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

CHAIR (Sullivan): My name is Loyola Sullivan, Chair of Public Accounts, and we will get today's meeting underway.

At the onset I want to mention, and I failed to mention yesterday, we are operating under the basic rules of the House of Assembly. I want to mention this especially for the benefit of the media, because it was a discussion we had the day before yesterday with reference to what is permitted and what is not permitted.

Under the rules of the House of Assembly, any audio recording has been in effect for some time and that has been standard. If you want to take a photograph with cameras, it would have to be done during a break, or prior. So if you need a minute or two at the beginning or so on, or during a break or at the end, if you need to get a photograph or a camera shot, that can be done then and not while the meeting is in session. We are going to bring it to a Committee meeting - I have it on the list for the next meeting - to look at that aspect while we are operating outside the confines of the House of Assembly. We had hoped to have them here at this session but there are some technical things being done in preparation for the opening of the House, where the televising is done in-house, and, of course, the feeds and the video are available to the media in that regard. By having it outside, I guess it is not possible to do that and we will discuss that at a Committee meeting and move forward, if there is consensus, with a resolution to deal with that. That is for the benefit of the media there.

I would like to start by having each person here introduced, so we know who is who here. I would like to start with the members of the Committee, first of all. To my right is the vice-chair.

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

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

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

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

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

CHAIR: For the benefit of others, press on the top button when you want to use the mike and the light will come on. You can release it then when you are finished speaking, please.

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

MR. NOSEWORTHY: John Noseworthy, Auditor General.

MR. LOVEYS: Wayne Loveys, Deputy Auditor General.

MR. JANES: Claude Janes, Audit Manager.

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

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

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

MS HANRAHAN: Denise Hanrahan, Director of Financial Operations.

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

CHAIR: Thank you.

We have Elizabeth Murphy, Clerk of the Committee, second to my left; Mark Noseworthy, Executive Director with our Committee, second to my right; Kevin Collins, with Hansard, is doing the recording, for Hansard purposes, of today's meeting.

I would like to start by - if anybody has not been sworn-in. I am not sure if Ms Hanrahan has been sworn-in. Had you been sworn in before the Committee last fall?

MS HANRAHAN: Yes.

CHAIR: You were, and I am sure Mr. Prim. I think all four were here before, and I guess the Auditor General's office, the same thing. I guess we do not have to have anybody sworn in this morning.

Our topic today is Coastal Labrador Marine Services, per the Auditor General's report 2000-2001; 3.28 in the Auditor General's report. Prior to getting into any questions and discussion there, we will give Works, Services and Transportation and, of course, the Auditor General, too, an opportunity if they have any particular opening comments on this particular topic.

Mr. Osmond.

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

I would like to have a few comments on this morning's report. As you say, it is paragraph 3.28 of the Auditor General's 2001 report. This paragraph of the report is nineteen pages in length, of course, and focuses on some very detailed aspects of our department's marine operations with a view to hopefully providing some helpful background for the Committee. I appreciate the opportunity to provide a few opening remarks to you.

Mr. Chairman, in 1998, when the department prepared cost estimates for the Coastal Labrador Marine Services, they were intended to be a broad order of magnitude figures over a five-year period with no adjustments for rising fuel costs. It was certainly known by all concerned at the time that these early estimates would have to be revised over time and updated as circumstances evolved and things changed, of course. The Auditor General's report, with all due respect, takes issue with the variance between these order of magnitude estimates and the actual costs, particularly the figure for the year ending March 31, 2001, which was the furthest out from the time of estimate. By that time some significant changes had taken place affecting the service, including the replacement of the Northern Princess on the St. Barbe run with the significantly larger Apollo to meet the growing demand on that service, and substantially higher fuel costs were prevailing at the time as well. Such changes had multi-million dollar impacts on our costs for that year. Indeed, though, when you look at the previous years they were more closely in line with the early on estimates.

Another issue in the report indicates that the department did not invite tenders for the period April 1, 1997 through December 31, 1997, and also that the department did not report this to the House of Assembly as would be required by the Public Tender Act. It is certainly true that no tender was called for this period, but this was in strict accordance with the Labrador Transportation Initiative agreement between the federal and provincial governments. This agreement did not come into effect until the end of March 1997, when the respective Cabinets approved the agreement. Included in this agreement was a specific undertaking that Marine Atlantic, a public or a federal/public Crown corporation, would continue to operate the service for the then imminent operating season, given the insufficient lead time in fact to do otherwise.

It is the department's position that no tender call was therefore required for this period, and indeed to try to do so would have been detrimental to the public good. Notwithstanding this position, a Ministerial Statement was made in the House of Assembly on December 9, 1997, referring to Marine Atlantic's continued involvement with this service during the transition period.

Mr. Chairman, marine operations are a very unique public service, not unlike trying to operate perhaps an airline. Details of the operations are frequently complex and very difficult to readily appreciate. It is not at all like plowing roads or constructing buildings. Marine also involves tight scheduling timelines that, if not met, can mean significant cost and inconvenience to the travelling public.

Furthermore, rigorous federal regulations meant to ensure public safety frequently present themselves as urgent non-discretionary actions to be taken by vessel operators and owners. Indeed, looking at marine operations from the outside necessitates also an understanding of the terms, standards and practices of the marine transportation industry which, as I said, is unique.

One of the key issues in the Auditor General's report refers to refit activities. It is very easy for non-mariners, I guess like many of us, to confuse terms such as maintenance, dockside refit, and dockyard refit. For the purposes of our contract with 10663 Newfoundland Limited, maintenance generally refers to work the contractor is able and is required to preform while the vessel remains in service, such as any machinery breakdowns that might take place while the vessel is on one of its runs, as well as oil and filter changes, that sort of thing.

Dockside refit, on the other hand, refers to work that can only be done when the vessel is at dockside but for which the vessel can remain in the water; such as above-water repairs, as per regulatory requirements, including engine overhauls and opening up a gearbox for inspection.

Dockyard refit, on the other hand, refers to work that can only be done when the vessel is out of the water or in dry dock, such as underwater hull work including work on shafts, rudders, propellers and that sort of thing.

From the perspective of the contract, these terms are very important as they result in different levels of payment, if any, to the vessel operating contractor while such work is being done. In essence, the contractor receives nothing extra for maintenance work while being paid additional amounts for lay up and actual work performed for dockside refits.

Dockyard refits, on the other hand, are special insofar as the department calls public tenders for such out-of-the-water work and the vessel operating contractor is only paid then for transporting the vessel to and from the dockyard, wherever it might happen to be, plus any vessel crew members required to stay with the vessel while it is at the dockyard. I might just say that vessels of this size are crewed 365 days of the year, Mr. Chairman.

As I said, these complexities can make it difficult to understand the arrangements under contract; however, such arrangements are standard in the marine industry and well understood by the respective parties to these contracts.

By the way, we have prepared a small flow chart which hopefully might be able to assist the Committee's understanding of this process, and we can pass this out to you now as well.

Misunderstandings of these definitions or classifications of work, we believe, lie at the root of many places in the Auditor General's report where it is stated that the department has failed to call for public tenders in accordance with the Public Tender Act. These are what the report refers in total to as the $990,000 in refit costs. Our intent, when we called the contract with 10663 Newfoundland Limited, and therefore our interpretation of the contract, is that all maintenance and refit work other than dockyard refits are included, or were included, in the contract. This is standard practice in the marine industry, and again well understood by the parties to the This is standard practice in the marine industry and again, well understood by the parties to the contract.

For the department to have tried to call public tenders for dockside work may well have resulted in legal challenges, in fact, by the contractor for breach of contract. It is conceded though that a different interpretation is advanced by the Auditor General, which is also equally possible. Advice from the Department of Justice, however, is that neither interpretation is better than the other. The department, therefore, takes the position that it publicly tendered for the vessel operating and refit contracts as appropriate and that it undertook its maintenance and refit activities in good faith and in accordance with its interpretation of the work tendered under such contracts. In fact, I would like to add that the Government of Newfoundland and Labrador has one of the most stringent pieces of procurement legislations in the country through our Public Tender Act.

Finally, I feel it would be helpful to briefly outline some background on how freight is handled by our marine services. The key to understanding here is that the transportation industry wide practice is of using bills of lading to describe the type, weight and volume of goods being transported. Essentially, the initial shipper fills in these legally binding documents and each carrier of the goods passes the bill of lading on to the next, in the transportation chain, until the goods reach the final destination or the customer. The goods may have changed hands many times while on route. However, they are not opened, inspected, re-weighed, et cetera, every time. Rather, experienced handlers readily know what a certain volume of a particular good should weigh and their reviewing of the bill of lading is usually satisfactory to allow the goods to continue on their way.

The Auditor General's report indicates that we do not check to ensure the total weight being shipped and subsidized by the Province is correct. This is true, but then to our knowledge neither does anyone else in the transportation industry dealing in bulk goods or containers either. Instead, the accepted practice is to rely upon the bill of lading, its system, to indicate the weight being shipped.

Thank you very much, Mr. Chairman, for giving me this opportunity for these opening remarks. There are other details in our marine operations and the subject contracts being reviewed which we will be happy to provide further details on for the committee based on questions raised.

Thank you.

CHAIR: Mr. Noseworthy.

MR. NOSEWORTHY: I would just like to talk for a moment about the most significant part of the report dealing with the $990,000 - that we have indicated - work that was performed in contravention of the Public Tender Act.

Myself and Mr. Janes, here to my right, met with John Baker on June 20, 2001 in our Corner Brook office to discuss this particular report. During our discussions Mr. Baker put forward the sorts of information and arguments that you just heard from the deputy minister, and assured me that if I would meet with the director of the Government Purchasing Agency and their legal counsel that, in fact, I would see the light also. I said well, if you want to set up a meeting, let's do that. So, on July 11, in St. John's, I met with Bruce Pillar, who was their former legal counsel. I met with Peter Fitzgerald, their current legal counsel. I met with Larry Cahill, the Director of Government Purchasing Agency. Mr. Janes was on the telephone, and Mr. Baker was there also.

During that meeting I started off by explaining our position, documentation we had, our interpretation of the agreements and shortly into that discussion I was asked if I could provide them with some time. So, I left the room and was summoned back in about twenty minutes or half-and-hour. When I got back in I was told - and Mr. Janes can confirm this. He was on the telephone - that, in fact, they agreed that this particular agreement was never intended to support $1 million of refit work. It was not designed for that. They suggested that yes, there could be minor repairs to be made during the operation of those vessels and that sort of thing, and that you probably would cover that, but in no way, shape or form was it ever designed or intended, or would it ever be able to support the paying of $990,000 in refit work. That is where we ended up right there. I was happy when I heard the Government Purchasing Agency and the legal counsel say that, and it was based on that, that we went forward with our report and took the position we did.

We had a response from the department on October 9, 2001. It was the first response that we received. Myself, the former Auditor General, and the deputy minister had a meeting on October 11 to discuss the response. It was quite long and a lot of detail and information there that we had problems with. Subsequent to that meeting, on December 20 we received another response from the department, and it was that response that we finally said, well, we will put it in the report, and that is the response that is included here. So, there is quite a bit of background to it. From my position, my office stands by this comment, that the $990,000 was in fact done in contravention of the Public Tender Act.

CHAIR: Thank you, Mr. Noseworthy.

We will get into questioning. Maybe, at the outset, if I could - if any member of the committee has any objection, I have no problem with it. Normally, I have ended up with questions at sessions, and if it is not a problem I will start with questions. If anybody has an objection, I won't start, I will certainly yield to that. If the questions are going on for a period of time and you want to get an opportunity to ask, because I have a fair number, some general and some of a specific nature, I could just stop and come back to it, if anybody feels it has gone a little too long and they have questions they want to move into.

So, does anybody have a problem with that?

AN HON. MEMBER: Not in the committee.

CHAIR: Thank you.

We will just start with a few generalities. I have looked at them in terms of sequence in the report there, so to follow those. First a couple of generalities.

In terms of, I guess, having sufficient funds available to be able to maintain the service at least for a long period of time without having to put an infusion of provincial money in, I guess the Labrador Transportation Initiative Fund was intended to assist in that. How much money would be in that fund right now and what might be the projected time in which it would run out?

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

MR. OSMOND: Thank you, Mr. Chairman.

I am afraid I don't have that information available. The Labrador Transportation Initiative Fund is governed by a committee led by Treasury Board. We would be, of course, invited to be there from time to time but that is a separate fund, if you will, that we draw down on but we don't actually manage or control.

CHAIR: In terms of anticipating when we might have a shortfall from that fund, you wouldn't know that?

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

CHAIR: Could you endeavor to find out and have a response back to the committee on exactly the status of that fund, because that was the nature of being able to take over the coastal marine service and to be able to operate it. It was supposed to, in perpetuity in the beginning, and I know as the cost projections kept changing the possibility of that fund - and I think there was reference made in the Auditor General's report on another section in the report; not in this specific one. It is important to maintaining, I guess, the integrity of that for the cost of operations in line with taking over the Coastal Labrador Marine Services. If we could get a response back to that we would certainly appreciate that.

Initially, when the company was successful - 10663 Newfoundland Limited. It is referenced here in the Auditor General's report on page 2. The owners of that company was a consortium of companies: Woodward, Crosbie's Shipping and Puddister's Shipping, I think, were the three initial ones. Is it my understanding that shortly thereafter that one company, the Woodward Group, bought out the others and it is just one we are dealing with now? Could someone confirm that and probably indicate the date which that became the case?

MR. BAKER: The only thing we can confirm is that they wrote and - at the time that this whole transaction was taking place, where one company was buying out the other company, or the other two companies, whatever, that is the only information I have at this time. I do not have the exact date.

CHAIR: Okay, but it is your understanding for the past while anyway, probably the past couple of years, that just the Woodward Group of companies now are the 10663 owners? That has been my understanding. I am not sure. I just want to make sure it is clear.

MR. BAKER: I do not know the particulars of the agreement. I do not know if it was phased out or if it was done all at once or what the particulars were in the understanding and the agreement between the consortium.

CHAIR: Mr. Baker, could you possibly get back to us on that? Because if we are dealing with a company on a contract it is nice to know who the owner of that company is, exactly who we are dealing with.

MR. BAKER: Yes, Mr. Chairman.

CHAIR: Thank you.

On page 3, in the Auditor General's report, if we look at figure 1, in 2001 it cost $10 million to operate the Bond and Ranger, and the wharf and terminal that came with that federal transaction there. When it was budgeted, basically, $8.4 million for that particular thing. I know you made some reference to the cost, but in this fiscal year, what were the major areas that caused almost a 20 per cent cost overrun there? What would be the significant things that contributed to that?

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

CHAIR: Yes, I am referring to Figure 1 on page 258 in the Auditor General's report, or page 3 in the document we have in front of us. It shows there under subtotal: Budget for 2001, $8.4 million; Actual $10 million. I am wondering, why was there almost a 20 per cent over-expenditure on what was budgeted for that fiscal year?

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

CHAIR: The wharf and terminal we can see were $1.3 million under budget, which means the other ones must have been $3.9 million over budget.

If you look at just the vessels themselves, for example, the $3.6 million and the $2.2 million, there was $5.8 million budgeted on just the two vessels. We spent $8.7 million, which is about a 50 per cent increase in the operation in the cost on those two boats alone. Why would you underestimate or budget in previous years such a small amount of money, or not anticipate? What was overlooked to increase the cost of these by 50 per cent?

The Auditor General might have a comment.

MR. NOSEWORTHY: I just want to refer you to Figure 3, as an interim step here. It does not show the budget but it shows a breakdown of the Actual; those first three lines. That will tie back your $10 million Actual, 2001, for the two boats. You can see the breakdown: payments to contractor, fuel and other.

CHAIR: Yes, but -

MR. NOSEWORTHY: (Inaudible) budget.

CHAIR: As opposed to budget.

The point I am making is: I f you budgeted so much for fuel and it was 50 per cent more, or those other areas, in comparison to your budget for those two vessels, for example, if we look at the $3.6 million and the $2.2 million, that is $5.8 million, and if you total up the actuals it was $8.7 million, so that is a $2.9 million increase. That is exactly 50 per cent more cost on those vessels than you budgeted in that year. Why would that be? In other words, if you want to provide what your budgeted fuel costs were, the actuals, the other costs budgeted in actuals, which one would be so out of whack that you would have missed your target by 50 per cent?

MR. BAKER: That year was the year that we did a great deal of work on the Sir Robert Bond with hull plating that was required after the ultrasonics were done on the vessel. That would account for most, if not all, of the difference in the overrun there in the budget.

CHAIR: That would have cost $2.2 million?

MR. BAKER: It was a significant amount. I do not know if we can put it right on the exact of $2.1 million, but I will get that breakout for you.

CHAIR: Yes, if you could get the breakout, because it is significant, a $2.2 million overrun on $3.6 million. If you could get these details. Would you have them with you, or would you intend to respond back to the Committee?

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

CHAIR: Thank you.

What about the Northern Ranger, for example? There was a $7 million overrun there on $2.2 million. That is over a 30 per cent increase in costs there. What accounted for that? If it was strictly - you were on target on your other costs, on your fuel and all other costs on the Sir Robert Bond. If it was almost all attributed to the hull, why would we be over 30 per cent over on the other one? What would have driven that to that point?

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

Certainly there would be a fuel expense that would be, you know, a key contributor here. I think John was trying to explain there were probably two major elements here. Regrettably, we do not have the statements and figures here in front of us but there were two key things to focus on . One would have been the hull plating on the Sir Robert Bond which was unscheduled and not recognized before we went into the year. The second thing would be the fuel consumption and the fuel cost increase that took place during that year, so those would be the two primary factors. Fuel would affect both vessels, of course, and the hull plating would have been primarily focused on the Sir Robert Bond.

CHAIR: The question I asked, too: If almost all the increase on the Sir Robert Bond was hull, or $2.1 million out of $2.2 million, you hit your targets on fuel costs on the Sir Robert Bond, your total cost, but missed on the other one. Wouldn't that be a consideration, if it was all a hull increase, the higher cost? If you were on target in your fuel estimation on the Sir Robert Bond, why wouldn't you be on target with your fuel cost on the Northern Ranger? If the entire cost on the Sir Robert Bond was for this extra special plating, why would there be a variance? Shouldn't you be closer to budget because of that? I cannot see different estimations of fuel costs on two different boats. I know consumption levels could be different but, at least based on those, why would it be accurate in one and not in the other?

MR. BAKER: At the same time that the extra money was spent on the Sir Robert Bond for the extra hull repairs, the Sir Robert Bond was late going into service. The Northern Ranger had to kick in earlier that season in order to make up for the absence of the Sir Robert Bond running from Goose Bay to Lewisporte. That would have attributed to that overrun in fuel because she had extra time in there for that full month of operation.

CHAIR: Wouldn't we have then gotten reduced savings on the Sir Robert Bond on fuel, if that was the case? If she was budgeted to be on schedule and wasn't, shouldn't we have gotten equivalent savings then on fuel for the Sir Robert Bond, for example?

MR. BAKER: Yes, we should have had some equivalent savings on the fuel on the Sir Robert Bond, plus the fact that the Northern Ranger would have taken more fuel, I guess, at a more expensive rate at the northern level in Goose Bay, where the Sir Robert Bond fuels mostly out of Lewisporte. Yes, we probably should have seen some lower rates on the Sir Robert Bond. I would have to again give you a full breakout of that, to let you know where the differences are.

CHAIR: Yes, I would like to see the breakdown, because if the total increase on the Sir Robert Bond was basically with the hull, and it did not get to sail, it was tied up, we should have been under budget then on the other items, if you excluded the hull, as opposed to the Northern Ranger.

MR. BAKER: Excuse me, Mr. Chairman.

Also, as another note further to that, from the previous year there were also some late invoices coming in, which were carried over to this particular year as well.

CHAIR: So they were carried to the year in which they were paid rather than the year in which they were earned? There was not an accrual or a carry-over on a receivable, or a payable, I should say, in the case of having to pay the cost? It was strictly not on an incurred basis; it was on a payment basis? Is that what you are saying?

MR. BAKER: Well, some accrual could have been set up, but I guess it was not enough because there was some money charged out to the subsequent year for fuel on those vessels.

CHAIR: Okay, because I would think that if something was incurred in February or March and it was not paid, that we should have made that allowance, an accrual for that bill to be paid in that fiscal year just ending, rather than forward it to the next fiscal year. Wouldn't that be an appropriate accounting procedure? I want to ask maybe the Auditor General to answer that.

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

CHAIR: If an expense, for example, occurred in March or February but did not get paid until April, basically, that expense should have been included in the statement for the fiscal year ended when it was incurred rather than when the cheque was actually issued.

MR. NOSEWORTHY: Yes, that is correct.

CHAIR: That is my understanding.

So, was it one that you were no aware of? If fuel is consumed, I am sure, on a particular day, you are certainly aware; there are appropriate procedures to sign off on that. Was it that the bill was late being sent? Why would that happen, that you would have one expense in one fiscal year carried into another?

MR. BAKER: I know I can speak directly for that, and I know a lot of the invoices were very, very late coming in for our fuel. I am given to understand that is why it was not all caught up within the cut-off period for the current year.

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

If we look at the Astron and the Apollo, too, on the same page 3, figure 1, the cost projections on these two obviously were higher than budgeted also. What would be the main factors that attribute to increased cost of operating these as opposed to the budgets you gave here, for example, in 2001? The Astron was $2.1 million and went to $2.3 million, $2.7 million, $2.9 million, and $5.4 million to $5.7 million. Would that be strictly extra fuel, an increase in fuel costs? What might that be attributed to, other than that?

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

CHAIR: It would be primarily there.

MS HANRAHAN: Primarily, yes.

CHAIR: The point is, if we were pretty well on target with these three, in terms of those costs, the question that comes to me is: Why couldn't we be on target with the Sir Robert Bond and the Northern Ranger in those costs also, if were able to hit it in those other areas? Is the fuel that you are paying in all of these pretty well the same type, rate increases? What is the difference in the fuel that would be used on those five boats, for example? Do costs vary significantly from one to another?

MR. BAKER: The price would not necessarily vary. The price would vary where the fuel was taken on-board.

CHAIR: Okay, so it was taken on-board. If it was necessary to, I guess, take on fuel in Labrador you have to pay a higher price, obviously, so I guess every effort was made to try to have your fueling at the most economical places. I would assume that is what is being done.

MR. BAKER: That is correct.

CHAIR: On page 4 in this report, 259 in the Auditor General's report, on some of these items there is a breakdown a little further that could go to those, but generally here, on page 4, there was an estimated cost of $51.8 million referenced in paragraph 2 under conclusions, and that escalated to $62.5 million over the period here from April 1, 1998 to March 31, 2001. It is a significant increase. I think that is a difference of $10.7 million over that period. What would account for all those extra costs there, some of the big items? Give me two or three of the major factors that attributed to that increased cost.

MR. BAKER: Again, if we refer to Mr. Osmond's opening remarks, when we referred to those estimates that were done in April of 1998, they were done in light of the fact that as the road progressed on the Trans-Labrador Highway, as it was completed, that we could move the marine services further north and thereby lessen the demand on the expense of the marine operation. That was a prime factor there.

Also, if we look, in addition to that, we also replaced the Northern Princess with the Apollo due to the fact that the Northern Princess could not accommodate the traffic offering. Also, we had fuel price increases. We went to tender for the freight vessels as well. The Northern Cruiser was replaced by the Nada, and that was a significant increase although done through the tendering process. Again, as we explained earlier, the hull plating on the Sir Robert Bond, and we had some wharf reconstruction. Also, in addition to all of that, it was anticipated, through talking with some of the contractors and everything else that were going to participate in the construction of the Trans-Labrador Highway, that they would be moving their equipment by barge. Once the marine service started, we found that a fair bit of that equipment was moving by the marine service. Of course, that increased our freight as well on our marine service.

CHAIR: You mentioned that there was extra wharf construction. This was not anticipated, for example. Would that be the wharf construction to modify it for the Apollo. Would that be the extra cost we are talking about?

MR. BAKER: It wasn't necessary for the Apollo because even when the Northern Princess was operating there, we knew since the fire that other work would have to be done.

CHAIR: So would it cost extra? My understanding, and it has been in the public forum, is that there were extra costs to accommodate the docking of the Apollo. Would that be true?

MR. BAKER: We didn't spend extra money in the docking of the Apollo because the Apollo was operating there before any money was spent at all. As I mentioned earlier, this work was identified prior to the Apollo going into service and there was also work over on the Blanc Sablon side that was identified prior to the Province going to tender for a different vessel.

CHAIR: So you are basically saying there was no extra cost for the docking of the Apollo. Would that be accurate?

MR. BAKER: Not particularly for the Apollo itself.

CHAIR: I guess, you didn't anticipate that traffic, basically, wouldn't be reduced with the highway. Projections should show a decline in the coastal volume, and there should be more of an on land volume. Have you looked at the ports further north, for example, Cartwright as opposed to Lewisporte? What cost savings or projections would you be seeing now that might occur because of this? Have you done a department analysis to look at exactly how much we are going to save on that particular aspect, that might keep these costs in line with earlier projections?

MR. BAKER: Yes, we have. I am not inclined to talk too much about cost, because our tenders are not closed yet, so I would rather hold that, but yes we do have projected costs in place in order to operate that service. I think it would be only appropriate that we wait until the tenders close to discuss that. Probably we can get it along to you at a later date.

CHAIR: Sure. I don't have a problem with that, if there are tenders. The reason I asked, too, is because you had some unanticipated costs, you indicated, with services going to tender here and that drove up your costs, based on your projections. I certainly hope that your projections now are not going to be, by the same token, that your other ones were under and we are going to have another increased cost rather than a savings in this particular area. That is my concern, because your projections provided here, of why you went $10.7 million more, is because you did not anticipate that tendering would be as high. That was one of the main factors, I think, you identified on those projections. So have you modified? Could I ask that? Have you modified your projections where you missed your projections before when it went to tender? Have you made significant allowances which would be more on target so that might not happen, as has happened in those cases referenced here?

MR. BAKER: Due to the fact that when we went to tender for the freighters earlier, we noticed a significant increase from the Northern Cruiser to the Nada. I guess this is kind of the unknown when you go to tender. You follow the process that the bidders go all over the world looking for vessels to suit the requirement. We only had the one vessel come in that met the requirement of that service. Therefore, with the service fast approaching and also the previous vessel that was in service there being sold, that we never had the opportunity to even, I guess, reject the tender that came in and do emergency on the other one. So we followed the tender process and sometimes this happens, that it comes in a little higher than you project.

CHAIR: I am just going to move into another particular area. I am still on page 4, under Conclusions in the Auditor General's report, on the same page 4. The Auditor General indicated, "The Department contravened the Public Tender Act and paid the contractor $990,000 for refit work not tendered..." as per the Public Tender Act. I know we have heard government and the Auditor General's explanation here.

I want to ask a question here. I will not belabour that and ask for repetition of what has already been stated but, why have refit costs - and if you look in reference to conclusions here. Why have refit costs in 1999 - it was $91,000. It went to $323,000 in 2000, and $576,000 in 2001. We have seen a tremendous increase. Are the boats getting progressively less seaworthy? What is causing all this extra work that is needed there on these particular boats? When we took over the boats, when we received them, did we get undervalue for these? Are we faced with increasing costs? Is this the trend that is going on now? I know the 2002 year is over and done with. Where is 2002? I know it is not directly here but we are seeing an increasing cost. Has that been stopped or is it still ongoing, and why would we see that happening?

MR. BAKER: With regard to the $91,000, we will start with that one. Just prior to that, prior to the Province taking over the vessels - I do have a little problem here with the years because (inaudible) it should be overlapping years so that we could get a good picture of what we are dealing with. The $91,000, I think, would be for the 1998-1999 year.

CHAIR: Yes, but when I refer to years I am referring to the fiscal year ending March 31. I just want to make that clear, and I am sure that is what the Auditor General's reference would be. Typical, I guess, the government fiscal year. If I was not clear there, I apologize for that, but the nature of the report is on that fiscal year.

MR. BAKER: In the $91,000, just prior to the Province taking full control of the vessels, Marine Atlantic did a full refit of the Sir Robert Bond. In the 1998-1999 fiscal year, all that was required to be done on the Sir Robert Bond would be some last minute certificate work whereby the crew would come aboard and just check out their safeties and do their fire-on-boat drill and things like this. So the cost was very minimal for that year because there was so much work done prior to the Province taking over the vessel.

Then, as we progress into the next year -

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

MR. BAKER: Yes.

The Northern Ranger needed an engine overhaul, one of the main engines. Also, there was some work required on the Bond, but not as much because her dry docking and her major work was done in the previous year. We only have to go to dry dock, as a mandatory requirement, every second year. That is why the $323,000 was a little more than the 1999.

We go to the subsequent year and now the Northern Ranger and the Sir Robert Bond both require extra work. It is a dry docking year. We have to abide by our surveys and also the issues that are put forth to us by Transport Canada. Those all have to be dealt with. So these are the reasons why you will see a little increase in the different amounts.

CHAIR: Okay.

I would assume then - the fiscal year just ended now, 2002 - that this would have gone down because they did not require dry docking. Would that be accurate? Do you have a figure to show the trend now? Because the year is over now about a year. I am sure the statements are done on the year. How much did it go down in 2002, then, if we did not require dry docking in those years? The most current statement.

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

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

MR. BAKER: It would depend. Like I said earlier, we also had to get into plate work as well on the Hull. Therefore, yes, the trend would normally be on refits of a vessel, especially under normal circumstances, that you would see one year a certain amount and then every second year you would see a little blip because there is extensive work and then she would level off and then the second year again she would increase.

CHAIR: Yes, but this has gone up significantly each year and I am just wondering, where the 2002 fiscal year ended a year ago, just about, whether somebody would have that figure.

MS HANRAHAN: I have more total figures as opposed to specific work. The Bond, at year end 2001, was approximately $5.7 million. The year ended 2002, she was $4.2 million. There is the drop that happened that year.

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

MS HANRAHAN: The following year was $4.2 million.

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

MS HANRAHAN: Right.

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

MS HANRAHAN: The Northern Ranger went from approximately $2.9 million to $2.4 million.

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

In terms of this area here, you are not sure whether it is down because of those refit costs. Would you have a breakdown of the refit costs, whether they went down? That was my initial question. I know you have the general figure. I guess there is a statement on costs for that year anyway, I would assume, with the appropriate breakdowns. If we could also make a note, we would appreciate seeing where the trend is going there.

With reference also to page 4, in the last paragraph, why is there an administration fee? Is there an administration fee, first of all, built into the agreement? Following from that, why, in 1999, was it only on salary? Why was it put on salary and supplies in 2000? Why did it go on salary, supplies, and catering services in 2001? Why did we keep expanding the scope in administration fee? Number one, what was the fee? What is it based on? Is there a contract basis to warrant having that fee, and why did you keep adding on to other things? Were there modifications or changes in that agreement to warrant that? If somebody could answer that, please?

MR. BAKER: The administration fee was a 10 per cent fee added to work that was required of the contractor. As specified in our clause under refit of 5.2.11.6 -

CHAIR: In your agreement?

MR. BAKER: In the tender document.

CHAIR: Yes. We requested, I know, just recently, earlier this week, to have a copy of that, which we were not able to get, to look at those details. I would have liked to have it, I said yesterday, to have read through it before today, but we did not receive it. If I do ask questions that are in that, we certainly would appreciate referring to the section. That would be fine. If we need to refer to that after, I certainly would not mind having a copy.

There is, in your agreement, a 10 per cent administration fee. What is the administration fee per agreement based upon? Where does that fit into salaries, supplies and catering? Why would you only put it on salaries one year, add it to supplies the next year, and add it to catering next year, if it was in the agreement you could do it in year one. I cannot see a company being so generous where they are not going to take an administration fee. Could you maybe elaborate on that?

MR. BAKER: Under that 5.2.11.6 there is no specific reference to a 10 per cent administration fee, but in our clause this refit (inaudible) cost shall not be included in rates submitted on rate form section seven. These costs shall be handled separately with the contractor at the refit period.

CHAIR: Okay.

Does it state in the contract that there shall be an administration fee that can be applied to salaries, supplies and catering, to all services? Does that state that in the contract?

MR. BAKER: Not specifically.

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

MR. BAKER: Not specifically.

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

MR. BAKER: What happened is that the contractor invoiced us at cost plus a 10 per cent administration fee.

CHAIR: All the invoices for his suppliers and everything were provided to substantiate that cost?

MR. BAKER: Yes, that is correct.

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

MR. BAKER: That was accepted because that is the norm under what we consider the industry standards: if you are going to charge something at cost, that there is normally a 10 per cent administration fee for the handling.

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

MR. BAKER: Anything that you are going to charge at actual cost, it would be acceptable that a 10 per cent administration fee would be acceptable.

CHAIR: Were catering services provided at actual cost?

MR. BAKER: Yes, they were.

CHAIR: There is supporting documentation to show that?

MR. BAKER: We have the actual cost of each of the meals provided, and they were supposed to be at-cost on those breakouts.

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

MR. BAKER: We dealt directly with the contractor.

CHAIR: The contractor could have provided the meals themselves and then put the fee on top of their own supplying of meals on catering?

MR. BAKER: We dealt directly with the contractor and they invoiced us for the actual meals provided. The meals provided also included an extra lunch for the crew where they were working a twelve- hour shift.

CHAIR: There is nothing to show that the meals were not prepared by the company. For instance, we could contract out a service to Swiss Chalet and pay them $1,000 and get a 10 per cent fee on that of $100. We could prepare the meals in-house and do our own costs and factor labour and factor all of the related things - maybe use of space on that particular boat, everything that would go into the cost and then put a ten on top. So we are making money on the administration fee and making money on the preparation of that catering service too, which could be a double profit coming there. If it is an independent, I can see your point, but have you done anything to indicate whether that is done outside? Did you or the Auditor General see any invoices to show that was independently provided and then a fee put on it? We did not expect them to (inaudible) for nothing, but if it is prepared themselves, through their own service, and then put a fee on, wouldn't that be a possibility of getting double payment for one service?

MR. BAKER: Again, as I mentioned, we dealt directly with the contractor. When the price of meals was discussed, yes, a comparison was done with the price of meals and what it would cost if we had to go other places to have this provided. Yes, the prices that we received were very minimal. So therefore -

CHAIR: If you did a comparison of what it would provide somewhere else, I would assume you would do the comparison on what Swiss Chalet would charge you with their profits built in. Is that the price you used? I cannot see you doing a breakdown on what the ingredients went into providing that. Does the Auditor General have anything to substantiate or add to this line of questioning?

MR. NOSEWORTHY: When we looked at the issue of the administration fee we inquired under what authority in the contract was this being provided. There really is nothing in the contract to require the payment of an administration fee at all. There is no requirement to pay an administration fee.

We found it most unusual that in the first year it would start off just on salary costs, then it would be expanded on salaries and supplies, and then finally on all costs. Not only was that unusual, but the other thing we found - and as we reported here on page 267, the number of the Auditor General's report on the page in the bottom, the last bullet. We make this comment, "In addition to the refit expenditures not being tendered... there is no support at the Department for any of the rates being charged by the contractor for the refit costs." That would include these invoices. All of these invoices came from the contractor. There were no invoices there from outside catering services. It was all contractor. We looked at those and there is nothing to check at the department to make sure the rates that were being charged were the rates that you would expect or anything else. It seemed whatever came in was paid. If there was an admin fee on it, that was paid also. The first year, it was on certain things, it was paid. The next year it was expanded, that was paid. The final year it was on everything, that was paid. It is most unusual and that was what we concluded here in the report.

CHAIR: Were those paid just to 10663 Newfoundland Ltd., Woodward Group of Companies or were they also paid to Canship and Labrador Marine? Which of those companies were paid that administration fee?

MR. BAKER: The administration fee only applied to work that was done outside of the normal operating days while the vessel was on her scheduled runs. More particularly, during the refit periods.

CHAIR: Was that done on the Sir Robert Bond, Northern Ranger, Astron, Nada and Apollo, on all five, or just on the Sir Robert Bond and Northern Ranger?

MR. BAKER: The Sir Robert Bond and Northern Ranger are the only two that the department is responsible for the refits.

CHAIR: So all those expenses were related to the Sir Robert Bond and Northern Ranger?

MR. BAKER: That is correct.

CHAIR: Thank you.

That, I guess, makes reference in that question. That is why the Auditor General's office referenced that there was $990,000 worth of work. I know the department had an opening statement and the Auditor General, that was not properly tendered and not paid out in compliance with the regulations. That is the sum of all those totals, I would assume. I ask the Auditor General.

On page 5 -

MR. BAKER: Mr. Chairman, I would like to just take a step back on the comment that was just made with regards to the $990,000 and with regards to the Auditor General's comments as well, that when we sat down to prepare this document we did not do it in isolation.

We sat down to prepare a document that was going to be able to accommodate operating those vessels and protecting the department's assets. In light of that, we looked at the industry standards and what was there in the industry for bare boat charters and how one would protect their assets. Also, along with that, we had to consider that, yes, this is industry standards but we also have to keep in mind and include into this the government legislation and policies and procedures that they have in place. In addition to our marine services officials, we sought the assistance of the Government Purchasing Agency. In addition to that, we sought the assistance of the Justice Department. Together, the tender document was put together and was completed.

Again, I refer to, that everything we did with regards to refits, we like to refer to the document and to our refit section. We knew going in that we had enough flexibility there that we - although the contract was let to the contractor for 365 days a year, that we could intervene for one month of each year to make sure the survey items were protected from the classification society and also any issues that the Transport Canada Marine Safety would have with regards to certificated items. We did that. We went each year and there are years as I mentioned earlier that you do dockside refit. At which time, when we do dockside refit, the vessel remains at dockside.

It also says in our document that whether the vessel goes to dockyard, it will be at the sole discretion of the department. The department then, again, would work with Transport Canada, Marine Safety Division, and the classification society, which would be Lloyd's, and if there are any survey items that would be required to be completed, even if the vessel was on dry dock the year before, it was something that happened - that now we need some underwater inspections done, for whatever reason, but it would be at the sole discretion of the department.

If the vessel did not have to go to the dockyard for those other twenty-eight days, as mentioned in our document, the work would be completed at dockside. Now, a vessel of this size, you cannot come out, turn the key, lock the door and walk away from her. You have to have a crew on-board all the time to make sure that there is heat provided, her boilers are running up, and that nothing freezes up and everything is in good order.

When we take the twenty-eight days, as the Auditor General is referring to, that we did not call tender for, work was done at dockside. Other than that, when the vessel went to dockyard, the work was tendered and the dockyard was paid the lay up days instead of the contractor. The contractor did not receive one lay up day while the vessel was at dockyard, but while she was at dockside and the dockside refit was taking place, that, yes, the vessel was still under the care of the contractor. So we paid the contractor instead of paying the dockyard and those expenses were for shore power, security, and fire prevention for the whole terminal yard and for those reasons.

CHAIR: I had a series on that a little later. I am going to get to that point a little later, when I finish the line I am on. I want to give the Auditor General an opportunity now to respond.

MR. NOSEWORTHY: Just following up on Mr. Baker's comments. The section of the agreement that you don't have, from the invitation to tender document, starts off by stating that during each year of a contract the owner and the contractor will mutually agree on a refit period for the Ranger. The refit period will be approximately four weeks. So, annually they will mutually agree. It goes on to say that it is understood by the contractor that the refit period may not involve dry docking.

Now, they had a refit period in one year and that was in 2000-2001, and in that year, during the refit period, the twenty-eight days, $154,000 was actually paid to the contractor without tender even though it was a refit period. It was paid without tender. When it went back into service an additional $422,000 was paid on the refit work. So, during the twenty-eight of dry dock they received $154,000 worth of work without tender, and then, when it went back into service, it received $422,000 in refit work, while receiving daily rates.

The year before that, in the 1999-2000 year, government didn't call a refit period at all, and what we found that year, there were ninety-two days when the boat was on lay up. Now, there was no dry dock or refit period called, but ninety-two days on lay up, one boat, and another one was on lay up for 114 days. During that year, no refit called but refit costs on that one, $323,000, while in receipt of a daily rate every day. I mean, government didn't even call a refit period when it could have and saved the twenty-eight days rates. Instead, without tender the contractor received $323,000 of work while in receipt of a daily rate.

From our perspective, it seems that even though the provision was in the contract to have, and it even suggested that they will, on an annual basis, have a refit period. Even though that was available it didn't happen. It happened one year and in the year that it happened only $154,000 was done during that period and then $422,000 was done after. So, even that seems very strange. They didn't call a refit period in the other year and so this contractor received daily rates while they were doing the untendered refit work.

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

Basically, in the fiscal year ending in 2000 there was no twenty-eight day refit provided as per the contract, which meant the company got paid a daily rate every single day and also got paid for refit work in that period of time without a public tender. If I am correct, in other words not only did they not declare a refit period and got twenty-eight days paid at a rate - I think the daily rate is, if it is operating, fifty-some hundred bucks a day. When it is laid up, it is in the three thousands a day. Basically they were getting paid a rate for sailing, on times, when they were also getting paid for other work without going to public tender. That is in the year 2000.

WITNESS: That is not right.

CHAIR: That is what I understand. I am reading in the fiscal year ended 2000. There was no twenty-eight day lay up and they got paid from the time they took possession until the end of that fiscal year. They got paid for every day a daily rate. Would that be accurate?

MR. BAKER: Mr. Chairman, it is mandatory - mandatory - that we have a refit period every year.

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

MR. BAKER: Yes.

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

MR. BAKER: If the refit was completed at dockside, the contractor would have been paid a lay up rate because you cannot escape the twenty-eight days of refit. It is not a free period, whether the refit is done at dockside or it is done at dockyard. If it is done at dockside, we pay the contractor for looking after the vessel because he is paying all of the shore power and all the security and making sure that everything is cleared, because this is normally taken care of over the winter months. So all the snow clearing at the terminal for fire prevention, all this stuff is all looked after by the contractor. Plus the fact that the department would not have an influx of people to go aboard anyway and take control for the twenty-eight days. There is no freebie for twenty-eight days.

