Public Accounts Committee

2000-02-07

Newfoundland and Labrador — Committees

February 7, 2000

The Committee met at 2:00 p.m. in room 5083.

CHAIR (J. Byrne): Order, please!

Good afternoon everyone. My name is Jack Byrne, the

Member for Cape St. Francis. I am also Chairman of the Public Accounts

Committee. To my right is Tom Lush, the Member for Terra Nova. He is the

Vice-Chairman. I don't think the media or anybody here needs to take pictures or

anything, do they?

I would like to introduce the Committee, although we

are a couple short here this afternoon with medical appointments and what have

you, starting to the right. I would ask you to introduce yourselves.

MR. MERCER: Bob Mercer, MHA for the District of

Humber East.

MR. JOYCE: Eddie Joyce, MHA for the District of

Bay of Islands.

CHAIR: Mr. Lush and myself. There are four of us

here this afternoon.

First of all, I would like to welcome the witnesses

here today, and the Auditor General and her staff. If we could have the

witnesses identify themselves, please.

MR. BISHOP: Harry Bishop; I am with the Department

of Industry, Trade and Technology.

MR. HOLLETT: Bruce Hollett, Deputy Minister of

Industry, Trade and Technology.

MR. SAUNDERS: Earl Saunders, Director of Debt

Management with the Department of Finance.

CHAIR: Thank you.

Also, I would like to ask the Auditor General to

introduce her staff.

MS MARSHALL: Elizabeth Marshall. Thank you, Mr.

Chairman. To my right is Mr. John Noseworthy. John is the Deputy Auditor General

with the office. To my left is Ms Julia Mullaly. She is Audit Principal with the

office.

CHAIR: Thank you.

I will ask Ms Murphy to swear in the witnesses,

please.

Swearing of Witnesses

Julia Mullaly

Harry Bishop

Bruce Hollett

Earl Saunders

CHAIR: Thank you.

Basically, this hearing was called by the Public

Accounts Committee after having some discussion with respect to the Auditor

General's report. Of course, the Public Accounts Committee is a Standing

Committee of the House of Assembly and we do have a responsibility to review the

report of the Auditor General and other issues that may come before us, so we

decided this year that we would have a look at the Newfoundland Government Fund

Limited. We called you people as witnesses for your views and opinions of any

concerns that the Committee may have, and/or brought forward by the Auditor

General in her report.

When you are speaking, if you could identify

yourselves for recording purposes when you turn on you mike. I would like to ask

the Auditor General if she has any opening comments with respect to the

Newfoundland Government Fund Limited.

MS MARSHALL: Thank you, Mr. Chairman.

I will just give a little bit of background to the

amount of audit work that we have done with Newfoundland Government Fund

Limited. We have carried out more than the usual amount of audit work. We have

audited financial statements for two years, 31 December 1997 and 31 December

1998, and we will be auditing the financial statements for 31 December 1999. We

have issued management letters in both years.

In my 1998 Annual Report to the House of Assembly, I

included the report item which is before you here today; and I would like to

indicate that in my 1999 annual report, which is expected to be tabled early in

March or when the House reopens, there is another item in there on the

Newfoundland Government Fund Limited which will be an update to this one.

CHAIR: Would any of the witnesses like to make

opening comments on the Newfoundland Government Fund Limited?

WITNESS: No, thanks, Mr. Chairman.

CHAIR: Okay.

I have just a quick question to the Auditor General.

Ms Marshall, you say you did more than the usual audit work on the Newfoundland

Government Fund Limited. Is there any particular reason for that?

MS MARSHALL: Yes, this is a new entity and there

is quite an extensive amount of money involved. The financial statements at this

point in time, I think, showed probably about $12 million or $13 million, but by

the time all the funds come in I expect it will be more in the area of $30

million-plus; so, because of the significant amount of money, we have been

tracking the activities.

CHAIR: Thank you.

Well, we may as well jump right into the questions.

Mr. Mercer, if you want to lead off.

MR. MERCER: Thank you, Mr. Chairman.

In reading the Auditor General's report, I must say it

is one of the shorter ones. I am sure that is no indication of the importance of

it, but I have a couple of points. I guess one is with the administration of the

fund and the second with the investment, but I will deal with the administration

of the fund.

If you read the Auditor General's comments dealing

with the administration, I will call it, of the fund, we get a somewhat

unflattering picture. For argument's sake, on page 2 of the white document which

you have there, she makes reference to: failure to comply with the deposition of

certificates with the escrow agent; failure to invest 70 per cent of the

investment funds in eligible businesses in a timely fashion; delays in

submission of financial statements, failure to make a deposit of the 20 per cent

of subscriptions into liquid funds, liquid securities and so on, until you come

to almost the final damning one, from a bureaucratic point of view, and that is

failure to maintain proper records. Not a very flattering picture for a fund

which probably has, at this point in time, $12 million with a potential of going

to $30 million. Comments?

MR. HOLLETT: Yes, thanks.

You have addressed a number of issues here, and if I

could deal with each of them in turn? There was indeed a delay in flowing some

of the money out to eligible projects. That delay in fact was a common problem

not just in this Province but in many other provinces that had similar programs.

Basically all provinces that were dealing with this particular program

encountered delays in flowing the funds.

