Public Accounts — Issue No. 14 — Monday, December 8, 2014 (HTML)

Hearing Room 605, Labour Relations Board
1066 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; Mike Morris, MLA; Lana Popham, MLA; Linda Reimer, MLA; Selina Robinson, MLA; Laurie Throness, MLA; John Yap, MLA

Others Present: Carol Bellringer, Auditor General; Stuart Newton, Comptroller General

2. The following witnesses appeared before the Committee and answered questions regarding the Office of the Auditor General report The 2014 Summary Financial Statements and the Auditor General's Findings:

• Carl Fischer, Executive Director, Financial Reporting & Advisory Services Branch

3. The Committee recessed from 11:01 a.m. to 11:15 a.m.; from 12:03 p.m. to 1:01 pm.; and from 1:35 p.m. to 1:44 p.m.

4. The following witnesses appeared before the Committee and answered questions regarding the Office of the Auditor General report Receiving Value for Money from Procured Professional and Advisory Services.

• Dave Pilling, Implementation Director, Strategic Initiatives Division, Implementation and Legislation Branch, Ministry of Aboriginal Relations and Reconciliation

• Vicki Willow, Senior Manager, Corp Procurement, Risk Management, Claims & Litigation, Highways Department - Construction & Maintenance Branch, Ministry of Transportation and Infrastructure

• Gail Silvestrini, A/Chief Financial Officer, Finance and Management Services Branch, Ministry of Transportation and Infrastructure

• Bruce Smith, Senior Financial Analyst, Budgeting, Student Services and Sector Resource Management, Corporate Finance Branch, Ministry of Advanced Education

• Barbara Burrage, Manager, Procurement Services, Financial Services Branch, Ministry of Forests, Lands and Natural Resource Operations

• Teri Lavine, Chief Financial Officer and Executive Director, Ministry of Technology, Innovation and Citizens' Services

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: The 2014 Summary Financial Statements and the Auditor General’s Findings	519
C. Bellringer
L. Moore
S. Newton
R. Jones
C. Fischer
Auditor General Report: Receiving Value for Money from Procured Professional and Advisory Services	546
C. Bellringer
R. Jones
P. Nagati
S. Newton
D. Pilling
V. Willow
G. Silvestrini
B. Smith

B. Ralston (Chair): Good morning, Members. Thanks for finding the new location. This is apparently inside government, so it’s only an attributed cost, not an actual one out of pocket. We have windows, too, which is really nice. I got an accounting joke in already. It might be the only one.

We have a fairly full agenda. We’ll hear from the Auditor General and the comptroller general, and then we’ll open it up for questions. I’ll begin with the Auditor General, who’s going to talk about her report, the 2014 Summary Financial Statements and the Auditor General’s Findings.

Auditor General Report:
The 2014 Summary
Financial Statements and the
Auditor General’s Findings

C. Bellringer: This is a report that Russ Jones and I issued jointly, as Russ had signed the audit opinion when he held the position of Auditor General earlier this year. The audit opinion was signed on July 8, 2014, on the summary financial statements for the year ended March 31, 2014, and it was a qualified audit opinion.

As you know, the government’s financial statements tell an interesting story about the province’s financial health beyond the bottom line. In my view and in the view of the office — and, hence, this report — too much emphasis is placed on the bottom line and not enough on various comparisons — for example, within the province, across time, across Canada, also in the international context. In order to make economic policy decisions, it’s obviously critical to understand how that bottom line was reached. That is: what are the details behind the annual deficit or surplus?

This year we included a new section in the report that highlights some of the information that can be gleaned from the financial statements. Lisa Moore, executive director on the public accounts audit team, will describe those details we included in our report, and we’ll show you where to find them in the public accounts documents.

I think she’ll make reference, too, that there’s also a guide that our office put out last year on understanding public sector financial statements, which is an important document to use. The examples that we included in this report are examples of some of the items that we talked about in a more general way in that guide.

Regarding the qualification in our audit opinion. I have stated publicly already, but I just want to emphasize that I would like to work with government over the coming year to try to issue an audit opinion without qualifications. It may not be something we can do that quickly. The other issue I’d like to discuss is the issuance of regulations issued under the Budget Transparency and Accountability Act.

On the qualification, the Public Sector Accounting Board of Canada provides standards for all government financial statements, including those of the provinces. Those standards are evolving. We do appreciate that this is going to be an ongoing discussion between our office and the comptroller general’s office not just this year but every year. We’re monitoring changes to international public sector accounting standards. They provide additional guidance in areas of interest.

It’s important to note that Canada is in a very strong position internationally with the way that our governments right across the country report in accordance with public sector accounting standards. By requiring accrual accounting and consolidation of all controlled entities, the statements are fulsome. I would point out that in contrast, some countries still don’t report the full extent of their government debt, and they therefore run the risk of not fully managing their financial risks. Our discussions are on a much more detailed level than that, and we don’t have any difference of opinion about the overall framework being applied.

My office and the government each interpret the standards differently in a few areas. It’s true that not all governments or Auditors across Canada have fully reached consensus on the application of recently issued standards for recording government transfers for capital expenditures, which is the most significant difference of opinion between our office and the government.

One of the benefits of having standards is that it enables comparisons across jurisdictions. But since we are not all on the same page about government transfers, those comparisons are currently compromised. The Auditors across Canada have discussed and continue to discuss our differences of opinion, and we are talking to the standards-setters, as well, to try and get some clarification from them.

The other issue is about regulations. We would like to discuss with government the issuance of regulations. It’s something which we are concerned about, and for a couple of years now we’ve been reporting our concern that the government has the ability to make regulations that would change generally accepted accounting principles as it chooses.

One final comment before I turn this over to Lisa. I do think it’s important to note that the government and our office are not disagreeing about what the detailed numbers are. Rather, we are disagreeing on how they should be shown in the financial statements and the extent to which they hit the bottom line. Should it be now or later?
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Having just said that, I think too much emphasis is placed on that bottom line…. It’s more important, in my view, to understand what the components are and then properly inform your economic policy positions.

L. Moore: Thank you, Carol, members. Our office has issued a report on the summary financial statements for many years, as a by-product of our audit work on them. For the last few years the office has also issued a bulletin explaining the audit qualification in more detail. A separate bulletin will not be issued this year.

Our report this year is made up of four general areas — the importance of generally accepted accounting principles, GAAP; the audit opinion on the March 31, 2014, summary financial statements; some new information to help in understanding the summary financial statements; and looking ahead, three changes to accounting standards over the next few years.

We have pointed out for a number of years that we remain concerned that government has passed two regulations to allow it to override GAAP. These are regulation 257/2010, rate-regulated accounting, which only impacts B.C. Hydro, and regulation 198/2011, which relates to deferral of certain revenues.

Due to standards-setters continuing to assess rate-regulated accounting, this related regulation currently has no effect on B.C. Hydro’s accounting. However, the regulation related to the deferral of certain revenues has led us and 18 private sector auditor firms to issue compliance audit reports, which means that the entity’s financial statements are not fairly presented according to GAAP but to the framework they have chosen.

We encourage government to report publicly in accordance with GAAP as developed by independent Canadian public sector standards-setters and to remove the regulations that create accounting policies that are inconsistent with these standards.

For the 2013-14 audit of government organizations that make up the summary financial statements, three different types of audit reports were issued. Of the 143 audit reports issued to organizations, the majority — 108 of them — were compliance audit reports due to organizations following the regulation on deferring certain revenues. In one case a modified audit report was issued, as a result of how the organization accounted for material government transfers and restricted revenues. The remaining 34 were unmodified audit reports. There were two modifications to the March 31, 2014, summary financial statements audit opinion issued by our office.

The first modification relates to deferral of revenues received from other levels of government and restricted revenues such as endowments. In either case, these funds are for the construction or purchase of an asset. This modification is due to a difference in opinion in the application of accounting standards by government and our office. It is based on information provided to us by the auditors of the government organizations, who have said that the statements they have audited are not in accordance with public sector accounting standards.

Because government has consolidated those financial statements without making any adjustment for the findings of the auditors, it follows that the summary financial statements also are not in accordance with public sector accounting standards.

The accounting standards which came into effect for the fiscal year ending March 31, 2013, introduced stricter rules about deferring certain revenues and, in the case of capital assets, generally say you must account for the money once the asset is built or purchased.

This first modification actually relates to two different accounting standards. One is for funds received from other governments, and a second is for restricted funds received from non-government sources, such as private donations to a university. But the effect of the two standards is basically the same. So while last year there were two separate qualifications, this year we have combined them as one.

If government had applied these accounting standards the way that our office and many private firms believe they should have, it would have reduced this year-end deferred revenue by $3.8 billion. Most of this relates to amounts that should have been adjusted last year, so the impact on this year’s revenue and surplus would be an increase of $232 million. This surplus increase does not mean that the government has additional cash. In most cases this money has already been spent on projects. Where it has not been spent, it is allocated to specific projects.

The second modification relates to the qualification last year on the Transportation Investment Corporation. Since we qualified our opinion on the summary financial statements last year, the comparative figures for this year are misstated, and we were required to point that out in the audit opinion.

At the Public Accounts Committee meeting in June 2014 we mentioned the report Understanding Canadian Public Sector Financial Statements. In this report we have included some information that can be understood by reading the summary financial statements.

Asset sales. If anybody would like to look, on page 64 of the Public Accounts you can see the gain on sale of assets this year of $601 million. On that page, you can see how significant those sales were in contributing to government meeting its targets. However, assets are only sold once and cannot be relied on as a continuing revenue stream.

The next section we talk about is oil and natural gas in-
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centives, which is on page 79 of the Public Accounts. Note 29 discloses incentives that have been deducted from oil and gas royalty revenues.

Unlike most revenue streams — taxation revenue is an exception — royalty revenues are recorded on a net basis; that is, the royalties revenues recorded in the financial statements are net of $587 million in incentives provided to producers in fiscal 2014. If government were to record royalty revenue on a gross basis, as is done for most revenue streams, the revenues and expenses would have both equally increased by $587 million.

Note 29 also shows that there is $1.25 billion in incentives that oil and gas producers will be able to deduct from future royalty payments.

Net liabilities is the next section, referred to on page 41 of the Public Accounts. If the province has more liabilities than accessible cash — that is, financial assets — it is said to have net debt or net liabilities. This is the amount of future revenues that will need to be generated to fund past services and transactions. On page 41 of the Public Accounts you can see almost $38 billion recorded as net liabilities.

To determine the true net liabilities figure, some adjustments may be needed. For example, public sector accounting standards require government business enterprises to be accounted for using the modified equity method. Because of this, this changes how one should read the net liabilities figure disclosed in the financial statements. Government business enterprises carry an additional $29 billion in net liabilities, which when added together, changes the figure to almost $68 billion.

In the next section, P3 debt and interest rates, on page 64 of the Public Accounts, in a footnote to note 18 is where you’ll find the debt related to P3 projects. However, there is limited detail. It is in the financial statements of the government organizations where you can find more detailed disclosure on these projects, including the interest rates related to P3 debt.

The section on cash management, on pages 44 and 45 of the Public Accounts, is where the cash flow statement can be found. It is an important statement to look at, as it tells the story of where government’s cash flow inflows come from and what they are used for. This year, for example, the government generated $2.3 billion from financing activities and $1.2 billion from investing activities. It used $2.5 billion for capital expenses and $1 billion for operating expenses.

The last section we talk about this year is on accounting for government business enterprises, also known as GBEs. Accounting for GBEs not only changes how one should read the net liabilities, as already mentioned; it also results in a large balance, which is called, in these statements: “Loans for purchase of assets, recoverable from agencies.” Page 59 of the Public Accounts is where this is found. It’s for the debt the government has borrowed and loaned to them. In this report we also explain what the investment in the GBEs and the movement of the account means.

Finally, we have included as appendix B the status of recommendations we have made in prior years. There were 20 recommendations accumulated and outstanding at the end of last year. There are no new ones this year. One has been implemented by government, two have not reoccurred this year, three we have withdrawn, ten we are not pursuing, and there are eight still outstanding.

S. Newton: I have with me, as you probably have met previously, Carl Fischer, executive director responsible for financial reporting. He will be driving while I talk.

First of all, we’d like to thank the Auditor General for this report. We always learn both through the process of going through the audit as well as from the report itself and working on our response back. So we appreciate the feedback. We do know that there are areas of issue, but it’s always a good process to go through, and it’s always useful to get the information.

An audit opinion with a reservation is a concern. It’s something that our offices have talked about on and off for a few years now, and it is an ongoing topic of debate nationally — something that we want to get to resolve as well. I think there is opportunity, as we move forward, but it’s not going to be quick or easy at this point.

We still remain committed to a leadership role in financial reporting, and I think we’ve demonstrated that in this year’s public accounts as well.

As you know, we still have disagreement on the treatment of some government transfers — those with restrictions on the use of the funds. The Auditor recommends that we should change the way we have been accounting for them, which is deferring recognition. At this time I’m not confident that it’s the right time to make the change. I think the standard will continue to mature. Alberta, Ontario, Quebec and the Territories defer restricted revenue under the same programs. Saskatchewan, Manitoba and the Atlantic provinces prefer to maximize revenue recognition and take revenue as soon as possible.

The related issue of deferred contributions is currently stalled in the face of strong feedback from non-profits across Canada. So I’ll talk a little bit more about what’s happening in the not-for-profit sector.

I think PSAB made a mistake in failing to recognize non-financial liabilities like they do non-financial assets. The result is that the accounting model is distorted. Revenue is brought forward, and then expense is thrown out into the future. So annual surplus and deficit doesn’t really mean what we think it should mean. I agree with the Auditor General that there’s more in the financial statements than just surplus and deficit. Given some of the accounting treatment, I think the standard
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understanding that the public would have on surplus and deficit would be skewed following the change.

Currently, in our case, we don’t have an option. The BTAA requires comparing budget to actuals. That’s what the Enns report was very strong on. Budgets are, by definition, revenue- and expense-based. The standards, as they’re shifting, are shifting more to an asset-liability focus, which makes it very difficult to reconcile those two positions.

That puts me in the unenviable position of being able to try to meet two specific requirements that can be at odds. Even if we get to a place in the future where, let’s say, there is full clarity and acceptance of revenue completely up front, that would run counter to how we budget and report out. That would create a bit of difficulty. So a lot to work through.

I would agree with the Auditor General. We can’t be satisfied with disagreeing every year when we produce the financial statements. We need to work through it. There’s a lot that’s happening in order to get us to where we need to go.

There are several groups working on the question. Auditors General, as mentioned, have a group. Audit firms that are working with the private sector have one. The comptrollers general are meeting to talk about the deferral issue.

PSAB continues to look at the issue through their discussion group. They’ve also issued an exposure draft on implementation of the government transfer standard to look for feedback to help with, potentially, implementation guidance. I’m not sure exactly what they will do with the information when they get it, but they are certainly interested in looking at what some of the problems are.

I’m meeting with my colleagues in January, at western comptrollers, and one of the issues will be the post-implementation of government transfers. What have we learned? Where are we at? What opportunities are there to be able to get to a better place?

PSAB and the Accounting Standards Board have also engaged in a project on revisiting the not-for-profit accounting standard, which is a different standard, but similar. The big issue, which received a lot of feedback, was the same issue: the recognition of revenue contributed for specific purposes. A different sector, but the problems are so similar that the outcomes will necessarily affect public sector guidance.

In short, the not-for-profits were very concerned that they cannot be accountable to their contributors if they don’t think the contributions are made to programs to be delivered into the future, and they’re taking it into revenue all at once. As I said, I do have to think about the issue related to how we budget and report and what that conflict may be as well.

I think we’ve managed to move beyond the qualification with the Transportation Investment Corporation. This is good news. We had a difference. It was disclosed in a very transparent way through the accounting and audit process. We’ve resolved the difference, and I’m very happy we were able to get to that place. I think we’ve seen that over a number of years with a number of qualifications. I’m particularly pleased that the resolution didn’t require any significant financial impacts on our financial statements.

Going forward, though, we will continue to review the performance of the Transportation Investment Corporation, like we do with all government business enterprises. The Auditor does that as well to ensure that they are being reported appropriately every year — not just TIC but all government business enterprises.

There were a number of other matters discussed in the report, and I’ve listed them on the slide. They were listed as “interesting” in the report. There are no recommendations. There’s no clear statement that there’s an issue to resolve. So there’s really not much to say as far as what we’re going to do to deal with it.

I am pleased that the Auditor is putting more into the report to talk about the kinds of things that people need to look at in financial statements. I think that’s very useful because they do provide a lot more information than just income and balance sheet. There’s a lot in the notes, and there are a lot of things that tie together that I think are important for financial statement readers to understand. I encourage that type of reporting and look forward to more in the future.

B. Ralston (Chair): I think the issue of government transfers will be probably something that will be addressed in questions. But you’ve both addressed it at a fairly high level. Maybe we could have a statement by each of you. Just what is the essence of the difference? That’s the major qualification in this audit, and I think that would be useful, maybe, to inform some of the questions because inevitably there will be questions about that. I don’t know whether that’s a useful way to proceed, but it might be helpful.

C. Bellringer: I also should point out — and I hope I’m permitted to disclose this — that Russ is currently sitting on PSAB, on the Public Sector Accounting Board. So he can share some more of the discussion that’s going on there if that’s useful.

The way I will describe this — and maybe Stuart can put it in more words — is the difference is the period over which we’re saying that the government transfer should be brought into income, into revenue. We’re saying if it’s a capital item…. I’m just going to talk about that and not the endowments for a second, because that’s the bigger one. If you’re building a capital item, we’re saying over the term of the build is when you…. You should have brought it into income by the time the item is built.

You are saying…. If you want to say what you were saying, maybe that would be more appropriate.

S. Newton: Absolutely. I think we’ve discussed this often enough that I think we could both provide each other’s arguments.

Our treatment currently, and has been for quite some time, is that funds are received, let’s say, to build a school and operate a school as a school. The money comes in. It’s recognized over the period of time that we need to build the school and run it as a school, because at any point in time, if we don’t run it as a school, we’re not meeting the obligation that was set when the funding was provided.

Personally, having that liability sit up there and slowly draw down into revenue over time shows us at any point in time the fact that we still have an ongoing obligation — or, at this point, let’s say the school board that received the funding has an ongoing obligation — back to the funders to run and maintain that school as a school.

It is a timing difference of: if we get $400 million, when that $400 million comes in. Is it over the four years of construction, or is it over the 40 years of construction and running it as a school?

B. Ralston (Chair): Okay, I think that’s a good opening position then. Maybe we’ll let it be explored in questions.

L. Reimer: I’m getting the impression…. Is this a problem for other provinces as well? Are other provincial governments having this same issue with their Auditors General’s opinions, or is it just us?

S. Newton: I can answer that. It’s not just us. Alberta’s opinion was clean with actually treating deferrals the same way we do. Then Ontario’s is due to come out shortly. Is that correct?

S. Newton: Their previous year’s audit opinion was clean as well, deferring it the way we do. I think in Quebec there are differences of opinion between the Auditor General and the comptroller general, so they’ve got qualifications related to that. That’s correct.

It’s hit and miss. I think the Auditors as a group are not all in agreement and the comptrollers as a group are not all in agreement. It’s very much a national issue. It creates a bit of a mess.

C. Bellringer: Also, there are other jurisdictions — and I believe Saskatchewan’s one of them; I’m not sure if there are others — where it is being treated the way we would like to see it being treated. It’s being treated that way by government, and there is, therefore, no qualification in the audit opinion. So you can see it treated that way, a clean opinion; treated the other way, a clean opinion; treated that way, qualification; and treated this way, qualification. That’s when it is true to say that not all of the Auditors are on the same page.

There are other factors to consider. One is whether or not, in that jurisdiction where there’s a clean opinion on it being treated a different way, it is significant or not within the context of their statements. I don’t know if there is any of that going on as well.

