March 14, 2003 PUBLIC ACCOUNTS COMMITTEE

The Committee met at 10:00 a.m. in Room 5083

CHAIR (Sullivan): My name is Loyola Sullivan, Chair of Public Accounts,

and we will get today's meeting underway.

At the onset I want to mention, and I failed to mention yesterday, we are

operating under the basic rules of the House of Assembly. I want to mention this

especially for the benefit of the media, because it was a discussion we had the

day before yesterday with reference to what is permitted and what is not

permitted.

Under the rules of the House of Assembly, any audio recording has been in

effect for some time and that has been standard. If you want to take a

photograph with cameras, it would have to be done during a break, or prior. So

if you need a minute or two at the beginning or so on, or during a break or at

the end, if you need to get a photograph or a camera shot, that can be done then

and not while the meeting is in session. We are going to bring it to a Committee

meeting - I have it on the list for the next meeting - to look at that aspect

while we are operating outside the confines of the House of Assembly. We had

hoped to have them here at this session but there are some technical things

being done in preparation for the opening of the House, where the televising is

done in-house, and, of course, the feeds and the video are available to the

media in that regard. By having it outside, I guess it is not possible to do

that and we will discuss that at a Committee meeting and move forward, if there

is consensus, with a resolution to deal with that. That is for the benefit of

the media there.

I would like to start by having each person here introduced, so we know who

is who here. I would like to start with the members of the Committee, first of

all. To my right is the vice-chair.

MR. JOYCE: Eddie Joyce, Vice-Chair, MHA for the District of Bay of

Islands.

MR. FITZGERALD: Roger Fitzgerald, MHA for the District of Bonavista

South.

MR. BUTLER: Roland Butler, MHA for the District of Port de Grave.

MS M. HODDER: Mary Hodder, MHA for the District of Burin-Placentia West.

MR. T. OSBORNE: Tom Osborne, MHA for the District of St. John's South.

CHAIR: For the benefit of others, press on the top button when you want

to use the mike and the light will come on. You can release it then when you are

finished speaking, please.

We will move with the Auditor General's office next.

MR. NOSEWORTHY: John Noseworthy, Auditor General.

MR. LOVEYS: Wayne Loveys, Deputy Auditor General.

MR. JANES: Claude Janes, Audit Manager.

CHAIR: Representing the Department of Works, Services and Transportation?

MR. OSMOND: Don Osmond, Deputy Minister of the Department of Works,

Services and Transportation.

MR. BAKER: John Baker, Executive Director of Marine Services.

MS HANRAHAN: Denise Hanrahan, Director of Financial Operations.

MR. PRIM: Tom Prim, Chief Operating Officer of Marine Services.

CHAIR: Thank you.

We have Elizabeth Murphy, Clerk of the Committee, second to my left; Mark

Noseworthy, Executive Director with our Committee, second to my right; Kevin

Collins, with Hansard, is doing the recording, for Hansard purposes, of today's

meeting.

I would like to start by - if anybody has not been sworn-in. I am not sure if

Ms Hanrahan has been sworn-in. Had you been sworn in before the Committee last

fall?

MS HANRAHAN: Yes.

CHAIR: You were, and I am sure Mr. Prim. I think all four were here

before, and I guess the Auditor General's office, the same thing. I guess we

do not have to have anybody sworn in this morning.

Our topic today is Coastal Labrador Marine Services, per the Auditor General's

report 2000-2001; 3.28 in the Auditor General's report. Prior to getting into

any questions and discussion there, we will give Works, Services and

Transportation and, of course, the Auditor General, too, an opportunity if they

have any particular opening comments on this particular topic.

Mr. Osmond.

MR. OSMOND: Yes, good morning and thank you, Mr. Chairman.

I would like to have a few comments on this morning's report. As you say,

it is paragraph 3.28 of the Auditor General's 2001 report. This paragraph of

the report is nineteen pages in length, of course, and focuses on some very

detailed aspects of our department's marine operations with a view to

hopefully providing some helpful background for the Committee. I appreciate the

opportunity to provide a few opening remarks to you.

Mr. Chairman, in 1998, when the department prepared cost estimates for the

Coastal Labrador Marine Services, they were intended to be a broad order of

magnitude figures over a five-year period with no adjustments for rising fuel

costs. It was certainly known by all concerned at the time that these early

estimates would have to be revised over time and updated as circumstances

evolved and things changed, of course. The Auditor General's report, with all

due respect, takes issue with the variance between these order of magnitude

estimates and the actual costs, particularly the figure for the year ending

March 31, 2001, which was the furthest out from the time of estimate. By that

time some significant changes had taken place affecting the service, including

the replacement of the Northern Princess on the St. Barbe run with the

significantly larger Apollo to meet the growing demand on that service,

and substantially higher fuel costs were prevailing at the time as well. Such

changes had multi-million dollar impacts on our costs for that year. Indeed,

though, when you look at the previous years they were more closely in line with

the early on estimates.

Another issue in the report indicates that the department did not invite

tenders for the period April 1, 1997 through December 31, 1997, and also that

the department did not report this to the House of Assembly as would be required

by the Public Tender Act. It is certainly true that no tender was called for

this period, but this was in strict accordance with the Labrador Transportation

Initiative agreement between the federal and provincial governments. This

agreement did not come into effect until the end of March 1997, when the

respective Cabinets approved the agreement. Included in this agreement was a

specific undertaking that Marine Atlantic, a public or a federal/public Crown

corporation, would continue to operate the service for the then imminent

operating season, given the insufficient lead time in fact to do otherwise.

It is the department's position that no tender call was therefore required

for this period, and indeed to try to do so would have been detrimental to the

public good. Notwithstanding this position, a Ministerial Statement was made in

the House of Assembly on December 9, 1997, referring to Marine Atlantic's

continued involvement with this service during the transition period.

Mr. Chairman, marine operations are a very unique public service, not unlike

trying to operate perhaps an airline. Details of the operations are frequently

complex and very difficult to readily appreciate. It is not at all like plowing

roads or constructing buildings. Marine also involves tight scheduling timelines

that, if not met, can mean significant cost and inconvenience to the travelling

public.

Furthermore, rigorous federal regulations meant to ensure public safety

frequently present themselves as urgent non-discretionary actions to be taken by

vessel operators and owners. Indeed, looking at marine operations from the

outside necessitates also an understanding of the terms, standards and practices

of the marine transportation industry which, as I said, is unique.

One of the key issues in the Auditor General's report refers to refit

activities. It is very easy for non-mariners, I guess like many of us, to

confuse terms such as maintenance, dockside refit, and dockyard refit. For the

purposes of our contract with 10663 Newfoundland Limited, maintenance generally

refers to work the contractor is able and is required to preform while the

vessel remains in service, such as any machinery breakdowns that might take

place while the vessel is on one of its runs, as well as oil and filter changes,

that sort of thing.

Dockside refit, on the other hand, refers to work that can only be done when

the vessel is at dockside but for which the vessel can remain in the water; such

as above-water repairs, as per regulatory requirements, including engine

overhauls and opening up a gearbox for inspection.

Dockyard refit, on the other hand, refers to work that can only be done when

the vessel is out of the water or in dry dock, such as underwater hull work

including work on shafts, rudders, propellers and that sort of thing.

From the perspective of the contract, these terms are very important as they

result in different levels of payment, if any, to the vessel operating

contractor while such work is being done. In essence, the contractor receives

nothing extra for maintenance work while being paid additional amounts for lay

up and actual work performed for dockside refits.

Dockyard refits, on the other hand, are special insofar as the department

calls public tenders for such out-of-the-water work and the vessel operating

contractor is only paid then for transporting the vessel to and from the

dockyard, wherever it might happen to be, plus any vessel crew members required

to stay with the vessel while it is at the dockyard. I might just say that

vessels of this size are crewed 365 days of the year, Mr. Chairman.

As I said, these complexities can make it difficult to understand the

arrangements under contract; however, such arrangements are standard in the

marine industry and well understood by the respective parties to these

contracts.

By the way, we have prepared a small flow chart which hopefully might be able

to assist the Committee's understanding of this process, and we can pass this

out to you now as well.

Misunderstandings of these

definitions or classifications of work, we

believe, lie at the root of many places in the Auditor General's report where

it is stated that the department has failed to call for public tenders in

accordance with the Public Tender Act. These are what the report refers in total

to as the $990,000 in refit costs. Our intent, when we called the contract with

10663 Newfoundland Limited, and therefore our

interpretation of the contract, is

that all maintenance and refit work other than dockyard refits are included, or

were included, in the contract. This is standard practice in the marine

industry, and again well understood by the parties to the This is standard

practice in the marine industry and again, well understood by the parties to the

contract.

For the department to have tried to call public tenders for dockside work may

well have resulted in legal challenges, in fact, by the contractor for breach of

contract. It is conceded though that a different

interpretation is advanced by

the Auditor General, which is also equally possible. Advice from the Department

of Justice, however, is that neither

interpretation is better than the other.

The department, therefore, takes the position that it publicly tendered for the

vessel operating and refit contracts as appropriate and that it undertook its

maintenance and refit activities in good faith and in accordance with its

interpretation of the work tendered under such contracts. In fact, I would like

to add that the Government of Newfoundland and Labrador has one of the most

stringent pieces of procurement legislations in the country through our Public

Tender Act.

Finally, I feel it would be helpful to briefly outline some background on how

freight is handled by our marine services. The key to understanding here is that

the transportation industry wide practice is of using bills of lading to

describe the type, weight and volume of goods being transported. Essentially,

the initial shipper fills in these legally binding documents and each carrier of

the goods passes the bill of lading on to the next, in the transportation chain,

until the goods reach the final destination or the customer. The goods may have

changed hands many times while on route. However, they are not opened,

inspected, re-weighed, et cetera, every time. Rather, experienced handlers

readily know what a certain volume of a particular good should weigh and their

reviewing of the bill of lading is usually satisfactory to allow the goods to

continue on their way.

The Auditor General's report indicates that we do not check to ensure the

total weight being shipped and subsidized by the Province is correct. This is

true, but then to our knowledge neither does anyone else in the transportation

industry dealing in bulk goods or containers either. Instead, the accepted

practice is to rely upon the bill of lading, its system, to indicate the weight

being shipped.

Thank you very much, Mr. Chairman, for giving me this opportunity for these

opening remarks. There are other details in our marine operations and the

subject contracts being reviewed which we will be happy to provide further

details on for the committee based on questions raised.

Thank you.

CHAIR: Mr. Noseworthy.

MR. NOSEWORTHY: I would just like to talk for a moment about the most

significant part of the report dealing with the $990,000 - that we have

indicated - work that was performed in contravention of the Public Tender Act.

Myself and Mr. Janes, here to my right, met with John Baker on June 20, 2001

in our Corner Brook office to discuss this particular report. During our

discussions Mr. Baker put forward the sorts of information and arguments that

you just heard from the deputy minister, and assured me that if I would meet

with the director of the Government Purchasing Agency and their legal counsel

that, in fact, I would see the light also. I said well, if you want to set up a

meeting, let's do that. So, on July 11, in St. John's, I met with Bruce

Pillar, who was their former legal counsel. I met with Peter Fitzgerald, their

current legal counsel. I met with Larry Cahill, the Director of Government

Purchasing Agency. Mr. Janes was on the telephone, and Mr. Baker was there also.

During that meeting I started off by explaining our position, documentation

we had, our

interpretation of the agreements and shortly into that discussion I

was asked if I could provide them with some time. So, I left the room and was

summoned back in about twenty minutes or half-and-hour. When I got back in I was

told - and Mr. Janes can confirm this. He was on the telephone - that, in fact,

they agreed that this particular agreement was never intended to support $1

million of refit work. It was not designed for that. They suggested that yes,

there could be minor repairs to be made during the operation of those vessels

and that sort of thing, and that you probably would cover that, but in no way,

shape or form was it ever designed or intended, or would it ever be able to

support the paying of $990,000 in refit work. That is where we ended up right

there. I was happy when I heard the Government Purchasing Agency and the legal

counsel say that, and it was based on that, that we went forward with our report

and took the position we did.

We had a response from the department on October 9, 2001. It was the first

response that we received. Myself, the former Auditor General, and the deputy

minister had a meeting on October 11 to discuss the response. It was quite long

and a lot of detail and information there that we had problems with. Subsequent

to that meeting, on December 20 we received another response from the

department, and it was that response that we finally said, well, we will put it

in the report, and that is the response that is included here. So, there is

quite a bit of background to it. From my position, my office stands by this

comment, that the $990,000 was in fact done in contravention of the Public

Tender Act.

CHAIR: Thank you, Mr. Noseworthy.

We will get into questioning. Maybe, at the outset, if I could - if any

member of the committee has any objection, I have no problem with it. Normally,

I have ended up with questions at sessions, and if it is not a problem I will

start with questions. If anybody has an objection, I won't start, I will

certainly yield to that. If the questions are going on for a period of time and

you want to get an opportunity to ask, because I have a fair number, some

general and some of a specific nature, I could just stop and come back to it, if

anybody feels it has gone a little too long and they have questions they want to

move into.

So, does anybody have a problem with that?

AN HON. MEMBER: Not in the committee.

CHAIR: Thank you.

We will just start with a few generalities. I have looked at them in terms of

sequence in the report there, so to follow those. First a couple of

generalities.

In terms of, I guess, having sufficient funds available to be able to

maintain the service at least for a long period of time without having to put an

infusion of provincial money in, I guess the Labrador Transportation Initiative

Fund was intended to assist in that. How much money would be in that fund right

now and what might be the projected time in which it would run out?

If you could just state your name at the beginning for Hansard purposes,

please.

MR. OSMOND: Thank you, Mr. Chairman.

I am afraid I don't have that information available. The Labrador

Transportation Initiative Fund is governed by a committee led by Treasury Board.

We would be, of course, invited to be there from time to time but that is a

separate fund, if you will, that we draw down on but we don't actually manage

or control.

CHAIR: In terms of anticipating when we might have a shortfall from that

fund, you wouldn't know that?

MR. OSMOND: I am sorry, Sir, no, I could not tell you.

CHAIR: Could you endeavor to find out and have a response back to the

committee on exactly the status of that fund, because that was the nature of

being able to take over the coastal marine service and to be able to operate it.

It was supposed to, in perpetuity in the beginning, and I know as the cost

projections kept changing the possibility of that fund - and I think there was

reference made in the Auditor General's report on another

section in the

report; not in this specific one. It is important to maintaining, I guess, the

integrity of that for the cost of operations in line with taking over the

Coastal Labrador Marine Services. If we could get a response back to that we

would certainly appreciate that.

Initially, when the company was successful - 10663 Newfoundland Limited. It

is referenced here in the Auditor General's report on page 2. The owners of

that company was a consortium of companies: Woodward, Crosbie's Shipping and

Puddister's Shipping, I think, were the three initial ones. Is it my

understanding that shortly thereafter that one company, the Woodward Group,

bought out the others and it is just one we are dealing with now? Could someone

confirm that and probably indicate the date which that became the case?

MR. BAKER: The only thing we can confirm is that they wrote and - at the

time that this whole transaction was taking place, where one company was buying

out the other company, or the other two companies, whatever, that is the only

information I have at this time. I do not have the exact date.

CHAIR: Okay, but it is your understanding for the past while anyway,

probably the past couple of years, that just the Woodward Group of companies now

are the 10663 owners? That has been my understanding. I am not sure. I just want

to make sure it is clear.

MR. BAKER: I do not know the particulars of the agreement. I do not know

if it was phased out or if it was done all at once or what the particulars were

in the understanding and the agreement between the consortium.

CHAIR: Mr. Baker, could you possibly get back to us on that? Because if

we are dealing with a company on a contract it is nice to know who the owner of

that company is, exactly who we are dealing with.

MR. BAKER: Yes, Mr. Chairman.

CHAIR: Thank you.

On page 3, in the Auditor General's report, if we look at figure 1, in 2001

it cost $10 million to operate the Bond and Ranger , and the wharf

and terminal that came with that federal transaction there. When it was

budgeted, basically, $8.4 million for that particular thing. I know you made

some reference to the cost, but in this fiscal year, what were the major areas

that caused almost a 20 per cent cost overrun there? What would be the

significant things that contributed to that?

WITNESS: Mr. Chair, is it the year ending March 31, 2001, you are

referring to?

CHAIR: Yes, I am referring to Figure 1 on page 258 in the Auditor General's

report, or page 3 in the document we have in front of us. It shows there under

subtotal: Budget for 2001, $8.4 million; Actual $10 million. I am wondering, why

was there almost a 20 per cent over-expenditure on what was budgeted for that

fiscal year?

MR. NOSEWORTHY: (Inaudible) compare the Budget as opposed to the

Estimates.

CHAIR: The wharf and terminal we can see were $1.3 million under budget,

which means the other ones must have been $3.9 million over budget.

If you look at just the vessels themselves, for example, the $3.6 million and

the $2.2 million, there was $5.8 million budgeted on just the two vessels. We

spent $8.7 million, which is about a 50 per cent increase in the operation in

the cost on those two boats alone. Why would you underestimate or budget in

previous years such a small amount of money, or not anticipate? What was

overlooked to increase the cost of these by 50 per cent?

The Auditor General might have a comment.

MR. NOSEWORTHY: I just want to refer you to Figure 3, as an interim step

here. It does not show the budget but it shows a breakdown of the Actual; those

first three lines. That will tie back your $10 million Actual, 2001, for the two

boats. You can see the breakdown: payments to contractor, fuel and other.

CHAIR: Yes, but -

MR. NOSEWORTHY: (Inaudible) budget.

CHAIR: As opposed to budget.

The point I am making is: I f you budgeted so much for fuel and it was 50 per

cent more, or those other areas, in comparison to your budget for those two

vessels, for example, if we look at the $3.6 million and the $2.2 million, that

is $5.8 million, and if you total up the actuals it was $8.7 million, so that is

a $2.9 million increase. That is exactly 50 per cent more cost on those vessels

than you budgeted in that year. Why would that be? In other words, if you want

to provide what your budgeted fuel costs were, the actuals, the other costs

budgeted in actuals, which one would be so out of whack that you would have

missed your target by 50 per cent?

MR. BAKER: That year was the year that we did a great deal of work on the

Sir Robert Bond with hull plating that was required after the ultrasonics

were done on the vessel. That would account for most, if not all, of the

difference in the overrun there in the budget.

CHAIR: That would have cost $2.2 million?

MR. BAKER: It was a significant amount. I do not know if we can put it

right on the exact of $2.1 million, but I will get that breakout for you.

CHAIR: Yes, if you could get the breakout, because it is significant, a

$2.2 million overrun on $3.6 million. If you could get these details. Would you

have them with you, or would you intend to respond back to the Committee?

MR. BAKER: I will respond back to the Committee.

CHAIR: Thank you.

What about the Northern Ranger , for example? There was a $7 million

overrun there on $2.2 million. That is over a 30 per cent increase in costs

there. What accounted for that? If it was strictly - you were on target on your

other costs, on your fuel and all other costs on the Sir Robert Bond . If

it was almost all attributed to the hull, why would we be over 30 per cent over

on the other one? What would have driven that to that point?

MR. OSMOND: Mr. Chairman, I will just try to offer some comment for you.

Certainly there would be a fuel expense that would be, you know, a key

contributor here. I think John was trying to explain there were probably two

major elements here. Regrettably, we do not have the statements and figures here

in front of us but there were two key things to focus on . One would have been

the hull plating on the Sir Robert Bond which was unscheduled and not

recognized before we went into the year. The second thing would be the fuel

consumption and the fuel cost increase that took place during that year, so

those would be the two primary factors. Fuel would affect both vessels, of

course, and the hull plating would have been primarily focused on the Sir

Robert Bond.

CHAIR: The question I asked, too: If almost all the increase on the Sir

Robert Bond was hull, or $2.1 million out of $2.2 million, you hit your

targets on fuel costs on the Sir Robert Bond , your total cost, but missed

on the other one. Wouldn't that be a consideration, if it was all a hull

increase, the higher cost? If you were on target in your fuel estimation on the Sir

Robert Bond, why wouldn't you be on target with your fuel cost on the Northern

Ranger ? If the entire cost on the Sir Robert Bond was for this extra

special plating, why would there be a variance? Shouldn't you be closer to

budget because of that? I cannot see different estimations of fuel costs on two

different boats. I know consumption levels could be different but, at least

based on those, why would it be accurate in one and not in the other?

MR. BAKER: At the same time that the extra money was spent on the Sir

Robert Bond for the extra hull repairs, the Sir Robert Bond was late

going into service. The Northern Ranger had to kick in earlier that

season in order to make up for the absence of the Sir Robert Bond running

from Goose Bay to Lewisporte. That would have attributed to that overrun in fuel

because she had extra time in there for that full month of operation.

CHAIR: Wouldn't we have then gotten reduced savings on the Sir

Robert Bond on fuel, if that was the case? If she was budgeted to be on

schedule and wasn't, shouldn't we have gotten equivalent savings then on

fuel for the Sir Robert Bond , for example?

MR. BAKER: Yes, we should have had some equivalent savings on the fuel on

the Sir Robert Bond , plus the fact that the Northern Ranger would

have taken more fuel, I guess, at a more expensive rate at the northern level in

Goose Bay, where the Sir Robert Bond fuels mostly out of Lewisporte. Yes,

we probably should have seen some lower rates on the Sir Robert Bond . I

would have to again give you a full breakout of that, to let you know where the

differences are.

CHAIR: Yes, I would like to see the breakdown, because if the total

increase on the Sir Robert Bond was basically with the hull, and it did

not get to sail, it was tied up, we should have been under budget then on the

other items, if you excluded the hull, as opposed to the Northern Ranger .

MR. BAKER: Excuse me, Mr. Chairman.

Also, as another note further to that, from the previous year there were also

some late invoices coming in, which were carried over to this particular year as

well.

CHAIR: So they were carried to the year in which they were paid rather

than the year in which they were earned? There was not an accrual or a

carry-over on a receivable, or a payable, I should say, in the case of having to

pay the cost? It was strictly not on an incurred basis; it was on a payment

basis? Is that what you are saying?

MR. BAKER: Well, some accrual could have been set up, but I guess it was

not enough because there was some money charged out to the subsequent year for

fuel on those vessels.

CHAIR: Okay, because I would think that if something was incurred in

February or March and it was not paid, that we should have made that allowance,

an accrual for that bill to be paid in that fiscal year just ending, rather than

forward it to the next fiscal year. Wouldn't that be an appropriate accounting

procedure? I want to ask maybe the Auditor General to answer that.

MR. NOSEWORTHY: I am sorry, I did not get the total question.

CHAIR: If an expense, for example, occurred in March or February but did

not get paid until April, basically, that expense should have been included in

the statement for the fiscal year ended when it was incurred rather than when

the cheque was actually issued.

MR. NOSEWORTHY: Yes, that is correct.

CHAIR: That is my understanding.

So, was it one that you were no aware of? If fuel is consumed, I am sure, on

a particular day, you are certainly aware; there are appropriate procedures to

sign off on that. Was it that the bill was late being sent? Why would that

happen, that you would have one expense in one fiscal year carried into another?

MR. BAKER: I know I can speak directly for that, and I know a lot of the

invoices were very, very late coming in for our fuel. I am given to understand

that is why it was not all caught up within the cut-off period for the current

year.

CHAIR: Okay, I will just move on to the next question.

