkwoods property.

I’m wondering if that's the interpretation that the Auditor General has, and I would certainly be interested in hearing any other opinions on that. I guess I'll just leave it at that. It looks to me like the project was going ahead. It's just part of the maintenance of the property, and the property, it looks to me, would have happened anyway.

M. Sydor: Let's put this purchase into perspective. NCC is in the business, basically, of buying ecologically valuable lands. At the time of the Darkwoods purchase it had approximately $200 million worth of property on its books — a combination of purchasing for cash and ecological donations.

In 2008, in addition, Darkwoods had purchased a few other properties, so it added about a little over $100 million to its value on the books. So the 2008 financial statements, I think, will show a little over $300 million worth of properties. They had identified Darkwoods as a property where they needed offsets to complete the purchase. That's basically the requirement.

We look at 2009. We look at 2010, 2011, '12, '13. What do we see? A continuing pattern of purchasing, acquiring properties — more than $200 million worth. How many offset projects does NCC have? One — one offset project. So if you apply a reasonable man's standard, how does this become the only property that you need offsets to purchase for if subsequently you're able to acquire more than $200 million without having to seek offsets?

Going back to your original question — yes, the property was purchased in 2008. It was done without having any offsets available, as they indicated in the document. You know, they were considering whether offsets were something that was available to them.

As I mentioned, what happened in 2007 around the time that they indicated they finalized the agreement, the federal government…. And this program that the federal government came up with had been something that had been in the works with NCC for about four or five years, so it just didn't pop out of the blue. It was something that they recognized was coming. This came along, and it gave them an opportunity to buy a property of this size. There were no financial barriers. They could go to the bank and get a mortgage, which they did.

Again, the criteria we looked at was what is generally viewed and what has been documented by climate action secretariat and PCT. Were offsets a critical factor in a decision to go ahead?

They were thinking about them, but I didn't see that they were a critical factor. They completed the project — i.e., buying the property — without offsets being in place or factored in. There was no evaluation going forward to the board saying: "Here's how much we'll be able to make from offsets, and here's how it factors in."

Some of the information we're getting is, obviously, after the fact. This document is dated February 13. I mean, we had basically finished our report by then.

K. Corrigan: I'm wondering if anyone from Pacific Carbon Trust would like to respond to that.

D. Muter: You've got the affidavit in front of you. Maybe I'll just speak to the question that was asked and some of the comments that Mr. Sydor has made.

It's probably important to know a little bit more about the Darkwoods project and to understand that this is the Nature Conservancy of Canada we're speaking of. They are a highly regarded organization in Canada. This is the largest-ever conservation project they'd ever undertaken. This is unprecedented anywhere in Canada. To purchase 55,000 hectares as a conservation project is very unique and presents significant challenges.

Yes, they did have financing in the form of the program from the federal government. Yes, there was an ecogift program that was available as value for the seller of the land. But in order to maintain the ongoing property, what they've always understood at NCC and the only reason why they chose to remove their financing conditions on the purchase and sale agreement was because they understood they were going to have a potential to sell offsets.

On the other example that Mr. Sydor brought up — that this is the only offset project the Nature Conservancy has undertaken — I believe that to be true as well, but I think it's important to note that not every single property that gets purchased by the Nature Conservancy can be an offset project. If you purchase a property that doesn't face a risk of the trees being removed and the carbon being emitted, it cannot be a forest carbon project.

There may be multiple reasons as to why this is the only one like that, that this is the only time they'd come across a property where they saw a risk, a threat of liquidation harvesting on it.

I think the last part on this is the consideration that
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was made by the board. It was the vice-chairman of the board who did the calculations of the carbon stored in the standing timber. That was done on March 5 of 2007.

It's those types of analyses that are the types of things that, in general, across our entire portfolio we look for. We ask accredited experts to look at and understand: "Is that considered? Is that reasonable? And is that an appropriate piece of evidence that's required in order to support the assertion that this project did face barriers and that offsets were considered in overcoming those barriers?"

K. Corrigan: Paragraph 4 of the affidavit of John Lounds says that between July 2006 and October 2007 the owners of Pluto Darkwoods Corp. changed their view and requested that the transaction proceed as an asset purchase, as this was more in keeping with NCC standard practice. NCC agreed, and the new asset purchase agreement was signed.

So the agreement was signed, it appears…. Or the decision was by October of 2007. The earliest date that offset projects could start is November 29, 2007. So it seems to me that although that's the statement, it's pretty clear even from this affidavit that the decision to purchase the property had been made. Therefore, the project — at least, some form of it — was going to go ahead by October 2007.

D. Muter: The agreement is a conditional agreement. Think of it the same way as an agreement to purchase a home. It's a conditional agreement that closes on a specific date. One of the conditions that the Nature Conservancy of Canada had was similar to purchasing a house. Do they have enough financing put together in order to close the purchase and to maintain the property ongoing?

So they had a financing condition on their purchase and sale agreement. They withdrew that financing condition with the understanding they were going to have offset sales and the value from that in order to support the ongoing property.

The requirement of the emission offsets regulation is not: when did the agreement get initialized? It's when the purchase closed.

The purchase closed after November 29, 2007. That's the standard that we have in the regulation in British Columbia. The project start date essentially began with the close of the purchase and sale.

K. Corrigan: Another question. This is the largest project that has been an offset project in British Columbia, correct? Is it this one — the Darkwoods? Yes?

D. Muter: No. I believe the Great Bear forest carbon project is larger, and the TimberWest forest carbon project is larger as well.

K. Corrigan: Okay. I'm very interested in these dates, and I'll seek to get an answer, again, from the Auditor General on the interpretation of those dates. I really have not had a chance to go through this document, so if other people have better questions, then I'd hope they would jump in.

B. Ralston (Chair): What I might suggest is, since we've just received the document, if there are…. It might be worth considering deferring this questioning until a later time. We can either have a response in writing, or we could invite Mr. Muter back. I'm sure he'd be delighted to come back before the committee.

It doesn't really lead to very effective questions if you've just received the material and you're reading it as you form your questions. That's not a criticism of you. That's just the timing of the way in which we've received this document.

K. Corrigan: Yeah. Would it be possible, Chair, just to see if there is a final answer from the Auditor General's office about the interpretation, and then we can ask more questions later? I do have a couple of other questions too.

M. Sydor: I think I understand Mr. Muter's position. The way PCT looks at it, it's the date of the sale that's viewed as the start date for the project. In this particular case, as you can see, there's an extended period of time.

There was an offer made in 2006 that was accepted by the vendor. He was willing to give NCC time to come up with the funding. The natural areas conservation program came into place. The vendor realized that selling the asset is more beneficial to him than selling the shares. They came up with a separate agreement.

The reason why it took time is because, again, the intent of NCC was to preserve the property, and to get the ecological gift tax certificate that comes along with that financial benefit for the vendor, there has to be an assessment of the quality of the ecological values that are in place. Then the document has to be sent to…. As well, there has to be an appraisal on the property so the vendor understands: "How much of an ecological gift can I give?" All that takes time.

I think a lot of that is documented in here. When you have the time to read it, you'll see that there are dates going into 2008 talking about the ecological gift. So it does take time. The sale date was in April 2008, and that's when the project started. But the intent all along was to
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preserve that property.

K. Corrigan: Can I continue with questions, or you've got other people? I've just got a couple more.

One of the problems, I think, with the projects and the fuzziness around them and what…. The appropriate baselines and so on are pretty clear. To me, it's the lack of clarity in the guidance.

One of the comments made on page 26 in the report was: "We expected to find clear guidance for proponents in key risk areas such as additionality and protocol development. Instead, we found that while the Pacific Carbon Trust had developed 'draft' guidance documents, proponents are not required to adhere to this guidance, and it does not sufficiently address key risk areas such as those identified in this audit."

The recommendation that followed was: "We recommend that the climate action secretariat ensure supplementary guidance to the emission offsets regulation be finalized and adhered to."

Then the response from government is: "The climate action secretariat has been working with Pacific Carbon Trust and the professional community to ensure that roles and responsibilities are clear and that the requirements of the emission offset regulation are understood by all parties."

The problem with that response is it doesn't address what the problems are that seem to be related to, perhaps, part of the problem with the evaluation of these two projects. The problem is not the understanding of the regulation. I would say it's the provisions of the regulation — that there's the lack of guidance, a lack of clarity. There's no clarity about additionality, and the response does not seem to address that.

I guess my question, to whomever wants to answer it down there, is: am I misreading that response and the fact that this is one of the problems directly related to the evaluation of both Darkwoods and Encana?

J. Mack: I guess, on the overall questions around guidance, to flag…. The carbon-neutral year was in 2010. These were two of the first projects that PCT had considered. In response to an audit, we recognize that there were areas where we were proceeding without sufficient formality and clarity around the guidance and expectations. I think the Auditor General had that finding. We accepted it. I would say that in our approach we did look at….

There's a difference between the individual offset project and how the portfolio manages. I would say, from our perspective, we thought we would learn through these and improve over time and do reviews on a larger set of portfolios. But we accept the advice from the Auditor General that those procedures should've been clear on day one, and we have worked through the conduct of the audit with the PCT and the professional community to do that.

On the issue about the merits of the individual projects, we felt that the guidance in terms of the government response was to focus on the recommendations, so we did that. We noted the disagreement between the Auditor General's assessment of the evidence and the test of reasonableness on those projects.

PCT's board of directors did issue a statement in conjunction, describing the steps they undertook to work with different firms to explore this. Consistently in those audit experts…. Not to take away from the work that the PCT had done to assess those themselves, but in looking at the independent advice that they've gone through and done again and worked with a professional association, there continued to be a difference of opinion between the Auditor General's office and those.

On a reasonableness test, I would say — not to speak on behalf of the Crown or the board of directors — they had to respectfully disagree with the interpretation of the Auditor and look at that assessment by these other accredited organizations as reasonable.

For the matter — and I hope we've expressed that — there is evidence in documents. The Auditor General's office has looked at this. We have those, and I think we're available to provide those explanations of how those are, in fact, in our view, credible offsets.

D. Muter: I think I mentioned this point earlier, but all of the validation verification statements that we have are publicly available on our registry. It might just help to mention some of the details on these specific projects.

The Darkwoods project, the Nature Conservancy of Canada. It was validated by Rainforest Alliance and verified by SCS Global Services, and ANSI provided a witness audit to Rainforest Alliance's work.

On the Encana project, it was KPMG that provided the validation audit and Ruby Canyon Engineering that provided the verification audit. All four of those bodies are ANSI-accredited. As well, KPMG were receiving a witness audit during that work.

In terms of our further due diligence, when concerns were raised when we saw the initial findings from the Office of the Auditor General, we undertook further reviews. We conducted further due diligence that James was referring to, to ask other experts.

In the case of the Darkwoods project, we looked at Brinkman forest services and asked them to look at it, review it for us, to comment on: "Is there any risk here? Is there something that we missed?" In the case of the Encana project, we asked SNC engineering to look at it and comment on the Encana project: "Did we miss any-
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thing?"

In all those cases, they came back and confirmed the opinion that we had received from the initial validation verification audit — that the projects were credible and in compliance with the emission offsets regulation.

So again, this was a challenge. We do not take this difference lightly at all. But in the end, on the balance of all the opinions we received and the requirements of the emission offsets regulation, we stood by the offsets and chose to go that direction.

M. Sydor: Rainforest Alliance, SmartWood group, did validate the project. Validation means that in their opinion, the number of offsets is within 5 percent of what they should be. That validation was in error.

The board itself recognized that the Darkwoods project was not conservative. Our report points out that they bought 40,000-odd more offsets than needed because the leakage factor that was employed by the project developer and allowed by Rainforest Alliance was not at the level that it should be. So the offsets were overstated on that project. Rainforest Alliance, had they done an adequate audit, would have recognized that.

In the project plan, where the project developer talks about leakage, he refers to a report that he views as the main document to look at what leakage factors should be in the northwest. If you go to that report, you'll see he says the report indicated that the leakage factor in the Pacific Northwest ranges from 7.9 percent to 16 percent. So his figure of 8.5 percent is within range.