K. Corrigan: I have a number of questions, but maybe I’ll just start with some on this subject — two questions. The first one. When you are looking at when you realize the revenues or when you account for the revenues, is it not true on the other side that everybody’s in agreement that when you build a project, like a P3 project, the debt for it….? If you’ve got revenues for that and then you built the project, and as it was being built, the debt for it is recognized at the moment of construction whether or not the payments are spread out over 25 or 30 years….

That’s a discussion I had with both your office and…. I was involved with Russ in a telephone conversation about that once. There was agreement, I believe, that the debt is realized at the moment of construction, not as those payments are being made to the P3 contractor over the years.

Wouldn’t it be consistent to say that the revenues coming in should also be treated as revenues during construction, to be consistent with when the money is going out and how it’s treated when it’s going out? That’s my first question.

S. Newton: There are two different statements that we’re working with. When you actually have debt, the corresponding piece is you’ve got cash in. So on the balance sheet you’re going to see debt and cash. On the income statement you’re going to see revenue and expense.

When the P3 starts, you’ll have debt on your balance sheet and cash and no expense. The expense will bleed out over the 40 years of that project. When you receive funds, you’ll have the funds coming in. Let’s say you’ve been given the money. You’ve got the cash coming in and the liability, so the deferred revenue, that will then bleed out over 40 years into revenue.

You have a matching revenue and expense stream. That’s your capital flowing out as well as the revenue being received to match it. And you’ve got your cash-in
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debt — or cash-in liability and cash-out…. Or the other way around. Anyway, you’re talking across two separate statements.

K. Corrigan: So because they’re the two different sheets, then it’s not relevant? Okay.

I had one more. I noted that the Auditor General pointed out that there were 18 private sector audit firms that agreed with your treatment. I’m wondering: did those audit firms…? Was that any kind of instruction from you, because they were doing contracts for the Auditor General, or was that just independently, that they came to the same conclusion about the treatment?

R. Jones: What we do is, on a monthly basis, meet with the firms in general and discuss topics as they come up. It’s interesting to note that we have disagreements across the country as far as the Auditor General offices go. Even with the large firms, there are disagreements across the country.

In this province all of the firms and our office have agreed that the treatment that we’re showing in the report is the correct way of doing it. If you talk to partners from KPMG, for instance, back in Ottawa, they might not have the same take on it. It’s a very interesting dynamic. But we did not force our policies or anything in terms of our interpretation upon these firms. It came from monthly meetings that we had with each one of them.

D. Eby: B.C. Housing is currently selling a large number of its assets. I was intrigued by the explanation of the Auditor General of this issue where, if there’s a $10 million building and the government received $10 million to build it, the question is about whether you claim it over 20 years at $50,000 a year or $250,000 a year over four years.

If the building is sold but still used as its intended purpose — so it’s a $10 million B.C. Housing building, just using the example — it’s sold at year 15, it’s under agreement with the federal government to operate it as a housing building, and it will continue to be operated as a housing building, what does the government do with the $10 million that it receives? How is that accounted for if we’re using the Auditor General’s model versus the comptroller general’s model?

It seems like if you sell the building for $10 million, you get $10 million in, but you’ve either claimed the whole amount under the Auditor General’s model or you’ve only claimed a small fraction of it under the comptroller general’s model. How will that work under these two different models if it’s sold halfway through and the purpose is still being achieved?

C. Fischer: Really, it depends on what the stipulations were. In order for any capital contribution to be deferred, the contributor would have to say: “You have to take this $10 million, use it for a social housing project — only a social housing project. If you stop using it for a social housing project, you have to give the money back to us.”

If, after five years, the building was disposed of to someone else who was going to use it for a social housing project, you have to give the money back to us. If, after five years, the building were disposed of to someone else who is going to use it as a social housing process, you would resolve the deferred revenue by bringing the $5 million into revenue. You would repay that $5 million back to the federal government, and then you’d recognize the gain or loss on the sale or disposal of the asset.

D. Eby: I don’t understand why you would make the payment back to the federal government. It’s still being used for its intended purpose.

C. Fischer: If, for example, we were to provide funding to a school district and the legislation says you have to use it to build a school and can only use it as a school and have to keep using it as a school…. Most agreements that are restricted, or stipulated, say that if you don’t use this money for the intended purpose or in accordance with the stated or required terms, then you have to repay the money. In some cases the federal government, in particular, will prefer to redirect that money to another social housing project.

In the case of the disposal, even if the province of British Columbia sells the social housing project to another operator to continue using it, the province gets that $5 million back. The province is generally not likely to be free to use that $5 million for other programs in health care or social services or education. They would have to either repay the money or redirect it to another similar program. That’s within the discretion of the contributor.

Generally since 2010, federal government transfer agreements follow a pretty restrictive guideline requiring an annual report back on the deliverables and outcomes under the program area. Quite often the requirement is for annual audit reports back to them to demonstrate that the money is used for the appropriate purpose.

There are always provisions for resolution if, halfway through, that program stops. Generally, they are to repay the money or redirect it to another purpose that’s appropriate to the original contributor.

D. Eby: It seems like this model would significantly restrict the government’s ability to use this money, as compared to the Auditor General’s model, where you would go back to your funder and say: “Yeah, we spent it all ten years ago when we built the building. Why are you coming after us for the money now?”

C. Bellringer: I’ll say something. Russ may want to add to this. It does get down to whether or not the amounts would be repaid. That’s certainly something that we looked at. It’s my understanding that that has not been the experience in the past. Amounts that have come in through capital contributions towards building something have never…. There are no examples to go back to where they’ve had to be repaid.

It certainly is something to consider when you’re trying to figure out what’s the…. We get into this whole…. The standard requires a different accounting depending on whether there are stipulations attached to the contribution. Stipulations have to be that you have to do something and that, otherwise, you have to pay it back. Your question is getting at the heart of that.

It’s a little bit speculative. I don’t know that there’s an example that we can all point to and say: “That’s exactly how it was dealt with in this case.” In theory, that is behind our difference of opinion. We believe that once the item is built, it’s highly likely it will just remain in ownership by the province.

I don’t know if you can try to explain it a different way that maybe makes more sense.

R. Jones: I was just going to mention that we don’t have a difference of opinion — the comptroller general and our office — if there are stipulations in an agreement that says: “Over ten years you must keep that asset and not sell it, or you have to give the money back.” We totally agree that the funding you received should be recognized over ten years. If the useful life of the asset is 30 or 40, it’s still only ten years, not the 40 years, because the stipulation says ten. We totally agree with that. That’s what the standard says.

In a lot of cases there aren’t stipulations in these transfers. You know, you get it and it says, “You need to build a school” — or a hospital. Once that asset’s built, the standard basically says that if there is no stipulation, you should recognize it as revenue.

Really, if you think about it, you are better off. You’ve received the funding, so you’re not having to take out debt to build an asset. Into the future you don’t have interest payments on the debt. You do have additional cash or money available to spend on other things.

S. Robinson: My question is about local governments and the expectation of other levels of government. Which is the model that they’re expected to use in terms of reporting out on these sorts of expenditures? I’m also interested — and you may or may not have the answer — in terms of the Auditor General for Local Government. Is there consistency there in terms of these challenges?

R. Jones: I can take a stab at that. On the Public Sector Accounting Board we have a couple of municipal members. They’re quite happy with the transfer standard, because that is the way that they look at capital funding. They do bring it into revenue when the asset is built. The firms in this province — that’s how they account for it.

S. Robinson: So if I could just have a follow-up. If I’m to understand correctly — and I know that a number of my colleagues around this table come from local government — that is the accepted practice for that level of government. They build lots of stuff. They build lots and lots of stuff. I guess I’m just challenged with how it is that we come to a different level of government — which builds stuff, as well — and they have a different way of reconciling how they account for these assets.

I’m wondering if the comptroller general might want to explain how it’s okay at one level of government — which is, it’s my understanding, a creature of this level of government — and yet at the provincial level there’s a different understanding of how to account for those….

S. Newton: My concern would be that at the local government…. Well, let’s back up. It still, as stated by both Carl and Russ, relates to stipulations attached to the funding. In a number of cases there are specific stipulations. In a number of cases it’s inherent in the legislation that enables the program. You would have to look at all the individual agreements where government is funding a municipality and, specifically, what the requirements were on the funds that they were given.

If there are limited expectations and a history of limited expectations as far as a series of stipulations and requirements and no history of the money being pulled back and no clarity of expectation, then you’ve got a situation where it’s easy for those municipalities to recognize the revenue all up front, and they have a free choice to use the money.

But if government, as the funder, has discretion to determine whether they’re going to pull the money back or not and choose to do so, then you would have stipulations, and I would expect that that level of government, if they are not deferring it, would be offside.

R. Jones: Just a quick clarification. When I said they would recognize it as revenue…. If it didn’t have stipulations — absolutely. The municipalities have said to me that they don’t have a problem with implementing the standard the way it is.

M. Dalton: It seems like there is certainly a lot of blue water between the two different positions. Does that impact what would be the surplus-deficit position that we’re in? The government does state where the province is as far as the deficit and what’s on the books. Is this the crux of the matter here, what we’re talking about? That’s my first question.

My second question is: which of the two positions best follows the GAAP positions on international practices in other jurisdictions? I know that’s the….
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S. Newton: Had we followed the civic requirements that the Auditor has on how we should treat deferrals, for the current year just the in-year amount would have increased the surplus by about $280 million. So we would have been $280 million to the good. Last year I think the adjustment was $3 billion, but that was covering previous years, so it was a prior-period adjustment. It would have put us to the good, had we followed that treatment.

My understanding is…. Actually, Canada follows international financial reporting standards, but we have PSAB, more specifically. There is IPSASB, so we’ll add another framework to your repertoire — International Accounting Standards Board. That’s an international public sector accounting standards board.

C. Fischer: It follows the same general model, though the international standards are typically less specific because they need to cover a broader range of participants — being government states and governments around the world.

C. Bellringer: One of the reasons why we have taken the position that we have taken is actually some wording in the international standards that very specifically says that in the absence of stipulations, the ongoing program is not a reason to defer. But then we had some conversations with the chair of IPSASB — of the International Public Sector Accounting Board — and I asked him to explain that to me so that I could better understand our position here.

He says that, well, they don’t always do that. I thought: “Well, that’s not useful.” We actually have now realized we do have to have some further conversations at the international level, because it is also a conversation taking place internationally.

The reason why I’m saying…. I don’t know that we will resolve this in the short term, because I think we have to wait until something changes, whether it’s a clarification in the international standards, a clarification in the Canadian standards or a greater consensus across the country. Something has to change, because we both have a basis for our opinion, which is different. Internationally they’ve just introduced a new framework, so that framework may actually provide us some answers to this.

M. Dalton: Given that the change recommended by the Auditor General actually would seem to make it more rosy — the budget position of the government — this doesn’t seem to be a sleight of hand by the government, by the comptroller general, to make the government look better. I think that’s what the public would be mainly concerned about, and that would be my concern too: are we — I think it’s called cooking the books — looking at things there just to make things a lot better than they are? Do you have a comment?

S. Newton: I think one of the places that you can go to when you see something like this, where there’s a bit of an odd situation, is broader than the jurisdiction you’re looking in — to determine whether or not this is a more pervasive problem. I think that’s where you get some degree of comfort that it’s not an easy answer. It’s not an easy situation, and there are a variety of opinions across the board nationally and, as I’m hearing, more internationally as well. It becomes a place where prudence dictates you might want to just stand pat until we get clarity.

We’ve got some pretty good arguments that are helping us come to the determination about what we need to do. I think the fact that we could have gained a benefit demonstrates a lack of self-servingness on our part. But it is a turmoil issue that is going to take some time to work through.

R. Jones: I’ll try and address a couple of…. Your first question, Marc, of course was around the deficit/surplus. It is one of the key indicators in the financial statements, and this would impact deficit/surplus.

Another key indicator that we were mentioning during Lisa’s presentation was the net liability number that shows up on the statement of financial position. The current way that it’s being recorded in the financial statements distorts that number. It’s a significant number as well, because you have this liability that’s sitting up there that really isn’t a liability, in our opinion.

Secondly, around whether or not it would impact deficit or surplus, in years where there are government transfers coming in — from the federal government, from other outside agencies — it would impact the surplus number.

However, if you don’t have those contributions coming in, it could impact the number the opposite way and create more of a deficit because you would still have the amortization on the assets that shows up as an expenditure with no offsetting revenue. It can go either way.

In most cases you do have transfers coming in. There are agreements usually with the federal government or other outside entities that would have transfers coming in each year. But it doesn’t necessarily mean it’ll be a surplus. It could be surplus or deficit.

G. Heyman: Much of my question, with respect to this issue, has been unfolding over the course of questioning. But my question goes back to a statement by the comptroller general that you receive funding for a school, for
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example, and you’re expected to build and operate it as a school for 40 years, so you’re booking the revenue over that period of time. Then Mr. Jones explained that there’s no disagreement, if there’s a stipulation that it be operated for a period of ten years or 50 or five, that it be booked as revenue over the stipulated period of time.

I don’t understand your rationale for choosing an expected life span of the building that’s not contained in a stipulation and incorporating revenue over that span of time, rather than over the span of time that’s expressly stipulated in whatever contract exists for receipt of the funds.

S. Newton: There’s also more than just the contract that has stipulations in the receipt of funds. A number of jurisdictions have taken this position as well. Inherent in the legislation, it sets up the ability to run a school and run the education system.

There is that expectation that, at some point in time, when that school board is no longer running that school, that school no longer exists. It reverts back to the province, and the province has the ability to dispose of the asset. The asset does come back to the province if it’s not performing as a school at any point in time over its life span. It’s akin to pulling the money back, saying: “You’re not actually building it and using it as a school, so we’re taking it back.”

B. Ralston (Chair): So was that the treatment then…? There were a number of schools over the last ten years that have been closed. I think 125, 150. Was that the accounting treatment that they received — that the individual school boards had to pay the unused…?

S. Newton: It depends on what was dealt with specifically with the school board. If it’s sitting there pending to be something else, that’s one thing. But if it’s no longer going to be a school, that’s different.

C. Fischer: It is the way the accounting works. The accounting kind of treats it as a repayment to government, and at the discretion of the minister, the minister can reissue a similar amount as further capital funding or contributions.

G. Heyman: Then my follow-up to the Auditor General would be: if that is the case, what negative impacts, if any, would occur in terms of keeping the accounts along the lines that you have suggested — in other words, your critique of the current method?

R. Jones: I think that what’s critical here is that the $230-whatever million we were talking about for the current year and the $3 billion in total are from funds that are coming from outside the government entity. They’re from the federal government. They’re from endowments coming in. They’re outside the government entity.

What we’re talking about here with school districts is something that’s inside the government reporting entity. At the public accounts level — the ones that you have in front of you — those get eliminated, in theory — like, “It’s a grant going to the school,” or “The school had….” Those get eliminated. That’s not part of the $3 billion and the $230 million.

We’re only talking about funds that are coming in as government transfers — in the main, from the federal government: for instance, for highways. The whole thing about schools and hospitals…. For their individual financial statements, it does have an impact, which is another story. To me, it tends to make the financial statements of school districts and hospital authorities useless because you’ve got this number that’s sitting there.

C. Fischer: Just to clarify, we’re not concerned about schools or any other entity. The same holds true for regional hospital district funding from the local government sector to hospitals held by health authorities. It’s completely ambivalent to where the source of funding comes.

G. Heyman: Well, Russ’s comment was helpful in the sense that I wasn’t seeing a direct connection between the point raised by the Auditor General and my question, and the answer of the comptroller general. Maybe you can explain the interaction between provincial government and school board and the relationship to reporting revenue from outside both.

S. Newton: The same principle is involved. If we’re getting funding from a local government or feds, the expectation is that it be used for that purpose over the life of the asset. School board is an example — a way to reference it. But the principles would operate the same if we were getting funding from a different source — as Carl mentioned, ambivalent of the source.
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An example has come up recently. The federal government, as you well know, gives a lot of money to the province to build highways — Kicking Horse, up in that area, whatnot.

Some of the stipulations…. We’ve seen a number where the agreement comes through from the federal government and it specifically says, “We will give you $100 million to rebuild the Kicking Horse bridge,” and whatnot.

For eight years you need to make sure you don’t sell that bridge or the highway to somebody, even if it’s only a kilometre or two. After eight years, then we don’t expect anything to come back. But within that eight-year period, if you do, then it needs to be repaid.

If you follow this standard, it would say that for eight years you bring the revenue from that money into the province. But once the eight years is up, that’s when the last amount should be recognized, not over the 80-year life of the highway.

I don’t know if that helps, but that’s the way this standard is supposed to work.

G. Heyman: That, in fact, is my understanding. What I’m still puzzling a little bit over is the comptroller general’s rationale for spreading the revenue out over a longer period of time when there is no contractual stipulation from the funder — the source of the funds that are being recorded as revenue — to operate it for longer than X.

S. Newton: There may be a short-term agreement attached to how the funding flows out. If we go back to the conceptual pieces that we were talking about earlier as well — around the cost of the asset, the revenue associated with that asset and the expectations on when the feds are providing the funding for a highway — I do not believe that the province would be in a position ten years out of an eight-year agreement to do something different.

The expectations would be the same. Actually, this is where we can take a very specific agreement, that federal agreement, and pick your province. You will see different treatments based on the positions that those comptrollers may be taking on that particular agreement.

L. Popham: I have two questions. The first one is regarding a statement that was made by the comptroller’s office around if the system were to change. It would be complicated, and it would take some time. I would like to know what that means, exactly, if we were to do that.

The second question is more to do with accounting practices. I understand that the gist of the argument is around transfer payments coming in to the government.

The example that I’m thinking of, which I’ve had a very difficult time tracking down detail for, is the convention centre. The convention centre was a project that a loan was disbursed for from the provincial government. That loan is increasing in size annually. I think we’re well over $100 million at this point. I believe, from what I’ve asked, that the amount of that loan is housed in the Ministry of Transportation. The loan payments, I imagine, are going into that as well. But it’s hard to find it through public accounts.

Would the two different accounting systems take that into consideration differently, or is it something that also just disappears from public accounts?

S. Newton: Currently the requirements of the BTAA as far as budget and actual needing to compare…. Our budget is based on revenue and expense: your sources of revenue coming in — taxation, fees, the like — and then the expenditures that will be applied against it. We need to be able to report out on that same basis, and we need to be clear not on cash flow — when we get cash in and out — but when an expense or a revenue item actually has occurred.

If we go to a place where we are collecting revenue all up front and not matching sort of the use of that revenue and the expense related to that revenue over time, we end up with a financial reporting cycle that’s offside of how we’ve budgeted. It would be offside of the expectations of how the public is informed of the bottom-line surplus-deficit number. We’d have huge swings, potentially.

As far as the accounting practices and the convention centre loan, I’ll have Carl walk through that.

C. Fischer: That particular transaction has been a source of much debate since day one. It is a loan to an outside entity, Tourism Vancouver. It is increasing over the past few years. I believe the ministry responsible is the ministry of community services. I can check that and let you know.

It’s a single transaction. The summary financial statements are general documents, so we don’t go into that level of detail. You can certainly get additional information by request to the ministry.

We’re treating it as an account receivable now. I think we’ve had discussions for many years in the past on whether or not it is actually a loan or a commitment of Tourism Vancouver to contribute to the convention centre. It does accrue attributed interest, and the interest is currently accruing slightly faster than the amount of dedicated hotel room tax that’s used to repay it.

That’s generally what I know about it now. It doesn’t show up separately in the public accounts, but we can certainly find additional information.
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S. Newton: It’s not a transaction. That transaction wouldn’t be treated differently in relation to the government transfers issue that we’re discussing.