At the time that the Auditor General's report was

prepared the Province was not in compliance with CIC regulations at that time

and was not in compliance with the details of the offering memorandum, but

subsequent to the Auditor General's report all of those issues have been dealt

with. The Province is in fact in compliance with CIC now and it is in fact in

compliance with the offering memorandum.

The other point that you addressed, Mr. Mercer, was

the issue of administration of the fund and that there were certain records that

were not properly maintained at the point in time in which the Auditor General's

report was done. In fact, all of those issues have since been addressed and

mechanisms have been put in place to make sure that all of the proper reports

are received on time and that the proper documentation is in place. All of these

issues have in fact now been addressed.

MR. MERCER: Would the Auditor General comment on

that in light of the fact that you have been down there and it does show up in

your 1999 report, presumably?

MS MARSHALL: Yes. In my 1999 report we came across

similar issues, similar problems. My recollection is that the maintenance of the

records had improved somewhat at the time we did the audit then. It was

subsequent to my 1990 audit, I understand, that the problems identified both in

1990 and 1999 had been rectified. Now I have not audited that. I can only say

that what we saw in 1999 and what is going to be reported to the House will

indicate similar problems existing.

MR. MERCER: So we have no conflict in your

statements and those of the Auditor General?

MR. HOLLETT: No. In fact, some of the difficulties

that we did have were in receiving certain reports from HSBC Capital Canada Inc.

The receipt of reports and that, the regular flow of reports, actually started

in December 1999, I believe, when we finally got everything, all of the pieces,

in from them, so that would have been subsequent to the Auditor General's 1999

audit of the fund.

MR. MERCER: I'm not going to get into the

investment side, I will allow someone else to do that, and possibly question

myself. On the administration side, on page 2 of our documents, under Compliance

with the Confidential Offering Memorandum, there are statements with respect to

the Canadian liquid securities and the investment of 20 per cent into those. The

AG indicates that at the time of her audit $718,501 was invested and by her

calculations something like $1.25 million should have been. In your letter to

Mark Noseworthy of August 27, on page 4, you say: "The Fund has maintained the

condition that 20 % of the subscription proceeds be placed in an account for

investment in liquid Canadian securities." The two statements are at variance.

She is saying they are not, you are saying they are. Am I reading that right or

wrong?

MR. HOLLETT: You are reading that right, but the

fund has maintained a condition with HSBC Capital Canada Inc. that 20 per cent

of the funds be invested. That is an item which they have since come into

compliance with, with us, so at this point in time of the funds that are

received, all of them are going into the proper proportions. The 70 per cent,

the 20 per cent, all of that is now in compliance with those conditions.

MR. MERCER: I guess the question I am asking,

specifically, is at the time of the audit - which is the point that you were

referring to in your letter of August 29 - you say you were in compliance and

the A.G. is saying that you were not in compliance.

MR. HOLLETT: No, at the time that the A.G.'s

report was written we were not in compliance, there was not the full 20 per

cent, but that has since been rectified.

CHAIR: The Auditor General.

MS MARSHALL: The only thing I can do now, Mr.

Mercer, not to confuse you, is just give you the information that I have as a

result of our audits. On page 2 - I think that is what you are quoting from -

where there should have been $1.25 million in there and there was only $718,501,

when we looked at it on September 30, 1999 the balance in the repayment account

was $1.6 million. They should have had $2.7 million in there.

MR. MERCER: So we are still behind.

MS MARSHALL: At both times, during both audits, I

found that the amounts were not in there that should have been in there.

MR. MERCER: Yes, I guess that is the point. At the

time of your audit, as reported here, you were behind something in the order of

$500,000. I think the numbers you just gave for 1999 were still about $500,000

or so.

MR. SAUNDERS: Just to provide some clarification

here, when the subscriptions close - when investors pay their money in to the

Hong Kong Shanghai Bank - 70 per cent of the money goes into an account that is

to be used to make investments in eligible projects, and 20 per cent goes into

what is called a repayment account. That is to be used to refund the money to

investors who are subsequently denied a visa for whatever reason. The Hong Kong

Shanghai Bank actually sends to Newfoundland Government Fund Limited, transfers

to its bank account, 90 per cent of the monies on the closing of each

subscription. The money came in, 90 per cent came in, it is just a matter - 20

per cent was not taken from one account and put into the other account. The 90

per cent proceeds did come in but it went into account A instead of 20 per cent

of that going into account B. That is all that happened here, and I think since

that time the Department of Industry, Trade and Technology has put in place a

process so that this happens automatically.

MR. MERCER: Don't get me wrong, I'm not implying

that there were monies misplaced or whatever. My initial comment was that from

the A.G.'s report it seems like all the rules and regulations of the offering

and of the fund itself were not being complied with.

MR. SAUNDERS: You are absolutely right. I'm just

providing some additional clarification on that.

MR. HOLLETT: If I may add to that, we have

subsequently written to HSBC Capital Canada Inc. and directed them to ensure

that all of these funds are put in the appropriate accounts at the appropriate

time. When Mr. Saunders referred to the Department of Industry, Trade and

Technology taking appropriate steps, that is what has been done.

MR. MERCER: I have one last question in this line.

On page 3, in the second bullet, it states:

"Under the terms of the Confidential Offering

Memorandum, subscribers are required to make a minimum non-refundable deposit of

$50,000, with the balance to be paid within sixty days of the deposit date."

