The Standing Committee on Government Operations recommends that the Office of the Comptroller General in the Department of Finance consider, and report back to the standing committee on, the utility of entering into service agreements or memoranda of understanding with GNWT boards, agencies, or other entities requiring support or assistance to complete their year-end financial reporting as required under the FAA.

Notable Audit Subject Areas

The following subjects have been identified as areas of particular interest to members of the standing committee, which also may be of interest to the public:

Public-Private Partnerships

Increasingly, governments across Canada are using various forms of public-private partnership (P3) arrangements for the provision of assets and delivery of services. In P3 arrangements, the private corporation finances the project. This enables governments to borrow less money up front to develop larger, higher-cost projects, as the full cost of the project is paid over the project's life. This, in turn, allows governments to undertake more projects in a given time frame and to obtain expertise from private corporations.

P3 projects are not without risk, however. P3 agreements require complex, expensive legal arrangements. There is a risk at the end of a project's life, typically 30 years, that the asset will be returned to government in an unfit state and that any compliance penalty provided for in the agreement will be insufficient to remediate the asset. Government may guarantee a higher rate of return to the private corporation compared with the cost of borrowing, meaning that over its life a P3 project may cost more than a project done through standard procurement practices. Significant issues arising during the construction phase may delay project completion and result in lawsuits and the application of penalties. Problems of this latter nature have impacted upon the GNWT's Mackenzie Valley Fibre Link Project.

There is a risk that the private partner may not have sufficient equity to pay penalties arising from such issues and may seek compensation from government for excess costs incurred. There is also a related risk that the private partner may experience insolvency or bankruptcy, potentially impacting upon its ability to see a project through to completion or requiring that a new partner step in to take over the original partner's responsibilities. Earlier this year, the collapse of UK-based Carillion, the parent company of Carillion Canada Inc., which holds a 50 per cent equity interest in Boreal Health Partnership, called into question the impact that this bankruptcy would have on the Stanton Renewal Project. In this instance, the P3 arrangement served to protect GNWT's interests by requiring the partner to resolve matters relating to the status of other consortium members. As a result, the assets and liabilities associated with the Stanton Renewal Project have been assumed by Fairfax Financial Holdings, and the project is continuing as planned. Nonetheless, both of the first two P3 projects undertaken by the GNWT have experienced some of the problems associated with this form of procurement. This amply demonstrates their more volatile nature.

At the end of 2015, the Canadian Public Sector Accounting Board (PSAB) approved a proposal to develop a public sector accounting standard specific to public-private partnerships. While this work is ongoing, the Office of the Auditor General has been working with the GNWT's Department of Finance on the accounting treatment of P3s in the public accounts. As a result, the way that P3 projects are reflected in the public accounts is evolving from year to year.

2015-2016 Public Accounts

In the 2015-2016 Public Accounts, information on P3 projects was primarily located in two places in Section I of the public accounts: under the Note 2 summary of significant accounting policies and under Note 18, contractual obligations, which identified the GNWT's commitments related to P3 projects.

2016-2017 Public Accounts

Starting this year, the GNWT has included a section on P3s under the Financial Statement Discussion and Analysis part of Section I (page 35). Much of the information included here is similar to that previously found under Note 18, contractual obligations.

P3 projects are now being booked as assets owned by the GNWT and shown as work in progress on Schedule A, the Consolidated Schedule of Tangible Capital Assets (page 49). This schedule identifies P3 operational (service) commitments totalling $284.7 million from March 31, 2017, until 2048; and commitments related to P3 tangible capital asset (building) projects in process at year end totalling $72.3 million from March 31, 2017, until 2018.

In 2016-2017, the Section I, Note 2, Summary of Significant Accounting Policies (page 23), again contains an explanation of the treatment of P3 projects in the public accounts. Some of the highlights of this treatment include:

• P3 agreements may be used to procure services and public infrastructure when the total costs (capital, operating and service) over the life of the project exceed $50 million;
• There is appropriate risk-sharing between the GNWT and the private partners;
• The agreement extends beyond the capital construction phase;
• There is a clear net benefit to the GNWT as compared with standard procurement processes;
• The operating and service costs identified in the agreement are expensed as they are incurred;
• For assets under construction, where the GNWT bears the risks and rewards, the capital asset (classified as a work in progress) and the corresponding liability are recorded based on the actual costs incurred by the P3 partner. Where the GNWT does not bear the risks and rewards of the asset until substantial completion, the future associated agreement is disclosed; and
• Rules are also set out for how a capital asset is valued and how any revenues are reported.

Section I, Note 14, Long-Term Debt, also provides information on P3 projects. It identifies the $51.2 million loan due to Boreal Health Partnership for the Stanton Renewal Project, repayable in monthly instalments of $794,000, starting at the expected in-service date (November 2018) until November 2048; and the $90.9 million loan due to Northern Lights General Partnership for the Mackenzie Valley Fibre Link, repayable in monthly instalments of $620,000, starting at the expected in-service date (August 2017) until July 2037.

The committee understands that the manner in which the GNWT reports on P3 projects is driven by evolving PSAB standards. The committee is pleased to see that the GNWT has taken the initiative to report cohesively on these very important capital projects in the Financial Statement Discussion and Analysis part of Section I and encourages the GNWT to continue to do so.

In its discussion with officials from the OAG, the committee was advised that, in this interim period while the new PSAB standards are under development, the OAG had suggested that the GNWT bring together all of its information about P3 projects under one note in the consolidated public accounts. Accordingly, the committee makes the following recommendation: