Placing the Public's Money Beyond Parliament's Reach

Main Points

1.1 The federal government has paid billions of taxpayers' dollars to private foundations and other delegated arrangements set up to achieve public objectives, transferring the funds years before Canadians receive the intended benefits. The government has delegated program responsibilities to these arrangements, but they are often beyond the reach of Parliament's scrutiny. We found that the essential requirements for accountability to Parliament—credible reporting of results, effective ministerial oversight, and adequate external audit—are not being met.

1.2 In the delegated arrangements we examined, reporting to Parliament is not adequate for parliamentary scrutiny. None of the arrangements submit corporate plans for tabling in Parliament. Nor do they all provide annual reports with a credible description of accomplishments.

1.3 These arrangements have been established in an ad hoc way, and Parliament has not had an opportunity to consider fully the resulting changes in how it authorizes and oversees this public spending. The government should seek the views of Parliament on the form and nature of scrutiny that is appropriate for the new arrangements.

1.4 Weak oversight of such arrangements is limiting ministers' answerability to Parliament. Other than appointing a minority of members to their boards of directors, the government has limited means of strategic monitoring of the arrangements and of making adjustments, should things go wrong or government priorities change. Moreover, the roles and responsibilities of federal appointees to the boards are not defined clearly.

1.5 Parliament is not receiving reports on independent, broad-scope audits that examine more than the financial statements of delegated arrangements, including compliance with authorities, propriety, and value for money. With a few exceptions, Parliament's auditor should be appointed as the external auditor of existing foundations and any created in the future, to provide assurance that they are exercising sound control of the significant public resources and authorities entrusted to them.

1.6 As our audit was completed, the Treasury Board adopted the Policy on Alternative Service Delivery, which addressed elements of governance and accountability, as we and the Public Accounts Committee had recommended in 1999. Central agencies still need to show stronger leadership to help ensure good governance and adequate accountability.

1.7 More needs to be done to ensure that the arrangements institute and maintain public sector values and ethics. Sponsoring departments should make provision for the responsible parties to be aware of their duty in this regard.

Background and other observations

1.8 In 1999 we audited new governance arrangements. Some were delegated arrangements, set up as private sector organizations that exercise discretionary authority to carry out federal objectives. Others were collaborative arrangements that involve the federal government as a partner in delivering government programs with outside organizations. That audit found significant weaknesses: the absence of a coherent governing framework, putting accountability to Parliament at risk.

1.9 Our audit this year followed up on the delegated and collaborative arrangements we examined in 1999. We also examined several major funds and foundations set up as delegated arrangements since then. One new foundation, Canada Health Infoway Inc., received $500 million from the federal government; others have received multiple payments amounting to, for example, $300 million to Genome Canada and $250 million for the Green Municipal Funds.

1.10 Although more effort is still required, the collaborative arrangements we examined showed improvement in a number of features of the governing framework.

The government has responded. The Treasury Board Secretariat's response, on behalf of the government and the departments we audited, is included at the end of the chapter. The government recognizes the need to address a number of the elements in our governing framework, but it is not clear from its response to what extent it agrees or not with most of our observations and recommendations for putting these elements into practice. The government seeks flexibility in setting up new governance arrangements, using means it considers appropriate to each case.

Introduction

1.11 In our work on new governance arrangements, we distinguish between collaborative arrangements and delegated arrangements. In 1999 we audited new governance arrangements across the government, examining 10 collaborative and 7 delegated cases (November 1999 Report, Chapter 23, Involving Others in Governing: Accountability at Risk). Other audits that year examined two of those arrangements in greater detail: the Canada Infrastructure Works Program, a collaborative arrangement; and the Canadian Adaptation and Rural Development Fund, a delegated arrangement.

1.12 Our 1999 audit found serious weaknesses in the governing framework of new governance arrangements. Accountability to Parliament was placed at risk unnecessarily. We called for comprehensive remedial action, including stronger leadership from central agencies and specific actions by the federal departments that sponsored the arrangements. At the same time, we recognized that new governance arrangements could be undertaken for a good reason: their potential for more efficient, more client-oriented service delivery.

The federal government continues to use new governance arrangements

1.13 Some of the arrangements we examined in 1999 have received additional federal funding since then, particularly in the 2000 and 2001 budgets. Moreover, the federal government is establishing new arrangements; it announced several in the 2000 Budget. Initial plans to set up new foundations, announced in the 2001 Budget (the Strategic Infrastructure Foundation and the Africa Fund), have been changed; these initiatives will be in the form of traditional government programs. In this audit, we followed up on our 1999 cases and examined seven new arrangements. Exhibit 1.1 lists the arrangements we audited and those we followed up from 1999. Further detail is provided in Appendix A.

1.14 In 1999, we surveyed the federal government's use of new governance arrangements. We found 77 arrangements; the federal government had contributed a total of $26.2 billion to them between 1990 and 1999. We did not carry out a similar survey for this audit, but we noted that the federal government has committed a total of almost $6 billion in additional funding for the arrangements discussed in this chapter, both the new ones we audited and those we followed up from 1999.

Concerns about accountability to Parliament

1.15 Delegated arrangements can be grouped according to how the federal government funds them. The choice of funding mechanism has important consequences for the accountability relationship with the federal government. We noted the following approaches to federal funding:

• Transfers to foundations. Some funds and foundations such as Genome Canada receive federal funding in advance lump-sum grants and redistribute the money to eligible recipients over several years, under a funding agreement with the federal government.
• Funding through contributions. Other bodies, for example, the Canadian Television Fund, receive federal money annually through contribution agreements with the federal government. Contributions are conditional transfer payments for a specified purpose and are subject to being accounted for and audited.
• Distinct funding. In a third category are delegated arrangements funded by distinct methods. The St. Lawrence Seaway Management Corporation (SLSMC), for example, was funded through the transfer of assets from its predecessor Crown corporation to SLSMC and two property trust funds.

Greater risks to accountability in foundations

1.16 In collaborative arrangements, the governing framework's weaknesses are mainly in the level of co-ordination between the partners. A federal partner department or agency is accountable to Parliament in the traditional ways for the federal portion. But the accountability of the arrangement as a whole can be deficient in important respects. Shared accountability requires that more attention be paid to the relationship between the partners and the relationship each has with its governing body. The deficiencies require continuing attention, as we emphasized in our 1999 audit.