I think the Auditor General has found that those

deposits were not made in the full amount or they were not made in the timely

manners. Do you have any comments on that?

MR. BISHOP: With respect to those investors who

did not contribute their minimum, when we inquired of the HSBC bank as to why

that was not done, it was indicated to us that by and large the majority of

those investors were from Korea. The explanation we were given was that during

this time - it was during the crisis and so on - the liquidity situation of some

of these potential investors had changed; so, while they represented some of our

potential investors to the fund - in fact we were oversubscribed for the fund -

this was the reason it was offered up to us as to why we had not received

$50,000 non-refundable, because their financial situation had changed. So it was

a difficult issue to force because the ones who had to force it would be the

HSBC people, and they did not seem to think they had a mechanism.

MR. MERCER: Explain to me what it means to put a

$50,000 non-refundable. Are you an investor or are you not an investor if you do

not have the money, or that amount, in?

MR. BISHOP: I do not know what it means legally,

but I am assuming that if we have asked for $50,000 non-refundable to be an

investment and you do not have it there, one would, I guess, assume you are not

an investor; but it indicated here that some people had lower deposits than

$50,000. So, I guess it is a judgment call at that point whether or not you

would dismiss the investor.

MR. MERCER: I guess I am still not clear; how does

the $50,000 relate to the $250,000?

MR. BISHOP: That would be your portion of the

$250,000. So if for whatever reason you withdrew, I assume if you withdrew or

were deemed in some other way to be ineligible, you would forfeit your $50,000.

MR. MERCER: If you do not have the $50,000 in, you

have nothing to forfeit.

MR. BISHOP: That is right. If you nothing in, no

harm done.

MR. MERCER: Auditor General, could you perhaps

clarify a little bit for me your understanding of how this is, and the nature of

the comment?

MS MARSHALL: The only think I can say is that the

deposit was supposed to be made by the potential investor.

CHAIR: Excuse me, is you mike on?

MS MARSHALL: Oh, I am sorry.

The $50,000 was supposed to be deposited by the

potential investors, and the concern that I had is that there was a limit to the

Confidential Offering Memorandum. It could go up to $35 million; and if some

people did not have their $50,000 in, once you get to the $35 million, is it

possible that some of them might back out? It would look to be fully subscribed

and then, if they were not eligible, you would end up not getting your $35

million. You might end up with only $34.5 million. I think that is, in fact,

what has happened.

I think maybe you can provide further clarification on

that.

MR. BISHOP: That well may be the case, I guess, as

history proves out, but in the days when these numbers were identified we had

surpassed the number of potential subscribers that we had. It was explained to

us by HSBC and other marketers that this is typical, that they would

oversubscribe anticipating shortfalls. I am just sort of speculating now, but I

would assume that somebody thought if they were dropped off the table it would

not matter.

MR. MERCER: I guess that is where I am coming

from, the significance of it.

MS MARSHALL: I think, though, in fact, it did have

an implication because I think it did look to be oversubscribed; so it looked

like you were going to get the $35 million but I think something happened with

regard to some of the potential investors and actually you are not really going

to get the $35 million. You are only get $34.5 million or less, and I think that

is one of the implications of this.

MR. BISHOP: Again, I say to the Auditor General,

that well may prove out. At a point in time we stopped and we have a list of 140

investors. What we get from that remains to be seen because these people had to

be processed for visas, and some of them may not get it for various reasons.

(Inaudible) there anyway to get less than $35 million under regular

circumstances.

CHAIR: With respect to this, just to clarify it, I

would like to get it down even more basic than what we are talking about here. I

am under the impression that this immigrant fund was put in place - of course it

is for investment and what have you in the businesses of the Province, to start

up new businesses and what have you, but really it was to fast-track

applications for immigrants to get into the country; and if someone was supposed

to come up with $50,000 down and they come up with $9,000 or whatever, or less

than that maybe, are there applications being fast-tracked to get these people -

and not paying what was agreed upon? That is not the case?

MR. BISHOP: No, as we were led to understand by

CIC - we have every reason to believe that - the person has to demonstrate that

they have their $250,000 committed to a provincial fund. Until they have that,

they are not going to get their visa processed under this particular category.

MR. MERCER: That's fine, Mr. Chairman.

CHAIR: Mr. Lush.

MR. LUSH: I just want to follow on from you, Mr.

Byrne. I want to get down to the basics, to understand this before ... Could

someone tell me, first of all, assuming around here that people are totally

ignorant, know nothing about this fund, can somebody describe to us what this

fund is? How is it set up, and who benefits from it?

MR. HOLLETT: The advantage of the fund to the

Province is that it provides a source of essentially low interest-bearing money

that we can invest or have invested in eligible projects. The way this

particular program works: if, for example, you look at the details of the

Newfoundland program here, there was a maximum of 140 units at $250,000 each.

This would provide us with a pool of up to $35 million to invest in the Province

in eligible projects. Really, for the Province the main advantage of it is low

interest- bearing money that can be used to - in this particular case the

Province has decided that it is going to be used for the construction of

hospitals by the private sector. In very simple terms, that is the purpose of

the program, to raise venture capital money, and it is low interest-bearing

money to the Province.

MR. LUSH: What is with the investor? What does it

mean to him or her?

