Public Accounts — Issue No. 14 — Tuesday, October 16, 2007 (HTML)

2007 Legislative Session: Third Session, 38th Parliament
SELECT STANDING COMMITTEE ON PUBLIC ACCOUNTS
MINUTES AND HANSARD

Present: Rob Fleming, MLA (Chair); Joan McIntyre, MLA (Deputy Chair); Iain Black, MLA; Guy Gentner, MLA; Randy Hawes, MLA; Mary Polak, MLA; Bruce Ralston, MLA; John Rustad, MLA; Ralph Sultan, MLA; John Yap, MLA

Officials Present: Morris Sydor, A/Deputy Auditor General; Cheryl Wenezenki-Yolland, Comptroller General

2. The Committee considered the Auditor General’s Report entitled Changing Course — A New Direction for British Columbia’s Coastal Ferry System: A Review of the Transformation of BC Ferries (Report 8, December 2006)

3. Resolved, that the Committee endorse the recommendations contained in Report 8, Changing Course — A New Direction for British Columbia’s Coastal Ferry System: A Review of the Transformation of BC Ferries.

4. The Committee considered the Auditor General’s Report entitled Switching Tracks: A Review of the BC Rail Investment Partnership (Report 12, March 2007)

5. Resolved, that the Committee endorse the recommendation contained in Report 12, Switching Tracks: A Review of the BC Rail Investment Partnership.

REPORT OF PROCEEDINGS
(Hansard)

SELECT STANDING COMMITTEE ON
PUBLIC ACCOUNTS



CONTENTS

		Page

Auditor General Report: Changing Course: A New Direction for British Columbia's Coastal Ferry System: A Review of the Transformation of B.C. Ferries		301
	M. Sydor
	J. Orr
	K. Miller

Auditor General Report: Switching Tracks: A Review of the B.C. Rail Investment Partnership		307
	R. Jones
	S. Taylor
	K. Mahoney

Chair:	* Rob Fleming (Victoria-Hillside NDP)
Deputy Chair:	* Joan McIntyre (West Vancouver–Garibaldi L)
Members:	* Iain Black (Port Moody–Westwood L) * Randy Hawes (Maple Ridge–Mission L) * Mary Polak (Langley L) * John Rustad (Prince George–Omineca L) * Ralph Sultan (West Vancouver–Capilano L) * John Yap (Richmond-Steveston L) Harry Bains (Surrey-Newton NDP) * Guy Gentner (Delta North NDP) * Bruce Ralston (Surrey-Whalley NDP) Diane Thorne (Coquitlam-Maillardville NDP) * denotes member present


Witnesses:	Russell Jones (Office of the Auditor General) Kevin Mahoney (President and CEO, B.C. Railway Co.) Nancy Merston (Ministry of Transportation) Kathie Miller (Ministry of Transportation) Jamie Orr (Office of the Auditor General) Morris Sydor (Acting Deputy Auditor General) Sheila Taylor (Ministry of Transportation) Cheryl Wenezenki-Yolland (Comptroller General)

R. Fleming (Chair): Good morning. I'll ask members to take their seats, and we'll begin this morning's meeting of the Public Accounts Committee.

Welcome, everybody. It's good see members back in the capital for this meeting, and it's good to see some faces from the committee that were participating in the Canadian Council of Public Accounts Committees conference that we hosted here in August. All those skills we learned on how to run better public accounts committees will be put to the test this morning.

We have an agenda with two reports before us this morning. Discussion or changes to the agenda? Seeing none, then, all those in favour of adopting the agenda?

R. Fleming (Chair): The first report before you, Members, is Changing Course: A New Direction for British Columbia's Coastal Ferry System: A Review of the Transformation of B.C. Ferries. We have some witnesses from the Auditor General's office.

Morris Sydor, are you going to introduce your team to us this morning and begin the presentation?

M. Sydor: Yes, I will. Thank you, Chair. I do have a few introductory comments that I'd like to make. I'm here as acting Deputy Auditor General for two more weeks. I'm taking Errol's place. Errol's not available this week. He's spending the whole week in Luxembourg.

Earlier this year he received an invitation from the European Court of Auditors and the International University Institute of Luxembourg, to speak at a three-day seminar on performance auditing. This seminar is a first step toward the development of an MBA program for performance auditing at the institute. Errol was the only Canadian presenter invited and will speak about our approach to performance auditing, our work in promoting performance reporting by government and our work on the 2010 Olympics and public-private partnerships.

Our office accepted the invitation because it represents a significant international recognition of the leadership role our office has played in the areas of performance auditing and accountability reporting. I'm sure that when Errol gets back, he'll have a lot of interesting experiences to relate to you.

Auditor General Report:
Changing Course: A New Direction
for British Columbia's Coastal Ferry
System: A Review of the
Transformation of B.C. Ferries

M. Sydor: As you mentioned, Chair, we have two reports on the agenda today. With me today are Russ Jones, assistant Auditor General, and Jamie Orr, director in our office. Russ was responsible for both of the reports, and Jamie led the fieldwork for both projects. We reported on our review of B.C. Ferries in December of 2006. With your permission, Members, I'll ask Russ and Jamie to take the committee through the B.C. Ferries report.

J. Orr: Good morning. I'm pleased to have the opportunity to present this report on the change in the British Columbia ferry system. I'll start with a brief description of the structure and the objectives of the transformed ferry system and then go on to present the purpose of our review and a summary of the findings.

In April of 2003 government relinquished control of the B.C. Ferry Corporation to the newly created B.C. Ferry Authority. The corporation, now renamed British Columbia Ferry Services, was allowed to repurchase the shares held by the province for some $427 billion in debt and about $75 million in preferred shares. British Columbia Ferry Services then issued a single common share to the authority, making the authority the legal owner of the ferry services. The debt to the province has since been repaid, using private sector borrowings. However, the province continues to hold the preferred shares.