If we look at the Astron and the Apollo, too, on the same page

3, figure 1, the cost projections on these two obviously were higher than

budgeted also. What would be the main factors that attribute to increased cost

of operating these as opposed to the budgets you gave here, for example, in

2001? The Astron was $2.1 million and went to $2.3 million, $2.7 million,

$2.9 million, and $5.4 million to $5.7 million. Would that be strictly extra

fuel, an increase in fuel costs? What might that be attributed to, other than

that?

MS HANRAHAN: That can be attributed to rising fuel unit cost prices.

CHAIR: It would be primarily there.

MS HANRAHAN: Primarily, yes.

CHAIR: The point is, if we were pretty well on target with these three,

in terms of those costs, the question that comes to me is: Why couldn't we be

on target with the Sir Robert Bond and the Northern Ranger

in those costs also, if were able to hit it in those other areas? Is the fuel

that you are paying in all of these pretty well the same type, rate increases?

What is the difference in the fuel that would be used on those five boats, for

example? Do costs vary significantly from one to another?

MR. BAKER: The price would not necessarily vary. The price would vary

where the fuel was taken on-board.

CHAIR: Okay, so it was taken on-board. If it was necessary to, I guess,

take on fuel in Labrador you have to pay a higher price, obviously, so I guess

every effort was made to try to have your fueling at the most economical places.

I would assume that is what is being done.

MR. BAKER: That is correct.

CHAIR: On page 4 in this report, 259 in the Auditor General's report,

on some of these items there is a breakdown a little further that could go to

those, but generally here, on page 4, there was an estimated cost of $51.8

million referenced in paragraph 2 under conclusions, and that escalated to $62.5

million over the period here from April 1, 1998 to March 31, 2001. It is a

significant increase. I think that is a difference of $10.7 million over that

period. What would account for all those extra costs there, some of the big

items? Give me two or three of the major factors that attributed to that

increased cost.

MR. BAKER: Again, if we refer to Mr. Osmond's opening remarks, when we

referred to those estimates that were done in April of 1998, they were done in

light of the fact that as the road progressed on the Trans-Labrador Highway, as

it was completed, that we could move the marine services further north and

thereby lessen the demand on the expense of the marine operation. That was a

prime factor there.

Also, if we look, in addition to that, we also replaced the Northern

Princess with the Apollo due to the fact that the Northern

Princess could not accommodate the traffic offering. Also, we had fuel price

increases. We went to tender for the freight vessels as well. The Northern

Cruiser was replaced by the Nada , and that was a significant increase

although done through the tendering process. Again, as we explained earlier, the

hull plating on the Sir Robert Bond , and we had some wharf

reconstruction. Also, in addition to all of that, it was anticipated, through

talking with some of the contractors and everything else that were going to

participate in the construction of the Trans-Labrador Highway, that they would

be moving their equipment by barge. Once the marine service started, we found

that a fair bit of that equipment was moving by the marine service. Of course,

that increased our freight as well on our marine service.

CHAIR: You mentioned that there was extra wharf construction. This was

not anticipated, for example. Would that be the wharf construction to modify it

for the Apollo . Would that be the extra cost we are talking about?

MR. BAKER: It wasn't necessary for the Apollo because even when

the Northern Princess was operating there, we knew since the fire that

other work would have to be done.

CHAIR: So would it cost extra? My understanding, and it has been in the

public forum, is that there were extra costs to accommodate the docking of the Apollo .

Would that be true?

MR. BAKER: We didn't spend extra money in the docking of the Apollo

because the Apollo was operating there before any money was spent at all. As I

mentioned earlier, this work was identified prior to the Apollo going

into service and there was also work over on the Blanc Sablon side that was

identified prior to the Province going to tender for a different vessel.

CHAIR: So you are basically saying there was no extra cost for the

docking of the Apollo . Would that be accurate?

MR. BAKER: Not particularly for the Apollo itself.

CHAIR: I guess, you didn't anticipate that traffic, basically, wouldn't

be reduced with the highway. Projections should show a decline in the coastal

volume, and there should be more of an on land volume. Have you looked at the

ports further north, for example, Cartwright as opposed to Lewisporte? What cost

savings or projections would you be seeing now that might occur because of this?

Have you done a department analysis to look at exactly how much we are going to

save on that particular aspect, that might keep these costs in line with earlier

projections?

MR. BAKER: Yes, we have. I am not inclined to talk too much about cost,

because our tenders are not closed yet, so I would rather hold that, but yes we

do have projected costs in place in order to operate that service. I think it

would be only appropriate that we wait until the tenders close to discuss that.

Probably we can get it along to you at a later date.

CHAIR: Sure. I don't have a problem with that, if there are tenders.

The reason I asked, too, is because you had some unanticipated costs, you

indicated, with services going to tender here and that drove up your costs,

based on your projections. I certainly hope that your projections now are not

going to be, by the same token, that your other ones were under and we are going

to have another increased cost rather than a savings in this particular area.

That is my concern, because your projections provided here, of why you went

$10.7 million more, is because you did not anticipate that tendering would be as

high. That was one of the main factors, I think, you identified on those

projections. So have you modified? Could I ask that? Have you modified your

projections where you missed your projections before when it went to tender?

Have you made significant allowances which would be more on target so that might

not happen, as has happened in those cases referenced here?

MR. BAKER: Due to the fact that when we went to tender for the freighters

earlier, we noticed a significant increase from the Northern Cruiser to

the Nada . I guess this is kind of the unknown when you go to tender. You

follow the process that the bidders go all over the world looking for vessels to

suit the requirement. We only had the one vessel come in that met the

requirement of that service. Therefore, with the service fast approaching and

also the previous vessel that was in service there being sold, that we never had

the opportunity to even, I guess, reject the tender that came in and do

emergency on the other one. So we followed the tender process and sometimes this

happens, that it comes in a little higher than you project.

CHAIR: I am just going to move into another particular area. I am still

on page 4, under Conclusions in the Auditor General's report, on the same page

4. The Auditor General indicated, "The Department contravened the Public

Tender Act and paid the contractor $990,000 for refit work not

tendered..." as per the Public Tender Act. I know we have heard government

and the Auditor General's explanation here.

I want to ask a question here. I will not belabour that and ask for

repetition of what has already been stated but, why have refit costs - and if

you look in reference to conclusions here. Why have refit costs in 1999 - it was

$91,000. It went to $323,000 in 2000, and $576,000 in 2001. We have seen a

tremendous increase. Are the boats getting progressively less seaworthy? What is

causing all this extra work that is needed there on these particular boats? When

we took over the boats, when we received them, did we get undervalue for these?

Are we faced with increasing costs? Is this the trend that is going on now? I

know the 2002 year is over and done with. Where is 2002? I know it is not

directly here but we are seeing an increasing cost. Has that been stopped or is

it still ongoing, and why would we see that happening?

MR. BAKER: With regard to the $91,000, we will start with that one. Just

prior to that, prior to the Province taking over the vessels - I do have a

little problem here with the years because (inaudible) it should be overlapping

years so that we could get a good picture of what we are dealing with. The

$91,000, I think, would be for the 1998-1999 year.

CHAIR: Yes, but when I refer to years I am referring to the fiscal year

ending March 31. I just want to make that clear, and I am sure that is what the

Auditor General's reference would be. Typical, I guess, the government fiscal

year. If I was not clear there, I apologize for that, but the nature of the

report is on that fiscal year.

MR. BAKER: In the $91,000, just prior to the Province taking full control

of the vessels, Marine Atlantic did a full refit of the Sir Robert Bond .

In the 1998-1999 fiscal year, all that was required to be done on the Sir

Robert Bond would be some last minute certificate work whereby the crew

would come aboard and just check out their safeties and do their fire-on-boat

drill and things like this. So the cost was very minimal for that year because

there was so much work done prior to the Province taking over the vessel.

Then, as we progress into the next year -

CHAIR: That is the year ending 2000 now, the fiscal year 2000?

MR. BAKER: Yes.

The Northern Ranger needed an engine overhaul, one of the main

engines. Also, there was some work required on the Bond, but not as much

because her dry docking and her major work was done in the previous year. We

only have to go to dry dock, as a mandatory requirement, every second year. That

is why the $323,000 was a little more than the 1999.

We go to the subsequent year and now the Northern Ranger and the S ir

Robert Bond both require extra work. It is a dry docking year. We have to

abide by our surveys and also the issues that are put forth to us by Transport

Canada. Those all have to be dealt with. So these are the reasons why you will

see a little increase in the different amounts.

CHAIR: Okay.

I would assume then - the fiscal year just ended now, 2002 - that this would

have gone down because they did not require dry docking. Would that be accurate?

Do you have a figure to show the trend now? Because the year is over now about a

year. I am sure the statements are done on the year. How much did it go down in

2002, then, if we did not require dry docking in those years? The most current

statement.

MR. BAKER: I do not have the most current breakdown.

CHAIR: Would it be back to two or three hundred, then, as opposed to

five?

MR. BAKER: It would depend. Like I said earlier, we also had to get into

plate work as well on the Hull . Therefore, yes, the trend would normally

be on refits of a vessel, especially under normal circumstances, that you would

see one year a certain amount and then every second year you would see a little

blip because there is extensive work and then she would level off and then the

second year again she would increase.

CHAIR: Yes, but this has gone up significantly each year and I am just

wondering, where the 2002 fiscal year ended a year ago, just about, whether

somebody would have that figure.

MS HANRAHAN: I have more total figures as opposed to specific work. The Bond ,

at year end 2001, was approximately $5.7 million. The year ended 2002, she was

$4.2 million. There is the drop that happened that year.

CHAIR: At the end of 2001 it was $5.8 million, rounded off.

MS HANRAHAN: The following year was $4.2 million.

CHAIR: Okay, you budgeted $4.7 million; it went $4.2 million.

MS HANRAHAN: Right.

CHAIR: What about the Northern Ranger ? Would that be -

MS HANRAHAN: The Northern Ranger went from approximately $2.9

million to $2.4 million.

CHAIR: Okay, and you budgeted $2.5 million. In 2002, you would be on

budget then.

In terms of this area here, you are not sure whether it is down because of

those refit costs. Would you have a breakdown of the refit costs, whether they

went down? That was my initial question. I know you have the general figure. I

guess there is a statement on costs for that year anyway, I would assume, with

the appropriate breakdowns. If we could also make a note, we would appreciate

seeing where the trend is going there.

With reference also to page 4, in the last paragraph, why is there an

administration fee? Is there an administration fee, first of all, built into the

agreement? Following from that, why, in 1999, was it only on salary? Why was it

put on salary and supplies in 2000? Why did it go on salary, supplies, and

catering services in 2001? Why did we keep expanding the scope in administration

fee? Number one, what was the fee? What is it based on? Is there a contract

basis to warrant having that fee, and why did you keep adding on to other

things? Were there modifications or changes in that agreement to warrant that?

If somebody could answer that, please?

MR. BAKER: The administration fee was a 10 per cent fee added to work

that was required of the contractor. As specified in our clause under refit of

5.2.11.6 -

CHAIR: In your agreement?

MR. BAKER: In the tender document.

CHAIR: Yes. We requested, I know, just recently, earlier this week, to

have a copy of that, which we were not able to get, to look at those details. I

would have liked to have it, I said yesterday, to have read through it before

today, but we did not receive it. If I do ask questions that are in that, we

certainly would appreciate referring to the section. That would be fine. If we

need to refer to that after, I certainly would not mind having a copy.

There is, in your agreement, a 10 per cent administration fee. What is the

administration fee per agreement based upon? Where does that fit into salaries,

supplies and catering? Why would you only put it on salaries one year, add it to

supplies the next year, and add it to catering next year, if it was in the

agreement you could do it in year one. I cannot see a company being so generous

where they are not going to take an administration fee. Could you maybe

elaborate on that?

MR. BAKER: Under that 5.2.11.6 there is no specific reference to a 10 per

cent administration fee, but in our clause this refit (inaudible) cost shall not

be included in rates submitted on rate form

section seven. These costs shall be

handled separately with the contractor at the refit period.

CHAIR: Okay.

