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September 15, 2015

PUBLIC

ACCOUNTS COMMITTEE

The

Committee met at 1:00 p.m. in the House of Assembly Chamber.

CHAIR (Bennett):

Good afternoon.

This is

a meeting or, probably more appropriately put, a hearing of the Public Accounts

Committee of the Province of Newfoundland and Labrador.

I am the Chair of the Committee; my name is Jim Bennett.

Today we are looking into and asking questions regarding

Part 3.2 of the

Auditor General's report of December 2014, and it regards the Aquaculture

Industry Support.

On my

left are my fellow Committee members.

The Vice-Chair is Mr. Hunter.

Next to him is Mr. Peach and next to him is Mr. Cross.

Mr. Parsons's seat is empty; he advised he may be a little bit late.

Behind, in the next row, are Mr. Osborne and Mr. Murphy.

With us

we have the Auditor General and staff, and we have individuals from the

Department of Fisheries and Aquaculture.

The witnesses give evidence under oath; however, they are not subpoenaed,

they are here of their own volition to provide answers to questions to help the

Committee with background information related to Auditor General's report.

Murphy will now swear any witnesses who have not been previously sworn.

If a witness was previously sworn at another hearing at any time in the

period of this Assembly, since 2011, that person does not need to be sworn

again.

Swearing of Witnesses

Mr.

Tony Wiseman

Mr.

Brian Meaney

Mr.

David Lewis

Dr.

Daryl Whelan

Mr.

Trevor McCormick

CHAIR:

Thank you, Ms Murphy.

ordinarily begin by having the Auditor General provide us with some feedback,

just by way of background, so that anybody who may be paying attention,

watching, or ventures upon us wonders why these questions being asked and what

is the background to this. The

Auditor General explains his auditing process.

Then,

before beginning questioning, we offer the department an opportunity to give us

some feedback because things may have changed.

Quite often, they have done some things in response to the Auditor

General's report and this also allows us some context.

When we begin questioning, we tend to go approximately in ten-minute

segments, alternating back and forth among members.

Before

I proceed, Mr. Hunter, did you want to say anything before we start?

MR. HUNTER:

Thank you, Mr. Chair.

I would

just like to welcome the Department of FA and, of course, again, our Auditor

General's office and look forward to asking a few questions as we go on.

I just thank you for appearing.

CHAIR:

Thank you, Mr. Hunter.

Mr.

Paddon, could you give us some background or context with respect to this part

of our report?

MR. PADDON:

Thank you, Mr. Chair.

Again,

I will introduce my staff. We have

Sandra Russell who is the Deputy Auditor General with me; Trevor McCormick, an

Audit Manager in our office, who looked after this report; and Tony Wiseman who

is the Auditor in charge.

I guess

the focus of our report was around the Aquaculture Capital Equity Program which

is administered by the Department of Fisheries and Aquaculture.

Specifically it was around the administration and monitoring of that

program, and this was a program that was designed to invest in companies that

were interested in investing in the aquaculture industry in the Province.

Our

audit had three objectives. The

first was to look at whether support under the program was provided in

accordance with the criteria set out in that program; whether monitoring was in

also looked at monitoring around the Cod Demonstration Farm that had been funded

by the department.

We had

thirteen findings in our report and five recommendations.

In terms of conclusions against our three objectives, in terms of support

being provided in accordance with the criteria of the program, we determined

that this was not always the case.

Support was not always provided in accordance with the criteria, and I provide a

little bit of context around that.

We did not necessarily think that the support it is difficult how to frame

this. When we had discussions with

the department around the criteria, the department's criteria the objective

appeared to be to kick-start the aquaculture industry.

That was the genesis of this program, is to get a viable industry going

in the Province. We did not

necessarily think that was a bad objective.

The criteria that were around the program, we did not, in our view, think

they necessarily aligned with that overall objective of kick-starting the

industry.

For

instance, one of the criteria was that a company had to be in need of government

support. In our view, we did not

necessarily think that the companies required the support because of the

financial positon they were in; but, given the objective that the department

wanted to get an industry off the ground, support was provided just to ensure

that you had a strong player come in to start the industry.

We thought that was probably not unreasonable to want to make sure that

you had a winner to start with, but the criteria, in our view, did not

necessarily align with that program objective.

We did

find some issues around the monitoring of compliance in terms of financial

the agreements. The Cod

Demonstration Farm that had been funded, there was a requirement for monitoring

within a certain time frame. We

found that was not done on a timely basis.

So, as

I had indicated, we did have thirteen findings in our report around the review

that we did, and we did make five recommendations to the Department of Fisheries

and Aquaculture as part of our report.

Thank

you.

CHAIR:

Thank you, Mr. Paddon.

Mr.

Lewis or Mr. Meaney, do either one of you want to provide some sort of an

overview or

summary, opening statements some people call it?

MR. LEWIS: I want

to introduce the officials who are with me here today.

To my left is Brian Meaney who is Assistant Deputy Minister for

Aquaculture in the Department of Fisheries and Aquaculture.

I am the Acting Deputy Minister.

Sitting directly behind me is Dr. Daryl Whelan who is the Director of our

Aquatic Animal Health Division, in the event that there are any questions around

bio-security or animal health that might need to be directed to Dr. Whelan.

I guess

firstly we want to thank the Auditor General for the report.

Our program has been in existence now for around nine years.

It has been successful, I think, in kick-starting the salmon aquaculture

business to a new level in the Province.

Aquaculture of salmon started in the Province thirty-odd years ago, perhaps

closer to forty years ago, but it seemed like it was stagnant.

It never really got to a significant industry;

whereas, in other parts of

the world, aquaculture of salmon was growing at substantial rates.

The Province sort of reviewed why this might be and identified a program

called the Aquaculture Capital Equity Program which would, as the Auditor

General suggested, kick-start this industry.

So it

has been successful in certainly moving us up to the next level on aquaculture.

We had a setback in 2014 because of some disease issues, which I think we

will pretty well be out of that cloud this year.

We will be back closer to 2013 levels.

In the

Auditor General's report he referenced the value of the industry being $120

million-odd I think in 2012 when he did his review.

It was actually $197 million in 2013, and I think we are going to get

back closer to those areas again.

So, overall, in terms of the development of the industry, I think there is a

fair success.

The

Auditor General has certainly pointed out some of the issues around the program.

He has identified issues around the criteria and the way the criteria

could be interpreted as requiring a financial need in order for companies to

access the program. I think the

intention of government and sort of the way that it has been interpreted by us

but I can understand where the discrepancies would be was these companies have

an ability to attract capital in many different areas.

If you

take Cooke Aquaculture, for example, that was the first big player to come into

the Province. They are in Chile,

they are in Scotland, and they are New Brunswick.

They are in numerous areas, not only in salmon but in other aquaculture

as well. Of course, every time they

make an investment they look at what the opportunity is.

Most of these countries and jurisdictions that have aquaculture

development have some kind of a support program.

They weigh that when they are making their decisions.

terms of the administration, from our perspective, perhaps the most significant

findings that the Auditor General had, he certainly identified some deficiencies

in how we were administering and coordinating the administration.

There are three departments involved in the administration of the

Aquaculture Capital Equity Program.

We work in partnership with Business, Tourism, Culture and Rural Development,

and also with the Department of Finance.

On the

basis of the AG's recommendations, we have identified that there is a need for

better file management, better management of the process of receiving and

vetting and having reports reviewed on an ongoing basis.

We have developed a policies and procedures manual and identified

targeted staff within our department whose responsibility it is to manage these

processes going forward.

I think

we really appreciate those comments.

I think it is going to serve us well in terms of improving our internal

processes in the department to meet the recommendations that the Auditor General

has made for us.

That is

about all I would want to say by way of opening comments.

We certainly look forward to answering any questions to the best of our

ability from any of the members.

CHAIR:

Thank you, Mr. Lewis.

We will

begin with Mr. Osborne.

MR. OSBORNE:

I just wanted to refer to

Table 1, and the paragraph just under Table 1.

As of December 31, 2012 there were 145 aquaculture sites which occupied

approximately 6,089 hectares of water area in the Province.

Can you tell us how many aquaculture sites there are today and the area

that is currently being utilized by those sites?

MR. MEANEY:

I cannot give you the exact

figures. A number of sites are

still within I would say, there may have been an additional ten over that

period added, and I can certainly get you the exact numbers following the

meeting.

MR. OSBORNE:

Okay.

MR. LEWIS:

I guess it is probably worth

pointing out as well that not all the sites are occupied at any one time because

with salmon aquaculture, the same as you do with farming on land, you have

fallow periods. So you will set up a

site in a certain area for a grow-out period and then you will move to a

different site. The companies have

multiple sites. They do not have

fish on all of the sites at any one time.

CHAIR:

I neglected to mention that

you should say your name when you are speaking because people following along in

Hansard will not know who is who.

MR. LEWIS:

Oh yes, sorry, okay.

CHAIR:

It is only a minor annoyance

to have to say your name, but at least the people trying to transcribe will have

a better chance of getting who said what right.

Thank

you.

MR. MEANEY:

Further to your question, to

elaborate on, Dave, at any given time there should be roughly about two-thirds

of the sites, whether mussel sites or salmon or trout sites, in production.

So you have the current harvest years in that site would be occupied, the

fish that you stock the spring for the next harvest would be occupied, and then

the third site would lie fallow after harvesting.

MR. OSBORNE:

Have there been any

additional companies since the report that have applied for and/or been approved

for funding through the department?

MR. MEANEY:

Newfoundland Aqua Services,

which is a supply company that does net cleaning on the South Coast, have

applied and received a $2 million contribution through the Aquaculture Capital

Equity Program. As well since that,

in the spring, there was a recent announcement with Northern Harvest Sea Farms

for a major expansion of their operations and there was a commitment there over

the next four years for an additional $8 million investment.

MR. OSBORNE:

Okay.

With

Cooke, all of their financials, according to the Auditor General's report,

looked pretty solid. They had a

solid track record. As you

indicated, they are in other countries as well.

I understand the need, where Cooke was a large company, a major player,

to attract them to the Province. I

would like for you to be my banker when I am doing business.

To some

degree, it is sixteen years before the need for repayment and that could be

extended to twenty-five years, as well with dividend payments.

How do you justify such favourable terms to Cooke and I understand

again the need to attract Cooke here, but twenty-five years before the Province

receives payment for the money invested in Cooke seems to be a long period of

time.

MR. LEWIS:

Certainly it is clear that

the terms for the Cooke project were more favourable to the company than terms

for subsequent projects have been.

As Mr. Osborne pointed out, they were the first big player in.

We had an industry that had really been stagnant for quite a period of

years while aquaculture was growing significantly elsewhere.

So the government program was about trying to encourage significant

investment in the Province. Cooke

made substantial investments.

understand what you are saying in terms of it was very favourable terms, but at

the time this was considered to be a greenfield investment in Newfoundland that

really had not been proven. I mean,

our environmental conditions can be even though the South Coast is relatively

ice-free, we do have cold water that can get into super-chill conditions from

time to time and actually kill salmon over the winter.

We have had some experience of that happening.

It was

an unproven site, so it was considered to be a significant risk to the

financiers and the company when they came in.

I guess that factored into the government's decision-making process of

determining what were reasonable conditions for Cooke.

Once Cooke had come in and demonstrated that they were in fact able to

successfully grow and market salmon and make money, then the other companies who

came in behind had significantly different terms, mainly in terms of the amount

of time taken to repay. Certainly,

Cooke has a lengthy period of time of which they are less than half way through

at this stage. The other companies

have significantly less.

MR. OSBORNE:

Okay.

With

Gray aquaculture, obviously the terms were significantly different than Cooke,

but not all of the background work was done, according to the Auditor General,

with Gray aquaculture. Even the 20

per cent investment or equity that they needed was not there.

Audited reports and so on were not provided.

Since that, Gray has now filed for insolvency.

Have we received any repayment of anything at all from Gray?

MR. LEWIS:

We have not to date received any repayment from Gray.

They have come out from under their bankruptcy protection, receivership.

They were successful in refinancing their business and they are operating

on the South Coast today growing salmon, and also operating their hatcheries in

New Brunswick.

terms of the equity piece, the department looked at the contribution of smolt to

the project as equity, because Gray has a hatchery in New Brunswick that

produces smolt and there is a market value for that smolt.

We, at the time, had an opinion from an independent accountant that that,

in fact, would count as equity. We

worked with the Department of Finance, BTCRD, and we were not aware of anything

different than that.

Our

understanding, from further conversation with the Auditor General, is it is not

the issue of smolt being contributed to the project; it was an issue of shares

not being issued that would actually make it equity.

It would appear as something different than equity on the balance sheet

for that purpose is our understanding at least.

In terms of the company's contribution to the project, it was a

legitimate contribution of the amounts that were required in terms of value to

the project.

The

treatment of how that contribution was treated brought into question whether it

met a question of equity or not.

The best advice we had when this project was brought forward to government for

final decision was that this was in fact the equivalent of equity.

The two departments we worked with did not provide any different

interpretation.

MR. OSBORNE:

Have we received any

dividend payments from either of the other two companies, that part of the

agreements had indicated that dividend payments were to be made?

MR. LEWIS:

Yes, we have received

dividend payments on a scheduled basis from Northern Harvest, the total amount,

Brian

MR. MEANEY:

It is $2.4 million.

MR. LEWIS:

It is $2.4 million repaid so

far by Northern Harvest. Cooke, of

course, we are a long ways from receiving dividend payments from them.

They have a requirement for dividends, but they can cover that with

excess capital investments beyond what the expectation of when the project

commence was, which you referenced previously.

Northern Harvest has been paying on

schedule their dividends to date, as

well as repayments or I guess it is redemptions of the preferred shares.

They are meeting their obligations in terms of repayment.

Gray

aquaculture, because of the circumstances they are in, has asked for a deferral

of their repayments, which we have not yet approved until.

We have asked for a business plan, an updated business plan, from them

that is satisfactory to us before we consider recommending the deferral.

Cooke,

as I said, is a nice ways away from any expectation that they are going to pay

dividends or repay the preferred shares.

MR. OSBORNE:

Okay.

If Gray

does not pay, what protection is there for the Province?

MR. LEWIS:

It is an equity investment.

It is not a loan to them; it is equity.

In the event of a receivership, we would be the low end of anyone getting

paid back. They have managed to

secure financing, they are turning their business around, and the best

expectation for the Province is that they repay from a successful business.

MR. OSBORNE:

Okay.

What

measures have been put in place now to ensure that the department is receiving

financial statements and other requirements, as had been outlined by the Auditor

General, that had not been due diligence was not provided by the department in

many instances.

MR. LEWIS: Well,

I think the management of it, in terms of the day-to-day administration, was

probably not as effective as it could have been.

The Auditor General certainly pointed that out to us.

We have developed a policies and procedures manual that has

a checklist and requirement for annual reviews and so on.

We have identified two people in the department: one person in our

Planning Division who will be managing the requirements from companies, and also

an administrative assistant to Brian actually, who will be ensuring that the

files are properly managed better managed.

We have set up a new TRIM system for the management of files and a series

of checklists. It is all in the

policies and procedures manual that we developed.

I guess one of the things, previously, was a lot of these

reports would come to Brian. Brian

would email them to his counterparts, to the people in the other two departments

who would review them for us. So

when the Auditor General came looking for the records, we were not able to

provide complete records of whether we had received all of those and whether in

fact they had been reviewed.

We could show that it went to somebody, but if they did not

have any concerns or if they did not reply, the structure was not set up as well

as it could have been in terms of ensuring that all the boxes were ticked.

We have developed appropriate structures now, checklists and so on, and

systems to ensure that all the boxes are ticked as we go forward with the

programs.

MR. OSBORNE:

Okay.

CHAIR: We

should go to a government member.

MR. PEACH: I

have a question with regard to I am looking at the map here that you have with

the salmon and the mussels. In

Placentia Bay, we have mussel farms out around the islands there, and it looks

like that is the two that are dotted out there in the estimates area.

Are those farms very active now, can you tell me?

MR. MEANEY:

That is Merasheen Mussel Farms.

They are operated by a company that is based out of Triton.

They are a very active company.

In addition to that, they have recently

developed additional sites near that area for oysters as well.

They are trying to develop oyster operations there.

On the

South Coast, including Placentia Bay, it is very different growing conditions

than the Northeast Coast. That

provides continuity. So when their

mussels are not of the right size in the Northeast Coast, the mussels on the

South Coast and Placentia Bay may be of a better harvestable size.

So it works for continuity of supply for the growers.

MR. PEACH:

Isn't there a small

operation at Arnold's Cove as well, the Warrens or somebody there?

MR. MEANEY:

There was.

They are not active.

MR. PEACH:

They are not there now, are

they?

The

other question with regard to cod fish, back some time ago I know I was with

rural development back a few years ago now there was some cod farming that

started in Trinity Bay near Dildo Island and those places.

The Williams had it there.

That just afterwards folded.

Was

there any reason why? Was it

financial problems there or was it that they could not just rear the cod there?

MR. MEANEY:

Post-moratorium there was a

lot of interest in trying to extract as much value from the little bit of fish

that was available. One of the

things that we worked with some of the growers and prior to the moratorium as

well was that a lot of people expressed interest that we get a lot of fish in

August, the flesh quality is not that great, there is soft flesh.

If we could hold these fish and bring them to market later in the fall

when the fresh quality improved and also they had to wait, there could be a

differential of maybe two-thirds a better price selling the fish in October,

November as opposed to late August.

So we

worked with quite a number. I think

at one point we may have had twenty-five farms scattered around the Province.

These were traditional cod fishermen using cod traps who would take a

portion of their catch and put it into an open pen.

They would feed it usually with herring or mackerel.

They would ongrow it through the fall months and then sell it for a

better price later on in the year.

number of people found that this did not work with their fishing system.

It may have interfered with other fishing activities or other activities

they had. The sites may not have

been as great for holding the fish as possible, so quite a number of them fell

off, did not bother to continue on.

still have one, a Mr. Seward, in Little Heart's Ease who started with the

program, as I say, in the late 1980s and continues to ongrow fish today.

There is still some interest in the Baine Harbour area.

Every now and then we get some interest from that, but it has sort of

fallen by the wayside.

MR. PEACH:

So the same thing happened

in Placentia Bay with the one that was in Long Harbour at one time.

I think, though, the problem there was something to do with the depth of

the water and cold water, the crystals in the water, was it?

MR. MEANEY:

I cannot recall the specifics of that particular farm, Sir, but I could find out

and pass the information on to you later.

MR. PEACH:

Yes.

There

were quite a few surveys that were done back in the early 1990s and some of the

ones that we looked at through Dorset Fisheries, for instance, they were looking

at roe-on-kelp and things like that.

It seems like in Placentia Bay and in Trinity Bay we just cannot seem to

get the aquaculture up and running like you can in the other parts.

If you look at Notre Dame Bay and the Connaigre Peninsula, it seems like

they just ran with it there and it grew and grew and grew, but in the other

areas where they did a lot of surveys it never ever got off the ground.

Are

there still surveys ongoing now for the different things in Trinity and

Placentia Bay? I know I heard there

a while ago, myself and Mr. Jackman talked to some people about starting

aquaculture up towards Marystown, up in that area up there.

So is there any other exploration going on besides that?

MR. MEANEY:

In Trinity Bay there is very little I mean, there was a farm there in Cap Cove

that was dormant for quite a number of years.

The gentleman who operated that was very ill for a number of years.

He has since recovered and retired and he has that farm up and operating

and expanding it again it is a mussel operation.

The

Trinity Bay area, when you look at site opportunities there are a lot of

oceanographic features that you have to look back in terms of the presence of

ice, for example, during the year, how ice moves in and out of that area, and

how water movements are. So I think

there is certainly more interest in expanding the mussel industry, but the

existing mussel industry right now is really trying to focus on expanding within

their own reach. For example, in

the Green Bay area they have the support services, they have the wharves, they

have their warehousing, and they have their trucks and that.

So they will expand within that reach first before they will expand out

to elsewhere in the Province.

terms of Placentia Bay, as I indicated, the Merasheen Mussel Farms is now

expanding into oysters. They are

looking at also some areas in the St. Mary's Bay area with oysters, and a major

oyster operation in around Merasheen Island one of the largest in Atlantic

Canada at the end of the day and that is quite an exciting piece of new

opportunity there.

Again,

as you alluded, we have had expression of interest from Grieg Seafarms that are

here on the Island. They have done

some work in Marystown and are looking at sites again in around the Baine

Harbour, Merasheen, and Long Harbour areas.

They are doing some of the exploratory work to see if there is potential

for expansion in those regions as well.

So, yes, there is continuing activity and interest in expanding the

industry.

MR. PEACH:

What makes it so different

probably you just already said it in the Placentia Bay and Trinity Bay, but in

the Connaigre Peninsula? I will

just go with the Connaigre Peninsula; I am pretty familiar with that area.

What makes it so different up there with regard to salmon and we cannot

do it in the Placentia Bay? Is

there something there with regard to the depth of water or is it something to do

with the coldness of the water?

What is the difference?

MR. MEANEY:

We have done quite a lot of

research, particularly on water temperatures and oceanographic conditions in

Placentia Bay. We do believe it has

potential for expansion.

The

SmartBay project, as an example, is another great piece of information that has

provided a lot of good oceanographic work in that region.

I think we are to the point two things are happening.

One, the Connaigre Bay is getting very mature.

The companies are comfortable.

They have expanded there.

They have good production. They

have the processing plants and the infrastructure set up so that they are in

full-borne commercial production and now that gives them the opportunity to look

elsewhere in the Island and what other opportunities.

believe there is a lot of great potential in the Placentia Bay area.

There is a lot of great potential west of Bay d'Espoir towards the Burgeo

area, and certainly these have the oceanographic there are lots of places in

these areas that have good deep water that new farms can be expanded on, but I

think it is a these companies have a growth plan that requires significant

investment and you have to have measured growth process for expansion.

MR. PEACH:

I guess they want to try to

keep it in the location where it is more operable for them.

Do we

have any cod farming on the go now throughout the Island?

Are there many or is there any?

I do not see any on the map there.

MR. MEANEY:

There is just one cod on-growing project, as I said earlier, in Little Heart's

Ease near South Port. That

gentleman has been involved in the industry, I say going back to the early

1980s, and he continues to supply he is a cod fisherman, he takes a portion of

his catch, doubles its weight, gets a better price for it three months later.

He intends to stay at that, but we have had no other expressions of

interest in expanding that.

MR. PEACH:

In my district where it is

adjacent to the Connaigre Peninsula, especially on the Burin Peninsula area,

Terrenceville area and Grand Le Pierre, there was a lot of signage of the farmed

salmon that was showing up in the rivers and in the brooks there.

I know that is probably a DFO thing, but I have not heard anything about

it lately. Has a lot of that been

caught up or has it just died off, or what is happening?

MR. MEANEY:

The fate of escaped farmed salmon is very poor in terms of one of the things

to understand is these are truly domesticated animals.

They have only ever fed on a pelletized feed.

It looks something similar to dog kibble, if you like.

They have no natural instinct or have no knowledge of how to hunt for

food, so their fate in the wild is very limited.

They tend to end up in poor condition.

They do not feed well. They

do not understand foraging on fish and other species.

When we have recaptured escaped fish they generally have things in their

stomach that look like a food pellet.

Small mussel shells, rocks, and caddisfly houses near brooks.

So they do not do well.

We are

working co-operatively with DFO on what may have happened to that escape that

happened in 2013. DFO established a

counting fence at Garnish River.

They are looking to see what, if any, impact or if any farmed salmon actually

returned to that area because that is where the reports came from originally.

As well, we are co-operating with Memorial University and DFO in looking

at a genetic study across the South Coast in terms of determining what is the

genetic structure so we can better determine what fish are coming from what

origins. So we will be working with

that to see what, if any, impact is escaped salmon on the wild populations.

That

being said, our role as a department is to the maximum, to the extent possible,

reduce the opportunities for escape.

We were the first jurisdiction in North America to enact a Code of

Containment. We did the work here

in conjunction with the Ocean Sciences Centre, our staff, and the Marine

Institute to determine what are the key factors in escape?

They were determined to be equipment failure, net failure, and human

error. We have brought in measures

under the Code of Containment to minimize those to the absolute minimum.

For

example, we are the only jurisdiction that does regular net testing of all

cages. Every single cage that is in

use is tested for tensile strength to make sure it meets the manufactures

specification. In addition to that,

we are the only jurisdiction that regulates both mesh size and fish size going

in the cages. When a cage is

stocked it has to have a certain mesh size, and the fish stocked in that have to

be a certain minimum size.

The

theory was you put in an average weight.

If you put in fish that were averaging fifty grams, that means there are

some fish in there ten grams and there are some fish in there 100 grams.

So if you put in a two-and-a-quarter-inch mesh, then the ten-gram fish

could swim through. We have removed

that and said at sixty grams here is the size of mesh that you cannot use, so no

sixty-gram fish can escape that cage.

The

growers are required to do regular inspections of their mooring system and their

cage structure. We do inspections.

We have our own staff going out there. We take that issue very, very

seriously, and we report on that on a regular basis.

There is a working group that involves the aquaculture industry, both

levels of government, and the NGO communities including the salmon angler

groups, First Nations, and the Newfoundland Wildlife Federation.

We work co-operatively to find mechanisms to ensure that we, to the

absolute maximum possible, reduce escapes.

MR. PEACH:

There was a growing concern

were some showing up in the rivers there.

Some of the anglers were saying it was going to be a danger to the salmon

that go up the rivers and things like that.

What

you are saying is these salmon probably did not have any big effect on the wild

salmon. The other thing is the ones

that were there, I have not heard talk of them this year at all.

Last year there were a few but I have not heard talk of any this past

summer being seen in the area. I

guess probably they just died off, did they?

MR. MEANEY:

That is the presumption.

As I indicated earlier, if you turn as we had happen, for example, a

few years ago 100 cows out in the Foxtrap area got lost and they all died.

If you put domesticated animals into the wild with no capability to

survive, they are not trained to survive in that, their faith is very, very

poor, and their survival is very poor.

There

are quite a number of factors, but we recognize it as a concern.

DFO and ourselves, and as I said Memorial University, have entered into a

multi-year study to look at what, if any, impacts.

Those fish, for example, that you talked about that may have gone up a

river a year or so ago, were they actually spawning fish?

Were they actually capable of spawning?

Were they ready to spawn? If

they did, were they successful in interacting?

If so, what does the resulting prodigy look like?

Those are questions that we want answered, DFO wants answered.

So we are monitoring it on a very close basis.

MR. PEACH:

That disease that happened

in 2013, at that time, did that affect the market much?

The market today as opposed to in 2013, is there much difference in the

markets now? Are they coming back

to where they were?

MR. MEANEY:

In terms of the market, the

issue we had in 2013 had no influence on the market.

Market prices are set by consumer demand, and consumer demand for

Atlantic salmon throughout North America in particular, which is our largest

market, continues to grow. It has

not impeded.

We have

lost opportunity because we did not last year in particular have that many

fish to be able to go to market, but the industry has rebounded.

As Mr. Lewis pointed out, this year we are back to very, very high

levels. We should be back to record

production again in 2016.

MR. PEACH:

Okay.

One

more question, Mr. Chair.

CHAIR:

Mr. Peach (inaudible)

MR. PEACH:

Just one more question: What

percentage of that market that is in the salmon is in Newfoundland?

Is there a big percentage?

MR. LEWIS:

That was the point actually

I was just going to make from your previous question.

The world supply of salmon is we are a very, very, very small

percentage of the world supply. In

our peak year we had, I think, around 22,000 tons of salmon produced.

This year, I do not know where we will be.

It will be just under

WITNESS:

It is 16,000.

MR. LEWIS:

Yes, 16,000 tons, say, or

18,000, something like that.

Norway, by comparison, is producing 1.2 million tons at the moment.

Scotland is 200,000 or 300,000 tons.

Chile is producing huge amounts of salmon.

We are not the biggest player in the country by a long shot.

British Columbia produces significantly more Atlantic salmon than we do.

We are

a pretty small player so we are really a market taker, although now our

companies that are producing salmon here are harvesting them and marketing them

in such a way to maximize the value of those salmon.

They are a very, very small percentage of the total amount of salmon,

say, going into the US market.

Most of

our salmon goes to the US or Canadian markets.

Salmon is now the number one seafood in the US.

It has exceeded tuna as the main seafood product consumed in the United

States.

MR. PEACH:

So are they going out and

coming back? Are they going out to

the market in the States and coming back to us after?

That is what happens to other products that we have.

MR. LEWIS:

It all depends, really.

I was in Colemans a little while ago and picked up some salmon.

They took them out of a Northern Harvest Sea Farms box at Colemans in

Mount Pearl there recently. I am

assuming they were local salmon.

Our

salmon is sent to distribution centres.

So if Cooke takes their salmon, they will take the salmon and they will

send them out to a distribution centre.

They could very well come back again because the big stores like the

Sobeys and the Dominions and so on, they are all supplied by central

distribution centres.

Skipper's or somebody is selling salmon, most likely they have some arrangement

and they are picking them up locally.

Salmon could be going out and coming back the same way as other products

that we produce could be as well.

Like lobsters, for example, that is a really good example.

MR. PEACH:

What I was trying to

identify is that with Cooke Aquaculture, do we have a percentage of direct

market to Newfoundland from them?

To the stores in Newfoundland, what percentage of their production would go to

MR. LEWIS:

Do you know, Brian?

MR. MEANEY:

It would be very difficult to determine that.

The salmon aquaculture industry is kind of different in terms of its

marketing process. Because you have

access to product year round, most of these large companies have contract sales,

for argument's sake. So the Loblaws

chain may put out a request, say, that I need X thousand tons for the fall

promotion for X dollars per pound.

So companies will bid on that.

Their production for that three-month period may actually go to one customer.

As Mr.

Lewis pointed out, most large retail chains use centralized distribution, so

that if you want to have any product serviced by the Loblaws chain it all has to

be sent to a warehousing area in such and such a place, then it gets

distributed. There is a growing

effort amongst restaurants here in St. John's, in particular, and elsewhere

across the Province, and there a couple of small purchasers that will go around

and bring in regular shipments, for example, as Mr. Lewis pointed out, to the

Loblaws chain. Loblaws is actively

trying to source as much as it can of seafood as locally sourced, and so are

many of the restaurants around.

there is a growing effort, but it all comes down to being able to ensure that

you have a market to be able to justify going across the Province picking up a

variety of products and providing them to a service in a particular supermarket

chain or restaurant chain anywhere in the Province.

MR. LEWIS:

I think it is fair to say that we have historically been a seafood exporter, and

of course we will always be a seafood exporter because we produce far more

seafood than we could consume locally.

Now, when I talk about 22,000 tons of salmon, that is almost 50 million

pounds of salmon; that is ten pounds of salmon for every man, woman, and child

in Newfoundland on an annual basis.

That is

a lot of salmon, and most people are not eating that kind of amount of salmon,

so most of it has to be exported out of the Province.

Whether in fact a small amount goes to local suppliers and local

retailers and so on, that is really a value chain sort of question, what makes

the most sense in terms of supplying that chain.

CHAIR:

Mr. Murphy we have been

going about twenty-one minutes (inaudible).

MR. MURPHY:

Thank you, Mr. Chair.

I have

a few questions for you this afternoon.

Good afternoon, gentlemen.

Thanks for appearing today.

spite, I guess, of the growth of aquaculture in the Province, and it has shown

positive steps, there are still many questions to be asked when it comes to

regulation of the industry and, in particular, the granting of monies towards

the promotion of the industry. I

wanted to come back to some of the recommendations, but I do have some questions

as well outside that box that is in this report for you, too.

wanted to come over to page 61 of the Auditor General's report and come under

Capital Equity Program. It says

here in Finding 7 I will not read the whole paragraph.

It says here, the last line: As a result, the Department has not

effectively monitored the performance of the three Corporations which Government

had invested $22.8 million under ACEP.

wonder if you could explain that, what had happened there where the department

had fallen through.

MR. LEWIS:

I guess what the Auditor

General is saying is we could not demonstrate that we were always receiving the

financial information from the companies on a timely or complete basis.

They are required to send in financial statements on a quarterly basis

and annual audited statements. We

always get the annual audited statements.

The quarterly financial statements that come in oftentimes came by email

and so on, they may have been circulated by email, and we did not have a good

trail to be able to demonstrate that they all came in and were effectively

circulated and managed that way.

On that

basis, the Auditor General said we are not effectively monitoring the

performance. Now, we get all of the

audited financial statements.

Because of the recommendations of the Auditor General I

think I said previously, these are probably the most significant

recommendations in my view that the Auditor General pointed out to us we have

developed a policies and procedures manual.

We have identified specific staff to ensure that the trail is not only a

question of receiving the materials and circulating it to the right people for

review, but it is also being able to demonstrate that that is being done.

That, I

think, is one of the areas where we could do a better job, and that is why we

have taken this action on the basis of the Auditor General's recommendation to

put in place a better system. He

said, basically, does not have a systematic process.

So the whole idea of the policies and procedures manual identifying

specific staff, developing a new file management system, electronic file

management system and so on under TRIM is to put a more systematic process in

place so that we can demonstrate that we are meeting those requirements.

MR. MURPHY:

Will you have those

requirements in place before you grant the next loan to the next company that

comes in?

MR. MEANEY:

Yes. That is the short answer.

Since the Auditor General released his report, we have been working to

ensure and get those all put in place as quickly and as humanly possible.

As Mr. Lewis pointed out, we now have the dedicated personnel to address

those and the process is in operation today.

MR. MURPHY:

Okay, all right.

Carrying on down there, I will leave those questions there for now.

I might have a couple of more questions as regards to the process later

on.

Finding 10: COSI was not entitled to off-set (not pay) dividends totaling

approximately $1.4 million as at December 31, 2012 because it did not meet all

of its commitments under the Contribution Agreement. Specifically, COSI did not

complete a hatchery as per the terms of the agreement.