1.17 In delegated arrangements, the risks to good governance and accountability are higher. This is true of foundations, which have received most of the federal funds provided to delegated arrangements. Since delegated arrangements are established as non-profit corporations operating at arm's length from the federal government, their accountability to Parliament is in question. For these reasons, we have modified the governing framework we used as a model in 1999 and placed more emphasis on the essential requirements for accountability to Parliament (Appendix B).

Key developments since 1999

1.18 Much has happened since November 1999 that bears on the governance and accountability of these new arrangements. In particular, the issues associated with foundations and other delegated arrangements are attracting Parliament's attention.

1.19 The Public Accounts Committee held hearings on our 1999 audits and reported to the House of Commons in June 2000. The Committee's Eleventh Report dealt with Chapter 17, Canada Infrastructure Works Program: Phase II and Follow-up of Phase I Audit. Its Thirteenth Report considered Chapter 23, Involving Others in Governing: Accountability at Risk; and Chapter 24, The Canadian Adaptation and Rural Development Fund: An Example of Involving Others in Governing. The Public Accounts Committee's recommendations and the government's response to them are summarized in Appendix C.

1.20 On several occasions other parliamentary committees have considered issues related to delegated arrangements, including the following:

• The House of Commons Standing Committee on Industry, Science, and Technology met with the President and CEO of the Canada Foundation for Innovation in April 2001. Committee members expressed concerns about their lack of power to monitor this type of agency and about the limited role of the Auditor General. The same Committee considered science and technology policies in May 2001. Members questioned the Executive Director of Genome Canada about the ethical standards guiding the allocation of federal funds to private sector projects.
• In June 2001, the Senate Standing Committee on National Finance considered amendments to the 1997 Budget Implementation Act, which broadened the eligibility for funding by the Canada Foundation for Innovation to include operating and maintenance costs as well as projects located outside Canada. In addition, another $1.25 billion was provided to the Foundation.
• From March to June 2001, both the House of Commons Standing Committee on Aboriginal Affairs, Northern Development and Natural Resources and the corresponding Senate standing committee examined Bill C-4, an Act to establish a foundation to fund sustainable development technology. Parliamentarians expressed serious concerns about accountability and governance during the passage of Bill C-4. The government provided $50 million in funding to the Foundation for Sustainable Development Technology in Canada, established under the Canada Corporations Act, to carry out a sustainable development technology initiative before Parliament had explicitly approved either the initiative or the funding.

1.21 Problems with the accounting. From fiscal years 1996-97 to 2000-01, the government paid $7.1 billion through transfers to nine foundations to achieve various policy objectives such as encouraging innovation, assisting students with post-secondary education costs, and developing information technology systems for health care. It is a clearly stated government strategy to introduce spending initiatives only when the government is reasonably certain that it has the necessary resources. This is appropriate and prudent.

1.22 The government has treated the $7.1 billion in transfers to foundations as an expenditure. At 31 March 2001, however, almost the entire amount was still in the bank accounts and other investments of the foundations. Very little of it had actually been received by the ultimate intended recipients, namely the innovators, students, and health care providers. In substance, then, the $7.1 billion, or most of it, is not really an expenditure of the government.

1.23 The recording of these transfers as expenditures is an accounting treatment that enables the government to report a lower annual surplus. On several occasions, this Office has stated its view that decisions to transfer such significant amounts of taxpayers' money should be based on sound economic and policy analysis; they should not be made to achieve a desired accounting result such as reducing the reported annual surplus. We have said that this accounting treatment compromises the integrity of the government's reported financial results.

1.24 The Auditor General's Observations on the government's financial statements in the Public Accounts of Canada 2000-01 addressed the accounting treatment of transfers to foundations:

I cannot state unequivocally that the Government has not complied with objective accounting standards established by the Canadian Institute of Chartered Accountants' Public Sector Accounting Board (PSAB). Objective accounting standards promulgated by PSAB cannot anticipate all the new things governments will do, and the Government's own stated accounting policies allow it the latitude to record these transfers as expenditures of the year in which the foundations were announced. However, PSAB does recommend that financial statements be prepared to present the substance of transactions and events.

In light of questions and concerns raised about the accounting by governments in Canada for transactions such as those involving the foundations, PSAB has initiated two projects to clarify accounting standards in these areas. The Government should closely monitor progress on these two projects, due to the amount of public money involved with the foundations and the resultant distorting effects of its current accounting policies.

I urge the Government to change its policies as they relate to the foundations in next year's financial statements to properly account for the substance of these transactions. This change should be consistent with other changes to introduce accrual accounting next year.

Focus of the audit

1.25 We followed up on the findings of our previous audit and examined selected new arrangements announced since November 1999. The audit addressed a number of questions:

• Are these arrangements continuing to place accountability to Parliament at risk unnecessarily?
• Are sponsoring departments establishing appropriate governing frameworks in newly created arrangements?
• Are the government, the Treasury Board Secretariat, and sponsoring departments taking action to address our recommendations and those of the Public Accounts Committee?

1.26 In this audit, including our follow-up work, we examined the adequacy of the governing framework for delegated arrangements and whether changes had been made in response to our recommendations. In particular, we sought to determine whether essential requirements for accountability to Parliament were being met. In the new arrangements we audited, we also focussed on provisions for protecting public sector values and ethics and encouraging an organizational culture that respects these values and on the role that federal appointees play on boards of directors and in related governing bodies.

1.27 In one new collaborative arrangement, Infrastructure Canada, we examined the adequacy of the governing framework. We also followed up on the collaborative arrangements examined in 1999.

1.28 Further details on our audit objectives, scope, and criteria can be found at the end of the chapter in About the Audit.

Observations and Recommendations

Delegated arrangements—evading parliamentary scrutiny

1.29 The federal government has traditionally relied on departments, departmental corporations, and Crown corporations to redistribute public money to individuals and businesses for a variety of purposes, including scientific research and economic development. The Social Sciences and Humanities Research Council, for example, is a departmental corporation that promotes and assists research in the humanities and the social sciences; the Canada Council for the Arts is a Crown corporation that supports the arts. Each awards grants independently, without ministerial intervention. Although at arm's length from the government, the granting councils remain accountable through ministers who answer for them in Parliament and through well-established frameworks for governance and accountability.

