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October 17, 2013

PUBLIC

ACCOUNTS COMMITTEE

The Committee met at 9:00 a.m. in the House of Assembly Chamber.

CHAIR (Bennett): Good morning, ladies and gentlemen.

We are now on television, in-house. This is a hearing of the Public Accounts

Committee of the Province of Newfoundland and Labrador. This morning we are

going to hear from the Department of Natural Resources, Forestry and Agrifoods

Agency.

Normally how we begin is that we have the people who are here introduce

themselves. Because there is a record being made, a Hansard record, it is

important when people speak to identify who the speaker is. That way it makes it

easier for the person who is preparing the transcript at a later date.

Ordinarily we begin with people introducing themselves so we know who is

here. The Auditor General and the Committee members and the Clerk have been here

all week, so we know who is here, but we have new individuals this morning.

Generally, the process that we follow is we have members from the Committee

ask questions and request explanations and so on in approximately ten-minute

intervals, and we alternate back and forth. Usually we take a break around 10:30

a.m. How that works out is that generally every member has had an opportunity to

ask questions, at least in the morning half and in the afternoon half.

Ordinarily we would go through to roughly around 10:30 a.m., and we would

break for lunch around 12:30 p.m. or so. Then we will see how much time is

required.

I suppose I ought to have introduced myself. My name is Jim Bennett and I am

Chair of the Public Accounts Committee.

Next, I am going to go to Mr. Paddon.

MR. PADDON: I am Terry Paddon. I am the Auditor General for the Province

of Newfoundland and Labrador.

MR. WALTERS: Scott Walters, Office of the Auditor General, Audit Manager,

Acting.

MS RUSSELL: Sandra Russell, Deputy Auditor General.

MR. EVANS: Jim Evans; I am the Chief Executive Officer for the Forestry

and Agrifoods Agency.

MR. BOWERS: Good morning.

Wade Bowers; I am the ADM, Forestry Branch.

MR. YOUNG: Eric Young; I am the Director of Forest Engineering and

Industry Services.

MR. FORWARD: Gary Forward; I am the Supervisor of Industry Services.

MR. BRAZIL: David Brazil, Vice-Chair of Public Accounts.

MR. K. PARSONS: Kevin Parsons, Cape St. Francis.

MR. CROSS: Eli Cross, Bonavista North.

MR. MITCHELMORE: Christopher Mitchelmore, The Straits White Bay North.

MR. JOYCE: Eddie Joyce, Bay of Islands.

CHAIR: The witnesses who have been here throughout the week do not need

to be sworn, but Ms Murphy, our Clerk, administers the oath or affirmation to

anybody who has not yet been sworn, so I ask Ms Murphy to do that.

Swearing of Witnesses

Mr. Jim Evans

Mr. Wade Bowers

Mr. Gary Forward

Mr. Eric Young

CHAIR: Unless anybody has any questions it is also customary for us, when

we have agencies appear before us, if a member from the group would like to

provide some sort of an opening statement. It is not necessary, not required,

but sometimes it helps frame the information. That is clearly your option. If

you want to say something, we are available to hear from you to give some sort

of background. If not, I will start with Mr. Joyce. It is your preference.

MR. EVANS: We are pleased to be here today to answer any questions to the

best of our ability. If there is any information that we cannot provide, we will

certainly retrieve it and get it back to the Committee as soon as possible.

The Forest Industry Diversification Program was established in 2008, as you

are aware, and it was initiated to assist the forest industry in the Province to

compete in the global economy, to help them diversify and be sustainable into

the future.

In North America in particular, in that era, the industry was in a downturn.

There were plants closing everywhere; there was a lot of competition. The

Province thought it was prudent to assist the industry to position themselves

well into the future. So, that was done especially the sawmill industry is

well positioned now and taking advantage, in most cases, of the assistance that

was provided to them.

There were certain challenges in the industry, especially in rural

Newfoundland. The intent was to invest in the sawmill industry to have a

positive impact on the rural economy of the Province, I guess. The sawmill

industry, for those who are not familiar, is very well integrated with the pulp

and paper industry. If one sector of the industry goes down, it certainly has a

huge impact on the other sectors. So that was part of the point as well.

We have done a lot with product development, improving efficiencies in the

industries, and helped sustain, in many cases, the employment in the rural

areas.

Thank you.

CHAIR: Thank you.

Mr. Joyce, would you like to begin questions?

MR. JOYCE: First of all, thank you.

I am not sure how many witnesses here from the department were around in

2008. It is going to be interesting with some of the information coming forth,

what is on file.

The first question I ask is: Who was the minister at the time, in 2008, when

this program was brought forth?

MR. EVANS: The Minister of Natural Resources at the time, in 2008, was

Minister Dunderdale.

MR. JOYCE: Ms Dunderdale?

MR. EVANS: Minister Dunderdale.

MR. JOYCE: The current Premier?

MR. EVANS: Yes.

MR. JOYCE: I will just ask a few general questions. In the Auditor

General's report, they said the project was approved without government doing a

proper assessment. In hindsight, do you agree with that now, or is the

information that is in there where they never had the information on the

markets, never had the proper evaluation of transportation, do you feel now that

is correct?

MR. EVANS: I feel the project proposals were well assessed and had the

proper assessment. There were times when the initial application did not include

all of the information, but as we went through the process, and certainly before

any decisions were made and any offer of funding, the proposals were certainly

well assessed and all of the information was received.

MR. JOYCE: Just in the Auditor General's and I can go through it and

find it there is almost $8 million given to the company before they had the

application even approved. Also, before they had the markets, there was $8

million already given to the company. So how can you say that all the markets

and all the application were well approved when the Auditor General said that

there was money given before the application was reviewed and the information

that was requested was not even given to the department?

MR. EVANS: The committee acknowledges awarding an extension to the

business plan delivery and dates and changes of the scope for Company A. My

interpretation is the reference was related to a marketing plan, and the company

requested an extension to allow the newly hired plant manager to revise the

marketing plan. There was a marketing plan attached to the initial proposal, but

the committee felt that it needed revision.

MR. JOYCE: Can we get a copy of the recommendations that were made? In

the Auditor General's report, there were some recommendations that were made

about the marketing problems, about the marketing shipment. Can we get a copy of

that from the department, what the concerns were of the department at the time?

MR. EVANS: Is it the recommendations of the Auditor General or the

MR. JOYCE: No, the recommendations from the department itself.

MR. EVANS: Yes, we can supply that.

MR. JOYCE: You can supply that? Perfect.

So what you are saying, if I am correct and I would ask the Auditor General

that before the money is released all the information was put in to the

application before the money was released to the company?

MR. EVANS: Given the scope of the project, it was a very complex proposal

the construction of a pellet plant, upgrading of a sawmill, construction of a

wood yard and the committee worked very closely with the proponent. They

recognized that the product development must be reactive to certain market

conditions.

Yes, there was money released before we received the final market plan, but

we worked closely with the company. We dealt with the Wood Pellet Association of

Canada. The markets were there. They are still there today. It was not the fact,

in my opinion, that the markets were not there; it was that we just needed to

develop access to the markets.

MR. JOYCE: How many pellets has that plant produced for market?

MR. YOUNG: Since the plant has been commissioned and it takes a long

period of time to commission a plant of such large scale it is approximately

about 1,000 or 1,500 tons have been produced. Some of it is still stored on

site. A large portion of it was shipped to Corner Brook Pulp and Paper and

burned in their boiler system and tested there for efficiency and BTU. So, I

would say it is approximately around 1,500 tons have been produced?

MR. JOYCE: How much has been shipped to the European market, as proposed

in the application?

MR. EVANS: At this point, there has been none shipped overseas.

MR. JOYCE: What was the total amount, grants included, of the loan to the

pellet plant operation in Roddickton, the total amount?

MR. EVANS: The total for the loans, the grants, and the equity investment

for Company A was $10 million.

MR. JOYCE: Has any of that been recovered since?

MR. EVANS: No, at this point there has been no repayment. The repayment

plan is not supposed to start until 2014.

MR. JOYCE: How many people are being employed at the pellet plant now?

MR. EVANS: The pellet plant, as you may know, is not operating right now.

The owner is there, and I believe he has a manager on site, and maybe some other

people related to the operation because he is involved with some other woods

industry.

MR. JOYCE: In the Estimates, it was revealed that the government was

paying for the insurance of the property. Is this still correct?

MR. EVANS: At this point, yes, it is still correct.

MR. JOYCE: How much is government paying for insurance of the property? I

think it was $50,000. That was in the Estimates; I am not sure.

MR. EVANS: I stand to be corrected, but I believe the monthly payment is

roughly $10,000.

MR. JOYCE: So it is $120,000 a year?

MR. YOUNG: That is not correct. The total insurance for this year for the

pellet plant alone is approximately $78,000, of which the department has

contributed $50,000 to. I think Jim is a bit mistaken there. The insurance is

$10,000 a month, but it is over a compressed period; it is not for the full

year. The payments have been $10,000 a month though.

MR. JOYCE: Are there any other payments made towards that operation

besides just the pellet plant?

MR. YOUNG: Could you rephrase the question?

MR. JOYCE: Are there any other payments being made? You just said the

pellet plant. Are there any other operations there that the government is

subsidizing the payments?

MR. YOUNG: No, there is no other payment other than the payment we have

made on the insurance.

MR. JOYCE: I will just get back to the Auditor General's report where you

are talking about the markets. I go on page 303 so you can read it. I guess this

is part of the discussion. I will read it quickly.

"The Department provided $9.0 million in funding to Company A although issues

related to long-term viability and sustainability of the project had not been

adequately addressed. For example, the Department's assessment of Company A's

proposal indicated that: there would be issues transporting the wood in a

cost-effective manner; the business strategy presented was based upon optimal

production capacity versus a more reasonable in-depth market analysis; there was

no comprehensive market strategy reflecting both domestic and export market

demands; the company did not have the human resources or training to handle the

expansion predicted; and limited long-term planning was evident. The assessment

concluded that the Province would be taking a significant risk by approving the

funding."

Then, I guess, how can anybody say the marketing plan was comprehensive or

was done and we were just waiting for more information when all of this

information about the funds that was already given to the pellet plant was still

outstanding?

MR. BOWERS: (Inaudible) we are convinced that the committee at the time

did its due diligence, but we do acknowledge that the risk was high. There was a

risk, and that risk was identified in the initial assessment of applications. It

was presented during the presentation of funding.

There was an explicit statement made actually in the presentation in the

Cabinet paper concerning the risk and identifying the high risk. These ventures,

as I am sure you know, are often characterized by a high level of risk, but in

the view of the committee at the time there was a trade-off between accepting

some measure of risk, some uncertainty on markets, and we need to weigh that

against the risk of closure.

At the time, going back in time to 2008, as Jim said, during the downturn, we

had a situation in the Province, particularly in the Northern Peninsula with the

company you referenced earlier, of potential closure, 300-and-something jobs at

risk, and an economy that was based almost exclusively on the forest sector. So

we were weighing that kind of risk against the risk of not having all of the

information on market conditions and the proposal, as you say, that we

acknowledged.

The intent of the program, based around modernization and new, innovative

technologies convinced us that if we could build the foundation there and

stabilize that industry, it would be worthwhile proceeding given the information

we had at that time.

MR. JOYCE: You just mentioned, in your presentation to Cabinet, that

there was a high risk for this project. Is that correct?

MR. BOWERS: We would rate it as high risk for the project, yes. I would

characterize that.

MR. JOYCE: Okay.

CHAIR: Mr. Joyce, we will go on to Mr. Brazil now.

MR. JOYCE: Okay.

MR. BRAZIL: Mr. Chair, I have a couple of points there. While I look at

the Forest Industry Diversification Program, and I see the intent of why it was

set up, I think it would have, and in two points, served a very valued point,

and I do think there are a lot of merits to it, I am trying to get my head

around the major concerns that the Auditor General has about the process of

allocating money. I do realize sometimes you invest in businesses that may not

necessarily work out according to plan and may at the end of the day not be

viable, but the intent is to invest, do due diligence, and make things move

forward so the industry is viable.

So I can get my head around it, and this will probably help my colleagues,

too, give me a better understanding of how the whole process worked before I get

into some particular questions about some of the concerns. Can you just take me

through the process in 2008 it was established how a company would go

through the process and what assessment tools and that you guys would use to

look at the viability before approval and money exchanged hands? Then I will

have a better understanding of where the Auditor General is coming through with

some of his concerns, please.

MR. BOWERS: Okay, thank you.

I can start and maybe my colleagues can add some detail. It is important,

again, to go back to 2008 and realize the industry itself at that time made it

clear to government of the vulnerabilities around the sector. So they were, in

effect, lobbying for support to sustain the industry.

With the announcement of these funding regimes by government at the time,

there was a very rigorous and systematic process established to entertain

proposals. So there were a set of guidelines established, a set of criteria that

any proponent would have to meet. The applications would be delivered based on

those criteria. They would be reviewed by a committee that was established with

input from the lead, by Natural Resources, by our department, with some input

from, at the time INTRD, IBRD today, and some advice from Finance and so forth.

That committee was responsible for assessing the initial applications.

Through the process there was quite a bit of interaction and dialogue back with

proponents to get clarification and elaboration on any point that the committee

wanted to understand better. Then, following the initial assessments there was a

presentation of funding, a formal presentation based on templates that are set

up within the government system for presentation of funding. Eventually, after

full assessment, a recommendation went to Cabinet. So that was the broad

process.

Is there anything maybe specific you could add, Gary?

MR. FORWARD: I would just like to add that as a part of the process there

was a requirement upfront for each mill that was interested in applying for

funding to complete a mill diagnostics. We had a leading research organization

out of Quebec come in and do a complete diagnostic of the sawmills. That

diagnostic was used to evaluate the proposal; but, to say that, we also accepted

ideas from the sawmills outside of the mill diagnostic. So, the mill diagnostic

had provided some direction to the committee in the decision-making process.

MR. BRAZIL: Okay, thank you. It gives me a better understanding.

With that being said, it appeases me that the process initiated would

identify and would cover all the bases to make sure that any money that has been

allocated would have been done in the best interest of investment for the

taxpayers.

With that being said, as you can appreciate, the Auditor General has outlined

exactly some major concerns that identifies that parts of that process were not

followed. Can you give me some explanation? Was it lack of resources? Was it

oversight? Was it misunderstanding or authority? Was it just things went astray?

A number of the things that he identifies, part of the monitoring thing, part of

Cabinet approvals, is there a rational argument or reason why that did not take

place?

MR. BOWERS: I think there are a multitude of issues here because there

are various points raised by the Auditor General, and we respect all of those

points. These projects were complex. We had a change in conditions on a set time

of the evaluation.

To give you an example, at the time of application back in 2008, early 2009,

the pellet market, as an example, was doing very well. The price of pellets was

very high. We had a favourable exchange on the Euro for the dollar in our

favour. So decisions at that time were being made in those conditions or under

those conditions. Rapidly after the banking collapse and the downturn in the

sector, the landscape changed immediately and quickly. We were faced with a

change in condition.

So some of the, let us say, risk it was about managing risk at the time of

going forward entered the equation at that time. There were, and we concurred

that they were, instances where monitoring could have been improved. We had to

move forward with proposals with our best information, but in retrospect we

could have gotten, let us say, better information, but it was the best

information we had at the time. There may have been an oversight on a number of

instances, but overall we stayed very closely to that review process and the

guidance given to us by the committee at the time.

MR. BRAZIL: Okay, thank you on that.

Give me a little bit more insight of the partnership with federal programs,

how that worked, and what impact that had on your funding sources.

MR. BOWERS: Typically for those kinds of projects there is, if not a

requirement, certainly we are encouraged to look for leverage funding so we take

the burden off, let us say, the taxpayer and the Government of the Province. In

our case, one of the key agencies we would engage would be the federal

government through ACOA. Currently, we do a similar approach with RDC now that

RDC is available. The idea of using a dollar to leverage a dollar or leverage

more dollars is part of the strategy in these proposals in terms of coming up

with the full envelope of funding.

This particular project engaged ACOA as a partner in an attempt to leverage

additional funding. That would be a clear example of additional funding through

a partnership. It is a relatively common partnership to engage in, given the

nature of the business here in terms of economic development and trying to

sustain, acquire equipment, employ people, build infrastructure. So, it fit

ACOA's agenda, to some extent at least, and it met our requirements.

MR. BRAZIL: Fair enough, and I do understand when you get into business

like this and you have multiple partners that being diversified also means

maybe, midstream, making changes and adjusting to everybody's policies and

procedures. I can appreciate that, but I do have a concern, as the Auditor

General does, about, particularly as politicians and accountable for the public

purse, how the transparency and accountability was not an even flow.

My first concern right away is, knowing that you needed Cabinet approval for

anything over half a million dollars, why this $780,000 did not go through the

process. Did something go astray? Was there an understanding that you did not

need to go that process, or because there was multiple partners? Did somebody

fall down somewhere along the way?

I need to know, and I think this committee needs to know not only how we got

to this point, but more importantly, as part of this program, how issues like

this cannot happen in the future. If we are going to monitor not only programs

like this; this is an umbrella agency. I want to make sure that other agencies

get the message that policies and procedures have to be followed for a reason.

The Auditor General is the watchdog on that. We serve as the voice of the

watchdog. I need to get my head around that is a substantial issue,

particularly from a Cabinet paper on a program that exists within a department.

MR. EVANS: We feel that the committee met the guidelines under the FIDP

and the approval process. The request for funding was $500,000, and the

committee had the authority to approve that amount of money. There was a

transfer of money that was previously approved by Cabinet $280,000, I believe

that also had approval, but for a different project under the same company.

From our view, we feel that we had the authority to approve the $500,000 and

just use the unused portion of the other approved amount of money. If you go

into that operation today, it is certainly a sawmill under one roof and you

cannot separate two different projects. It is a blended operation and that is

the way we viewed it.

MR. BRAZIL: Okay, fair enough.

MR. BOWERS: If I could add maybe one comment in that because there was

money from the first project that was unused, from an administrative standpoint,

coming to your question about an oversight, I would argue that it was not an

oversight. Administratively, on our books, we ran the two projects as separate

entities. The $500,000 did not require approval because it was below the

threshold and the $280,000 from a separate administrative project was already

approved. When the committee decided to go forward, it was not considered to be

above that threshold for which we would go to Cabinet. So that was the rationale

for the way we approached that particular funding.

MR. BRAZIL: Okay, that is understandable.

Can I ask the Auditor General one quick question, if I could? Mr. Paddon,

when you look at that, was that your staff understanding of two separate

entities?

MR. PADDON: There were certainly two separate projects within for that

one company. In our view, as soon as you made a decision to transfer money from

one project to the other and scope changed, from my perspective, that $780,000

project then should have received some kind of Cabinet oversight because it was

not a $500,000 project. The Cabinet certainly had approved money for the other

project, but as soon as you take it from there and put it to the other one,

Cabinet has not seen anything or made any decision around that.

So in our view, at that point, as soon as it became a bigger project with a

different scope than the one they had approved on the other side, then there

should have been some request to Cabinet for approval.

MR. BRAZIL: Okay, so that is where the misunderstanding or

misinterpretation between how the program itself ran, thinking it had authority

to do that versus under the umbrella it should have been considered one and you

would have had to have gone back.

Okay, I believe my time is up on this one.

CHAIR: Mr. Mitchelmore.

MR. MITCHELMORE: Thank you, Mr. Chair.

It is very interesting to see that we are here today at the Public Accounts

Committee looking at another program that has been administered by the Forestry

and Agrifoods Agency where there are issues with the assessment, the approval of

payment of money, and the monitoring of spending of this money. Last year, the

Public Accounts Committee sat pertaining to the Growing Forward found in the

Auditor General's 2011 report and it had many of the same issues. The

department's response at the time read many of the same commitments to improve

the diligence after reading the report and what we are examining today.

I am cognizant that in 2008 the forest industry in Newfoundland and Labrador

was a very turbulent time, certainly. This program itself, the Forest Industry

Diversification Program, the $15.6 million had set goals and guidelines. To look

at some of them as to the public money that has been expended, we see there are

actually less people employed in the forestry today than what there was at time,

even when there was a crisis and people were highly unemployed. Even though

those jobs were there in numbers, they were technically lost in 2009.

I want to ask the department, around page 296 and 297, about the program

objectives. It lists six points there including, increasing job opportunities

and economic growth within the forest sector; assisting in further expansion

into export markets; net economic benefit to the Province without providing an

unfair competition.

Were these matters accomplished by the $15.6 million expended? How successful

were the programs, the money that was expended to Company A, B, and C? It sounds

like from the discussion that Mr. Joyce had asked, we see two employees who are

at one of the companies, and another company currently is on a temporary

shutdown with a number of employees laid off. Is the industry better off today

than what it was in 2008 because of these investments?

MR. EVANS: I will start, and maybe some of my colleagues can add some

points. Yes, I believe in my view we did meet the objectives. There are

challenges in one area in the Province, in Company A, which we continue to work

with, but we do have a facility there, a very modern facility, and we are

working through the issues with that proponent.

The other investments that were made have really improved the operation of

the other sawmills from a technology point of view and from a product point of

view. They have sustained their employment. Yes, one is temporarily shutdown; I

believe he is up and running again today. That is a totally separate issue.

We are well positioned for the future now. The price of lumber is on the rise

and has increased. So they are taking advantage of the investments that were

made. They are very competitive with their counterparts in the Maritimes and in

Eastern Canada in particular. If we had not done the program, I think we would

be in a different situation right now, and not necessarily a very positive

situation.

MR. MITCHELMORE: I certainly agree with you. I think the department has

made missteps, but I think the industry overall is at a turning point. Because

of the investments that have been made, you will see overall improvement in the

forest industry.

I want to go into specifics on Table 2 on page 299 in the Auditor General's

report. I want to have a better understanding as to Company A, Company B,

as to what was equity, the common shares that government would have in each

company, and what was actually grant dollars or a forgivable loan.

MR. FORWARD: I can begin the answer and somebody else can join in if they

like. For Company A, it was a repayable loan of $7 million; and $2 million of

the $9 million that you see there was a non-repayable investment. That was to

support the wood yard in the region to enable harvesting to continue while the

pellet plant was being constructed.

For Company B, the $2.25 million was a repayable loan. The second project

with Company B was an equity investment where we took shares in the company.

Company C, it is also like an equity investment.

MR. MITCHELMORE: How many shares did you take for that equity loan, and

after? Is that option there for the company after? We have seen with IBRD that

they have done similar investments where they have put equity on the table and

then it could be converted to a loan at a later date.

MR. FORWARD: Yes, you are right, that option is there.

MR. MITCHELMORE: Okay.

What are the rates for all these loans and equity?

MR. FORWARD: The loans are at zero per cent interest, and the equity is

similar. It is just that we would redeem the shares over a period of time.

MR. MITCHELMORE: So there is no actual interest?

MR. FORWARD: Correct.