Does it state in the contract that there shall be an administration fee that

can be applied to salaries, supplies and catering, to all services? Does that

state that in the contract?

MR. BAKER: Not specifically.

CHAIR: Does it state what the per cent of the fee is in the contract?

MR. BAKER: Not specifically.

CHAIR: Why would we pay a fee if it does not state it?

MR. BAKER: What happened is that the contractor invoiced us at cost plus

a 10 per cent administration fee.

CHAIR: All the invoices for his suppliers and everything were provided to

substantiate that cost?

MR. BAKER: Yes, that is correct.

CHAIR: Who decided then on the 10 per cent fee?

MR. BAKER: That was accepted because that is the norm under what we

consider the industry standards: if you are going to charge something at cost,

that there is normally a 10 per cent administration fee for the handling.

CHAIR: Is the industry known to have a 10 per cent fee on catering

services?

MR. BAKER: Anything that you are going to charge at actual cost, it would

be acceptable that a 10 per cent administration fee would be acceptable.

CHAIR: Were catering services provided at actual cost?

MR. BAKER: Yes, they were.

CHAIR: There is supporting documentation to show that?

MR. BAKER: We have the actual cost of each of the meals provided, and

they were supposed to be at-cost on those breakouts.

CHAIR: Were the meals provided by an independent company to the

contractor?

MR. BAKER: We dealt directly with the contractor.

CHAIR: The contractor could have provided the meals themselves and then

put the fee on top of their own supplying of meals on catering?

MR. BAKER: We dealt directly with the contractor and they invoiced us for

the actual meals provided. The meals provided also included an extra lunch for

the crew where they were working a twelve- hour shift.

CHAIR: There is nothing to show that the meals were not prepared by the

company. For instance, we could contract out a service to Swiss Chalet and pay

them $1,000 and get a 10 per cent fee on that of $100. We could prepare the

meals in-house and do our own costs and factor labour and factor all of the

related things - maybe use of space on that particular boat, everything that

would go into the cost and then put a ten on top. So we are making money on the

administration fee and making money on the preparation of that catering service

too, which could be a double profit coming there. If it is an independent, I can

see your point, but have you done anything to indicate whether that is done

outside? Did you or the Auditor General see any invoices to show that was

independently provided and then a fee put on it? We did not expect them to

(inaudible) for nothing, but if it is prepared themselves, through their own

service, and then put a fee on, wouldn't that be a possibility of getting

double payment for one service?

MR. BAKER: Again, as I mentioned, we dealt directly with the contractor.

When the price of meals was discussed, yes, a comparison was done with the price

of meals and what it would cost if we had to go other places to have this

provided. Yes, the prices that we received were very minimal. So therefore -

CHAIR: If you did a comparison of what it would provide somewhere else, I

would assume you would do the comparison on what Swiss Chalet would charge you

with their profits built in. Is that the price you used? I cannot see you doing

a breakdown on what the ingredients went into providing that. Does the Auditor

General have anything to substantiate or add to this line of questioning?

MR. NOSEWORTHY: When we looked at the issue of the administration fee we

inquired under what authority in the contract was this being provided. There

really is nothing in the contract to require the payment of an administration

fee at all. There is no requirement to pay an administration fee.

We found it most unusual that in the first year it would start off just on

salary costs, then it would be expanded on salaries and supplies, and then

finally on all costs. Not only was that unusual, but the other thing we found -

and as we reported here on page 267, the number of the Auditor General's

report on the page in the bottom, the last bullet. We make this comment,

"In addition to the refit expenditures not being tendered... there is no

support at the Department for any of the rates being charged by the contractor

for the refit costs." That would include these invoices. All of these

invoices came from the contractor. There were no invoices there from outside

catering services. It was all contractor. We looked at those and there is

nothing to check at the department to make sure the rates that were being

charged were the rates that you would expect or anything else. It seemed

whatever came in was paid. If there was an admin fee on it, that was paid also.

The first year, it was on certain things, it was paid. The next year it was

expanded, that was paid. The final year it was on everything, that was paid. It

is most unusual and that was what we concluded here in the report.

CHAIR: Were those paid just to 10663 Newfoundland Ltd., Woodward Group of

Companies or were they also paid to Canship and Labrador Marine? Which of those

companies were paid that administration fee?

MR. BAKER: The administration fee only applied to work that was done

outside of the normal operating days while the vessel was on her scheduled runs.

More particularly, during the refit periods.

CHAIR: Was that done on the Sir Robert Bond, Northern Ranger, Astron ,

Nada and Apollo , on all five, or just on the Sir Robert Bond

and Northern Ranger ?

MR. BAKER: The Sir Robert Bond and Northern Ranger are the

only two that the department is responsible for the refits.

CHAIR: So all those expenses were related to the Sir Robert Bond

and Northern Ranger ?

MR. BAKER: That is correct.

CHAIR: Thank you.

That, I guess, makes reference in that question. That is why the Auditor

General's office referenced that there was $990,000 worth of work. I know the

department had an opening statement and the Auditor General, that was not

properly tendered and not paid out in compliance with the regulations. That is

the sum of all those totals, I would assume. I ask the Auditor General.

On page 5 -

MR. BAKER: Mr. Chairman, I would like to just take a step back on the

comment that was just made with regards to the $990,000 and with regards to the

Auditor General's comments as well, that when we sat down to prepare this

document we did not do it in isolation.

We sat down to prepare a document that was going to be able to accommodate

operating those vessels and protecting the department's assets. In light of

that, we looked at the industry standards and what was there in the industry for

bare boat charters and how one would protect their assets. Also, along with

that, we had to consider that, yes, this is industry standards but we also have

to keep in mind and include into this the government legislation and policies

and procedures that they have in place. In addition to our marine services

officials, we sought the assistance of the Government Purchasing Agency. In

addition to that, we sought the assistance of the Justice Department. Together,

the tender document was put together and was completed.

Again, I refer to, that everything we did with regards to refits, we like to

refer to the document and to our refit section. We knew going in that we had

enough flexibility there that we - although the contract was let to the

contractor for 365 days a year, that we could intervene for one month of each

year to make sure the survey items were protected from the classification

society and also any issues that the Transport Canada Marine Safety would have

with regards to certificated items. We did that. We went each year and there are

years as I mentioned earlier that you do dockside refit. At which time, when we

do dockside refit, the vessel remains at dockside.

It also says in our document that whether the vessel goes to dockyard, it

will be at the sole discretion of the department. The department then, again,

would work with Transport Canada, Marine Safety Division, and the classification

society, which would be Lloyd's, and if there are any survey items that would

be required to be completed, even if the vessel was on dry dock the year before,

it was something that happened - that now we need some underwater inspections

done, for whatever reason, but it would be at the sole discretion of the

department.

If the vessel did not have to go to the dockyard for those other twenty-eight

days, as mentioned in our document, the work would be completed at dockside.

Now, a vessel of this size, you cannot come out, turn the key, lock the door and

walk away from her. You have to have a crew on-board all the time to make sure

that there is heat provided, her boilers are running up, and that nothing

freezes up and everything is in good order.

When we take the twenty-eight days, as the Auditor General is referring to,

that we did not call tender for, work was done at dockside. Other than that,

when the vessel went to dockyard, the work was tendered and the dockyard was

paid the lay up days instead of the contractor. The contractor did not receive

one lay up day while the vessel was at dockyard, but while she was at dockside

and the dockside refit was taking place, that, yes, the vessel was still under

the care of the contractor. So we paid the contractor instead of paying the

dockyard and those expenses were for shore power, security, and fire prevention

for the whole terminal yard and for those reasons.

CHAIR: I had a series on that a little later. I am going to get to that

point a little later, when I finish the line I am on. I want to give the Auditor

General an opportunity now to respond.

MR. NOSEWORTHY: Just following up on Mr. Baker's comments. The

section

of the agreement that you don't have, from the invitation to tender document,

starts off by stating that during each year of a contract the owner and the

contractor will mutually agree on a refit period for the Ranger . The

refit period will be approximately four weeks. So, annually they will mutually

agree. It goes on to say that it is understood by the contractor that the refit

period may not involve dry docking.

Now, they had a refit period in one year and that was in 2000-2001, and in

that year, during the refit period, the twenty-eight days, $154,000 was actually

paid to the contractor without tender even though it was a refit period. It was

paid without tender. When it went back into service an additional $422,000 was

paid on the refit work. So, during the twenty-eight of dry dock they received

$154,000 worth of work without tender, and then, when it went back into service,

it received $422,000 in refit work, while receiving daily rates.

The year before that, in the 1999-2000 year, government didn't call a refit

period at all, and what we found that year, there were ninety-two days when the

boat was on lay up. Now, there was no dry dock or refit period called, but

ninety-two days on lay up, one boat, and another one was on lay up for 114 days.

During that year, no refit called but refit costs on that one, $323,000, while

in receipt of a daily rate every day. I mean, government didn't even call a

refit period when it could have and saved the twenty-eight days rates. Instead,

without tender the contractor received $323,000 of work while in receipt of a

daily rate.

From our perspective, it seems that even though the provision was in the

contract to have, and it even suggested that they will, on an annual basis, have

a refit period. Even though that was available it didn't happen. It happened

one year and in the year that it happened only $154,000 was done during that

period and then $422,000 was done after. So, even that seems very strange. They

didn't call a refit period in the other year and so this contractor received

daily rates while they were doing the untendered refit work.

CHAIR: Just a question, and you can respond to it at the same time.

Basically, in the fiscal year ending in 2000 there was no twenty-eight day

refit provided as per the contract, which meant the company got paid a daily

rate every single day and also got paid for refit work in that period of time

without a public tender. If I am correct, in other words not only did they not

declare a refit period and got twenty-eight days paid at a rate - I think the

daily rate is, if it is operating, fifty-some hundred bucks a day. When it is

laid up, it is in the three thousands a day. Basically they were getting paid a

rate for sailing, on times, when they were also getting paid for other work

without going to public tender. That is in the year 2000.

WITNESS: That is not right.

CHAIR: That is what I understand. I am reading in the fiscal year ended

2000. There was no twenty-eight day lay up and they got paid from the time they

took possession until the end of that fiscal year. They got paid for every day a

daily rate. Would that be accurate?

MR. BAKER: Mr. Chairman, it is mandatory - mandatory - that we have a

refit period every year.

CHAIR: Did you have one in the year ending March 31, 2000?

MR. BAKER: Yes.

CHAIR: Was the contractor paid daily rates for every day during that

year?

MR. BAKER: If the refit was completed at dockside, the contractor would

have been paid a lay up rate because you cannot escape the twenty-eight days of

refit. It is not a free period, whether the refit is done at dockside or it is

done at dockyard. If it is done at dockside, we pay the contractor for looking

after the vessel because he is paying all of the shore power and all the

security and making sure that everything is cleared, because this is normally

taken care of over the winter months. So all the snow clearing at the terminal

for fire prevention, all this stuff is all looked after by the contractor. Plus

the fact that the department would not have an influx of people to go aboard

anyway and take control for the twenty-eight days. There is no freebie for

twenty-eight days.

CHAIR: But, doesn't the agreement say that there shall be a

twenty-eight day period each year at which the vessel reverts to the owner, the

Government of Newfoundland and Labrador, and the contractor is then relieved of

responsibility during that period? It reverts to the owner. Isn't that in the

basic contract? I think that is in the operating agreement, I understand, even

in our package.

MR. NOSEWORTHY: That is in

section 5.2.11 of the refit document.

CHAIR:

Section 5.2.11.

You are saying that did not happen in the year ending 2000? The boat never

went back to the owners of the boat, the Government of Newfoundland and

Labrador, which should have been during that twenty-day period. Is it my

understanding that when it goes back to the authority of the Government of

Newfoundland and Labrador, the contractor does not have charge of that boat

during that twenty-eight day period and therefore should not be paid fees on

that twenty-eight day period. Would that be correct?