PCT, in its due diligence, hired PricewaterhouseCoopers to look at a number of other standards and see what factors are actually considered there. I think they came up with a range of 10 to 20. But in that report, the 7.9 percent that was identified in the project plan actually refers to a project where you're converting forest land to agricultural land. It has no bearing whatsoever on a Darkwoods project.

In that report, you will find that projects similar to Darkwoods, where all you're doing is adjusting the harvest levels and the amount of land you're preserving…. When you look at the leakage rates, the actual leakage rates that occurred….

In the Pacific Northwest, where this study was conducted, they actually cut back on logging for spotted owl purposes. The leakage ranged from 16 percent to more than 80 percent. That was the range that should have been considered by the project developer, not looking at 7.9 percent that converting forest to agricultural land would produce. So in our view, Rainforest Alliance did not do an adequate job.

Now, in terms of Encana, it was identified that KPMG validated the project. KPMG required a letter from PCT authorizing them to use that protocol, because PCT is the one that worked with Encana to develop the protocol. The protocol did not meet EOR requirements on the fundamental requirement for additionality or the baseline.

In that project, Encana said: "We define the baseline as historical practice." The standard.... The EOR says: "Identify the potential baselines that you considered in your project, and identify the criteria you used to select the most reasonable baseline." That was not done in that case.

Encana as well, as we know, started the project before they came forward to offsets. We've had a brief discussion around NCC and how much work they did. What did Encana tell us about their prior consideration? When they received the documents from us.... Where we said, "We don't see any evidence that you've done this," they said: "That's right. Offsets were not considered as part of the decision to go forward with this project because it's not required." So they had a misunderstanding as to what the requirements of the EOR are.

False with Darkwoods. The board spent over $400,000 extra to get that cushion in place because they knew the offsets were overstated. Encana came back to us and said: "No. We didn't consider offsets when we went ahead with this project. We didn't need to."

B. Ralston (Chair): I'm beginning to feel that we're…. I don't think we're going to resolve this here. I think we've had a very good exposure of the divergent points of view. We're not here as a court to make a finding.

Unless there are further questions on other topics, I think I'd encourage members to consider addressing other questions rather than this one. I just don't see us resolving this. It's going back and forth in a fairly systematic way. I just don't see us getting any closer, and that's not our job — to get to a resolution.

K. Corrigan: Thank you, Chair. I will ask a completely different question as my final question.

I just wanted to confirm the figures that were given to us earlier. The document talks about the actual emissions increasing 6 percent from 2010 to 2011. But it was reported as "a relative reduction of approximately 3 percent when normalized for climate variability — i.e., a colder average temperature in 2011."

I guess I'm going to roll up several questions into one, because I only have one more question. I promise. I wanted to find out who did that evaluation and if the methodology in that evaluation is available. And then just confirmation, as well, with the numbers.

So 750,000 tonnes in 2010. Is that correct? And 776,000 in 2011 — that was the increase. And then for 2012 I thought it was down to 770,000. I may be incorrect, because I was writing numbers quickly as the informa-
[ Page 188 ]
tion was being given.

If my numbers are correct, then, what we have — and our aim is to have a decrease of emissions in this province — is an increase of 20,000 tonnes from 2010 to 2012. Is that explained again by cold weather? Or what is the explanation for that? I could be wrong on the numbers. I may not have written them correctly. That's my final question.

J. Mack: On the first issue, we issue a report — and I'd be happy to make those available to the committee — that talks about the emissions of the government writ large, as well as individual public sector organizations. I do believe the Auditor General did look at the methodologies around measurement and, I think, was largely supportive of the work we'd done.

Your numbers are broadly correct — that emissions went up from 2010 to 2011. They came down slightly in 2012 but are not an absolute reduction from 2010. The government's recognition on that is very simply that we need to do more to get those results, recognizing that we're dealing with things like capital stock turnover, where you make investments and don't see the results of those for some time.

I think Mr. Trumpy was reading from a chart, so perhaps that chart could be provided through to the Clerk, and we'll distribute that to members as well then. I think that's the chart. Yes, he's nodding in agreement. We can be accurate, then, if we have that chart circulated.

K. Corrigan: Bruce, part of my question was not answered, though. Can I just follow up? It'd be the last one. I promise.

The reduction from 2011 to 2012 is only 6,000 tonnes, I believe. That's 20,000 tonnes more than 2010. Part of the question was…. And thank you for the answer. It was pretty comprehensive. But I just wondered how the weather figured into the 2012 figures.

J. Mack: Yeah, if I can just answer the question. What I will do is supply this document. It's our report against our 2012 year, so it has some facts and figures, as well as some illustrative stories.

There is, just from an accounting perspective, a slight difference between the government submissions and then what we require of offsets. So I'll just note that the PCT does have numbers, which are in line with the numbers you provided, on the number of offsets purchased. They follow the same trend. I'll read out….

For example, the buses that operate as transit, the fuel they pay for. We don't put a price on those, so they've been excluded in accordance with the legislative definitions.

The numbers for 2010. The total emissions for the province — there's a chart here that we'll make available to you — were 812,065 tonnes. In 2011 the emissions increased to 873,938 tonnes; in 2012, 845,211 tonnes.

We've attempted to be very clear that we hold ourselves accountable to the emissions, and then we analyze our performance. What we had done to try to provide some analytics was what's called climate-normalized emissions to give a sense of: are these variations in year-over-year temperatures, or is there evidence of a trend? So we've climate-normalized those. That'll give you an efficiency perspective.

Those numbers are 860,170 in 2010; again, normalizing for climate, 849,679 in 2011; and in 2012 almost the same but slightly lower, 848,707.

I want to be very clear that we hold ourselves accountable to the absolute emissions. This is to be illustrative that to try to understand whether we're seeing signs of progress, we made some modest claims that…. To us, those look like modest benefits to date in terms of efficiency and emissions.

D. Eby: Mr. Chair, just before we excuse these witnesses, there's a housekeeping matter.

During the break, I was speaking with Mr. Jones, and he indicated that it makes the Auditor General nervous to release any documents from their confidential file. It would be easier if we simply asked the witnesses to produce that slide show, rather than the Auditor General going into whether or not they have the authority to release that to us.

I'd just like to redirect that request to the witnesses here — to produce that slide presentation, which apparently includes some kind of a direction to the board or suggestion to the board that the report be slowed or delayed.

D. Muter: I believe so. I'll confirm that I know what the document is.
[ Page 189 ]

D. Muter: I'll have to find out what the document is, as I don't know what Morris is referring to. Once I find that out….

B. Ralston (Chair): I think it was described as part of a slide presentation to the board. That's how it was described.

D. Muter: That should be easy for me to find, then, and provide for the committee.

B. Ralston (Chair): Okay, great. Just so that it's clear on the record that that's your commitment.

I think it's been a very thorough airing of this report. I want to thank everyone for participating, and I hope we brought some clarity. As I've said, I don't think we've resolved any issues here. I think the nature of the subject is one that inspires fairly passionate response, and I think we've seen evidence of that here today.

I want to thank everyone for their participation. I want to, then, as I've done with the other reports, adjourn debate. We'll have any discussion or decisions about resolutions at a later date and reserve the right to recall anyone that we've suggested that we may wish to recall.

I just wanted to reiterate, just as PCT and the government has, that this was a challenging audit for both parties. We appreciate the climate action secretariat's and the Pacific Carbon Trust's work in this area and accepting the recommendations.

Just to reiterate that my staff did look…. You know, when they go out and they do these audits, they look at the key risk areas. We looked at them for the offset projects, we assessed the evidence, and we came up with our conclusions. We formed the conclusions, and we continue to stand by those conclusions.

One of the things I want to reiterate from what I said at the beginning, however, is that we believe that these recommendations will assist government going forward and achieving carbon neutrality. Even where there are some differences in opinion, I still think the discussions that have been held around that point to areas where the government….

As long as they continue to apply professional skepticism to evidence, like we do, when we get it, I think it'll serve the government and the public going forward.

B. Ralston (Chair): Great. Then, with the qualifications that I've just stated, we're finished on this one. We'll just take a few minutes and set up for our next report, which is Health Benefits Operations: Are the Expected Benefits Being Achieved? We'll take five minutes.

B. Ralston (Chair): We're beginning discussion of a report entitled Health Benefits Operations dating from February 2013. I'll turn it over to Mr. Jones on behalf of the Auditor General's office.

Auditor General Report:
Health Benefits Operations:
Are the Expected Benefits
Being Achieved?

R. Jones: Thank you, Chair. This report examined the contract between the Ministry of Health and Maximus B.C. Health Inc. and its affiliates. The audit found that the ten-year, $324 million contract, known as an alternative service delivery agreement — or ASD, as we call them — has not realized all the benefits expected when the deal was signed in 2004.

At the time of this audit the Ministry of Health was negotiating a renewal of the contract term with the current service provider. Our office ensured that the ministry was informed ahead of time of our findings, prior to finalizing the negotiations.

The audit also identified areas for improvement in terms of the ministry's monitoring of the service provider. The ministry has been proactive in addressing our findings and recommendations. Just recently our audit team met with the ministry to discuss improvements in their auditing of the service provider to meet issues raised by our office.

I'd like to thank the dedicated staff at the business management office for their outstanding cooperation on this project.

I'd also like to point out that while the report deals specifically with the Maximus contract, we identified a number of challenges, as we do in many of our audits, that are likely common to other arrangements. The recommendations can be applied to all sorts of other ASD agreements. At the time of this audit government reported to have signed 11 such deals worth about $2.4 billion. So there's a lot of good lessons to be learned from here.

These numbers continue to grow, and these are high-dollar-value, long-term deals that directly affect services that British Columbians use regularly, such as PharmaCare and the Medical Services Plan in this pro-
[ Page 190 ]
gram.

Long-term projects such as this one require a high level of oversight and management from government to ensure that benefits are realized, costs are controlled and government retains enough knowledge to effectively negotiate or reintegrate services back into government if appropriate to do so. Because of the significance of these arrangements and their associated risks, we plan to undertake additional work on these other ASDs in the future.

With me today on my far left is Laura Hatt, who was involved in carrying out this assignment. Directly beside me is Malcolm Gaston, the acting Deputy Auditor General, who oversaw the entire project. I'll turn it over to them to take you through the slideshow.

L. Hatt: On November 20, 2004, the Ministry of Health signed a ten-year contract worth $324 million with Maximus B.C. Health Inc. and related companies to administer the province's Medical Services Plan and PharmaCare programs and improve related technology. These services are also known as health benefits operations.

This contract is one of 11 ASD contracts signed by the province at the time of our audit and was of particular public concern when it was signed, due to the labour and privacy implications of outsourcing sensitive and critical services to the subsidiary of an American-owned company.

The ministry expected that this ASD arrangement would achieve a number of benefits ranging from improved service levels to technical benefits like new technology and improved privacy and security. The benefits we examined were among the key benefits put forward to decision-makers and announced to the public.

The purpose of the audit was to determine whether the Ministry of Health has been monitoring and achieving the expected benefits of the health benefits operations arrangement and publicly reporting on the costs and benefit of the arrangement on a regular basis. We focused on whether or not the benefits have been achieved and how effective a role the ministry has been playing in ensuring their achievement.

Since we were concerned with the ministry's role, we did not conduct a direct audit of the service provider. Instead, we analyzed the ministry's performance information on the achievement of benefits. We also considered the validity and reliability of this information. We did not audit whether the benefits were the right benefits or whether all the corresponding improvements had the intended impact on operations.

Overall, we found that the health benefits operations ASD had resulted in some improvements, but the expected benefits had not been fully achieved.

The ministry's monitoring of the service provider can be improved. In some cases monitoring has occurred, but the ministry has not been consistently holding the service provider accountable for its achievements. Most of the performance information monitored by the ministry is provided by the service provider, and where this information is key to demonstrating the achievement of benefits or mitigating significant risks, the ministry should obtain assurance that it is accurate and reliable.

The ministry has engaged third-party auditors to gain assurance over many aspects of the performance information received from the service provider. However, the scope of this assurance does not cover all of the key attributes of the reported information.

The ministry's public reporting on the arrangement does not cover all the benefits, and costs are not reported against results. More transparent public reporting on the costs and benefits of the arrangement is required so that the public can understand what has been achieved for what cost.

In terms of service levels, the service providers' reports indicate that all service level requirements outlined in the contract have been met since November of 2005, and at least five have been improved since the handover of services.

Nevertheless, we are unable to conclude whether the services have improved, for two reasons: the ministry has not been obtaining the required level of assurance over the accuracy of the data underlying reported service level results, and baseline data does not exist for more than half of all the service levels reported. As a result, the ministry cannot be certain that reported results are both accurate and higher than pre-handover levels.

In terms of the transformation of legacy systems, call centre technology, the MSP claim system and the registration and premium billing systems were expected to be replaced by April of 2006. Only the call centre was replaced on schedule. The MSP claim system was completed in 2012, six years later than expected. The registration and premium billing system has only been partially replaced and may not be completed before the end of the contract term in 2015.

Delays were caused by both the service provider and the ministry. After 2006 it became clear to the service provider and the ministry that the service provider's original technical solution for two of the three major legacy systems was not viable. Some later delays were caused by ministry-led initiatives such as the revenue management system and the B.C. Services Card.

In terms of IT currency, as the ministry did not formally monitor this benefit until 2011, we were unable to determine whether IT requirements have been met for most of the contract term. However, we did note that the replacement of desktop and laptop computers and PharmaNet hardware updates were delayed beyond the time frames established in the contract.

We found that the ministry has been largely effective
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in transferring the financial risk to the service provider. However, we did note that the ministry paid an additional $13.6 million to the service provider for operations covered in the original contract. Of this, $11.6 million was the outcome of a dispute resolved under the dispute resolution terms of the contract and was significantly lower than the initial claim made by the service provider. Because of the ambiguity of key contract terms such as "material change" and "material impact," we were unable to determine whether an additional $8 million was also for services included in the contract.

We also noted that the ministry does not have a documented set of criteria for assessing proposed changes to the contract and does not keep a comprehensive record of proposed changes and the rationale for the decision to not implement.

In terms of privacy and security, most of the privacy and security benefits identified by the ministry have been implemented, including numerous structural and technical safeguards, and policies and procedures. However, there are some gaps in the ministry's monitoring of privacy and security under this arrangement.

Two tools that were intended to proactively identify breaches were not implemented, and third-party audits commissioned by the ministry do not cover subcontractors. They also do not provide assurance that data access and storage are limited to Canada and that data access is segregated from the service provider's parent company, as promised.

As a result, the ministry was unable to demonstrate that these two outcomes intended to mitigate the risk of disclosure under the U.S. Patriot Act have been achieved.

We also found that the ministry is not monitoring the service provider's audited financial information to identify profit-sharing opportunities.

We did find that the ministry's public reporting is limited. It does not cover all the expected benefits of the arrangement. Quarterly reports issued by Health Insurance B.C. focus on service levels and leave out key benefits, such as the transformation of legacy systems, privacy and security, and risk transference. Further, the cost of the deal is reported separately in the ministry's annual report, making it difficult for readers to know what is being achieved for the reported costs.

To address these concerns, we made a number of recommendations: critically assess the viability of proposed solutions and plans to ensure that timelines are realistic and technological solutions will meet business objectives; ensure all key terms are defined in the contract and establish quantifiable thresholds where appropriate; monitor and enforce all significant contract terms and deadlines; obtain assurance over the accuracy of significant results; maintain a comprehensive record of decisions to facilitate knowledge transfer and consistent decision-making over the life of the contract; and publicly report results by contract objective with sufficient information to enable readers to understand what is being achieved for what cost.

We will follow up on the status of the implementation of these recommendations and provide our findings in our spring 2014 follow-up report. As we noted, the ministry has been proactive in addressing the issues that we've raised in our audit.

Given the significant use of contractors to deliver a provincial government service, the office also plans to conduct additional work in this important area of government expenditure.

I've got Lindsay Kislock, assistant deputy minister, health sector information management/information technology; and Guy Cookson, executive director, business management office.

L. Kislock: I am. Good afternoon. I am Lindsay Kislock, and to my left is Guy Cookson. We're pleased to be here today to represent the Ministry of Health and respond to the Auditor General's audit on the health benefits operations.

I think, by way of background, it's good for the committee to remember back to early 2000 when the number one complaint received by British Columbia MLAs was the inability of their constituents to register for the medical services program. The medical services registration process had not changed much since it started in 1965, and we had a paper process, really, in an emerging computerized world.

Simply put, government needed to join the 21st century and identify a solution where business practice, re-engineering and information technology could be introduced to a largely paper-based process.

To do that, government pursued a joint solution request for proposal process to identify an ASD solution to address the service delivery and aging technology issues.

In November 2004 the ministry entered into a ten-year contract with Maximus Canada for $324 million to deliver the business operations in support of the medical services program and PharmaCare.

The agreement to outsource a significant scope of health administration was precedent-setting, and it wasn't without transition issues, as any large scale IM and IT project always is. However, once the transition's issues were overcome, Maximus has met all service level requirements since November 2005.

The ten-year contract with Maximus required government to advise Maximus by March 2013 of our intentions either to go back to market to institute or call the
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clause in the contract that provided for a five-year contract extension or to bring the services back in-house. The ministry needed to make a decision. We commissioned an end-of-term assessment of the contract, and it was timely to work with the Auditor General during the audit process because the work of the Auditor General helped guide our activities and, ultimately, that contract extension.

As has been covered, the audit covered six recommendations, and I'll go through the ministry's response to those recommendations now.

Recommendation 1 was to critically assess the viability of proposed solutions. The ministry accepts this recommendation. We recognize that we need to have a stronger role in reviewing solutions that are proposed as we go forward with these types of decisions. Since the handover of the operation, we have taken a stronger role in reviewing and validating services and suggestions provided by the service provider. The lessons we've learned from our relationship with Maximus will certainly guide future activities of the ministry.

In terms of recommendation 2 — ensure that all key terms are defined in the contract — we have made, as we did the contract amendment…. We have taken the suggestions of the Auditor General into consideration and redefined terms or defined terms as required.

The issue of quantifiable thresholds has been addressed where appropriate, so we have done that in the contract extension. When it's not in the public's interest to have those quantifiable thresholds defined, we haven't done that.

G. Cookson: Typically, for example, payments will be made based on the volume of transactions. That would be an example.

L. Kislock: Recommendation 3 was to monitor and enforce all significant contract terms and deadlines. We agree that all terms and deadlines need to be monitored and appropriately enforced. We have the business management office dedicated for this role.

This is a contract designed to allow us to respond to changing times and changing programs, so it's important that we find a balance between the partnership and enforcement of the contract. Many times it is the government that's asking for change, so we need to find that balance in the partnership environment.

Recommendation 4 was to obtain assurance over significant results reported by the service provider. We agree that assurance is critical. We do have an audit program that we work quite closely with an external auditor to do. There is always room for improvement in any activity, and we are working with the Auditor General to identify potential enhancements to our audit program. We have also expanded service level measurements in our contract amendment so that we can get further assurance from our service provider.

Recommendation 5 was to maintain a comprehensive record of decisions. The ministry did maintain a record of all changes that were made to the contract, so if there was a change request or a change order agreed to, we had a record of those changes. What we did not have was a record of all the things and great ideas suggested by our service provider or by our staff that were considered and not executed.

We recognize the value in having a comprehensive record in our possession, because those decisions or requests may come forward again, so we accept this recommendation, and we are implementing it on a go-forward basis.

Finally, recommendation 6 was that we publicly report the results by contract objective. We agree that public reporting is a good thing. Accountability and transparency are always to the benefit of the public. We were initially given an exemption from the ASD reporting requirements established by the ministry responsible for ASD. However, we plan to adopt the guidelines that they've established in our '12-13 annual report. We are pursuing further discussions with central agencies to determine what additional enhancements we can make to our public reporting to, I think, really deliver on this recommendation.

In summary, I would say, overall, the government is satisfied with the work of Maximus in improving the administration of MSP and PharmaCare. We know that success has been achieved every day when people are able to phone and actually enrol in the MSP program. We are pleased that the Auditor General has found that improvements have been achieved because of this outsourcing arrangement.

We recognize that the Auditor General has made some excellent recommendations, and we intend to tighten up our monitoring and management functions to deliver on the recommendations that have been made. We continue to work with the Auditor General's office to institute additional controls necessary for the ministry to ensure that we are receiving the expected benefits laid out in the original proposal.

S. Simpson: I have a range of questions. I'll just start with a couple and then get back around to it. I guess the first one is a broader question. It's something that has sort of become apparent to me over the last couple of days, sitting here listening to a number of reports.

It is this question about the monitoring, broadly, that
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goes on that allows the Auditor General to be able to make definitive assessments of the situation. It seems that in instance after instance we've seen reports from the Auditor General suggesting that the inadequacies of monitoring of internal audit of that reliable information and data have made it difficult for the Auditor General to be able to make definitive determinations.

Equally, it's raised serious questions about whether the appropriate authority — the ministries or whatever — has had the ability to achieve the objectives and to satisfy themselves that they're achieving whatever those objectives are of the work that we're looking at.

The question that I have for Mr. Jones is: is this an endemic problem that you're seeing in terms of the government generally or in terms of the audits that you're doing? I don't want to stretch too far, but in terms of the audits that you're doing, is there a problem around the levels of monitoring and other evaluation that raises questions about whether we're actually as clear about what we should be getting out of these agreements and out of the work you're doing?

R. Jones: Thank you, Member. I would say it is a common theme that we have seen in all of our audits of P3 arrangements, of ASD agreements. It's not an unusual circumstance. That's why I think….

I've tried to preface every report we've dealt with so far by saying that these observations and recommendations that we're coming up with not only apply to the organization we're dealing with currently but should be used across government. Hopefully, that is getting out to the rest of government, where these ASDs and P3s are being looked at.

I would say that in many cases the monitoring seems to always be — even in Crown corporations, in the SUCH sector, hospital authorities and whatnot…. It's probably one of the most difficult areas for people to come to grips with, but it is probably one of the most important areas as well. Without the monitoring — making sure that the performance metrics are being met that are in these agreements — it is very difficult to determine whether or not you're getting good value for money.

S. Simpson: I guess that would be a point that stands out for me from these couple of days. I would like to see this committee consider making some recommendations that may be broader than the specifics of any given report before us. Maybe there is a recommendation there at some point on this question of how monitoring is done and the need to improve that capacity.

It's something that we're seeing pretty much in every instance. Close to every instance we are seeing this question raised by the Auditor General. It may be that one of the broad structural areas where we need to see improvement by government is on the monitoring questions.

I'm going to just follow that up a little bit with a question related to privacy. If I go to page 17 of the report, around privacy and security of personal information, the Auditor General has said that they found that the promised structural and technical safeguards and policies and procedures have been put in place — including segregation of duties, user logs, confidentiality, etc. — in regard to the primary contractor here.

But it goes on to say: "Despite these improvements, we noted that the ministry has not implemented two monitoring tools intended to proactively identify privacy breaches. Instead, the ministry has been relying on the service provider to self-report breaches. This creates a risk that breaches are not being disclosed to the ministry and resolved appropriately."

It then goes on to note: "First, the audits do not cover the service provider's subcontractors, which means there is a risk that the contractors are not complying with the terms outlined in the contract. Second, they do not provide assurance that data access and storage are limited to Canada and that data access is segregated from the service provider's parent companies."

I would ask if the ministry could comment on those issues and maybe tell us a little about what action has been taken to improve that capacity, particularly as it relates to subcontractors. It seems that the suggestion is that, with Maximus, there's been some work done there to deal with that, but it hasn't reached the subcontractors. How has that been addressed?

L. Kislock: I can respond to that question. The contract that the ministry has with Maximus provides that all of the terms of the contract flow down to the subcontractor and that data and information remain in Canada. There are severe penalties associated with breaching those clauses.

In terms of doing further audits to ensure that those provisions are being followed by the subcontractors. Guy, perhaps you could respond.

Again, I think the one thing about the deal with Maximus…. It was signed at a time when there was a heightened level of interest in privacy and security, so there was a lot of focus within the contract and the MSA around the ability to control and ensure privacy and security.

The fact is that the auditors have done an excellent job, coming in and identifying a couple of points where we could be doing a little extra — significantly extra — in terms of assuring of the fact that we have clarity around the role of the subcontractors and their access to privacy and security data.

