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REPORT TO THE HOUSE

Thursday, November 9, 1995

The Standing Committee on Public Accounts has the honour to present its

SIXTEENTH REPORT

Pursuant to Standing Order 108(3)(d), the Committee has studied Chapters 9 (Overall Management of Federal Science and Technology Activities), 10 (Management of Departmental Science and Technology Activities) and 11 (Management of Scientific Personnel in Federal Research Establishments) of the 1994 Report of the Auditor General.

INTRODUCTION AND CONTEXT

The Report of the Auditor General for 1994 contained four chapters relating to science and technology. The Committee has already reviewed one of those chapters on March 14, 1995 -- Income Tax Incentives for Research and Development -- and has reported to the House thereon. The Committee held two meetings on the subject, on March 28 and May 9, 1995, with senior officials of Industry Canada (and the Communications Research Centre), the Treasury Board Secretariat and the Office of the Auditor General.

There is general agreement that science and technology make a significant contribution to economic growth and to Canadians' quality of life. The federal government allocates large sums of money to science and technology activities. In 1993-94, it spent about $6 billion on these types of activities, excluding the $1 billion in tax credits.

Federal science and technology funds are mainly allocated ($3.5 billion) to various federal organizations (intramural activities). The activities are managed and conducted by some 35,000 federal public servants, including 19,000 scientists. Seventeen organizations share more than 90% of the resources. Other federal funds are allocated to industry, universities, foreign interests and other.

CHAPTERS 9 AND 10

In its 1994 Budget, the government recognized the need to "put in place a true strategy for R & D, one with real priorities, real direction, and a real review of results". After completing various stages in the federal review of science and technology, the government was to make its new strategy known shortly. The Deputy Minister of Science and Technology, Harry Swain, indicated at the meeting on May 9 of this year that the date when the new strategy would be tabled was a decision for the government to make, but that the Department would comply with the deadlines imposed. The end of June has been suggested as the anticipated timeframe. However, nothing has yet been tabled by the government, and time is growing short.

The Committee does not question this approach, which should assist the government in managing its science and technology portfolio more effectively. However, it is puzzled about the Auditor General's comments that while they have been the subjects of discussion and controversy for more than three decades, the issues of strategy, priority and results have never been resolved. The same comments apply to the issue of the management of scientific personnel.

The Committee wishes to ensure that all the elements that are necessary in order for the strategy to be implemented and succeed are in place. In Chapter 9 of his Report, the Auditor General refers to four elements that the government should include in its strategy:

(1) Establishment of strategies and priorities; (2) Framework for coordinating activities of departments and agencies; (3) Framework for evaluating results; (4) Information for Parliament and the general public for purposes of accountability.

At its meeting, the Committee sought to know what the government intended to do to incorporate these elements in its strategy. With respect to establishing priorities, discussions have been held on the cuts made in the budgets of the granting councils. The Committee wondered whether this choice had been made from a strategic perspective. The Deputy Minister assured that Committee that this was the case. In his opening statement, Mr. Swain mentioned that the federal science and technology review played a significant role in establishing priorities for the 1995 Budget and the Program Review. For example, priority was given by the government to activities which encourage innovation and rapid commercialization of new ideas.

In addition to establishing priorities, the Committee is of the opinion that the government must set a direction on what must be done. A link must be made between activities that should be undertaken and the resources needed to do so. This presupposes changes in the current structure of the departments and agencies, and in the management of their activities. If other entities such as the university sector were able to serve government objectives better, appropriate choices would have to be made. The Committee believes that it is important that everyone know what is expected of him or her, so that everyone can make the maximum contribution to achieving priorities. For example, the Committee believes that more attention needs to be placed on business development activities. Research establishments should develop internal capacities to identify potential clients and partners and to promote their services. Some organizations have already put in place some business development and marketing activities. However, more effort should be made to promote the commercialization of technologies and products. The government will have to clearly communicate to the departments what direction is to be taken, from the outset.