B. Ralston (Chair): Perhaps, given that request, then, you could supply some further details and circulate it to the committee, if that’s of an interest to the member.

V. Huntington: It seems to me that if, beyond the stipulation period of the transfer, the accounting method you’re choosing impacts the deficit-surplus or distorts the liabilities, then to me it is, should I say, probably inappropriate. It sounds to me like there’s an introduction of complexity into the process that doesn’t really need to be there.

Why is government so strident in sticking with this process when you can just as easily say we’re going to do it the other way and remove that complexity and those disparities from the system?

S. Newton: The method in which we’ve been…. It’s really easy to just account for something different.

However, when you go do that and a change occurs and you’ve got to redo it — like, go back and fix it — that’s really difficult to do.

We have a standard that’s in flux. We are consistent with how we’ve been treating it previously, right through to this point in time, so there’s been no change on our part.

I’m not convinced we’ve got to a national-level standard that needs to be applied, given the differences of opinion across the board. Prudence is that we stay the course until we have clarity. When we get clarity, then we’ll have to solve the problem.

There have been a number of cases where we’ve been faced with a qualification or a particular issue where we would have needed to change what we did — fundamentally change the accounting. We didn’t.

I think we’ve maintained consistency and comparability across years, to be able to use the financial reporting appropriately so you can tell how things are changing. But at this point to change substantially, then have this standard work its way through the system, then come to a different place and then have to change again — that would ruin our consistency and ability to tell how government is managing funds over time. So we will wait.

V. Huntington: I guess I’m struggling with the fact that I don’t feel I’m getting the right numbers now and that the system that you’ve chosen, for whatever reason, to use is perhaps not the best way to be doing it, that you should be looking at getting on top of what those complexities are and how you would change it, should the standard actually become what is being proposed by the Auditor General’s office.

S. Newton: We know how we would treat it if the standard became the standard. But I think….

V. Huntington: Sorry, but do you not think that it is the better, easier, more straightforward, more appropriate way of doing the accounting?

I guess it’s not a question. I recognize it’s just accounting, but by deferring that transfer over the lifetime of the asset, it’s almost treating it like operational funding. I get a little bit confused about that way of looking at it.

G. Kyllo: I think it really comes down to the consistency of the reporting. The way the financial statements for the province have been reported has been very consistent.

I think if we have a look at it with our balanced-budget legislation and the importance of having fiscal prudence and have a look at the real performance of the province…. If we were to get an extra $500 million in transfer payments from the federal government in any given year, it would make government’s job that much easier. We’d have $500 million of extra room within our fiscal budget in order to meet our balanced-budget legislation.

Likewise, the other challenge would be is if there’s also a year where, maybe, the federal government decides that they’re going to reduce transfer payments. Maybe the federal government decides they’re going to start pulling back and they’re not going to fund big infrastructure or transportation projects. In that case, that could put additional pressure on the government.

If the federal government was funding at $1½ billion a year consistently and then in one year decided they’re going to reduce their transfer to $1 billion, suddenly the province is going to have a $500 million shortfall that they’re going to have to try and find and make up through other reductions in other programs.

I think the challenge with that is that it doesn’t provide consistency. So the federal government transfers could have a huge impact on the performance metric — which, I think, the taxpayers of this province are largely looking to government to actually attain. I think the methodology and the reporting, the way we’re currently doing it, is certainly the most fiscally responsible in the current term because it’s not impacted negatively by transfer payments from the federal government.

Stuart, I’m not sure if you’ll want to add anything more. But from that perspective, from meeting our balanced-budget legislation, does the current method of reporting
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not provide the most credible and consistent path moving forward?

S. Newton: In determining how we were…. Even looking at the government transfer standards now, the choice, from an accounting perspective, was almost ambivalent to the balanced-budget requirement.

It needs to be. Accounting needs to be pretty clean and clear and not necessarily care about what the specific sort of need might be of what you want your transaction to look like. It has to stick to principles, so we’ve chosen it.

Having said that, though, it does provide some degree of…. Actually, it doesn’t necessarily provide some degree of certainty because we are being really clear with how we’re going to treat the transaction. There still is the opportunity in any given year for the feds to throw in a chunk of money without any stipulations attached to it.

In providing the answer, the choice of the accounting method to use is independent of the balanced-budget legislation, although what we’re doing certainly makes it easier.

B. Ralston (Chair): But isn’t that, with respect to Greg’s question…? I mean, there’s $3.6 billion a year in health and social transfers and other federal contributions that are included in the operating budget of the province. This is specifically a standard for capital, is it not?

Is there not that distinction? I’m looking at the second quarterly report: contributions from the federal government health and social transfers, $2.9 billion; other federal contributions, $6.69 million. So $3.6 billion approximately. That’s in the operating budget of the province. So are we not talking about two different things there?

C. Fischer: You’re correct. The issue at hand is related solely to stipulated or restricted capital funding for a specific purpose. I shouldn’t say capital; potentially it could be operating funding as well. It’s generally not the case.

We don’t have any disagreement with the Office of the Auditor General’s approach on mechanism. We also agree that there should be a stipulation we should recognize, on a basis consistent with that stipulation, and where there is no stipulation — whether it is general funding or even targeted funding, like Canada health and social transfer — revenue is revenue.

Quite a few times, when there are federal transfer programs in big surplus years, we don’t agree with other parts of government that that amount should be deferred, because these stipulations are not direct, they are not concrete, and they’re not positive. I think the issue is more in the nature of what a stipulation is. “Stipulation” is a word that only entered the accounting jargon three or four years ago in an attempt to make things clearer. In our case, it hasn’t really done that.

Just to provide a little comfort, I don’t think we have any issue on government transfer arrangements going forward. It’s really easy to make sure that a transfer is written using the words “eligibility,” “criteria” and “stipulation” in a way that we can clearly and unambiguously agree on the accounting.

Where we have a problem is $3 billion worth of historical transfers over many, many years — which were written with, I guess, perceived deficits — and the clarity or the substance. It would be ideal if we could, between Lisa and I, hit the road and go through each agreement and recast them and get the parties to agree. But that might be a bit more expensive than the value you’d get from the incremental improvement in accounting.

Whether it’s operating or whether it’s capital doesn’t make a difference. The difference solely comes in the stipulations, and those are fully within the discretion of the transferor.

I guess part of the problem is that it’s only in the public sector that we have what are called non-exchange transactions. They create a problem for accounting because, unlike an exchange transaction, where the two parties each have equal discretion…. You can make some assumptions about the economic nature of it. But when you’re dealing with governments, who don’t just engage in trade transactions but invest in assets for the purpose of public service delivery and receive funding from other parties for the purpose of delivering programs and services in the future, it does make things a bit more complicated.

L. Throness: Allow me to express just a little bit of frustration about the discussion. Here we have two experts and, really, bodies of experts who are of high integrity. They’re independent from the government. They have vast knowledge about very complicated subjects. This subject has come up before in this committee. We have 20 other subjects that were withdrawn, but, actually, they appear again. They’re not pursuing anew, but, actually, they appear again. It’s almost as if they are still being pursued and not withdrawn.

I’m sort of wondering: how can this committee add value to this discussion? Any comment that I would make, you would not want to rely on, right? I’m just speaking for myself. I’m wondering why we’re talking
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about this over and over again if you folks, the experts, the absolute experts, cannot come to ground on it and internationally and nationally there are disagreements. Do you want the committee to side with one or the other?

B. Ralston (Chair): I think the endeavour here is simply for the committee to understand the nature of the difference. I think we’re getting a clear sense of the very sharp ambiguity of the position. I agree with you that there may not be more value that we can add, but I think we have an obligation to at least understand the difference since that is a major qualification of this audit opinion.

C. Bellringer: What the Chair just said is, to me, a very important part of the discussion. Do you understand what the difference is? I’m hearing a very good understanding of what that difference is. Therefore, it’s back to the…. So if you look at the bottom line, and if the focus is that the deficit this year was X or the surplus this year was Y, then that’s too simplistic in my view, because then you’re accepting every number as being so exact.

It’s almost as though we’re going back to the cash basis of accounting in the old days. In those days, yes, it was black and white. This much money went in, and that much money went out. At the end of the day, that’s what you have left.

There are a huge number of numbers in the financial statements that are based on all kinds of subjective considerations. For us, the most important thing — and back to the reason why we put in all of the matters of interest — was to pull out some of those things that do involve all kinds of assessments. This is the largest disagreement and the one that is most subjectively seen in a very different way between our office and the comptroller general’s office. If you’re understanding that, then you can factor that in.

When you’re looking at something like balanced-budget legislation…. I’ve certainly lived with many varieties of balanced-budget legislation in another jurisdiction and have listened to the discussions that went on there. The balanced-budget legislation can take many forms. Do you want the bottom line to balance? Do you want it to exclude your Crown corporations, or do you want it to include your Crown corporations? Do you want that to be over one year or over several years? In all of those sorts of decisions, you need to understand the factors that are going into that bottom-line number. You’ve most certainly had a fulsome discussion of that.

J. Yap: Following up on that point, I think, Carol and Carl, you alluded to the value, the use of the financial reporting, the value of making the change and the value to the financial reporting that we’re looking at here. My question is to ask from the perspective of the user who is reading the financial statements and drawing some conclusions and some judgments. Perhaps both of you can comment.

Has there been any, apart from the public sector accounting folks who have not reached a consensus…? What about other users? The ones I’m interested in, in particular, are the financial analysts and those that do bond ratings and the risk assessments that the whole financial system relies on.

Where do they sit with this difference of opinion on the treatment of deferrals? It seems to me if they…. They’re one group of many, but I think most of us would agree they’re a pretty important group because they kind of set the tone for financial markets. Could you comment on their perspective of users of the financial statements — in particular, the bond-rating people?

S. Newton: I’ll start with the bond-rating agencies first. Bond-rating agencies would take a set of financial statements, and they’re not looking at one number. What they’ll do is they will go much deeper than this. They’ll look at things like cash flow, ability to pay back debt, ability to meet targets and commitments, level of overall debt, how that debt is funded and supported. Those are the broader things that they look at.

What we have here…. I think it was stated earlier that the quality of the numbers isn’t at issue. It’s the presentation of the numbers. The bond-rating agencies aren’t looking at presentation. They’re looking at the detailed substance. So from that perspective, it’s not an issue for them.

We meet with the rating agencies prior to the release of the public accounts to let them know the qualifications and also to let them know what the audit opinion is, what the Auditor’s stated impact is. We also provide our perspective as well. But for a rating agency, we’re looking more at cash flow. They would know when the cash came in. They would know how things are being funded. They would know a lot more information than just in here, so for them, I don’t think it’s an issue.

Public Sector Accounting Standards Board is working on a conceptual framework task force. It’s looking at: what’s the conceptual framework that we should use to build our financial statements? One of the issues that they started with was: who are the users, what do those users need, and what do general-purpose financial statements need to have versus something that would be specific-purpose? That’s an ongoing project. That’s a piece of work
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that we would expect would shape helping, maybe, potentially solve some of the disagreement.

The other piece is that we did have — and it’s the basis for us moving to Public Standards Accounting Board GAAP and having it consistently applied throughout government — was the Enns report. It was very clear. There’s a lot of user consultation there. They were really talking about usefulness to the user, understandability of the user and that comparison of budget to actual and consistent use of accounting throughout the entity and things like consistency and comparability to be able to tell over a period of time how things were changing.

A number of those principles have evolved into what we do, but I think the other piece is that accounting is infinitely complex. When you go to deal with your own personal financial choices, you probably sit down with an adviser telling you where to put your money and how to deal with it because it is that complex.

So understandably, a set of financial statements like this, although a summary and at a higher level, would have some inherent complexity in them. That is why I think some of the choices of the Auditor — to start talking about different things in the financial statements — would help to open up some of that understanding and maybe make the information more accessible to users.

I don’t think there’s a user impact at the professional-level user, but I think there probably is a user impact from the general public looking at the audit opinion, the qualification and then maybe not being able to work through what that means. I hope that helps.

C. Bellringer: Just in terms of the bond rating and the work of bond-rating agencies and other external users, we are planning to do a little bit more work over the next couple years to better understand how the statements are used and so on.

We have seen some examples in Canada where the numbers in financial statements have been picked up by, in particular, the Fraser Institute. I’m not saying for sure it was there, but that kind of organization — where they’ve picked up numbers out of financial statements without even noticing that there was a huge qualification in the audit opinion and basically using the wrong numbers from various jurisdictions.

It is critical that we land, in Canada, on a common spot in the short term. Otherwise, the numbers across Canada are going to be distorted by this, because the number is significant enough that if we’re treating it differently, we are going to be reflecting different bases of deficits and surpluses.

While I say there’s too much emphasis on it, I’m not suggesting that there should be no emphasis on it. It should be one of many things that are looked at, and it should be done consistently across Canada.

B. Ralston (Chair): Thanks. I’ve put myself on the list next, and I’m going to move to a different topic. On page 58 of Summary Financial Statements there’s a reference to sinking fund investments, provincial government bonds, which dramatically declined — I think that’s provincial government bonds of other provinces that are held by British Columbia — from almost $1.7 billion down to $352 million. Was that part of the asset sales? I think there was a sale to….

C. Fischer: It was part of a larger strategy to move away from sinking funds, simply because capital markets are returning very little return on fixed-security instruments. It makes no sense to hold something making half a percent interest when you’re paying 3 percent interest.

I believe there was one section that was done at the same time as the release of assets program. If I remember correctly, it was B.C. Transportation Financing Authority sinking funds that were liquidated in that period.

B. Ralston (Chair): Wasn’t there a sale to National Bank, as well, of a portfolio of provincial government bonds?

B. Ralston (Chair): Then the other question on that section was…. Miscellaneous, $444 million. The note suggests it has something to do with entry into the RMB market, the bonds. Perhaps you could just confirm that.

C. Fischer: I believe that last year that was a temporary measure where there was an issue in Chinese currency and a temporary position taken offshore attributed to sinking funds.

B. Ralston (Chair): I think it’s mentioned elsewhere in the statements that all foreign currency transactions are hedged. Is this hedged as well?

C. Fischer: No. Renminbi transactions are not hedged. There’s no efficient available market to hedge Chinese currency currently.

B. Ralston (Chair): Is there, then, a higher risk in taking that position if the foreign currency is unhedged?

C. Fischer: Yes. If foreign currencies aren’t hedged, you’re subject to the risk of their fluctuation or Canadian dollar fluctuation. If the foreign currency depreciates relative to the Canadian currency, it would be a negative effect.
[ Page 533 ]

B. Ralston (Chair): I had one other question. On page 17 of the Auditor General’s report, on surplus asset sales, there’s a mention that gives some examples of sales. Is there a detailed list of all the sales, the vendor and the purchaser, and the relative gain for each transaction? If there isn’t, could one be produced? It’s very hard to locate any of this information from the Ministry of Finance.

C. Fischer: We don’t have a list available. I know there was some discussion about public accountability on release of surplus assets. We would have to follow up with the Ministry of Technology, Innovation and other things to see where they’re at with that.

B. Ralston (Chair): Well, I’m going to request, then, a detailed list, including vendor-purchaser price and appraisal price, as well, for each transaction.

Finally, in that note it says “close to $290 million” from the sale of Little Mountain property in Vancouver. As I understand it or as I recall, the sale was concluded in 2008, yet the recognition of that revenue was deferred a number of years. It happens to come in a year when the surplus is less than $290 million. Was the recognition of that revenue deferred in order to have an impact directly on the surplus/deficit number?

C. Fischer: Property transfers are recognized at the date of title transfer. The Little Mountain property, though agreed in 2008, concluded in 2013. I forget the date absolutely. I don’t know whether there was some strategy involved. In my experience, usually it is a delay pending vendor financing or other arrangements with subleasing or developers that results in the delay of property transfer.

B. Ralston (Chair): But it is a rather striking delay of over five years from initial agreement to sell till the revenue is recognized. That seems to me to be pretty unusual in a real estate transaction.

S. Newton: Well, it’s a delay in initial setting up of an agreement and title transfer. Recognition occurs at transfer. It would be subject to whatever ongoing negotiation was occurring as far as getting the vendor to be able to complete the sale on their behalf.

B. Ralston (Chair): So both sides would have to agree on the date of title transfer, then, and that would affect the recognition of the revenue. Is that not correct, then?

S. Newton: Yes, but it would be subject to whatever issue the purchaser may have had in order to complete the sale as well. So there are a number of factors involved other than just sitting around….

B. Ralston (Chair): Well, no doubt. I mean, there was the market crash in the intervening time, but I think they were on their way back up by 2011-2012. So you’re saying that as far as you know, there was no deliberate delay, as far as you’re aware, in order to accommodate recognition of this revenue in the 2013-14 budget year.

I see it’s just after 11. I don’t know whether it might be a convenient time to take a short break. We’ve been at it hard for a couple of hours. Could we take five minutes and then come back, and we’ll resume?

B. Ralston (Chair): I have a list of questioners: Kathy, David Eby and Simon. Anyone else want to add themselves to that list? George. Anyone else? Laurie. Anyone else? Okay.

Someone did ask me if there was any restriction on the questions that you could ask in terms of the topic. I think we just focused on that one issue at the beginning, but members are, of course, free to ask questions on any aspect of the public accounts that they want to pursue here.

K. Corrigan: I just want to make an observation. Greg pointed out earlier that he doesn’t think it’s particularly prudent to recognize revenue sources that can vary from year to year in support of the government’s approach to accounting for revenues that come in. But I would say that if prudence and year-to-year variability is a concern, then I think Greg would probably agree that it probably isn’t a good idea to sell $600 million of assets in one year in order to balance the budget.

Given that, I have a question. It is in the same area, but it’s a very specific question. On page 14 of the report, it points out that 108 of the 143 organizations receiving separate audit opinions received compliance audit reports because they followed the regulation government issued related to the deferral of contributions revenue, which is inconsistent with GAAP. I wanted to ask really specifically about that.

First of all, I’m assuming that most of those entities were school boards, but I’d like confirmation on who they were. Secondly, one of the requirements, in a paragraph above, which talks about compliance reporting, is that “the entity must include a note with its financial statements explaining how they would be different if it were adhering to GAAP, and the Auditor’s report must reference this note.” I think at a different part of the report, but I can’t remember, it said “including quantification of what that difference would be.”
[ Page 534 ]

I’m just wondering, Auditor General or Mr. Jones, whether or not all 108 of those organizations did comply with that requirement — that there was a note including the quantification of how much that was. Not that I want to see all 108 notes, but I’m just asking the question.

R. Jones: Yes, most of them did. I would say probably 99 percent of them did include that in their note.

Can I go on to a different subject then, if I got such a short answer to that one, Mr. Chair — in a different area?

B. Ralston (Chair): Okay, but the question could be as short as the answer sometimes too.

I have a question about P3s. I wanted to, generally, make the observation and thank the Auditor General — and Russ as well, because you were involved in this — for the interesting facts. I think it really did make this report more accessible and more understandable to us, and to the public as well. I appreciate that.

I did want to get it on the record. I know there’s been public discussion about it, but I thought it was really interesting that the report included a reference to the difference between the cost of P3 debt and government debt. There was a difference on the P3s of 3½ percent on $2.3 billion. That looks like it’s for this year, anyway. It’ll vary from year to year. That’s about $80 million.

I guess the question I have is if this, then, piques the Auditor General’s interest in doing something I’ve been asking for, for a while — and you’re going down this road a little bit and taking a look at the methodology for P3s: really consider whether or not we are getting good value for money on P3s. That’s only part of the cost of a P3 — the interest rate.

It’s my belief that we’re paying a lot for these things, and we’re paying a lot more than if we had done them publicly. Will there be a look in the future at methodology and really breaking down the costs and benefits of P3s, not just individual projects but overall, saying we’re getting value for money or not?