Ownership of the terminals was retained by the province. B.C. Ferries has the exclusive right to these terminals through a prepaid lease with a term of 80 years, including the renewal option.

You may notice in our report that we refer to both entities collectively on occasion as B.C. Ferries. Although they are separate entities with separate boards of directors, the authority is legal owner and appoints the British Columbia Ferry Services' directors. At the time of our report and currently, all the directors to the authority are also directors of Ferry Services.

The objectives behind the changes were to resolve long-standing governance problems and to make the ferry services sustainable in the long term. The governance problems have been identified in various reports, including some from this office. Previously the major decisions about operations, capital replacement and financing were made by government, not B.C. Ferries or its board, and sometimes these decisions were influenced by competing public policy priorities. The changes to B.C. Ferries are intended to allow the board to make its own business decisions based on business reasons.

The second objective is to ensure that the ferry system is sustainable in the future, largely through reducing its dependence on public funding.

In our report we seek to answer two questions. Are government's objectives in making the transformation likely to be achieved with the mechanisms in place? And how is progress towards these objectives monitored, measured and reported to the government, the Legislative Assembly and the public?

We felt that the transformation had been successful in its immediate governance objective of separating public policy decisions from business decisions. While B.C. Ferries must continue the core ferry services set

out in the coastal ferry services contract, it has sufficient independence that it can make its own operating, capital and financing decisions. The most significant indication of this has been the decision to have the new C-class ferries built overseas. Previously new ferries were built in British Columbia.

Government retains its ability to pursue public policy goals through the coastal ferry services contract. This covers the routes, the number of round trips in each route, the hours of operation and the capacity to be provided as well as the fees to be paid for these services. The contract also provides for the continuation of subsidized travel by school children, seniors, the disabled and certain medical cases. However, B.C. Ferries is now directly reimbursed for these.

Although B.C. Ferries is responsible for setting fares within the price cap set by the regulator, the province can influence these through the service fees. To lower fares, government can increase its service fees thereby lowering the price caps and the fares. Conversely, lower service fees will result in higher fares.

The independence granted to B.C. Ferries carries some risk. The new B.C. Ferries is neither a Crown corporation accountable to government nor a private sector corporation accountable to shareholders. In the absence of direct accountability to any owner, there may be, or there is, less incentive for the company to perform well. This could reduce government's ability to achieve its objectives for the ferry system.

We did note factors, including provisions in the act, which encourage good performance. For example, the ferries commissioner can apply pressure to improve productivity when setting the price caps.

The process for selecting directors for the B.C. Ferry Authority from the appointment areas ensures that those most affected by the ferry system are represented on the board. The board of the authority was required to, and has, prepared a profile of the skills and experience necessary to the board as a whole. These must be considered when appointing new members.

In addition, B.C. Ferries is subject to considerable scrutiny by media and the public. However, while these factors provide increased incentive for good performance, they do not replace the ability of the company's owners to hold the board of directors responsible for its performance. We therefore concluded that the independence risk is not completely mitigated.

To address this, we recommended that there should be criteria for evaluating how well the coastal ferry system is achieving the objectives of the transformation, and that evaluation should be carried out at least once in every performance term to determine when or if changes to the Coastal Ferry Act should be made. That is, government should periodically step back and assess whether the direction taken by B.C. Ferries is in line with government's strategic direction.

The Coastal Ferry Act contains several provisions aimed at making the ferry system sustainable through reducing its dependence on public funding. A commercial approach is encouraged both to increase revenue and to keep costs down. As well as improving the efficiency of core services, B.C. Ferries can expand the ancillary services to increase revenues. Examples of such increased ancillary services are the Tsawwassen Quay retail outlet and the expanded reservation system on major routes.

There's a greater reliance on user-pay in order to reduce, although not necessarily eliminate, government contributions that would otherwise be required. We noted that the ferry service on the major routes between Vancouver Island and the lower mainland is already 100 percent user-pay.

B.C. Ferries is required to seek alternative service providers to provide core ferry services at lower costs. By introducing competitive pressure, government expected B.C. Ferries to become more efficient and thereby reduce costs. However, introducing such competitive pressure is not easily done. B.C. Ferries is in the position of seeking alternative service providers while at the same time competing against them.

B.C. Ferries also has the advantage over new operators in that its administrative systems and staff are already in place so the cost of an additional route would only be the direct cost for that route while a new service provider will likely have to meet additional overhead costs as well.

The act also created the position of the British Columbia ferries commissioner, who is responsible for regulating ferry services and tariffs charged to the travelling public. The commissioner is to encourage the operator to minimize expenses, as long as safety is not affected.

As already mentioned, in setting the price caps for the route groups, the commissioner may apply a productivity factor, which may require the company to become more efficient in order to maintain its return on equity. We note that he has in fact done so for the second performance term.

The commissioner has power to enforce his rulings. For example, should he find that B.C. Ferries is not complying with the coast ferry services contract or is exceeding the price caps, he can issue an order to the company to correct the situation. If the company does not comply with such an order, it may be fined up to half a million dollars.

However, as already mentioned, B.C. Ferries does not answer to any owners who would feel the effect of financial penalties and therefore cause the directors to avoid such penalized activity. This means that the penalties may not be as effective as intended.

The second question we sought to answer was how progress towards government's objectives is monitored, measured and reported to government, the Legislative Assembly and the public. We found that both the commissioner and the Ministry of Transportation monitor the provision of services to ensure that the requirements of the coastal ferry services contract are met.

However, there is no provision to monitor how well the ferry service is achieving the objectives of the transformation. Our earlier recommendation for periodic evaluation addresses this concern.