1.30 When the government began using foundations to redistribute public money, it created a different framework. Federal ministers and officials explained this framework when appearing before parliamentary committees. They said that governance is established through the non-profit corporate structure of the foundations. The board of directors and the members of the corporation have subject-matter expertise, and the government appoints a minority of both. There are no shareholders in a non-profit corporation, but the members are expected to scrutinize the foundation's activities as shareholders would. Directors are to operate the foundation in an open and transparent way. Public information is available through the annual report, which includes audited financial statements; in a few cases, the annual report is tabled in Parliament.

1.31 The basic agreement between the federal government and the foundation is the funding agreement, signed by the sponsoring ministers. The funding agreement is a legally binding contract that places obligations on both parties. The funding agreements we examined have many provisions in common, including requirements for a public annual report, independent financial audit, and evaluation studies.

1.32 Placed at arm's length. The government refers to the foundations as designed to be at arm's length from it. Once public money is in a foundation's hands, the government relies on the expertise and professionalism of its directors and members to perform their functions properly. The government expects them to use their good judgment to achieve the foundation's objectives with the money provided. In the government's view, a number of provisions of the funding agreements create the arm's-length relationship between it and the foundations. For example, the government appoints only a minority of directors. Other such provisions include a requirement that, upon winding up, the fund or foundation not return any remaining money to the federal government but distribute it to eligible past recipients or related entities.

1.33 In their governance and accountability, these funds and foundations are clearly further away from the government than the granting councils are. They are not formally answerable to Parliament through ministers. In our view, the foundations have been placed beyond the reach of effective ministerial oversight and parliamentary scrutiny.

Limited exposure to Parliament

1.34 The statutory authority for 8 of the 13 delegated arrangements we examined is the Canada Corporations Act, the federal non-profit framework law. Only three arrangements were established by direct legislation, namely, the Canada Millennium Scholarship Foundation, the Canada Foundation for Innovation, and the Canada Foundation for Sustainable Development Technology. In each of these arrangements, the legislation maintained the same type of arm's-length design. The two remaining arrangements were incorporated under provincial law or an existing federal statute.

1.35 The choice of means other than legislation to create such arrangements is, in itself, a barrier to accountability to Parliament. Direct legislation is a way to tailor the design of an organization and facilitate good governance and accountability. The legislative process provides opportunities for review, debate, and approval in both houses of Parliament and careful study of the legislative proposals by parliamentary committees. Parliament determines the mandate, governance, and accountability provisions of the arrangement. The use of direct legislation also allows Parliament to retain control over future changes in the arrangement's design and governance, in that changes may be made only by amending the legislation.

1.36 The Privy Council Office has responsibilities that relate to delegated arrangements. It is involved in machinery-of-government issues, that is, the form and design of departments and agencies. We believe the Privy Council Office should play a stronger role in shaping the legislative provisions for governance and accountability of future delegated arrangements.

1.37 Recommendation. If the federal government decides to create delegated arrangements that involve significant changes in policy or significant commitments of public funds or assets, it should do so through direct legislation. The Privy Council Office should ensure that this legislation meets the essential requirements for good governance and accountability to Parliament.

A governing framework

1.38 The governing framework used to assess delegated arrangements comprises the features that we believe are essential for good governance and accountability to Parliament along with other key elements, including mechanisms for accountability, transparency, and the safeguarding of public sector values and ethics. It builds on the framework we developed in 1999 and is shown in Exhibit 1.2, and in more detail in Appendix B.

Essential requirements for accountability to Parliament not met

1.39 To examine the government's approach to foundations and other delegated arrangements, we considered how the features of the governing framework apply in each of the arrangements we examined. We began with accountability to Parliament, a primary focus of our audit. Exhibit 1.3 summarizes what we found in examining the funding agreements and related documents for the new foundations. In some cases, features are applied on a voluntary basis, rather than through agreements.

Reporting to Parliament and the public needs improvement

1.40 We expected the arrangements to be reporting appropriately to Parliament and the public on their plans, on the extent to which they have achieved their federal public policy purposes, on their spending and investment of federal public money, and on their stewardship of federal assets. It is particularly important that Parliament be kept informed about transfers to foundations, which are payments of public funds made many years in advance of need. Typically, these matters should be reported in corporate plans and annual reports. In addition, evaluation findings on the overall performance of the arrangement should be tabled in Parliament.

1.41 We noted that the Treasury Board's revised transfer payment policy, which came into effect in June 2000, requires that departments report to Parliament on arrangements, including foundations, that are funded by grants or contributions. In their reports on plans and priorities, sponsoring departments are to provide the arrangements' objectives and expected results, and in their departmental performance reports the results the arrangements have achieved. We expected the arrangements' funding agreements to include specific provisions for reporting this information to the sponsoring departments, to ensure that the policy's requirements are understood and can be met by the arrangement.

1.42 All but one of the 13 delegated arrangements we examined—both the new foundations and the arrangements we audited in 1999—publish annual reports, but only four make provision for tabling of the reports in Parliament. The annual reports include audited financial statements (with the exception of the Green Municipal Funds, whose accounts form part of the audited financial statements of the Federation of Canadian Municipalities). Natural Resources Canada and Environment Canada, the sponsoring departments of the Green Municipal Funds, agreed to report to Parliament on the funds' performance in their departmental performance reports. In a memorandum of understanding, the departments undertook to provide Parliament with a "coherent and integrated perspective on the performance of the funds" in their respective areas of responsibility.

1.43 None of the arrangements have provisions for tabling a corporate plan in Parliament. More than half provide for producing annual, corporate, or strategic plans but not for making them public. However, three foundations—Genome Canada, the Foundation for Sustainable Development Technology in Canada, and the Canada Millennium Scholarship Foundation—provide for including information on the next year's plans in their annual reports that are tabled in Parliament. Canada Health Infoway Inc. is different in that it is required to take into account the Blueprint and Tactical Plan for a Pan-Canadian Health Infostructure, a document developed by a federal-provincial-territorial advisory committee and available on the Health Canada Web site.

1.44 Many arrangements provide for independent evaluation at the end of the federal funding period as well as at the midpoint. However, only two of the new arrangements we examined, Genome Canada and the Foundation for Sustainable Development Technology in Canada, have provisions for the sponsoring minister to table evaluation findings in Parliament, in the annual report.