C. Bellringer: We’re currently in the process of putting our performance audit plan together, which is something we will take to this committee so that you can see the rollout of it — a longer period than what we’re working on at the moment.

We had been leaning towards selected projects. We’ve done that in the past, and we were anticipating doing something in the future. We’ll put on the list a consideration of something broader than that.

D. Eby: My question relates to government business enterprises, or GBEs. It’s a broader question first, to make sure I’ve got a firm grasp on the issue here, and then a more specific question about B.C. Hydro.

As I understand the GBEs, the treatment is different in that their debt is treated as separate from government. Therefore, for bond-rating agencies and others looking at provincial debt, they would not see the government business enterprise debt like the Port Mann Bridge debt or the B.C. Hydro debt. Is that a fair summary?

S. Newton: They would look at all the debt of the summary financial entity. They have a copy of the debt report at the end of the Public Accounts, which lists total debt as well. What they’re looking at is they’re looking at the whole debt, but then they’ll also look at how that debt is funded or repaid over time. That’s where you get that taxpayer-supported versus self-supported difference that comes up as well. But they’re looking at total debt and the method by which that debt would be repaid over time, so the sources of income for the entity as a whole.

D. Eby: Then, I don’t fully understand the dispute over the Port Mann Bridge. So what if it’s categorized as a GBE or as public debt? What’s the distinction, or is it a distinction without a difference?

There was an issue in the report, as I understood, that just this fiscal year it is now permissible to categorize it as a GBE, whereas previously, the Auditor General said: “Don’t categorize it that way.” What is the effect of it being categorized or not categorized as a GBE, if that is, in fact, the situation?

If it’s not a government business enterprise — so it’s not classed as a GBE — the financial information for that enterprise would be included in the financial statements line for line. Their cash would get added to our cash; their investments would get added to our investments. It would be completely dissolved into our financial statements.

If it shows up as a government business enterprise, it would be recorded as an investment — so it would show up as an investment in the Transportation Investment Corporation — and we would participate in the change in value of that investment over time. It would show up as a separate note, as well, on the financial statements.

As far as the overall impact to the bottom line, there is no difference in impact. As far as total debt that government carries, it would still be the same total debt that government carries.
[ Page 535 ]

D. Eby: Then, the question in relation B.C. Hydro is…. There’s a note in the report that there may be a new accounting standard applied to B.C. Hydro that would limit its ability to do rate-based accounting. I’m wondering if we’d have a few more details about that and what the impact of that would be, if any, on our understanding of B.C.’s financial position.

S. Newton: Currently under the existing accounting standards the use of rate-regulated accounting is allowed. This is where the regulator can set the rate, and the regulator is also providing permission to defer certain items over a longer period of time. Under the current standard that’s allowed.

There was a point in time previously where it was looking like, at least in Canada, we were going to get to the borderline, where international financial reporting standards at that time had said that deferral accounting wasn’t allowed. Canada had gone to international financial reporting standards. So at that point in time B.C. Hydro wouldn’t be allowed to defer.

Subsequent to that, the standards-setters in Canada have said we’ve got another window, to 2016, to allow for B.C. Hydro to continue using rate-regulated accounting, pending the international financial accounting standards coming to some resolution on how they want to treat rate-regulated accounting, given that the North American model is vastly different from the European model, which is what the IFRS standard is built off of.

That’s why we’ve got this impending date of 2016. The hope is that the international financial standards-setters will come to a resolution prior to that date so that when our standards-setters meet their deadline, they’ll have clarity on what the future looks like. I’m hoping it’s not going to be like last time, where we got to having to make financial decisions on the coming year without any clarity on what the standard was going to be.

That’s the impending piece for years ending in 2016. Russ can add if I’ve misquoted anything.

C. Bellringer: I’d like you to…. Russ is closer to where things are at with the accounting standards currently. The GBEs and Crown corporations in the international world do account for…. Public sector accounting statements internationally do deal with Crowns differently than we do in Canada. There are a number of us, and I’m one of them, that would be saying: “In the future, I’d love to see the standards move towards the international.”

I think it’s more understandable and easier to use a set of financial statements where Crowns are consolidated in, so when you look at the debt number, you look at the total debt of both the core government and also acknowledge the Crown in there. It’s well understood, though, as you say, with debt-rating agencies and so on that those are in two different places. They know to look to both those places, and they’re both disclosed. It’s just shown differently in Canada than it is internationally.

Rate-regulated is another one where across the country, over time and even today, there are a number of us that draw out the deferred numbers. You should be well aware of the fact that there are deferrals that rate-regulated accounting permits. It’s correct accounting, but it’s also a very significant number that you should be aware has not yet been recognized in the accounts.

Russ has a better understanding of the timing of all of this, because things were going and then they’re not going, and now they’re in a different place.

B. Ralston (Chair): The Auditor General did complete a report several years ago about the effect of deferral accounts on B.C. Hydro, so there is that work to look at.

R. Jones: There is a discussion paper currently that the International Accounting Standards Board has out for people to respond to. The due date on that is, I think, January 15 of 2015.

That is addressing the whole issue of whether deferral accounts are assets or liabilities and whether they should be allowed to be shown in the financial statements of an entity. At the Public Sector Accounting Board level, we are responding to that discussion paper. I know there are a number of other Auditors General across the province that will be responding to that as well.

It’s underway. Yes, there’s nothing that has to be done until 2016 now. Hopefully, by then the international standards can come to some sort of conclusion on it. I think it’s tending to move a bit more towards accepting it. That’s my feeling.

C. Bellringer: The biggest change would be amounts that are deferred that currently are…. If it were to change, they would be expenses that you would see going through the current accounts — so actually the opposite in the deferral world to what we were just talking about with government transfers. I don’t know the number, though, so I don’t know the range that we’re talking about.

I just want to say that I really appreciate the quality of the responses today and, in light of what Laurie had said earlier, I think the dialectal approach which we’re engaging in is healthy and adds to my understanding of the accountability. So thank you.

B. Ralston (Chair): That’s not a word we hear often
[ Page 536 ]
from the Liberal caucus.

G. Heyman: I’m looking at page 41 of the summary financial statements — employee pension plans. I’m looking at the note on page 49, and I have a couple of questions. One of them is: does this represent simply the public service pension plan or all of the plans that are managed by or at least that are invested by BCIMC? I’m assuming that this only represents the government obligation and not the employer obligations in jointly trusteed plans or employer obligations of employers included in the plan who are outside of government and outside of the GRE.

C. Fischer: Yes, that’s correct. The note covers all pension obligations, including the four public sector pension plans under joint trusteeship. For those plans, we include government’s share under joint trusteeship, excluding the municipal share for the municipal pension plan. It also includes other plans, including separate plans of some Crown corporations like B.C. Hydro, universities like UBC and even one school district. It also includes the MLA superannuation account.

C. Fischer: No, the Workers Compensation Board is independent of government. We did, until 2010, include disclosure information related to WCB — or WorkSafe B.C., as it’s known now — but we no longer include any information.

G. Heyman: Not on that. I have on another issue, but I can wait if you have others on the list.

B. Ralston (Chair): Okay. We’ll just go to the…. I’ll put you on the list down there.

Money has been cheap for a long time, and I’m wondering why the interest rates appear to be so high here and why they vary so much — one at 14 percent and one at 6 percent. The list is on page 23.

R. Jones: One of the things that you need to remember about P3s — or you probably do know about P3s — is that each one is its own separate negotiation. Depending on what is negotiated with the private sector really does impact what those interest rates are. In the case of the one that’s very, very high, a lot of that project was funded by government through regular debt. Then there was only a small portion that was funded through the private sector, and it was at a very high level. That’s in their financial statements. That’s where we got the information.

B. Ralston (Chair): It was funded in February 2009 — right at the bottom of the financial crisis, I think.

Each one of these has been, you know, funded at various times over the last number of years when interest rates were at very different levels. That’s why there’s a huge variety. You’ll see there are some health authorities that are much lower that have been recent.

S. Newton: One other thing to note, as well, is that interest rate isn’t the cost of debt to the proponent. It includes paying the proponent for their share of the debt, but it also includes profit for the proponent in relation to the deal, any risk transfer, efficiency. There are a lot of things negotiated into that.

That rate really would be more appropriately termed the internal rate of return on the part of the proponent for the project. It has a lot more values that we’re paying for that the proponent is providing — and it’s coming through those payments — than what we would probably have paid if we were doing it ourselves. We would still have those payments. But because it’s being transferred over to the proponent, it shows up in that rate. So it’s not just the cost of the debt.

L. Throness: Perhaps related to that, if these rates do take into account efficiency gains — for instance, the transfer of risk, perhaps maintenance costs, remediation at the end of the life span of the asset — can we quantify the benefit that comes from the transfer of that risk to the private sector?

S. Newton: That would have been the detailed negotiations of each one of those P3s at the time as a unique sort of transaction where they’re working through…. “Are we going to do it this way? Are we going to pay for it this way?” Those deliberations and discussions and assessments would have occurred at the point of the deal.

L. Throness: Perhaps if the Auditor General is going to do a study on this in the future, that could be part of the methodology — computing the benefit that might result from a P3.

R. Jones: One of the things that Partnerships B.C. does is they put out a value-for-money report for every P3
[ Page 537 ]
that they undertake that tries to quantify those amounts.

We have looked at a couple of those. They do quantify it in the report. When we looked at the Sea to Sky one, we did come out and say that there was some benefit, but it was all in the qualitative aspects of more safety or whatever — very hard to measure.

B. Ralston (Chair): Some of the benefits are hard to quantify is, I think, the short answer.

A couple of years ago, when we were discussing some of these international standards that are changing, I was curious about what was driving the upheaval, basically, in standards across the globe. In a private conversation with — I think it was — the former Auditor General, I was told that it was the international corporations that were starting to demand a single accounting standard around the globe.

Is that the case? What is driving these new standards that suddenly seem to be causing all of this debate among governments and the private sector? If you could describe that a little bit, I’d appreciate it.

C. Fischer: I think there are a few big drivers that have pushed accounting into, really, a very different approach. The first one is the need for multinational corporations to be able to list on multiple exchanges around the world — so capital-market drivers.

Another is the maturity of financial analysis for those investors in capital markets. It’s much more efficient for a large-scale investment analyst to analyze day-to-day or quarterly changes in financial reporting for different corporations if they’re all on the same standards, so there are some large-scale capital-market drivers.

Another big factor has been that for many years there has been criticism of the relevance of accounting because it used the historical-cost model rather than moving towards fair market values. In the 1980s I think that failure was exploited by a lot of people who would buy companies, break them up, sell off the assets for a profit and add value that way.

In order to deal with the fair market value issue, accounting has moved away from a traditional revenue-and-expense model to an asset-and-liability model, which is far too detailed for most people to get into, but it does create a lot of changes — a lot of changes in the public sector, but even a bit more complication in the public sector governments simply because you’re dealing with non-exchange transactions as well as exchange transactions.

It’s hard enough to attribute a value to investments in public service delivery. It’s even harder to do that from an asset-and-liability basis than a revenue-and-expense. The outputs are harder to measure than the inputs to the assessment. That’s kind of a snapshot of how I think we’re being impacted by changes in accounting.

S. Sullivan (Deputy Chair): Just on that, I think the general public finds it more intuitive to work on a revenue-expense than an asset-liability. It’s much more intuitive for people. So moving to this other model has probably made it a little bit more obtuse for the general public, I would think. Certainly, that’s the way…. I tend to look right at: what’s the revenue-expense?

Possibly that drives a little bit of the effort by the Minister of Finance to focus on the bottom-line kind of thing. Just on that, also, the guide that you produced was quite helpful, but I noticed that the wording often, and sometimes even the categories, didn’t correspond to the actual financial statements in it. I’m not sure…. There were the five key financial statements and “The Statement of Financial Position” — which I would call a balance sheet; I guess it is normally — and then the statement of changes, which I would call an income statement.

Then there’s this “Remeasurement Gains and Losses”, which I didn’t actually see in the main statements here. Then one refers to changes in net debt and other changes in net liabilities, which I’m sure is a small thing to deal with.

For example, the — what do they call it? — remeasurements, changes and losses. I didn’t see that, actually, in this statement. Can you explain why that is?

C. Fischer: Remeasurement gains and losses is an international financial reporting requirement that would be required of Crowns. The Crowns have the remeasurement gains and losses statement in them. These, being produced on a PSAP basis, would be different, but they also come in.

S. Sullivan (Deputy Chair): Okay, so they’re in the Crowns, then. They’re not considered one of the…. In the guide it says that’s one of the five major statements that a government would produce.

Question about the taxpayer versus self-supported debt. I think that there was a discussions about Crowns being self-supported and government being taxpayer supported, but in this definition, in your statement, Crowns are considered part of the taxpayer debt, at least part of that. Can you explain the difference? Page 50: “Taxpayer-supported debt includes the debt…of those Crown corporations, agencies and SUCH sector entities who require an operating or debt servicing subsidy.”

S. Newton: Self-supported debt would be from an organization like a commercial Crown, like B.C. Hydro, where government is not providing a subsidy to the organization to run. Whereas a school board would be…did I get that flipped around? Self-supported debt is the
[ Page 538 ]
debt that the Crown is supporting themselves through revenues outside of government.

Taxpayer-supported would be any entity, like a school board or any other Crown, that is receiving, essentially, support from government through a government transfer over the course of the year in order to meet their operational requirement.

R. Jones: I was just going to point out that taxpayer-supported and self-supported debt is not a concept that is in public sector accounting standards. It’s something that government has set up. I mean, debt is debt.

S. Sullivan (Deputy Chair): Just one more question referring to the previous discussion we were having. I believe that in the financial statements, at least the statement of financial position, of the assets that the government has, almost half of them are these loans for purchases of assets. Then, I think, half of all our assets would fit under this category that is of dispute. That’s a pretty major piece of work, I guess.

Maybe it speaks to the importance of the difference of opinion? How much money would we be talking about all together then?

S. Newton: I think the difference in the net asset number…. You had calculated $3.8 billion difference, so the net asset liability number on page 41, two-thirds of the way down the page, would be to the good by $3.8 billion better than it’s listed here. That’d be $35 billion.

B. Ralston (Chair): I had myself on the list next. I wanted to talk about page 17, “Oil and Natural Gas Incentives.”

Obviously, there was a previous dispute between the comptroller general and the Auditor General which has been resolved. The incentives are netted out of royalties paid when they’re paid. But on page 18 it’s clear that producers continue to earn incentive credits which they have not yet expensed against revenue. The number is $1.25 billion.

What measure of certainty is there in the assumption or not that that $1.25 billion will be netted against future revenue from oil and gas?

S. Newton: What’s listed here is in relation to the work that the producers were doing in order to be able to get to the natural gas. They’re given an incentive whereby if they wouldn’t have actually gone to that particular area to drill — it was a non-producing well, or it’s a difficult-to-access area — there would have never been any exploration work done there, short of having a credit to be able to go do that.

As they’re doing the work, we get a sense of the credits that they could claim against revenue if the well produced. It’s still subject to the well producing. We do have credits applied on a regular basis, and the note does indicate that for the last year it was $587 million on the amounts.

S. Newton: Yes. As far as the likelihood of it being achieved, it does get written down periodically based on factors that occur, but I’m not too sure exactly the write-down rate. The $1.241 million may not all be ever claimed as a credit, but as far as the proportion, I’m not sure. I would say the majority would be.

R. Jones: I was just going to mention that in the past, when we looked at the deep-well credits, historically it was between, I think, 90 and 95 percent of them that were used on an ongoing basis every year. However, since the natural gas prices and whatnot have declined a bit, I think the users are tending to hold onto them longer and waiting to maybe put the wells into productive use.

We also have in there some road credits, which can be applied against roads. When the companies build the roads, they apply those credits. In our opinion, it’s probably fairly likely that they’ll get used at some point in time.

R. Jones: No, because the government has basically said: “You drill deep. That’s the credit if you start producing.”

B. Ralston (Chair): Has the Auditor General’s office done a review of the incentives themselves? There was a program, where some were drilling. Basically, through technological change and other ability at the drill site, that incentive has been phased out.

Specifically with deep-well credits and deep-well re-entry credits, obviously the technology is evolving very, very rapidly. Is there any assessment about the ongoing
[ Page 539 ]
real cost to the producer or the drill company of doing that work versus the amount of incentive credit that they get? What’s the ongoing evaluation of the program that takes place, or is there any?

S. Newton: I wouldn’t be party to that information. We would know what the credit was allowable at the time, but as far as the policy choice to grant a credit or evaluate the usefulness of a credit to meet a particular need, that would have been outside of the accountants…. So I’m not aware of what work is being done there.

B. Ralston (Chair): On the Auditor General’s side, then, in terms of performance audit, is there any evaluation of that program? I mean, given the numbers involved, it seems like some scrutiny might be in order from the perspective of the public treasury.

R. Jones: It is something that we have on our three-year plan as something to possibly look at because we’re also, as you know, watching what happens in the LNG area and what credits are going to be available there. It is something that, when we do the financial audit every year, we chat with the ministry about: what credits are still in place, what ones may be being phased out so that we have a good understanding of it when we’re looking at the revenues and expenses and liabilities.

B. Ralston (Chair): The evaluation of the program, then, although you may prospectively be doing something, really rests at the policy level of the individual ministry? Is that fair to say?

C. Bellringer: Definitely in terms of the policy piece, but there are lots of…. I think where we have a role to play is ensuring that the information that goes into the policy debate is available to you. So there are aspects of it, I think, I’m comfortable that we possibly could look at.

B. Ralston (Chair): Is there any modelling done by either the comptroller general or the Auditor General of the way in which the $1.25 billion might affect the budget in the next, say, five years or ten years?

S. Newton: That would be more Treasury Board staff, in developing the budget and some of the revenue assumptions. That would be where that information would be.

K. Corrigan: I have a few questions. The first one is going back to B.C. Hydro and the rate-regulated accounting. Is it possible, depending on what happens in the next couple of years, that B.C. Hydro would be put in the situation that it is going to have to end the deferral all in one year and then get hit with $4.7 billion of expenses? What would be the practical outcome of that?

C. Bellringer: Well, it’s somewhat speculative, but it’s highly unlikely. If a change was recommended, it would usually be proposed that it’s done retroactively. I don’t know if there is any discussion on whether it flows through the current year or whether it is adjusted to the accumulated numbers as opposed to running through current.

C. Bellringer: We don’t know where it’s going to go yet, so it’s hard to really know how they’re going to land on the accounting.

R. Jones: I just might add, as well, Member, that there is a regulation in place that has B.C. Hydro using the U.S. guidelines. I wouldn’t want to bet, but if I were betting, the U.S. is not going to change. They’re going to continue to use rate-regulated, and that’s what the regulation allows B.C. Hydro to do.

S. Newton: What, potentially, you may end up with is a situation that was occurring prior to the last almost about to change, where the reg was put in place because North America–wide, everybody’s on the same regulatory regime. B.C. not following the same regulatory regime would have had difficulty working within that sort of environment.

That’s where we started to see statements coming from the Canadian Securities Exchange commission that were allowing producers to keep following the U.S. standard — which was part of the Canadian standard prior to the change — and provided guidance across the board. That’s where we were drawing our decision to put the reg in place to provide some stability until this problem was figured out. It did provide stability, and thank goodness Hydro didn’t go to a whole new accounting regime and then have to come back because it’s allowed again. We’ll wait and see as we cross that ’16 line.

But theoretically, if the North American market…. Let’s say for some reason the U.S. does follow international standards and rate-regulated goes. Then we would look to the standard to see whether or not they’ve put in provisions in relation to retroactive with restatement, in which case it wouldn’t be a bottom-line hit in the year. It would really be up to the standard-setters on their transitional rules.

K. Corrigan: A follow-up to that. Who makes that decision, then? I know I’m asking a policy question. Would
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B.C. Hydro have the independence to make that decision? Or would it be the Ministry of Finance? Or would there be advice from you, or what?