So, you

had an agreement in place with COSI to do this, and that was a condition,

obviously, of them getting the money.

Am I right on that?

Okay,

so they did get the money, but they did not follow through on the agreement.

So what did the department do in this particular case?

MR. MEANEY:

Just for a point of clarification, there were no funds required for the hatchery

until the hatchery was actually completed.

MR. MURPHY:

Okay.

MR. MEANEY:

In the original plan for the hatchery the time frame was very aggressive and

they had intended to get the hatchery up and operating as quickly as possible.

They made the efforts to do so.

They spent a lot of time finding the appropriate area, trying to track

down an appropriate water supply, getting access to particular sites.

They

wanted something in that South Coast region that was reasonably close to their

farming operations. They had spent

a lot of time, effort, and financing in the Terrenceville area looking at a

potential site down there. They

finally settled on an area that was in St. Alban's, but by the time they got the

work done, got the hydrological work, the water testing, started the process of

getting approvals from communities, from Environment, and elsewhere, they had

exceeded a time frame that they had planned to use.

In the meantime, they were shipping fish in from New Brunswick to stock

their cages.

They

met with us and they said, look, we need additional time, we intend to build a

hatchery, we intend to get up and operating and if we do not, we will pay you

money back. They made best efforts

to do that. We ran into a lot of

problems: the piece of property that they actually wanted was actually owned by

the federal government under a 1966 agreement for federal harbours.

It took a number of months to get that reverted to us.

The

issue of getting the water from the town supply they did exceed the time frame

that we agreed to, the amendment of the contract.

They did follow through, but in the strict sense of the word within the

time frame and the agreement that we had set in place they had not completed a

hatchery meeting the terms of the contract.

They did finalize that and have the hatchery built the year following

that agreement. So it was two years

late overall, about a year later than the amended contract, but they did meet

the conditions at the end of the day.

MR. MURPHY:

Okay.

In that

agreement though, with the $1.4 million investment, does that amount have to be

paid to government or was that just an outright grant?

MR. MEANEY:

The dividend offset process

worked in the following manner.

Once they had their initial target of their capital investment met, anything

additional in new capital expenditures above and beyond that could be utilized

to offset the 3 per cent dividend owed annually.

In the

first number of years they had finished their original capital expansions and I

think it was $39.2 million in capital expenditures had to be met.

Following that, anything that they actually built in Newfoundland, new

capital expenditures not related to anything in the original contract that was

verified by an independent auditor certificate.

On a

go-forward basis and the dividend goes in a cumulative basis.

If they had expended $2 million in a given year, that would be

cumulative. If they were required

to repay $300,000 a year, that $2 million would go against the $300,000 on an

annual basis for a number of years, if you follow where it was going.

What

had happened is that the company had provided, in their annual audit of

financial statements, a listing of new capital additions with each of their new

audited financial statements. The

contract originally said that they would provide an independent auditor

certificate identifying new capital expenditures.

consultation with our sister departments, the company came to us and said, look,

we are providing you audited financial statements by an independent auditor.

This shows what our capital is.

Can we use that for the offset?

It was agreed that was acceptable.

I think

in the process during the Auditor General's review, there was a point in time

where that auditor certificate identifying new capital expenditures that would

offset the dividends due was not showing up in the file.

MR. MURPHY:

Okay.

MR. LEWIS:

Just to add to that.

In terms of the hatchery, the department and government were interested

in seeing a hatchery built here. It

is bricks and mortar on the ground.

A lot of the investments in aquaculture are cages, boats, movable pieces.

A hatchery is capital, built on the ground.

It is not easily movable. It

really shows a strong commitment.

When you are building hatcheries, you are sort of all in.

Cooke had the ability to bring in salmon from elsewhere.

There was a keen interest in seeing the hatchery built.

There were tight timelines on it.

If they

had not followed through with the hatchery, it would be a different issue I

think they certainly followed through and built an excellent hatchery, which

is operating and producing smolt on an annual basis for farm operations in the

Province. They did run into some

unanticipated issues in terms of the timing of getting the hatchery built.

Not of their own volition, but issues with land, issues of finding

suitable supplies of water, because these hatcheries use groundwater systems and

so on.

That

delayed the project, but ultimately the project was completed.

The hatchery is on the ground and it is producing fish for farm sites in

the Province on a regular basis now.

MR. MURPHY:

Okay.

Finding 12, also on page 61, it says, The Department paid GAGL approximately

$550,000 when GAGL claimed a vessel in the amount of $1.1 million that was not

an eligible capital expenditure under the Contribution Agreement.

What happened here?

MR. MEANEY: When

the company was developing their proposal for expansion, they identified to us

early in the process when we develop these projects, it generally comes

forward with a concept to say here is what we are interested in, here is the

scope and magnitude, and the ACEP criteria requires a very detailed, specific

business plan to support that expansion before government would consider an

investment.

During that process of getting that detailed business plan,

the company came to us and said as part of our ability to expand here, we are

going to need a support vessel.

There is currently an older ferry that is being retired out of the New Brunswick

fleet. It was the Grand Manan queen

or something like that it was called.

This is what we want to identify to be utilized as our new service vessel

for the operation.

So they advised us of that upfront, that this was their

intention and depending on the timing, and the timing of getting the proposal

together, getting it approved through Cabinet and getting it all put in place,

it took a long er period of

time. In the interim, the parent

company went and purchased a vessel and started the renovations they needed

because they were committed to coming to Newfoundland.

When

the project was finally approved, they provided the documentation and support

for the purchase of that vessel. In

the contract Contribution Agreement that was signed with the company, it

indicated in there that there were to be no inter-company transfers of assets

that would be paid under the process.

The

reality was when we looked at that and we had an independent auditor have a look

at this, the parent company was a hatchery operation.

It was all land based. They

run hatcheries in Central New Brunswick.

They did not have any need for a ferry-type vessel, a small ferry to

support their business. The only

reason the company went and purchased a vessel at the time was for their

Newfoundland operations. It was an

opportunity. The owners took it

upon themselves to purchase it and bring it into the Newfoundland operations.

When it

finally was approved, we looked at it.

It was deemed from our perspective and our sister partners' to be a

legitimate business cost. We asked

for an independent assessment and said yes.

In technical terms and that condition of the contract, yes, it was an

inter-company transfer, but it was certainly one that was intended in the

business plan to come forward.

There was nothing untoward and it was done at fair market value, so the

department deemed that it was an eligible cost.

MR. MURPHY:

Okay.

What

year was that? That was in it

does not say here exactly. Was that

in 2012 as well?

MR. LEWIS:

No, it was before that.

I think it may have been 2008 or 2009.

MR. MURPHY:

Okay.

I will

leave that for now. You can just

supply it later on.

MR. LEWIS:

Okay.

CHAIR:

Mr. Murphy, we should move

on to a government member.

MR. MURPHY:

Sure.

CHAIR:

Before we proceed, Mr. Lewis

and Mr. Meaney, typically there is a departmental response to the Auditor

General whenever there is an AG report done.

I cannot find the departmental response that would seem to include all of

the statements that you are providing.

There

is something which says the response from the minister, but it is very brief and

it includes something called the Aquaculture Capital Equity Program policies and

procedures manual. Was something

else submitted in addition to that?

MR. LEWIS:

I do not think so. Our

response is published at the end of the Auditor General's report, right?

CHAIR:

Okay.

MR. LEWIS:

We discussed with the Auditor General more of the details of the background on a

couple of occasions. Our response

was more concise. As Mr. Chair

indicated at the beginning, this provides an opportunity for further background

and so on to the issues that are being raised.

I think

the Auditor General captures a lot of the background and what the department

advised in the text of the Auditor General's report.

It says the department indicated this or that or whatever, as you read

through the report. So our response

at the back was just specifically on the recommendations that were put forward

by the Auditor General.

CHAIR:

Why I am asking is because

usually there is a departmental response.

The department either agrees or disagrees, or has taken some action, or

has not taken some action. The

Committee, then, has the benefit of that.

What I

am hearing today in response to some of the questions is that Mr. Lewis, you

said that is what the Auditor General says.

That implies that you do not necessarily agree with him.

If there is anything in the report you do not agree with, then we would

prefer to know. Otherwise, it is

not very helpful to the Committee when we get long speeches on particular

issues.

We only

have until 4:30 o'clock, which is fine.

We can stay until 4:30 o'clock.

The long speeches in response to a specific question the Committee

members are asking become less than helpful when you forget what the question

was at the end of the speech. If we

had the departmental response, a written response, it would be more helpful.

there anything in the AG's report ?

MR. LEWIS:

We could be a bit more concise, I guess.

CHAIR:

Is there anything in the

Auditor General's report that you disagree with?

MR. LEWIS:

No, we do not disagree with anything.

The one question that we did sort of scratch our heads on was the one

around the financial need; was there a definite financial need for the funding?

We do not disagree with the Auditor General.

We understand the point the Auditor General made.

Looking

at the criteria that are listed, you could certainly interpret that as, if you

do not need the money, government is not giving you the money.

From a strict financial perspective, we totally understand that

interpretation.

He goes

on in the report and indicates that we understand what was probably intended

here, which was to kick-start the aquaculture business, but the criteria, the

way that you would read those, do not match that objective.

When we looked at it we would think: Do they need this financial

incentive in order for the project to go ahead?

Yes , otherwise they are going to do it somewhere else.

That is different than: Do they need the money

because they cannot raise

the money somewhere else?

There

are two different

interpretations the way the criteria were written.

We do not disagree at all with what the Auditor General is putting

forward in how this is being interpreted.

It is probably the right

interpretation, but it is not the

interpretation

that we were operating on. As he

indicates in the text of his report, it is probably not what was intended in the

first place.

CHAIR:

I think the principal issue

for the Committee and maybe for the AG will be: Is it within the guidelines, if

the guidelines are provided and these are policy issues established by

government? Is the department

operating outside of its own guidelines or within its own guidelines?

If it is outside of the guidelines, then what does that say?

MR. LEWIS:

Right.

CHAIR:

I would like to go to

another member now. I will have

questions at the end.

Mr.

Hunter.

MR. HUNTER:

The Notre Dame Bay area;

shellfish takes in a lot of my area in there.

Over

the last number of years I have been talking to the producers over my way.

They were doing a bit of complaining about applying for financial help

and the criteria to meet it because it was so time sensitive to them.

They only had a certain time frame to seed, grow, and harvest.

They find themselves lots of times having oversized mussels, which is no

good to them.

With

the sensitivity of timelines and that, is it any different in applying for

funding that would make it not the right time for these producers to apply for

funding? I do not know if they can

meet the criteria because they said the funding is there today.

I do not want it today; I want it at a certain time.

Some of the producers said, well, I cannot apply for it because the

timing is not right.

MR. LEWIS: I do

not know that there is really a cycle in terms of when is the best time to ask

or to seek funding. Obviously, if

it is an assistance program not the Aquaculture Capital Equity Program, but

let's say it was Fisheries Technologies and New Opportunities Program or

something, and they wanted some assistance for market development or whatever.

Usually those funds are provided in the Budget process.

So you would get a lag in the spring by the time your budget gets

approved, goes through Estimates Committee and all that kind of stuff, before

you would be approving projects.

So there might be some cycle there.

If it is a question around applying for site

licences or approvals

for sites for aquaculture operations, there are a large number of departments

and agencies, federal and

provincial, that are involved in that process.

It is a fairly time-consuming process.