MR. MITCHELMORE: What, in terms of security, did the Province take in

terms of lending $15.6 million with no interest over that time period?

MR. FORWARD: We have security on components of Company's A, B, and C

plants to secure the investment.

MR. MITCHELMORE: What would you say is the risk exposure? How secure for

the assets, compared to other creditors, would these investments be?

MR. FORWARD: I would say it is I am just trying to think of the three

projects now and just give you a general answer, but I think it is relatively

good security. In some cases we may not be at the top, but we have good security

and we are confident we can recover our investment if we have to.

MR. MITCHELMORE: Okay.

Would that also include the timber rights that would be associated with any

of these companies as security?

MR. YOUNG: No, the way the system is set up here in Newfoundland, each of

the sawmills have an annual operating permit. They are given an annual licence

and that can be withdrawn by the government I should not say at a moment's

notice, but we reserve the right to withdraw permits as we issue them. It is

only an annual permit that is issued each year.

That is an issue with the industry, of securing a secure fibre supply over an

extended period of time. There are a number of mechanisms available for the

Province to issue commercial cutting permits. Right now, for all the companies

that have been mentioned here, they operate on an annual operating permit.

MR. MITCHELMORE: Yes, it seems like that would be very challenging. If

you have five-year forestry plans and you know the annual allowable cuts, if you

could issue five-year licences, then you could go to outside sources like banks,

private investment companies, venture capitalists, or partners to seek

investment rather than looking at the public purse. No company, or very few

companies, are going to look at investing if there is a one-year chance that,

well, at a whim the department could take away that licence or allocation.

MR. EVANS: Just to go back a little bit on the security, the securities

we have are on physical assets in the mill. I believe it is clear. The timber,

you are right, is a one-year annual permit. The department does not withdraw

them on a whim. They are issued annually, that is correct. We only have three

mechanisms to issue an allocation under the legislation, but if a company

performs well on an annual basis their permit is automatically renewed the

following year. In some cases, I am aware that some of the companies do actually

utilize their permit or the volume to get funding from outside sources.

MR. MITCHELMORE: Okay.

In particular, I guess, when approving these applications there was a call

for proposals?

MR. FORWARD: What happened there is that when the program was announced

back in 2008, we had a meeting with the sawmill industry. That briefed them on

the program and laid out the process that would be required to make application

to the fund. From there we received proposals from interested sawmills that

wanted to make application.

MR. MITCHELMORE: How many applications did you receive for this fund?

MR. FORWARD: I am just trying to think, but probably seven or eight,

somewhere in that vicinity.

MR. MITCHELMORE: Did you have an assessment process to determine how the

best proposals were actually getting and how funds would be allocated?

MR. FORWARD: Yes, we did.

MR. MITCHELMORE: Is it possible for the committee to get a copy of your

assessment process?

MR. EVANS: We can provide the assessment process as we have reviewed the

proposals, yes.

MR. MITCHELMORE: Great.

CHAIR: Mr. Mitchelmore, we should move on to Mr. Parsons.

MR. MITCHELMORE: Sure.

MR. K. PARSONS: Good morning, gentlemen, nice to have you here. To tell

you the truth, my knowledge of the forest industry is not like my partners here

in the back row, they are more or less from the West Coast. My forestry job was

getting up every Saturday morning with my father and going in and cutting our

wood for the winter. He always wanted to have a three-year supply, so he had me

up every Saturday morning and doing a bit of wood.

I am very interested in this program, and it seems to me that when I look at

Company A and what was done as an investment and the timing of the investment.

Basically, in 2008, as we all know, the recession hit and maybe it could have

been the worst possible timing to make any kind of investment in anything,

really, when you look at what happened in Europe and where you are.

I just want you to explain to me obviously, there was a lot of due

diligence done to make sure the investment was a proper investment at the time,

but what effects did what happened in 2008, as we know, with all the industry

all over the world. What happened to the forestry industry, and especially the

pellet plant industry, I would imagine it was examined that there was a market.

Just explain to me the effects that happened then, especially in Europe. I think

your markets were in Europe, and what happened there?

MR. BOWERS: Yes, you are right, at the time it was a challenging time.

That challenge is continuing in a sense. We are going through a transformation.

The issue with some of the sawmill industry, particularly around pellets, was

never really markets. The markets were decent, they are continuing to be quite

good, and the trend for future markets is extremely strong. It is more about

being in a competitive position and making the transformation in the sector so

that it is modernized, innovative, and competitive to allow us to compete in

that global marketplace.

The competition is really one, I think it is fair to say, on volume. If you

can produce adequate volume and control, say, transportation costs and so forth

you can compete, but the markets are firm. Things like the price of pellets will

vary, transportation costs will vary, and so forth.

At the time, as I think I alluded to earlier, when the project was initiated

the environment and the conditions were nearly all favourable. The downturn that

happened quickly put some of this at a higher risk, as we talked about. So we

were aware of that risk and the way the committee viewed it at the time, and the

way we are viewing it now, is that we went through a process of modernization

and innovation to strengthen that foundation for that industry.

We have a foundation today for that sawmill industry in the Province that we

did not have before. If we had not made these investments through this fund,

there is a very high likelihood that we would not have a sawmill industry today.

As the sawmill industry develops, it becomes more integrated and fewer larger

mills, and we have a basis today to sustain that industry, primarily through

this funding program.

MR. K. PARSONS: Okay. So since 2008, the sawmill industry, how has it

grown? Money that was coming into the Province through the sawmill industry in

2008 versus 2013, where is it?

MR. BOWERS: It has grown primarily through modernization and

productivity. The productivity is a key factor in being competitive. So we have

fewer mills that are more efficient, let us say. So it is about efficiency and

productivity to a large extent.

MR. K. PARSONS: Okay.

MR. FORWARD: I just want to add, Wade, too, that since 2008 our sawmill

production has increased by about 15 million or 20 million board feet as well.

Also, right now our industry, in my opinion, is very competitive. We have mills

in Newfoundland that would compare to mills anywhere in Atlantic Canada, and

that is because of the FIDF. We have a very good base now to move forward with

the sawmill industry. These mills that are operating today went through some

very, very tough times. Right now, they are in a position to reap the benefits

of the FIDF.

MR. K. PARSONS: Okay, that is good.

So you are saying our investments are after improving the industry and made

it more competitive in the marketplace?

MR. FORWARD: Sure.

MR. K. PARSONS: Okay.

MR. BOWERS: (Inaudible).

MR. K. PARSONS: Okay, go ahead.

MR. BOWERS: I have one more point related to that. On the investment side

there is that key component of direct investments through this program, but I

think it is important not to lose sight of a different kind of investment. That

is for many, many years the forest sector made huge investments, millions of

dollars, into silviculture programs and growing the forest. We equally made

multi-million dollar investments in protecting that resource. So we grow it and

we protect it for harvest. We need to realize the full potential of those

investments, and one of the ways we are realizing those investments is through

the modernization and the development of our sawmill industry.

MR. K. PARSONS: Yes, I do a bit of hunting up in the Millertown area in

Central Newfoundland. I can see there is silviculture that really came in, and

where it was cut over twenty years ago now there are trees. You can see big

changes in investments in silviculture.

I want to go back to the pellet plant. In your opinion, is there going to be

a market? Is this going to be viable in the future?

MR. EVANS: We have a state-of-the-art facility there in that area. The

markets are there, certainly very strong as Wade alluded to, and predicted to

increase. There are challenges around the pricing right now, shipping costs, and

there are issues in that particular area that we continue to work through with

the proponent. It is an ongoing process. Personally, I feel there will be an

operation there, a viable operation, in the near future.

MR. K. PARSONS: Okay, because I know that on the Northern Peninsula where

my colleague is from the forest industry one time was one of the major employers

on the whole Northern Peninsula. I can understand why we made the investment

that we did. When you take 300 or 400 people out of employment, it is important

that you do invest in that kind of industry. So is it a positive thing in the

future that you can see for this pellet plant, because obviously we need to get

the employment in any part of rural Newfoundland?

MR. EVANS: Yes, that is our objective, to have that plant up and running,

maintain and create employment in the area, utilize the forest there to the best

of our ability, and maximize production. Yes, we feel confident, and as I said

earlier, we continue to work with the proponent to make it a viable operation

and get it up and running.

MR. K. PARSONS: Okay.

Your program, is it active today? The diversification program, is there any

activity on it today?

MR. EVANS: The funding aspect has ceased, but we continue to monitor the

program. There are repayment requirements for some of the loans and things. I do

not know if anybody else wants to add anything to that. It is still active from

that perspective, and we still monitor and work with the sawmills on a regular

basis anyway.

MR. K. PARSONS: Okay.

In your opening statements you said the sawmill industry and the pulp and

paper industry feed off of each other. How does that work?

MR. EVANS: Yes, they have a very strong symbiotic relationship. I will

put it that way. The sawmill industry relies on sawlogs from the newsprint

industry in a significant way. They sell or trade sawlogs to the sawmills. In

turn, the sawmills produce pulp chips and small-diameter round pulpwood, and

transport it back to the newsprint mill.

So it is always an exchange of fibre in the Province. If the newsprint

industry goes down, it is going to have a huge impact on the sawmill industry

because there is no outlet for pulp chips and pulpwood. Similarly, if the

sawmill industry goes down, it is going to have a huge impact on the newsprint

industry because of the requirement for sawlogs.

MR. K. PARSONS: So a lot of the sawlogs that are going to, say, places

like Sexton's and places like that are coming from Corner Brook and area?

MR. EVANS: Yes, that is correct. He has a number of sources: the

newsprint industry would be one; his own operations would be another. He

purchases sawlogs from other Crown land operators as well, so a lot of different

sources.

MR. K. PARSONS: Okay.

I am good on my questions.

CHAIR: Mr. Joyce.

MR. JOYCE: Yes, I will just ask a few more general questions before I get

in.

I heard the department say they did due diligence. Are there any outstanding

bills outside right now that are owned by this company because of this, say in

Corner Brook or in the surrounding area? I am sure you did an assessment to

ensure all the payments were made here. Are there any outstanding payments owed?

MR. EVANS: Just to clarify, you mean to other private industry?

MR. JOYCE: No, other companies from this pellet plant?

MR. EVANS: I will have to defer that question to somebody else.

MR. JOYCE: I am sure you did your assessment that all the money was spent

and the payment was made because it is government funds. Are there any

outstanding?

MR. YOUNG: Yes, there are outstanding invoices that are due to some

companies around Corner Brook for fabrication and for supplies. Our contribution

in the Department of Natural Resources was $9 million that went into the

project, but the project is much larger than $9 million. The proponent, in this

case Company A, had to seek alternative funding. He had to contribute his own

funds into the project.

As we explained earlier, unfortunately, the pellet plant is idle. The whole

operation is idle right now and there are some invoices that need to be paid by

the proponent. So, the answer is yes.

MR. JOYCE: Can you tell me how much?

MR. YOUNG: Unfortunately, no, I cannot. We would probably have to sit

with Company A and review his year-end financials. They are not really due to us

until when, Gary?

MR. JOYCE: Okay.

Are there any plans, or is there any talk of selling this pellet plant? Are

there any proposals put forth to sell the pellet plant itself and move it out of

Roddickton?

MR. EVANS: I guess the knowledge I have on the operation there, there are

always different proponents looking at proposals in the Province, and I am not

aware of any right now that would be looking to purchase that operation. Not to

say that it would not happen or it has not been inquired in the past, but I am

not aware of any right now.

MR. JOYCE: In the last six months, eight months, are you aware of any?

MR. EVANS: As I said, over the last two years since I have been in this

role, there are always proponents coming into the Province looking for

opportunity. I am sure there have been people looking at that particular

operation. Nothing concrete has come from that yet, but I am not aware of any

right at this moment.

MR. JOYCE: Okay.

I am just going to go through the Executive

Summary, a few things, and there

was one thing that was mentioned just then about how to secure funds. I will go

to page 294, Payments, "The Department did not always ensure that all sources of

funding were confirmed or that the applicant's contribution was actually

invested in the project prior to the disbursement of funds."

Is that accurate?

MR. EVANS: I will start the response, and maybe we can get some input.

There were occasions that funding from the applicants was not received or

confirmed upfront, but it was an ongoing process and a very complex project. The

committee reviewed this and was in constant contact with the proponent. We are

confident and we can demonstrate that the required contributions have been made

by the applicants and, in some cases, exceeded what they were expected to

contribute. So, yes, they were, eventually, but not entirely upfront in every

case.

MR. BOWERS: If I could add a point there on that particular issue

concerning the applicant. We did extend a number of deadlines for the applicant

in a few instances, and it was primarily because of the change in conditions

that we were trying to create a level of flexibility under the program so we had

what I would sort of characterize, I guess, as a sort of staggered approach to

the application process.

In one company at least, the company's financial status, there was a

condition where we required or preferred a contribution upfront, but we waived

that because we knew that as the project developed the company would be in a

better position to deliver that contribution. That was why we attempted to try

to allow some flexibility on that particular issue.

MR. JOYCE: Next, "The Department did not have adequate guidelines related

to determining which expenditures were eligible under the Program. For example,

the Department permitted the companies to submit invoices that were dated prior

to the date the application was submitted and also prior to the date the funding

agreement was signed."

Is this correct?

MR. BOWERS: It is not correct in the true sense. What the committee did,

they acknowledged that expenditures before the final agreements might be

eligible. So they made it clear to the proponent that if you have an expenditure

it may be eligible, if it meets the criteria, but that level of risk and

assuming that risk really fell to the proponent.

The committee did not say or grant the applicant the privilege or simply

invoicing before that time period. They just said you may be eligible. That

would have to be accessed, based on the nature of the invoice and its direct

relevance to the project.

MR. JOYCE: I ask the Auditor General: Is that correct? We are hearing now

that it is not correct. Were there invoices and were payments given for work

that was done prior to the date the application was submitted and prior to the

date the funding agreement was signed?

MR. PADDON: I do not think we are saying different things here. My

understanding is that there were expenditures made by proponents prior to signed

agreements. If I hear what I think Mr. Bowers is saying is that they indicated

to the company that they could make the payments, but there was a risk that they

were not going to get funded once the agreement was signed. Perhaps, at the end

of the day, they did allow those payments to be eligible.

Our point is really that typically, in my experience, there are two points in

time: one is the point up to when you make the application; then there is the

point that the application is approved. So if you make an expenditure before you

even make an application, there is almost an inference that perhaps you cannot

assume there is going to be a program unless you are going to apply for it, so

any payments that you made before that should be on your own nickel, as it were.

There is perhaps a grey area between when you apply and when it is approved

that there is some flexibility that you could go back and say okay, we will

allow it. Typically what I have seen in other programs that are administered by

governments is that you certainly do not get funding against expenditures you

make before you apply to the program, and in a lot of instances not even up

until it is approved. That is a bit of a judgment call.

MR. JOYCE: So before they even applied for the program there are

expenditures that were approved after they applied. Am I correct on that?

MR. PADDON: Yes, if you look at Table 5 on page 307, we have indicated

here that for two of the projects there were some expenditures made of about

$306,000 that were made before the application was received; and then prior to

the agreement being signed, $1.7 million, which includes $306,000. That is a

subset.

MR. BOWERS: (Inaudible) one more note on that. When invoices came in,

they were fully assessed in terms of their relevance to the project, but the key

point I should make is that at the time of that downturn there were a lot of

pieces of equipment on the market and auctions on the market that these

companies were able to take advantage of to get discounted equipment for these

mills at a very low, discounted rate. The result or the implication of applying

that invoice allowed government to save enormous amounts of money. There were

huge savings involved in that decision.

MR. JOYCE: Excuse me, but I have seen a lot of government programs and

any money spent prior to the application will not be accepted, and we see it all

the time. I am not saying you are not correct, Mr. Bowers, but it is pretty hard

for me to say that you went out and bought a piece of equipment for a program

you did not even know was going to happen. There was not even a program and you

go out and buy a piece of equipment for a program that may come in the future.

MR. EVANS: No, the program was announced and we had consulted the sawmill

industry at that point. They were aware of the program, but as the Auditor

General pointed out, there were some invoices permitted before applications were

received.

MR. JOYCE: Okay.

MR. EVANS: We felt comfortable in that decision.

MR. JOYCE: I just have two more questions before I move on.

On page 293, "The application and business plan for Company A was incomplete

and did not include required information regarding related companies, debts

owning to the Province and a detailed market analysis." Is that correct?

Page 293, the second last paragraph, "The application and business plan for

Company A"

MR. YOUNG: I can address this question.

For Company A, that is correct. The application and business plan that were

received, the business plan that was attached to the application process did

contain incomplete information. We recognized that as a committee, and through

our due diligence and through the financial analysis that was completed and in

this case it is called a presentation of funding.

During that process of reviewing the financial information of the applicant,

most current information was used; 2008-2009 audited financial statements, net

present worth, statements were used as most up to date. As well, we conferred

with the applicant to get additional information around markets and things. It

is correct.

In the application process there was some incomplete information; however,

when we took it to the next step, when we reviewed the application and did the

presentation of funding, did the financial analysis of the project, all of that

information was provided and the most current and up-to-date information at that

time was used.

MR. JOYCE: You mentioned audit statements, 2008. Did you go back to 2005

as was required?

MR. YOUNG: Yes, 2005 statements were attached to the application. Then we

took it from and during the presentation of funding we used the most current

information.

MR. JOYCE: I will discuss that later.

Next, "The Department reimbursed Company A approximately $1 million related

to claims that included the Harmonized Sales Tax (HST) on the invoices claim.

The HST was eligible for an input tax credit and was, therefore, recoverable

from the Federal Government by the company. As a result, the Department paid the

company approximately $1.0 million that should not have been considered an

eligible expense of the project." Is that correct?

MR. EVANS: I just want to point out, the FIDP guidelines did not specify

the inclusion or exclusion of taxes on total project costs but we do acknowledge

that it happened, unintentionally. It was an oversight on our part.

Since the commencement of the projects, all tax credits have been reinvested

into the project by the proponent. We have continued to work with him, continued

to review his invoices, and today we are advised that the proponent's

contribution, including the HST, the rebate he received, equals a $2.9 million

investment by that proponent.

CHAIR: We should move on to Mr. Cross now.

MR. JOYCE: Yes.

MR. CROSS: Thank you, Mr. Chair.

Again, I almost need to echo comments Mr. Parsons made, that my experience

with the forestry industry is very limited. Bonavista North did have a very rich

history, the Indian Bay area and all through Bonavista North and Carmanville

area, up to 1961, and then a fire wiped us right out. Through my years of

growing up, we saw white sticks in the woods. It was not until I went to the

Northern Peninsula to teach in 1979, that I actually knew there was a tree in

Newfoundland big enough that you could not put your arms around it. Before that,

it was bush and rock. I guess my history is pretty limited there.

I looked at this closely and studied it somewhat, as I could. In looking at

2008, when this program was initiated, the objectives like to compete in the

global economy, develop specific new products to make and meet new market

opportunities and to stabilize the forestry industry whereby we cannot

absolutely, categorically say we have done all these things. We can say, if what

I hear is right here this morning, that we are poised on the brink of this now

and by doing this program we are poised to take opportunities that we would not

be able to take advantage of if this was not in place.

We also looked at the complexity, the issues and the risk, and all of these

things that were associated with this program in its inception and as it grew,

but through the whole process, because of the complexity and these issues, there

were many of what I would probably term and the word has come up of missteps

throughout the process.

Mr. Parsons also asked a question: What funding applications are you dealing

with today, sort of not active that way, proposals for funding today? Through

the recommendations of all these missteps that were created, I want to look at:

How are we ready for or what action is taken in the department, if we did get to

active funding applications again today, that the recommendations from the

Auditor General's Office have been met or have been taken and a growing process

had taken place?

If you could indulge me almost on a hypothetical hunt for a few moments, I

want to look at the various recommendations for the different sections and just

ask that question.

The first area, Approval and Assessment of Applications, if we look through

the report, and it is complex, we talked about information not being totally

complete on applications, business plans being incomplete or being redone and

added to, and funding not properly approved in a couple of instances. The major

recommendation in this area was that, "The Department should ensure project

proposals are properly assessed before being approved to ensure all projects

meet the criteria established for funding"

If this was going to happen today and we were going to repeat 2008, 2009, or

2010 again, how have you reacted to these statements to prepare for that or are

there changes that you have done?

MR. BOWERS: I think you have characterized it really well. There were

lessons learned here and there were some oversights that we needed to and we are

addressing. There is no question.

One of the things we are confident on is the actual assessment process

itself. It was fairly rigorous. We are comfortable with that assessment, but we

realized there is a need going forward to put a lot of emphasis on the outcomes

and the benefits, that we derive and understand what those benefits should be.

We can do more there by, say, more detailed site visits, for instance, to some

of these operations to understand better the progress that is being made, to

make sure we have maybe additional progress reports along the way so we hit

certain milestones along the way that can be improved. We recognize that.

At the end of the day, there is a need for our department, and we are looking

at this, to develop maybe an accountability framework so we can actually get a

better measure of progress. So we compare the objectives of the program to the

outcomes and the final product, and have some measures there that are a little

more tangible. We see areas there where we are continuing to improve. We have

learned a number of points through this exercise, through this particular

program, where that can be improved.

In the broad sense, in terms of application process, committee review and the

right questions to ask, we are still very confident that fundamental process is

very solid around this project.

MR. CROSS: Okay.

Obviously, we also talked about some of the changing conditions that were

beyond the control of the forest industry here in Newfoundland with the pellet

prices, the prices they could obtain, the rates of the Euro, and also this

entire downturn in the economy in Europe. All of these things that were sort of

out of our control, at the end the whole element of risk is still there.

When you make a decision based on all of this sound background, there is

still a risk that it is still beyond your control. You make that step and

confirm that, yes, we are going to go ahead with funding because of all the

process that has gone. Then that risk is ultimately very high and you still have

to look back, and we know what hindsight is; it is twenty-twenty compared to

making that decision at the point in time. It is, again, like a gamble in some

cases, but if you mitigate all of the other factors I guess there is still a

degree of hope that things will work out.

The second part of this with regard to payments and approvals, again there

are many indications of ideas that were not quite satisfactory to the eye of the

Auditor General. On page 310, the recommendations are there, like to, "confirm

all sources of funding prior to project approval" or to develop program

guidelines that address that. Again, how would that be dealt with, if this was

repeated or for the future? Because I know that is what we are looking at, is

how to correct some of this.

MR. EVANS: Yes, we recognize and certainly acknowledge and accept the

recommendations of the Auditor General. As Mr. Bowers mentioned, there were some

lessons learned here on our part and the confirmation of sources of funding at

the time, from outside sources, we felt confident that they were there, but we

did not have that letter in our hands sort of thing. That will be something that

will be changed if we have a future program, that type of rigour I mean, and to

adhere to strict guidelines, a very systematic approach to it, and adhere to the

guidelines that we develop. Certainly if we have another program there will be

improvements in the processes that we lay out.