1.45 We examined the Estimates documents of the sponsoring departments (2001-02 reports on plans and priorities and 2001 departmental performance reports) to see what information they provide on the new delegated arrangements. In every case, we found that the arrangements were mentioned in departmental performance reports, but information on their performance was not always provided. Our findings are shown in Exhibit 1.4.

1.46 Noteworthy was Industry Canada: its 2001-02 Report on Plans and Priorities provided information on Genome Canada's expected results, and its 2001 Performance Report provided information on the arrangement's performance. We noted that Natural Resources Canada and Environment Canada did not provide the performance information called for in their memorandum of understanding on the Green Municipal Funds. They informed us that since no funded projects were yet complete, not enough information was available. Reporting on other arrangements in departmental performance reports was limited by the fact that the arrangements (Canada Health Infoway Inc. and the Foundation for Sustainable Development Technology in Canada) had not yet started operations in the reporting period.

1.47 Overall, we found that Parliament was receiving some useful information on most new arrangements, whether in sponsoring departments' Estimates documents or the arrangements' own annual reports. Sponsoring departments referred in their Estimates documents to the Web sites of most arrangements, which appeared as a "hot link" in the electronic version. Such references improve reporting to Parliament. However, there is still considerable room for improvement in the performance information provided.

1.48 Of the delegated arrangements we audited in 1999, only one has improved its reporting to Parliament. The annual report of the Canada Foundation for Innovation is now tabled in Parliament; before, only audited financial statements were tabled.

1.49 Recommendation. To ensure adequate reporting to Parliament on delegated arrangements, sponsoring ministers should table the following in a timely manner:

• multi-year plans;
• the findings of evaluations; and
• annual reports on what has been accomplished that include audited financial statements.

These documents should be referenced in the sponsoring departments' Estimates documents.

Inadequate external audit regime

1.50 We expected all delegated arrangements to be subject to broad-scope, independent audit, including financial, compliance, and value-for-money audit. All of the delegated arrangements we examined have provisions for financial statements and the report of an external auditor appointed by the board—the traditional audit function found in any private sector organization. The government does not appoint the external auditor. Auditors' reports on corporate financial statements provide an opinion on whether the financial statements present fairly the corporation's financial position and financial operating results. Such audits do not address explicitly the traditional public and parliamentary concerns about propriety, value for money, compliance with law, and the adequacy of internal controls.

1.51 The Auditor General has authority to scrutinize the roles and responsibilities of sponsoring departments in developing up-front arrangements for the payment of federal money to delegated arrangements, through their funding agreements. But she has no authority to audit the operations of the delegated arrangements after the public money has been transferred. The Auditor General is unable to provide Parliament and the public with any assurance on the prudence and probity of the subsequent use of these funds or authorities for public policy objectives, even when very large sums of federal money are involved.

1.52 Furthermore, in a number of delegated arrangements, money is transferred as a lump sum many years before its ultimate intended recipients will need funding. In receiving lump sum transfers, foundations are effectively exempted from the kind of periodic scrutiny by Parliament that occurs when funds are appropriated annually. These are not conditional payments that ministers can be called upon to account for and sponsoring departments can audit. Most delegated arrangements are not subject to any audit by the sponsoring department.

1.53 The creation of more foundations and the transfer to them of very large amounts of public money raise increasing concerns about the lack of adequate means for parliamentary scrutiny. In order to hold the government accountable for federal public policy delivered by delegated arrangements, Parliament needs information and assurance from broad-scope, independent audit that covers compliance with authorities, propriety, value for money, and verification of performance information. With some exceptions, the Auditor General is well placed to conduct this audit work. Where delegated arrangements involve provincial or territorial governments or where the federal government is not a major contributor, other audit arrangements may be more appropriate.

1.54 Recommendation. The federal government should ensure that adequate mechanisms are in place for broad-scope audit of all delegated arrangements. The Auditor General should be appointed as the external auditor of foundations, with a few exceptions.

Lack of ministerial oversight

1.55 We expected to see provisions and plans for effective mechanisms that would allow sponsoring ministers and their departments to collect more strategic information about the arrangements than annual reports provide. We call this strategic monitoring (Exhibit 1.5). Ministers then must be able to use the information to make adjustments if an arrangement is not performing as expected. The government also should have the power to intervene in exceptional cases where the public purpose of the arrangement is clearly not met, or where circumstances have changed considerably since the creation of the arrangement. In extreme cases, the minister should be able to terminate the arrangement and recover any remaining federal funds.

1.56 We expected that ministerial oversight of an arrangement would include compliance audits at the discretion of the sponsoring department. Where delegated arrangements receive federal funding through contribution payments, the Treasury Board's transfer payment policy requires that the contribution agreement include the minister's right to conduct an audit, even though that right may not always be exercised. We note that the same policy also requires "provision for appropriate reviews, program evaluation and audits" in agreements with arrangements that distribute the contribution payments to others. A good practice is to make provision for sponsoring departments to undertake evaluations of the arrangements. Two of the new arrangements had such provisions.

1.57 If federal representatives or appointees on boards of directors are to be involved in strategic monitoring, we expect that sponsoring departments would clearly define their roles when they are appointed and would give them appropriate guidance.

1.58 Inadequate mechanisms for correction. We did not find adequate provision for departmental direction or corrective action in any of the new arrangements we audited. With the exception of the Canadian Adaptation and Rural Development Fund program, we saw no improvement in those we followed up from 1999. The means available to the federal government to make adjustments tend to be formal and inflexible. Arrangements created by legislation are subject to amendment, although the process can be cumbersome. If the agreement is breached, the government may pursue a legal remedy but that, too, is often lengthy and expensive. To adjust other arrangements, the federal government is limited to reopening the funding agreements with the mutual consent of the parties.

1.59 Since our 1999 audit, three delegated arrangements have provided for compliance audit, including one foundation, the Canadian Health Services Research Foundation. Apart from requiring audited financial statements, however, none of the new foundations has provided for compliance audit.

1.60 Provisions for the ministers to terminate the arrangement and recover federal funds are weak; only two of the new arrangements have them. The minister can recover unspent funds from the Foundation for Sustainable Development Technology in Canada if it violates the funding agreement by, for example, providing misleading information to the government. And if the Canadian Foundation for Climate and Atmospheric Sciences uses its federal money for purposes other than those stipulated in the funding agreement, the minister can require partial or full repayment.