S. Newton: What we would do is my office would look at the impacts, the effects, determine what’s happening in other jurisdictions, determine how we would need to move forward, provide a recommendation to Treasury Board. Then from there it would be a policy decision of government, having received the lay of the land as far as what’s going on, what the potential effects are long term and short term and what the recommendation would have been from my office.

K. Corrigan: Was that the process that was in place when the regulation was passed as well?

S. Newton: To pass the regulation, it was a recommendation for the reg. The reg went through Treasury Board. Then I don’t know what the next legislative step was to approve the reg, but it was a policy choice based on a recommendation.

S. Newton: It would have come from the comptroller general’s office at the time.

K. Corrigan: Okay. I have more questions, but if you want me to wait, I’ll do it if you have a long lineup.

B. Ralston (Chair): I don’t have a long lineup, but we’re getting probably…. We’re just at five to 12, so I think we’ve got time for one more, maybe — one and a follow-up.

G. Heyman: My question goes back to the oil and natural gas incentives and is to the Auditor General. It’s in a section of your report called “The Summary Financial Statements Can Tell an Interesting Story.” You point out that, as you say…. What are the exact words here?

G. Heyman: I’m on page 17. “Of interest, though, is how government records the royalty revenues and the incentive expenses” — going on to point out that it’s reported as a net amount rather than as a higher revenue with an offsetting expense for credits.

I’m wondering why you think this is of interest, other than the fact that there’s a choice of ways of presenting this — if you think that there are effects in terms of transparency of choosing one over the other, if you have a preference for one way of reporting over another, or if you simply took the opportunity to drill a little deeper into the statements and bring things to the surface. [Laughter.]

B. Ralston (Chair): There was a previous dispute between the comptroller general and the Auditor General about how to treat this area, but without rehearsing all of that, perhaps we can let them answer.

C. Bellringer: On the gross-to-net discussion, I’d say: “Almost all of the above.” On the choice of the words “of interest,” though, I would turn to my right, but I agree with it. The bottom line isn’t affected. Showing things gross is always more transparent, and knowing how to find your way around statements is complicated enough. So it would be an easier way to look at it.

R. Jones: I would just add that “interesting” maybe is taken in the wrong context here. What we were trying to do was just point out to the public and members where you could go in the financial statements to find information that maybe isn’t totally clear on the statement of operations. If you went to the statement of operations, you wouldn’t know that it was netted, but if you go to note 29 — which is a little further on, I think on page 79 — it does show you what the gross amount was.

As Carol mentioned, normally you would show them gross on the statement of operations.

G. Heyman: My follow-up question is in fact from page 79, where the different sources of the credits are broken down for this year and the previous year. It shows credits for roads of $6 million, and $12 million in 2013 — which, as we all know, is a pretty minuscule amount when we’re talking about roads.

I think it is probably fair to say that elsewhere in the budget is a significant — over the years, very significant — amount of money budgeted for roadbuilding by the province that appears, at least to me, to be of limited utility to anyone other than oil and gas companies, at least in the short term. Do you have an opinion about whether that should be more transparently recorded in the statements?

R. Jones: It’s a tough question to answer because in some cases these resource roads do get used to help people go to recreational sites, in the end. But the oil and gas industry isn’t the only one where there are credits allowed for roadbuilding. The forestry sector also has credits that are built into the stumpage system for companies that build roads. That goes against their stumpage. A number of those roads, at the end of their life, return to the province and are actually recorded on the books of the province.

The Sierra-Yoyo-Desan P3 that you see in here is an asset that is a resource oil and natural gas road that is on the province’s books as an asset. These, in general, I think — or some of these — are ones that just go to, yeah, an oil and gas site that may not ever be used again. But because there needs to be access provided — I’m not sure if it has to be provided by the province — for the companies to get to where the leases are, they provide a credit of some sort for them.

G. Heyman: But even with Sierra-Yoyo-Desan one could argue that the immediate benefit is not to the province, even though it may accrue to the province at some point in the future. Or perhaps more to the point: would the road ever have been built for any other use if the only use was some future accrual to the province for recreational use as opposed to the immediate requirement to access gas drilling sites?

My question remains: is there some more appropriate way to apportion that particular expenditure in terms of one that is part of the overall expenditure of government as opposed to an indirect credit to the oil and gas industry?

R. Jones: Thank you, Member. I think that is, I would say, a policy decision. It’s part of the structure for pricing oil and gas. It’s policy, as far as I can tell. It’s in the act. They allow road credits. If you look at it from an economical standpoint for the province, it does help generate revenue, because without those roads being put in place, the royalties from the natural gas and oil wouldn’t be coming to the province.

G. Heyman: I’m not disputing that. I’m not disputing the benefit; I’m raising the issue about the transparency of credits and indirect credits.

R. Jones: I guess that’s why we would like to see the credits separated out on the statement of operations. In other jurisdictions…. I think in Alberta, if I’m not mistaken, they actually in their financial statements net them as well. I’m not certain. But then they list what the credits are, similar to what the province does here in the note.

B. Ralston (Chair): We’re at 12 o’clock, so I’m going to suggest we recess. I don’t think the lunch has quite arrived, so we’ll probably have time for e-mail and phone calls before we get to eat. We’ll reconvene at one o’clock.

B. Ralston (Chair): We are continuing our discussion of the financial statements and the Auditor General’s opinion on the financial statements.

For those people who are here for the other report, I think we’ll probably start it, obviously, as soon as we finish this. Given the number of questions, I sense we’ll maybe be another half to three-quarters of an hour perhaps.

K. Corrigan: I wanted to talk a little bit about note 27 — “Contingencies and contractual obligations.” I note that for this year, the total for contingencies and contractual obligations is up to $102 billion. That’s note 27 on page 77 of Public Accounts. Almost $103 billion, over half of which are natural resources — and I guess that’s largely independent power projects. But there are significant amounts. For this year alone, it’s a total of $9 billion.

This concerns me. And I know that a former Auditor General, John Doyle…. I think he had mentioned once or twice that he was concerned about the public policy implications of the province being so tied up in long-term contracts — IPPs, various types of P3s and so on.

I’m just wondering if there is any intention by the Auditor General’s office to do any work on this aspect of the books to do with P3s and so on — the fact that through policies that incur long-term obligations, we are indeed perhaps hindering the ability of future governments to make public policy decisions because we’re so tied up in these contracts.

I mean, $9 billion is a pretty significant portion of the budget of the province. Just wondering if there are any thoughts on that or any comments on the use of these long-term contracts and the implications.

R. Jones: I mean, you know, contractual obligations — yes, it is a big number. One of the things I was going to mention to you as well, though, is the new standards that will be coming out in the next couple of years. We have a new standard on assets that is going to be coming out at the Public Sector Accounting Board.

Part of that is looking at contractual rights and forcing the province to also disclose contractual rights — for instance, if there are annual allowable cut contracts out there with forest companies, to disclose the revenues side as well. I mean, it’s not all one-sided. There are contractual rights that are out there, as well, that would help offset some of those contractual obligations.

Big number — you’re right. Using P3s, using long-term contracts, is something that’s always been in place,
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I think, in most governments. The RCMP contract is another one that’s a long-term one that’s got a lot of liabilities attached to it, but it is something that the province needs as well.

We certainly look at it each year and make sure that it’s disclosed appropriately. We’re also going to have a new liability next year called contaminated sites, which will be very, very large. It’s just trying to get in the financial statements information to inform taxpayers of what the financial state of the province is.

We’re also in the midst right now of doing a report on fiscal sustainability of the province that is taking a look at longer-term sustainability issues in the province that go beyond just one term of a government, looking at ten to 20 years out.

K. Corrigan: Can I follow up on that? I’m interested in that, because it sounds a little bit maybe wider scope but a little bit about what former Auditor General John Doyle was talking about. He did express concern about the magnitude of, I believe — that’s my interpretation — the contractual obligations.

I agree that there have always been long-term contractual obligations but nothing close to the level of contractual obligations…. I mean, in the time that I’ve been elected they’ve skyrocketed. I think they’ve certainly maybe quadrupled or tripled over the last five or six years. This is a number that has been going up regularly.

I have concerns about it, and it’s no secret here that I have concerns about the implication of P3s and whether we really are getting value for money. That’s why I go back to concern about the methodology.

I know that Partnerships B.C. does produce value-for-money reports, but frankly, I think many of those value-for-money reports are self-serving. Partnerships B.C., to me, is in conflict because it gets benefit from, relies upon, the work that it does at the same time as it is the organization that is evaluating whether or not a project should be done as a P3, and then it does the work as well. To me, it’s in conflict with three different roles.

That would be another one that I think would be interesting to take a look at, because I know other jurisdictions have required that those functions be separated. I think we have some pretty egregious examples of Partnership B.C.’s role in the evaluation.

Anyways, that’s just a comment. It’s not really a question. But I think it’s something that I like to raise. When I see these numbers going up and up and the impact that it will have on future legislatures, it concerns me. It sounds to me like that might be part of the consideration that’s going to be happening. Okay. That’s great.

B. Ralston (Chair): Just to follow a little bit on that, the parliamentary budget office in Ottawa also did a study of fiscal sustainability over, I think it was, a 25-year horizon. Will one of the things that will be included in that…?

I think that when you have contractual obligations that are basically very, very difficult to end, in the sense that they’re lawyered up and there are legal obligations, it’s very difficult. If the government encounters a rough patch, one of the ways to deal with that is to reduce expenses. But when you have expenses that are locked in legally, then you don’t have that flexibility.

Would that be a consideration in your report on fiscal sustainability? Or, if not, would you be willing to at least consider that as a suggestion?

C. Bellringer: We’re always willing to consider. I’d say my biggest fear at the moment is that the list of things we’re considering is a lot longer than the resources we have available to get to all of them.

C. Bellringer: I’m not so sure we could even absorb enough people to cover absolutely everything.

We also want to continue to improve the information that we’re disclosing in our report on public accounts. I mean, there are elements we can look at without getting into an expanded, full-blown performance audit. So we will look at both of those things.

B. Ralston (Chair): I had a couple of short snappers, I guess. Page 54: “Due from self-supported Crown corporations and agencies.” UBC Properties — due to return to the Crown $41 million. And then SFU Community Trust — $6 million.

I had understood that UBC was financially independent, although in the reporting entity. Can you describe what that $41 million is composed of? If it’s not possible to answer it here, could I get a detailed written answer on that?

C. Fischer: Both UBC Properties and SFU Community Trust are subsidiaries of the respective universities. They are self-supporting. They are shell organizations, the purpose of which is to enter into lease arrangements with external developers for land owned by the property. Doing that allows them to crystallize the gains from the long-term lease and return that back to the universities. The universities use those profits to support educational programs and development.

All of the universities in British Columbia have non-core, self-supported business enterprises that they operate — a variety of different business. The profits are returned to the university, and that’s just one of the sources of funding they have to carry on their programs.

B. Ralston (Chair): I understood it, though…. It says it’s due from self-supported…. So who is due to, then?
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C. Fischer: So UBC Properties is a fully owned subsidiary of UBC that’s mandated to carry on a business.

B. Ralston (Chair): And then, I take it, Vancouver Island Technology Park Trust is a similar arrangement?

B. Ralston (Chair): Then on page 57, “Other investments,” there’s a big decline in pooled investment portfolios and also equity investments. Equity investments down from $598 million the previous year to $370 million. The note doesn’t appear to accord with that, because it says, “Equity investments have a market value of $520 million,” yet the value in 2014 is $370 million.

Perhaps you could explain the reason for the decline in those two amounts and perhaps a little bit more of an explanation of the note.

C. Fischer: Sure. The reason for the decline is a decrease in two funds that the province used to hold: the children’s education fund and the housing endowment fund. Those programs were converted. For example, the children’s education fund was converted into an RESP program, so those moneys were transmitted. The moneys were paid, so they were no longer invested in other investments. Same thing for the housing endowment fund. It was another similar operation.

B. Ralston (Chair): So those are the two that I referred to as pooled or investment portfolios?

C. Fischer: Yes. The list here is a list of instruments that other funds or buckets of money could be invested in for short-term gains.

C. Fischer: Yeah. It’s a type or category of investments that the children’s education fund could be invested in.

B. Ralston (Chair): So is there a separate explanation in writing available of those decisions and their impact on this number?

C. Fischer: We don’t have any analysis on the decisions. We do variance analysis each quarter to kind of test the way the numbers are working. We could do a bit of research, but that’s about as authoritative as, really, it’s going to get.

B. Ralston (Chair): Well, I don’t want to ask for a bunch of unnecessary work, but it seems to me this is a very skimpy explanation — I think, understandably, a summary explanation. I’d just like a little bit more detail if I could get that.

B. Ralston (Chair): Finally, I wanted to know a little bit more about the warehouse borrowing program. This was the subject of an Auditor General report. I gather the ministry changed its practice when they had, I think, as high as $6 billion or $7 billion in the warehouse borrowing program. It’s declined drastically. On page 48 there’s a note. What’s the operating principle in the warehouse borrowing program, and what do you foresee as the intended use of that program in the future?

S. Newton: Currently the balance in the warehouse borrowing program is zero. The program is used to be able to take advantage of the ability to borrow, at a particular point in time, at a good rate, to foresee the need to be able to flow borrowed funds out to entities that need to use it — so Crowns if they’re going to be borrowing as well. There’s no intention to have funds sitting in the warehouse borrowing program for any appreciable period of time. The interest on the fund gets attributed to the ultimate user of the borrowed funds when they have to repay back to government.

B. Ralston (Chair): In the financial statements at page 41 they talk about financial assets, cash and cash equivalents, at $2.3 billion. None of that is part of the warehouse borrowing program? That’s just straight cash? I think previously it was reported as being a cash or a cash equivalent, if I remember correctly.

S. Newton: My history doesn’t go back that far on the warehouse borrowing program, but in the years that I’ve been involved with this office, there’s not been a balance carried on the financial statements.

C. Fischer: The cash would be the offset from the warehouse borrowing program. The warehouse borrowing program was conceived as a kind of debt-sourcing mechanism. It makes sense to be able to borrow money in advance, if you have good liquidity like the province, but only if rates are rising. You want to borrow at the cheapest rate. Now that rates are stable or declining, it makes
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no sense to borrow in advance of requirements. If you do it now, you’d have a negative carry, so it would wind up costing money.

The cash and cash equivalents would be the offset to warehouse borrowing. Warehouse borrowing would reflect the value of the debt instrument, the bond that you use to borrow the money, and cash would be the receipts. It could either stay in cash or cash equivalents for a short period of time or be invested in other vehicles, like equities or pooled investment portfolios, for a longer period of time.

On your last question you did ask about equity investments and the value in paragraph 3, where it says: “Equity investments have a market value of $520 million.” Then in the table it says $370 million. That just means that the purchase price was $370 million when those equity instruments were purchased, and the market value at March 31 is estimated at a different value, $520 million, because the value of the equity investments went up.

B. Ralston (Chair): Oh, I see. Well, presumably, there’s a different cost base for…. You wouldn’t have bought that all at once, I wouldn’t think.

G. Heyman: This is a question. It’s as much curiosity as anything else, but it flows from the public hearings conducted by the Finance Committee, where a number of post-secondary institutions came and talked about their need to make capital investment, either for new space or rehabilitation of deteriorating space, and talked about the impact of being part of the government reporting entity.

The advantages are obvious. But one of the impacts was that — if I understood some of the submissions correctly — in some cases they’d accrued surpluses, which they intended to be used for building maintenance, upgrades or construction and weren’t able to do so because to do so would affect the government’s bottom line on the financial statements in terms of surplus or deficit. Similarly, they couldn’t borrow without it adding to consolidated debt unless, of course, it was paid back within the same year it was borrowed.

I understand the mechanics of that, and to some extent it’s a policy question, but it seems that the inability of institutions to use funds they have to maintain their facilities when there’s a cost of not doing so in a timely manner is a bit of a perverse result.

I’m wondering if there are any mechanisms available that are consistent with generally accepted accounting principles that could answer the question they asked us about: how do we access the funds we need, which we have, to do the upgrades that are needed?

R. Jones: Thank you for the question. I think what it stems from is the fact that the surplus funds that are there could be accessed. However, in doing so it would also create an amortization amount that has to flow through the statement of expenditures without an offset, much like government transfers have currently, so that it would increase their expenses over time.

The school districts, unless they can get permission from the minister, aren’t allowed, if I’m not mistaken, to run a deficit at any point in time.

G. Heyman: For clarity, these were post-secondary institutions I’m referring to, but I imagine that this is the same.

R. Jones: Post-secondary is the same sort of thing, yeah. Because there’s no offset from a government transfer in this case, because it’s coming out of surplus, there would be an additional expenditure on their bottom line, which creates some concerns if there aren’t revenues to offset it or permission to do it.

B. Ralston (Chair): I think the government did promise, in the Speech from the Throne a couple of years ago, that this issue would be addressed and resolved, but I don’t think there’s been action taken on that. Is there any resolution in the offing? Certainly the post-secondary institutions regularly raise this with the Finance Committee.

R. Jones: I think that’s why, in one of our reports, where we were talking about working capital…. That’s why we sort of called it stranded cash, because it is stranded out there — to use it results in an expenditure of some sort that isn’t currently in the budgets.

G. Heyman: There may be no short-term answer to my question, and I think the Chair’s question is somewhat similar. There must need to be a solution to the question at some point, because there is not a lot of utility in public funds being stranded when there is a need for them, and not using them, arguably, results in increased costs or liability down the road.

I think my question was…. I understand from the government’s perspective the desire to continue to show a surplus. I was trying to get my head around, during the committee hearings, whether there was some way of presenting this in the statements that wouldn’t run contrary to the government’s goal but could help address the problem — whether it’s through notes, transfers, funds or any other mechanism.
[ Page 545 ]

R. Jones: It’s a policy issue, probably around balanced-budget legislation as well. What do you define as a “balanced budget?” Is there a possibility that on, say, the statement of operations, you have revenues, you have expenditures, and then you come to a total — and then below that have your amortization for something like capital assets, which doesn’t impact whatever you would call the balanced budget?

I mean, there are mechanisms that could be talked about and dealt with if there was a willingness to do it, probably. But it’s all in how you define that bottom line for balanced-budget purposes.

S. Newton: I think we approached this question last year when we went through the public accounts as well — I think in relation to school boards as well. Part of it relates to cash. The transfer of cash is separate from the accounting definitions of “revenue” and “expenses.”

If we are funding an organization based on what’s called the accrual basis of accounting, they’re being funded for, essentially, non-cash items like depreciation. That then creates cash in the bank on their books, but they already got hit for the expense, which was the depreciation.

Any time you want to spend money outside of building a capital asset, there’s an expense cost that’s part of the total bucket of what we’re planning to be able to spend for a given year. The cash is actually separate from the expense-revenue side. Government has taken a number of steps to deal with the stranded-cash issue as far as consolidating cash balances to be able to deal with borrowing, to reduce the cost of borrowing. The cash is held centrally, and that’s a program that’s even talked about in the Auditor General’s report, as well — to be able to deal with that.

Some of the other issues with universities, as far as wanting to borrow to be able to build — they’re still subject to that total debt for the entire organization. The only way to avoid that would be if they were separate from government. But separate from government, I think the costs are far greater than the benefits that would be obtained. It really is a situation where post-secondary institutions are competing with all the other demands for capital across a large organization and have particular needs and desires that have to be weighed into the broader totality of what we’re going to fund for capital construction.

B. Ralston (Chair): I think I’ve really got the last question here. On page 76, “Contingencies and contractual obligations,” there’s a reference to First Nations’ negotiating costs. Just so it’s clear, I’m not disputing the necessity nor the legitimacy of negotiating costs. But it does say that amounts of the loans from Canada to the First Nations was approximately $486 million. It goes on to say: “The amount of any provincial liability is not determinable at this time.”