MR. CROSS: Okay, and I think one of my colleagues talked about the

monitoring that was referred, to so I think the answer to any question I might

have had in that area has already been addressed.

Again, just to say that my knowledge of the intricacies of all of this is not

great, I am intrigued by the type of questions that my colleagues are asking and

I look to their expertise to draw out the answers that we need. From these

general terms I am satisfied with that intent and to know that as we move

forward consciousness is built in to make sure that maybe some of these missed

steps will not be there if things repeat. That is the growing and the learning

process. So I defer the rest of the time to the details of my colleagues.

Thank you, Mr. Chair.

CHAIR: Mr. Mitchelmore.

MR. MITCHELMORE: Thank you.

I would like to ask a question on page 301 relating to the business plan

being incomplete. For Company A, it talks about a personal net worth statement

that was undated and only contained information to 2005. However, the

application was received in June 2009.

I am just wondering, why such an oversight by your officials, or looking at

especially expending $9 million and not knowing the worth of an individual or

the companies and subsidiaries?

MR. BOWERS We acknowledge that the personal net worth statement should

have been included in that initial application, in that very first application.

We did detect that and we did go back to the proponent to get that extra

information so that by the time we submitted the presentation of funding that

extra information was included.

MR. MITCHELMORE: Okay.

When it comes to the business plan here, obviously the application was

submitted in June of 2009 and it talks about that the company had requested on

March 31, 2010 a more comprehensive marketing plan.

What actually pushed the department to make that request?

MR. BOWERS: My understanding is that at the time the Committee reviewed

the initial application with its marketing plan we identified some deficiencies

in that plan. The plan was not as comprehensive as we wanted so we went back for

extra information, for a more comprehensive marketing plan basically, to feed

into the proposal.

MR. MITCHELMORE: Initially, were sales to come domestically?

MR. YOUNG: Actually, there was a three-pronged market plan that was

proposed initially by Company A. Part of the sales market identified was local

sales for the residential market as well as the industrial market here in

Newfoundland. Another portion of the market plan consisted of sales into

Atlantic Canada, into the bag market for the residential market, so there was an

opportunity there. The third component was to explore the opportunity to export

into the European market. That would be into the larger bulk sales into Europe.

Actually, there was a three-pronged marketing plan that was initially proposed.

MR. MITCHELMORE: Right.

It just seems from a series of events, having approved funds, then go back

and request more detailed markets and things like that, after expending nearly

all of the funds, I am just wondering about the dynamics. What significantly

changed from the initial marketing plan to the current marketing plan that was

submitted? Did it move from the industrial market to a more export-focussed

market?

It goes on to say here, "We note that since January 2012, the pellet plant

has been idle due to a number of issues, one of which was inadequate shipping

and storage capabilities." So I would just like to know the reasoning and if the

marketing plan is to ship to Europe, I mean the new one that had been submitted?

Was shipping and transportation looked at?

MR. BOWERS: I think the marketing plan initially, as I said, failed to

capture the market potential. We, as a committee and as a department, knew that

market potential. We were aware that the market potential for pellets was quite

high and growing, but that was not reflected in that initial plan. So we wanted

the proponent to capture that. We knew that information based on our in-house

research, but also through some consultation with the Wood Pellet Association of

Canada. So we had a high degree of confidence around the market, but we were not

seeing that expressed in that initial market so we came back.

In terms of the shipping at the time, when we evaluated that the initial plan

on shipping and storage was targeted in 2008 to both Stephenville and/or Corner

Brook, those ports. So given the volumes possible, the market conditions, the

price of pellets, and the exchange rate, we knew at that time that those sites

had a high potential for economic success. So we needed to see those details

better laid out in the plan. So that was the reason why we wanted that

elaboration on that second market plan with more emphasis on the market

potential.

MR. MITCHELMORE: Right.

You did mention a 2008 report. I just want to go back before this proposal to

The Telegram

article that was published, Roddickton Pumped About Pellet

Plant, May 8, 2008, talking about everything being rosy, although, "Details of

the planned pellet plant are sketchy, but 40,000 cubic metres of pulpwood are

expected to be needed from the Northern Peninsula in the coming year." It goes

on and talks about in detail how the Province's revitalization plan, which would

be this particular plan we are talking about, "allocates millions of dollars

for finding new markets, creating business plans, equipment for sawlogs, the

plan for pulpwood" that would create big changes in the industry.

It talked about the Integrated Forest Products Group, a coalition of

Newfoundland's seven sawmills, submitted a proposal intended to save their

industry to the Natural Resources Minister and the Innovation, Trade Minister.

It called for three pellet plants across the Province, built by industry.

Government would, in turn, convert its buildings near the plant, such as

hospitals or schools, to pellet heat and provide a guaranteed market.

The benefits, according to the President of the IFPG, would be a market for

pulpwood created and the government would save on heating costs. Pellet plant

heat would be approximately half of oil heating at current prices. The

government commissioned a cost-benefit analysis of converting public buildings

to pellet heat.

I would like to request that we receive a copy of that report that was

commissioned. It says from this report, government or industry would get a

return on their investment, converting from oil to pellet heat, within three to

four years.

This was all back in 2008. I am just wondering: If this report was already

commissioned in 2008 to show that public buildings could be converted, what

actually was required to go back to the drawing board when it came to markets?

It states in that

article that you could actually fill the market for three

pellet plants, domestically.

MR. EVANS: I am not familiar with the

article that you just quoted from.

Not being in the role, I am not clear on that analysis paper but we will

investigate that. If it is available, we will provide it to you.

I just want to point out there are some complexities, as you may know, about

converting oil-burning facilities to wood pellets. There are actually two

commercial buildings here on the Avalon: nurseries that are using pellets today;

and we have a small government facility on Brookfield Road where we are

utilizing pellets, or will be shortly.

There are a lot of complexities around the conversions, a lot of capital

investment required upfront, but we still continue, I guess, to explore those

options. That is still being continued by the department or explored.

MR. MITCHELMORE: Payback for those was stated at three to four years. If

we look at the capital expenditures of the government over a period of time in

building new hospitals, new schools, that would not be converting, that would be

using new technology.

I guess my question around this is that if the government approved this

money, had already expended it, which department did not do its due diligence

here when it came to looking at allowing a pellet plant to be idle for a number

of issues because of inadequate shipping and storage capabilities? Was this

something that was missed in the initial assessment or what is the barrier

there, I guess?

This is on page 302. What are the issues, I guess? The Auditor General notes,

"due to a number of issues, one of which was inadequate shipping and storage

capabilities."

MR. YOUNG: I think the answer to your question goes right back to the

opening statements by Jim and Wade. It is really about economics. That is what

it comes down to.

At the time of 2008 and 2009, the economics made sense to be exporting to

Europe out of the West Coast of Newfoundland. You could afford to transport the

pellets from the Northern Peninsula down to Corner Brook and export it, bulk

exports. Things have changed significantly. The euro has changed from $1.80 down

to about $1.29 now. The shipping costs to Europe has dramatically increased in

the last three or four years. The price of fuel for those large ships has gone

up significantly. So, those conditions have changed over the past number of

three or four years.

The opportunity to ship pellets via truck over any extended period to a port

is very difficult. The math gets really poor when you do that. Because the

conditions have changed in Europe, as well the falling price of wood pellets

initially, in 2008, we were looking at around $220 a ton, FOB, in Rotherham.

That has significantly dropped since then. It is around $160 or $170 now,

depending on the agency that you are dealing with, the energy company. The math

is different now.

Is there an opportunity to ship pellets from the Northern Peninsula out of a

port here on the West Coast? No, I do not think so. That is different.

What has also changed is the size of the vessels that would be used.

Initially, back in 2008 and 2009, we were looking at 8,000 or 9,000 ton vessels

that could ship to Europe. Again, that has changed dramatically. What we have

seen now is those vessels are not readily available any more. A lot of the

energy companies are moving towards the large they are called Ready-max

vessels, which handle about 25,000 to 40,000 pellets in a shipment.

The math has changed; the logistics has changed dramatically. For those

reasons, the conditions that were set up in 2008 and what is real now in 2013 is

dramatically different. You have to change your business plan and your tactics

as conditions change in the global market. That is the answer.

MR. FORWARD: Just a comment on the industrial conversions. There are some

issues there. There are some opportunities there, but it is a bit like a chicken

and egg thing and I think what we have found is that it requires huge

investments to move into burning pellets in an industrial situation. I think

that people are reluctant to move to that way, until you see more pellets being

produced in the Province.

It is a bit of the chicken and egg. You would not go out and buy an oil

furnace if you did not have any oil available. So, it is very similar to a

chicken and egg. We need to get the industry built up enough so that people have

confidence in the supply. I think that is one of the bigger issues.

MR. MITCHELMORE: Yes, there are certainly long-term contracts to be had

in Europe and in the United States for multi-year shipping and export; that is

quite evident in the world market.

CHAIR: Mr. Mitchelmore, we should go to a government member now.

MR. MITCHELMORE: Yes, Sir.

MR. K. PARSONS: I have to say this is a very interesting conversation we

are having here this morning. I have learned quite a lot.

You talked earlier about there were three phases, you looked at domestic and

you looked at probably Atlantic Canada markets and European markets. What has

changed since 2008 for our domestic market here in Newfoundland? I guess, in

2008, you must have looked at saying okay, the possibilities of what we could

sell in Newfoundland versus what we are selling today. Where are we to there

with that?

MR. EVANS: I will start with the response. The domestic market in our

Province is very small and the commercial facility producing pellets would have

to the economics would not be there just to supply the domestic market alone,

because you need volume to be profitable. I would think the Atlantic market,

there are producers in Atlantic Canada and in Eastern Canada for sure, that the

trucking costs and the cost of pellets itself, they can probably put it in

Atlantic Canada cheaper than we can from the Island here.

I do not know, Wade, if you want to add anything more to that.

MR. FORWARD: The market for domestic pellets was very small in 2008. The

Province had a small program where we encouraged people to buy wood pellet

appliances, and we had some success with that. I would think the market in the

Province now is probably 3,000 or 4,000 tons of wood pellets and some that is

being supplied by our local producers, but the local market will never be able

to consume the large volumes that are required for a large size of pellet plant.

It can help, but it will never be able to absorb 40,000 or 50,000 tons and you

would have to move into industrial applications in order to achieve that.

MR. K. PARSONS: Okay.

Mr. Mitchelmore just read an

article there from The Telegram and it

suggested that it is a viable industry and going to be a growing industry, so

your forecasts obviously in 2008 versus what they are today are a lot different.

The forecast that you had there, the pellets just did not grow here or did not

fly off the shelves like you thought they were?

MR. FORWARD: I think in 2008 and 2009 when we commenced the program we

probably assumed the uptake would be a little more. Some of the issues are that

these wood-pellet stoves are expensive and a lot more expensive than a

conventional woodstove. That is one of the impediments, I think, for moving

forward, but there have been some real interest in wood-pellet stoves in the

Province, and we see that growing. So what we initiated through the wood pellet

rebate program has been good, and I think it has introduced wood-pellet stoves

into the Province. I think we can see that grow in the future.

MR. K. PARSONS: Okay.

Just a question now out of curiosity, really: What would be the difference

between, say, the cost of oil versus wood pellets? If I was going to build a

home tomorrow and I wanted to use wood pellets as my source of heat versus oil,

what is the difference?

MR. YOUNG: I can handle that one. I have a wood stove and that.

Basically, I have a really modern home on the West Coast and my heating bill now

is around $1,000 a year when I am heating my house with wood pellets. Most of

the wood pellets are around $5 a bag, a forty pound bag. In comparison to

previously, when the price of oil was higher than what it is right now, my

heating bill was around $3,500 a year. I have since paid for my stove within two

heating seasons. I see a real benefit and I am encouraging people to come,

visit, and see the technology that I am using.

That is just space heating. The real savings are in boiler systems. The

technology that is out there now, there are probably about half a dozen or ten

homes or residents in the Province now that use wood pellets through a boiler

system where the heat is radiation heat sort of thing. That is the way to go. If

you are going to do a new facility or a new home, you would look at a boiler

system that would be heated with wood pellets. It is very, very competitive to

oil.

In terms of electricity, it is still competitive with electricity; however

the payback time would be significantly longer than it would be if you were

burning oil. Then there is the whole carbon issue that you would have to look at

as an individual.

MR. K. PARSONS: How about for storage? I look at when I grew up; we burnt

wood and had the teepee behind the house type of thing. So for wood pellets, you

would have how much storage and how much burning? Do you have to have a lot of

it stored there in order to burn it? How does it work?

MR. YOUNG: No, unlike firewood where historically we plan a year in

advance, I plan about a week in advance. I store probably twenty or thirty bags

at a time in my garage, which take up no more space than this desk I am leaning

on here. Because of the availability, initially in 2008 when we tried to put the

pellet rebate program out, there were issues in availability of pellets around

the Province. You cannot ignore that. Since then, almost all of the building

supply stores and the Wal-Marts, wood pellets are readily available from of a

number of distributors or producers outside of Newfoundland as well as within

Newfoundland.

So storage is not an issue, or it is a small issue, availability is no longer

an issue, either, and the prices are going down. As more competitors are in

there you see the prices starting to drop a little bit on the purchase price.

MR. K. PARSONS: You had a week's supply. My father used to like to have a

three-year supply of wood cut. So he had us in the woods quite a bit.

Just the pellets itself, are all the pellets that you buy at Wal-Mart and

everywhere else, are they all produced here in Newfoundland, or most of it?

MR. YOUNG: No, they are not. Unfortunately there are real issues with

distribution of goods in Newfoundland, and if anybody is familiar with how

Canadian Tire or Wal-Mart operate, it is significantly different. We were a bit

nave in thinking that we would be able to tap into the Wal-Marts and to the

Kents here in Newfoundland with a local product. Unfortunately, most of the

distribution is done in Truro and it is done in and around Nova Scotia and that,

so goods in Newfoundland would have to flow up to Truro and then back to

Newfoundland again for it to be distributed. That is a real eye-opener. So

because of the distribution system set up by Wal-Mart, Kent, and a few other

suppliers, Canadian Tire particularly, they feed off Atlantic Canada, and it is

just the way that it is set up.

So you see a lot of pellets produced in New Brunswick, Quebec, Nova Scotia,

and here in Newfoundland being sold. It is tough for the local producers to get

into the market. Most of the sales that are being done here in Newfoundland are

through purchased direct sales, going through the producer and purchasing, such

as the one in Bishop's Falls. All of his sales are out of his facility, pretty

well the same thing it is with Cottles Island that he sells. He did have some

success with Sobeys and was able to tap into that market for the smaller bags,

as well as the larger bags. He did have some success in that. It was limited

success. I am not aware if his contract with Sobeys is still standing. I am not

sure. I would have to check on that.

MR. K. PARSONS: What is the total production of wood pellets now in the

Province?

MR. YOUNG: In the Province right now, like I said, we have two facilities

that are operating. The one in Bishop's Falls would probably produce around

1,000 to 1,200 tons a year. Cottle's Island in Summerford has a capacity to

produce around 10,000 tons. They have never achieved that capacity. They vary

from year to year. I would say they will probably produce around 2,500 to 3,000

tons of pellets this year.

MR. K. PARSONS: Okay.

I have a question for the Auditor General. I know this particular one we are

dealing with here this morning is a lot different from what we have been dealing

with in the past. It is more or less a program type thing, when you went in and

looked at different expenditures and how they were expending their money, for

example, cellphones and different things like this. I guess this program is a

little bit different when you went and did your investigation, because mainly we

are looking at three companies and how it was done here. How do you feel with

the response you have received from the department?

MR. PADDON: It is really difficult to say, because you are right, it is a

bit unique where this was a one-off program and the program has since been

discontinued.

I was just thinking about how we would evaluate, I guess, the department's

response to our recommendations. It might be a bit difficult to look at anything

definitive, unless we could look at similar programs that were perhaps currently

being administered. We will have to sort of think a little bit about that.

I think it would be difficult to be able to definitively say, yes, they have

taken the appropriate action. I do not think it is because they necessarily

would not want to. It is that you really only can look at it once you have a

program that you are going to administer, and I am not quite sure what the

agency has on the go at this point in time. We will have to see when we get

there.

MR. K. PARSONS: Yes. It is going to be very difficult to go back and do

your two-year assessment too, afterwards, even when

MR. PADDON: Yes, you cannot go back to this particular program because it

is over.

MR. K. PARSONS: No, you cannot go back to this program. It is not there,

so there is no judge to what it is.

In the future, is there any more? Do you think this program is going to be

used again in the future?

MR. EVANS: I cannot predict that. From a forestry perspective, it depends

on the need I guess, and the budget process.

We are involved, from an Agrifoods perspective, in the agency on a Growing

Forward 2 program. It is another five-year funding program for the agriculture

and Agrifoods business here in the Province. We were here last year under

Growing Forward one. That is an opportunity there, and there are other funding

programs in Agrifoods as well, but forestry right now is very limited at this

point.

MR. K. PARSONS: Okay.

The whole program itself, diversification program, obviously there was a huge

investment in these companies. What do you see this investment? Do you think it

was a good investment? Do you think we made our money? I know the sawmill

industry, as you indicated before, has tapped into the markets and without the

investments that were made. The overall program, in general, how do you feel

that it worked?

MR. EVANS: My opinion is that it was very positive for the sawmill

industry. They are well positioned now. They can compete with their counterparts

in Atlantic Canada or Eastern Canada. They are taking advantage of the higher

lumber prices and doing very well. They have diversified their product in some

cases and sustained the employment levels that they have traditionally held.

The one on Company A, we have a good facility there. It is poised, and we

continue to work with the proponent to get it up and running. It is not

operating yet today, but we are confident and optimistic that it will be into

the future. From my perspective, it was a very positive and successful program.

MR. K. PARSONS: Okay.

The forest industry is such a different industry, if you look at the fishing

industry and what happened, and basically the same thing with the pulpwood. You

had three large mills here in the Province and then all of a sudden it is gone.

It is something like the cod fishery, gone, but at least the fishery could fall

on crab and other species to compensate for that. The forest industry, the only

thing since the pulp industry has gone where it is, is the sawmill industry

where you are looking at.

What was the employment, say, before 2008 in the whole industry, as such?

CHAIR: Mr. Parsons, we should soon take our morning break.

MR. K. PARSONS: Okay, no problem. If you could just answer that question,

that is all.

MR. EVANS: I cannot definitively quote an answer. We had three newsprint

mills and eight integrated sawmills, so it certainly would be higher than it is

today. We say right now in the whole industry there are close to 4,000 direct

and indirect, and induced jobs created in the Province. So it was much higher in

2008, I am sure.

MR. K. PARSONS: Okay.

It is a huge industry, obviously, still with 4,000 people employed in it. So

it is very important to the whole Province.

MR. EVANS: Yes.

MR. K. PARSONS: All right, I thank you.

MR. EVANS: Thank you.

CHAIR: We will resume in, let's say fifteen minutes. You never know; it

is likely going to be a long day, so let's take fifteen.

Recess

CHAIR: When we broke, we concluded with Mr. Parsons, so we will take up

with Mr. Joyce.

MR. JOYCE: Thank you, Mr. Chair.

First of all, I just want it on the record that we are here today asking my

assumption is most of the people who are here from the department were not even

a part of this decision making or just going through the information that has

been provided here. There are two who were part of the decision and two who were

not. That is what I am being told here. I appreciate, sometimes, that you have

to go on the records that you have.

I just say to Mr. Bowers: I hear your optimism about the pellet plant and the

operation, but it is hard for me to be optimistic when I realize that there is

$11 million or $12 million spent, there is no wharf down there, there is no

docking facility, and no market. So, I am just not as optimistic that the work

has been done.

There is another comment that was made earlier, talking about 2008 and

talking about how the markets change. It is part of the process in 2008, but I

have to put it on the record and I go to page 301 it was 2010 that they were

still looking for a business plan.

We are not talking 2008 when we had the great drop, and 2009; we are talking

about 2010 when the department still never had "a detailed market plan by March

31, 2010 as a condition of funding, however, this plan was not received by the

Department until August 2010 at which point the Department had already

contributed $8.4 million of the $9.0 million in approved funding. In addition,

in a letter to the company in December 2010, the Department indicated that they

had not yet finalized their assessment of the company's marketing plan and

questioned if the company had any confirmation of markets. At this time $8.9

million had been contributed to Company A without an approved marketing plan

which was required prior to any funds being dispersed."

I, as a person here on the Public Accounts, take a bit of exception when we

talk about what happened in 2008, when here we are in 2010 and still trying to

get a marketing plan, but gave the money prior to. It is all we hear, that in

2008 things changed, but it was 2010 you were still looking for the marketing

plan and there was supposed to be no funds.

The question I will ask somebody and I do not know if anybody can answer

this because it was already mentioned that it was sent up to Cabinet was it

sent up to Cabinet prior to the approval? Obviously, up to 2010 there was no

marketing plan even approved or up to August was not even submitted. Was it

submitted to Cabinet that there was no market plan in the analysis that was sent

to Cabinet as part of the high risk? Was it submitted to Cabinet that there has

been no marketing plan given to us from this company?

MR. BOWERS: Just let me make maybe a

preamble or a comment on optimism.

You raised the issue that you are less optimistic maybe than I am. Just to

clarify, one of the reasons for my optimism about the forest sector in general

terms is that we see and we understand that there will be an increase in the

demand for fibre into the future. The demand for fibre is actually increasing on

a global basis, and it is going to continue to increase for a long time.

Now, the reasons for that demand are not tied exclusively, obviously, with

the pulp and paper sector. That is a sector that is in a downturn. In a more

innovative sense, there is going to be an increase for fibre for things like

pellets and for other, newer, and more novel products, everything from cosmetics

to new drugs to new cellulose material. On a global basis, there is recognition

that trees offer valuable materials like cellulose, and lignin, for instance;

new glues can be derived from lignin.

Part of my optimism is looking into that future and looking at new products

that will arrive, some products that are quite new

MR. JOYCE: So my question: Was it sent up to Cabinet without the market

analysis being completed?

MR. BOWERS: Okay, so that second part of your question, my understanding

is that at the time when the paper went to Cabinet, we had this initial

marketing plan anyway. We had that as a start. The deficiency was that the

marketing plan was not as comprehensive as we wanted.

I cannot answer what qualifiers were on that marketing plan in the Cabinet

paper. I was not privy to that, and I do not know if any of my colleagues have

any insight into that, but I can say that at that time we did have that initial

marketing plan that we deemed was

MR. JOYCE: When did you have the marketing plan? Because here in the

Auditor General's report and the Auditor General can confirm if I am

misquoting him "As a result, the Department requested that Company A submit a

detailed marketing plan by March 31, 2010 as a condition of funding, however,

this plan was not received by the Department until August 2010 at which point

the Department had already contributed $8.4 million".

Did you have the detailed plan by the time March 31, 2010? I mean, if there

were two people there I am sure they would know.

MR. YOUNG: I can address that question.