1.61 Four arrangements we audited in 1999 provide for the disbursement of federal money and assets if they terminate or wind down: the St. Lawrence Seaway Management Corporation, the Canada Millennium Scholarship Foundation, the Canadian Institute for Health Information (in part), and the Canada Foundation for Innovation. The Canada Millennium Scholarship Foundation and the Canada Foundation for Innovation provide for remaining funds to be distributed to, respectively, eligible public institutions and eligible grant recipients. However, of the portion of its funding that the Canadian Institute for Health Information receives through contributions, the government is to recover any unspent funds and repayment of any funds not spent in accordance with the agreement.

1.62 Recommendation. The federal government should ensure that an adjustment mechanism is in place that allows sponsoring ministers to intervene in a delegated arrangement in the exceptional case where the arrangement is clearly not meeting its public purpose or where circumstances have changed considerably since its creation.

1.63 Recommendation. The federal government should ensure that provision is made to allow sponsoring departments to undertake compliance audits of delegated arrangements.

1.64 Recommendation. In the event of the winding up or termination of any delegated arrangement, the federal government should recover unspent federal funds.

Federal appointees to boards of directors—unclear roles and responsibilities

1.65 Sponsoring departments might rely on federal officials appointed to boards of directors and similar decision-making bodies to carry out oversight responsibilities. We interviewed a number of these federal appointees (Exhibit 1.6). Our findings raise concerns about the guidance given to these officials.

1.66 The legal framework used for funds and foundations makes it difficult for federal appointees to function in the dual role of public appointee and member of the board of a private corporation. There is a potential conflict between the duties of oversight on the federal government's behalf and the statutory duty of board members to act in the corporation's best interests. The officials we interviewed recognized the possibility of such a conflict but generally did not see it as a significant problem.

1.67 Sponsoring departments provided very little guidance to federal officials and others appointed to boards. In some cases, their involvement consisted of giving the appointees information such as funding agreements, general terms of reference for the arrangements, and conflict-of-interest guidelines.

1.68 The Privy Council Office is involved in machinery-of-government issues and provides advice to Cabinet on federal appointments. In our view, it is well placed to give departments guidance to ensure that they clearly define the roles and responsibilities of federal appointees and that appointees are adequately prepared to assume their responsibilities.

1.69 Recommendation. The Privy Council Office should ensure that departments fully define the roles and responsibilities of federal appointees to boards of delegated arrangements. The federal government should resolve the issue of the potential conflict of duties.

Other elements of the governing framework need attention

1.70 In addition to the essential requirements for accountability to Parliament, we examined other features of the governing framework, namely, adequate transparency and the protection of public sector values and ethics.

1.71 Sponsoring departments of the arrangements we audited in 1999 gave us an update on the changes they had made to the governing framework in response to our recommendations. We expected that the government would look for opportunities to improve the governing framework in delegated arrangements, for example, before providing additional federal money.

Ensuring adequate transparency—a mixed record

1.72 Delegated arrangements generally have made available to the public a wide range of information about their operations, often on their Web sites. Many have adopted a communications strategy to make the public and stakeholders aware of their accomplishments and other key information. For example, foundations that redistribute public funds have released information on eligibility criteria and on the application process.

1.73 However, few arrangements have set up a regime equivalent to federal legislation on access to information. Only one of the new arrangements did so voluntarily, the Canadian Foundation for Climate and Atmospheric Sciences. Among the arrangements we examined in 1999, the federal regime for access to information applied to two, and only in part: the Canadian Television Fund and the Canadian Adaptation and Rural Development Fund. The Canadian Health Services Research Foundation and the Canada Foundation for Innovation applied a comparable policy on access, voluntarily and on a case-by-case basis. While these arrangements have maintained their provisions for access, none of the others have made improvements.

Protecting public sector values and ethics

1.74 We expected that those who manage and redistribute public resources for a public purpose would exercise a special duty of care for the proper, prudent, and productive use of those resources. They must meet high standards of stewardship and accountability. Good governance in the public sector also includes the values of honesty, openness, fairness, responsiveness, and accessibility. In the new arrangements we audited, we looked for provisions and practices that promote those values.

1.75 We selected a number of features of the governing framework to examine the way public sector values and ethics are protected in delegated arrangements. We focussed on provisions that ensure consideration of relevant federal policies, responsiveness to citizens' concerns, and adherence to codes of conduct and guidelines on conflict of interest.

1.76 Relevant federal policies applied. We found that most delegated arrangements followed the applicable federal policies, for example, providing services in both official languages and meeting the requirement for environmental assessment. Generally, they also had conflict-of-interest provisions appropriate to the public sector; three arrangements had adopted them since our 1999 audit. However, we found that they had done very little to establish broader codes of conduct that extend beyond conflict-of-interest considerations to public sector values and ethics. Similarly, few arrangements stipulated sanctions for failure to comply with conflict-of-interest provisions or codes of conduct.

1.77 Responsiveness to the public was also weak. Apart from providing for annual public meetings, foundations and other delegated arrangements offered stakeholders and the general public few opportunities to raise concerns and be heard.

1.78 Ensuring values and ethics. Our findings raised a broader question: What must sponsoring departments do to engender a culture that reflects public sector values and ethics? When they establish delegated arrangements, sponsoring departments have to find effective ways of ensuring ethical conduct. The legislation governing non-profit corporations does not necessarily require delegated arrangements to observe public sector values and ethics. Sponsoring departments have to ensure that those managing the arrangements are aware of their duty to institute and maintain public sector values and ethics. They need to foster a corporate culture of accountability, one that balances taking risks with protecting the public interest.

1.79 A good practice that we noted is to make public the salary range of the arrangement's senior officials. The Foundation for Sustainable Development Technology in Canada has provided for such disclosure; the Canada Foundation for Innovation disclosed the annual salary range of senior management in its 2000-01 annual report.

1.80 Sponsoring departments can help to ensure that members, directors, and staff of delegated arrangements understand the conduct that taxpayers expect of them when conducting public business. There is a need to educate staff in public sector values and ethics and ensure that codes of conduct are enforced. Directors must ensure that appropriate policies and systems, conflict-of-interest rules, and controls against fraud and corruption are in place and working effectively. Federal appointees to boards can play a role in this, provided that their responsibilities are defined more clearly. The arrangements have to demonstrate and report to Parliament, as part of good governance, that they have an ethical culture and that their values and ethics initiatives are effective (see Auditor General's October 2000 Report, Chapter 12). As the case of Canadian Blood Services shows (Exhibit 1.7), developing public sector values and ethics is a significant ongoing challenge.