MR. HOLLETT: To the individual investor? To the

individual investor it is an opportunity for them to demonstrate that they are

eligible for immigration to Canada and to receive a Canadian visa.

MR. LUSH: Why was it set at $35 million, or 140

units, whatever? Who decides that? Couldn't it have been more? Why couldn't it

have been $70 million?

MR. BISHOP: That was a number used by the federal

government and it was in line with the

definitions determining whether you are a

small business or a large corporation, $35 million being the cutoff for small to

medium size. That number was used to determine the maximum size of an investment

that a provincial government fund could arrive at, per fund.

MR. LUSH: What liabilities does it place the

Province under?

MR. BISHOP: There are no guarantees from the

Province to any investor. It is risk capital, as the deputy said.

MR. LUSH: The eligible ventures in this Province

were designated to be hospitals? Hospitals only?

MR. BISHOP: Yes, the Province decided in this

particular case that the Newfoundland Government Fund would invest in hospital

projects.

MR. LUSH: We started one, did we not, on the

Connaigre Peninsula? What is the status of that?

MR. BISHOP: There were initially, I guess, three

hospital projects that were identified by the Newfoundland Government Fund, one

being the one in Harbour Breton, also Fogo and Bonne Bay. The Newfoundland

Government Fund was initially started to flow some money towards the Harbour

Breton project but Treasury Board, in looking at the terms of that particular

agreement with respect to government's ability to purchase the hospital at the

end of the lease, it appeared that particular contract was done in such a way

that that cost was a little bit open-ended. There was not a definite cost

attached so that government could know today exactly how much it would have to

pay to buy that hospital from the developer at either five years or ten years,

because it was an option every five years to purchase the hospital from the

developer. The government decided that no, we would not go ahead with that

particular lease arrangement with that developer, that we would put the money

back into the Newfoundland Government Fund and that particular hospital would be

financed out of regular government budgetary expenditures. That hospital project

is proceeding. It is simply not being funded by the Newfoundland Government

Fund. It is just being funded as part of government's normal capital program.

MR. LUSH: Of the other two - of course, I think we

know Fogo.

MR. HOLLETT: Yes, the Fogo project is proceeding.

MR. LUSH: There is another?

MR. HOLLETT: Bonne Bay.

MR. LUSH: Bonne Bay. That is proceeding as well?

MR. HOLLETT: Yes, that is proceeding as well.

CHAIR: Further to that, because I had that

question in my mind to bring up, I am just going to read a

section out of the

Auditor General's report and then ask a question maybe to the Auditor General or

to yourselves to comment on.

It says: The Corporation issued an Offering Memorandum

in September 1996 to raise funds from immigrant investors in order to provide

loan and equity capital to establish, expand, purchase, maintain or revitalize

businesses or commercial ventures in Newfoundland.

I would like somebody to explain to me the rationale

for this money being used to build hospitals. It seems to be a public

responsibility to build hospitals; yet, we are utilizing this money to build

hospitals. Would someone like to comment on that, because that seems to be a

stretch for me.

MR. HOLLETT: I guess if you look back at some of

the immigrant investor programs from years gone by, there were a number of

projects undertaken in this Province and in many other provinces that in fact

had a higher degree of risk, and many of them failed, subsequently, if you look

at some of the resorts and other things that were built under some of those

programs. In this particular case it is a private sector venture because what is

happening is that these hospitals are being built by private developers and then

government is simply entering into an operating lease to utilize these

facilities. It is the responsibility of the developer to build these hospitals

and then to provide, under a fixed-lease payment arrangement with the regional

health care boards, for the operation of that building, and that would include

any maintenance of the building, et cetera.

The developer, in fact, is incurring the risk here

because they have to enter into a contract. Then they have to go and build this

particular hospital facility and lease it to the health care board under defined

terms. I am sure, as in the case of all developers, they are hoping to be able

to make money on it, but it is a risk. It is a private sector initiative in that

regard.

CHAIR: It may be a private sector initiative, but

I think there is very little risk involved here for the private sector in this

situation, because the money is there, set aside, and it is going to be utilized

for that anyway. The money is there, waiting to be spent or to be paid out to

the private investor.

Auditor General, would you like to comment on that?

MS MARSHALL: I won't step into that yet because I

have not seen how they are going to set it up. Theoretically it has been

explained to me but I am just waiting to see how they set it up. I understand

there is going to be some sort of leasing arrangement with the contractor, and

then the health care facilities themselves are going to lease from the

contractor. I cannot really offer any opinion or explanation on it until I

actually see the details of what is going to be set up.

CHAIR: In actual fact, if the government involves

themselves with a lease on these hospitals and at the end of it they are going

to end up buying it out, buying out the lease, then the money they have put into

it in the meantime, the money that has been put in place by these investors,

immigrants, whoever - what is the right way of putting it, to my mind? If we

don't know what we are going to be paying at the end of it, it could be a real

skunk in the woodpile here.

MS MARSHALL: That is what I am interested in

seeing, what exactly the terms are of the leases that are put in place.

CHAIR: I have a few more questions. If anyone else

wants to jump in at any time, let me know.

On page 2 of your document there, in the right column,

top section, it says: Citizenship and Immigration Canada has not granted a

marketing extension beyond 30 June 1998 to the Corporation, through the

non-compliance of the Corporation in beginning eligible projects. As a result,

the Corporation is not allowed to pursue new investors.