What efforts have been made or could be made to determine what the provincial liability might be, and on what basis would liability be apportioned, if it were to be?

C. Fischer: This program is a bilateral program fronted by the federal government to provide capacity funding to First Nations to develop the skills and to access the resources to engage in treaty issues on an equal footing. The federal government provides the funding and governs the loan agreements with First Nations. The terms are that on attaining a final settlement of treaty, the amount of those loans will be taken out of the final settlement.

Only in the case of a default — First Nations walking away from the treaty table — is the federal government entitled to try to recoup that money. So far, we have not had a situation where a First Nation has been taken out of the treaty process or the federal government has tried to recoup any of the capacity funding. In that situation, the province could be requested to repay 50 percent of that funding.

There just isn’t any statistical basis to make an estimation of, in the future, how much of that money will go into default and what the province’s part of repayment would be. There’s no rational basis to do that.

B. Ralston (Chair): In the case of concluded treaties — because there have been a few — were these fees then recaptured as part of the settlement?

C. Fischer: Yes, they are recaptured at source. In treaty settlements, the federal government puts up the money; the province puts up the land. The federal government is really quite diligent about recapturing their investment.

M. Dalton: Can I just follow up on that question right there — just on, I believe it was, the $486 million from the federal government? Was that actually allocated and spent? Was it more programs, or is it being held?

C. Fischer: No. That’s $486 million on funding provided from the federal government to First Nations directly.

V. Huntington: Just on the question of recapturing the funding that had been loans from the federal government to the treaty negotiations. If they’re recapturing those loans, and yet the province is providing the land, is there any settlement between the province and the federal government in terms of the actual cost of those negotiations?

Is the recouping of that loaned money 100 percent, or is it part of the negotiations? Do you know? Is the prov-
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ince ending up paying for something that the fed is getting repaid back?

C. Fischer: Yes. The province doesn’t provide any of the funding for those $486 million in capacity funding for First Nations, and we don’t get any in return.

C. Fischer: There’s land. There’s money, which the federal government provides, and negotiated rights and entitlements.

So far, the treaty process has been fairly equal in terms of provincial and federal participation. As well, there’s relative equal standing on the administrative costs. These capacity funds don’t calculate into costs whatsoever.

K. Corrigan: I wanted to ask a question about Note 11, “Loans for purchase of assets recoverable from agencies,” on page 59, which is the vast majority of that $19 billion that has been loaned out over time as loans to B.C. Hydro for construction or to buy assets.

It’s referred to also on page 20 of the report. I notice that that number has gone up fairly significantly, both the total and also the portion that is B.C. Hydro, over the last year. I’m just wondering: is it because B.C. Hydro is, in fact, acquiring more assets, has an increase in its assets? Or is the term of the loan longer, so the numbers are going up?

Do you have any comment at all on the fact that this number seems to be rising, certainly year over year? I don’t know what it was two or three years ago. Is it of any concern whatsoever, or is it just simply part of the business of B.C. Hydro in gaining assets?

R. Jones: What I do know is that B.C. Hydro has a ten-year capital plan in place. I would assume a fairly large amount of the increase this past year was for the northwest transmission line. It was one of the assets that there was a fair amount on.

Just in general, their capital program in a year is probably close to a billion dollars. And it will continue to rise, depending on what happens with Site C, of course. It is a program that B.C. Hydro has in place. There’s a number of capital additions they have to make every single year to just maintain or to improve the current facilities that are out there. It’s not surprising to see it go up.

K. Corrigan: A follow up on that. This is to do with an ambitious program of construction, not necessarily a reflection of the debt being spread over a fair amount of time and not being recovered. You’ve no concerns about the length of time that the bonds are being repaid and so on? I’m just trying to sense here: are they getting further in debt because they’re getting further in debt, or is it because they’re actually getting assets for it?

R. Jones: I think I can say it is because they’re purchasing more assets. Their capital program is expanding. And all of the debt that they get, I’m pretty sure, is funded through the province.

C. Bellringer: I will add, that is a high enough risk and significant area that it’s definitely on our potential audit list for value for money — or something more than just what we’re doing, overseeing the inclusion in the public accounts.

B. Ralston (Chair): B.C. Hydro is separately rated by the bond rating agencies, so the rating is material for the province’s own rating as well, I think.

I don’t see any further questions. So thank you very much. I think that was a good, thorough discussion. Maybe we’ll just take a brief break, and we can set up for the next report.

B. Ralston (Chair): We’re now going to turn to consideration of a report entitled Receiving Value for Money from Procured Professional and Advisory Services, May 2014.

I’m going to turn it over to the Auditor General to open our discussion, and we’ll proceed from there.

Auditor General Report:
Receiving Value for Money
from Procured Professional
and Advisory Services

C. Bellringer: Thank you, Mr. Chair. This was a report that was released when Russ Jones was the Auditor General. So I’ve asked him to start with the opening comments.

R. Jones: Thank you very much, Carol. This is an audit of procurement of professional service contracts. The
[ Page 547 ]
government of British Columbia buys more than $560 million worth of professional and advisory services annually through contracts with private sector businesses.

These services are such things as technical studies that are done, strategic advice and project supervision, and are critical to helping government achieve its objectives for public programs.

The scope of our audit in this case was across government. It wasn’t a specific contract, such as Maximus or anything like that. This is more professional service contracts, and it was across four ministries that we took a look at them.

Ensuring that procurement provides the right services at the right price and time requires government to manage both the cost and quality of services purchased and then to assess whether or not they achieved the expected outcomes from those contracts. Fair, competitive procurement of these services is in everyone’s best interest. The public expects government to get value for taxpayer dollars spent. Vendors expect to have fair access to opportunities, and ministries expect to get what they are paying for and get it on time.

In this audit the office examined a sample of contracts for professional and advisory services from four different ministries to determine whether the procurement of these services was followed in a competitive, fair and cost-effective process and resulted in the right services delivered at the right price and at the right time.

As in any audit, we have some recommendations at the end that will help government in achieving the best possible value for money spent and hopefully will help the other ministries that we didn’t take a look at to take a look at their practices and implement those recommendations that are pertinent to their ministry.

To explain further, with me today from the office is Peter Nagati. He was the director who took the lead on this work. I’ll turn it over to Peter to take you through the report.

As Russ mentioned, the Office of the Auditor General has looked at the practice of contracting for professional and advisory services in the government of B.C., and I am pleased to present to you our final report highlighting our findings and conclusions regarding the value for money that government receives from contracts for services.

Very briefly, about our office. As the non-partisan independent auditor of the Legislative Assembly, the Auditor General audits the government reporting entity. As you know, our office serves the people of B.C. and their elected representatives by conducting independent audits and advising on how well government is managing its responsibilities and resources.

Under the Auditor General Act the Auditor General conducts and reports on both financial audits and performance, or value-for-money, audits. The previous discussion was a financial audit, of course, and now we’re talking about a performance audit, a value-for-money audit.

We chose this topic for audit because of the importance of contracting of goods and services in helping government to achieve its objectives and also because of the amounts of money involved. Over $6 billion worth of goods and services are bought by the provincial government each year through a process known as procurement. Of this $6 billion, more than $560 million is spent on professional and advisory services such as strategic advice, engineering design, technical studies, project supervision, legal advice and so forth.

Government buys these services because it does not always have enough employees with the necessary skill set in-house. This is especially true when the need for services is short term, and procuring services makes sense when the anticipated benefits of buying the services outweigh the costs of buying them.

The purpose of this audit was to determine whether government is receiving value for money from the procurement of professional and advisory services. We did this by assessing a sample of procurement files to determine whether the procurement processes that were followed were competitive, fair and cost-effective. We also examined whether decisions to contract for professional services resulted in government receiving the right services at the right price and time.

For the first objective we look at procurement process. With the second objective we look at outcomes, to the extent that we were able to.

We examined 40 contract files — ten each from the Ministries of Advanced Education; Energy and Mines; Technology, Innovation and Citizens’ Services; and Transportation and Infrastructure.

We developed our audit expectations for this sample in collaboration with the ministries, procurement officials and officials in the office of the comptroller general. We also reviewed relevant legislation and policy.

We concluded that in the sample of contract files that we looked at, the procurement of professional and advisory services was mostly competitive, fair and cost-effective.

Most of the procurement files were consistent with our expectations, but we did find some cases where the processes were not competitive enough, given the value of the contract. For example, we found several cases where the contracts were directly awarded without an adequate rationale for doing so or evidence to show that the specific conditions for direct awarding applied.

In some other situations, the need to procure services was not always clear. We didn’t always see a cost-benefit analysis or a consideration of alternatives to procurement.
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We also concluded that in the majority of cases, the ministries received the services as defined in the contracts on time and at the negotiated price. By “the majority of cases,” we mean that the requirements of the contract were met in 28 out of 32 contracts, 32 contracts being the contracts that were completed at the time of the audit.

In four contracts, we did find that the ministries could not demonstrate that they had received the services as defined in the contract on time or at the negotiated price.

We also found that the ministries did not consistently complete vendor performance evaluations after a contract or use those evaluations to inform future procurement decisions. More importantly, we found that there was a lack of consistency in how the ministries identified what they were trying to achieve with the contract at the outset and whether they achieved those outcomes at the end.

As a result, in some instances the ministries put themselves at risk of not receiving value for money from their decisions to contract for services. Therefore, we also concluded that the ministries could do more to ensure that they receive value for money from awarded contracts.

That concludes our overview. Oh, pardon me. It does not. We have recommendations. Please bear with me. The most important part.

We did come up with five recommendations that we directed to the ministries and one that we directed to the office of the comptroller general.

Recommendation No. 1 is directed to three of the four ministries, and it’s to assess whether procuring services is necessary.

Recommendation No. 2 is directed to all four ministries we audited, and the recommendation is to compete every opportunity to the extent appropriate.

Recommendation No. 3, also directed to all four ministries: complete and document evaluations of vendor performance to assist in future procurement decisions.

Recommendation No. 4, which is directed to the office of the comptroller general: develop and implement a fair and transparent process for considering past vendor performance when making new procurement decisions.

Recommendation No. 5, directed to all four ministries: assess vendor performance against all contract requirements as the work progresses.

And finally, recommendation No. 6: achieve the intended purpose for each contract by identifying outcomes sought and evaluating whether those outcomes were realized.

S. Newton: While we’re getting set up, I’ll do some quick introductions because there are a lot of people here.

Of course, you know me. Dave Pilling, although he’s got a job currently in Aboriginal Relations and Reconciliation, was, up till two months ago, before he took off, government’s chief procurement officer working for my office. So I felt it was important, given we’ll have procurement questions, that he be here. OCG actually sets core policy for procurement. So we’ll set the policy framework that the ministries operate under.

Then in case there were specific questions related to what’s occurring in ministries, we have representation from the ministries as well. As we get a question that might pertain to a specific ministry, we can bring them up.

With me are Barbara Burrage, manager of procurement services, financial services branch, Ministry of Forests, Lands and Natural Resource Operations; Bruce Smith, senior financial officer, Advanced Ed and their procurement person as well — Donna Porter wanted to come here, but she had something else that came up at the last minute, so she made sure I had the best possible person here, and that’s Bruce — Vicki Willow, senior manager, corporate procurement and risk management, claims and litigation, highways department, Ministry of Transportation and Infrastructure; Gail Silvestrini, acting chief financial officer, financial management services branch, Ministry of Transportation and Infrastructure; and Teri Lavine, chief financial officer and executive director, Ministry of Technology, Innovation and Citizens’ Services.

Second slide. I think it’s important to understand a lot of what’s going on in the procurement space right now, and what had been going on prior to the audit procurement is very important. A lot of time and attention is being paid to it because the easier you make it for people to undertake a procurement, both from a particular vendor perspective and a ministry staff perspective, the more likely they are to follow the rules that they need to be able to follow. So a lot of work has been done and is in the process of being done. I just want to run through some of that.

My office is currently updating chapter 6 of the core policy manual. I encourage you all to go on line and read it. It’s all the procurement policy for government. Clarifying and updating some information right now, and then we’re looking at a second phase to improve the requirements by getting through a heavy stakeholder consultation process to improve core policy.

The vendor complaint review process has been up and running for a while and is another vehicle for when vendors have concerns about the competition. There has been some ongoing and recently more intense vendor outreach discussion, which has resulted in a number of the things I’ll talk about next. There’s an ongoing procurement council with representation from all the ministries to talk about procurement issues on an ongoing basis.
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We’ve recently added resources at the Public Service Agency to increase the amount of focus we put on procurement training. From my perspective, it’s probably more important to focus a little more on procurement and a little less on financial. I was willing to make a play for pushing resources for procurement because I think it’s one area that’s complex enough that you want to make sure people have enough training.

Some recent initiatives that you may be aware of. The Doing Business with Government project resulted in 12 recommendations that have been made to government to raise awareness about procurement — and more recently a short-form request for proposal for in-scope opportunities less than $250,000. Making something shorter and easier would result in people more likely able to access government but also be able to get it done correctly.

There’s currently a procurement transformation initiative which has a variety of ADMs looking at procurement issues across government to see how we can more efficiently and effectively undertake procurement. And as you are aware, government is undertaking a number of Lean processes. Procurement in ministries and contracting in ministries is an ongoing Lean project in several ministries.

Slide 3. Always happy to have somebody else take a look at procurement and look at any area in government to determine whether or not we’re doing things well or poorly. Really appreciate the fact that the Auditor General came through.

Actually, what I really appreciate is the number of discussions with the Auditor’s staff and my office around what would be good criteria to use to get a really good picture of the quality of procurement for professional services within government. That was very much a joint development of what those criteria should be. I’m really pleased with the approach that way on the audit. Both myself and the ministries welcomed the recommendations that were provided.

Of the recommendations that relate, all but, I think, No. 4 relate to actually having staff on the ground following existing procurement policy. So nothing new, no change. It’s just that there were examples where people weren’t doing what they probably should have done. In those cases, those recommendations are accepted.

Ministries have done a number of things in order to address the recommendation’s improved guidance and training. Within ministries there are key individuals who provide information to their ministries as far as how in their ministry they’re going to undertake procurement: what are the key areas of risk? What do you need to focus on?

Ministries themselves — because we’ve got broader core policy procurement requirements — have more specific documentation within their ministries to provide to staff on how to undertake procurement. Those manuals have been updated.

There’s always a need to remind people of the importance of documentation for any decision or any aspect of a procurement that they’ve undertaken. In the absence of documentation, regardless of what your best intent was and what you thought you did, it’s very difficult for the Auditor to come in afterwards and tell that you actually did it or not.

As well as the last piece, and I have referred to it before, there have been a number of Lean initiatives in relation to contract management and how we actually go through assessing and letting a contract, which have helped to streamline, in some cases, the number of steps and touchpoints. When you reduce the number of handoffs, you increase the likelihood that the accountability is clarified in that one person who didn’t necessarily have anybody else to hand it off to. They’re more likely to take the time to make sure it’s done correctly.

Slide 4. Focus on the word “intends.” We’ve done some work on vendor reference checks, originally on the vendor reference check policy for contracts over $10 million where there’s a specific requirement for the evaluation committee to actually undertake reference checks. Any current contract that’s over $1 million has to have a reference check done in anticipation that they may be doing larger contracts and we would want to look at the reference check.

Going below that threshold is a little bit more difficult. There’s a little bit more risk involved in being able to assess a contractor and their performance in a way that’s meaningful to the individual who did the work but not necessarily detrimental to a broader conglomerate organization that might have offices all across the province or the country. If one individual did one piece of contract work with the ministry, we want to be able to talk about how well or poorly that was done, but that’s that individual. They may be part of a larger organization. Is the larger organization penalized for the work that that one individual did?

It’s a little bit more complex to deal with vendor reference checks that way. A number of jurisdictions are grappling with how to put that in place. As we move forward with the broader community, that is something that we are committed to working at increasing. I do think it’s important if a procurement or a contract in one area was done poorly, we want to rely more on just word of mouth to be able to be clear where we need to improve or where that individual might need to improve.

As part of our commitment to follow up on the recommendations, I think it was last week I went to the ADMs of corporate services to present both the report and the findings, broadly, to ensure that each ministry was well aware of the issues that Auditor General found. We said that although the issues were specific to a ministry, don’t assume that it’s not a problem in your ministry. We talked through what you probably need to do within your ministry as part of a quick refresher or a reminder so that some of the
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issues that Auditor General has found don’t recur.

The procurement council, the other group that we talked about earlier, also had a similar presentation on the Auditor General’s findings and what expectations there are from my office in relation to following policy. As well, the government chief financial officers will get the presentation at our next meeting, which I think is in a couple of weeks, before Christmas.

Those are the groups that are best placed to disseminate any sort of need for change in procurement or any sort of policy change. We also will engage with them on any of the work that we do on the vendor reference check to determine how well or poorly that can help the ministry in being able to get to a better procurement process.

I’ve got Dave with me if there are really hard questions, kind of like Carl answers all the hard questions on the financial side. Then there are people from the ministry to answer questions as well, should they be specific to a ministry.

K. Corrigan: I was interested, I guess to start…. To the Auditor General: how was this sample chosen? Was it a random sample?

P. Nagati: No, it was not a random sample. We chose the sample to make sure that we had a broad selection of different solicitation strategies — for example, direct awards all the way through to a very competitive request-for-proposal process. We also selected the samples based on risk. For example, if we had a contract that was very close to a threshold where the threshold might require a higher level of competition, we took a close look at those contracts.

K. Corrigan: Interesting. Thank you. I wondered about that. The fact that 19 of the 40 contracts ended up being direct-award contracts — is that representative? That concerned me.

I know that many of them were below that $25,000 threshold. But particularly, it’s noted that two particular contracts — two out of 40 is significant; it’s 5 percent — that were directly awarded had started out at less than $25,000. Then somehow — without adequate documentation, certainly in one case — it suddenly jumped to $50,000 and another to $123,000.

I’m just wondering if there’s any response on that concern about the number of direct-award contracts there were. Is this a trend in government that we should be concerned about, particularly given the promise that we’re going to have a very open procurement process?

P. Nagati: We didn’t examine trends. We focused on the most recent year of information available to us, which was fiscal 2012-13. With regard to the extent or the amount of direct awards, we did find that in seven out of 40 contracts that we examined, a more competitive process was warranted.

K. Corrigan: Just one more follow-up on that. But almost half of them were direct-award contracts. How does that score? Seven out of the 40…. Of the 19, I guess what you’re saying is that about over a third of those should have been…. Well, they may not have all been the direct-award contracts. It just seems to me that it’s a high representation of direct-award contracts. That, to me, points out a concern which may or may not have been reflected in the recommendations and the comments.

P. Nagati: Policy does allow for direct awarding. We didn’t challenge the policy. We did not audit the policy, but we did examine whether procurement was sufficiently competitive, fair and cost-effective.

How did the ministries that we examined operate within that policy framework? Once again, we found some examples where a more competitive process was warranted.

S. Newton: A large number of these contracts in the sample selected were for a very low dollar value in relation to other contracts.

One of the things, one of the principles, in the procurement rules is the cost-effective process that you undertake in order to do a procurement. If I’m going to do a procurement for $2,000, I’m not going to put it on B.C. Bid and select bids. It’s going to cost the vendor probably ten to 100 times more than what we’d pay. Also, on the part of the ministry, they would take a shorter process and get through their decision-making faster, which may lead to more direct awards.

Because of the dollar value, I think you’re seeing more direct awards. It doesn’t excuse a ministry from just having at least jotted a note down on the explanation as to why they were choosing that specific direct award. I’m concerned about the low dollar value, because I think it skews the results. If the dollar values were spread over a medium-sized, larger or broader range, I think we would get a different view.