It will take a number of months to get approval for a new site.

For

mussels, for example, one thing would be Transport Canada.

What are the impacts on vessel traffic?

They have to look at it.

These days, I do not think the head office is in Halifax now to deal with

those issues. There are time lags.

I am

not 100 per cent clear on the question, whether it was around we need a new

site, or if it is we need some money to go to do some marketing for mussels for

the next two months, or something along those lines.

I think we are fairly responsive on those usually, but maybe not all the

time.

MR. HUNTER:

It is not so much the

marketing. They are running out of

areas to grow mussels in. Just as

an example, a couple of years ago they were looking at deepwater farming.

They could move into other areas, but this is all below-surface farming.

The type of equipment they needed to do that was a lot different than

what they were doing in shallow water.

They

need to apply for funding for this.

They were saying they do not meet certain criteria, and the time frames just do

not work out for them. Where did we

go with that project or that venture that we tried to do a few years ago?

Did it ever go anywhere?

MR. MEANEY:

There have been a number of

projects; one in particular, in the Exploits area that looked at deepwater

technology and is operating today.

Sometimes the challenge with a new project and new technology is trying to get

all the partners plus the proponent together and get the costs sorted out.

There

are quite a number of opportunities.

As Mr. Lewis points out, there is ACOA and other places that can provide

and sometimes, yes, it takes a bit of time and effort to bring all the players

to the table and get a project funded and starting as quickly as possible.

We encourage the growers to work with our staff, and the staff of other

departments like ACOA and BTCRD, to try to get those projects together as

quickly as possible and try to get an answer back to them as quickly as

possible.

MR. HUNTER:

Is anybody doing it yet?

MR. MEANEY:

One operation, as I say, in

Exploits Bay.

MR. HUNTER:

Okay.

MR. MEANEY:

That is operating in

deepwater now.

MR. HUNTER:

Yes.

Okay, I know what you are talking about now.

That

was that part. The other part of it

all relates to criteria on funding.

There a few years ago, out my way, they were trying to do some experiment with

scallops and lobster. That was all

time sensitive as well, particularly with the experiment.

Some of

these guys hired scientists to do the research for them, but could never avail

of funding to go any further than they did with their own money.

So that has all pretty well died off, there is no more research and

development of scallop and lobster in the Province?

MR. LEWIS:

Do you mean aquaculture for scallops and lobster?

MR. HUNTER:

Yes.

MR. LEWIS:

Brian, do you know?

MR. MEANEY:

The scallop aquaculture business, we, as a department, invested in excess of $5

million over a significant period of time to support that sector, along with

other federal and provincial funding partners.

We did a step back and I cannot exactly remember the date, but we did

an economic analysis and it basically showed that scallop aquaculture was just

not economically viable with the technology and the prices that were available

at that time. All the information,

all the science, is there if somebody wants to pick it up tomorrow and dust it

off, and if something is different in 2015 than it was in 2000 it may be worth a

look.

terms of lobster, people have tried lobster aquaculture around the world; nobody

has been able to get it right yet.

So it is very much small research on the side of the bench at a lab at the Ocean

Science Centre as people are still having a look at it, but there is no thing in

a commercial sense together today.

MR. HUNTER:

So it is not something the

Province would push to try to research and develop, to get private individuals

involved? It is not something that

DFA would go out there and try to encourage.

MR. MEANEY:

We are there to support the entrepreneurs and the people with the ideas.

If there is somebody who has a proposal we would be more than happy to

sit down on whatever programming we can identify, if it is a worthwhile

approach, we would be happy to try and support it to the best of our ability.

MR. HUNTER:

Yes, I see most of it is

pertaining to the finfish.

MR. LEWIS:

Just to add to that years ago, back in the 1980s and probably early 1990s

there was a sort of a shotgun approach to aquaculture development in the

Province. There was a large amount

of effort spent on multiple species everything from eelpouts on up.

It really was not getting very far, so the strategic plan from around the

late 1990s into the early 2000s was to retrench all of that and focus on four

key species that had the best opportunity for commercial development.

The focus was on salmon, steelhead trout, cod at the time and

mussels.

Now, I

think we are making substantial progress on the salmon.

We do see that the mussel sector there is a lot of growth opportunity

in mussels that we are not achieving.

I think over the next few months we will be trying to figure out if there

are ways to sort of kick that up to the next level as well.

We are

starting to see interest in other species again now, as Brian indicated just a

few minutes ago. We are seeing an

interest in oysters in Placentia Bay and in St. Mary's Bay.

We are seeing some interest in soft-shell clams on the West Coast.

We are starting to see some companies interested in diversifying out into

species. To the extent that we have

programming that can assist, we are assisting.

MR. HUNTER:

(Inaudible) any other

questions.

CHAIR:

Mr. Cross, you have not

asked any questions yet.

MR. CROSS:

Probably, to consume the

rest of this time, there are a couple of questions.

You had referred back to the 1980s and 1990s and probably into the 1990s

and early 2000s. I remember in

Wesleyville it is in my district there was a finfish hatchery on the wharf

there. Basically they were hatching

lumpfish for release into the wild.

I do not know what the market is for lump eggs these days, but it was

experimental I suppose at the time, that is the nature of it.

I had

question earlier about if some of these other things are back on now, people

would be willing to invest. Is it

the same procedure for this?

Although this is an equity program and that was more of a research program.

How would that fit with that, or is it totally out in a different field?

MR. LEWIS:

Well, the Aquaculture

Capital Equity Program could accommodate some projects like that, but they would

have to be fairly substantial. The

minimum amount I believe for finfish aquaculture is $500,000 and for shellfish

aquaculture would be $250,000. It

would have to substantial projects; it is not $20,000 or $30,000 sort of thing.

The

program is open to mussel and to other species.

Right now, the only real projects that we have funded so far have been

related to salmonids salmon and trout and the one that we did for net

washing that Brian mentioned previously.

MR. CROSS:

Okay.

reference to the amount of hatching that was done there, that was in a caged

system on a wharf. I know there has

been some debate as to the contained cages on land versus the open cages with

regard to losing fish to the wild, escape, and all that in the questions we have

talked about. Is there any

investigation now or any groups now investigating or applying for finances to

attempt the landlocked cage system?

MR. MEANEY:

We have had no applications.

We have met with one company from the Middle East who specializes in

constructing land-based aquaculture facilities.

We have had a good discussion with them, but there has been no follow-up

or no proposals coming forward for a land-based operation.

MR. CROSS:

Okay.

there any evidence or any cost factor there?

Would it be much more expensive to operate a land-based system versus the

cages in the water? More capital, I

guess.

MR. MEANEY:

Certainly it is capital

intensive. There are about a dozen

to fifteen operations looking at Atlantic salmon and land-based operations being

trialed around the world, one in Canada sponsored by the Department of Fisheries

and Oceans in British Columbia. We

are monitoring it very closely.

There has been a number. One in

Nova Scotia has tried and it had a bunch of technical problems.

There is another one in Denmark that has had three attempts to try to get

the farm up and operating, but either was struck with disease or mechanical

issues.

There

is a lot of interest around the world in this.

The potential for particular markets, there may be, but certainly their

technology is not proven and it is not commercially viable today from all the

information that we have been able to monitor.

CHAIR:

Mr. Murphy.

MR. MURPHY:

Thank you very much, Mr.

Chair.

I only

have a couple of more questions left.

I have a child care issue that is after popping up so I am probably going

to have to bail here, but I wanted to get this thought in.

On page

87, your response from the department, it says here, the second line, Given the

unique nature of each plan, the Department believes it is therefore appropriate

The first thing that popped in my head when I read that I could see

picking a project on the basis of its merits.

The first thing that popped in my head was competition.

The second thing that popped in my head was giving a company an unfair

market advantage by doing that.

I am

wondering, and I guess the question is for the department: You can see a

strategic investment into a company, but should we be setting a baseline for all

companies? I will leave that as an

open-ended question in this particular case.

I think if we are talking about giving loans out to one company, maybe

$10 million, or a loan to a company that might be $1.4 million, either way some

of these companies are playing off against each other in the stock market.

They are all looking for investment.

They are all looking for market share.

Are we

in fact giving them a competitive advantage by doing this, by giving them loans?

Well, even though it is still young, I guess I will say it, it is

established here not without some risks to it, at the same time.

The question, I guess, here to the department: Are we being too flexible

Are we giving somebody more market share?

Are we being anti-competitive by trying to be competitive at the same

time? Do you have a legal opinion

on that?

MR. LEWIS:

No, we do not have a legal

opinion for sure. In terms of the

context, the criteria we would see flexibility on would be the repayment, the

time for repayment, and so on. We

see each project as being different in terms of the scale, the time it takes to

actually implement the project, the time to get to a first cycle, how long they

should pay back the funds over.

Every business plan has its own projections as to what their cash flows are

going to look like over some period of future years.

I could

see where you might potentially have a maximum of X years as opposed to it has

to be eight years or it has to be six years.

Do you know what I mean?

Projects may need some flexibility in order to be viable and able to repay the

funds and so on. I do not think we

would go with twenty-five years anymore.

I do not know; it is not my decision.

Ultimately, you make recommendations, Cabinet decides.

MR. MURPHY:

Yes.

MR. LEWIS:

That was a one-off.

I do not think we will see that anymore, but you might see projects that

will be twelve years. Every project

will be different.

The

program is available to all species.

Even though it has been mostly salmon and trout that we have been doing

projects on, but it could be on mussels.

The payback on mussels could be completely different than what it is on

salmon in terms of their ability to turn that around and pay back government and

so on. So that was sort of where we

were coming from in saying there needs to be some flexibility in the program.

Brian,

do you want to ?

MR. MEANEY:

Just by way of example, the

Cooke Aquaculture proposal was coming from a standing start.

They had no fish in the water and no infrastructure on the ground.

If it takes you eighteen months to grow your first smolt to put into a

cage, you have to develop your cages, your nets, gets your boats and everything

else through the construction phase, and there is another eighteen months to get

that fish to market. So from the

time you start to the time you get your first sale, it could be somewhere

between three and four years.

If you

look at a retraction of shares that would be certainly very different than if

you had a company expansion that already has cash flow and saying I am now at X

and I want to go to X plus 30 per cent.

Then the company has a cash flow and are not at a standing start.

They are moving forward.

That

kind of flexibility on the first one you say, okay, we may have to give some

bread or grace on the front end because until the first crop, you cannot expect

any repayment. If you are an

existing operator, then you already have cash flow and your terms may be

somewhat different.

MR. MURPHY:

Okay.

Your

department, they have gone out and gotten legal opinions on this?

Have they gotten good legal advice when it comes to giving and

financial advice for that matter when it comes to ?

MR. LEWIS:

All the agreements and

everything are all reviewed by the Department of Justice as a part of the

process. If you go to Cabinet, then

the Department of Justice provides input into the papers and all that sort of

stuff.

terms of competitive impacts, no, I do not recall that we have had any legal

opinion on, is this project unfairly competing against someone else here or

somewhere else in the world. No.

MR. MURPHY:

Well I am just wondering

like when it comes to entry into the industry, too, that sort of thing.

The

other questions I have here I wanted to ask you a couple of questions about

the assessment of risk, too; when you go in to assess a project for risk, what

factors you would be considering. I

am thinking environmental here, too, now when I ask that question; for example,

the use of pesticides on salmon for the removal of sea lice and the effect on

the lobster industry, that sort of thing.