MR. BAKER: Mr. Chairman, again, for that twenty-eight day period, each

year the department takes control. It is under the control of the department;

but, having said that, for those twenty-eight days the lay up rate has to be

paid somewhere. Somebody has to be in place to look after the vessel, which is

considered as a lay day. The department goes aboard to do and take control of

the refit period, whether it is at dockside or in dockyard. The twenty-eight

days, like I said, is not a free period at all. We either paid it to the

contractor or we paid it to the dockyard. Even at the dockyard it is called lay

days. It is a lay day that somebody has to be there to protect the vessel during

those periods.

CHAIR: On page 28 -

WITNESS: I think the deputy minister has -

MR. OSMOND: I will just try to add some clarity to it, Mr. Chair. This is

why we tried to create this table, or this chart, for you. I know it is a bit

confusing, even for ourselves. You have to put it all down on paper so you can

understand it. What the Executive Director of Marine is trying to say is that

the vessel is crewed 365 days of the year; 365 days of the year the power is on

the vessel. You cannot turn it off and just walk away from it. Someone is caring

for the vessel all the time. There is being money spent caring for that vessel

every day of the year. The only thing that will change, in accordance with the

contract, is if we take custody of the vessel to put it into a dockyard

somewhere.

The mandatory refit of twenty-eight days every year can happen either one of

two ways, according to this figure for you. It can go and be done dockside, in

which case it is done by the contractor, and lay up time is provided for in the

contract and paid for, or government can take custody of the vessel having had

it tendered for the work to be done at a dockyard. It goes to a dockyard, and

included in the tender for the dockyard are the same things that the contractor

otherwise would take care of at dockside. You have to keep the thing plugged in,

you have to keep it heated, you have to keep it running and so forth.

I think there is confusion, Mr. Chairman, over some of these terms and that

is what is behind a lot of the frustration, I think, in trying to understand

what happened here.

CHAIR: Actually, I follow that particular point. For instance, on the Sir

Robert Bond , on page 34 as an example, and that is the Vessel Operating

Agreement, during a lay up day $3,065 is paid.

On page 34 in our booklet here, in the Vessel Operating Agreement for the Sir

Robert Bond , the agreement is one of the documents in that big book there, I

am assuming, because there is a list of documents that make reference here but

we only received, I think, just a part of that, just Vessel Operating Agreements

- $3,065 a lay up day. During the fiscal year ending 2000, it is my

understanding that the lay up days there would have been paid to the Woodward

Group of Companies because there was no twenty-eight days designated. Would that

be correct?

MR. OSMOND: What I am trying to say, Mr. Chairman, is that there is a

twenty-eight day period.

CHAIR: Yes, I was getting to the next year then, and that might answer

where I am heading. The next year, there was a twenty-eight day period

designated.

WITNESS: Every year.

CHAIR: No, the first year - basically, during year two, the year ending

2001, who was the $3,065 rate paid to in the year ending 2001? Who was the

recipient of that?

MR. BAKER: Mr. Chairman, the lay up days only paid from approximately the

end of November when the vessel would come out of service until approximately

June 9 or 10 when the vessel goes back into service. That is a lay up period. It

is not for the full year. During that time, whether the vessel goes to dry dock

for refit or it goes dockside for refit there is a twenty-eight day period.

CHAIR: Yes, I understand that, and there is a two week pre-season and

post-season. I am familiar, as I have read through all the details of that. My

question was: During the twenty-eight days designated in the year ending 2001,

who was paid for that twenty-eight day period on the lay up day? I think 10663

was paid the year ending 2000. The year ending 2001, who was paid during that

twenty-eight day period?

MR. BAKER: If it went to dry dock, it would have been the dockyard. If it

did not go to dry dock -

CHAIR: Yes, which dockyard?

MR. BAKER: I think the last couple of years that we went to dry dock, the

successful bidder was the Newfoundland dockyard at St. John's.

CHAIR: Okay, so that went to tender?

MR. BAKER: Yes.

CHAIR: On that twenty-eight days?

MR. BAKER: Well, like I said, I would have to check that specific time

period.

CHAIR: Yes, but I am wondering, did it go to tender for that twenty-eight

day period in 2001?

MR. BAKER: If the vessel went to dry dock, it went to tender.

CHAIR: Yes, and I think you said it went to dry dock, so I am asking if

it went to tender. You are saying, yes, it did go to public tender?

MR. BAKER: If the vessel went to dry dock, it went to public tender.

CHAIR: It went to dry dock, you have established that, so I am assuming

it went to public tender. Are the supporting tender documentations there?

MR. BAKER: If the vessel went to dry dock, yes, the supporting documents

would be there.

CHAIR: Okay, my next question, did it go to dry dock.?

MR. BAKER: I would have to check the dates on that, Mr. Chairman.

CHAIR: Well, that is the point I would like to know. If it did, who was

paid that, and was it the lower tender? The previous year it did not go to dry

dock and the rate was paid, to 10663. The reason I am asking is, if it went to a

specific dry dock under a public tender the next year, during that twenty-eight

day period, should not have received anything there and it would have gone to

the dockyard basically. That is based on what you are saying. Wouldn't that be

correct?

MR. BAKER: If the vessel went to dry dock, there should have been a

twenty-eight day period.

CHAIR: Yes, and could you provide which dry dock it went to, and were

there tenders called, and how many tenders? You do not have that with you?

MR. OSMOND: Regrettably not, Mr. Chairman, but we will be happy to get

that for you.

CHAIR: Okay, if you could, please.

Mr. Joyce has to leave, so we will switch to him to ask a question before he

goes.

MR. JOYCE: I just have two or three questions. I have to catch a flight,

and they are moving the flights up because of the storm. I will be very brief

because I know you never asked a lot of questions in the last couple of days.

This twenty-eight day or thirty day lay up, is this in the standard agreement

that you signed with the company itself?

MR. BAKER: Yes, that twenty-eight days is clearly identified.

MR. JOYCE: Clearly identified, and is it standard practice?

MR. BAKER: Yes, it is standard practice to have a refit every year.

MR. JOYCE: I will ask one more question, Mr. Chairman, and then I am

gone.

The Deputy Minister mentioned in his opening that you had a legal opinion

that this agreement did follow the public tender act.

MR. OSMOND: Yes, Sir, we asked the Department of Justice to review the

actions that we had taken on this as well as the Auditor General's opinion on

this, and their response, without being able to quote it

chapter and verse, was

basically that neither opinion should be given any more credence over the other.

So, they were both equally plausible.

MR. JOYCE: Did the Auditor General see the legal opinion?

MR. NOSEWORTHY: I did not see any legal opinion that the Deputy Minister

is referring to, but I did meet with his current legal counsel and the former

legal counsel and they concluded that, in fact, it didn't support the

$990,000. That is where it ended in my office and Mr. Janes is a witness to

that. John Baker and Larry Cahill were there.

MR. JOYCE: So, there is a legal opinion stating that this is within the

public tender act?

MR. OSMOND: Yes, we have a letter from the Department of Justice written

by Mr. Bruce Piller and the end result of that letter is just as I stated.

CHAIR: At that meeting -

MR. JOYCE: Oh, no. I will ask one more question and I am gone then.

CHAIR: Sure. Go ahead.

MR. JOYCE: I am not trying to put anybody on the spot here, but is there

any way that - then again, Works, Services, the one that oversees the public

tendering for the Province, you have a legal opinion. The Auditor General is

saying, well, we don't agree. Well, I am not sure what you are saying. Is

there any way that Works, Services and the Auditor General can get together and

say, okay, boys, how can we do this. Obviously you are going to follow Justice

and if Justice says yes, you are following the Public Tender Act, you are going

to do it. If the AG says, well, we don't feel that it is, that you contravened

it, is there any way to get together, because Works, Services are the ones who

oversee the public tendering for the whole Province?

CHAIR: The Auditor General already gave testimony here today that there

was a meeting on July 11, 2001 in which the former and current legal counsel

indicated that it was not in line.

MR. JOYCE: I can't ask the question?

CHAIR: I want to comment on information that has already been entered to

avoid too much repetition, but if you want to ask another question, sure, go

ahead.

MR. JOYCE: I am just asking: Is there any way that sometimes the AG can

get together - because this is not just for this issue. I am talking about the

public tendering for the whole Province which Works, Services is responsible

for. This is just a suggestion more than anything else.

MR. NOSEWORTHY: We tried to work closely to come to an agreement. We had

taken the position long before we met with the legal counsel and the Director of

the Government Purchasing Agency. It was clear to us, based on our understanding

and

interpretation of it, and when we had the meeting I was open-minded and I

was waiting to be persuaded, and it didn't happen. As a matter of fact, when I

came back into the room I was told that they agreed with my position and the

Director of the Government Purchasing Agency - now that person is in an awkward

position and I might add that last year we recommended that consideration be

given to moving that position away from the particular department and having it

out into more of a autonomous role where they would probably be able to provide

a more open opinion.

MR. JOYCE: Okay.

MR. OSMOND: If I may just add a supplementary to that. In my experience

with government it is certainly very helpful to receive criticisms from the

Auditor General. It certainly does help us improve the way that we do business

and this is an exercise, I think, in that here today. Undoubtedly, when the

Auditor General submits reports to us and gives us good criticism on how we do

our business, it does help us improve things and we do continue to make

amendments to our documentation and make amendments to the way we do business to

try to be in conformance with proper procedures as identified by the Auditor

General.

If I might make as well just a quick point on the Director of the Government

Purchasing Agency, that agency, as the Auditor General points out, does indeed

report administratively into our department and into the assistant deputy

minister for works. In years gone by - maybe it was ten or fifteen years ago -

there were some minor amendments made to our legislation at the time in terms of

how that reporting relationship took place; however, there have been no real

changes made to the legislation since that time, though I would indicate the

important piece in this is that the Director of the Government Purchasing Agency

is appointed by the House and can only be dealt with by the House. So within the

department, or me as deputy minister, I do not have the power to change his

position or anything of that nature. He does clearly have autonomy and

independence from that perspective but reports within the department more for

administrative purposes, and certainly there is legislation dealing with that.

It has been well talked about in the past.

MR. JOYCE: Thank you.

CHAIR: Thank you.

I think the Auditor General has reported here from a meeting on July 11, and

with legal counsel, and Mr. Janes, too, of the Auditor General Office. Maybe it

is something our Committee would have to consider - we are supposed to meet

after today, too - that maybe we should have more witnesses here - maybe the

Director of the Government Purchasing Agency - because the Auditor General has

reported that they agreed with him.

Who provided the letter from the department to works and services, indicating

that it is in compliance with the Public Tender Act? Who did that letter come

from?

WITNESS: We sought for and received the opinion from Bruce Pillar, who is

a solicitor with the Department of Justice.

CHAIR: That would be the same Bruce Pillar who attended a meeting and

indicated to the Auditor General that it was contrary.

I have not seen a Justice decision yet that really implicated its own

government, because they do not do that. I have never seen it, in my time in

here, publicly.

I want to continue -

WITNESS: Excuse me, Mr. Chairman. I would like to make a statement here

as well.

I was at that meeting in July and I do not recall any statement saying that

we contravened the Public Tender Act.

CHAIR: What statement did you understand to be -

WITNESS: Very similar to what we have received from the Justice

department now. If you look at it in this light or if you look at it in that

light, from different angles, yes, you could see some discrepancies there, but

not very clearly come out and state that we are contravening the Public Tender

Act.

CHAIR: In the departmental response here it is indicated, of course, that

the Justice department has not necessarily supported government or the Auditor

General in the response here. You are saying, subsequent to that, they are

supporting government?

Is there a different response now from Justice than indicated in the

submission on page 273 in the Auditor General's Report, page 18 here,

"... the Department has received an

interpretation from the Department of

Justice with respect to the particular contract terms in question..... I do not

think the terms of the document generally lead to a conclusion that either of

the competing

interpretations [that of the Department or the Auditor General]

should be given more credence."