L. Popham: The small business accord set a policy that small business procurement contracts would be increased by 20 percent. Is that lens being used when looking at this at all? Is that being checked at all?

L. Popham: So there would be no record of that information for you to peruse, at least? Where is that information being kept?
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P. Nagati: If I’m understanding correctly, I think the initiative you’re speaking to is a pending initiative which wasn’t in place at the time of the….

S. Newton: I believe over the last period of time…. It’s CSCD. They were establishing the baseline. I believe the baseline is established; I don’t know what the number is. From there, they need to start measuring what the change would be over time.

V. Huntington: Just to follow up on the issue of small business. To small business, the low-value contract can be very important. Thus, competitiveness and fairness in the procurement policy are also extremely important.

S. Newton: I still believe that there is…. I wouldn’t say cost-effectiveness trumps competitiveness. It just talks about the nature of the work that you would do. In some cases you are getting three quotes. In other cases you’re going to markets with an RFP. In other cases you’re going into something more broadly, where you’re getting information from the vendor community before defining your contract requirements, and then a more broad-scale consultation. Depending on the dollar value, it will escalate.

There are requirements. If it’s above $50,000 and it’s going to be direct-awarded, there’s the requirement for the notice of intent to direct-award to go out more broadly so people know that you’re intending to direct-award. The ministry might not have a clear indication that there is only one vendor, so they need to do that in order to understand that there potentially wouldn’t be any other people who could contract.

Below $25,000, it’s getting three quotes. The expectation is that that gets documented.

I think we’ve got some document problems in relation to some of these direct-awards without any sort of reasoning behind it.

V. Huntington: I also think that you’ve got…. I think they’re more than perception. You’ve got a sense out in the small business community that it’s almost impossible to break into the procurement process.

If I could just follow up on that one bit. Do you have anything to do with health procurement, or is that strictly at the provincial level and the national level? Do you involve yourself in the rules regarding health procurement?

S. Newton: We set the procurement rules for the CRF, consolidated revenue fund — so ministries. Ministries that are procuring are required to follow Core Policy chapter 6 rules.

V. Huntington: Okay. Does chapter 6…? I’m going to go and read this. Does it have any rules regarding bundling of products?

S. Newton: Chapter 6 would look at principles around things like demand aggregation, cost-effectiveness for government services. There wouldn’t be a direction to say “bundle or not bundle.” But those are things that need to be considered in going to the procurement. The procurement is done…. Best value for government is the focus. There are a variety of specific requirements.

Now, value can be termed as the best product at the cheapest price, but government also has other values that they were trying to drive for. If you use the example of the aboriginal procurement guidelines, part of it was looking at culturally appropriate services, which was one of the evaluation criteria in the evaluation of a procurement. There is the ability to be a bit more broad, but it is focused on value for money for government — value for the taxpayer dollar.

V. Huntington: I’ll just make the comment that what I’m finding is that the value for money, especially the bundling issue within the health sector, is substantially cutting out smaller businesses that specialize. If — and maybe say this to the members opposite too — the issue is supporting small business in the province, you’re cutting a lot of the expertise out of the procurement process by permitting some of these opportunities to be impossible to enter into.

Even though they’re told, “Oh well. Wait until next year. The system’s transparent. You can get into it. You can do this,” it’s impossible.

S. Newton: That was the intent of the Doing Business with Government project that resulted with the report. I know there’s some work being done.

S. Newton: Mind you, I think in relation to that, that’s only been around for about a year.

S. Gibson: I think, with regard to the thesis of price versus value, or the benefit, that’s one of the hardest things. I have been on both sides of the table. I’ve pur-
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chased many things working for a company, but I also owned my own manufacturing company. We had to go out and try and get the business. Further to this point, it’s sometimes a challenge for a small business to go out, so I know that’s a part of the challenge you face.

One of the things that I would like you to speak to is…. You mentioned the RFP model. A lot of times, everybody will meet the rules — they’ll come in, they’ve got the right price, the right service package — but there’s no innovation attached to it. It’s simply check off the box, and you get the business. One of the things that, I feel, for government — and for all sectors, frankly — is the chance to innovate.

We’re buying $560 million worth of services and stuff every year. As one MLA here, one thing I would like to encourage — and I don’t know how you do that; I think it’s complicated, especially in government, where there are so many levels of accountability — is how you do innovate.

Somebody comes in with a great idea. It’s an adjunct to the initial proposal, looking for, say, tenders — the traditional tender. Somebody comes in, and they say: “You know what? We’ve got this great idea to help government save money or do something really cool. Can we include that?” “Well, no. It’s not on our checklist. Just give us the regular boring proposal.” They get the job, but there’s no innovation. There’s no excitement. There’s no energy attached to it that can benefit government.

S. Newton: There are mechanisms by which ministries, if they’re planning to procure, to go out to market, to get information from the market on how something would be approached. It’s not creating a contracting relationship in that you’re not putting out a request for proposal, but you’re getting information from the vendor community, expressions of interest and ideas, so then you’re able to then go out and do your procurement.

That’s one step that ministries can take to find out what the lay of the land is out there: “Here’s my problem. What can industry or various players be able to provide to help solve that?” Then I can go back and develop a request for proposal that more adequately addresses my needs.

I would expect that, given that you want to do as much as you can with the few dollars you have, if it’s worth the time and money to go to market to find out what is innovative, you would be driven to want to try something that is more innovative and, potentially, more cost-effective.

S. Gibson: A supplementary, if I may. There are a lot of new businesses forming every day. A couple of guys get together in their garage, and they develop a little business. They don’t have a lot of expertise. They don’t understand a lot of procurement procedures. These are the heartbeat of our province. These are our next generation of leaders. They’re adding tremendously to the economy. How do we welcome them?

This seems to be — and it’s not a criticism — kind of adding to the wall because we want to be accountable to taxpayers. Fair enough. That’s why we’re all here in this room. I get that completely — 100 percent subscribe to that. The little “but” caveat is: what about a couple of ladies who’ve got some kind of business? They make uniforms, or something, and they want to sell us some uniforms. So they approach us, and they think: “Oh man, this thing looks just too complicated. We’re going to get beat up by the big guys.”

The little business flounders, and they could do some tremendous work for government. How are we encouraging them? How are we making this process more welcoming for those kinds of folks who would love to do work for the government but they don’t have a lot of expertise?

D. Pilling: I think I can answer, at least partially, your question. I think it’s a good question. It raises concerns for everybody around: how does government invite, accept, consider those innovative ideas, particularly from small business, which represents such a big part of this economy?

I know that the Small Business report has at least one recommendation devoted to: “Hey, let’s find a way, a process, even a policy to create a forum to invite those innovative ideas, to consider them and then potentially fire them out in the form of a procurement.” We do have policies that require fair and open.

To use your example, if some ladies come up with a great idea and they want to market it to government, it may be a great idea, but it may not be an original idea. We can take that and fit that into our needs and say: “Yes, that’s something we need.” We still need to go out, under our current policies, and procure that fairly openly and transparently. So if there is a humongous bank, a humongous company out there that can compete with those two or three ladies, there’s nothing in our policies that prevents that.

Just looping back to your original question around what we have in place. I’ve heard ideas about these reverse trade shows where government puts on sort of a forum annually or periodically to describe, define, what our needs are and then invites the public and industry to come with their innovative ideas. Then how we translate those ideas into procurement process, I guess, needs to be sorted within the context of our policies and principles.

S. Gibson: One other quick question, if I may, is: what about business relationships? When I had my little manufacturing company…. It was just a small company. We only had 13 employees, but I was the kind of guy to go
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out and get the business. I was looking for relationships.

When we got a good relationship going, people trusted us, and we did a lot of work for various companies. Sometimes I guess we weren’t always the cheapest, but the relationship was there. They valued us, we delivered on time, and they expected us to do good work for them. We never took advantage of that.

How does this model…? I looked through the documentation; I don’t see that really being nurtured. Say a ministry really enjoys a good relationship with a particular consultant. They’ve got a rapport, good work for the government. There’s a chemistry there. Everybody gets along well, which makes it more efficient and more productive. How do we nurture that so we’re encouraging relationships — people to build into government to help us do a better job? Is there some way that we can acknowledge that?

S. Newton: I think part of what you get from a reference check would be, I guess, that objective sense of whether or not that individual did good work. We need to be really careful with vendor relationships in government from a conflict-of-interest perspective. That can tend to cause a problem.

Yes, there are vendors who are recognized as doing good work. It doesn’t necessarily mean they’ll always do good work, and it doesn’t necessarily mean that there isn’t anybody else who could do something better. By going to a competitive process, you are allowing that vendor who has done good work to demonstrate that they do good work, and you’re also allowing for the potential for another vendor who can do equally as good work to compete. You would still end up getting the best value out of that — however you’re defining value — for the best price.

I don’t think that deters the individual who is doing a good job and working well with their client, being government, from competing and being successful. Chances are they may end up being successful because they can better meet the need, because they probably have a bit more experience.

S. Robinson: I guess I want to preface my question with a comment and appreciation for the Auditor General’s office for making the distinction between outputs and outcomes and recognizing that they’re not necessarily the same thing. Outputs talk about how busy we’ve been, and outcomes talk about how effective we’ve been.

When I was in local government, we had a situation where staff reported out, with great pride, about all the sidewalks they’d built in order to promote walking in the community. But they weren’t measuring walking. They were just measuring how much money we’d spent on building sidewalks, and there was absolutely no connection. It’s always sort of stayed with me about that example.

I guess I also just want to express some concern. I’ve come from the social service sector. That is provincially funded. The demands on reporting outcomes rather than outputs have been going on for over ten years. I’m a little disappointed that direct service ministries haven’t been doing that as a matter of course with these contracts.

In reading the report, what became clear and what was identified as a way to fix it was that these were training issues and that more staff training needed to happen in terms of understanding the difference between outputs and outcomes. It’s how I understand it.

The question I have is: how will you measure the effectiveness of the training — that it’s been effective? You can do all the training that you want, which is an output, but we want better outcomes.

S. Newton: We would look at the compliance rates on whether or not ministries are meeting all of the contracting requirements and whether or not those rates are changing. But it may be for a variety of reasons. It may be better training. It may be better awareness generated from the results of this report and a lot of communication going out.

We are changing the nature of the tools that we use in order to procure so it makes it easier for people to do the right thing. As we automate more, it limits my choice as an individual undertaking a procurement. Something might not go through if I don’t put in what I was supposed to put in. We’ll get a sense of whether all of the things, in total, are working — not necessarily, specifically: is training outperforming maybe a systems change?

Following on that thought, how do you see the sort of cyclical nature of continuous improvement of that? You’re doing a whole bunch of these things. I notice there was one chart that was linear — this one, exhibit 1, “Phases of the procurement process.” There are six phases. It’s linear, but there’s no feedback into any other part. Do you see that still the same way? Or do you see that — “Corporate reporting: collecting and analyzing data on procurement and generating reports” — somehow feeding into other sections?

S. Newton: I think this is related to the procurement cycle, a procurement relationship that we might have with a direct vendor. We would plan our procurement right through till: is the vendor giving me what I want? Some of that feedback should help for the next procurement we go out. So we’ve got a vendor performance reference check. We might also have better information on whether or not we put better deliverables into the contract itself.

As far as how overall procurement is doing in government, that’s not what this was talking about. I think we
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monitor procurement through the procurement council, through some of the testing that we do to tell whether or not procurement is rising, falling or staying stable. It’s improving a little bit, but it still could improve more.

Right now you looked at these four ministries. Is there expectation that in a year, should the Auditor General pick three or four different ministries, this would have a substantial spillover effect? What lesson is learned here?

S. Newton: I would hope so. Yes. I think what we’ve got is a distributed system. I’m providing information to senior people within ministries. There actually is a more concerted effort on the procurement side, on the training side, more so than we’ve had in the past. Even outside of communicating the results of this report, the focus that we’re putting back on procurement training should help as well.

Ten years ago the office of the chief procurement officer was created. There was procurement certification within government. There was a variety of courses. That had a bit of an upswing and really helped improve procurement. There’s been a languishing of procurement training for a period of time, and we’re just starting, in this past few months, getting resources in place to start working on improving the training.

I would expect, as a result of those things, that if we did this in two years, it would be better.

G. Heyman: Part of ensuring public confidence in procurement, in addition to an open and transparent procurement process, is ensuring that there’s evaluation and demonstration of value for money.

With respect to the recommendation that evaluations be completed and documented on vendor performance, the first thing that actually jumped to mind here was a previous Auditor General report that we discussed about a year ago. Mr. Jones referenced Maximus. In that case, a very substantial contract was renewed after a ten-year period where, in fact, some of the key, major deliverables of the original contract that had formed the rationale for the entire contract being let had not even been met — period. It wasn’t a matter of performance. They just hadn’t been done.

When I look at exhibit 7 on page 22, which shows that 78 percent — almost four out of five — vendor evaluations were not completed where required, I’m wondering if there is a private sector benchmark that would be considered applicable or if government itself has a benchmark in mind. I mean, I see the ministry responses to the recommendation, but they don’t seem overly enthusiastic to me or overly tuned in to the public interest in terms of recognizing the significance of the criticism that’s been made here.

S. Newton: My expectation on compliance with procurement requirements would be that 80 percent of the time it would be met. There are reasons why people might not do certain things, but at a minimum, that’s the expectation that we’re…. When we test, looking for compliance with policy, not just about procurement but more broadly in financial management, our expectation is that at least on the documentary side — so we have the bits and pieces of paper and the demonstration of the requirements met — the threshold is 80 percent. We need to see that.

On the dollar-value error that might cause an issue, I think it’s a 98 percent target, so a 2 percent error on the dollars. So there is a benchmark that we’re using that this isn’t meeting, which is requiring the training and communication.

G. Heyman: Is this a matter of policies and guidelines being ignored, misunderstood or not met? Or is this a case that, on something as fundamental as a detailed procurement policy and evaluation policy, there were simply gaps?

S. Newton: I think it’s them not being met. I don’t think there are gaps. I don’t think the Auditor General’s office noted gaps. I think the policy is that they’re requiring the things that the Auditor wanted to be in place to be there.

G. Heyman: Then my question to the folks from the Auditor General’s office: do you have opinions or observations or narrative from your discussions with people in the ministry about how these gaps came to be?

P. Nagati: The short answer is no. The longer answer is that there are always time considerations, pressures to get things done that come into play. But I think for the most part my recollection is that people generally have a good understanding of their contract, what’s happening. As a consequence, they don’t always feel the need to document what they believe to be true. As the comptroller general mentioned, it makes it difficult for us as auditors to come in after the fact and say: “Ah, okay. We have sufficient appropriate evidence to confirm that you have, in fact, met this requirement for sound procurement.”

G. Heyman: I guess my final question would be — and I’m not sure there’s an immediate answer: do you in the Auditor General’s office consider it adequate to make the recommendation and let the ministries figure out how to meet it? Or do you think there actually needs to be an analysis of how such a large gap occurred in pretty much all of the four ministries that you reviewed — so presumably many, many more?

R. Jones: I think what we find…. It’s a common theme in a lot of our reports when we talk about evaluating outcomes. It’s not just in procurement, but it seems to be in
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a number of programs that we look at across government. It’s a very difficult thing, sometimes, to get your head around but something that is absolutely necessary when you’re trying to get services delivered. It’s one thing to get a report from a consultant that gives you a whole bunch of information, but what were you expecting as an outcome from the information that you got, and how are you going to measure that?

It is something we’ll keep promoting in every single thing we do. I’m not sure that training will necessarily solve the problem. It’s more or less, right from the beginning, trying to understand what you’re trying to get out of the contract that you’re letting. Without that information feeding back into the process, it’s not meeting our expectations.

G. Heyman: If I might, Chair. I guess what I’m partly getting at with my follow-up line of questioning here is I think what came to light in the review of the relationship of the Ministry of Health with Maximus was that there simply were not the resources to determine independently whether the commitments that had been made were actually being kept. There was an over-reliance on self-reporting.

It seems to me that before the problem can be fixed, the source of the problem needs to be identified. Secondarily, I’m hopeful that there will be some follow-up on these four ministries, and perhaps additional ones in the future, to say: “Well, this was what we found a year ago, and here is the improvement.” Perhaps retrospectively, the ways in which the improvements were made will answer the question about what the root causes of the deficiencies were.

B. Ralston (Chair): I’ve got some people who were on the list for a second time, but David, I think, hasn’t asked a question, so you can go.

D. Eby: There have been some questions about qualification of bidders to provide services. I’m curious about the due diligence that’s expected of ministries before they qualify somebody as a bidder on a process and whether that due diligence is repeated if it’s a multi-year contract, for example.

In particular, I’m interested in the financial solvency of the particular bidder, the capacity to deliver the contract as promised and so on. The city of Vancouver got in a huge jam when they awarded the Olympic village contract to a developer that did not have the solvency to complete the project.

What stops the province from being in a similar situation? What is the due diligence that’s expected of a ministry or a Crown before they award one of these contracts? Is there a policy written somewhere? Is there something? Was that part of the scope of this review done by the Auditor General?

S. Newton: Current policy requires that you determine specifically what you need of your vendor in order to be able to produce whatever it is you want. You need to be able to assess whether they have the skills and abilities to do that. Also, on large procurements we are looking at the ability of the vendor to provide that service on an ongoing basis.

Let’s say we’ve got a vendor who has never actually done something on, let’s say, an exponentially larger scale than what they’re currently resourced to do. There are a lot of questions and a lot of expectation on that vendor to be able to describe — in modelling and whatever else, especially on a larger procurement — how they’re going to be able to meet that. That’s the expectation — that it’s adequately planned and you’re clear on what you need from the vendor in order to meet that requirement. That also includes the vendor’s ability to conduct that work.

So if you’ve got, let’s say, a small service provider that is already tapped out, that’s a problem and a concern for the evaluation group to be able to work through whether or not they could actually complete the project.

D. Eby: Is that policy written down, or is that just a commonsense expectation that it would be placed?

S. Newton: It would just be in ensuring that they have the requirements. There are some more specific guidelines in procurement guidelines.

D. Pilling: I don’t want to point any fingers, but I wonder if…. We are the policy governance agency, but there are some ministries that are represented here that might be able to provide you with specific examples of how they ensure financial capability through bonding, etc., or the general capability of any vendor to perform the projects. I think it’s in everybody’s interest to do that.

There are no specific requirements in policy as far as what a vendor must provide to show that they are capable. That would be left to each ministry and each project.

This audit was limited to professional services contracts. It’s a much different situation when you’re getting into capital projects in the tens and hundreds of millions of dollars, which I think is similar to the context that you’re referring to.

I’m not sure, Member, if that answers your question, but there may be an opportunity for one of the ministries here to provide a specific example.

V. Willow: I’m with Ministry of Transportation and Infrastructure. Within the ministry we probably pro-
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cure in the range of $800 million to $1 billion per year. Professional services are probably in the range of maybe $150 million a year in a typical year.

We have a couple of things to address. I think I heard a couple of questions there. One was about prequalification. Of that $150 million that we used for prequalification, probably about $100 million of that is for engineering and technical-related services. With that, we do have a prequalification system within the ministry.

What we do is we put out opportunity for any consulting firms in British Columbia to apply and to come into the ministry. We adjudicate them, and we adjudicate them based on their qualifications; their capacity; the size of their firms; what sort of services they provide, because obviously engineering services are widespread.

We do an adjudication process, and then when a project comes up within the ministry, what we’ll do is sort of narrow down the scope to those particular engineering firms that we know have the capacity or can provide the nature of services, that can provide that service.

What that does, as we were talking about value for money…. We’d probably do several hundred contracts a year for engineering-type services. We don’t have to go out to B.C. Bid every single time to get every single firm to respond. There’s a fairly rigorous process that takes place for that adjudication. So that’s one side of it.