1.81 Recommendation. Sponsoring departments should ensure that provision is made for the responsible parties in delegated arrangements to be aware of their duty to institute and maintain public sector values and ethics.

The delegated arrangements examined

1.82 We discuss in a case study the governing framework for each new delegated arrangement we examined.

Collaborative arrangements—different challenges

1.83 In 1999 we examined 10 collaborative arrangements; in 2001 we followed up on 8 of them. We also examined a major new collaborative arrangement, Infrastructure Canada, which replaced the Canada Infrastructure Works Program. As we have noted, accountability and governance present different challenges for collaborative arrangements and delegated arrangements. Our findings reflect the differences.

Infrastructure Canada—positive improvements

1.84 The Infrastructure Canada initiative builds on the earlier Canada Infrastructure Works Program. We examined it from two perspectives:

• as a new collaborative arrangement, to determine the adequacy of the governing framework; and
• as the successor to a previously audited program, to follow up on our recommendations on governance and design.

We did not examine Infrastructure Canada's operations or project funding.

1.85 The governing framework has improved. The Governance and Accountability Framework of Infrastructure Canada is a key difference from the earlier program. The framework is intended to ensure "that both public and parliamentary accountability are secured while establishing clear and comprehensive governance structures; and that program results and their impact on local communities are openly and publicly reported."

1.86 The Governance and Accountability Framework sets out a clear accountability structure for Infrastructure Canada that includes the following:

• the purpose, objectives, and scope of the program;
• the principles that are to govern interactions and transactions across the country;
• the structure for governance, including roles and responsibilities; and
• mechanisms for accountability.

1.87 We compared this framework with what we found in 1999 (Exhibit 1.8), and we noted several improvements:

• Reporting. Infrastructure Canada has mechanisms for reporting to Parliament and the public on objectives, intended results, and results achieved.
• Accountability mechanisms. There are provisions for value-for-money audit as well as financial and compliance audit. There is also a requirement for corrective action on the observations and recommendations of internal audit.
• Protection of the public interest. Infrastructure Canada has adopted procedures for citizen complaint and redress and provided for public consultation by both the national office and a management committee in each province and territory. It also makes specific provision for public sector values, notably adherence to such federal policies as ensuring the availability of services in both official languages and complying with applicable environmental legislation.

1.88 Infrastructure Canada plans to make public its objectives and its results, primarily on government Web sites and in the Estimates documents. We found that participating departments have already communicated some of this information. Future reporting will be affected by the transfer of responsibilities for Infrastructure Canada to the Deputy Prime Minister and Minister of Infrastructure and Crown Corporations.

1.89 The Treasury Board Secretariat has set up an automated system, the Shared Information and Management System for Infrastructure Canada (SIMSI). The system will structure, store, and manage all information on the initiative; facilitate data manipulation; and support reporting. SIMSI is expected to be the main means of compiling and reporting information on activities, finances, and results. In particular, the system is intended to allow Parliament and the public easy, ongoing access to Web-based information on Infrastructure Canada and on the status of approved projects.

1.90 Follow-up findings. In 1999 we reported on the financial and management regime of the Canada Infrastructure Works Program Phase II. We also reported on our follow-up of Phase I and the extent to which the government had acted on our 1996 observations and recommendations. Our 1999 report made several recommendations and the Public Accounts Committee made similar ones (Appendix C).

1.91 In 2001 we reviewed information from the Treasury Board Secretariat on the action the government had taken to respond to our recommendations. Rather than examine improvements at the project level, we looked at Infrastructure Canada's governing framework. We found that it reflects most of our 1999 recommendations, as outlined in Appendix D.

1.92 We identified one area where Infrastructure Canada could have provided more complete direction. The Treasury Board Secretariat has set out a general requirement that the arrangement be managed to control the risks, and it has indicated that risk is an important factor to consider in establishing public-private partnerships. However, the nature of Infrastructure Canada's public-private partnership risks has not been defined or analyzed.

1.93 We found that Infrastructure Canada has incorporated most of the Public Accounts Committee's recommendations on program objectives and design. Where the lessons identified in the Evaluation of Phase 1 of the Canada Infrastructure Works Program are still relevant, it has addressed them.

1.94 Overall, Infrastructure Canada's design is a significant improvement over that of the Canada Infrastructure Works Program, Phase II.

Follow-up on 1999 audit of collaborative arrangements

1.95 We asked sponsoring departments of the collaborative arrangements audited in 1999 to report the changes made in the governing frameworks in response to our recommendations. We asked what practices they had adopted to improve governance and accountability.

1.96 Overall, we found that collaborative arrangements had improved their reporting and their mechanisms for promoting accountability and protecting the public interest (Exhibit 1.9).

1.97 Departments reported some good practices adopted since 1999 in a few collaborative arrangements. For example, Human Resources Development Canada established an internal working group to support liaison between regional offices and provincial and territorial partners administering Labour Market Development Agreements. The working group ensures that regions are kept abreast of issues and concerns, and it provides a forum for discussion. Environment Canada adopted a policy entitled "Working with Others: Policy on Revenue and Collaborative Arrangements," which guides managers in various aspects of collaborative arrangements.

Government-wide issues need attention

Ad hoc changes in parliamentary scrutiny

1.98 An area of major concern is the ad hoc establishment of new delegated and collaborative governance arrangements. As we have already noted, although there has been some discussion of new arrangements by parliamentary committees, the overall impact on the scrutiny process—how Parliament authorizes and oversees public spending—has not been adequately considered.

1.99 Parliament may indeed decide to lessen its scrutiny of certain types of new arrangements, perhaps in exchange for more transparent reporting to the public. However, these changes should be made after an informed debate in Parliament on their merits. We recommended in 1999 that the government seek the views of Parliament and the public on how to reconcile new governance arrangements with accountability to Parliament. There has been no progress on this recommendation (Appendix D).

1.100 Given that the government continues to provide new funding to foundations and other delegated arrangements announced in recent Budgets, the need for Parliament to consider the issue is now more compelling.