We have recently met with the Auditor General, with our own auditors, to ensure that the annual audit going forward in April of 2014 will address these particular
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points. We're working with our auditors to find the right tools to give us assurance on both those points — around subcontractors and the access to data outside of Canada.

S. Simpson: Just to maybe be a little clearer on that. It says that the monitoring tools intended to proactively define these breaches are not in place.

Maybe you could tell me — because this suggests that it's self-reporting: is the ministry saying that there's a recognition that the approach of self-reporting is not a sufficient or an adequate approach to take and that the expectation now is that there will be some level of independent audit of those subcontractors to ensure that the conditions outlined here, or that the questions raised by the Auditor General around these matters of compliance for those, will in fact be done by some level of independent audit that is not a matter of self-policing by Maximus?

G. Cookson: Yes. The fact is that we have been reliant on Maximus for self-reporting on a number of these issues. Typically, they have been, in our understanding, very diligent in terms of reporting on those. And our audits have covered off the activities of Maximus in terms of monitoring and reporting out on breaches.

There have been omissions in terms of the subcontractors, so what we have to do is put in place and increase our audit activities to ensure that we are covering off these areas that hadn't been adequately covered by our existing audit process.

We are taking the advice of the Auditor General's office and working with our own auditors to find appropriate ways to actually comply with this recommendation.

S. Simpson: I believe I heard you say that your expectation is to have those in place in the spring of 2014.

G. Cookson: Yes. We are working actively with our auditors right now to design those tools so that we can actually go forward, as I say, in the annual audit which takes place over March-April.

S. Simpson: I'll ask one more question, and then I'll come back later, after others have had an opportunity.

This question goes to gainsharing and profit-sharing issues. I believe it's on page 18 of the report.

The report says: "The service provider is required under the agreement to give the ministry audited copies of its financial statements and the calculations used to determine whether the thresholds for profit-sharing were met. The ministry has not been receiving these documents. Therefore, it cannot be certain whether profit-sharing should have occurred."

It's a two-part question — first to the Auditor and then to the ministry. Has the Auditor determined in any way what the gap might have been between what should have come back to the government as a gainshare or a profit share versus maybe asking the ministry: are you going to put in place an audit system that allows us to determine that? And are we going to have some way of determining whether retroactively Maximus owes us a piece of the action that we haven't got?

R. Jones: Thank you, Member. No, we did not determine what the gap was. I will turn it over to the ministry to explain what they intend to do.

G. Cookson: The actual original agreement was intended…. The profit-sharing was intended to capture any excess profits that were made by Maximus in the delivery of this service. What we have been getting from Maximus is their own accounts, which are submitted to Maximus Inc. in the U.S., and we have been relying on the fact that those are audited accounts at Maximus Inc.

The auditors have pointed out that this isn't adequate, that we really need to have audited accounts from Maximus B.C., Maximus Canada.

The information that's been provided to date is that the profits by Maximus have been well below the threshold at which time they would be actually sharing profits with us. We obviously will be looking at fully audited books, but we think that the information they've provided to us is a fair representation of their profits to date. We will be confirming that through audited accounts in the future.

S. Simpson: Just to be clear. I fully understand that it may be that Maximus isn't realizing the kinds of profits that allow us to take back some kind of surplus profit from them. That may well be the case, but clearly, what I read here is that we have not, the ministry has not had the information to really ascertain whether that is in fact the case and whether there may have been some additional or excess profit that Maximus should not have realized and should have come back to the government coffers.

Am I to understand here, and maybe the ministry could give us some idea of what kind of timeline we're looking at, that the ministry is going to, then, require — I guess it's Maximus B.C., as I believe we were just told — a fuller accounting of that so we know what the situation is in a definitive way and so, should we be owed anything back, we're going to get that back? If we could confirm that and what the timeline is to make sure that occurs.

Then, of course, is there any capacity to go back and look at what's happened over the last ten years and at whether we're owed anything over the last ten years?

L. Kislock: The ministry has been comfortable with the information it was receiving, as was described by my colleague Guy Cookson.

We accept the recommendation of the Auditor General that there's a higher level of standard in reporting that
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could be achieved with audited financial statements coming from Maximus Canada. We have accepted that we will require audited financial statements from Maximus Canada going forward, and we will use that higher-level document to determine whether the revenue-sharing clause should be instituted going forward, based on the documents.

We have received financial statements and audited statements from Maximus International. Those documents demonstrate that they aren't within the range that would require profit-sharing back with the province of British Columbia.

B. Ralston (Chair): I guess the question does arise when you make the point that there was an extension of five years in March of 2013. Surely that would be the point at which a maximum — no pun intended — leverage could be exercised on the corporation to actually comply with what's a previously negotiated contract provision that they provide these things.

One can readily imagine that the tax lawyers and accountants would make sure that the profit never reaches the threshold, that there's a profit share required. Obviously, these are mechanisms, such as transfer pricing, which are notorious. That's actually an issue that the Public Accounts Committee in Britain is dealing with, with companies like Google and Amazon. Maximus is in, I think, that size and sophistication in terms of tax planning.

Perhaps you can just tell us whether this issue was addressed in deciding to extend the contract for another five years, because it seems that you'd have their attention at that point.

G. Cookson: As Lindsay referred to earlier, the timing of the audit was fortuitous, with the work that we're doing around the renewal of the contract. In fact, this was clearly required as part of the extension. Part of, again, the joy of having the auditors in is that one of the things they were recommending…

…is the fact that there were opportunities to tighten up some of the contract terms. We have done that, and it's clearly documented within the extension, the amendment to the MSA, that audited accounts will be required.

B. Ralston (Chair): Okay. You'll have to get that little excerpt, "the joy of auditing," and put it on the wall back in your office.

M. Dalton: In many respects this is a real success story. I remember years ago waiting up to an hour or so to get a response on the phone with MSP.

There's really a contrast, I think, with what's happening right now with the States, with Obamacare and their healthcare.gov. I think they can have six people on at one time, for the millions of people that want to enrol, so it's just a real challenge.

A question regarding the five-year extension. Just cost comparisons with other contracts — potential providers or in-house. What type of…? Have we examined that? What are the cost comparisons, the savings that are estimated right now?

G. Cookson: As part of the preparation to the end of the original contract term, we undertook an end-of-term assessment, where we considered the three options going forward. One was to repatriate the service back into government. A second was to go back out to the market and see what deal we could secure there, and the third was whether to extend or not.

The consultant's work came back, and they were…. Part of the challenge is the fact that there aren't many instances of this type of service being delivered across Canada or anywhere else in the world. It's also complex because of the fact that it's provision of an ongoing operational service plus a transformation service — the delivery of answers, the call centre, etc., but also replacing some of these legacy systems.

We did the best in terms of going across Canada and beyond to look at some comparators to compare it to what we're doing. Certainly, the indications that we had suggested that we were very much in the ballpark.

Certainly, the ability to control costs going forward was seen as favourable, and there was a great deal of uncertainty, if we went back out to the market, whether we would be able to secure a better deal — and the increased risk associated with that. So the determination was that the five-year extension was in the best interests of the ministry at this time.

G. Heyman: Part of the report states that the key tools necessary to identify privacy breaches are not implemented, and that creates a risk that breaches would be undetected by the ministry. It goes on to state that the contract "specifies that data storage and access should not occur outside of Canada to mitigate the risk of disclosure under the U.S.A. Patriot Act," that the ministry and the service provider have controls in place, but the ministry doesn't know if the service provider is fully complying.
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Now, the ministry response was appreciation of the comment by the Auditor General and a statement, which you've repeated today, that terms and deadlines need to be monitored. But you also stated that you believe it's important to "find a balance between partnership and enforcement" as part of the relationship between government and the service provider.

Given that the ministry was quite significantly criticized by the Privacy Commissioner in the summer for not having clear policies or training measures in place to ensure that privacy was protected at every level, I actually find this a very vague statement.

What does it mean to "find a balance between partnership and enforcement as a productive relationship" when we're talking about something as fundamental as the privacy of people's private medical information, or any of their private information, particularly seeing as the ministry itself has taken fairly significant action on alleged privacy breaches in the past? Or was this meant to apply to some other term and condition of the contract?

L. Kislock: That statement is meant to apply to the management of the contract overall. It was a joint solution RFP, which is a partnership arrangement where the ministry benefits, as does the partner, from a partnership-type approach.

When it comes to the privacy and security of British Columbians' personal information, Maximus has an outstanding privacy and security program. We audit that program annually with an independent auditor.

The Auditor General has suggested that we should put in place mechanisms to do subcontractors and look at potential solutions to identify that data isn't shared with the international owner of Maximus. We agree with those recommendations, and we are working with the Auditor General to make those two additional enhancements to the audit that exists.

We are impressed and think Maximus sets a great standard around the program that they have for their staff with respect to privacy and security training. It is impressive, and it results in many…. They discover through their own audit and privacy program people who are breaching the terms and conditions, and they report those immediately, within two hours, to the ministry.

G. Heyman: My memory of the history of this contract is while the contract was being negotiated, the ministry actually believed there was no risk whatsoever under the U.S.A. Patriot Act, and it was only after some considerable public discussion that the ministry implemented a number of measures that were supposed to protect private information from exposure under the U.S.A. Patriot Act.

Now, my memory and understanding of the U.S.A. Patriot Act — and this is a question for the Auditor General — is that there are two unique features of the act. One is that the act applies to U.S.-owned subsidiaries whether or not they're wholly resident in a country outside the United States and that if there is a request to produce information, it's against the U.S.A. Patriot Act to actually disclose to anyone that you've provided that information. I'm not aware of that either not being true or having ever been amended.

In that context, how is it actually possible to rely on Maximus's own reporting about privacy breaches?

R. Jones: I must admit I'm not very familiar with that act, so I'm not sure I have an answer for you.

G. Heyman: Well, then perhaps I could suggest that…. And if my information is incorrect, I'll apologize in advance. But this is my memory, and my memory is based on legal advice from some years ago. May I ask that you look into that and respond to the committee at some point in the future?

L. Hatt: I am not going to claim to be an expert in the U.S. Patriot Act myself either, but what we did look at is that during the ministry's initial procurement for the joint services solution, the Privacy Commissioner made a number of recommendations in terms of what the ministry should be implementing in terms of privacy and security to mitigate the risk under the U.S. Patriot Act. As part of the audit, we took those recommendations into consideration when we developed our criteria, to say: "Has the ministry implemented those recommendations?"

That one piece that fell out was the actual assurance over the data segregation within Maximus Inc. B.C. We didn't look specifically at the act itself. We relied on the Privacy Commissioner's recommendations as part of our criteria.

G. Heyman: Well, I'll just sum up by saying that I appreciate that, and I also remember that from the time. On the one hand, one could say that it's a bit conspiracy theory–oriented or paranoid to believe that United States security agencies will go poking around into people's private medical information, but apparently, given recent coverage of the extent of the United States security operations both in the United States and in other countries, perhaps it isn't.

Again, I'd repeat my request that the Auditor General actually review the act and see if that raises any additional privacy concerns that should be addressed.

D. Eby: There was a section of the report that I tried to
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understand on my own and I'm going to need some help with, so I hope the author can help me. On page 17 there is a bullet discussing transference of financial risk. The first bullet says: "An additional $13.6 million in funding was paid to the service provider for operations, including $11.6 million to keep the service provider economically viable."

I didn't understand that. What does that mean? Does that mean that we actually paid to make sure this company didn't go bankrupt? That's how I read it, and that can't be right. This is a very large American company.

L. Hatt: That was under the contract. We looked at all of the change orders that were put forward by Maximus to identify if the ministry paid for anything that was outside of what should have been covered under that original fixed price. We found that $11.6 million was one of the change orders that was paid.

When the service provider originally took over the contract, they had some challenges in start-up. As we noted, the ministry levied penalties because they weren't meeting their service levels in 2005, so this funding was, in part, to keep the service provider operating.

D. Eby: So this was money that was paid…? It wasn't money in hand. These were penalties that were essentially waived, then, by the public so that the company or their subsidiary wouldn't go bankrupt?

L. Hatt: Yes, and collected them. But this was a change order that was put forward by the service provider, and the ministry did pay that money out. It did go through the dispute resolution process, and it was reduced from the original ask. But yes, the rationale behind the change order was to keep the service provider viable.