The other side of it, in terms of a lot of our bigger capital and construction projects, is we actually use bonding as our source of security. Although we don’t do any specific looking into their financial statements or their capacity, we rely on bonding companies to do that. They’ll look at the capacity of the firms. They’ll look at what their history is, their bonding rates — all kinds of things.

That’s where the beauty of bonding comes into play. It provides for that service for us, and it seems we have good success with that. We have security bonding. We have performance bonding and labour-material bonding on our larger capital projects.

I know that’s not what we’re talking about here today, but I think that may address the question.

K. Corrigan: I wanted to go to the other end of the process, not the evaluation that we’ve talked a bit about but go back to the beginning of the process and the obligations that ministries have to consider what the options are before deciding to contract out the services, essentially.

I notice from the key findings and recommendations that four contracts over $100,000…. These would be, I guess, low- to mid-range. In three-quarters of the cases — it’s on page 17 — the expectations were met in terms of that evaluation. Part of that evaluation is whether or not the work should be done in-house or whether the services should be procured.

Because we have the expertise of the ministries here, I’m just wondering if we could get a sense of how that determination is done. Particularly, I guess, with the lower contracts, I get the sense that this evaluation is not necessarily done. Is there kind of a culture? It seems to me there is a bit of a culture in government at this point, that services will be…. There will be sort of an inclination or built-in culture to contract out services as opposed to having them done in-house, perhaps to keep the size of government down.

If so, what are the sort of structures in place to make that decision? Is that part of the decision at every point, or is it just a given that the services will be contracted out?

Then the final part of that question is…. We’ve been in a hiring freeze now for many, many months in British Columbia. How is that affecting everything? I know that ministries are simply not able to hire the people to do the work. We heard, for example, with the FICOM report, that about half the positions are begging people to come in, and they can’t get them, and much more is being paid by government in order to contract out those services.

That’s a general question. I’d be interested in the perspective of any of the ministry representatives who would like to comment on that area.

V. Willow: Well, just because I’m here, I guess I can speak for the Ministry of Transportation. I think we’re a ministry that, as you know, privatized a lot of our services a few years ago. In terms of construction crews and all of those, we don’t really have the choice on those ones because we do not have the in-house resources for construction. We do have some field crews that manage those construction contracts.

In the other case I just talked quite a bit about — the engineering and technical services — again, we don’t have those resources in-house anymore. It comes down to the fact that to get the work done, we need to contract out the majority of the work that we do.

K. Corrigan: Is there any thought or evaluation of whether or not this is the most effective expenditure of tax dollars or whether it would be better to have people come in-house, at least in some areas — to have the expertise in order that we’re not so reliant on, I guess, the inconsistency and the vagaries of contracting out. I mean, there are very good people that we contract with. But the reality is, if you lose your in-house expertise….

V. Willow: That’s a very good question. I think that no matter what work we do, there’s always the question of whether we can do that work in-house as the initial question, and then we look at the options for getting the work done.

It just so happens that in our case, in the majority of
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the work, we just don’t have the in-house expertise. That was a decision that was made a few years ago with a different government, I believe — that we do a complete shift in how we provide our services. Whether that will be something we look at in the future, I’m not sure.

G. Silvestrini: It’s Gail Silvestrini with Transportation. One of the other things with our ministry — we do have, as Vicki was mentioning, a core expertise that oversees the programs. Because we have capital projects that come and go, we don’t require the staff full-time. So if it’s a consulting service contract for first aid, for instance, we would not have that staff because we don’t need them full-time. It’s very much more beneficial to only bring it in as needed.

We do have quite a number of and as-and-when-needed contracts, because we don’t need them full-time. So a contract is much more efficient.

K. Corrigan: Bruce, because my spokesperson area is advanced education, can I just ask whether perhaps the representative from Advanced Education would care to make any comment on this area of discussion — or anything else you want to talk about, about advanced education?

B. Smith: Thank you for the question. Much like Vicki and Gail said, our ministry does contract out professional services, generally for policy work or research work, training. They tend to be lower-value contracts.

All contracts are required to go up through our executive, and we have a process where an ADM actually has to sign off to the fact. It goes through an ADM as well as our executive financial officer, EFO, to confirm that the resources are not in place in the ministry, because we’re quite conscious of avoiding employer-employee relations with contractors, which can develop if you keep people on too long.

L. Popham: I just wanted to revisit small business procurement. My question is directed towards the comptroller’s office. The reason why I’m concerned about this is because….

This policy, I believe, actually came into play in early 2013, and the policy wasn’t to increase the amount of small business procurement up to 20 percent. The policy is that 20 percent of total procurement contracts or more are to go towards small business. Given that that’s the policy, what boxes get checked off when we’re choosing these contracts to make sure that we’re increasing it 20 percent or more?

I know the baseline had to be figured out, but it almost doesn’t matter. That is such a huge amount of contracts that it has to have some lens that gets put over it. That’s my question.

S. Newton: On an individual procurement coming through in any ministry, I do not believe there’s going to be criteria that says: “Is this small business? They now have preferential treatment over other-sized businesses.” I think the focus is on increasing access and the ability for small businesses to interact with government and be successful.

Otherwise, we would have a very clear policy change in procurement policy that says if it’s under a certain dollar value, you need to assess the size of the business and give it to the smallest business that’s applying. I don’t think that meets a number of the tests around best value for money and those types of things that we would have in a procurement.

My understanding of the focus — and that area of policy work is outside of my office — is to focus on increasing access, increasing the ability for small businesses to know about procurement opportunities, increasing the ease with which they can engage in a procurement opportunity, like the RFP process and simplifying that, as well as some of the pieces that were talked about briefly on the innovation side. Dave was talking about the reverse trade shows — or other opportunities for small businesses to be able to demonstrate what they can do for government, prior to government making procurement decisions.

L. Popham: My follow-up, then, is this. That’s not the policy. The policy is that 20 percent or more procurement contracts are held by small business. It’s not access, and it’s not working with government. It’s that they hold those contracts.

S. Newton: …specific thing in procurement policy that’s overriding value for money at this point in time. That’s a bit of a conflict. I think one of the ways that it’s being addressed is if you increase access and ability, that 20 percent would be achievable.

D. Pilling: There are a number of initiatives, which the comptroller general was speaking to at the beginning of his presentation, on what is being done in the procurement space. Small business initiative. I think there were 13 recommendations that came out of that. Government is working to address many of them. Many of them are focused on increasing small business’s participation in government contracting opportunities.

That’s the commitment. It’s not a policy that I’m aware of. It’s a commitment that was made as a campaign commitment that was followed up and is being pursued by a couple of other ministries that are not represented here. I can’t speak entirely on their behalf, but there’s a num-
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ber of…. Essentially all of government is involved in responding to those recommendations and building up that capacity of the small business groups.

As far as what measurement looks like in the future, I can’t speak to that because that’s not our organization’s mandate. But there are a number of initiatives that are being taken to address that particular project, to increase small business’s participation.

B. Ralston (Chair): I think I know the answer to this question, but I want to just ask it anyway. None of the individual contractors are identified. They are identified by type of services. Yet I think it was reported by Mr. Nagati that in two direct rewards the reason for that wasn’t clear. And then I think it was in four other cases that the decision to procure was not clear — or was, at the very least, murky.

Sometimes public accounts committees are accused of a strategy of blame and shame, but I’m just wondering why there is no reference to the individual contractors here. The report — you’ll forgive me — seems a bit ethereal because there’s no concrete examples of specific contracts, other than in this very generic way.

I assume for the usual privacy reasons or commercial confidentiality or whatever, there are no names attached to any of this. It does all seem a little bit hard to focus on in terms of what is actually going on here.

I wonder if anyone wants to comment on the design of the audit. I suppose that’s really what I’m asking.

P. Nagati: The intent here was to provide an overview of procurement within government as opposed to an in-depth analysis of any particular contract.

B. Ralston (Chair): Usually, in understanding an area, the power of a vivid example is quite instructive. You have, in the case here, a number of low-value contracts, which are the ones under $25,000. Certainly, they’re notorious for suspicion of some kind of political direction or influence. There’s no proof one way or the other here, but when they’re not named, it seems to me to be an incredible amount of audit effort for very little real understanding of what might actually be going on here.

S. Newton: Not knowing the process that was used to select them or the reasoning why…. The recommendations in the report are focused on government and what government did or did not do. They’re not focused on the contractor and what the contractor did or did not do.

From that perspective, listing the contractor, I think, would presuppose that there was a problem with the contractor, and that’s not what was stated in here. It wasn’t about whether the contractor was performing. It was whether or not government was performing. So I think the appropriate party is named in the report, as far as who needs to do something to change. I think if you started to list individual contractors, people would presuppose that there’s a problem with the contractor, and I think that would be inappropriate.

B. Ralston (Chair): Well, no. I would disagree. I’m not suggesting that there’s anything wrong with any individual contractor. I’m interested in the process and how those decisions were made. You have some strategic planning, $13,000; policy development, $22,000; business support, $24,000; executive coaching, $70,000; community consultation reporting, $19,000.

These are the kinds of contracts where it’s sometimes considered that personal relationships go towards making those decisions. The ability of anyone to examine that seems to not be here, because there has been a failure or a deliberate decision not to disclose who the individual contractors are and who made the award.

I just want to express that. Obviously, it doesn’t sound like I’m going to get an answer on it. But I think that if there is the power to audit…. You’re an independent office. I don’t quite understand why there would be such reluctance to explore a little bit deeper and give us a sense — particularly when, in the report that comes to the committee, you’re saying that in the case of two direct awards, the reason for the direct award wasn’t clear.

C. Bellringer: I just want to say, as a general comment, that I do tend to list names in reports. We come to this dilemma at the end of almost every audit, when you have to make a call as to whether it’s best focused on the general or whether the specific adds value. I wasn’t there when that decision was made on this report, but I most certainly….

In other reports I’ve issued in the other jurisdiction I was in, we did err on the side of listing when we could — just to give you some comfort that I certainly don’t have an overall policy that, going forward, you’re never going to see names. That certainly wouldn’t be the case.

V. Huntington: I was curious to read that some ministries feel inhibited in completing performance evaluations because of a fear of a liability risk. Have you moved into that arena to sort of prevent that fear from jeopardizing the ability to evaluate a vendor, if you know what I mean?

D. Pilling: Just to clarify, are you referring to the use of evaluations for future procurement decisions?

V. Huntington: No. It’s on page 22. “The ministries we assessed and the office of the comptroller general told us that potential legal action by vendors who may disagree with the results of evaluations inhibited the completion and use of performance information” — in the evalua-
[ Page 559 ]
tions. I would think that that would be an extremely difficult thing for the comptroller general to permit…. If you’re requiring evaluations in order to justify the contracts, then you have to somehow enable the ministries to get over that fear. I’m wondering how you’re doing that.

S. Newton: That’s with the training and the outreach that we’re currently doing with ministries as well as the clarity that we can provide as we work forward with the vendor reference check — to make people feel way more comfortable with assessing it.

Now, when you do a reference check or when you’re going to do a vendor evaluation, it does require you to have been clear on the reason for the procurement, the need for the procurement, the definition of the outcomes and outputs of the contract. Reluctance may be in place to do that, do an evaluation, because there was a lack of clarity on what you were expecting the contractor to do in the first place. That would actually create risk, if you’re evaluating a contractor poorly when there wasn’t clarity on what was required of the contractor in the first place.

There are two parts to that: getting them through doing that but also getting them to ensure that in the first place — in the planning and the solicitation and the drafting of the contract — there’s enough in there, appropriately, to do the evaluation the correct way. We have to hit it from two perspectives. Then we can make people more comfortable, to want to be able to do that.

V. Huntington: From the Auditor General’s perspective, is this a significant gap in evaluation of contracts? Is it something that the comptroller general should be looking at very closely?

R. Jones: I think the comptroller general’s office is looking at it. I think it’s a very high risk if you’ve got one ministry that can’t talk to another ministry about somebody they want to hire and ask how that person performed. I think that’s just a natural thing that I’d want to do. But again, you would have to have a process in place where you would hope that the analysis done of the vendor’s performance on the previous contract was based on outcomes and evaluation of how well the work was performed.

B. Ralston (Chair): It’s just after three. I’m going to suggest we take a break for about five minutes or so before we head towards our last part of the session. So we’ll stand down for about five minutes.

S. Robinson: My question is just a follow-up from Vicki’s. It has to do with this concern about potential legal action, which was one of the rationales provided that inhibited the completion and use of performance information to inform procurement decisions. Has there been legal action? Is there historical rationale for that? Where would this angst come from?

D. Pilling: I can take a stab at that, because it was our office that agreed with the ministry’s concerns. The advice comes from our legal counsel that it’s a risk. As far as, “Has there ever been litigation?” I can’t answer that. But the advice does come from legal counsel.

S. Robinson: So there are some nervous Nellies that say there’s a potential, but it’s not that there’s been any record or that there’s been any threat or that there’s been any action that we know of?

B. Ralston (Chair): That was hardly a dignified comment on legal advice. [Laughter.]

K. Corrigan: Just on that, would it not be possible to…? Uh, oh. He’s hiding under the desk now.

Would it not be a fairly easy thing to write into a contract that you agree that there’s going to be an evaluation process at the end of it and that you agree to that and disclaim any right to sue or whatever?

D. Pilling: I think that’s a great point. Although I’m no longer in the ministry, it was something that we have committed to looking at under recommendation No. 4, I think it is.

There is a lot of value — and we recognize that there’s a ton of value — for all kinds of reasons as to why those evaluations should go into future decisions.

In order to make something like that work, you absolutely have to be transparent and put it up front in your solicitation documents, in your RFP and your tender documents, etc. Maybe follow up in your contract, as well, and just make it abundantly clear that there will be an evaluation at the end of this and that that evaluation
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may inform future procurement decisions.

That’s something that we are looking at as part of our follow-up or response to recommendation No. 4.

K. Corrigan: Thank you. I have two more questions. I know we’re on a timeline here, apparently.

One of the answers that I heard earlier was that there was a decision made several years ago to, essentially, contract out a lot of services.

I guess my question is for the Auditor General or for Mr. Newton. Is this, then, saying that, given that the ministries are smaller now, nobody is doing this evaluation on a fairly regular and across-the-board basis about whether or not it is better to contract out services from government on the basis of value to taxpayers? Is this something the Auditor General’s office would look at or that government would look at?

I know that once we lose the ability, you can’t do it in-house. But somebody, I would think, should be taking a look at this on a regular basis and saying: “What’s the most efficient way of doing this?”

S. Newton: I would think the expectation would be that that would enter into ministry strategic planning as far as…. If we’re going to go forward and we need to do certain things, what is the most cost-effective way to do it? If we’re in a period with restricted funds, then you would want to look for the cheapest and most cost-effective way to do it.

I don’t know if every single year that they go do strategic planning, the ministry is going to sit down and say contracting versus not. But service delivery methodologies and the ways we deliver services are regularly thought of in ministries as far as how they’re going to get what they need to get done. Now, I don’t think there’s a policy that needs to be done. I can’t tell you which ministries may or may not think that way. But certainly, with constrained resources, that would be an expectation.

The other piece — and where there may be another answer to the question — is that I’m not too sure, in relation to Treasury Board direction for ministries as far as meeting their targets and providing service delivery, what other direction they may be provided as far as figuring out how you’re going to get the service delivered over a period of time through a different mechanism.

Certainly, I think that’s encouraged, because anything that allows you to do more with the limited resources you have, you’re going to want to think about and consider. Just that pressure alone would cause you to do that. But as far as: specifically, is that a question on people’s minds regularly when they’re doing planning? I can’t answer that.

R. Jones: Member, all I can say is that when we went to do this audit, we didn’t specifically take a look at whether or not it made sense to contract services out versus keeping them in-house.

I can say, and this is just from our office’s standpoint, that every year when we take a look at our staffing, say, for financial audits, we do sit back and say: “Okay, do we have enough resources to get us through what we call the busy period” — which is in April, May, June — “in-house? And if we don’t, should we be hiring full-time staff to fill that one gap, or should we go outside and take a look at hiring in some contractors?” We do, do that analysis on a regular basis.

It is something I would hope that everybody is taking a look at whenever they’re trying to decide on whether to contract out or do it in-house.

K. Corrigan: I heard the Ministry of Transportation, though, saying…. Maybe it’s happening at a high level, but what I heard was that there was, essentially, a political decision made several years ago and that that has really forced that ministry, anyways — and, I would presume, others — to make the decision to contract out. Because the personnel simply aren’t there, there is no other option.

From a taxpayer’s perspective and concern about the taxpayers, that concerns me — about whether or not those decisions are actually being made on that basis or whether they’re being made just on: “Okay, well, we don’t have the people.”

C. Bellringer: Just quickly. I don’t know enough about what specifically goes on in B.C. But most certainly, I have seen procurement decisions like this over 30 years of auditing — much of it in the public sector, where much of it is flowing from a political philosophy. So I would expect some element of it being determined on a policy basis at a central level and that that should be well communicated through the system. I don’t know where it takes place, but I’ve added it to the already quite long list of potential audits.

K. Corrigan: Okay, my final area of questions, my final question. Looking at the survey that was done of the vendors who bid on the procurement opportunities and their sense of whether or not the process was fair — in terms of cost, particularly — or it was too burdensome, the finding was that almost two-thirds of the respondents agreed or strongly agreed that the cost of preparing and responding to the procurement solicitation was reasonable, given the value of the business opportunity.

That would mean that a third either thought it wasn’t,
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had no comment on that or didn’t know. But those were the ones that got the contracts, right? Did you take a look at the majority of respondents who didn’t get contracts? Do we know how satisfied those that were applying for contracts or bidding on contracts were, how they felt about it? Presumably, the ones that got the contracts would be more favourably disposed to the process than those that didn’t.

P. Nagati: Yes. Thank you for the question. You raise a very good point. What we could not capture, the people we could not survey, were those that may have looked at a procurement opportunity and said: “Ah. This is too expensive relative to the value. Therefore, I will not submit a bid.”

The only people we’re aware of were those who actually bid. So right away you have a fairly biased sample.

P. Nagati: Oh, we did survey the unsuccessful bidders. The two-thirds of respondents who agreed or strongly agreed that the cost was appropriate or in line with the value of the contract did include the unsuccessful bidders.

P. Nagati: Who we did not capture were those who may have looked at it but didn’t bid.

B. Ralston (Chair): Well, thank you very much. It was a good discussion. We will draw this one to a close, and then we’ll adjourn a little bit early. I always try to keep the members of the committee happy. Thank you very much for your participation and your answers.

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Chair:	Bruce Ralston (Surrey-Whalley NDP)
Deputy Chair:	Sam Sullivan (Vancouver–False Creek BC Liberal)
Members:	Kathy Corrigan (Burnaby–Deer Lake NDP)
	Marc Dalton (Maple Ridge–Mission BC Liberal)
	David Eby (Vancouver–Point Grey NDP)
	Simon Gibson (Abbotsford-Mission BC Liberal)
	George Heyman (Vancouver-Fairview NDP)
	Vicki Huntington (Delta South Ind.)
	Greg Kyllo (Shuswap BC Liberal)
	Mike Morris (Prince George–Mackenzie BC Liberal)
	Lana Popham (Saanich South NDP)
	Linda Reimer (Port Moody–Coquitlam BC Liberal)
	Selina Robinson (Coquitlam-Maillardville NDP)
	Laurie Throness (Chilliwack-Hope BC Liberal)
	John Yap (Richmond-Steveston BC Liberal)
Clerk:	Kate Ryan-Lloyd

REPORT OF PROCEEDINGS(Hansard)

SELECT STANDING COMMITTEE ON PUBLIC ACCOUNTS

REPORT OF PROCEEDINGS
(Hansard)

SELECT STANDING COMMITTEE ON
PUBLIC ACCOUNTS