Since there are a number of departments and agencies working in the field of science and technology, mechanisms must be put in place to encourage congruence of policies and objectives. Even if all departments can redefine themselves in terms of the new strategy, they must be positioned on the basis of their interactions. The second element to be included in the government's strategy is a framework for coordinating the activities of departments and agencies. At the meeting, Mr. Swain stated that he agreed with this. He added that the process leading up to the 1995 budget has resulted in departments working together much more closely than in the past. However, the Committee believes that more than this is needed. It acknowledges that it is not easy to determine the best model for managing science and technology activities. At the meeting, it tried to learn more about the government's intentions, but the decision as to what model would be adopted did not seem to have been made. For example, there are some who advocate grouping scientific activities under a single department. Whatever structure is chosen, the Committee believes that the entity that will coordinate science and technology policy will have to have the necessary authority and the credibility required to play this role with respect to the other departments. The government will also have to provide clear and consistent leadership if it wants to achieve its goals.

The third element to be incorporated into the government's new strategy is a framework for evaluating results. In the Committee's view, the government must know what kind of achievements are being made, and in order to do this it must have information on planned and actual results. This presupposes the establishment of measurable objectives and performance indicators. Once again, Mr. Swain stated that he is in favour of this approach. In an internal report on federal science and technology activities, the authors recommended that Statistics Canada establish an on-going development project to design, plan and implement an extended program of output-oriented statistics and indicators. The Committee believes that this would be a step in the right direction. The Government will have to ensure that Statistics Canada has the resources needed for carrying out this project.

The fourth essential element in the government's strategy is information for Parliament and the general public. The public is entitled to know whether the government has met its objectives, and what it cost. Instead, what is currently available is information on program input such as expenditures and human resources assigned to the various activities. At the meeting, Mr. Swain contended that a problem arises because of the differences between the vertical responsibilities of departments and the horizontal approach to science and technology activities. The Committee still believes that the necessary steps must be taken to coordinate information on overall administration. The agency that is in charge of coordinating science and technology activities will have to perform this task.

The Committee believes that the weaknesses observed by the Auditor General in Chapter 10 on the Management of Departmental Science and Technology Activities are largely the result of the absence of any true comprehensive strategy. In recent years, departments and agencies have received no clear signals as to the direction they should give to their activities. To assist the government in implementing its strategy, departments and agencies will have to adopt precise goals and concentrate on achieving results. All stages of project management (project selection, anticipated results, information on costs, evaluation, etc.) will have to be reviewed so that departments and agencies re in a position to assess the effectiveness of their science activities.

The Committee is impatiently awaiting the tabling of the new strategy. The 1995 Budget has already made known the government's intentions in terms of orientating its science and technology activities toward activities that encourage innovation, rapid commercialization and value added production. The challenge will be to translate these intentions into concrete actions.

The Committee intends to monitor the government's progress in implementing its strategy closely. It wishes to ensure that elements are in place so that the measures taken by the government are able to produce real change. However, the Committee believes that the Office of the Auditor General can perform this task more effectively. Accordingly, the Committee recommends:

CHAPTER 11

The nature of scientists' work is such that they may be viewed very differently from other occupational groups. For one thing, they are required to have very specific knowledge about certain fields. Often, they must hold advanced academic degrees. Because of this they undoubtedly begin their careers later than other occupational groups. For another, the fact that scientists specialize in extremely specific fields makes them less mobile. It is sometimes difficult to find another position for an employee whose project has been completed.

There is no doubt that the contribution made by scientific personnel in departments and agencies is essential if the government's science and technology objectives are to be achieved. On the other hand, we can say that any change in government plans in this area will have an impact on human resources. In fact, not only will scientific personnel be affected by the budget cuts announced in the 1995 Budget, but they will also have to adapt to the new role that the government intends to play in science and technology. In order to ensure that these radical changes will be implemented and that scientific personnel make a positive contribution to them, the performance of such personnel must be maximized through appropriate management practices. In concrete terms, this means that managers must be given the tools they need to do this.

The Committee was therefore not very reassured to learn that many of the problems relating to the management of scientific personnel that have been identified in studies done over the past 30 years have still not been resolved.

As the employer of the Public Service, Treasury Board has an important role to play in managing human resources. Among other things, it determines policies on human resources needs, remuneration and training. Treasury Board's somewhat standardized human resources guidelines may affect scientists more than other occupational groups. The question of fixed term contracts discussed at the meeting is a good example. Government policy makes a permanent job available to any employee hired on a temporary basis after five years, which often happens in scientific projects. Once a project concludes, the skills and qualifications of some of the scientists prove to be too narrow for them to be easily transferable to work on other projects. Managers therefore have to deal with less effective personnel for carrying out other projects.