They have not refuted the opinion. By calling in and having meetings on the

issue, wouldn't that give significance that they really had a concern? Would

they have gone to that length if there was some doubt?

WITNESS: Mr. Chairman, I guess we have to go and check the letters, look

at the dates of the meetings and so forth, but my impression was that the letter

was written much later, subsequent to these meetings and so on, but clearly that

is something we can clarify by just looking at the dates of these things.

CHAIR: Could the Auditor General shed any light on that, or Mr. Janes?

MR. JANES: I just wanted to comment that during that meeting they did not

say that it directly contravened the act. All that was said is that the $990,000

was not meant to be covered under that tender, so they did not really use the

words: contravened the act.

CHAIR: They said it was not meant to be covered?

MR. JANES: That is right.

WITNESS: Which is the same.

CHAIR: Those are the words they used.

Mr. Butler, I think you had a question, as well as Mr. Osborne, on this

topic.

MR. BUTLER: I want to come back, Mr. Chairman, to a comment that you

made. Maybe I misunderstood you, when you referenced a member of Justice - I

failed to get the name - when you mentioned the letter that the department had

received from a lawyer in the Department of Justice. I guess those people are

going on what he stated in that. Are you saying that his judgement is taken out

of context here, and he is not here to defend himself? Because you seemed to

belittle it, that: would they ever do anything to go against government anyway?

CHAIR: No, what I indicated, what I asked, was it the same Mr. Pillar

that was in on these meetings? We got a different

interpretation from the

Auditor General's office. I only said I have never seen a Justice department -

I did not say Mr. Pillar - I said I have never seen a statement come out of the

Justice department on an opinion that basically incriminated a government. In

any lawsuit, or whatever you are going to do, that would not be -

MR. BUTLER: In essence -

CHAIR: I used that in a general context, yes. I was not referring

specifically to Mr. Pillar.

MR. BUTLER: Really, Mr. Chair, what you are saying is, what the

department stands on versus the Auditor General's report, it is one against

the other. I think you are belittling the situation from that gentleman,

whomever he or she may be.

CHAIR: We have heard a couple of conflicting reports.

Mr. Osborne had a question, and then Mr. Fitzgerald.

MR. T. OSBORNE: Thank you, Mr. Chair.

My question is simply that if the Department of Justice has indicated that

neither of the positions should be given more credence, I mean, really it is a

matter for

interpretation as to whether or not the Public Tender Act as been

breached. But, having said that, what is in the best interests of the taxpayers?

If the department are saying, on a technicality, that the Department of Justice

is saying neither of the positions or

interpretations should be given more

credence, what we are doing here is spending taxpayers' money. If, by going to

public tender, we could have saved taxpayers' money, wouldn't that be the

right thing to do?

MR. OSMOND: Mr. Osborne, perhaps my colleague, John Baker, can also

respond as well, but I think what we were dealing with here was a situation

where if you wanted to go to public tender, let's say, on this, if that was

your choice then what are the pros and cons of doing that for the moment?

By going to public tender you would have to be removing it from the

contractor's care, the same crew who have managed that vessel for the last

eleven months of the year or what have you, who intimately know the vessel, in

many cases have operated on that vessel for many years, have done this kind of

work routinely at dockside in past years. So you would be dealing with the

people who would know the vessel the best, if you would leave it in the

contractor's care. So, when we talk about standards and practices and that

sort of thing, that is what you would be trying to call into question here,

whether or not it would be better to leave it in the care of those who have

always done the work or to extract it from their care and to publicly tender for

it to see if you could get someone else to do it cheaper.

The rates that are charged by the contractor are always highly scrutinized

and, in these cases, we feel that we have gotten good value for our money and we

got the work done by people who were very knowledgeable of the vessel and,

indeed, in whose care the vessel had been for the last eleven months and would

continue to be in their care for the next eleven months. So you were dealing

with a group of people who also had an interest in making sure that the vessel

was well maintained.

CHAIR: Mr. Osborne, and then we will get to Mr. Fitzgerald.

Just one other followup on this specific thing.

MR. T. OSBORNE: Thank you.

I thank Mr. Osmond for that response but, again, I have to ask specifically,

considering the fact that if we are dealing with one individual who knows there

is no competition and his best interest is also the bottom line for that

company, would government have saved money if we had gone to public tender?

MR. OSMOND: I can only state, sir - it is a hypothetical question, I

guess - we have scrutinized the costs that were coming from the contractor and

felt that they were fair and reasonable, and felt we were getting good value for

our money.

I might draw an analogy, if I may, to other circumstances in other contracts

where work is done that is not contemplated specifically in the contract. When

we are building buildings or building roads, the same things happen. Unexpected

things occur or things that you could not define at the time when you go to

public tender, yet you require that contractor to, nevertheless, do the work. It

is the reasonable, proper and appropriate way to handle this extra piece of

business as opposed to trying to remove it from that contract, getting another

contractor to do it, and bringing it back to the original contractor. Then you

are faced with liability questions over whether it was good enough, or whether

it was done to a point where the older contractor would accept liability for it

if there was a problem later on that occurred as a result of the work that was

done by the other contractor; who is to blame, who is going to be culpable for

it, all kinds of things that come into question. It is for those kinds of

reasons that we oftentimes stay with the original contractor and do things like

change orders when it comes to building contracts and so on as well.

CHAIR: Mr. Fitzgerald.

MR. FITZGERALD: Mr. Chairman, I was just going to make a comment because

it seemed like we were getting bogged down there on who said what, what was said

when, and that sort of thing. I just want to make a comment, but if we are

moving away from that then I do not have anything to say.

I think, with all respect to both parties here, if there is documentation and

a letter to show that the Justice Department had said there was not a

contravention of the Public Tender Act, then we should accept that and move on

from it. Having said that, I do not think we should ever be shy in going to

public tender for anything in order to provide the people out there with the

best value for their dollar. Far too often in the House of Assembly, especially

as it relates to Marine Services - and I realize too that it is a different

service and things need to be done when they need to be done. I think if you

look at much of the documentation that has been tabled in the House, a lot of it

is related to Marine Service and I think a lot of it could have gone to public

tender rather than be classified as an emergency the way it was (inaudible).

Those are just my comments at this time.

CHAIR: Before we move from there, I think the department's own response

here in the Auditor General's report, to the Auditor General report and I

reference on page 273: did not give any more credence, that is the Justice

Department, to the Auditor General's view or the department's view. The

question I just asked, and then I will move off this, was: When you are in doubt

about whether something has to go to the Public Tender Act, why wouldn't you

go to a Public Tender Act? If you use the argument that - I will just add by

saying - because someone is familiar with it, they would have it forever.

Whoever lays sods all the time in Pippy Park would have it forever, or whoever

does an extension to government buildings would have it forever, because they

are good at it and we like their work and we think it is fair - every contract.

Wouldn't that eliminate and undermine the whole basis on which a Public Tender

Act should be based?

MR. OSMOND: Mr. Chairman, we would certainly take the position that this

work was tendered. This was all publicly tendered. It was contemplated under the

contract that certain dockside refit work was going to be done by that

contractor.

CHAIR: Okay.

Could you provide for our Committee copies of that tender, and the tender

documents for that specific service? Does it state in that, that all refit work

and so on would be done by the contractor? Is that in that document? Were there

other people who submitted tenders on this, other companies that bid?

MR. BAKER: In the initial bid, when this went to tender, we had three

companies -

CHAIR: The overall service, yes. I am not talking about the overall

service. I am speaking about specific work that needed to be done on a refit

basis to keep the boats operating. I am not talking about the general

contractors. There were three bids. The lowest dropped out and then it came down

to two other bids. I am very familiar with the background on that, but I mean

the specific work as it went ongoing from year to year. That is what I am

asking, was this work tendered? The $990,000, were there other competing bids on

that? I understand there was not, from reading the Auditor General's report.

MR. OSMOND: Mr. Chair, as my colleague John Baker had indicated earlier

this morning, the only time we would have gone to tender was when we were going

to the dockyard. Whenever that instance arose, we would have gone to public

tender. Otherwise, we did it within this contract.

CHAIR: Okay.

Thank you.

Mr. Noseworthy.

MR. NOSEWORTHY: Just one point. There is a

section in this agreement, and

I do not think you have this agreement, that says the owner - government - will

be responsible for refit of the vessel during the refit period, and it says that

the refit period may not involve dry docking. So, wherever the boat is, if there

is refit of the vessel, then the owner is responsible for that.

It goes on to say: Including all costs, tendering - it is right here,

tendering - the owner will be responsible for tendering and all arrangements for

the work and overseeing the work. The contractor will provide a list of

recommended items for refit approximately two months before the scheduled refit.

So it contemplates in the agreement, underneath is refit work, and refit does

not mean that it has to be in dry dock. Refit period may not involve dry

docking. It could be anywhere, so even when the boat is in service, and it

clearly contemplates right here that the owner, government, will be responsible

for refit of the vessel during the refit period, including all costs, tendering

and arrangements. So it contemplates tendering right in here.

CHAIR: What section, Mr. Noseworthy?

MR. NOSEWORTHY: That is

section 5-2-11-2.

CHAIR: Okay.

Is that a copy of the book for us, that was brought today? I wouldn't mind,

Mr. Noseworthy, or somebody -

MR. NOSEWORTHY: That is a relevant

section when you are talking about

tendering.

MR. OSMOND: Mr. Chair, if I may.

CHAIR: Yes, Mr. Osmond.

MR. OSMOND: These are the very clauses and so forth that the Department

of Justice was asked to review, upon which it rendered its opinion. Rather than

us, I think, sitting here today tweezing apart the clauses and whatnot, we have

gone to the Department of Justice and sought their opinion on this, and their

opinion, as is included in our response to the Auditor General's report, is

that neither

interpretation should be given more credence than the other.

CHAIR: That is why, I guess, I asked the question, when you are in doubt,

whether something should be tendered. Because someone just happened to be doing

it, wouldn't it be in the public interest to go to a public tender when you

are doubt? If you are clearly certain - the Justice department could not tell

you with certainty that the Auditor General is wrong. He said, there is just as

much credence as the department. Wouldn't it be prudent to go to public tender

when you are in doubt?

MR. OSMOND: Mr. Chairman, I do not disagree with you, if we are in doubt.

We frequently or usually would take the position that we will go to tender if we

are in doubt. However, in this case, this doubt, if you will, although none on

our side, arose after the work actually had been performed. When the work was

performed, when it was implemented, we on our side were not in any doubt. We

felt we had interpreted the document accurately and fairly, so we were not in

any doubt - that what we were doing was contravening the Public Tender Act.

CHAIR: Thank you.

I think we have exhausted that topic, on that particular aspect of it, I

think Mr. Fitzgerald indicated. I will just continue on page 5. At the top of

page 5, page 216 of the Auditor General's report, there is reference made that

there were no work orders issued for work to be done. Why wouldn't there be

work orders issued? Why wouldn't that be the case?

MR. BAKER: Mr. Chairman, when a vessel goes into refit, and you are

referring to dockside or dockyard, there is a refit list prepared and that

document is followed right through - and we have copies here - the refit period.

Now, whether it is done at dockside or dockyard, our superintendent of marine

engineering is in control of that document. Yes, as the clauses state, the owner

will be responsible for the refits, and the owner was responsible for the

refits, and those documents were prepared.

Now, we have a project manager on site when those refits are taking place.

The project manager will take the refit list and he will assign different jobs

to the different engineers who are on the vessel. They will monitor that on a

weekly basis and document the job completion and the percentage of work done,

and each week there will be a progress meeting. Then, all of that work is

documented: how much is done, what percentage is done, what percentage is left

to do, and that will control the work on the refit and the progress being made.

CHAIR: I am wondering if the Auditor General could comment with reference

to no work orders issued and so on, and the concern the Auditor General would

have had with that?