We also found that the coastal ferry services contract requires B.C. Ferries and the ministry to develop performance measures to determine the quality of service provided. However, at the time of our report this had not been done. Accordingly, we recommend that the Ministry of Transportation and B.C. Ferries develop the required performance measures relating to quality of service.

British Columbia Ferry Services and the B.C. Ferry Authority issue separate annual reports. British Columbia Ferry Services also reports quarterly and annually to the commissioner on performance, and each performance term it reports on its alternative service plan. The commissioner issues his own annual report. Each entity also maintains its own website providing additional information.

However, we believe it would be of value to taxpayers, ferry users and legislators to have a single report covering significant actions within the ferry system. This would help in assessing how the system is performing and what value is being received for the funding provided. We therefore recommend that the Ministry of Transportation issue, separately or as part of its annual service plan report, a comprehensive summary report on the coastal ferry system.

Since 2003 we have seen a number of developments. Orders were placed for six ships, including the motor vessel Sonia, now renamed the Northern Adventure. There has been an increased focus on ancillary services, both on board and at the terminals. Private sector financing was obtained to pay the debt owed to the province, and since our report was issued, the ferry commissioner has issued his ruling on price caps for the upcoming second performance term.

Except in the area of alternative service delivery, the new structure appears to be functioning as intended. Significant capital spending is still required, and new financing will be required for this. As well, the initial term of the coastal ferry services contract is 60 years, and we're still in the first, or transitional, performance term of this contract. It has not yet been tested in many areas.

For these reasons, it is still too early to say whether the new ferry system will fully achieve its objectives. However, we believe that the structure created has the potential to achieve these objectives. Business and policy decisions appear to have been separated already, and B.C. Ferries is moving ahead with its capital spending program and replacing aging ferries and other infrastructure.

As noted, we have some concerns over the absence of direct accountability to the owners. Periodic evaluations will be necessary to determine whether the direction taken by B.C. Ferries continues to be compatible with the strategic goals of government.

R. Fleming (Chair): Committee, should we hear from the Ministry of Transportation and then entertain questions?

R. Fleming (Chair): We'll just proceed to the next presentation on this report. I think we have with us this morning Sheila Taylor, the assistant deputy minister, finance and management services; and Kathie Miller, the assistant deputy minister in transportation planning and policy.

K. Miller: Good morning, Chair, Deputy Chair and committee members. I'm Kathie Miller, the assistant deputy minister, transportation planning and policy. I'm pleased to introduce my colleague Nancy Merston, who is the director of the marine branch for the Ministry of Transportation.

I have a brief presentation that I'd like to start now. Nancy will deal with the slides for me.

Responsibility for the province's interface with B.C. Ferries came to the Ministry of Transportation in April 2003, when B.C. Ferries ceased to be a Crown corporation and when legal ownership of the B.C. Ferry Corporation was transferred to the B.C. Ferry Authority. This is a very active file for us, and we work hard at developing productive and appropriate working relationships with the independent B.C. Ferry Services company and the British Columbia ferries commissioner as well as stakeholders and user groups.

Our activities are largely focused by the requirements set out in the coastal ferry services contract and are carried out in the context of the Coastal Ferry Act.

First, we'd like to thank the Auditor General's staff for their work on this review and report. The ministry's general response to the report is that the report accurately reflects steps the province has taken in setting a new direction for delivery of coastal ferry services. We agree that the establishment of the B.C. Ferry Authority, B.C. Ferries company and the British Columbia Ferry Commission has achieved the immediate objective of separating government policy decisions from the business decisions of B.C. Ferries. We also agree that periodic reviews of the relatively new business model will help determine if the stated government objectives continue to be met.

The first recommendation from the audit reads that government establish criteria for evaluating how well the coastal ferry system is achieving the objectives of the transformation and conduct evaluations of that performance at least once in every performance term in order to determine when or if changes to the Coastal Ferry Act should be made.

In our response we agree that a periodic review to evaluate how well the coastal ferry system is achieving the objectives of transformation is prudent. This, of

course, would be in addition to the ongoing monitoring of performance and contract administration activities that the Ministry of Transportation undertakes. We are considering what might be the most effective process to implement this evaluation, but neither a process nor a time line has yet been established.

In the meantime, since the Changing Course report, the ministry has concluded negotiations with B.C. Ferries for the second performance term of the service contract, which is effective April 1, 2008, for a four-year term. The objectives of ensuring long-term stability by minimizing the cost of the ferry system to the taxpayer, protecting the ferry system in the long term and improving customer service framed those negotiations.

Two outcomes that illustrate this are that we did reach agreement on service flexibility in the number of sailings per day, to better match demand patterns without dropping below core service levels; also, taxpayer funding remains unchanged, with the exception of the northern route strategy, which was an increase in funding that was contemplated in the service contract. Also, the ministry meets with the chairs of the ferry advisory committees for ongoing dialogue with ferry users.

The second audit recommendation — that the Ministry of Transportation "issue, separately or as part of the annual service plan report, a comprehensive summary report on the coastal ferry service" — brings this response. Independent entities such as B.C. Ferry Services, we believe, are best positioned to report on their own activities on a timely basis. Various time lines and report issue dates for the company and for the commissioner do not line up well with the ministry's annual reporting time lines.

However, the ministry will provide links to the individual reports on the ministry's Internet site to facilitate access to the most up-to-date reports available publicly. Payments under the service contract are reported in the ministry's annual service plan and in the public accounts.

We are also considering increasing the information regarding ministry activities with respect to the service contract in the ministry's service plan report. Action to date is that the ministry Internet site has been updated to include information on the new model, the contract documents and links to the B.C. Ferry Authority, B.C. Ferries and the British Columbia Ferry Commission.