What do you do in that particular process in the event of the licensing

and construction of an aquaculture farming facility?

MR. MEANEY:

In terms of the program

itself and the financing, the risk assessment, there is a two-step process.

The licensing piece takes into account everything from the environmental,

oceanographic conditions, the water temperatures, the presence of ice, how water

patterns move within the farm operation, what history of other aquaculture

activity may have been there, what are the known disease profiles, are there

farms adjacent, and what has been their experience?

That information is all part and parcel, and captured in the licensing

process.

That

provides us an input in terms of, if I would say, the biophysical and

environmental risks, including the risk of disease.

Does the company have the capability to provide proper fish health care,

access to veterinarian services, et cetera?

All that part of it.

That

feeds into the business plan analysis that would be looked under the ACEP.

We would have to see what are the mitigations are and where are the

levels of risk? So if you are in an

existing farming area if you were to establish a farm in the Connaigre Bay or

in Fortune Bay today, you have the advantage of ten years or so of information;

the highs and lows, the issues, one site versus the other site, and what kinds

of issues.

We have

a greater level of understanding.

The risk, we believe, would be somewhat mitigated, assuming the company has the

appropriate and identified in the business plan technology, expertise, and

processes in place to address it.

One of

the previous members asked the question: What about Placentia Bay?

Well, there we have zero history of growing salmon in a cage.

So the level of risk, from an environmental perspective, has to be

measured. You have to ensure, if

you come forward with a business plan, that those risks are identified and they

can be mitigated to the extent possible.

How

would you then look at that in terms of what is the level of risk that the

company is taking, their investors are taking, and the Province is willing to

take in a greenfield development? I

am not sure if that drives to the question you were asking.

MR. MURPHY:

No, that is pretty good.

All those conditions, obviously, would be affected, whether a government

is going to give a yes or no to a farm like that, basically.

MR. LEWIS:

Yes.

MR. MURPHY:

Okay.

Mr.

Chair, I do not think I am going to ask any more questions here now.

I have to go. I will leave

it with you. It is not going to

affect quorum or anything? You have

enough people to carry on with it?

CHAIR:

Well, we need four for

quorum and that includes the Chair.

MR. MURPHY:

Okay, so you are good?

CHAIR:

Although it is a bit unusual

to have Public Accounts proceed without Opposition representation.

MR. MURPHY:

That is what I am wondering.

CHAIR:

That is not my issue.

My issue as the Chair is as long as I have a quorum until we get the

questions answered.

MR. MURPHY:

As long as you are covered.

CHAIR:

It is not a matter of me

being covered; it is a matter of the Committee being able to function.

MR. MURPHY:

Yes, okay.

I will

stick around for a few then.

CHAIR:

Do we have questions from a

government member?

MR. PEACH:

I just want to follow up on

what we had talked about earlier; fish going out and coming back in with regard

to the market. I am just wondering

about the quality.

If you

go into Sobeys, for instance, or Dominion, and you pick up a salmon and look at

it, the gills on the salmon are white.

That shows that the quality is starting to go down on that fish.

You buy it, but it is hardly fit to eat.

You do not get a taste like you would from a fresh salmon coming direct

from the market.

It is

the same thing with mussels. You go

in and pick up a bag of mussels at Sobeys.

You boil the mussels. Once

you cook the mussels, probably 6 per cent or 7 per cent of the mussels sometimes

are I bought a bag there a while ago and I would say about 6 per cent of them

would not open up. They were white

inside when you did open them up.

That shows again that the mussels are starting to rot.

Does

anybody monitor that kind of a situation with the fish coming back in?

I know there is good quality going out.

It is like a fisherman on the wharf who goes out to his nets.

He brings in the fish and it is alive in the boat.

He sells it over the wharf.

Once it gets sold over the wharf to the company, it probably does not get to the

company.

For

instance, Arnold's Cove processes the codfish.

It goes in through Dorset Fisheries, but it gets caught over the wharf.

It is put in a container on the wharf and it is there for two days.

By the time it gets to Icewater, the quality is gone down to a B grade or

a C grade.

The

same thing happened here with the salmon that is going out and coming back in.

Who monitors it to see what quality is going into the stores?

I tell you, if the quality in the stores was being monitored, those

mussels that are being sold, some of them would be taken off the market.

MR. LEWIS:

That really is a food safety

issue you are raising there. That

would be under the Food Premises Regulations.

MR. PEACH:

For inspection, under the

Food Inspection Agency?

MR. LEWIS:

It falls under the

Department of Health, but it is enforced by Service NL.

MR. PEACH:

Okay.

I was just wondering about that.

One

more question, Mr. Chair, if I can ask it, on lobsters.

Back a couple of years ago, probably 2013 or 2012, the government put

some money into Memorial University to do a study through the fisheries

department on lobsters in Placentia Bay.

I have not heard much on that.

Where did that go?

It was

to research to see what was happening to the lobsters in Placentia Bay, to see

if they were coming back or what happened to them.

I have not heard anything on that since.

I do not know if the money was spent through the university and nothing

was ever done on it or whatever. I

have asked questions on it, but I am just wondering.

MR. LEWIS:

I could not tell you.

I will make a note and I will get back to you on it.

It is not ringing any bells with me to be honest with you.

MR. PEACH:

No, I do not think you were

with the department at that time.

MR. LEWIS:

Maybe not.

Certainly I can check with my staff.

If there was a project that was funded through our department, we can get

the information for you.

MR. PEACH:

Yes, I appreciate that

because it was announced for Placentia Bay.

As a matter of fact, it was announced in the House of Assembly, too.

MR. LEWIS:

Okay.

We will

follow up on that for you.

MR. PEACH:

All right, thanks.

That is

it, Mr. Chair.

CHAIR:

Yes, I have a few questions.

On Page 60 of the Auditor General's report, item 3 near the bottom says,

Government approved a $5 million equity investment in Gray Aqua Group Ltd

(GAGL) when the Corporation did not have a minimum private sector equity

position of 20% of total assets.

What

percentage did the company actually have?

MR. LEWIS:

The Auditor General

indicates that it was 3 per cent equity.

The issue that I mentioned previously related to the smolt, the

contribution of the smolt, and the value of the smolt to the project.

We had

an independent accountant at the time who indicated to us that would count as an

equity investment in the project.

The Auditor General pointed out to us that because of the way it was handled,

there should have been shares issued in order for that to be considered equity.

That is

my understanding. I am not an

accountant, but that was my understanding, that it was not technically equity.

Even though it was a contribution of the company into the project, it did

not meet the definition of equity.

CHAIR:

So if that is the response

today, was it communicated to the Auditor General in writing as the departmental

response previously?

MR. LEWIS:

We had a discussion with the

Auditor General on it. The point I

just conveyed, in terms of the shares and so on, was based on the conversation

we had with the Auditor General. In

the report, I think it references that shares were an issue and it was not

equity. It is not in our response,

but it is in the body of the report as far as I know.

CHAIR:

Okay.

Item 4

continues from that question. It

says, Government approved a second equity investment of $5 million in GAGL in

March 2012, when the Corporation had not demonstrated that it could complete the

start-up of aquaculture operations in accordance with targets established in the

business plan associated with Government's first equity investment of $1 million

in March 2009.

Is that

true?

MR. MEANEY:

The issue there related

around the start-up date of the company.

If you look at their business plan and the target production they had in

the years following, unfortunately the company had some difficulties in getting

started up on time.

Actually, while they did not technically meet their production targets within

the year identified in the original business plan, it was out of phase by about

a year because of circumstances beyond their control.

So technically no, they could not demonstrate that they had met the

targets in the business plan. They

did meet the targets the following year had the business plan said it started

in X and moved it forward a year, it would have lined up.

CHAIR:

What were those

circumstances that were beyond their control?

MR. MEANEY: The

issue related to their ability to access sufficient numbers of fish to stock in

their first year. Their original

business plan would have seen a 2007 start-up, but because of the unavailability

of smolt, that got pushed out to 2009.

So it pushed the project ahead and out of phase.

CHAIR: Did they

have the smolt available for their start-up?

MR. MEANEY:

They did not have the full volume that they had hoped for in that particular

year.

CHAIR: How much

did they have available?

MR. MEANEY:

I would have to go back and get that figure exactly for you.

I am sorry; I cannot tell you off the top of my head.

CHAIR:

Did they have enough or did

they lose some of them?

MR. MEANEY:

They did not have enough to start what their original target was.

For argument's sake and I am just using this as an example if they

were hoping to have a stock originally with 2 million fish, they were probably

down to about 1.3 million or 1.4 million.

So that resulted in placing the project out of phase.

CHAIR:

If they had 3 per cent, and

I take it that is in cash, then the other 17 per cent was in smolt?

MR. MEANEY: The

minimum requirement is 20 per cent.

So in many cases the equity investment was larger than the 20 per cent.

As I recall from the project and again, I would have to go back to the

detailed business plan they had more than the 20 per cent equity if you had

included the smolt as equity, as per the commentary that we made earlier.

CHAIR: Has the

detailed business plan been provided?

MR. MEANEY: All

projects require a detailed business plan with submission; that is the basis of

our analysis.

CHAIR: Has it

been provided to the Auditor General?

MR. MEANEY:

Yes.

CHAIR: The

Auditor General does not, by statute, share his working papers with us.

Can you provide the Committee with a copy of that detailed business plan?

MR. MEANEY: We

would have to seek advice because the business plan contains private information

of individuals within the company, net worth, those types of information, and

private financials. So we would

have to get advice in terms of what we are able to release

for you on that basis.

CHAIR:

Okay.

How old

is that business plan?

MR. MEANEY:

That would have been, I

think, 2007 or 2008 for the original investment.

CHAIR:

So it is a seven- or

eight-year-old business plan? Gray

aquaculture has since filed a petition for bankruptcy protection.

MR. MEANEY:

They did file for

protection. They had a creditors

meeting. They provided a proposal

to all creditors, which was accepted.

They exited from bankruptcy last year and are now back operating with new

financing.

CHAIR:

Who owns the assets that

were owned by Gray aquaculture?

MR. MEANEY:

Gray aquaculture continues

still to own them. They were never

in bankruptcy. They sought

bankruptcy protection. They had

outstanding debts. There was a

creditor proposal made and all creditors agreed to the redistribution of debt.

They had new financing and the company is solvent today.

CHAIR:

You will follow up on the

business plan and see if there is any reason that it should not be provided?

MR. MEANEY:

Yes, Sir, I will.

CHAIR:

Under 5, which is the next

page, page 61, the Auditor General found that, The Department did not provide

evidence that it evaluated the financial impact of shareholder plans to

construct a processing plant in Hermitage on GAGL's ability to carry out the

business plan associated with the $5 million equity investment .

It says that there is no evidence that it was evaluated.

Was it

actually evaluated and there was no evidence provided, or was it not evaluated?

MR. MEANEY:

The 2012 proposal that Gray

put together was a multi-faceted proposal.

It also included for them to start processing their own fish.

They

had a separate proposal just to go backward, the Aquaculture Capital Equity

Program does not and cannot, by its objectives, fund primary processing

activities, anything inside a processing plant that deals entirely with the

production of fish, not with the processing of fish.

They had provided at that time to government a detailed proposal for a

fish processing licence, including a detailed business plan related to that

aspect of their operation that was provided to the Fish Processing Licensing

Board for review and the department for review.