MR. NOSEWORTHY: A normal part of commitment control in any government

department, in any activity that you are working at, would be to have purchase

orders issued in order to control your expenditures to make sure you have

sufficient funds to anticipate receipt of an invoice so that it could be matched

and paid, and that sort of thing. You know, if no work orders are issued, that

is not a good thing so we pointed that out here. We also found, in the same

context, that in fact there was an error, an $1,800 overpayment. In that a rate

charge by the contractor was for a different vessel and they were overpaid

$1,800.

Another overpayment is related to the billing of payroll and catering

services while the vessel was being paid at the full daily operating rate of

$6,967 per day. The contractor actually went and billed the department and they

paid this $63,000 for payroll and catering costs. That is on page 270 of the

Auditor General's report. So it is very important to have purchase orders

issued to anticipate the type of expenditures that would be coming down to

establish what the prices would be, what you would expect. It is a control

mechanism. It is a requirement in government, so we put it in as an issue.

CHAIR: You basically feel if that was being done here these overpayments

would not have happened, or it would have been picked up that they were billing

for one boat when it should have been the other boat? Those thing were likely to

have been -

MR. NOSEWORTHY: That is part of the process. Yes, you can anticipate what

you would expect to pay and it would be set up that way. Then you would be able

to match and you would supposedly identify overpayments. That happens a lot in

government. They identify that and then they make the adjustment, but in this

instance, no purchase orders, no work orders and it was not detected.

CHAIR: Those two you referenced there, that is the total of $65,000 - on

page 260 in your report - the catering plus the rate charge that was wrong?

MR. NOSEWORTHY: Yes.

CHAIR: Okay, thank you.

The agreement -

MR. BAKER: Excuse me, Mr. Chairman?

CHAIR: Yes, sir, Mr. Baker.

MR. BAKER: With regards to what the Auditor General has just commented

on, the $65,000 that was pre-season per diem and would not have anything to do

with work orders. This is identified in the rate

schedule of the vessels on a

per diem. What happened there is that there were two days that were charged for

pre-season and the wrong vessel was charged. The Northern Ranger rate was

charged for those two days rather than the Sir Robert Bond .

CHAIR: My understanding, just to make sure we are correct, that they were

charged the operating day of $6,967.08 which is the Sir Robert Bond

operating. That is what the charge was but it should have been - because Mr.

Baker indicated it wasn't an operating day, would that be - I ask the Auditor

General, the rate that was charged was an operating day based on the Sir

Robert Bond's operating day but it was a pre-season, it should have been

$3,032.89, it was in the pre-season preparation period. Are you saying the

difference from $6,967 to $3,032 is what should be charged? My understanding is

that $6,967 was charged when it should have been the other boat.

MR. NOSEWORTHY: The rate that was charged was $3,944. It should have been

$3,032, a difference of $912 for two days is $1,824; rounded to $1,800.

CHAIR: Okay.

MR. NOSEWORHTY: The $63,000 relates to a different issue. On page 270,

what we have here is a situation where the Sir Robert Bond is now in

operation at $6,967 per day. That is the operating rate. We have the Sir

Robert Bond at an operating rate of $6,967 and it is here for twenty-four

days receiving that. In addition to being paid that money we said that they

should have been receiving a lay-up rate of $3,065 because they were not

operating. We said the contractor was overpaid by $93,648 as a result of that

because they received the operating rate versus lay-up because it was not in

operation. Then, on top of that, even though they got the $6,967 per day they

went and billed for payroll and catering services. It seemed unusual.

CHAIR: Was that money recovered if it was billed incorrectly?

MR. NOSEWORTHY: I do not know. You would have to ask the departmental

officials if they recovered that.

CHAIR: Was that money recovered, I ask the department? That is right

because you would not have done any subsequent audit to substantiate that. Was

that money recovered where it was overpaid?

MR. OSMOND: Mr. Chairman, I guess, with the long-standing relationship

like this one where there are invoices coming out every month or so, because

occasionally errors in there are usually corrected then on subsequent invoices

as a credit given. In this case staff advised the contractor of the overpayment.

The contractor acknowledged and agreed that there had been an overpayment and

there would be a future invoice adjustment accordingly. Regrettably, I do not

have a copy of the adjusted statement at this time but it is certainly something

that we could try to have for you in the next few days.

CHAIR: Did the contractor agree that the overpayment was as indicated

here? Did the contractor agree on the amount?

MR. OSMOND: Yes, as far as I know.

CHAIR: Okay. It is your understanding it would have been adjusted,

hopefully?

MR. OSMOND: Yes, that would be my understanding. I just, unfortunately,

do not have the paperwork to confirm that right now.

CHAIR: Was Ms Hanrahan going to have a comment on that?

MS HANRAHAN: Yes, please.

We have three or four issues here. I just had a couple of points of

clarification with respect to work orders. We do, routinely, use work orders for

some projects. In this case what would happen is once the work order spec was

determined and the work that was to be decided between dockside, dry dock,

whatever was needed to be done and our marine superintendent realized what the

vessel needed at that point, then they would determine a cost estimate and a

permit would be put in place. The permit would block funds based on the estimate

of what that work would cost and any future invoices would draw down upon that

amount of money. In that respect, we did have commitment control and did have

project estimates.

With respect to paying rates and having some errors in billings, as you can

imagine the size of these contracts and the amount of transactions that occur,

there are times when there are errors made. On subsequent invoices it was

routinely done that adjustments would go through. They would be approved by the

marine division as having been back and forth with the contractor.

CHAIR: Thank you.

On page 5 in this booklet. I think the department indicated earlier that -

with reference to, "The contract envisions a refit period...". The

first bullet there, the department - whether you really had a refit period. I am

wondering why there was no refit period in 1998-1999? Referenced in the second

indented paragraph down as per the agreement. Now, I know the

interpretation of

what you would consider a refit. A refit would not - the agreement is fairly

clear, I think, in that statement, that a refit does not necessarily have to be

a dry dock. It may be dry dock, or it may not be dry dock. I would assume that

if it requires dry dock for underwater areas and things of that nature that it

could not be done while it is in the water. It may necessitate that but it is

not necessarily specified. Why wouldn't there have been a refit period

designated? What would be the rationale or reason for that?

MR. OSMOND: Mr. Chairman, my understanding is that - again, if we go back

to all these

definitions and stuff - there was indeed a refit period. We are

required to refit the vessel every season. The refit though was not defined as a

dockyard refit. It was a dockside refit, and that is contained within the

contract. I think what you might be referring to is defining a refit period that

is outside the contract,

whereas in this case there was a refit period that was

within the contract.

CHAIR: Okay. In this case they received a daily rate of $173,385 during

that period. Why would the contractor - got a daily rate and also the $91,000

for work that was done while they were being paid the daily rate? I understand

that went directly to the contractor, right? It did not go out to a tender. I

think that has been established. What was the daily rate they were paid in that

period?

MR. OSMOND: Mr. Chair, indeed, that would have been a dockside refit

being done. The contract contemplated that the contractor would continue to be

paid for a lay-up day during that time frame. In addition to that lay-up period,

in addition to the revision of the normal things that keep the vessel operating

during that period, he would also be paid for the additional work that was being

performed as part of the refit.

CHAIR: So that was depending on which boat, whether it was a little over

$3,000 or $2,500 that they were paid the lay-up day for that boat, the

contractor was, in addition to doing the $91,000 in work?

MR. OSMOND: Correct. I am not sure on the figures but yes, generally

speaking.

CHAIR: Yes, as in this paragraph here on page - that we referred to.

In 1999-2000, also, I think there was no officially declared refit period.

Was there in 1999-2000? That is a little farther down, I think in the next

paragraph. There is no designated refit period. Once again, the same thing

happened I guess the following year. The contractor got $323,000 for doing work

and the daily rate of $680,000 he got during the same time. That was based on a

lay-up day and the contractor received $323,000 also. Once again, that went, I

am assuming, on the same basis as it went to the contractor? If it went to

public tender, isn't it logical that whoever won the tender would seek to hire

the personnel that would be there? I know people who retired from that service,

when they worked with the federal government and were retired - I know people

personally - who got called to come back and go to work on one of these boats.

Wouldn't it be logical that the contractor would seek someone familiar with

that, whether it is an engineer or whatever the case may be? Wouldn't it be

logical to have at least somebody there who would be familiar with some of the

work? That shouldn't be a basis, would it, to give a contract to somebody

because they are familiar? I mean, there are other people out there, are there

not, who know engines and boats and operations, people with expertise. Why would

it have to be just confined to this, especially with such large sums of money

involved?

With this transaction here alone, if you look at the lay up days which would

have been paid anyway, but still $323,000 on top of that, I mean there was

almost a million dollars during that period, in excess of a million. Why would

that have to happen?

MR. OSMOND: Mr. Chair, when you say, have to happen, it was within the

power of the department, according to the contact, to, at its discretion, make a

decision. If we felt we were not getting good value for our money we might well

have decided to do it in some other fashion. However, that was not the industry

practice, if you will, and we were convinced that we were getting good value for

our money. So we had no reason, in fact, to take it, remove it from this

contractor and have a separate tender and a new contract assigned to it.

CHAIR: Is it possible you could have gotten better value for your money

if you went to public tender? Do you have a comment on that?

MR. OSMOND: Mr. Chair, you may well be right. Hypothetically, anything

could happen, I suppose. We felt convinced that we were getting good value for

our money and the decision was made to carry on with the existing contractor on

that basis.

As I said earlier in my remarks, frequently within contracts things come up

that are in addition to what is specifically outlined in a contract, yet it

makes good sense to carry on with that contractor and have them perform the

additional work.

CHAIR: You mentioned discretion. Wouldn't it probably be in the best

interest, where there is discretion, to exercise that? Who knows, if you do not

try it? By not using discretion to put it out to tender, wouldn't that

undermine the basic intent of putting services available to the public so we

could have as many people as possible and even build an expertise maybe in that

area rather than confine it? Wouldn't that be against the basis intents and

purposes of the Public Tender Act - and to get a cheaper price for taxpayers, of

course?

MR. OSMOND: The only response I could make, Mr. Chairman, would be that

we did publicly tender this work. The additional work that we are talking about

was contemplated within the contract and we followed the Public Tender Act to

have this work performed.

CHAIR: Were there many tender submissions? When it was dockside refit, my

understanding was that it did not go to tender.

MR. OSMOND: That is correct.

CHAIR: That part was not tendered?

MR. OSMOND: It was tendered within the original tender. The vessel

operating contract contained provision, in our opinion and in our

interpretation, to carry out dockside maintenance.

CHAIR: The same one that the Justice department indicated that the

Auditor General's opinion has as much credence as the department's opinion.

MR. OSMOND: Correct.

CHAIR: Which meant, when in doubt -

MR. OSMOND: Mr. Chairman, if I may again, the doubt arose after the work

had been performed.

CHAIR: What is happening now? Is it going to tender now for dockside

refit?

MR. OSMOND: I will let my colleague, John Baker, speak to any new

contracts that are coming up.

CHAIR: Maybe I could ask: Since this report that was tabled basically on

January 31, 2002, has all the dockside refit work since then gone to the

Woodward Group of Companies or have other people had an opportunity to tender on

it?

MR. BAKER: When we compiled the document - I will refer back to that -

again, we put together a document with industry standards and with the

assistance of the Government Purchasing Agency and with the assistance of

Justice. It was determined at that time that we were fully within our right and

abiding by all the rules and regulations and procedures and whatever to carry

out the document as it was written and approved. Therefore, once this was

happening, we felt we were within our right and a document was drawn up for this

specific reason. Not for a specific reason for any particular contractor,

because it went to public tender, but it was drawn up very openly with everybody's

eyes open, that, yes, this covers through our Government Purchasing Agency and

the Public Tender Act, and we proceeded along those lines.