The third audit recommendation is that the Ministry of Transportation and B.C. Ferries develop performance measures relating to the quality of service as required by the coastal ferry services contract. In our response we noted that we are reporting relating to quality of service already in three areas: on-time performance, customer satisfaction and traffic congestion. However, we did make a commitment for the ministry and B.C. Ferries to meet and discuss additional performance measures relating to quality of service, which we have done.

Since the Auditor General's report and the ministry's response, the Ministry of Transportation did meet with B.C. Ferries to discuss new performance measures for the following categories: safety, operational reliability and value for money. Since the audit came out, B.C. Ferries has added new measures, which appear in their 2006-2007 annual report, for employee safety, passenger safety, reliability and cost per passenger.

G. Gentner: I suppose we should just cut right to the chase, the recommendations, if we may. There are three there in particular, of course. Many members may want to have a go at it as well, obviously.

Recommendation 1 — that the government establish criteria for evaluating how well the coastal ferry system is achieving. I want to know exactly if…. The ministry's response seemed to be very curt, and I know this report is somewhat old per se, but I'm wondering how much has the Ministry of Transportation put forward some of these recommendations.

In particular, what does B.C. Ferries see in its need to develop a relationship with the ferry advisory committee and the chairs who proposed to the ministry before that they should be working alongside, with an objective to establish criteria for evaluating how well the coastal ferry system is achieving? Have they been listened to? How much community input is going to be placed into this need for criteria?

K. Miller: The ferry advisory committees that have been established by B.C. Ferries and were in existence before this new model provide an interface with B.C. Ferries, and they discuss a lot of the operating aspects. The Ministry of Transportation has just recently, over the last year or so, engaged the same ferry advisory committees through their chairs for discussions of things like service levels and where there's an opportunity for them to advise us on what impacts they have on the local economy, etc., with changes in fares or in the service.

Going forward, we hope to be able to work with the ferry advisory committee chairs to discuss service level changes that might be mutually beneficial. That's not something that's done very quickly, so we didn't really have an opportunity to do much of that in performance term 1, but we believe we'll be able to do that in performance term 2.

The evaluation that I took from the audit recommendation concerning this was an evaluation to make sure that the arrangement with B.C. Ferries through the act and through the contract continues to meet the requirements or objectives set by government.

I haven't given a lot of thought, but certainly will, as to how public input might be helpful in that. Certainly, the ferry advisory committees would be a good conduit for that. We haven't dismissed it. We just haven't yet considered it.

I don't understand this — why you wouldn't have. I don't know what the difference is between performance term 1 versus performance term 2. But if you want to evaluate what the transformation is, you have to talk to the clients — namely, the public in general. So again, when will the public have some input into determining the criteria for evaluating how the ferry system has achieved its objectives for transformation?

K. Miller: We'll be glad to get input through the ferry advisory committees on how that public input might best be determined on that. We just haven't done it yet.

K. Miller: When we resume discussions with the committees. We're planning for a meeting in November. We can certainly put that on the agenda.

J. McIntyre (Deputy Chair): I just want to maybe shed a little bit of light on the discussion that's happened so far.

In my limited experience…. Bowen Island actually falls in my constituency, so I've had a fair bit to do with their interest, obviously, in ferry service. The feedback I've had is that the advisory committees have really appreciated the extent to which the ministry has been listening and involving them in certain decisions, certainly related to the flexibility and the fact that every route has been able to be tracked individually so that if any given route, like Bowen, was able to accrue some savings for one reason or another — or less frequent service, or something like that — any savings would accrue directly to that route and would be affected in fares.

The feedback I've got is actually fairly favourable — that there is input from the users who are impacted through those advisory committees.

Secondarily, maybe to Mr. Gentner's question, is that, certainly, the surveys…. It appears from the presentation that B.C. Ferries is already conducting surveys on customer satisfaction, reliability, value for money, etc., so that's obviously a way in which the travelling public is able to directly input. All those criteria — whatever there are; there are now, it looks like, six — that are measured are certainly a way for the public to voice their opinions.

I notice quite a difference in the degree of government subsidy of these various ferry routes. Have you been able to ascertain a rationale or a model or some reasoning and logic behind the very remarkable differences in subsidy paid to various ferry routes?

In particular, I'm mindful of the fact that it appears, according to the numbers in the report, that the subsidy on the Horseshoe Bay–Langdale route, which is frequently used by my constituents, is very, very low, but other ferry routes in the province have well over 60-percent subsidy from the taxpayer. Why is this?

K. Miller: The subsidy levels, or how it's distributed amongst the non-major routes as the major routes don't get a subsidy, are really to address the gap between the costs of the ferry — which could be all the operating costs and if there's new infrastructure that's been put in at the terminal or new vessels, where there are costs related to that capital investment — and the revenue that comes from users.

The subsidy is largely distributed to close that gap to an equal level so that there are differences in the amount of the subsidy, but the price cap will be the same percentage for all of the non-major routes.

G. Gentner: Recommendation 2. It seems that the response from the ministry is very evasive. It is not going to come forward with an independent or a comprehensive summary report. I still don't understand why. I know the ministry seems to believe that if it puts links on its webpage to the other entities, that seems to be good enough.

Are we going to see a comprehensive summary, as the recommendation from the Auditor General suggests, or not?

K. Miller: Not as suggested by the audit. But in terms of satisfying what is…. As to the requirement for access to all of the reports issued by the company or the authority or the commissioner which would be germane to that, we're seeking to find a way of making the most up-to-date information as easily available as possible, but not to summarize all of it in a report issued by the Ministry of Transportation.

K. Miller: Well, there are some logistical difficulties with that in terms of getting the up-to-date information available for when we issue reports versus when reports are issued. Also, this is an independent company that has to report on its…. In its annual report there are requirements under the act about when they have to issue these reports. Their lenders require certain documents to be filed and to be available publicly.