D. Eby: Perhaps, then, to the ministry. It seems very unusual to me that we would be paying public money to keep a private company running. Can you explain why we would do that?

L. Kislock: There was a contractual dispute with the service provider, and we went through the dispute mechanism provided in the contract and agreed that we owed them the money as indicated.

D. Eby: So you have a different understanding. This wasn't to keep the service provider operating. This was money that we owed them under a contractual obligation?

G. Cookson: In fact, my understanding is that there was…. In the JSRFP process the ministry worked with the successful proponent to come up with the details of the final deal, which was based on an economic model which would allow Maximus to make reasonable profits on delivering these services. It was found that there was an error in that model and that because of that, it would have made the deal basically untenable for Maximus.

So they had requested, basically, a compensation for that error through the dispute resolution process. They had asked for a significant — well, a higher sum of money. The ministry negotiated down to this existing sum of $11.6 million, in fact, to compensate them for the error in the agreed model.

B. Ralston (Chair): And this is going on while you didn't get audited financial statements from the Canadian subsidiary. So how would you know whether they were telling the truth about that?

G. Cookson: The basis was on the actual agreed economic model, not on their financial results. It was an agreement between the ministry and Maximus that the original model, which was built to provide them with a reasonable profit level, had an error. It had a number of errors, in fact. And they were adjusting….

G. Cookson: Yeah. The ministry and Maximus agreed to the model. It was an error in the model.

D. Eby: Mr. Chair, if I may. The error in the contract resulted in British Columbia not having to pay out $11.6 million. I mean, it seems to me that this is a company with independent legal advice, a huge company with very sophisticated lawyers reviewing the contract. I don't understand how there can be an error in this manner where, essentially, they don't make as much profit as they expected to. It seems like their error, and they bear the cost. Can you help me understand why it would flow this way and not the other way?

G. Cookson: The JSRFP process is a partnership in terms of building the model. Again, there were, as I understand it, some errors in the model and some information which was provided by the ministry which was,
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perhaps, found to be incorrect. I don't have the full details of the actual change order that was put in place, but we could provide it if necessary.

B. Ralston (Chair): Just before you move on, could you do that, then, and provide it to the committee, and we'll circulate that to the members?

D. Eby: Just to the Auditor General — if you have any thoughts on that assessment of what happened.

R. Jones: Thank you, Member. I was just going to say that Laura did mention that she has some comments on this.

R. Jones: No, she doesn't. But my understanding was that it was in relation to some information that maybe wasn't supplied at the time the contract was being negotiated — from the ministry's side. It's not unusual in a lot of these long-term contracts, where information from the government side isn't supplied at the time that negotiations are underway — that the proponent can't come back and say: "Well, you know, there was a mistake."

D. Eby: One last question. In June of 2012 there was news that 43 people had their privacy breached by a worker who was viewing patient records. I just wanted to clarify that this breach, as I understand, came from notification from Maximus that this was taking place.

Is that the understanding of the Ministry of Health, that this was the Maximus detection system that detected their worker who had viewed 43 British Columbians' records improperly?

G. Cookson: That is correct. The system that Maximus has in place is a series of random audits and also tools where particular behaviour can basically be detected. This was another occasion where an individual employee had chosen to look up records where they were not authorized to do so. Maximus reported the breach and took adequate action.

D. Eby: And how many times has this happened at Maximus, that their system has successfully worked to detect their own employees who are improperly accessing information?

G. Cookson: Their ongoing audits are detecting this infrequently, but it does happen. You know, somebody wants to have a look at Luongo's medical records is a typical example, or somebody's looking up some personal friend or family member where they have no authority to do that. That happens very much in…. It could happen, whoever is providing that service. The important thing is that Maximus has the tools in place to actually detect it and take adequate action.

D. Eby: I think the concern this committee had was that the province doesn't have that capacity…

D. Eby: …to ensure that those are actually the only times in which that's happening.

L. Reimer: I think this is a good-news story, but with the size of our system and that, I gather it takes quite a long time to get everything fully implemented. I just wanted to ask…. On page 7, it indicates that the registration and premium billing system is still not completed. I'm just wondering where that is at.

I also wanted to ask how many firms there are that provide this service. I think you've already answered that. There are very few that are capable of handling this.

Then the third question I had was with respect to a question Bruce already asked, about quantifiable thresholds and what they are. You said, where the ministry believes the public interest is better served, with a case-by-case basis. I'm just wondering if you can give me an example of that, because I'm having difficulties. We're talking about contract terms in the recent extension. I'm just wondering: under what circumstances would a case-by-case approach be applicable to contract terms?

G. Cookson: We have three questions there, so I'll start with No. 1. The actual replacement of the R-and-PB system with the Medigent rapid system is on track to complete, basically, a year from today, to go into production. What we have done — and it has made a huge difference — is lock down any changes to R-and-PB while they focus on delivery of that project. We have had problems in the past where we've had a number of initiatives come forward that have delayed the ongoing work on the replacement. We're moving ahead.

The second question was: are there any other service providers out there that could do what Maximus does? There are. I mean, there are other firms that would be more than happy to take it on. Whether they could do it as well as Maximus is part of the question.

Maximus has a business which is very much focused on delivering health services, both in United States and in Canada, so they're somewhat unique in the fact that
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they're focused on delivery of health services in the way that they are. But again, I mean, I'm sure there are a number of firms out there that, if we were to go to the market, would be more than willing to provide a proposal going forward.

The last issue that you asked about, relating to quantifiable thresholds. We have found that in a number of instances it's in the best interest of the ministry to actually negotiate rather than to have to work to a rule. By having an ability to negotiate, we can accommodate different circumstances in any particular instance. Rules do tend to work to somebody's advantage — not, we believed, always to our own advantage.

I think one of the things I would reflect on in terms of that, though, is the recommendation from the Auditor around documenting decisions and the basis under which we're making decisions on an ongoing basis. That was part of the comments coming out of the audit — that we needed to do a better job of documentation so that we can clearly demonstrate why we made a decision here in one way compared to another.

The ministry still believes that it's in our best interest in some instances to have an ability to make decisions on a case-by-case basis, but we need to be able to support that.

K. Corrigan: There are repeated references in this report to opportunities for the ministry to apply penalties and a decision made to forgo those penalties. I'll just give you a couple of examples.

"The service provider experienced significant challenges in the first year of operations."

K. Corrigan: Sorry. That's on page 15, near the bottom. Continuing on: "However, the ministry did not apply penalties for delays in transformation and allowed the service provider to revise the transformation plan. Aside from the timelines, the second version of this plan did not substantially differ from the original 2005 plan."

Then later, on page 16 around the middle: "The contract allows the ministry to impose fines when the service provider misses a critical date, but the ministry has chosen not to do this, instead allowing the service provider to revise its plan. The contract does allow for this flexibility." And: "Desktop and laptop computers were not replaced until five years after handover, even though the contract requires them to be replaced every three years."

I assume that there could have been penalties associated with that, because they didn't fulfil the terms of the contract. It looks to me like there were just repeated opportunities where the contract was not being filled, and yet government chose not to impose penalties.

Yet on the top of page 16 it says: "In addition to these challenges, there were a number of government-led initiatives that impacted transformation. As a result, the ministry paid out an additional $3 million to compensate the service provider for lost efficiencies.''

Then, Mr. Eby has talked about the $11.6 million that was paid out, described as keeping the service provider economically viable. I think the point that the Chair made quickly earlier was: isn't half the point of these contracts, or a large point of these contracts — as has been said repeatedly when contracting out or when P3s happen — to transfer risk? I don't find it a great good-news story for my part, because it looks to me like it has cost the taxpayers a whole whack of money.

I guess my question, then, is: how much was the initial contract for? How much, over those five years, was actually paid out, and has the ministry quantified or estimated forgone penalties? I appreciate that may not be available right now, but I would appreciate that information.

G. Cookson: Sorry. There were a number of things that came up there. Can you just repeat the actual question?

How much was the initial contract for? How much was actually paid out for those five years, and how many dollars were forgone in penalties that government would have been eligible to collect?

G. Cookson: Just to clarify, the original contract was for ten years. The original contract value was $324 million. The estimated complete payment to Maximus over the ten years is estimated to be $430 million. The difference between the $324 million and the $430 million is chiefly accounted for by changes in the scope of the actual contract, particularly for things like the services card, the revenue management system and improvements to PharmaNet.

The fact is that, as the report points out, the ministry has largely been successful in transferring risk under this contract. There are some exceptions.

There were significant penalties levied against Maximus B.C. in the first five months of the contract, where they missed service levels repeatedly. So there were millions of dollars of penalties that were imposed on Maximus for that purpose.

The question of the penalties around their inability to meet the actual timelines for the transformation projects, in terms of claims and the enrolment system. Again, going back to the JSRFP process, the ministry, with Maximus, agreed on a schedule and the components of the replacement of those two systems in transformation. There was an agreement around that. Maximus did their best to deliver on that, but it was discovered that those solutions weren't appropriate.

This comes back to that question about whether it's a
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partnership or penalties that we're talking about. In that instance, the ministry worked with Maximus to come up with a revised solution and a revised schedule for that. And the ministry decided not to impose penalties because of the feeling that it was a partnership to come out with the best solution in a reasonable period of time.

The IT currency question is an interesting one. With regard to desktops, for example, there was a decision made between Maximus and the ministry — which, unfortunately, wasn't adequately documented — to move from a desktop-type system at Maximus to what we would call a dumb terminal–type solution.

The huge advantages in terms of privacy and security were that with a dumb terminal you can't have external media to actually save any data off of the system. So there was a good business reason why we decided to delay replacing the actual desktop system while they developed this solution relating to a dumb terminal. So there were no penalties around that. That was an agreement between the two parties.

K. Corrigan: So the ministry decided to work with Maximus with those missed deadlines — the legacy projects. Did the ministry estimate what the cost of that was?

I mean, I know it's work that wasn't done, but what was the value? Surely, when the original contract was negotiated and evaluated internally, there must have been a dollar figure attached to the value of that component of the contract. I'm wondering if you could let me know how much that part of the contract was worth and then was forgone.

G. Cookson: Yes. Interestingly, I believe the actual funding around transformation was in the area of $26 million. Do you remember, Laura? It's in the report, anyway. There was an estimate of about $26 million, I believe. But the penalties for not actually delivering were really carried by Maximus.

The original deal was predicated on their replacement of these legacy systems and the ability to achieve additional efficiencies based on the implementation of those systems. So every delay in the implementation of the systems does impose a cost on Maximus. It doesn't impose a financial cost on the ministry. Where the ministry actually loses is with regard to the ability or the functionality of the systems which we're replacing.

You know, the R-and-PB system is a great mainframe-based type of system, but it's somewhat inflexible. So there's a penalty to the ministry in terms of implementing changes in the MSP rates, for example, and the ability to be, I guess, more sophisticated with the groupings of rates or whatever that will come with the new system. But there's no actual financial cost associated with that delay.

K. Corrigan: I'm just trying to tie this down a little bit. So the number that you gave was $26 million, and I recognize there'd be a penalty to Maximus, but that was part of the contract that was in the evaluation in coming to terms on this contract.

Now, not everything was missed. But are you saying that $26 million worth of value to the system as a whole was lost or just some portion of that?

G. Cookson: Sorry, the actual number…. My apologies. Down at the bottom of page 11, the actual original contract was for $324 million, which we paid out to Maximus over the ten-year period in monthly payments.

Within that original MSA, Maximus had a responsibility to replace the three legacy systems. So that was included within the $324 million. Then the estimate was between $18 million and $20 million that it would cost them to replace those three systems.

Again, they continue to be on the hook to replace those systems. Whether it costs more or less is irrelevant to the ministry, as it is a fixed-price contract.

L. Throness: The ministry has pronounced itself extremely satisfied. It's met all service level requirements since 2005, but it's six years late on one, and it's going to be a year still before another one, one of the main legacy systems, is done.

It almost seems to me as if Maximus is sort of becoming part of the bureaucracy. We don't renew them because they're so fantastic and nimble and quick; we renew them because they're already pretty entrenched, and it would be pretty tough to rip them now out of the system.

Like with P3 projects, with infrastructure projects like SkyTrain, we really want to know as public-policy-makers if we're doing better than would otherwise have been the case if we would not have hired a private company and would just have gone with public.