When

the proposal for the Aquaculture Capital Equity Program came forward, that was

raised with the company. They

indicated they had separate financing to be able to deal with that outside the

Capital Equity Program. We raised

it as a concern. We convened a

meeting with the owners of Gray Aqua Group, ourselves, BCTRD or IBRD as they

were at that point and Finance, as well as ACOA to address our concerns.

That

was a meeting that we held. We

provided the date of that meeting in an email and notice of the meeting to the

Auditor General. We were not able

to provide anything in writing that said we reviewed this plan and we clearly

indicate that this has no bearing on the production plant.

We had that discussion with the Auditor General and that is the

information we provided.

CHAIR:

So this is whether the

construction of the plant would impact the ability to carry out the business

plan that had already been submitted.

That is how I understand it.

Mr.

Paddon, maybe you can enlighten me there.

MR. PADDON:

For us, this was a question

of documentation providing documentation to support our questioning.

CHAIR:

Under 8, the Auditor General

says, The Department did not request, and GAGL and Northern Harvest Sea Farms

Newfoundland Ltd. (NHSF) did not provide annual audited statements certifying

the Corporation's equity investment and compliance with the terms of Agreements

in connection with the Provincial investments.

Why would that be?

MR. MEANEY:

When the contractual

documents were drafted for the Northern Harvest and the Gray Aqua Group

contributions, there was a copy and paste over with a condition that was in the

original Cooke Aquaculture contract that was not required.

This was copied over in error in copy and paste.

referred that to the Department of Justice for comment.

Certainly it said the department should have been monitoring that.

We recognize that it was not part and parcel of this investment.

It was not the same investment.

The Department of Justice indicated this was an error.

They advised that this should be waived without prejudice to the company.

It was never an item that was intended to be in the contracts, therefore,

we never intended to monitor it.

There was no rationale under the proposal or agreement to Finance to be able to

monitor that.

CHAIR:

Was it waived in writing?

MR. MEANEY:

No.

CHAIR:

As I understand it, the

agreement as it was entered into had a requirement for annual audited financial

statements and the department did not ask for them and they were not produced.

Then the department went to the Department of Justice and you told the

Department of Justice that this was an error, you should not have asked for

them.

MR. MEANEY:

The Cooke Aquaculture

investment had a particular clause related, as we talked to earlier, about this

additional capital investment to offset dividends.

That was not included in any following contracts.

As part of that requirement, Cooke was required to provide us an annual

audited statement of additional capital expenditures above and beyond the

original proposal, which I think was thirty-nine point two.

That was related to the offset.

So they had to spend more money in capital to offset the dividend owing.

neither the Northern Harvest or the Gray was there a similar condition

negotiated. There was no request by

either of those parties to offset the dividends; therefore, there should have

been no contractual requirement for us to require them to provide us an audited

financial statement of additional capital expenditures.

CHAIR:

I understand from the first

sentence that it means the parties, the government and these investor companies,

entered into a written agreement with this requirement.

Is that correct?

MR. MEANEY:

Yes, that was part of the

contractual documents that all parties signed.

CHAIR:

And there were several

million dollars involved?

MR. MEANEY:

Yes, there was.

CHAIR:

Do you know if the companies

had legal advice?

MR. MEANEY:

Pardon me, Sir?

CHAIR:

Do you know if they had

legal advice?

MR. MEANEY:

Yes, certainly they had

their own legal.

CHAIR:

Can you explain how the

department and these substantial companies would enter into an agreement and

then say that the requirement for annual statements is an error?

MR. MEANEY:

Just to be clear, the

requirement for annual audited statements is consistent across all companies.

What this particular reference here is to is an audited certification of

the capital expenditure, of new capital expenditure.

That was only required in the Cooke instance because it was related to

the offset of dividends.

The

other agreements with Gray aquaculture and Northern Harvest did not have an

agreement to offset, therefore they did not have a requirement to provide us

they should not have had a requirement to provide us with information regarding

new capital expenditures. All of

the contracts, though, just to be clear, require annual audited financial

statements of the companies involved.

CHAIR:

Did this come to light

before the Auditor General's audit or as a result of the Auditor General's

audit, or in some other way?

MR. MEANEY:

This came to light as a result of the Auditor General's audit.

CHAIR:

Has it since been resolved

in writing between the parties?

MR. MEANEY: No,

it has not. The advice by the

Department of Justice is that we did not have to respond.

We advised all parties and they are in agreement with it, but it was not

done so in writing.

CHAIR: The next

one, number 9, says, COSI did not provide the Department with the required

annual auditor certified schedules stating that sufficient eligible capital

expenditures had been incurred to allow an off-set of dividend payments to the

Province totaling approximately $404,000.

What is happening there?

MR. MEANEY:

That came to light in the discussions, as I indicated in an earlier comment.

The ability to offset dividends required the company to have new capital

expenditures in and above the original business plan requirement.

In the first couple of years, the company provided the

department with auditor certification of new capital expenditures.

On a go-forward basis, they then advised government that the new capital

expenditures will be identified in the regular financial audited statements but

they did not want to go through the expense of creating an additional audited

statement prepared specifically for this purpose.

Reviewed internally in government, in terms of the audited financial

statements, it was deemed that this was sufficient in the spirit of the intent

to provide us the information to decide whether or not there should be financial

offsets.

As indicated, going through the Policy and Procedures

Manual, this year we are sitting down with the companies and identifying all the

items they need to provide to us.

We will sit down if indeed the company continues to wish to take a different

route, we will seek legal advice and amend the contracts, if necessary, or we

will retain the existing process, depending on the advice we get from both

Justice and Finance.

CHAIR: Okay.

Under 11 it says, The Department did not adequately review

the claims for payment that were submitted by Corporations in connection with

the Provincial contributions that were made under the Contribution Agreements.

It goes on to say, There were instances where the Department paid claims

when invoice listings were not provided.

When invoice listings were provided, the Department did not always carry

out review, audit or inspection procedures.

Is that in fact the case?

MR. MENAEY: Mr.

Chair, I wonder, could we

take a five minute break?

CHAIR:

Oh, sure, yes.

Recess

CHAIR:

We are back on right now.

We were at question 11 of the Auditor General's finding: The Department

did not adequately review the claims for payment that were submitted by

Corporations in connection with Provincial contributions that were made under

the Contribution Agreements.

It went

on to say, There were instances where the Department paid claims when invoice

listings were not provided. When

invoice listings were provided, the Department did not always carry out review,

audit or inspection procedures.

I was

asking, first of all, if in fact that is the case.

MR. MEANEY:

The contract requirements

for the provision of claims required the proponent to provide an auditor

certificate attesting that the claim amount met the criteria of eligible capital

assets as contained in the Contribution Agreement.

We had received those auditor certificates to support every claim that

was made under the program. There

was not a requirement in the contract for the auditor certificate to detail the

invoices and the amounts.

The

Auditor General had a look at that and said in some cases they were and in some

cases they were not. They

recommended the norm would be that the auditor certificate would include a

listing of the expenditures. Our

discussion with our department, Finance department people, said the contract

said there was no requirement. We

recognize that what the Auditor General suggested is a good suggestion, and we

have now included that in our normal process for all new claims going forward.

CHAIR:

On page 62, under

Recommendations, the second item said: The Department should clearly

demonstrate and document that all ACEP eligibility criteria have been met before

making recommendations to Cabinet for investment approval.

Has

that happened now? Is that the

practice now?

MR. MEANEY:

Yes, it is. When we went forward

with other projects since then, we clearly identified in our advice to Cabinet

that all the program criteria were met, and that was signed off by the three

departments that were reviewing it.

CHAIR:

It seems that sometimes the

department was outside of the guidelines, and maybe business decisions were made

and guidelines were not always adhered to.

Have guidelines now been changed sufficiently to permit the Department of

Fisheries and Aquaculture to carry on in aquaculture investments?

Are the guidelines now broad enough or narrow enough or clear enough?

What I am asking: Has there been a change in guidelines or updating?

MR. LEWIS:

There has been no change in the guidelines since the Auditor General made his

recommendations. The guidelines

that are included in the report and listed on the department's website are still

the guidelines that we are following.

We do recognize the point the Auditor General made regarding the

financial requirements piece, and some consideration will be given to whether,

in fact, we should seek clarity on those guidelines, or perhaps revision.

CHAIR:

Under item 6 the

recommendation is: The Department should review and document the results of its

review of the quarterly financial statements and annual audited financial

statements that are submitted by Corporations in accordance with the

Contribution Agreements.

Does

that happen now?

MR. MEANEY: Yes.

One of the issues identified in the process and I think Mr. Lewis

alluded to it early is that when we received the financial statements in some

cases they are provided to us by email; the person

receiving them would email to the other departments and our internal financial

people. We now require

acknowledgement of those financial statements and if there are no concerns, a

note back, for example, email or in writing, to say we have reviewed and have no

concerns, or we reviewed and we found the following concerns.

So the documentation piece is critical there, and that is part of our

process now.

CHAIR:

So the quarterlies are

unaudited, I think, and the annuals are audited?

MR. MEANEY:

In most cases, yes, the

quarterlies would be unaudited financial statements.

CHAIR:

What is the normal leg time

to produce the quarterlies?

MR. MEANEY:

Roughly sixty days following

the quarter, and in one case it is ninety.

CHAIR:

The annual?

MR. MEANEY:

Again, it is sixty days in

most cases and ninety days following the fiscal year-end (inaudible).

CHAIR:

I think one of the reasons

that Gray got into financial difficulty was as a result of ISA.

Some of the fish were condemned due to ISA I believe that is correct

and the Canadian Food Inspection Agency provides compensation of, I believe,

their input costs. Is that correct?

MR. MEANEY:

Yes.

Just as Gray was coming into their first major harvest, they were hit by

ISA and that resulted in significant losses because the bulk of the fish that

was struck by ISA were market-ready fish.

That limited their

CHAIR:

So, to protect its position,

does the Province take an assignment from any company where it invests, an

assignment of proceeds of CFIA compensation, in case a company is wiped out

because of ISA or some sort of a compensable disease and they do not get started

up again?

MR. MEANEY:

As an equity investor, we

are not eligible to take a lien on that basis.

That was part of the review or the bankruptcy protection hearing in terms

that monies provided through CFIA were part of the general revenue of the

company then and were available for all creditors in that process.

CHAIR:

Mr. Parsons, you may have

some questions.

MR. K. PARSONS:

(Inaudible) and it was

probably already asked. I am very

interested in the cod fishery. I

know that years ago when we owned a trucking company, we used to truck a lot of

fish to Bay Bulls. There were a lot

of hatcheries there in Bay Bulls.

Right now in the Province, what are we doing when it comes to the cod fishery

for aquaculture?

MR. MEANEY:

We had quite a lot of

interest back in the late 1980s, early 1990s in cod growing, as well as

establishing a cod hatchery. On the

cod grow out, which were fishermen taking their catch or a portion of their

catch and feeding it and selling it later in the year for a better price, most

fishermen did not find that to be of benefit to them.

We have one existing, as I indicated earlier in the day, in Trinity Bay

near Little Heart's Ease. There is

one fisherman who continues that.

The cod

hatchery and cod growth from sort of egg-to-plate aquaculture, that was given a

tremendous amount of effort, time, and finances around the world: Norway,

Canada, and Scotland. The reality

is that the operating costs the cost to produce a pound of codfish was greater

than the market price available.

Growing cod from egg to plate, if I could put it in that vernacular, is not

economically viable right now.

MR. K. PARSONS:

What is the time frame?

How long would it take to do it versus, say, salmon?