The Committee wonders whether the approach taken to the management of scientific human resources in the Public Service should not be changed. At the meeting, the Committee noted that some departments have already indicated to Treasury Board that they wanted to have more flexibility in the rules. The Deputy Minister, Mr. Swain, said that departments may lay out their constraints and requests for exemptions in the business plans tabled with Treasury Board in the context of human resources management. On the other hand, these procedures take time. The Committee has learned that it took two and a half years for the Department of Defence and one and a half years for the Department of Agriculture to obtain certain exemptions to the five-year rule.

Other changes have been requested by the departments. In response to a request from the Committee, the Secretary of the Treasury Board forwarded a list of the flexibilities and changes requested by the departments for the management of their scientific personnel. Mr. Giroux also notes that "the Treasury Board Secretariat's intent is to work closely with departments to delegate authorities and to tailor policies to meet their unique business needs where they are consistent with cost-effective management".

Treasury Board seems to be open to increasing the latitude allowed to the departments. However, negotiations are at present conducted on a case-by-case basis. The Committee believes that this may not be the most efficient approach. The question of the five-year rule demonstrates that while some departments have obtained specific exemptions, the problem remains, because this is not available to all science agencies. Even an extremely dynamic establishment like the Communications Research Centre still faces numerous constraints in terms of human resources management. In some departments, scientific activities involve only a fraction of the department's activities, so that management problems affecting their scientists are not considered a priority.

In the Committee's view, Treasury Board could develop a better- adapted and more decentralized human resources management scheme which would still include suitable accountability mechanisms. Certain measures, such as retirement incentives, could apply to all departments, while others (special recruitment programs) would be applied to certain departments as required. At the meeting, Mr. Giroux mentioned that decentralization toward the departments to give them greater flexibility was the direction he wanted to take. The Committee acknowledges that Treasury Board has to deal with numerous constraints such as collective agreements. However, Treasury Board must solve the problems raised in the Auditor General's Report in a more definitive manner. Accordingly, the Committee recommends:

In the meantime, the Committee wants to know how negotiations on initiatives concerning the flexibilities and changes sought by the departments are progressing. The Committee received a status report in June 1995. It wishes to make this practice permanent. The Committee therefore recommends:

At the meeting, it was suggested that a special forum devoted to issues involved in the management of scientific personnel should be created, as proposed by the Auditor General. According to Mr. Swain, in some sense the first meeting was held on May 8 of this year, when the heads of the various science agencies met to discuss these issues, among others. He thought that this approach could be expanded in the near future. The Committee wishes to ensure that this is done. Accordingly, it recommends:

Finally, the Committee is concerned at the delay by the government in tabling of the new government science and technology strategy. It hopes that the strategy will contain elements that will address the question of the management of scientific personnel. In order to monitor this question closely, the Committee recommends:

In accordance with Standing Order 109, the Committee requests that the government table a comprehensive response to this Report.

A copy of the relevant Minutes of Proceedings (Issues Nos. 32, 34 and 36 which includes this Report) is tabled.

Respectfully submitted,

RICHARD BÉLISLE

Chair.

REPORT TO THE HOUSE

Monday, November 20, 1995

The Standing Committee on Public Accounts has the honour to present its

SEVENTEENTH REPORT

Pursuant to Standing Order 108(3)(d), the Committee considered Chapter 5 of the Report of the Auditor General, May 1995: Office of the Superintendent of Financial Institutions -- Deposit-Taking Institutions Sector.

The importance of the financial services industry to Canada's economy and the concerns expressed by the Auditor General (AG) in this report led the Committee to consider the activities of the Office of the Superintendent of Financial Institutions (OSFI). The Committee therefore held a meeting on this subject on October 3, 1995 with representatives of OSFI and the Office of the Auditor General (OAG).

Introduction and Background

The purposes of the system of supervising and regulating federally-regulated financial institutions are to protect depositors from losses resulting from bankruptcies by these institutions, to maintain public confidence in them, and to encourage competition in the financial services industry. Nevertheless, no system, however sophisticated, can prevent all bankruptcies. The aim of the regulatory system is to assure Canadians that the financial services industry is sound and operates effectively.