We believe there is a comprehensive array of reports that are already required and are available. The main issue might be that it might be a little hard for folks to find it, so we're trying to facilitate that by having one-stop shopping of where to get links for all of these most up-to-date reports.

G. Gentner: Therefore, I assume that the ministry's position is that it doesn't believe it needs a comprehensive analysis of what's happened to B.C. Ferries. Just for the record.

R. Fleming (Chair): I wonder if you could comment just on the Auditor's discussion around what you're obligated to do under the contract that you've entered

into with B.C. Ferries in terms of reporting and what the gap is between what you're doing now.

In part of this discussion around reporting, how difficult…? If some of this data can be gathered by a resourceful person or a member of the public, a taxpayer, in different locations, how difficult is it for B.C. Ferries to then put it in one place and just include it as a section of its annual report that goes to the Legislature and is available through other venues?

R. Fleming (Chair): There were two questions, actually. The first was: what is the gap between what you're obligated to do in the contracts that you have with B.C. Ferries in terms of reporting, which is discussed in this audit?

Secondly, in terms of this question of adding extra reporting on B.C. Ferries operations in the ministry's annual service report, isn't it a case that you could collate and publish information that you suggest is available elsewhere, and you could provide web links and those kinds of things that may be in existence now and put that with additional analysis into the annual service plan? I'm failing to see the difficulty there.

You've suggested there's a time lag in reporting between the two entities, but so be it. You go with the most current information available, I would think.

K. Miller: Sure. It's certainly possible to gather up all of these reports and have them as an appendix, but it would be huge. We have service contracts with lots of service providers. We don't do that for any of them that I'm aware of. It's not impossible to do that. It just seemed unnecessary.

R. Fleming (Chair): Maybe I could ask the Auditor, then. What, under the contract, in terms of obligations for reporting, is not being fulfilled as the most current part of this report would suggest?

J. Orr: I don't believe there are any clauses in the contract or the act that aren't actually being complied with. There is a lot of reporting. There is a lot of information being provided. Our feeling was that perhaps it's too much information to be easily absorbed.

We'd like to see a single source that a citizen could go to and find out how the ferry service is performing. That was the recommendation for a summary report that would pull together the significant events and actions of the year.

Again, I don't think there's any case where there's no…. I don't believe there is any non-compliance with either the act or the contract.

R. Fleming (Chair): Okay. On the performance measure issues, then. Is it the case that your office and the Ministry of Transportation are still working on additional measures that relate to the quality of service and that there is a dialogue and a plan for follow-up report to see when those additional measures might be reported?

J. Orr: We haven't actually discussed that with the ministry since the report came out. At that time, that particular clause had not been complied with in developing the performance measures, so we had recommended that it be done. It sounds now as if that may have been addressed.

J. Rustad: I'm a little curious. With the report that you've done here, A New Direction for British Columbia's Coastal Ferry System, I'm wondering if you particularly looked at the issue of independence. What I mean by that is that past practices have led to some pretty significant issues in the ferry system. I'm wondering if the measures that have been put in place are sufficient to eliminate the opportunity for political interference in the process of the ferries that could lead to a future issue of a potential fast ferry–type fiasco.

J. Orr: As far as the independence goes, I suppose there's really a continuum there. It can be totally free, or it can be totally controlled. The report states that B.C. Ferries is now sufficiently independent that it's able to make its own business decisions. That's based on the evidence to date.

We believe that under the criteria that are in existence right now for government accounting, Ferry Services is independent. Does that answer your question?

J. Rustad: In terms of independence, are there sufficient checks and balances in place that would prevent the type of incident we saw associated with the fast ferry fiasco?

J. Orr: I hate to give an absolute answer, but I would say that it appears yes. Those checks are in place.

R. Hawes: I just want to go back to Mr. Gentner's point and the way he left it with the ministry staff.

It just seems to me that there is no great burning desire among the public for a simplified, comprehensive report. If there were such a burning desire, it would seem to me that through the advisory, the public has an opportunity to give input and make the request. Certainly, they could ask the advisory committee, through some of the survey stuff that's being done, that B.C. Ferries be asked to supply a simplified, comprehensive report. It would seem to me a pretty easy thing for them to do, perhaps.

But I don't really see a need if there's no desire among the public for such a report. For everyone else, I think they do have the ability to put together the report. That may seem complicated to some, but those who are really interested probably have the ability to do the analysis themselves.

R. Sultan: On this matter of monitoring performance, I think the points are well taken that perhaps some quantitative measures could be contrived to track this a little bit more than exists today.

Let me just say, as a person who is a somewhat frequent user of the ferry service and certainly in contact with people who are very regular users of the ferry service, that the overall impression I get is that the ferry service — as the title of the Auditor General's report says, A Review of the Transformation of B.C. Ferries — has indeed been transformed under this new government's model.

The ferries — it's my impression, talking to people — are cleaner. The attitude of the staff is much improved. The ambience of the vessels is friendlier. People are happier. This has, under the leadership of Mr. Hahn, become an excellent ferry service.

I might also add that I frequently go to visit my son in the Seattle area with Washington State Ferries. Antiquated vessels going back all the way to the days of President Coolidge are still in service. The U.S. Coast Guard is demanding that they remove some of these riveted vessels from service because they leak so much. Can you imagine subjecting the public to such a service? It's dreadful.

By comparison, we have a ferry service up here to be very proud of, and it's getting better, so hats off. I think it's been a very successful transformation.

R. Fleming (Chair): It seems like just yesterday that he was inaugurated as president, though.

M. Polak: Just with respect to the whole performance measures issue. Obviously, that's a major focus of government across the piece. How many times have we talked about performance measures here? At this committee I think it's probably all we talk about.