A question to the Auditor General: can this audit help us in this regard? Does it help us determine whether this is better than the alternative?

R. Jones: Thank you, Member. From what we've done here…. This took a look at what the expected benefits were from the contract. We didn't go back and take a look and say: "What was the public sector comparator?"

I would hope in the business case that went forward and in the business case for any renewal that that would be taken into account. You would take a sober look at going back and say: "Okay, if we had done this through the public sector versus this outsourcing, what would it
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have cost versus what it did cost?"

L. Throness: Although historically, the what-if question is almost unanswerable. Perhaps I could put it to the ministry officials. What do you think? Has the private delivery agent provided an extra benefit to the ministry?

L. Kislock: I would go back to my initial comments. We would use the basis of comparison of early 2000 and the ability of British Columbians to register for MSP.

We have service standards and service levels agreed to with Maximus, and they have continued to achieve those service levels since 2005. We are satisfied with the services being provided by Maximus. We did an end-of-contract review before we made the decision to extend the contract, as it was provided in the original procurement, for an additional five years. So the ministry was satisfied enough to do the contract extension for five years.

We have made the commitment that when this contract runs to its end, we will be going back to the market. I think, ultimately, it's only by going back to the market that you can determine whether the value…. Are you going to get the same value that we're getting from Maximus, or are we going to have to pay more for those services? Certainly, that is a risk.

Additionally, I would say for the member that if we transition to a new service provider, there are always costs associated with that transition, as there would be transitioning a service back to the ministry.

L. Throness: Okay. I'm glad to hear that you're going back to the market in five years. I think that's great.

One more question for the Auditor General. We have, in the 3P infrastructure arrangements, Partnerships B.C. to guide this on a governmentwide basis. This is really a 3P arrangement with respect to service delivery. Is there any sense in establishing an office like Partnerships B.C. to oversee service delivery P3 arrangements like this if we wanted to extend those?

R. Jones: Thank you, Member. I believe there is an ASD secretariat that is in place in government. I'll let Malcolm talk a bit about that because he's been dealing with ASDs more than I have.

M. Gaston: When we did our first big look at ASD contracts, we looked at the revenue management system. At that time there was an ASD secretariat. Part of that audit looked not just at the revenue management procurement but also looked at the whole process that had been put in place by the secretariat.

The secretariat was wound down mainly because there had been, I think, a lot of activity in terms of outsourcing. Most of the work, then, was at the ministry level in terms of maintaining those contracts and the relationship with the service providers.

Now that we've started coming back up to the end of contracts and there is an increasing need for more central support, the strategic partnerships office has been established. I think it's still in its fairly early days. That is something that we've considered as part of our planning, actually — looking at the strategic partnerships office and what it's doing. But we decided it was a bit early to look at them. We decided to do this particular audit instead.

B. Ralston (Chair): Yeah, I remember asking a series of questions in estimates about the ASD secretariat. Not getting answers, but that was a different question.

S. Robinson: I have some questions about the response from the Ministry of Health that's in the report — in particular, on page 10, item 3: "Monitor and enforce all significant contract terms and deadlines." There's a bit of vagueness in the response. I just want to get some clarity.

"The Ministry of Health agrees that terms and deadlines need to be monitored. That is why the Ministry of Health has a dedicated office responsible for overseeing this agreement."

So has this office been in existence for the entire time, or is this a new office? And if it has been around for the term of the agreement, what's going to be different now in order to make sure that we get better monitoring of the contract terms and deadlines?

G. Cookson: The BMO, business management office, was established as part of the original outsourcing. At that time it put in place all of the processes for monitoring and establishing reporting requirements as part of the MSA, establishing an annual audit process. So yes, the BMO has been around as long as the deal's been in place.

We have continued to strive to do a better job going forward through our auditing process. We do have an annual audit outsourced to a major audit firm in town. We have done a lot of work around auditing.

That being said, we recognize the value of the Auditor General's work. And we did meet with the Auditor General's staff the other day with our own auditors to go through the recommendations and identify priorities so that we can incorporate those additional safeguards within our auditing process going forward.

In addition, as I mentioned earlier, with the renewal of the agreement and the extension for five years, we had the early advice from the Auditors General around some of those elements within the MSA. Those have been incorporated within that, while we're continuing to tight-
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en up and ensure that we're doing our due diligence to hold Maximus accountable for its responsibilities under the MSA and ensure that we're continuing to meet the expectations of the public.

L. Kislock: I would just say for clarity that we changed and defined some of the terms that were pointed out to us by the Auditor General as missing in the original contract. So we have made contractual changes as a result of the audit.

S. Robinson: That's really helpful. I'm thinking sort of down the road, when we come back to take a look at this, that it would be nice to have some very specific details about what the intention of the ministry is in order to tighten that up so that we can go back and ask if those sorts of things have happened.

I'm also curious about this idea of the partnership versus enforcement. When I've hired contractors to do a bathroom or paint a room, it is a partnership. But at the end of the day, if I'm paying the bill, it's got to be to my satisfaction.

This is the first time I've heard of this kind of arrangement called a partnership, and that, I guess, raises a little bit of concern around what that means. Are there parts that aren't happening in the way that we expected, given that this is a long-term, very expensive arrangement?

I'd like to understand a little bit more. I don't know if we'll have time. This idea of partnership: what does that mean, and what are some of the risks and benefits of that kind of an arrangement? It just sounds a little bit different than anything that I've ever seen.

B. Ralston (Chair): I just would say that I wouldn't expect these officials in the ministry to answer the general question. But in terms of the context of this self-defined partnership here, I think that would be a reasonable question to explore. I'll leave it to the ministry officials to answer as they wish.

L. Kislock: Thank you for the question. When we go to market for an RFP, we usually are very clear on what we want to buy, and the proponents respond specifically on that. In a JSRFP situation — which this was, and one of the first — we worked with the proponents to design the solution. Both parties understood what the desired results were, but how you would get to the desired results, we worked on together.

Using your example with painting your room, you could contract to have one coat of paint. If you decide in the process that you need two coats of paint, and you need, maybe, the outside of the hallway also done, then you can work through the relationship to compensate your painter for that. This arrangement is much like that.

S. Robinson: I have a different question. Thank you for that. I'm still wrapping my head around this model, but hopefully I'll get there.

The other question I have is for the Auditor General. Again, I think Shane alluded to this earlier, around this general theme that we're seeing around making sure that we have some good reporting mechanisms, reporting out to the public, making sure they have a comprehensive record of decision to facilitate knowledge transfer so that we have consistent decision-making. I'm wondering what advice you have, sort of going forward, if this is a pattern. What advice do you have around how we address that over everything that we're doing, moving forward?

R. Jones: Thank you, Member. I think when I was addressing Shane's question…. It's one of those things where I think this committee has a role to play in helping promote these types of things. We come up with the recommendations in individual reports, and getting the endorsement from this committee on those recommendations — or, in addition, making further recommendations if you think needed — would go a long way to getting it out there in the public record in a more fulsome way than just on a report-by-report basis.

I certainly know that my staff and I, whenever we're out there talking to Crown corporations or ministries in regards to ASDs and P3 arrangements and talking with Partnerships B.C., continue to promote the fact that you need to be monitoring. You need to be comparing to the objectives, looking at the performance metrics, reporting out on that so that you as legislators can see how these arrangements are working.

We work with the comptroller general's office, as well, to ensure that the message is getting out there, because these things are getting more prevalent. I don't think they're going to go away. It is the way that business is being done.

B. Ralston (Chair): I'm going to suggest — it's ten after three — that we take about five to seven minutes as a break. We've been at it for a couple of hours. Then we'll be heading down the home stretch. So about a quarter after.

B. Ralston (Chair): We are continuing with questions on our report, Health Benefits Operations: Are the Expected Benefits Being Achieved? dating from February 2013.
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V. Huntington: One really brief question and one brief comment. Are the service providers, the employees providing the service, headquartered in B.C., in Canada, U.S., overseas? Where are the Maximus employees?

L. Kislock: The Maximus employees providing service under this contract are located in Victoria, British Columbia.

Just as a comment that you may be interested in, we've recently been advised by a few constituents, and then had the experience ourselves, that when you call in to Maximus, the phone is being answered as Maximus. It's confusing to constituents. Is there no way that they can answer: "MSP, PharmaCare"? Is there not a way that they're supposed to answer that indicates a British Columbian service?

G. Cookson: I'm sorry. I'm surprised to hear that. They are actually contracted by the ministry to deliver HIBC services — health information B.C. They operate HIBC on our behalf, so they should be actually responding "HIBC" — certainly not "Maximus."

V. Huntington: I'm really pleased to hear that. Perhaps you could just mention that to them.

N. Letnick: Laurie brought up a good point around people who renew contracts having a bias — even though it might not be an obvious bias, but a perceived bias could be there — that they would renew the contract with the existing proponent. I'm happy to hear, as well, that after the five-year extension, that's it. You're going to go back out.

My question has to do with a fairness officer. I believe when it comes to doing RFPs for capital purchases, there is a fairness officer that reviews the RFP process to make sure that the process was done fairly.

Does that same officer also review contracts of this nature? In other words, will there be someone who does not have a bias or is not given to a perceived bias looking at the renewal process to make sure that the natural tendency to want to get into an agreement with someone who has been doing a good job does not occur — that it's actually fair to all the other proponents who would like to knock Maximus out of the picture and take over the contract — or, for that matter, that the costs and benefits, the value-added for taxpayers and comparing the in-house offer is also done fairly, as per an outside person or agency?

L. Kislock: Fairness officers are usually used by ministries in the original procurement. I can't tell you whether a fairness officer was involved in this JSRFP process. I can tell you that the original process provided for a five-year contract extension.

The market knew when we went to market with JSRFP that it was a ten-year contract with provision to extend for five years. The decision to extend the contract rested with the ministry within the terms of procurement policy in British Columbia.

We were clear on what the terms were when we went to market originally, and we exercised that five-year extension as was provided for. That was the ministry's decision.

N. Letnick: I don't think I communicated my question properly, Lindsay. My question has to do with after the 15 years. The next time, will a fairness officer be involved so that people like us can ask you the question and say: "Was this done fairly?"

L. Kislock: Fairness officers are the general accepted procedure. You have one just to provide that third-party, independent assessment of the process that's being used. It's best practice to do that. I would expect that the ministry would have an independent, third-party adviser when we go back to market.

G. Cookson: Just a supplementary to that. With the reprocurement or the extension that we went through, we did work extensively with the strategic partnerships office, which is the old ASD office. We also were aware of the fact that over time, with a service provider like this, there's a dependency that is built up. And so there is an expectation that there will be an active process for levelling the playing field when we do go back to the market.

S. Gibson: Well, I think all of us that come out of a business or a municipal background shiver when we hear the word "change orders." The word seems to reverberate a little bit through this report — change order.

I refer to something in the report that I'd kind of add to some of the earlier remarks by colleagues. "We were unable to conclude whether an additional approximately $8.8 million paid to the service provider was for services…." I believe the word missing there is "not included" — "services not included in the contract due to the ambiguity of the key contract terms." Is that correct? The word "not" is missing there, right? The word "not" is missing, I believe.

We looked at the change orders and assessed them within the contract. They define the terms "material change" and "material impact," but they don't necessarily attach a quantifiable threshold to what that might include.

So when we looked at the change orders, there was some ambiguity in terms of whether those costs should
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have sat with the service provider or with the ministry. What we're saying is that the ministry paid $8.8 million that we're not able to conclude because of the ambiguity of terms. Does that clarify it?

S. Gibson: Right. I guess it goes to the heart of much of the discussion today. I think the Auditor General addresses that well. It is those — and you don't really use that word particularly — change orders, where the supplier is coming with all kinds of concerns…. I think that, to me, has been an important role where you, as the Auditor General's department, have done a good job, so I think that's good.

Just one quick question I had is: how many employees does the service provider have who'd be totally dedicated to our account in the province of British Columbia? How many employees are totally dedicated to our account? That would be of interest to me to know.

G. Cookson: My understanding is that's proprietary information. Our communications experts have suggested that isn't in the contract. It's proprietary. But all of the employees are actually, as Lindsay points out, in Victoria, and I can say it's in the order of about 250.