1.101 Recommendation. In the current session of Parliament, the government should seek Parliament's views on how delegated arrangements are changing the parliamentary scrutiny process.

A need for central agency leadership

1.102 In 1999 we found a lack of clear direction and guidance from the central agencies to departmental managers, particularly on how to address the elements of accountability and good governance when they set up new governance arrangements. There was no consistent governing framework to ensure that departments balanced the flexibility and efficiency of new arrangements with the need for good governance and accountability to Parliament. Moreover, central agencies were not monitoring or assessing the results of these new forms of program delivery. Trends, successes, and issues in the creation of new arrangements were not tracked or evaluated, nor communicated to managers of existing arrangements or sponsors of new ones. We made recommendations to the Treasury Board Secretariat for action in these areas (Appendix D).

1.103 The central agencies' responsibilities in the creation of new governance arrangements have not changed. The Privy Council Office is involved in machinery-of-government issues. The Department of Finance approves provisions that involve financial commitments by the government. The Treasury Board Secretariat is responsible for advising Treasury Board ministers and government departments on implementing organizational change. It also assists departments in establishing new and innovative forms of program delivery known as alternative service delivery mechanisms, which include new governance arrangements.

1.104 In addition to following up on the action taken to address our 1999 recommendations, in this audit we examined the leadership that central agencies provided in the creation of selected new arrangements.

Treasury Board's new policy is a promising initiative

1.105 We asked Treasury Board officials what action the Secretariat had taken on recommendations addressed to it by our Office and by the Public Accounts Committee; we also asked what leadership and guidance they are providing to departments that sponsor new arrangements.

1.106 The Secretariat's main role in the new arrangements created since 1999 has been to consider departmental submissions to the Treasury Board for funding. In the case of Infrastructure Canada, Secretariat officials played a lead role in developing a governance and accountability framework.

1.107 Since 1999, the Secretariat has focussed on developing a Treasury Board policy intended to ensure better governance, accountability, and reporting relationships for new governance arrangements and other means of alternative service delivery. As our audit was completed, the Policy on Alternative Service Delivery was approved, to take effect from 1 April 2002. The Secretariat consulted with departments and developed a draft policy guide.

1.108 There are good features in the policy. Under the policy, all new alternative service delivery initiatives must address key policy issues that reflect the public interest. As part of the approval process, the Treasury Board can require departments to provide answers to questions in the public interest on governance, results achieved, service delivery, and values and ethics. The Board can also require other information, including a measurement and reporting framework. The policy requires "appropriate" ministerial accountability and authority, including reporting to ministers, Parliament, and the public. Overall, these requirements cover most of the elements of the governing framework presented in this chapter.

1.109 More guidance needed. The draft policy guide provides some, but often quite limited, guidance on these requirements. We think departments need further guidance, especially on key governance issues. We suggest that this chapter and our work in 1999 provide many of the details of what is appropriate for new governance arrangements.

1.110 Ensuring that learning takes place is important. The policy outlines an ongoing role for the Treasury Board and its Secretariat to promote organizational learning across government and assess the impact of new arrangements on service delivery and on overall government performance. The Secretariat needs to make available enough resources and skills to implement this policy successfully and ensure departmental compliance with it.

1.111 In conjunction with the policy, the Secretariat has begun to develop a database intended as an on-line tool for learning across the public service. It plans to include in the database guidance by central agencies, departmental case studies, reports of this Office, and other reference documents. It will also include a variety of tools, guides, and practices from departments and generic templates to support options analysis, decision making, and assessment of alternative service delivery initiatives. However, at the time of our audit the database was not yet ready to use.

1.112 The transfer payment policy. The Treasury Board policy on transfer payments applies to federal grant and contribution payments, which are used to fund many of the new governance arrangements. It adds several new requirements for their governance and accountability, in addition to reporting in the Estimates. They include preparing a results-based management and accountability framework to measure and report results; and assessing effectiveness through program evaluations or similar reviews when renewing terms and conditions. These are all requirements we would expect to see reflected in funding agreements.

1.113 We noted that the new foundations that received funds from the federal government were exempt from the transfer payment policy's provisions against making payments in advance of need. We are concerned by this exemption. Large amounts of public money have been provided up front to foundations with limited assurance of proper controls and accountability, and the money will not be spent on grants to the intended recipients for years to come. Advance funding also limits the flexibility of future parliaments and governments to respond to changing circumstances and priorities. In our view, this matter deserves a thorough debate in Parliament before any more public money is transferred to foundations.

1.114 A need for government-wide evaluation. We are concerned that the government is using new governance arrangements, and particularly foundations that receive lump-sum grants, as major instruments of public policy without evaluating the appropriateness of that use, what they cost, and how effective they have been. As we reported in 1999, an evaluation is needed.

1.115 Recommendation. The Treasury Board Secretariat should ensure that its database on alternative service delivery collects and makes available adequate information on the types and number of new governance arrangements created by federal departments. The database should also provide government managers with information on lessons learned and good practices by arrangements.

1.116 Recommendation. The Treasury Board Secretariat should review exemptions to the Treasury Board policy against making payments in advance of need. The findings of this review should be reported to Parliament.

1.117 Recommendation. The Treasury Board Secretariat should develop an evaluation framework and undertake, after a suitable interval, a government-wide evaluation of the use of new governance arrangements as instruments of public policy. The results of this evaluation should be reported to Parliament.

The role of the Department of Finance

1.118 In 1999, we noted that the Department of Finance had been involved in the creation of selected new arrangements. In this audit, we found that it was involved in creating the new funds and foundations announced in the 2000 Budget. Officials of sponsoring departments told us that the Department of Finance had played a strong role in key approval processes to put in place the governing framework for the funds and foundations, including the development of funding agreements.

1.119 Officials of the Department of Finance did not agree. They explained that their role in the Budget process included challenging departments' spending of public funds to ensure that it was warranted and that it avoided duplication with other federal programs.

1.120 The timing of the payments to funds and foundations and the fact that they were announced through the Budget dictated a demanding schedule for officials of sponsoring departments to complete all the steps of the approval and funding process. These included making submissions to the Treasury Board and crafting complex funding agreements. In our view, this approach did not allow for full consideration of governance and accountability.

Conclusion

1.121 The government continues to make extensive use of new governance arrangements to deliver public policy. The issues our 1999 audit raised are just as compelling today.