With respect to this report, though, it's my understanding that the performance measures being discussed and the evaluation conducted by the Auditor is reflective of the question asked, which is: has B.C. Ferries met the transformation objectives in terms of structure? Is that correct? We're not primarily here discussing a report that would engage the full range of services that B.C. Ferries provides, down to the sunshine breakfast.

J. Orr: The concern was that there should be a mechanism to make sure that government is keeping an eye on the ferry service to ensure that it continues to meet government's objectives.

M. Polak: Prior to the coastal ferry services contract that's in place now, were there performance measures outlined in the past that were regularly reported on?

J. Orr: I don't know the answer to that. However, B.C. Ferry Corporation was a Crown corporation under the direct control of government at that time.

M. Polak: Perhaps that could be a question. I don't know if you might have the answer to that in the ministry.

R. Fleming (Chair): Maybe that question can be answered to the committee at a later time?

G. Gentner: Just on fares increase. The report mentions that the B.C. ferries commissioner can enforce his or her orders by imposing financial penalties on the company. I quote it: "Due to the absence of any financial impact on these controlling B.C. Ferries, however, we question how effective these penalties can be in ensuring compliance."

J. Orr: Simply that with no shareholder to feel the pinch of financial penalty and to motivate the board to change its behaviour, there's no real reason for the board to make that change, assuming it had a reason to engage in the original behaviour to start with.

R. Fleming (Chair): Okay, committee, I would suggest that we move on to the key findings and recommendations of the report, and I will look for a motion to adopt the report and its recommendations.

R. Hawes: I would move that we adopt the report and the government's response.

R. Fleming (Chair): Okay, so the report recommendations and the response. Is that what you're saying?

R. Fleming (Chair): Thank you to our witnesses for being here this morning, and Mr. Orr for your presentation and your work on the audit, and to the ministry staff as well.

We will switch over to Switching Tracks on B.C. Rail. I'd like to welcome Russ Jones, the assistant Auditor General, who is going to lead the presentation this morning on the second report, Switching Tracks: A Review of the B.C. Rail Investment Partnership.

Auditor General Report:
Switching Tracks: A Review of the
B.C. Rail Investment Partnership

R. Jones: Thank you, Mr. Chair, and thank you, Members, for allowing me to come and present our report on Switching Tracks. It's a review of the B.C. Rail

investment partnership. I'm pleased to take you through it, hopefully in a fairly quick manner, and summarize what we've discussed in this report. We completed this back in November of 2006, so it's getting slightly dated as well.

In our review we sought to clarify the roles and responsibilities of the province, British Columbia Railway Co. and the federal agencies in overseeing CN on the former B.C. Rail line. We did not attempt to investigate or report on several of the derailments that have happened after CN took over from B.C. Rail. This falls under the federal jurisdiction and is the responsibility of Transport Canada and the Transportation Safety Board of Canada.

We looked to answer the four questions that you see on the slide. What are CN's commitments to the province and stakeholders under the partnership? Who is monitoring CN to ensure that its commitments to the province and stakeholders are fulfilled? What remedies are available should CN fail to meet its commitments? Is CN fulfilling these commitments?

Before we look at the answers we found, I'm just going to take you on a quick look at how the province got to the partnership arrangement with CN.

Prior to the partnership agreement with CN, B.C. Rail conducted its operations over a rail network of approximately 2,315 route kilometres and 740 kilometres of industrial yard and track sidings.

Back in 2002, after consultation with shippers and railway communities and other stakeholders, a number of problems with B.C. Rail were identified, such as declining service, a lack of rail cars, uncompetitive rates and declining economic opportunities. Add to that the mounting debt.

The province decided there was a need to find an experienced operator for the railway. The Canadian National Railway Co. — or as we call it, CN — was the successful bidder in that process.

There are two main transactions involved in the partnership. The sales of the operations and the assets, such as the trains, were done through what they called the transaction agreement. The lease of the railway line, which includes the right-of-way and railbed assets such as bridges and tunnels, was set out in what they called a revitalization agreement.

The one thing that wasn't included in these agreements was the Roberts Bank connecting line. It still is in operation with B.C. Rail as we speak today.

The amount of consideration paid for all of this was $1 billion. The third agreement, the consent agreement, was required to supplement these other two agreements in order to address some competition issues that were identified by the Competition Bureau, a federal agency. It provided further service and rate commitments that were not specifically addressed in the first two agreements.

With that brief introduction, let's just take a look at the four questions and what we found.

There are two broad categories of commitments. Those which are fulfilled by a single event or implementation are referred to as one-time commitments and are generally aimed at providing economic development opportunities to northern communities.

Some examples of that. There was a requirement to establish a northern division office and modern wheel shop in Prince George by CN and to transfer some of the wheel production for western Canada to this shop. There was also supporting the infrastructure improvements to the Prince Rupert Port Authority by constructing some terminal trackage and upgrading rail infrastructure. That was up to a maximum of $15 million.

Commitments which must be fulfilled by meeting ongoing performance standards are referred to as performance commitments. Some examples of those are lower rates in aggregate, shorter and more predictable transit times measured against benchmarks, and service performance for connecting carriers on par with the service that CN provides for its own traffic. Performance commitments are generally monitored and enforced by the federal agencies.

Who's monitoring these commitments? Prior to the partnership B.C. Rail's operations did not extend beyond the borders of British Columbia, so what they were subject to was regulation by the province, not by the federal government. Because CN operates across the country, that all changes. Now it's the federal agencies that have authority to regulate what CN does.