B. Ralston (Chair): I'm not sure that was an unequivocal answer, though, given that it seems to have been deduced rather than….

G. Cookson: It's based on a firm number. But ultimately, we don't manage based on the number of employees. We manage based on the delivery of services.

Anyone else, for their first time? I have some questions, but I'll keep those till the end.

S. Simpson: You know, I guess the first observation I'd make….We talked about this partnership versus enforcement. It would seem to me from the conversation that the government has been a somewhat more generous partner than Maximus has in this relationship in terms of where the money has gone. And that gets to that question of enforcement.

Based on the numbers that we have here, the original contract — that $324 million — increased to $430 million after a series of change orders. That's about a 30 percent increase in the cost of the contract, based on a series of change orders, and the scope of the contract, presumably, had changed. I think there's, again, a question about how the assessment of that happened. I'm certainly interested in knowing about that.

But I want to get to a question around the end of term, following at the conclusion of ten years, when the determination was made to provide the five-year extension. I believe the ministry official said that there was an assessment and a review done from an independent, outside body — somebody who did an assessment, a review, and provided advice to the ministry, presumably upon which the decision to go forward with the extension was made.

Could the ministry — and the Auditor General might have some comment about this — tell us: are you satisfied, based on what we've learned from the rest of this report about the questions of information, about monitoring, about assessment, that there was a body of information there that you could be satisfied was enough to make the decision to sign a $264 million extension?

R. Jones: I believe we did not look at what the information was that the ministry used to extend for the additional five years. I think you'd have to get some further clarification from them on that. So I really can't comment on that.

L. Kislock: The ministry, as I said in my earlier comments, commissioned an end-of-term assessment, an independent report that we used to base our decision on, as well as working collaboratively with the Auditor General, who determined that improvements had been achieved through this. So in working with the Auditor General to make changes for contract extension, in addition to our independent end-of-term assessment, the ministry made the decision to extend the contract for five years.

S. Simpson: Thank you for that. I seem to recall that in a previous answer where you referenced that assessment, you said that part of that assessment was to assess the body of work that Maximus had done and the appropriateness of a contract extension. Also, there was some evaluation there or a valuation of alternate options that might be considered if the extension was not going to go forward — what those options would look like. Presumably, that is part of this assessment that was done. I believe that's what you said; correct me if I'm wrong about that.

I guess the question that I have — because this might help inform the body of work that the Auditor General has already done — is whether that assessment…. Now that the contract is over and done with, and that's all good, would that assessment be available to the committee?

L. Kislock: The ministry's position is that that assessment was prepared for the executive council and, therefore, is governed under the Freedom of Information and Protection of Privacy Act and not available for distribution.
[ Page 205 ]

S. Simpson: I have one other point. This is a question to both the Auditor General and the comptroller general, because I think they both bring different perspectives but critical perspectives to this.

It goes back to what has been a bit of the thread of this discussion about monitoring, about assessment, about evaluation, about audits, about all of those things that we've been talking about here and the comprehensiveness of that work, whether it's with this report or with other reports, and satisfying the people on this committee, as well as everybody else who's got to do the work that we do, that in fact we are accomplishing what we need to accomplish in British Columbia with these contracts.

The question I would put to the Auditor General and the comptroller general is whether it would be possible maybe for you to do a little collaboration between your two offices and maybe provide a memo to this committee sometime in the future that would give us your perspectives as the key oversight bodies for this about what changes might look like, what monitoring might look like, about whether there are tools in government.

I know we spoke briefly. Partnerships B.C. does a serious amount of this work already when they evaluate for P3s. But whether you could provide some insight for us on how we might improve on these aspects of these agreements so that at least the committee would be informed about the thoughts from the expertise of both your offices about what that might look like. Then we could determine to choose to do something with that or not do something with it down the road.

I'd be really interested in getting the perspective and expertise of your two offices on how we do a better job in some of those areas where we've identified some shortcomings in a number of the reports we've seen over the last few days and just what we do to be a little better at this.

I would ask the two offices whether that's something that you might be able to do — considering you have a whole lot of other responsibilities and obligations — and the appropriateness of you doing it.

R. Jones: From my perspective, I think it would be a very useful thing to do. Stuart and I meet every couple of weeks to discuss issues. This certainly would be a good one to tackle and get back to this committee in the future.

S. Newton: I'd have no problem doing that. I think that would provide good additional information for the committee to consider.

S. Simpson: I'd very much appreciate that information. It would help me to understand better if there are things that we can learn for best practices to move forward, and it might help us in future work as we look at other work that's done as this committee keeps its work up. I'm going to leave it there for the moment.

B. Ralston (Chair): Okay. Given the sort of general assent, you'll report back after you've had a chance to discuss a realistic timeline and what form that might take and how the committee might be advised.

K. Corrigan: I just wanted to follow up on a question that Vicki had asked. You stated that the Maximus employees all live in Victoria. There's a number of subcontractors. Do the subcontractors' employees all live in Victoria as well?

G. Cookson: No, not necessarily. Depending on what services they're looking for or what kind of outsourcing they're doing, those sorts of skills may not be available in Victoria.

K. Corrigan: There are approximately 250 employees living in Victoria. Then do you have any idea of how many subcontracted employees there are?

G. Cookson: Just to be clear, I think there are a number of contractors they use on a regular basis. They have a series of employees. They also have contractors working on an ongoing basis on system development, which typically are locally based. There's also expertise where they need to go beyond for, I would say, a fairly small number of specialist-type consultants, which they draw, like anybody would, from worldwide in terms of accomplishing what they're trying to accomplish.

K. Corrigan: So we're not talking big chunks of this contract being subcontracted and going, say, overseas or anything like that.

G. Cookson: No. I mean, there's certainly very limited contracting that would go with anybody who's not locally based. There are things like Telus. They have deals with Telus for telecommunications and support for their IVR — those types of contracts. The other interesting thing is that a requirement under the MSA is that all board members are Canadian citizens. That's another part to it.

On a different matter, page 11 of the report, talking about service level requirements. The Auditor says:

"Although we did not find any evidence to suggest that service level requirements are not being met as reported, for two reasons we were unable to conclude whether services to the public and health care providers have improved.

"One, the ministry has not been obtaining the required level of
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assurance over the accuracy of the data underlying the reported SLR results, and two, baseline data does not exist for more than half of the SLRs. As a result, the ministry cannot be certain that the reported results are both accurate and higher than pre-handover service levels."

Again, transferring risk and improving service were two of the major reasons why the province entered into the contract in the first place.

There are two questions. One of them is…. There was talk about the amount of time it took to get an answer. I've heard anecdotally — just anecdotally — recently of people being so frustrated that they can't through on that line and have given up. I don't know whether that's valid or not.

The report seems different than the comments that were made by the representatives of the Ministry of Health, and so I'm trying to square the two. I'd like to know what the answer is to that. What is the evidence that things have improved under this contract? In addition, is the baseline data…? Is the data there now? Has that data been put in place? I'd be interested if it's been put in place to the satisfaction of the Auditor General as well.

G. Cookson: Just to clarify. In those two elements, recommendations from the Auditor General, one is around the efforts the ministry has made to actually audit the base data that the service levels are based upon.

Our existing auditors…. We had done a lot of work with them disentangling exactly the process under which service levels are measured by Maximus and reported back to the ministry. So we knew exactly where all the data went, what they did with it and how it was reported out to us.

For example, there's a service level around answering the phone. On average, they answer the phone within three minutes.

Our auditors had clarified exactly how that worked so we knew when we got the number where it had all come from.

The Auditor General has suggested that the one step we had missed was: is that data that's coming out of the system, coming out of R-and-PB, coming out of all the systems that we run accurate data, and can we be sure that's an accurate reflection of what's happening?

One of the go-forward action items is to have our auditors go back and just take a look at all that data and make sure that it's an accurate reflection of what's going on.

The second part was around this idea that we didn't have baselines. It's impossible to say whether it's gotten better if we don't have a baseline. Now, unfortunately, it's impossible to go back and create baselines at a later date.

One of the problems the ministry had and one of the reasons that it was a motivator for going to outsourcing this was the fact that we really weren't capable of understanding what was happening with service and what kind of service levels were being provided. We did know — as many of you may have heard, if you were around at that time — there were some people who were very frustrated with the services being provided and the fact that they felt they couldn't get through on the phone at all.

Where the auditors have suggested that there is only a limited number of these service levels that we can actually say have improved because of the fact that we only have a limited number of baselines, we certainly know anecdotally that the service has improved.

Now, if you're suggesting…. I think there was a comment that there are some problems getting through at the current time. I would be more than happy to pursue that and find out what's going on, because we are meeting our service levels. Maximus is meeting those service levels through HIBC. You know what? If we hear anything different, we would certainly like to pursue that.

K. Corrigan: I was wondering if the Auditor General or somebody wanted to respond.

R. Jones: Thank you for the question. Our observation in here around baseline data is what it is. Hopefully, going forward, now that the ministry has been collecting data, when they go to renegotiate the contract in another five years, they have something to take a look at and compare to.

I'd like to say that…. Well, I wouldn't like to say that this is an isolated instance, because it wouldn't look good for the ministry, but I can say for a fact that this isn't an isolated instance in a lot of these contracts that are being done and is probably another theme that Stuart and I need to talk about and bring back to this committee. It is quite prevalent in a lot of these contracts that there is no baseline data to start from, and it's worrisome.

K. Corrigan: Just a follow-up question. The comment from the ministry was that part of the reason to transfer over was because things were frustrating. Presumably, the contract…. There were service level requirements, so my question is: if we didn't have the baseline data, how did we…?

I guess, what I would like to ask is: why did the ministry not take a look at what was happening and measure what was happening before contracting this service out? Then we could've known whether or not there were improvements. I mean, how do you even set your service levels if you don't know what's going on and what's necessary?

L. Kislock: I would say the ministry took the information that was available to establish the service levels in the current contract — the information that was available to the ministry at the time, the baseline information and what the ministry desired the service to be. We would
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have had an idea of what service British Columbians were receiving, and we would have had an ideal expectation we would have liked to achieve. That is probably what was used to establish the service levels that are in the contract.

K. Corrigan: But we've just heard from the Auditor General that the information was not there.

L. Kislock: We've heard from the Auditor General that baseline information was missing for 50 percent. But we did have baseline information for 50 percent that we are able to report against, so we did have some information.

D. Eby: That feeds right into my question. I'm looking at a report. I apologize. I know it's not in front of you, but it is on the office of the chief information officer website. It's Health Benefits Operations: Project Summary. I see, very clearly, on page 12 of 32, current service levels, September 2004, and a six-month average for enrolment, MSP premium assistance, MSP account maintenance, phone busy rates, average phone wait, as well as expectations of Maximus.

Maybe you could clarify for this committee exactly what you have baselines for, because it looks like there were baselines for that — as well, that Maximus had specific expectations that they were told to meet within 90 days of implementation, which was in 2005, which were less than half of the current delivery.

R. Jones: Thank you, Member. I was just conferring with Laura to see, in terms of the 50 percent or whatever that number is that was missing: was it significant baseline data, or was it more the outlying, less significant portions of the contract? Laura did mention that the major baseline data for the bigger items that you just mentioned was there, and it was used. The baseline data that wasn't there was on some of the — I shouldn't say more insignificant — lesser dollar-value items.

D. Eby: I understand that Maximus was actually going to be paid based on whether or not they hit these targets, so that seems critical.

The other question is simply with the $11 million adjustment. I'm looking in this paper as well — which is a very important paper, which we should all have — that says that the public sector comparator was $277.9 million for the ten-year discounted cost, and the Maximus deal was $273 million for the ten-year discounted cost. If you add $11 million to the Maximus deal, you end up with $284 million. It's $7 million more expensive than the public sector comparator, in which case they may not have even been awarded this contract.

It seems to me that that error was a material error that led to a decision being made by the government on the basis of incorrect information, and it doesn't seem to have gotten the level of attention that it should have received in this report as a result. Am I misunderstanding that?

R. Jones: I'll try and answer from our perspective. As I mentioned to begin with, we didn't actually look at the business case model. We've come in and looked at the benefits. You have to be very careful, I think, again, when you start looking at the public sector comparator versus the original agreement that was reached.