OSFI is an important entity in the federal regulatory system. It is responsible for supervising and regulating banks and federally-regulated investment, trust and loan companies and co-operative credit societies in order to ensure that they are financially sound and comply with the legislation. In 1994, the consolidated assets of OSFI- supervised deposit-taking institutions and investment companies amounted to $904 billion.

The federal regulatory system includes other entities in addition to OSFI. As well as providing deposit insurance, the Canada Deposit Insurance Corporation (CDIC) sets and promotes standards for sound commercial and financial practices. The Department of Finance develops policies and legislation concerning the financial services industry, and has overall responsibility for the workings of the system. The Bank of Canada acts as lender of last resort and has certain responsibilities concerning the operation of the payment system.

New legislation governing federally-regulated financial institutions came into effect in 1992. These legislative changes had four main objectives: (1) to benefit consumers by increasing competition and the variety of services offered by financial institutions; (2) to enhance protection for depositors and policyholders; (3) to strengthen the competitiveness of Canada's financial institutions; and (4) to lay the groundwork for discussions with the provinces on harmonization. Some of these objectives were already enshrined in the legislation or set out in public documents. The legislative framework has to be reviewed in 1997 since the statutes, which were proclaimed in 1992 and which govern the activities of the financial institutions, contained a five-year sunset clause.

The Committee believes that, in anticipation of the 1997 review of the regulatory system, it would be advisable for the government to seek to ascertain whether its objectives have been reached. The Committee considers that a program evaluation would identify which aspects of the regulatory system are producing the desired results and which must be changed. An evaluation would help determine whether the present regulatory system is the one most likely to achieve the objectives, or would suggest alternatives. It is of the utmost importance that the changes to be proposed in 1997 have a sound and logical basis. The Committee can only agree with one statement contained in the interim report on the 1992 legislation by the Standing Senate Committee on Banking, Trade and Commerce: "High standards of proof are going to be required on [certain] questions (Is there adequate competition in the system?). Answers to these questions which consist essentially of assertions that are designed primarily to support an industry's position with respect to its preferred shape for the financial services sector of the future will play no useful role in the forthcoming debate." (page 14) The Committee is all the more convinced of the need for a program evaluation since the AG noted in his report that no comprehensive evaluation of the system has been carried out in order to ascertain whether the government is reaching its objectives for the financial services industry.

The Committee recognizes that such a task is not easy, particularly since action must be taken promptly if the results of the evaluation are to be available before the 1997 changes are proposed. However, the Committee believes that such an evaluation is not an impossible challenge. Since more than one entity is involved, each one will have to contribute if the evaluation is to be successful. OSFI Superintendent John Palmer seems to agree to participate in an evaluation. At the meeting, he stated: "This recommendation [by the AG for a comprehensive evaluation of the regulatory system] is understandable and touches on evaluating broad public policy. As Superintendent, I am prepared to consider the areas under OSFI's purview that could be evaluated taking into consideration the cost-effectiveness of such evaluations." Since the evaluation affects more than one entity, the government could make the Treasury Board Secretariat responsible for co-ordinating it. The Committee therefore recommends:

Two aspects in particular caught the Committee's attention at the meeting and must, in its opinion, form part of the evaluation: (1) clarification of each entity's responsibilities in order to achieve the objectives; and (2) OSFI's ability to meet certain major challenges.

Responsibilities of the entities in achieving the objectives

The Committee is of the opinion that, in order to ascertain whether the objectives have been achieved, the entities responsible for achieving them must first be identified. At the meeting, the Committee had the impression that these responsibilities were not always very clear. As the AG noted at the meeting, it has not always been clear which entity is responsible for achieving public policy objectives such as maintaining the stability and competitiveness of the financial system, even after Bill C-100 addressing some of these issues was tabled. The Committee therefore recommends:

OSFI and CDIC have overlapping responsibilities in supervising deposit-taking and troubled financial institutions. Both entities can intervene in certain situations. The Committee sought to ascertain which entity has the main responsibility when an institution becomes troubled. According to OSFI Superintendent John Palmer, OSFI has the main responsibility as long as there is hope that the institution can be saved. When the institution's solvency is threatened, CDIC must use the powers given to it by law; CDIC intervention becomes more pronounced as the institution's financial viability deteriorates. John Palmer also noted that the "Guide To Intervention for Federal Financial Institutions", outlined in the White Paper entitled Enhancing the Safety and Soundness of the Canadian Financial System, would help define OSFI's and CDIC's responsibilities at the various stages of an institution's decline. However, the Committee has not been convinced that these responsibilities, particularly the issue of which entity is to be accountable when things go wrong, are now better defined. The Committee therefore recommends:

    That the government more clearly define which entity has the main responsibility for intervening at each of the four steps described in the "Guide To Intervention for Federal Financial Institutions".

The Committee also sought to ascertain how overlap between OSFI and CDIC responsibilities could be beneficial, something that is not usually the case. The Committee acknowledges that it sometimes may be difficult to avoid certain types of overlap, given the nature of the two entities. However, the Committee does not want those facts to be an excuse for minimizing efforts to reduce overlap. At the meeting, OSFI Superintendent John Palmer admitted that there might indeed be duplication and overlap in cases where both entities supervise financial institutions that are not having any particular problems. The Committee therefore recommends:

    That OSFI and CDIC take all possible measures in order to identify and eliminate overlap, particularly in activities involving the supervision of sound financial institutions, and that they first address all the cases identified by the AG in his report.

OSFI's ability to meet certain major challenges

The Committee is of the opinion that, when the economic climate deteriorates, the presence of an entity like OSFI becomes absolutely crucial. It also believes that OSFI's activity is indeed to anticipate serious recessions in order to determine their consequences for financial institutions. The Committee considers that in such an eventuality OSFI must be prepared to react quickly. The Committee therefore recommends:

    That OSFI draw up a plan of measures to be taken with regard to financial institutions in the event of a profound, serious economic crisis.

In reading the AG's report, the Committee noted that OSFI may not have all the tools it needs in order to meet the challenges facing it. For example, the emergence of new trends in the financial services industry--such as Canadian banks' increasing exposure to derivatives--can be observed. Certain specialized operations could have considerable risks for financial institutions' security and soundness. The Committee believes that OSFI should assess specialized risk areas in greater depth.

The Committee recognizes that the OSFI Superintendent has made efforts in recent months to strengthen that organization. For example, OSFI has made it a priority to draw up guidelines to help examiners make fair decisions, and progress has been made toward that end. The publication of the "Guide To Intervention for Federal Financial Institutions" is also a step in the right direction. The Committee intends to closely follow up on OSFI's progress. It therefore recommends:

    That OSFI provide, by December 31, 1995, a detailed action plan (including target dates) of the measures it intends to take over the next twelve months in order to respond to the recommendations and observations contained in the AG's report and the concerns expressed by the Committee at the meeting and in this Report.

Pursuant to Standing Order 109, the Committee requests that the government table a comprehensive response to this Report.

A copy of the relevant Minutes of Proceedings (Issue no. 36 which includes this Report) is tabled.

Respectfully submitted,

RICHARD BÉLISLE

Chair.

REPORT TO THE HOUSE

Thursday, December 7, 1995

The Standing Committee on Public Accounts has the honour to present its

EIGHTEENTH REPORT

Pursuant to Standing Order 108(3)(d), your Committee has considered Chapter 6 of the May 1995 Report of the Auditor General of Canada (Federal Transportation Subsidies -- The Atlantic Region Freight Assistance Program).

I.INTRODUCTION AND BACKGROUND

In his first interim report, tabled on 11 May 1995, the Auditor General stated his concerns about the wind-up phase of a transportation subsidy program, the Atlantic Region Freight Assistance Program (ARFA). Subsequently, on 6 June, the Committee held a meeting with officials from the Office of the Auditor General (OAG), the National Transportation Agency (NTA), the entity that administers ARFA, and Transport Canada, the department with policy responsibility for the program.