Two of the more important federal agencies that are involved in this are the Competition Bureau, which looks at anti-competitive practices in the railway industry across Canada and which is responsible for monitoring and enforcement of performance terms in the agreements, and Transport Canada, which is an independent, quasi-judicial tribunal that makes decisions on economic matters involving federally regulated transportation.

The agency serves as a dispute resolution authority over certain transportation rate and service complaints and monitors the transit time performance commitments that are in the agreements.

Much of the oversight by these two agencies relies heavily on shippers or competitors monitoring CN's operation, which is quite typical of the industry across Canada. The province, through B.C. Rail, monitors the one-time commitments made by CN and the required environmental management of the lease property.

Safety and minimum operating standards of the lease property are the purview of Transport Canada, which I mentioned earlier. You will note that in our report, in the appendix at the back, there is a list of all of the commitments, who's responsible and how they're being looked at.

What remedies are available if things don't go right? The transaction and consent agreements provide dispute resolution remedies for connecting carriers. Initially, the service deficiencies are dealt with between the carrier and CN. However, as in any dispute resolution, if they can't come to an agreement, an arbitrator is appointed by the Canadian Transportation Agency, and their decision will be binding in these negotiations.

Shippers are also protected in the form of financial penalties that can be assessed if CN cannot provide

cars for them. In addition, if CN fails to meet the benchmark transit times as set out in the consent agreement, then they are required to pay a penalty into a trust fund that's held by the B.C. Rail corporation. To date there's been over half a million dollars paid into that fund. These funds are used for upgrades to the railbed in order to improve reliability in transit times.

Industry stakeholders can seek remedies in a variety of ways as well — through the CTA with respect to rate and service complaints and through the bureau because it is responsible for the monitoring and enforcing of CN's performance commitments. This is a complaint-driven process, and the remedies are as varied as the complaints.

The final remedy available to the province is one that, hopefully, won't ever have to be inflicted. That would be the termination of the lease for breach of the conditions of the agreement.

This is where we found a weakness in the reporting by the bureau. Because there are performance commitments that are enforceable under the lease, this means there are remedies for non-performance available to B.C. Rail Co. in the province, in addition to those applied by the Competition Bureau. However, there's no requirement for the Competition Bureau to notify BCRC of any non-compliance. So BCRC could be delayed in taking actions, should it become necessary.

Our recommendation is to eliminate any delay due to lack of knowledge. We recommend that BCRC, as signatory to the consent agreement, request that the Competition Bureau provide BCRC with a copy of any notice of non-compliance at the time the notice is given to CN.

Is CN fulfilling its commitments? At the time of our report we found that CN's one-time commitments had largely been met or that work was in progress to meet them. It is too early to assess whether CN is in compliance with the environmental laws as, at the time of our review, the protocol for monitoring had only recently been signed and only one-third of the tracks had been audited by B.C. Rail at that time.

The transit times were being monitored, as agreed. Penalties, as I mentioned before, were required when performance did not meet the benchmarks, and they were being remitted to BCRC. In 60 percent of the zones that were looked at, the targets were met or exceeded. No formal complaints have been received by either the Competition Bureau or the Canadian Transportation Agency, which tends to indicate that other performance commitments were being substantially met. In our auditing jargon, that's negative assurance.

What we concluded was that there appears to be a generally adequate system for monitoring CN's performance in regards to its commitments under this partnership. CN appears to be fulfilling most of its commitments up to this point in time.

R. Fleming (Chair): Thank you, Mr. Jones. Is Mr. Orr commenting on this report?

R. Fleming (Chair): I'm going to ask that the witnesses from B.C. Rail or the Ministry of Transportation come forward.

Good morning, Sheila Taylor, assistant deputy minister of finance and management services. Welcome to the Public Accounts Committee.

S. Taylor: Good morning, Chair, Deputy Chair and members of the committee. Thank you for the opportunity to formally respond to the Auditor General's report, Switching Tracks: A Review of the B.C. Rail Investment Partnership.

I'm pleased to introduce Kevin Mahoney, who is the CEO of the B.C. Railway Co. He is here today to assist with any questions that the committee may have on the Auditor General's report.

We have a short presentation. In general, the ministry is very pleased with the report and feels that it accurately portrays the various agreements in place under the B.C. Rail investment partnership, the roles and responsibilities of the agencies involved and the current status of the commitments under the partnership.

The ministry also agrees with the Auditor General's overall report conclusion that there is an adequate system in place to monitor CN's delivery on its commitments under the investment partnership.

In our opinion, CN is fulfilling its commitments to the province under the investment partnership. Measures consistent with the revitalization agreement are in place to monitor and safeguard the assets in the future, and the B.C. Railway Co. does manage the revitalization agreement as a prudent landlord should.

With respect to the one recommendation made by the Auditor General in the report — that BCRC as a signatory to the consent agreement request that the Competition Bureau provide BCRC with a copy of any notices of non-compliance at the time the notice is given to CN — the ministry's response is that the B.C. Railway Co. has requested that the Competition Bureau provide it with any notices of non-compliance that are issued to CN.

To date no notices have been received, but we would like to note that B.C. Rail does receive a quarterly transit time oversight report from Canadian Transportation Agency, and they prepare this on behalf of the Competition Bureau.

We don't have any further comments, other than that we are happy with the report. We're pleased to have the opportunity to formally respond.

R. Fleming (Chair): Thank you. Mr. Mahoney, any comments from you on the report?

R. Fleming (Chair): Okay. I'll open the floor to comments or questions that members have on this report. Mr. Gentner will lead off.

G. Gentner: I do have questions, but I'm going to have to look for them, because I was not expecting to be first up here. I thought there'd be a big lineup waiting to ask questions.

The commitment to provide service to the Olympics. Did the Auditor General find any preliminary or early decision-making process as to what that means? I know the transportation plan has not been rolled out relative to the Olympics, but I don't see anything here but a bullet provided on the relationship or the agreement between CN.