As Wade alluded to, in the presentation of funding that is developed for the

application process that would go before Cabinet there are a number of

categories inside that. There is financial, there is diagnostic, what equipment

you are using, what the budget is, and what your markets are. There is a

section

there around markets. That was completed, based on the applicant's application

and through conversations with them, when we did our due diligence on completing

the presentation that would eventually end up in Cabinet.

It was identified, as Wade alluded to, that there were deficiencies on the

marketing side of things. We knew that upfront and we put it into our

presentation of funding. That is why in Cabinet, when the minutes of Cabinet

came out, it said: Please work with the proponent and have a business plan

completed by March 2010. Yes, that was our instructions and we proceeded with

that.

Also part of that, we spoke with Company A and we said: You need people to

work with you to help you develop that. We encouraged them to hire a plant

manager who would serve in the role as a marketing person as well. We did that.

It takes a while to hire someone on. That individual was hired during the spring

months, or the winter of 2010. At that time, Company A came to us and said: I

just hired my marketing guy. I just got my plant manager on line. He is going to

need time to get his head around this. Can I be given an extension to prepare

our marketing plan, based on the most relevant information we can gather right

now?

As a Committee, we met and we decided to give that extension, to grant the

extension.

MR. JOYCE: Okay.

I am just assuming now that Cabinet, which Premier Dunderdale was the

minister at the time, brought it to Cabinet without a marketing plan completed,

approved spending up to $9 million of funds without a detailed market plan and

said, okay, go ahead and spend the money but go back and fill in the blanks on

the marketing plan. Do you see the logic in that?

Before you spend money in 2010, by the way, not 2008, don't you see the logic

that before you would spend government funds you would guarantee that you have

the markets? That you would have the confirmation saying it is like now when

we are going through Muskrat Falls, they are trying to sign agreements; yet, the

testimony we are getting here today is they spent the money without a detailed

marketing plan of who they were going to sell the pellets to, what the costs are

going to be, what the costs are of shipping. There is no marketing plan.

How can anybody justify spending government funds without having a guaranteed

market in selling it?

MR. BOWERS: At the time, the committee and the department recognized the

marketplace and the potential in the market. There was no question that was not

recognized by the department at the time.

I think from my point of view, I see it as an attempt really to elaborate and

provide more details on the market plan. It was not that there was no

information on the market. There was some information on market conditions but

there was an attempt to get a better refinement and a better exactness about the

marketplace that we were after. We were struggling for more detail.

MR. JOYCE: Do you have any signed agreements for buyers?

MR. EVANS: The proponent continues to be over the last number of years,

and back then in conversation and discussion with potential buyers of the

pellets. As Wade alluded to, the market was very vast and it is still growing

today. The market itself was there, and we were confident it was there. There

were no contracts signed, I believe, but there was some indication they would

purchase the pellets from the operation

MR. JOYCE: This is my last question on this, my last comment. What I am

being told here today is there was $8.4 million of the $9 million approved in

funding spent before a detailed marketing plan, and even a part of that

marketing plan, there was no confirmation of any agreement to buy the pellets

from this plant in Roddickton. Is that correct?

MR. EVANS: The first part of your question, as we alluded to, there was a

marketing plan developed as part of the proposal. We went back and asked the

proponent to elaborate on that. That was there.

The contracts could not be definitively designed until they were actually in

production and could demonstrate that they could deliver the product. We were

confident, and still today in other areas that we are dealing with, the market

is there, the buyers are there, and they do demonstrate that the need is there

as well.

MR. JOYCE: If we have all of that, why is the facility not in operation?

MR. FORWARD: Can I add something about markets and how things work in

Europe?

The way things work with the marketplace in Europe is when you enter into

these larger sales, you enter into what is called an off-take agreement. You

sign a five-year agreement or a ten-year agreement with a company, usually a

utility. The pellets are burned in Europe for energy consumption. What happens

is you do not really nail down the contract in your final market until you are

able to produce a pellet because these contracts are based on BTU value.

What happens is, when you get into a conversation with a potential customer

you send a sample of your pellets. They will do an analysis and determine the

BTU value. What they pay you will be based on the BTU value; therefore, your

dollar value is based on the quality and energy content of your pellet.

In Company A's predicament, they really could not nail down exact markets

until they were able to product a pellet. At some point in time, I cannot

remember the date now, but they did have some contracts with companies in

Europe.

CHAIR: Mr. Joyce, we should move to a government member now. I am not

which one.

Mr. Cross?

Mr. Parsons, did you have any questions?

MR. K. PARSONS: No.

CHAIR: Mr. Michelmore.

MR. MITCHELMORE: Where I left off was in a

section that Mr. Joyce was

talking about, the marketing plan and the whole process. Based on what you are

saying there is that markets were available for export. What were the details in

the marketing plan that would have been required? What type of impact did

deferring this decision have on the company and its operations?

MR. EVANS: I will start, and maybe someone can fill in after me. The

details that were required would be involved with the transportation, the

volumes, the conditions around purchase, the quality of the pellets, those types

of things. The delay the impact had on the company, I do not know if it was

negative but it was to their advantage to have that marketing plan elaborated on

and revised.

MR. MITCHELMORE: I go back to page 302, and it says that the issues still

were inadequate shipping and storage capabilities. Was that put forward in the

marketing plan, that there would be a requirement for shipping and storage

capabilities as to how they are going to export markets?

MR. YOUNG: Yes, there was a requirement in there to address those issues,

and they were addressed in the marketing plan. At the time, in 2010, the plan

was to consider shipping out of the Port of St. Anthony if there was

availability on the small vessels, if the price of pellets if the economics

worked out properly on that. So there was a requirement.

MR. MITCHELMORE: Okay.

MR. YOUNG: Just to go back to your previous question, I did not get a

chance to add to it. We are really focusing pretty heavy on the pellet plant,

but we have to bear in mind that this was a very large, complex project. Even

though we are focusing on the construction of the pellet plant, I would like to

bring attention to the committee that we also built a brand new sawmill. We also

built two new kilns. We also built a large, regional wood yard that sustains the

forest industry on the Northern Peninsula. There was a lot going on in that

two-year period. There was a real flurry of activity.

The delays we could have asked for, that may have happened, really impacted

the finances of that program. A lot of the equipment had thirty, sixty day

budget estimates on it. To extend periods of time would have negatively impacted

the economics, the construction of that site. You have windows of opportunity

for construction; try to get as much done during the summer months. You are

dealing with a number of different suppliers.

We have over 2,000 records of invoices. I do not know how many different

suppliers are involved with that project up there. Bear in mind, it was very

complex to build a pellet plant but it was also very difficult to build the

kilns, and the sawmill that was modernized. Actually, it was a whole new sawmill

that was constructed on site. So any further delays would have impacted

financial estimates and the budgets that went into that project, because a lot

of these suppliers do not like waiting any more than sixty days for their money,

and the quotes were only good for sixty days as well.

MR. MITCHELMORE: I can understand that, and as Mr. Bowers had said

earlier, I am more optimistic about where the forest industry could be headed. A

concept of having a sawmill, kiln, and a pellet plant as a fully integrated

enterprise at the right scale makes a lot of sense.

I want to move forward, down about funding not properly approved. On page

302, the Auditor General points that the department approved $780,000 in funding

to Company B for equipment not assessed by an independent consultant. In fact,

the consultant recommended efficiency improvements instead.

Did the department pay for this independent consultant? If so, what was the

cost?

MR. FORWARD: The independent consultant actually completed the sawmill

diagnostics for about seven or eight sawmills at the time. I believe the cost

was just in excess of $100,000. So they came to the Province, spent a week or

two weeks in the Province, and they completed all the mill diagnostics within

that time period.

MR. MITCHELMORE: Paid for by your department?

MR. FORWARD: That is correct, through the FIDF, yes.

MR. MITCHELMORE: Okay.

Why would the department fund new equipment instead of listening to the

independent consultant's technical diagnostic recommendations of doing the

improvements?

MR. YOUNG: Unfortunately, the Auditor General never got a chance to see

the minutes of the meetings that were held afterwards. The way the technical

diagnostics worked was that if innovations were hired, they came in and

completed their analysis, they produced an individual report for each of the

sawmills. They then came back and met with each of the individual sawmills. They

discussed the report and went through the findings.

In the case of Company B, which we are talking about here now, the minutes of

the meeting that was held between the consultant and Company A which

unfortunately I do not believe the Auditor General's office had the opportunity

to see, and if they did they missed that point. In those minutes of the

meetings, it clearly stated in there about the technology involved with the

HewSaw that was being proposed by Company A. They said: Yes, it is a great idea.

They sanctioned that idea. In fact, in the text, they said that it would be

ideal for the conditions in Newfoundland to take advantage of such technology,

which would allow people to saw smaller log size, lower your spec on your

sawlogs.

We have a copy of those minutes available, and we can leave that with you. So

the consultant did agree with Company A, and since then that technology has been

installed in Company I should say Company B's sawmill.

MR. MITCHELMORE: So it is in particular minutes that that discussion and

dialogue would happen? I guess I defer to the Auditor General. Is there

commentary in response to the department on this particular matter as to having

minutes supplied? Would that not be something the department would have supplied

to your office during the review?

MR. PADDON: It is difficult to comment without actually seeing the

minutes. Typically, I think we would have probably seen or been provided with

what was available at the time; but, in the absence of actually seeing this, it

is difficult to make any definitive comment.

One of the things that we do is provide copy of the report for validation,

and I am not quite sure if this issue was addressed during the validation

process. I just do not recall.

MR. MITCHELMORE: Okay. I would certainly like to see copies of those

minutes.

I also have a question as to it says here that for the initial part A of

the program that the Cabinet made an approval for the initial $2.25 million, but

the second project had a difference in scope and the department should have

requested Cabinet approval for the second project, as the project funding

totalled $780,000, which required Cabinet approval, as it exceeded $500,000. Why

did Cabinet not approve this larger amount?

MR. EVANS: The new proposal was for $500,000, and they had the authority

under the program guidelines and directions to approve up to that amount. The

$280,000, as we indicated earlier, did have approval under a different project.

So we viewed it as the new request was for $500,000, we had the authority to

approve that amount, and did that. The other $280,000 had approval, albeit under

a different project, but it also had approval. Administratively, from our view,

both the $280,000 and the $500,000 had the appropriate approval.

MR. MITCHELMORE: Okay.

In another instance, we see that the funding that was approved without

Cabinet approval transferred from that earlier grant. It says that from that

assessment made by the department officials that there was a host of concerns

and it concluded that the Province would be taking a significant risk by

approving the funding. Why was it the department decided to take this risk with

$280,000 additional, above and beyond, without seeking Cabinet approval?

MR. PADDON: I would just make a comment. That comment relates to Project

B. That comment relates to Project A.

MR. MITCHELMORE: Project A? Okay, thank you.

MR. BOWERS: Company A was it?

WITNESS: (Inaudible).

MR. BOWERS: We acknowledged, as I said earlier, that the risk to the

Province was high that was, I would say, moderate to high, for sure. That was

indicated in the presentation of funding and it was explicitly stated in work

that went up to Cabinet.

Again, that risk that we identified and that we were willing to accept was

weighed against some other risk factors as well, and those included trying to

sustain that entire industry of forest products. As I said earlier as well, we

had made major investments in silviculture and protection in the forest sector.

There was another issue that I did not mention earlier, related to the

potential for the loss of workers from areas in rural Newfoundland, like the

Northern Peninsula, for instance, the risk of them moving out and not being

available.

When we looked at that risk and the trade-off, the committee was confident

that we should proceed.

CHAIR: Mr. Mitchelmore, we should go to a government member now if one of

them has questions.

Mr. Joyce.

MR. JOYCE: I will just go back to a few comments and I will ask the

question: When did the money start flowing to the company from government? It

says here in the Auditor General's report that before they received the detailed

analysis of the markets, there was $8.4 million of the $9 million approved in

funding. Was there any money actually started to be spent by then, or how much,

or when did it start being spent?

MR. FORWARD: Are you referring to a specific company?

MR. JOYCE: Just Company A.

MR. FORWARD: The first funds were dispersed to Company A in October of

MR. JOYCE: Okay, October 2009.

Thank you.

I go to page 302, in 2010, and here we are worrying about shipping and

storing of the pellets. Once again, testimony was given that in 2010 we went

back looking for where you are going to ship it from and the storage.

My question is if the money started being spent in 2009 wouldn't prudence say

that you need to have the shipping, because shipping would be part of the cost,

put in the proposal? How can you say start spending money, we will worry about

shipping later and the cost of it? There is something missing.

MR. BOWERS: Well, you recall in the initial proposal the plan for

shipping was out of Stephenville and Corner Brook, so at that time there was a

plan for shipping and on that basis the project goes forward. Then the downturn

comes and some of the volumes are affected by cost. Cost-benefit ratios change

so that was the reason why the shipping issue did not pan out for those

particular locations.

MR. JOYCE: When did the downturn start if there were no pellets ever

produced?

MR. BOWERS: I am referring to the economic downturn in 2009.

MR. JOYCE: When was the economic downturn, 2008?

MR. BOWERS: Right.

MR. JOYCE: So we are looking two years later. The economic downturn was

not 2010. In 2009 the downturn was already in place.

MR. BOWERS: Yes.

MR. JOYCE: I do not mean to argue with you on this, but you cannot say,

well, the economic downturn is done and part of the plan, but even though we

knew the economic downturn was in place we will still give them the money anyway

without knowing where we are going to ship it from.

MR. BOWERS: That is true at that point but we had to bear in mind that

while that was occurring we were still accessing the options for shipping. We

were looking at alternative options including the St. Anthony port and any other

option that might replace that initial location.

MR. JOYCE: Okay.

If that is the fact, I really cannot understand how the money was flowing. If

that is fact, if you were looking at options for bringing it to Stephenville and

Corner Brook, why would you let the funds go because you did not know how much

it was going to cost you if it was sustainable anyway?

It boggles my mind how you can say, well, in 2010 we are looking at where we

are going to ship it from. You give the money in 2009 saying, go ahead and spend

the money, and you do not even know what markets you have. In 2010 you are

coming back and saying, okay, now we have to look at where we are going to ship

it. You do not know how much it is going to cost to ship it, and shipping, as we

know, is a big part of it. Then the storage is another part which has not been

addressed.

How can the department say okay, and the Cabinet itself? Was Cabinet aware

that shipping was not taken care of and storage was not a part of it?

MR. EVANS: I think it is fair to say that certainly nobody can predict

how long the downturn can last. We were dealing with that aspect of it as well.

The price of pellets was down, the Euro was impacted, shipping costs were

higher, and it changed the whole economic dynamic of the project. I guess nobody

could predict how long it would last.

So the project had started, it was evolving, I guess, and we were seeking

solutions on shipping, on markets, and on storage; it was evolving. That was

some of the risk that we were dealing with, and we talked about risk earlier.

You weigh the risk; is it better to continue or to stop?

MR. JOYCE: Again, Mr. Evans, I do to want to put you on the spot because

I know you were not part of the assessment. It is very important for me to know.

Were those risks of no markets, no port, and no cost analysis of how much it is

going to be to ship it to Stephenville or Corner Brook, and no storage facility,

all included in your assessment when you sent it to Cabinet back in 2009 to get

approval of $8 million or $9 million before any of those issues were even taken

care of?

MR. EVANS: I am not going to talk about what was in Cabinet, but I am

sure the information that was available at that time was included and to the

best of our ability, we had whatever information that was available there. The

markets are still there. It was not the concern, about no markets. The markets

are still there today. There are issues around pricing and transportation that

we continue to work with and work with the proponent to resolve. I guess that is

where our optimism comes in. We are trying to get that project up and running.

MR. JOYCE: I know you spoke to the proponent and I know it was put out in

the media that they are going to need a wharf, $4 million, and a storage

facility. Are there any discussions with the proponent on this extra $4 million

for the wharf and the storage facility in Roddickton?

MR. EVANS: We are into discussions on a number of fronts with the

proponent. We are not in a position to reveal anything right at this point.

There are several issues there to deal with and we continue to work with the

proponent and other interests to resolve the issues up there and to get that

operation up and running.

MR. JOYCE: I ask the Auditor General, of course any time do you do it, if

you are going to build a house you have to know what it is going to cost and you

have to know upfront. Did you find this strange when you went through it that

the markets were not in place, no storage, the shipping was not nailed down, and

the cost?

MR. PADDON: I guess that would likely be the nub of our concern. It is a

question of understanding what all the risks are before you make a decision or

start to spend money on a particular project. If there are significant issues

that would still be outstanding, we would have expected to see those issues at

least brought to some conclusion and either reassessed or it depends on the

significance of the issue. I think it would be safe to say that you would expect

to see those significant outstanding issues brought to a conclusion.

MR. JOYCE: I will just ask the question that was brought up earlier about

the payment or when you sign a contract you have to know how much BTUs are in

the pellets. My question is: Were there any pellets sent over to Europe to find

the BTUs so you could set a price for it?

MR. FORWARD: Yes, I believe it was. Company A did enter into a contract

with the European company for the sale of a large amount of wood pellets. In

order to achieve that sale, they would have had to have an energy content

determined for the wood pellets.

MR. JOYCE: Can we get a copy of that? I do not want you to agree to it

now because it may be with a third party or fourth party and you may not be able

to do it, so I would not want to put you on the spot. There were pellets and my

understanding from discussions is that there was a test run done of pellets. You

are saying there was one test run done that was shipped over to Europe?

MR. FORWARD: No, there was a contract signed; there were no pellets that

shipped. There was testing done on the energy content of the pellets that was

completed at the wood science centre in New Brunswick. A sample of pellets were

bagged and sent to the wood science centre for testing.

MR. JOYCE: When was this contract signed with the company in Europe?

MR. FORWARD: I cannot recall right now when it was, but it was when the

plant was getting close to being commissioned. So they would have produced a

pellet or at least tested their raw material to determine energy content.

MR. JOYCE: So you are not sure if it was a pellet or just raw material,

if the pellets were actually produced?

MR. FORWARD: As far as I know, it was pellets that were sent to the Wood

Science Centre.

MR. JOYCE: Oh, okay, perfect.

I just find, with all these concerns that were brought up, that it was money

being spent without any of those issues being resolved. You can see the major

concern with it.

I just go back to another thing that was brought up earlier, and I just want

to get it clarified, on page 301, "Application information not complete". I will

go through the first section, "the applicant reported $220,444 in outstanding

debt owed to the Provincial Government by Company A. However, our review

identified that the company also had $50,000 in equity financing (with

established repayment terms) and a related company (not identified in the

application) had an additional $500,000 in equity financing (with established

repayment terms) owing to a Crown agency, which was not reported in the

application."

Was that ever picked up after? Was that in the initial application or did it

have to come up after when you went back seeking more information?

MR. EVANS: Yes, we acknowledged that the company omitted the information

on the outstanding companies and outstanding debt in the initial application.

Subsequent to that, before we sought approval, the committee identified that

issue and it was identified in the offer of funding. The related companies and

their outstanding debt was all part of the information provided before any

decisions were made.

MR. JOYCE: Okay.

So who picked up on that the application was not complete or there were other

companies that were not put in the application itself?

MR. YOUNG: The way the process worked was the FIDF committee would review

the application and we would use our sister department, IBRD. They would bring

in the Economic Development Officers who would prepare the financial review of

each of the applications. In Company A's application that would have been

reviewed by an EDO, an Economic Development Officer, from IBRD and during his

review process, his due diligence, that individual picked up these omissions and

made it known to our committee.

Gary, do you have anything to add?

MR. FORWARD: Yes, just so you understand, too, we just did not receive a

proposal, a business plan, or whatever. There were a number of redirects back

and forth with the company in question to determine how the information may have

been missing. So in some cases we may have gone back to the proponent five or

six times to acquire the information.

MR. JOYCE: Just on the next, "Business plan incomplete", where it said,

"a personal net worth statements (undated) by the applicant to the Department

which included information only to 2005, however, the project application was

received in June 2009. We would have expected an updated net worth statement

would have been received."

Was that ever received up to 2009?

MR. YOUNG: Yes, that was received. Like the comments around the debt that

was outstanding by the individual as well as these other companies, that

information was provided through the redirects that we made with Company A as

well as the work that was done by the Economic Development Officers. That

information, yes, was contained in the final analysis. We used information from

2005 that was provided with the application as well as 2008-2009 present work

statements that went into the presentation of funding, and we can show you

those. We have the documents that identifies that.

MR. JOYCE: I will just ask the Auditor General, did you see those updated

statements to 2009?

MR. PADDON: I will ask Mr. Walters to answer.

MR. WALTERS: I do not have my case work all in front of me, but I am 99

per cent confident that we did not receive a copy in our 2011.

CHAIR: You did not.

MR. WALTERS: Did not, but if it is available we would sure like to see

it.

CHAIR: Can you check and confirm when we break at lunch if you received

that or not so we will know by this afternoon and so we do not have to be coming

back over the long-term?

MR. WALTERS: Yes, I have the casework file there and I will just pull it

up and see if I can find a copy, or if we received it, if it was after our

request for it.

CHAIR: Yes, the date received, if received.

Mr. Joyce, we should go to a government member now.

MR. JOYCE: Okay, I was just going to ask one more question.

CHAIR: Go ahead.

MR. JOYCE: You mentioned that, and then again this is getting I assume

two parts to it, the 2009 statements were included in your final assessment.

Were they included before the money was approved in 2008 or 2009? Were they

included then, because once again we see that the money was flowing in 2009? We

see that the proper marketing plan was not done. We see the shipping and storage

was not handled until 2010. So was this done before the money started flowing in

2009?

MR. YOUNG: Yes. That information was provided and was part of the

analysis of the Economic Development Officer that went into the presentation of

funding that eventually went into our presentation to Cabinet. So Cabinet's

decision was based on whatever most up-to-date information the EDO collected and

put into his analysis. So thus, yes

MR. JOYCE: So up to date means up to 2009, as the Auditor General

mentioned?

MR. YOUNG: To my knowledge, yes.

MR. JOYCE: Okay, thank you.

MR. K. PARSONS: I would like to just ask a couple of questions if I

could, please.

Just getting to what Mr. Joyce is talking about there, and it is an analysis

that you did beforehand, so money obviously started to roll in 2009, but

obviously the application takes a little while. It is not something that is done

overnight. It is probably a year or two that all the information has to be I

know Mr. Joyce said there were no markets, but you guys say there were markets.

So could you explain where the markets were?

MR. BOWERS: Again, we looked at both global or international markets and

domestic markets, but as we stated earlier, the domestic market is small, and we

realize that it is small. Then and currently the most favourable markets are in

Europe. So the potential that we were seeing, as we still see, rests mainly with

trans-Atlantic shipping to Europe.

MR. K. PARSONS: The shipping cost, as you said earlier, the cost you

looked at, shipping was a lot smaller, you are using smaller vessels, and the

cost of shipping was could you explain it and elaborate a little bit more on

how the cost changed from 2008 when the application was done to even t