The information contained in the Auditor General's report and the testimony given during the meeting convinced the Committee that concerns about the final phase of the program were justified. As the Committee learned, the segment of the market occupied by affiliated shippers and carriers was vulnerable to potential inflation of rates when claims for subsidy were submitted. In order to safeguard the interests of Canadian taxpayers, the Committee issued an interim report in which it recommended steps to reduce this risk. It also asked the Chairman of the NTA to confirm that his agency had the authority to assess the rates cited in subsidy claims for their reasonableness and to reject claims based on unreasonable rates. Such an assertion would have confirmed that the Agency now interprets its powers in conformity with the views held by the Minister of Transport. The Chairman was also asked to describe how his agency intended to act on that authority.

Mr. Gilles Rivard, Chairman of the NTA, responded to the Committee's request in a letter dated 5 July 1995. However, instead of confirming that he and his Agency agreed with Transport Canada that the NTA has the authority to assess and reject claims based on the reasonableness of rates, Mr. Rivard maintained the NTA's previous position

      that it does not have the authority to either scrutinize freight rates or deny subsidy on the basis of the freight rates charged by carriers for the movements contained in their subsidy claims.

Having stated this, the Chairman indicated that the Agency had ``put in place a new Rate and Activity and Review Process for identifying subsidy claims that may contain questionable freight rates.'' If this new process identified questionable rates, claimants would be asked to explain those rates. The Agency would then make a decision whether or not to pay the claim. ``This may mean,'' the Chairman wrote, ``that where an individual carrier fails to satisfy the Agency that a freight rate charged is not excessive, the Agency may deny payment of subsidy.''

The Chairman's reply demonstrated that he and his Agency were not in agreement with the Department of Transport with regard to the NTA's powers. It was also apparent that notwithstanding this fundamental disagreement, the NTA, in setting up its new audit process, was proceeding on the basis of an authority it claimed not to possess. As a consequence of this, and because it wished to be informed of the progress being made during the termination phase of ARFA, the Committee met with the Chairman and other officials from the NTA and officials from the OAG on 7 November 1995.

II.OBSERVATIONS

At the meeting, the Chairman of the NTA reiterated the substance of his letter of 5 July. He confirmed that his Agency still does not share Transport Canada's interpretation of the NTA's powers to assess or question the level of freight rates charged by carriers for the movements contained in their subsidy claims. However, despite this disagreement, he had instructed his staff to implement a new process that engages his Agency in an activity for which -- in its view -- authority is lacking. Mr. Rivard did not indicate that any effort was underway to resolve this disagreement with Transport Canada. Instead, he stated that carriers whose subsidy claims had been rejected could challenge the NTA's authority to do so in the courts. ``A court decision in this area,'' he told the Committee, ``would provide absolutely definitive direction on the matter.'' Mr. Rivard also told the Committee that he had recently obtained an opinion from a senior counsel in administrative law at the Department of Justice to the effect that the NTA does not have the power to assess the rates contained in claims for subsidy. Mr. Rivard promised to provide the Committee with the final version of this legal opinion once it is completed.

The Chairman of the NTA also informed the Committee of the progress that has been made during the wind-up phase of ARFA. At the time of the meeting, 2,500 claims had been identified for scrutiny under NTA's new Rate and Activity Review Process. Work had been completed on 600 of these claims and no evidence had yet been found of claims based on excessive or unreasonable rates. Mr. Doug Rimmer, Director General of the NTA's Marine, Trucking and Regional Offices, claimed that lack of such evidence was due perhaps to a deterrence effect -- the very existence of the new process was discouraging carriers from submitting claims based on inflated rates. The Committee believes, however, that an additional explanation is possible.

The NTA's Rate and Activity Review Process begins by identifying those carriers most likely to submit claims based on questionable rates. Subsidy claims submitted by these ``high risk'' carriers since the January 1995 announcement of ARFA's termination are then reviewed. The rates submitted in these claims are compared to those contained in claims submitted by these same carriers prior to the termination announcement. If rate increases are detected, the claimants are asked to justify them. If the explanations given do not satisfy the NTA, the claim is rejected.

Such a process, however, fails to take into account the possibility that the rates submitted by high-risk carriers were inflated prior to January 1995, a possibility that clearly emerges from the Auditor General's report. This being the case, the Agency has established a review process that may simply be comparing yesterday's inflated rates with today's. Thus, while the Rate and Activity Review Process can measure increases in rates, it cannot, by itself determine whether those rates are reasonable. That this process has not uncovered any evidence of claims based on excessive or unreasonable rates should therefore come as no surprise.