When this report was done by the Auditor General, it

was somewhere up around $13 million; now we are hearing it is up around $30

million. What is the current status of that? What is going on here now?

MR. HOLLETT: The marketing restriction that was

placed upon the fund by CIC really had no impact upon the fund's ability to

raise the money because at that point we had already had more than 140

subscribers, which was the maximum that we were allowed to have.

CHAIR: What was in the system before that date

could have been pursued. Is that basically it?

MR. HOLLETT: Yes, we had 184 I believe.

CHAIR: I was referring to the fast-tracking of the

applications earlier, and why someone would put in $250,000 or $500,000 or $1

million, whatever the case may be. I still think the bottom line is to get their

applications fast-tracked to become an immigrant into Canada. Can someone give

me some profiles of some of these immigrants: the number of immigrants; if they

are staying in Newfoundland; if they are moving on; are they setting up

businesses here in Newfoundland? Just some kind of an overall picture of what is

actually happening to these individuals. How many have actually been approved in

here?

MR. BISHOP: I guess what I could do is just

explain the nature of this particular category. These investors are, by the

nature of the way the program is set up, not required to live in Newfoundland.

They have to invest in the Newfoundland government fund, and in return for that

their visa is processed through the embassies and so on. As you say, it is

supposed to be on sort of an expedited basis, but the requirement is not there

to live here. We would prefer that they live here, obviously, and bring their

family and educate them and so on, but that is not a requirement that we can put

in place.

While the tracking is done by CIC as to the address

and so on of the individuals, we do not have specific information at this point

in time to be able to say how many have come and lived. Because they are in the

process of having their visas processed, it may even be a little early to

determine when they are going to come and where they are going to live.

CHAIR: So there is $30 million, you said, $30

million now?

MR. BISHOP: Potential of.

CHAIR: Potential of $30 million over the past how

many years? Two or three years?

MR. BISHOP: Well, it would have begun in 1997. In

July of 1997 we actually received our first monies.

CHAIR: And we don't have any of these individuals

living in the Province?

MR. BISHOP: Not that we can confirm at this point.

CHAIR: And we don't have any of these businesses

set up in the Province that they would put money into?

MR. BISHOP: They were not required to establish

their own business. They had to invest in this fund.

CHAIR: I know that, yes.

MR. LUSH: Actually, it fulfils a requirement for

entry into Canada.

MR. BISHOP: Yes.

MR. LUSH: Is that the same with all of the others?

MR. BISHOP: With all the provinces.

MR. LUSH: You don't have to go to the province for

which you have been subscribing? It just qualifies you for citizenship or entry

into Canada, anywhere the -

MR. BISHOP: Exactly, because the program was

established historically to attract people from foreign countries to bring their

capital, their expertise and themselves and their families to Canada and make an

investment.

CHAIR: The criteria of this immigrant fund for

Newfoundland $250,000 - the $50,000 down or whatever - is that the same

throughout the country?

MR. BISHOP: Under that program it is, yes.

CHAIR: Okay.

Mr. Mercer.

MR. MERCER: I think I understand what is going on,

but I just want you to tell me if I am right or I am wrong.

It has always been my understanding that the fund

basically was an expediter for people to come into the country. They would put

$250,000 into an investment fund which would, in this case, be managed by your

department, by government, as a venture capital fund to be used by the private

sector to do whatever you have deemed to be eligible. Is that essentially

correct?

MR. BISHOP: Yes.

MR. MERCER: With no guarantee to "the investor"

that he will receive any return on his investment, and no guarantee that he will

not lose some or a portion of that investment - strictly risk capital - that is

the nature of the investment fund?

WITNESS: (Inaudible).

MR. MERCER: So basically all that you are doing is

acting as a intermediary between someone trying to get into the country and

entrepreneurs out there looking for risk capital to get into a business venture.

MR. BISHOP: Yes.

MR. MERCER: That is essentially it; and, in the

case of the hospitals, that speaks to a whole different issue of government

policy with respect to having private sector build public facilities and lease

back? That is a whole different issue altogether? Essentially it is just a block

of money that you would pay to get into the country, no guarantee on return. You

act basically as a risk capital fund and you disperse that to the private sector

to do whatever you decide to do. Is that essentially correct?

MR. BISHOP: Yes.

MR. MERCER: Olay, I just wanted to be clear on

that.

MR. LUSH: On what basis can you lose, can the

investor lose, in this particular area where money is allocated to a hospital?

The hospital is going to be built, isn't it? We decided not to build the one on

the Connaigre Peninsula but I don't expect that has affected any of the

investment because now we are proceeding with the other two. I am just wondering

how one could lose their investment when the money is allocated to be spent on a

hospital which the Province needs and which the developer is going to build, one

assumes.

CHAIR: That is what I was on earlier.

MR. HOLLETT: I do not foresee many circumstances

where this particular program is likely to result in anybody losing their money.

With any type of a project of this nature there are circumstances you could come

up with where somebody could lose their money, but essentially I think this

could be characterized as a fairly low risk, and in this particular case, to

those investors it is going to be a fairly low return.

CHAIR: On that note there also, when I was reading

this information I read somewhere in there - I thought I did - that this money

was pretty well guaranteed to be returned to the investor anyway at a very low -

what, 2 per cent or something? Did I read that in the documents?