MR. MEANEY:

From egg to plate for salmon

is roughly thirty-six months. For

cod we are approaching five years.

MR. K. PARSONS:

Okay.

MR. MEANEY:

If you consider risk over

time, the longer you have an animal alive the greater the risk tends to run you

more time. That was one of the

factors in this as well.

MR. K. PARSONS:

We used to I would say it

was back in the mid-1970s, early 1980s, we had a tank.

One of the trucks had a tank on it.

We used to carry the fish from Flatrock and Torbay live.

We used to put it in those holding tanks up in Witless Bay or Bay Bulls

at the time.

The

fish were, I would say, sixteen inches or less.

Within a year or so they were pretty nice.

It was pretty nice cod. The

early stages of cod development, is that what takes most of the time?

MR. MEANEY:

No, getting a fish large

enough to stock is about a third.

The grow out, from the time you put them into a cage to get them to market,

takes about three of those four years, we will say.

MR. K. PARSONS:

I think the biggest problem

right now probably with the fishery I know in my area the fishermen tell me

they can catch a fine lot of fish, but I do not think the plants or anybody

wants to take them because of the market aspect of it.

There is not a lot of market there that was there in years gone by.

Perhaps

you can give me I know it is probably a little bit off the cuff here, but I am

interested because I know what has happened in the cod fishery.

On the food fishery, I get my regular trip every day.

In the last couple of years I have noticed a lot of changes.

It seems like the cod is a lot bigger and there are a lot more cod there.

talking to the fishermen in the area, the biggest problem for them, if they ever

went into commercial fishery, is basically markets down the road and who is

going to take it and where it is going to go.

Is there anything getting done with that in the department?

MR. LEWIS:

Just to back up a second for

the cod aquaculture piece

MR. K. PARSONS:

Okay.

MR. LEWIS:

As Brian indicated, Norway,

Scotland, and ourselves everybody who was interested in cod aquaculture when

the stocks collapsed in the early 1990s.

Since then, the stocks have recovered pretty well everywhere else except

here. As you indicated, there are

good signs that the stocks are coming back here now as well.

It is a

lot easier to harvest the codfish that is wild, that you do not have to have in

a cage, and you do not have to pay for.

You do not have to pay people to feed it; you do not have to buy the feed

to feed it and so on. Economics

just do not work for farming cod at the moment.

The

other thing that happened with the collapse of the cod stocks was there was a

lot of interest in other white fish so you have a huge international market now

for tilapia. I mean you can get

tilapia here at Costco, or in Sobeys, or any of the stores.

Twenty years ago that did not exist around here.

Even ten years ago it did not exist.

Those fish are taking the place of some of the cod as well.

That is

sort of why the cod aquaculture thing worldwide is pretty well off now.

In terms of the markets we really had one major cod producer that

continued to process cod even though there was virtually none in the Province,

and that was Icewater in Arnold's Cove.

We also had a couple of other small significant players like John

Osmond's operation in Codroy that have stayed in the cod business.

Basically, when the resource regime switched to a shellfish regime, everybody

got into the crab business. A fair

number of people got into the shrimp business.

The eighty or ninety companies we had producing cod, most of them got out

of it.

Now

companies are starting to see that the groundfish is coming back and they are

going to have to invest. A lot of

the companies now are asking themselves it is a matter of timing now.

It seems like it is not an if, it is a when.

So the

question is when is the stock going to get back to a point where we are going to

have a commercial fishery, and what are we going to have to do in order to be

able to take that fish and turn it into the maximum valued product that is

required? There is a good market

for good cod. The Icelanders are

exploiting that; the Norwegians are exploiting it.

Iceland has a 200,000-ton quota of cod a year.

In the

Barents Sea, the quota is 1.2 million tons and we have about 15,000 tons here at

the moment. Really, apart from what

Icewater is doing which they have maintained some of their lucrative markets

in Europe even in the face of really very little fish over the last twenty years

there is a good opportunity for good valued cod.

Certainly Newfoundland will go back into that business when the resource

gets to the point where the fishery opens and people are going to pursue that

fishery.

In the

department, we are seeing a lot more interest in the last year or two.

Some companies whose business plan for cod was to take the cod and send

it to Arnold's Cove like if it comes in my plant, I am in Fogo, and I will

send it to Alberto in Arnold's Cove now they are realizing we have to get back

into the cod business, too. So you

are seeing some people starting to do some salt cod again in the Province.

You are getting companies that are starting to think about what equipment

we need in order to be able to really utilize this resource when the fishery

reopens.

MR. K. PARSONS:

It is going to be a huge

problem though in the future. I

believe the fishery is going to open.

I think it is going to open sooner than later, too because I think you

are seeing a lot of decline in the crab fishery in certain parts of the

Province, and to talk to the fishermen, if the cod comes back, the crab

decreases and stuff like this.

The

biggest problem I can see is going to be the workforce to be able to handle it

and also the technology. I know in

the 1980s they started bringing all the filleting machines in and stuff like

that, but there were just as many people on the lines filleting fish.

If you go on the wharves these days, it is a job to find a fellow who

knows how to fillet a fish. It is

going to be a huge issue for everybody, I think, down the road.

MR. LEWIS: It

will be a much more capital-intensive business than it was back in the 1980s,

for sure, when we had numerous people filleting fish, and doing trimming and so

on. You will see a lot more because

the bodies are not there to start with, really, to provide that kind of a

workforce.

You will see a lot more technology involved.

We saw it with the baiter 184s in the late 1980s; we were starting to go

that way. You will see a lot more

of that, technology on boats and in plants.

MR. K. PARSONS:

Also, the fishermen will

want a whole lot more money for their product than what they did when the

moratorium came into effect and you were looking at eighteen cents or nineteen

cents a pound. Now they are talking

seventy-five cents with gut out, round, basic cod to sell now.

That is

all I have. It was just a couple

questions on the cod fishery.

Thank

you very much.

CHAIR:

In the AGs report on page

65, it shows that Gray Aqua I am going to say drew down $4.8 million against

$6 million that was approved. Is

that because they got into difficulty?

Why didn't they take all the money?

MR. MEANEY: The

company can only draw down if they have sufficient expenditures.

The $4.8 million was what they had expended up until the point that they

got hit with the ISA event and started having losses.

They did not make any additional capital expenditures.

There were more planned, but they did not complete their capital

expansion plan because they

ran into those difficulties.

Therefore, we would not have put any further money out.

We do

not advance any funds; it is based on invoice.

They have to make the expenditure first before they can make a claim.

CHAIR:

Okay.

This

probably is a better question for Dr. Whelan, although probably all of you know:

When did we have the last ISA outbreak?

DR. WHELAN:

The last event that we had

was really about November, December, and then the lag time.

The last depopulation that we did was in January 2014.

Those were the last fish that were taken out of the water.

CHAIR:

Are there any other

pathogens that are in salmon in any other parts of the globe here, the kidney

disease and all these other diseases that fish can get?

DR. WHELAN:

Yes.

CHAIR:

We have them here now?

DR. WHELAN:

Yes.

CHAIR:

Are there any active cases?

DR. WHELAN:

I guess at any point in time

there would be.

CHAIR:

Okay.

there anything that has been reported to CFIA yet?

DR. WHELAN:

No, there are no reportable

diseases.

CHAIR:

Okay.

On page

69 and I am nearly concluded there is a reference to the Investment in Cold

Ocean Salmon Inc. In 2006, the

business plan was reviewed by the Evaluation Group.

Who made up the Evaluation Group?

MR. MEANEY:

The Evaluation Group is made

up of the ADMs from our department, BTCRD, Department of Finance, as well as

relevant staff within that department in each of those departments whose

expertise is sought and involved in reviewing it.

For

example, in the case of our department, it is our technical experts who would

verify that in looking at the business plan.

So if X amount is set aside for feed, we would do the calculation to make

sure that those feed amounts are correct and provide that to BTCRD, for example,

who would do the analysis of the business model once we verified the costs.

CHAIR:

Okay.

I do

not have any more questions, but some of the Committee members may.

In that case, I will go to Mr. Paddon.

Are there any areas that we should be covering?

What are your observations?

MR. PADDON:

No, I would not say there is

anything that I would suggest you cover.

I just had a couple of comments and just a couple of observations to

make.

Just to

talk a little bit about our process and this gets to one of the questions you

had raised a little while ago. When

we complete the audit, we ask the departments for a response, and the response

is only to the recommendations. We

will publish those responses verbatim in our report.

That is what you see in this report.

The

rationale for only dealing with the recommendations is that up to that process,

we would have gone through a validation process with the department to make

sure, one, that things are factually correct and that we have not missed

anything, those sorts of things. In

this particular case, there were a number of meetings, obviously, with the

department, and you go back and forth and make sure that you have the

appropriate information, or that you change your commentary to reflect the

information that you receive.

At the

end of the day, my outcome is always to be balanced.

So there are cases where I will make a judgement and provide a commentary

based on my judgement. There are a

number of instances in here where I have made a comment, but I have also tried

to provide what I thought was the department's view of the world, to provide

some balance. Anytime you make a

judgement call, somebody else can have a different point of view.

At the end of the day it is my report, my judgement, but I want to make

sure that all views are represented.

So I just wanted to provide that information for the Committee.

There

have been a couple of comments here about documentation and lack of

documentation as being an issue. In

our business we have a saying that if it is not documented, it is not done.

So we rely on documentation to support everything that you do.

That sort of factors into in a lot of cases the commentary that we

make. If we do not find

documentation that can support a position or an outcome, then we will report

that. In a lot of cases you will

see that the wording is specific to say that we could find no evidence.

That is not to say that it was not done, but certainly there was no

evidence.

I do

take the point that the deputies made, that they have put a checklist in place

to look at the monitoring of annual reporting and terms of conditions.

I think that is a good outcome, and we look forward to seeing that when

we do our update.

The one

area when we do our update that we look for is the non-compliance with the terms

and conditions. While there may be

good reasons for changes or amendments, in a lot of cases what we would look for

is (inaudible). There is language

in the agreements that one would assume are there for good reasons and they were

negotiated and Cabinet would have approved it on the basis of particular

outcomes. So, if you get a point

where you allow a company to waiver from their commitments outside the terms and

conditions, then I am not quite sure sometimes where the right balance is.

Should

I do not know. In my view, a

term and condition is a term and condition.

If you are going to make a change, then make it with the appropriate

approvals to make sure everybody is onside.

That is just a comment I would make.

In a couple of years, we will follow up on our recommendations and do a

little bit of testing, so hopefully we will see that the recommendations have

been actioned.

Thank

you.

CHAIR:

Thank you, Mr. Paddon.

Usually

we like to give the department an opportunity, besides thanking them for coming

in, if you would like to have any concluding remarks.

MR. LEWIS:

No, other than to thank the

Committee for the questions. We

will get back where we have committed to provide additional information to

parties. Again, I thank the Auditor

General for the report. We take

these reports as constructive criticism and good advice as to how to improve

programs and program delivery. That

is the perspective we take it from.

Certainly, we will endeavour to address the recommendations that the Auditor

General has made to us.

CHAIR:

Thank you, Mr. Lewis.

Before

we adjourn, I need a motion to approve our minutes of this morning.

Moved

by Mr. Peach; seconded by Mr. Cross.

All

those in favour?

SOME HON. MEMBERS:

Aye.

CHAIR:

Carried.

motion, minutes adopted as circulated.

CHAIR:

In that case, a motion to

adjourn.

Moved

by Mr. Parsons.

motion, the Committee adjourned.