Agency witnesses argued that their Rate and Activity Review Process is in accordance with the Auditor General's recommendation that the Agency ``compare all [high-risk] claims ... for movements from January 1995 to the end of the program with the claimants' previous claims to assess their reasonableness.'' This is undeniably so. However, it also reflects a narrow and incomplete reading of the Auditor General's report. That report revealed the strong likelihood that non-arm's length carriers were submitting claims based on rates higher than those charged by their unaffiliated counterparts in order to receive an inflated subsidy. In light of this a more appropriate test of reasonableness ought to include a comparison of the rates charged by these high-risk carriers with those charged by lower-risk, more competitive elements in the trucking business. It is only in this way that evidence of questionable rates can be truly found and the treasury be protected against excessive subsidy payments. Accordingly, the Committee recommends that

    The NTA take immediate steps to amend its Rate and Activity Review Process in order to compare the level of freight rates charged by non-arms' length carriers for movements contained in their subsidy claims with rates charged by arm's length carriers and report the results, including the dollar amounts and number of irregularities, of the 2,500 audited claims, to the Committee.

In the meantime, the Committee notes that during the meeting Mr. Rivard demonstrated an openness to making the rate review more rigorous. This included a commitment on his part to go over subsidy payments made since January 1995 to verify whether or not these claims were based on rates that had declined since the termination announcement.

Finally, the Chairman of the NTA was asked whether or not his Agency intended to collect subsidy overpayments on a retroactive basis. Mr. Rivard replied that he would have to check with his senior staff. If he found that his Agency has the power to do this, he would do it. If he found that this authority was lacking, he would do what he could to obtain it from Transport Canada and report the results to the Committee. The Committee looks forward to receiving a timely answer to this question.

III.CONCLUSION

In closing, the Committee wishes to express its profound disappointment that timely action was not taken by those responsible to solve the problems associated with ARFA. As early as 1985, it was known that an important loophole existed in one of the program's elements. The extent of the NTA's efforts to solve this problem amounted to two letters that were sent to the Department of Transport. There is no evidence that any corrective action was taken in response. The NTA did not pursue the matter further. The loophole remained in place.

A second major event took place that called for swift action on the part of those responsible for ARFA. In the late 1980s, the rates charged by the trucking industry in the region where ARFA was operative were deregulated. Those in charge of the program's administrative and policy elements ought to have known the impact this change would have on a subsidy regime based on a regulated environment. The program should have been amended to reflect this change. It was not.

In 1987, another signal was sent to those responsible that there were serious problems with the program. In that year, the Office of the Auditor General released a report listing a number of concerns about ARFA's administration. The report called for an evaluation of the program and a strengthening of its administrative controls. An evaluation was finally conducted six years later and produced a study that led finally to ARFA's cancellation in July 1995.

Lastly, in 1995, after it was announced that ARFA was being terminated, the Auditor General released a report that has been the basis of this Committee's examination. That report provided clear evidence that certain aspects of the program were vulnerable to risk and recommended ways of minimizing that risk during ARFA's last phase. Steps have been taken in accordance with this advice, although, as the Committee has noted, those steps are not as rigorous as they could be.

The time for action, however, was not in 1995 during the final months of the program. As the preceding summary indicates, there was an awareness that something was wrong as early as 1985 -- ten years ago. That was when corrective measures should have been taken.

There is more to being a good officeholder than simply following the rules. Those who hold public office are also obliged to show regard for the interests of citizens and to protect those interests to the fullest possible extent. As the Auditor General has pointed out, public service is a public trust. The manner in which ARFA has been mishandled is a glaring example of public trust poorly served. The Committee fully expects that public servants will be proactive in discharging the higher duties which are imposed upon them by the positions they occupy. In so doing, ARFA should serve as an example of what may go wrong when those duties are not fulfilled.

Pursuant to Standing Order 109, the Committee requests the government to table a comprehensive response to this Report.

A copy of the relevant Minutes of Proceedings (Issue No. 36 which includes this Report) is tabled.

Respectfully submitted,

Le président,

RICHARD BÉLISLE

Chair.

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