R. Jones: We will be addressing that, hopefully, in our upcoming report that will be out in the new year on the 2010 commitments. It is one of the things we have on our radar screen for including in that report, but we did not look at it for this report.

R. Jones: I would like to say either at the end of January or in early February. That's when we hope to have it out.

G. Gentner: And the ministry has agreed to this? They will be providing all the pertinent information for you to do a review?

R. Jones: We have corresponded with all of the ministries and Crown corporations that we feel are involved in the Olympics at this point in time. Yes, we're getting good cooperation from everyone.

R. Fleming (Chair): This will be a follow-up report to the September 2006…?

R. Jones: Yes. It's a follow-up to the one that I think was addressed in the spring by this committee.

R. Fleming (Chair): Any other comments, committee? I know the scope of this review is very narrow, so it doesn't look at other aspects of B.C. Rail's privatization — just whether the compliance with the major commitments in the agreement is part of this.

G. Gentner: Just one other question. I find it strange that, on page 5, the Auditor General suggested the province didn't know that an objective was that the province would lose its oversight responsibilities. Why would the province not have known that?

K. Mahoney: Just in terms of the railway legislative structure, there is a capacity for a company to keep an asset like B.C. Rail separate and apart. At the time the process started, there was no certainty as to who the eventual winner would be. It could very well have stayed a provincially regulated entity if it hadn't been a class 1 national railway that won the bidding process.

G. Gentner: I'm glad to see we have a very assertive AG's department on top of all this.

I just want to know why it is that the ministry wouldn't have weighed what the consequences would have been. I mean, it obviously went to tender. You obviously had to have done some research as to what it would have meant had it gone to CN, relative to the loss of oversight.

K. Mahoney: There were a number of factors that were considered by the province, I assume, in the process of deciding who to pick. I can't speak for what weight they might have put on regulatory environment or not. I certainly do know that that information was in front of the province.

R. Fleming (Chair): I want to ask you a question about relations with the federal regulator now, in terms of reporting. I'm not quite sure what the latest update is in terms of how that is working, whether there is direct communication in the case of any issue of non-compliance and whether that's done on a timely basis, and if the reporting loop now directly includes B.C. Rail and the province.

Maybe that's a question for the Auditor General to start with. If you have any comments….

R. Jones: We have not done a follow-up yet on this report. I'll throw it over to the ministry and to B.C. Rail to address whether or not they've put that in place yet.

K. Mahoney: We certainly have made contact with the federal Competition Bureau with respect to the specific audit recommendation and asked for them to notify us in writing of any non-compliance issues that are brought to their attention.

We also made direct contact approximately six months ago with the bureau, just to follow up, to verbally ask the same question. We intend to continue that process.

With respect to the transit time, we do get written quarterly reports from the Canada Transportation Agency.

R. Fleming (Chair): Has there ever been any discussion between the B.C. Auditor General's office and the Auditor General of Canada about looking at — simultaneously examining — the Competition Bureau on how they're doing their job relative to western Canada or B.C. and, specifically, when you do that follow-up, to look at this issue?

R. Jones: We haven't had any formal discussions with them lately. When we were doing this review, we

did contact the Auditor General of Canada to see if they had done any reviews on any of the federal agencies at the time. They really hadn't done anything. It's always something that we're looking to do with our federal counterparts — get involved in some joint audits — but we have nothing on the horizon at this point in time.

J. Rustad: I know at that the time, the CN–B.C. government partnership around B.C. Rail was quite contentious. We've seen a number of things happen, particularly in my riding, first of all, with the Port of Prince Rupert. That has spurred the opportunity for an inland container port in Prince George. We've got the wheel shop that's happening in Prince George. There has been significant investment, even things through the airport as well as, of course, the NDI Trust.

Also, it's my understanding that the employment based out of Prince George along the CN, in particular with the rail…. For activities that have been associated with the old BCR line but also with CN, the employment levels have gone up.

I'm just wondering whether or not the Auditor General…. Have you looked at the employment levels and the impact that may have had on that partnership and, in particular, some of those benefits that may have accrued around my area in Prince George?

R. Jones: We haven't taken a look at any of the outcomes of the agreement yet. All we really tried to do was take a look at whether or not the commitments have been met at this point in time. For instance, have they been working on the tracks to Prince Rupert?

As I say, we've summarized those in that appendix as to whether or not we feel that the commitments have been met. We haven't looked at what the outcomes from those commitments are.

R. Fleming (Chair): Committee, we don't have any other members that wish to speak at this time, so perhaps we want to move to the recommendations — or recommendation, I think it is — of the Auditor General. I think the one recommendation deals with the consent agreement — following the consent agreement, to have non-compliance reported and giving notice to B.C. Rail.

R. Fleming (Chair): That concludes the formal business of this morning's meeting. May we always finish in this timely a way.

Our next meeting is on November 20, and there will be notice sent out to members shortly with the items up for discussion there.

I want to thank all the witnesses that appeared this morning and committee members. It's great to be back.

R. Fleming (Chair): Okay. Josie Schofield is just going to circulate to members, before you leave, a summary of the annual conference of the Canadian Council of Public Accounts Committees.

Again, thanks to those members of the committee that did participate. I thought we had an excellent showing of members of this committee at the conference, and I know we've been getting excellent feedback from our national, provincial and international guests who attended that conference.

I really thank all of you for your participation and for this morning. If I could have a motion to adjourn.

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REPORT OF PROCEEDINGS (Hansard)

SELECT STANDING COMMITTEE ON PUBLIC ACCOUNTS

REPORT OF PROCEEDINGS
(Hansard)

SELECT STANDING COMMITTEE ON
PUBLIC ACCOUNTS