MR. HOLLETT: Two per cent, that is right. The

Newfoundland Government Fund Limited provides the investors with a promissory

note of 2 per cent.

CHAIR: Can the Auditor General comment on that?

Because to me there is no risk here.

MS MARSHALL: It is not guaranteed by the Province,

so if something goes wrong, going back to your earlier question where Mr.

Hollett was saying that it seems like it is very low risk, regardless of whether

it is low risk or high risk there is no guarantee by the Province. If something

goes wrong and those investors do not get their money back the Province does not

have to come up with the money. It has not been guaranteed. I understand that in

the new Immigrant Investor Fund, which is the new one coming up which I

understand we have not gotten into yet, there is a guarantee by the Province but

in this case there is no guarantee by the Province. That is correct, is it?

MR. HOLLETT: That is correct.

MR. MERCER: Page 1 (inaudible), paragraph.

CHAIR: Page 1.

MR. MERCER: No, I just draw that to your

attention, Mr. Chairman, because that is what I believe that paragraph says.

CHAIR: Yes. Thank you. Do you have - sorry.

MS MARSHALL: Excuse me. Could I just make one

other comment? This is directed probably towards what Mr. Mercer was saying

earlier about the hospitals. When we looked at the first hospital that got

approved under the Immigrant Investor Fund I thought that was an odd type of

investment, but those investments are being approved by CIC so they are deemed

to be eligible projects even though they did look unusual even to me.

CHAIR: Mr. Lush.

MR. LUSH: I wonder if somebody could say what kind

of projects are approved, generally? You say this is an odd one. What is

generally done, or is there any generality to it?

MR. HOLLETT: It is my understanding that some

other provinces are using it to construct hospitals and some other provinces are

using it to construct educational facilities.

MR. LUSH: Which is not too different.

MR. HOLLETT: Which is not too different, no. It

would be a very similar sort of arrangement. The key for us was that CIC

accepted these projects as being eligible projects under this program.

CHAIR: On page 2, in the second column, the second

paragraph, the Auditor General has some concerns with respect to the federal

guidelines on the audited annual financial statements: within 140 days. Is that

being met now?

MR. BISHOP: With respect to that particular item,

yes. That has been addressed, and if I can use now the current example of this

year, we have already had our accountants engage the preparation of the

statements and we will shortly contact the Auditor General for audit. We are

well within our time frame this year.

CHAIR: On page 3, the first column, third bullet

down, in that general area there - oh, I think we have addressed that. I'm just

going through some of the concerns we have here now.

On page 3, second column, under Consulting and

Professional Services, there were some concerns the Auditor General had there

with respect to the process you used to hire consultants and professional

services. Do you have any comment on that? That is at the top of page 3.

MR. SAUNDERS: This is just to provide some

information on that. I cannot give too much about how they were selected, but

the distribution and marketing agent for Newfoundland Government Fund Limited is

HSBC Capital Canada Inc. I think you have copies of the Confidential Offering

Memorandum, and it is outlined in there that HSBC receive a fee of 6 per cent

for the distribution of the units and a further 1 per cent for marketing. So 7

per cent of the proceeds, right off the top, go to HSBC Capital Canada Inc. I

don't know what percentage it is, but certainly a significant percentage of the

expenditures outlined there for consulting services relate to the fees paid to

HSBC Capital Canada Inc. I believe - and Harry Bishop could probably confirm

this - that those fees are not out of line with fees being paid by other

provinces for marketing their immigrant investor funds as well. As to how HSBC

were selected in the first instance, Harry may have some information on that.

MR. BISHOP: With respect to the selection of the

consultants, my awareness of the process is that the Canadian charter banks were

all contacted and solicited to take on this particular fund as distribution

agents. In all cases we were declined because the Province would not provide a

guarantee to the investors. The only entity that took up our cause was HSBC

Capital Canada Inc. I recall at the time that the range of fees that were being

charged by the other charter banks were similar to that charged now to us by

HSBC Capital Canada Inc. So they were competitive rate-wise at the time but they

were the only ones who would take on the fund without a guarantee.

CHAIR: I would like the Auditor General to comment

on that.

MS MARSHALL: Yes, in addition to those fees I was

also interested in finding out how they selected the accounting firm that they

used and also legal counsel. There was about $161,000 spent on legal fees so I

was interested in what process the corporation used in order to select a law

firm.

MR. BISHOP: I can comment with respect to the

accounting firm. When that firm was selected they were one of three accounting

entities that responded to a request for proposals, submitted a capabilities

list of services and fees. The company that was selected was the winner in that

particular situation.

I am not really sure of the process that was engaged

with respect to the hiring of legal counsel. This is a little before my time on

this file. I'm assuming it was done on some sort of similar basis.

MS MARSHALL: We have not seen anything that would

indicate that yet.

CHAIR: Thank you.

MR. BISHOP: I haven't as well.

CHAIR: We dealt with the records, I think. Mr.

Mercer, you brought that up, didn't you?

MR. MERCER: I raised the matter of the records in

a general sense, that a large number of them appeared to be in noncompliance

with the procedure set down. I did not go into any of the specifics of them of

course, but this seemed to me somewhat "sloppy," but apparently a lot of that

has now been taken care of.