This is me just speculating, but it could have been that this additional $11 million was something that might have had to have been added to the public sector comparator as well. I don't know, but your point is very well taken, and I'll let the ministry try and answer that one.

D. Eby: Just before they do, Mr. Jones, I note that this is the second contract where the government has pursued a private option, where the private contractor has come back later and demanded additional money — the other was the Sea to Sky — which would have changed the analysis of whether or not to go public or private. Again, we find ourselves in the situation of wondering how this math is done. Perhaps the ministry…. And then, Mr. Chair, I'm done.

L. Kislock: The ministry has been clear on that $11 million. We went through a joint dispute resolution process. The original terms of the contract were decided, and all of the information wasn't correct. When we corrected that information, through the dispute resolution process the ministry agreed that they owed Maximus some additional money, and that money reflects that amount.

D. Eby: Yes. I guess the point was just that it should have been there in the original analysis of whether or not to go with Maximus — that $11 million. And it would have put it significantly over the public cost.

L. Kislock: But I would concur with the Auditor General that you'd likely have to add that $11 million back to the public sector comparator.

L. Kislock: No, because probably the same error was made when we looked at the public sector comparator.

I understood from you earlier that this payment was related to a guaranteed profit to Maximus at a certain level and that the ministry, intentionally or otherwise, accidentally withheld information that made Maximus
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unable to determine how much profit they would make. And that is clearly not an issue for the public sector.

L. Kislock: The business model. There was an error in the business model that Maximus used to bid on this contract. And when that error was corrected, it was recognized that we owed Maximus the negotiated amount.

B. Ralston (Chair): I have just a couple of questions. And you'll be pleased to…. I think that I'm the last on the list, so I won't be long.

I want to ask you to reconcile slide 8. You talk about publicly reporting issues by contract objective, yet I'd understood — and there's a long history of public debate about this — that the Maximus contract was considered proprietary. There was a series of information and privacy requests. A heavily redacted version was, I think, released publicly after about six or seven years of trying to get access to the contract.

Can you just explain to me how you reconcile the…? And you even refer to it in your recent comments that something as innocent as the number of employees was considered proprietary information. Can you reconcile those two positions?

L. Kislock: The Auditor General has made recommendations around increased public reporting. We acknowledge and accept that recommendation, and we'll attempt to provide greater public reporting than we have to date.

B. Ralston (Chair): You speak there of an exemption in slide 8, an exemption from the ASD reporting guidelines. Can you just explain what that means?

G. Cookson: When the deal was originally signed, the ASD was formulating reporting guidelines. They weren't finalized. The ministry requested an exemption, and that was granted.

I think the important piece here that we're missing…. We are reporting out on a regular basis on the ability of Maximus-HIBC to meet its service levels. Our understanding of what the auditors are asking for is to link the performance of Maximus with the expected benefits that were originally laid out when the deal was done. It's not just….

The reporting on service levels is interesting in itself, but how are we actually doing against achieving the benefits that were originally detailed? And as part of that, it would be good to be able to link the actual costs to what we're actually achieving.

We are currently in discussions with the OCG and the strategic partnerships office to try to come up with a standard around reporting, because there's no existing standard that's been agreed to. There needs to be a standard around how these ASDs are reporting so that we can be consistent going forward and also to accommodate the privacy requirements under the contract. So we're trying to get to where they've advised. It makes sense to us, what they have recommended. How far we can go is another question.

B. Ralston (Chair): So you may very well be met with the objection that the information that you seek to publicize is proprietary and can't be publicized. Is that right?

G. Cookson: Correct. I think we can certainly make the connection between what the original benefits were that were identified and how we are doing against those objectives. We can certainly make that clear. We can certainly report out on service levels. But we may be a little bit more careful about how we report around costs.

B. Ralston (Chair): You spoke of a report — an independent consultant that advised the cabinet, apparently — on whether or not to extend the contract for five years. I note your report was that the previous contract…. Its full expenditure was $430 million over ten years, so $43 million a year. And the new contract was $264 million for five years — about, by my rough calculation, $52 million plus a year. So an increase, on average, of $9 million a year.

The report is not released. How is the public or any informed citizen to make an evaluation of this increase of $9 million a year when we have the core review scraping for money here, there and everywhere? How are we to make any sense of an increase of $9 million a year if there's no access to the report that recommended this extension?

G. Cookson: The new contract, the extension, actually accommodates a significant increase in scope in the services provided by Maximus.

B. Ralston (Chair): Is that proprietary information, or is that public information?

G. Cookson: No, that's public information. The original audit that we're reviewing today went to the original objectives of the deal going forward, so they talk about reporting back to those original objectives. I think that if we are going forward with a reporting mechanism, we have to accommodate the additional scope and be able to report on that as well.

Some of the major elements that have been included are, again, the work around PharmaNet and e-prescribing that's being done, the work that's being done around the services card, the work that was done to actually support Fair PharmaCare monthly payment options.

There's a whole series of additional services and scope
[ Page 209 ]
accommodated. I think — again, to your point — that it would be sensible for us to be able to report against that broader level of objectives rather than just the original. Certainly, when you look at the release of information, the scope of what was required within the contract has never been withheld.

B. Ralston (Chair): Is the allocation, then, between continuing services at the same level as what you described as expanded scope — in other words, additional services? Is the allocation financially between those two a matter of public record, or is that proprietary?

G. Cookson: I do actually have that number. I'm just going to dig around here for that, because we did make that calculation. My apologies. It's taking me a while to scramble and get that number.

B. Ralston (Chair): Well, perhaps you can provide that to the committee in writing, assuming it's not proprietary.

G. Cookson: No, it's not. The actual number, if we were continuing under the original scope for….

B. Ralston (Chair): Right, the allocation. There's an increase of $9 million a year, on average, over the life of the new five-year contract. So I'm wondering how much of that $9 million is an increase just for providing existing service and how much of that $9 million is for providing additional new service.

G. Cookson: The calculation I have is that the extension…. We're paying $264.3 million for five years. If we were retaining scope to the original scope, the cost of that five years would have been $203 million. So over the five years, the additional cost is $61 million, of the broader scope.

B. Ralston (Chair): One final question. If there was a policy change on the part of the government…. For example, the Canadian Taxpayers Federation has attacked and criticized the payment of MSP premiums. They regard it as an inefficient duplication of effort at the government level.

If there was a decision by government to abolish MSP premiums — after all, B.C. is one of two provinces that have MSP premiums — what would be the impact on the contract? Is there a provision in the contract for a policy change by government like that to result in a diminution of the payment to Maximus, or is there some penalty that the government would have to pay?

G. Cookson: Typically, that would be covered under a standard change order, which would reduce the scope of the deal in question. We don't actually have a clear indication of what the savings would be around that. But again, it would be covered under a change order.

B. Ralston (Chair): Are you able to say whether there would be penalties that the government would have to pay for making that policy change, or would it simply go forward on a basis where if you're not receiving the service or you no longer want the service, you don't have to pay? Do you know?

G. Kyllo: I had a couple of comments, I guess. Obviously, establishing that baseline data before entering into contracts is extremely important, and then establishing the measurables that are going to be used so that we can identify what quantifiable service delivery levels are and the cost per service.

If I have a look at the total dollars of MSP payments and, along with that, PharmaCare, the percentage of the annual contract, now at $53 million a year, equates to about 1 percent. When we look at providing these dollar figures as we move forward…. Ten years ago the determination may have been that we're more than happy to pay twice as much per person on MSP as a percentage in order to improve the service delivery measure. It's really difficult.

I think the challenge with even using averaging…. The average value of a car over the last ten years will be X. But to have a look at what that average is compared to the price of a car next year, it's pretty hard to draw a conclusion when, at the same time, we also have different levels of service delivery and all the rest. So it's pretty hard to draw any conclusions just from the numbers at their outset.

I certainly would encourage not just yourselves but in all instances, when we're moving forward into longer-term contracts, that we take the time and energy to identify what that baseline data is so that we really know moving forward what the cost is, even with the case of this contract. What portion of the total contract cost was for the development of the actual programming, and then what was the ongoing monitoring cost?

It may be that 50 percent of the cost of this development of the program was just in the development of it, so the ongoing maintenance or management cost may be a very small number. But if we don't know that, it's pretty hard to negotiate what that go-forward is as far as the extension of the contract.

R. Jones: I wanted, before we end the discussion on this topic, to thank the members for their questions, because I think you're bringing out some very, very important points around the whole P3-ASD discussion. Pointing out right at the outset…. This is why it's very, very important at the outset to get the public sector com-
[ Page 210 ]
parator in line with what you're trying to deliver through the private sector — clearly defining the scope, the deliverables, the performance measures up front so that you've got a comparison that makes sense in the end.

I think every question that you've asked is something that we've grappled with for a number of years now in terms of looking at these agreements. Hopefully, Stuart and I can come back with some good suggestions.

B. Ralston (Chair): With that, then, we'll adjourn debate on this and leave the issue of recommendations to a further discussion.

B. Ralston (Chair): We do have another item on our agenda, which was the follow-up. I'm going to suggest that we not deal with that today. I'm trying to curry a little favour with the committee.

I think that's a discussion that's fairly portable. It's certainly a discussion that we should have, and perhaps Sam and I will agree when to reschedule that.

R. Jones: If I could just say one thing, Chair. We've provided, I think, all the members with a slide deck that talks about the follow-up process. I think there's also a comparison in there to each of the jurisdictions in Canada.

In the last two pages we've provided some follow-up options and some questions for discussion that I would ask that you take a look at and consider. Maybe, as the Chair has mentioned, we can talk about it in the future. There are some important questions in there.

S. Gibson: Mr. Chairman, were you thinking of talking about this briefly tomorrow or not?

B. Ralston (Chair): I don't think so. The difficulty with this one is that we have a number of witnesses coming for the other matters. This one didn't…. It was just staff here, so there were no witnesses.

If by any chance we get through our material — and I think we have a pretty busy day tomorrow — we could, in theory, do it at the end. I somehow doubt, given how we've been off in estimating time, that we'll actually get to it tomorrow.

R. Jones: The title of the slide deck is called A Briefing on the Follow-Up Process.

B. Ralston (Chair): Also, the Clerk is distributing this review of jurisdictions — it's two pages — just to give you some further background.

S. Simpson: Mr. Chair, is this information and the information others talked about available…? We have this electronically too? It's been sent to us?

K. Ryan-Lloyd (Deputy Clerk and Clerk of Committees): To confirm, we received that just this morning. It's not yet in your binders. I can follow up by e-mail later today so that you'll have an e-copy as well.

S. Simpson: An electronic version would be great, because then I don't have to carry this away.

K. Ryan-Lloyd (Clerk of Committees): Yeah, I can distribute it to everybody later tonight.

V. Huntington: I'm sorry, Kate. What are we talking about here — the slide deck to this report?

K. Ryan-Lloyd (Clerk of Committees): Yes, Vicki. To complement the material already in your binders with respect to the follow-up discussion, the Office of the Auditor General has prepared a very helpful comparative table examining follow-up processes in other Canadian jurisdictions. We have just distributed now a print copy of that, but I will follow up by e-mail later tonight.

K. Ryan-Lloyd (Clerk of Committees): Yes. The accompanying slides, Vicki, are in the members' binders.

Hansard Services publishes transcripts both in print and on the Internet.
Chamber debates are broadcast on television and webcast on the Internet.
Question Period podcasts are available on the Internet.

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:	Guy Cookson (Ministry of Health)
	Malcolm Gaston (Deputy Auditor General)
	Laura Hatt (Office of the Auditor General)
	Russ Jones (Acting Auditor General)
	Lindsay Kislock (Ministry of Health)
	James Mack (Ministry of Environment)
	David Muter (Acting CEO, Pacific Carbon Trust)
	Stuart Newton (Comptroller General)
	Morris Sydor (Office of the Auditor General)
	Chris Trumpy (Former Chair, Board of Directors, Pacific Carbon Trust)
	Tanya Wood (Office of the Auditor General)

REPORT OF PROCEEDINGS (Hansard)

SELECT STANDING COMMITTEE ON PUBLIC ACCOUNTS

REPORT OF PROCEEDINGS
(Hansard)

SELECT STANDING COMMITTEE ON
PUBLIC ACCOUNTS