1.122 Although collaborative arrangements require attention, the one new collaborative arrangement we examined, Infrastructure Canada, showed marked improvement in most governance features over the program that preceded it.

1.123 Delegated arrangements present far greater risks to accountability and good governance, particularly in foundations that receive lump sum grants in advance of need. In our view, the government's notion of an arm's-length relationship does not in any way lessen its responsibility for meeting public policy objectives and ensuring good governance. In the approach it used to set up the new foundations we examined, the government failed to meet the essential requirements for accountability to Parliament. Such an approach does not ensure adequate annual reporting to Parliament; it precludes effective ministerial oversight; and it limits the scope of independent external audit to the financial statements of the foundations. In short, it is an organizational design that frustrates the ability of Parliament to scrutinize effectively the use of substantial amounts of public money and authority.

1.124 The Treasury Board has recently adopted a policy that addresses governance and accountability issues, and the Secretariat must now ensure that the policy is implemented successfully. Until now, central agencies and sponsoring departments have not provided the necessary leadership and guidance with respect to a governing framework or made full use of what has been learned. They have not fully implemented many of the recommendations we made in 1999. In the absence of their guidance, good governance and accountability cannot be assured.

1.125 Delegated and collaborative arrangements alike have gaps in the governing framework that they still need to fill. In particular, the delegated arrangements established since our last audit have not put appropriate governing frameworks in place. Sponsoring departments do not have adequate means for strategic monitoring of arrangements, and there is little provision for them to intervene if arrangements depart from their agreed public policy objectives. Provisions to engender public sector values and ethics are weak; so are provisions to ensure that citizens have adequate access to information.

1.126 Parliament requires independent external audit of delegated arrangements that covers all aspects of their operations, including their financial statements, compliance with authority, and achievement of value for money. In our view, all delegated arrangements should be subject to such broad-scope audit and, in particular, Parliament's auditor should be appointed the external auditor of foundations, with a few exceptions.

Treasury Board Secretariat's response. The government recognizes that innovative organizational arrangements for service delivery to Canadians must address Parliament's, the government's, and citizens' needs for openness, transparency, visibility, and accountability for the expenditure of public money and the achievement and reporting of results.

When the government transfers funds to non-government organizations, such as foundations, it makes a very conscious and considered decision that an organization at arm's length from government is in the best position to deliver on the public interest.

It places trust in the expertise, integrity, and professionalism of the foundation's directors and members and their independence from political influence or interference.

These are public decisions, which are fully and properly accounted for in the Estimates and Public Accounts. In addition, some of these arrangements are introduced through legislation and, hence, again subject to parliamentary debate and scrutiny.

The government needs the flexibility to determine, on a case-by-case basis,

• the most appropriate means of ensuring accountability for results, and
• the role of individual ministers and the government in relation to an organization that is designed to be at arm's length from government.

The new Policy on Alternative Service Delivery and the Policy on Transfer Payments strengthen governance and accountability, and they are based on a results management framework that ensures that these arrangements commit to measure and publicly report on results.

These policies will help to shape new governance arrangements and ensure that they address a wide spectrum of public interest issues and deliver sustainable results for Canadians.

About the Audit

Objectives

Our audit had the following objectives:

• To assess whether, in selected new governance arrangements, sponsoring departments have put in place appropriate governing frameworks.
• To assess the extent to which the government, the Treasury Board Secretariat, and sponsoring departments have acted on our recommendations and those of the Standing Committee on Public Accounts and have met the commitments the Secretariat made to the Committee.

Scope

Our audit examined the following:

• The actions taken by the Privy Council Office, the Department of Finance Canada, and the Treasury Board Secretariat in response to our 1999 recommendations on new governance arrangements and to the related recommendations of the Standing Committee on Public Accounts, as well as the commitments the Treasury Board Secretariat made to the Committee on behalf of the government.
• The actions taken by sponsor departments with respect to the new governance arrangements examined in 1999.
• The design and implementation of governing frameworks and accountability regimes in selected new governance arrangements, including five delegated arrangements announced in the 2000 Budget, the new Infrastructure Canada program (a collaborative arrangement), and Canada Health Infoway Inc., announced by first ministers in September 2000.

Criteria

We assessed the arrangements in our case studies against a number of criteria under each audit objective.

For action taken on our recommendations and those of the Public Accounts Committee, we expected the following:

• The Privy Council Office, the Department of Finance, and the Treasury Board Secretariat would take a leadership role in providing guidance; developing best practice; communicating lessons learned for use by departments in creating, monitoring and adjusting their new governance arrangements; and setting out an evaluation framework.
• The government (Privy Council Office and/or the Treasury Board Secretariat) would involve Parliament in developing governing arrangements that involve third parties in delivering federal programs and services.
• Departments with new governance arrangements examined in our 1999 audit would look for opportunities to improve their governing frameworks.
• For the new governance arrangements examined in our 1999 audit, the shortcomings identified in 1999 would be addressed and the elements of the governing framework that were in place in 1999 would be maintained or improved.
• Some good practices would be identified in the setting up and monitoring of new governance arrangements by sponsoring departments.

For arrangements created since 1999, we expected the following:

• The governing frameworks for selected new governance arrangements would appropriately address the elements identified in our 1999 Report, including
• mechanisms for engendering a culture of accountability, transparency and propriety in arm's-length bodies (ethics infrastructure)
• appropriate audit regimes for any entity handling public money, including the role of Parliament's auditor
• appropriate oversight mechanisms for departments to monitor and adjust arrangements
• the role of federal members on boards of delegated arrangements
• In designing these new delegated arrangements, departments would have
• undertaken an assessment of the risks faced
• provided adequate guidance on the elements of good governance

Audit team

Assistant Auditor General: Maria Barrados
Principal: John Mayne
Directors: Tom Wileman and Robert Cook

Maria de Souza
Denis Jobin
Jo Ann Little
Erin Molloy
Frances Smith

For information, please contact Communications at (613) 995-3708 or
1-888-761-5953 (toll-free).

Definitions:

Collaborative arrangements— In these arrangements the federal government is a partner with other orders of government, non-governmental organizations, and the private sector in delivering programs. (Back)

Delegated arrangements— They are set up as separate legal organizations that exercise discretionary authority to redistribute public money, use public assets, or deliver public services on the government's behalf. (Back)