CHAIR: What I was referring to there was on page 3

under Corporation's Records. I think we did address that, but I think the

Auditor General indicated in her upcoming report to the House there may be some

similar concerns. You don't feel that that is going to be the case?

MR. BISHOP: Certainly, as of around December 1999,

we believe that we have addressed all of the issues that have been raised with

respect to the comments that the Auditor General has made. We are satisfied now

that all of the proper reports are being presented on time and that all of the

records are being maintained properly.

CHAIR: Auditor General, when did you do your last

audit?

MS MARSHALL: The last audit work was carried out

around October 1999 and we identified similar problems, with the exception of

the records. There seemed to be some improvement in the way the records were

maintained but there were still some problems with non-compliance with the

Confidential Offering Memorandum and also with regard to the regulations. I did

have a meeting with both Mr. Hollett and Mr. Wall, the Deputy Minister of

Finance, I think probably just after Christmas and they indicated that the

issues I had raised had been resolved and I should see some improvement during

the next audit cycle.

CHAIR: Thank you.

On page 17, the Statement of Revenue, Expenditure and

Surplus for the year ended 31 December 1998, there are surpluses showing for

1997 and 1998. What happened to those surpluses? Can you explain that to us?

Would the Auditor General like to comment on that first?

MS MARSHALL: Probably I can speak to that. This is

a financial statement. There is not really a surplus because some of the

expenditures that were made by the Corporation had been deferred. In other

words, they really have not been expensed yet. Certain types of expenditures are

flowing through that financial statement and some have not. What you will see is

that surplus will probably turn around at some point in time as the expenditures

are brought into that income statement. I do not know if Mr. Bishop wants to

further comment on that or not.

MR. BISHOP: No, I would prefer if I could speak to

our accountants about that. I am not really as up to that as I would like to be,

I guess.

CHAIR: Is there anybody who can address that here?

So we do not know what you are going to do with the $196,948, is that what we

are saying?

MR. BISHOP: Obviously, all monies are contained

within the Fund's bank account.

MR. LUSH: It finds another immigrant.

CHAIR: We can pay for another one coming, we do

not have to put any money into it.

MR. LUSH: That is what I mean. The government will

sponsor (inaudible).

MR. HOLLETT: If I may, this surplus that is shown

here is the result of this particular calculation at that point in time. I think

you really have to look at the program, over the full life of the program, and

see, once we get to the point where we have had the funds, they have been

invested in a project for a full five years and then flow out - I mean, there is

no intention at this point for the Fund to look at this particular amount here

and say: We have a surplus of $196,948 as of the end of 1998 and we now have

money we can do something with. This particular fund is all set up and it is

meant to be looked at over the entire life of the program. It is a number of

years before this program will have run its course. This particular surplus for

that year is just where it stands at a particular point in time.

MS MARSHALL: That surplus will decrease now as the

years go by.

CHAIR: That is what usually happens, though.

MS MARSHALL: Yes.

CHAIR: There is no doubt about that.

I have a couple of others here that I wanted to ask

about, then I will be finished I think.

Page 20, under note 9, Financial Instruments, it

states: "The purpose of the Corporation is to raise capital from immigrant

investors and invest in eligible business projects in the Province of

Newfoundland. At 31 December 1998, the Corporation has not yet invested the

proceeds of the Confidential Offering Memorandum and therefore its exposure to

market, credit and liquidity risk is considered limited."

When I saw that I went over to page 16, the

Newfoundland Government Fund Limited Balance Sheet, and I saw $13,231,213. I

made a note here: How much is invested in businesses? How much has actually been

put into business in the Province?

The Auditor General.

MS MARSHALL: At the point that these financial

statements were prepared there was none invested, but basically what note 9 says

is that the money is safe because right now it is sitting in the bank.

Therefore, it is not subject to any exposure because it is not out there

invested anywhere, it is tucked away in a bank account earning interest.

CHAIR: It is not doing anything for us either.

MS MARSHALL: It is not doing anything, but it is

safe.

CHAIR: It is safe, but the whole intent of the $13

million now, which is up to $30 something million, is to have investment in the

Province, get businesses going to better the economy and what have you. Can I

get some kind of comment with respect to the status of that? What is going on?

Is it going to be sitting there forever?

MR. HOLLETT: The money has now, in fact, started

to flow for the Fogo Island project. The money was accumulating here until we

had identified an appropriate investment under this particular program. They

have been identified now and the funds have in fact started to flow out to the

project.

CHAIR: Will this new figure of $30 million all be

used for hospitals or are there going to be any other types of businesses in the

Province?

MR. HOLLETT: The understanding at this point is

that all of the funds that are eligible to invest under this program will be

required for the hospital projects. There are three hospital projects that we

are intending to do under this program and all of the funds that are available,

which is in fact 70 per cent of the $30 million, will be invested in those

hospital projects.

CHAIR: Further to that, I am having a problem with

this. I have to read this again. The Corporation issued a Offering Memorandum in

September 1996 to, it says on page 10, "raise funds from immigrant investors in

order to provide loan and equity capital to establish, expand, purchase,

maintain or revitalize businesses or commercial ventures in Newfoundland..." and

Labrador.