Again, as we stated, when we do a dockside refit, it is normal in industry

standards that you have the crew carry out the work under the guidance of a

project manager, and this work is carried out at dockside. Again, as the Auditor

General pointed out, it is at the sole discretion of the owner, and the owner

took full responsibility of each and every refit period. We felt that, because

of this, and with both parties, the Government Purchasing Agency and Justice,

advising us, that we were okay. A couple of years down the road we get an

interpretation from the Auditor General's office that you are not in

compliance, rather than, when we did it, we were in compliance.

CHAIR: Okay.

The question I really asked is, whether the refit is at dockside or whether

it is on a dry dock, wherever it is, for a twenty-eight day period each year the

vessel reverts to the owners, which is the government. During that period, since

the Auditor General's report, since it is now after the fact, for the past two

years has any work at dockside gone to tender, or has anyone received any work

other than the Woodward Group of Companies for the past two years on dockside

refit?

MR. BAKER: Yes, that is correct, they did. The Newfoundland Dockyard

received work and the Marystown Shipyard received work from the Northern

Ranger .

CHAIR: Was that on dry dock or at dockside?

MR. BAKER: That was at dry dock.

CHAIR: No, I asked on dockside refit. In the past two years, did any

company other than the Woodward Group of Companies do work at dockside? Not on

dry dock. When on dry dock, I think that has been answered. Has any other

company had an opportunity to bid on dockside refit or work?

MR. BAKER: We have carried out the dockside refits as per the tendering

document that we have.

CHAIR: So you are saying there is only once company that did that work.

Would that be correct?

MR. BAKER: It was done through the contractors, crew member of the

vessel, and under the guidance of our superintendent of marine engineering.

CHAIR: It has been established in an earlier question that the contractor

is solely now the Woodward Group of Companies. I think that has been

established.

We will just move on. On page 5, there was reference again, there was

designated refit work from 7 May to 14 June. There was the contract which paid

$154,000 for refit work. I guess you are stating for that also, that it is

falling under the same thing? You are saying the original contract was out -

this book here, you are saying, gave you authority, even though a specific

section of that, 5.2.11.2, indicates that this work could be tendered? It was

not really tendered as such. My understanding is that you figured you got fair

rates from the contractors of that service and therefore you were not compelled

to go on that either. I guess that is following from our previous items too.

Would that be correct?

MR. BAKER: Mr. Chairman, if we follow along on that bullet there, there

were designated refit periods from 7 May to 14 June, during which the contractor

was paid $154,000 for refit work which was not tendered by the department as

required. During this period, no daily rates were paid to the contractor and

that is because the vessel would have gone to dry dock. As was stated earlier,

even if it goes to dry dock, there is a requirement that we have so many vessel

crew on board during that period, and this is why you see the two amounts there.

CHAIR: Okay, I follow that.

On page 6, with reference to the subsidy there with reference to freight,

what procedures are in place to ensure that the payment of this subsidy is as

per the contract? I know there was some reference made at the beginning. Could

you tell us a little detail? How can you monitor to ensure that the amount of

money that is payed is correct and accurate? Could somebody comment on that

specific question?

MR. BAKER: We have what we call a Labrador Regional Manager who also

oversees this operation during the operating period. During the season, he will

do audits on the weights and billings of the contractor to determine that he is

in line and everything is done properly.

CHAIR: What is the department doing to ensure that Woodwards is complying

with its contract as it relates to the quality of service? There is reference

made here on the quality of service, like: the vessel must be maintained at a

high state of cleanliness, repair, reservation services throughout the year,

remove debris from various areas and so on, at least once a week stevedoring,

facsimile machines are maintained at wharf points and terminals; they were

lacking in areas and so on. Are those references here in the Auditor General's

report now? What is happening now? Are they all corrected, and is everything

complying with expectations of an appropriate quality of service?

MR. BAKER: Again, Sir, our regional manager for the Labrador services is

a very hands-on person. He has at least twenty-five years of experience in this

business and in that particular service. He spends very much time at sea with

the vessels and with the Sir Robert Bond, the Ranger, and also the

container vessels. He is monitoring this all the time. Also, I cannot remember

ever receiving a negative response from any of the passengers travelling on the

North Coast service with regards to the cleanliness or the service provided on

the vessels.

CHAIR: In terms of having fax machines available at some of those ports

there, do they all have these services now in terms of communication and so on?

Has anything happened since this report? The Auditor General made reference to

some of these items. Are there any changes as a result of this report?

MR. BAKER: Mr. Chairman, we did a followup on that after this report was

received. They said there were a lack of fax machines on the coast. The response

we received was that they were having problems keeping fax machines at freight

sheds on the dock. Because the contractor had other offices in the ports that

had fax machines, they maintained the fax machines at those facilities rather

than at the dock site.

CHAIR: They basically had those services available in all ports. Would

that be accurate, but not necessarily at the dockside location?

MR. BAKER: Not necessarily at the dockside location but they did have

them in the ports.

CHAIR: In all ports and available?

MR. BAKER: Yes, that is correct.

CHAIR: The Auditor General, in your review, it was basically the dockside

that you looked at, or is there anything that you can add to that from your

perspective?

MR. NOSEWORTHY: When we did the review we inquired about this aspect and

no one provided us with any information or could tell us whether these fax

machines were at these locations. All we had was a list of fax numbers which did

not include these locations. Therefore we made the statement that we did.

CHAIR: I was just wondering, and maybe ask the committee here, could we

probably take a ten minute break and then we might be able to clue up after a

break rather than a lunch break? Would that be more appropriate? It is entirely

up to the committee what they -

WITNESS: The faster the better, sir.

CHAIR: Okay. We will take probably a ten minute break and stretch that -

MR. FITZGERALD: You are on page 5, Mr. Chairman, there are thirty -

CHAIR: No.

WITNESS: We are good for another month, Roger.

CHAIR: No. Actually, it is not. A lot of these items that were

generalized there in conclusions are done in detail on the subsequent pages. Do

not let that scare you, I say to Mr. Fitzgerald. It will not be too many more

from my perspective.

We will probably take a ten minute break or so, just stretch and then we will

get back and try to conclude it.

Recess

CHAIR: Order, please!

We will resume the meeting again and I will try to sum it up as quickly as

possible. Most of the things, I guess, have been covered under the umbrella of

other things. I should not take too long more in my line of questioning. Maybe

that might mean all the questions have been asked and there might be nothing for

anybody else.

With reference to page 7, page 262 in the Auditor General's report, when we

look at government's estimated cost, it shows there 2002, $11 million. Then if

we look at 2003, obviously they projected that it would cost about $11 million

in these years and would decline then in 2004. If you look at the budgeted costs

then - there were revisions, of course, along the way. We made some reference to

it earlier, of $19.5 million. When you look at the last year of expenditure

there, I think there was an actual cost in 2001 if $21 million. You know, that

is a fair amount. We are almost double in what we anticipated. That is one of

the basis - I know I asked at the beginning - when projections were done the

Labrador Transportation Initiative, the $347 million, they hoped by taking over

that service, getting the boats to the wharf and terminal there from the federal

government and, hopefully, money in the road construction, that that would

lessen the need along the way for increased coastal service and that they might

be able to do it at a cheaper cost.

The costs have really gone out of whack from projections there, and I know we

had some reference to it earlier. What went wrong basically, I suppose, and what

might be future projections or corrective measures to get it back? Is it really

that we missed the boat so much - it is going to cost so much that we are not

going to go back to the federal government and ask them for another $100

million; it is going to cost more than we thought. I do not think that will be

greeted with too much pleasure. What is the future, basically, in terms of cost

control?

MR. BAKER: Mr. Chairman, as I stated earlier, those estimates in 1998

were done with the anticipation in mind that we would anticipate the service,

more particularly, moving further north as the road was completed.

The first move would have been into Mary's Harbour and we would operate

from there, but due to the construction starting, it started from both ends,

from the Red Bay side and from the Mary's Harbour side and also with the

increased activity on the fish plant there on the dockside in Mary's Harbour,

it was felt that it could not accommodate a freight and passenger service into

the Mary's Harbour port. That was one reason why we could not move further

north. Following that, it was anticipated that we would probably be able to move

further north then into Charlottetown but since that time, right at the dock

site, and, I guess, good for Charlottetown, there was a fish plant built.

Therefore, again, no lay-down area and no space to accommodate a passenger and

freight service out of the Charlottetown area. With that in mind, we had no

other choice but to carry on, status quo, until we could reach Cartwright. Those

are the reasons for the difference in the amounts, because as we move further

north then we could have made a change in the vessel configuration.

CHAIR: Do we now expect to see the cost come back in line, come back

close to projections? I know there are revised projections that have occurred

since the initial projections. Where do we expect it to take us in cost now? It

has been reported that it is going to cost more now to operate from the new port

as opposed to Lewisporte, for example? Is there any truth to that?

MR. BAKER: Do I understand the question, that it could cost more than

from Lewisporte?

CHAIR: Yes. I guess I will just deal with the first one first. What do we

expect to do to keep the cost in line? You know, we were way out in our initial

projections, I guess, and even beyond the revised projections somewhat. What is

the trend for the cost in the future? Have we turned the corner now? Are we

going to see costs being contained and more in line with expectations initially,

when we struck this deal?

MR. BAKER: We are expecting the cost to come down. Our projections are

that the cost will come down. As I mentioned earlier, the tenders are not closed

yet and I would rather hold off in stating any amounts that we would expect to

pay in the coming year or future years until after those tenders have been

closed and opened.

CHAIR: I guess the jury is out on whether it is going to cost more or

less to deliver it from Lewisporte. That is basically what you are saying on

that one.

Will there be extra stopoff points? There will be a facility now in

Cartwright, I think, is it? Cartwright is going to be the new location. There

would be drop-offs to Cartwright that will have to come by marine service, I

guess, rather than by land. Then there are going to have to be movements from

there, again, to other destinations, as opposed to coming from the Island

portion itself. So, extra stoppage points: Would that bring on extra costs or do

you expect to see economies? Generally speaking, wouldn't you think an extra

stop would be an extra cost?

MR. BAKER: The freight and passengers traveling north of Cartwright would

travel to Cartwright by road, then they would join the vessels at the Cartwright

terminal and proceed on from there.

CHAIR: Yes, but the new highway begins in Cartwright, right?

MR. BAKER: Yes.

CHAIR: And it will link right up to the current one, I guess, at Red Bay

where it ended before. So people using that service now would - south of there,

you mean? South of there they would move by road to Cartwright? You said north

of there, did you? You probably meant south of there, did you?

MR. BAKER: No. The people and freight moving north of Cartwright would

travel to Cartwright to connect with the vessel to continue their voyage rather

than picking up a vessel in Lewisporte or southern Labrador.

CHAIR: Okay, go by road. So they would cross on the Apollo , I

guess, across The Straits?

MR. BAKER: That is correct.

CHAIR: The marine cost should be lessened, but I guess the road cost in

comparison to marine is what remains questionable, whether it is going to be

cheaper for the people of Labrador, for example, if you do it overland by

trailer, cross on the Apollo, down to Cartwright and then by boat, or by

going directly from Lewisporte. I guess time will tell what impact that has, I

guess.

Just on first blush to me it looks like a long overland route across on a

ferry in the Straits and into a terminal storage in Cartwright and then on to a

boat further north might be an extra cost to the consumers and people might pay

more for a product by the time it gets to Nain or Hopedale, or wherever the

destination is.

If I am missing something, I would certainly like to have a comment on that

because to me - and I spent over twenty years in business and we did the

movement of goods and services all around the world, actually - it seems to be

an extra level of cost we are adding to the system, not a reduction of cost.

MR. OSMOND: Mr. Chair, certainly there has been a study done most

recently, the Abbott Report, on trying to determine whether it would be more

expensive for the people of the North Coast of Labrador, or less expensive, as

well as just the overall impacts. I think it is fair to say that it was

difficult, even for a consultant going out and spending a lot of time at it, to

really come up with a defined answer here. It really comes down to letting the

marketplace do its thing and see what happens. The experience though, that we

have seen on the South Coast, has be