We are really putting this into hospitals that should

be built with public funds, I suppose. This program was put in place to create

jobs and to do exactly what was said here - expand, purchase and whatever the

case may be - businesses in the Province. We have $30 million that to my mind is

not really going to be creating jobs in the private sector. What do you think?

MR. HOLLETT: In fact, Mr. Chairman, the

construction and the operation of these facilities will indeed provide some

jobs. Under the regulations of Citizenship and Immigration Canada these

particular projects, which are hospitals to be built by the private sector and

leased to government, were deemed to be eligible investments under that criteria

and that is -

CHAIR: Maybe I am asking the question to the wrong

individuals. What I am saying is once these hospitals are built and there are

going to be doctors, nurses, lab technicians, x-ray technicians and front line

workers and what have you, all public servants, jobs will not be created in the

private industry unless we privatize the hospitals like a certain premier.

MR. HOLLETT: In fact, though, each of those

particular structures will be the responsibility of the private sector. The

health care board will lease from the private developers the actual building,

which will require that the developer maintain the building, but the health care

board is in fact then, yes, responsible for putting the appropriate medical

staff in the hospital.

CHAIR: Basically, in health care there will be

some form of a coalition, I suppose, between public and private in that

situation compared to what is happening today.

MR. JOYCE: Can I ask one question?

CHAIR: Sure.

MR. JOYCE: To the best of your knowledge, around

the Province today - I know in Corner Brook it is done, but a lot of bigger

corporations - aren't there a lot of businesses now that go to a private

investor and say: You build the building, we will lease it for twenty or thirty

years with the option to buy? Is that a normal business practice now around the

Province?

MR. HOLLETT: Although I cannot speak to the extent

to which that occurs in the Province, it is my understanding that that is a

fairly common practice.

MR. JOYCE: That is a common business practice now

so the company itself does not have to incur the cost of maintenance, the

general building and the cost of building the hospital itself, or a building or

whatever.

MR. HOLLETT: That is right. There are companies

that specialize in that area and then they assume all the risks that are

associated with the operation of the building.

MR. JOYCE: So it is common.

In have just two more small questions. It was brought

up, with the $50,000 maximum that the Auditor General mentioned in her report,

that there were some instances where it was not paid. Would the applications

proceed if the money was not paid or would the money have to be put down first?

MR. BISHOP: They would have to provide evidence

that the entire $250,000 was committed to the Fund before they could commence

processing the visa.

MR. JOYCE: When the Auditor General brought that

up in her report, there were stipulations in place that the applicant could not

proceed unless the guarantee was in place.

MR. BISHOP: That is correct. Each individual has

to have confirmation of their full commitment before they begin the process.

MR. JOYCE: The second question is this. If the

$250,000 was put down by an applicant, that would not guarantee him or her

entrance into Canada; they would have to go through with the normal immigration

process.

MR. BISHOP: Absolutely. CIC issues the visa and

they have to meet all the rules and regulations set down by CIC for immigration,

so the $250,000 guarantees nothing. If they are declined for a visa the money

will be refunded to them.

CHAIR: Basically, goes to the head of the queue.

MR. JOYCE: Okay.

CHAIR: Thank you.

Are there any more questions? No?

Would the Auditor General like to make any concluding

comments?

MS MARSHALL: I have no other comments. As I say,

there is another report item in my next annual report to the House of Assembly

so I do intend to track this. Because I'm interested in seeing how they are

going to arrange the financing with the private sector developer and what kind

of arrangements they are going to make with the health care boards to lease

those facilities.

CHAIR: Thank you.

Would any of the witnesses like to have any concluding

comments?

MR. SAUNDERS: On your point, Mr. Chairman, about

the investment, in the funds Confidential Offering Memorandum the investment

objectives are outlined there and these are the ones that you read.

WITNESS: (Inaudible) page (inaudible)?

MR. SAUNDERS: I have page 14 of the Confidential

Offering Memorandum. The third paragraph there under Investment Objectives does

say that: "Investments will be directed to the privatization of public services

which may include infrastructure projects with a privatization component which

will result in economic benefit to Newfoundland." I guess the hospital would fit

under the infrastructure.

CHAIR: Okay. Thank you for that.

What will happen now is the Committee will be meeting

and discuss the questions and the comments and the points of view that were put

forward here today. We will reporting to the House of Assembly. That is our

mandate, to report to the House of Assembly with any points or concerns or

recommendations that we would like to make at that point in time, and then the

action will be taken from that point on if any is required.

I would like to thank the witnesses for coming here

today. I knew - this is probably for the media - that this would not be a long

hearing compared to some of the other hearings that we have had, and it was

fairly straightforward. This is a short report, as Mr. Mercer mentioned earlier,

with respect to the Auditor General's report on this. That does not mean it

isn't important or anything like that.

Again, thank you for coming out and giving us your

point of view and your answers. I would like to thank the Committee, the Auditor

General's staff and the media for showing up here today. We will reporting to

the House of Assembly hopefully this spring setting.

Thank you.

The Committee adjourned.

Document details

Collection	Newfoundland and Labrador — Committees
Citation	2000-02-07
Type	committee
Volume / chapter	committees_standingcommittees_publicaccounts_ga44session1_2000-02-07_pac_20-_20no.7_.htm
Language	en
Format	html
Source	PROVINCIAL
Identifier	dbfe6e7522f8e1b587666788dfa048d3a481fdce

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