CHAIR: But, doesn't the agreement say that there shall be a twenty-eight day period each year at which the vessel reverts to the owner, the Government of Newfoundland and Labrador, and the contractor is then relieved of responsibility during that period? It reverts to the owner. Isn't that in the basic contract? I think that is in the operating agreement, I understand, even in our package.

MR. NOSEWORTHY: That is in section 5.2.11 of the refit document.

CHAIR: Section 5.2.11.

You are saying that did not happen in the year ending 2000? The boat never went back to the owners of the boat, the Government of Newfoundland and Labrador, which should have been during that twenty-day period. Is it my understanding that when it goes back to the authority of the Government of Newfoundland and Labrador, the contractor does not have charge of that boat during that twenty-eight day period and therefore should not be paid fees on that twenty-eight day period. Would that be correct?

MR. BAKER: Mr. Chairman, again, for that twenty-eight day period, each year the department takes control. It is under the control of the department; but, having said that, for those twenty-eight days the lay up rate has to be paid somewhere. Somebody has to be in place to look after the vessel, which is considered as a lay day. The department goes aboard to do and take control of the refit period, whether it is at dockside or in dockyard. The twenty-eight days, like I said, is not a free period at all. We either paid it to the contractor or we paid it to the dockyard. Even at the dockyard it is called lay days. It is a lay day that somebody has to be there to protect the vessel during those periods.

CHAIR: On page 28 -

WITNESS: I think the deputy minister has -

MR. OSMOND: I will just try to add some clarity to it, Mr. Chair. This is why we tried to create this table, or this chart, for you. I know it is a bit confusing, even for ourselves. You have to put it all down on paper so you can understand it. What the Executive Director of Marine is trying to say is that the vessel is crewed 365 days of the year; 365 days of the year the power is on the vessel. You cannot turn it off and just walk away from it. Someone is caring for the vessel all the time. There is being money spent caring for that vessel every day of the year. The only thing that will change, in accordance with the contract, is if we take custody of the vessel to put it into a dockyard somewhere.

The mandatory refit of twenty-eight days every year can happen either one of two ways, according to this figure for you. It can go and be done dockside, in which case it is done by the contractor, and lay up time is provided for in the contract and paid for, or government can take custody of the vessel having had it tendered for the work to be done at a dockyard. It goes to a dockyard, and included in the tender for the dockyard are the same things that the contractor otherwise would take care of at dockside. You have to keep the thing plugged in, you have to keep it heated, you have to keep it running and so forth.

I think there is confusion, Mr. Chairman, over some of these terms and that is what is behind a lot of the frustration, I think, in trying to understand what happened here.

CHAIR: Actually, I follow that particular point. For instance, on the Sir Robert Bond, on page 34 as an example, and that is the Vessel Operating Agreement, during a lay up day $3,065 is paid.

On page 34 in our booklet here, in the Vessel Operating Agreement for the Sir Robert Bond, the agreement is one of the documents in that big book there, I am assuming, because there is a list of documents that make reference here but we only received, I think, just a part of that, just Vessel Operating Agreements - $3,065 a lay up day. During the fiscal year ending 2000, it is my understanding that the lay up days there would have been paid to the Woodward Group of Companies because there was no twenty-eight days designated. Would that be correct?

MR. OSMOND: What I am trying to say, Mr. Chairman, is that there is a twenty-eight day period.

CHAIR: Yes, I was getting to the next year then, and that might answer where I am heading. The next year, there was a twenty-eight day period designated.

WITNESS: Every year.

CHAIR: No, the first year - basically, during year two, the year ending 2001, who was the $3,065 rate paid to in the year ending 2001? Who was the recipient of that?

MR. BAKER: Mr. Chairman, the lay up days only paid from approximately the end of November when the vessel would come out of service until approximately June 9 or 10 when the vessel goes back into service. That is a lay up period. It is not for the full year. During that time, whether the vessel goes to dry dock for refit or it goes dockside for refit there is a twenty-eight day period.

CHAIR: Yes, I understand that, and there is a two week pre-season and post-season. I am familiar, as I have read through all the details of that. My question was: During the twenty-eight days designated in the year ending 2001, who was paid for that twenty-eight day period on the lay up day? I think 10663 was paid the year ending 2000. The year ending 2001, who was paid during that twenty-eight day period?

MR. BAKER: If it went to dry dock, it would have been the dockyard. If it did not go to dry dock -

CHAIR: Yes, which dockyard?

MR. BAKER: I think the last couple of years that we went to dry dock, the successful bidder was the Newfoundland dockyard at St. John's.

CHAIR: Okay, so that went to tender?

MR. BAKER: Yes.

CHAIR: On that twenty-eight days?

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

CHAIR: Yes, but I am wondering, did it go to tender for that twenty-eight day period in 2001?

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

CHAIR: Yes, and I think you said it went to dry dock, so I am asking if it went to tender. You are saying, yes, it did go to public tender?

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

CHAIR: It went to dry dock, you have established that, so I am assuming it went to public tender. Are the supporting tender documentations there?

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

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

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

CHAIR: Well, that is the point I would like to know. If it did, who was paid that, and was it the lower tender? The previous year it did not go to dry dock and the rate was paid, to 10663. The reason I am asking is, if it went to a specific dry dock under a public tender the next year, during that twenty-eight day period, should not have received anything there and it would have gone to the dockyard basically. That is based on what you are saying. Wouldn't that be correct?

MR. BAKER: If the vessel went to dry dock, there should have been a twenty-eight day period.

CHAIR: Yes, and could you provide which dry dock it went to, and were there tenders called, and how many tenders? You do not have that with you?

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

CHAIR: Okay, if you could, please.

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

MR. JOYCE: I just have two or three questions. I have to catch a flight, and they are moving the flights up because of the storm. I will be very brief because I know you never asked a lot of questions in the last couple of days.

This twenty-eight day or thirty day lay up, is this in the standard agreement that you signed with the company itself?

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

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

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

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

The Deputy Minister mentioned in his opening that you had a legal opinion that this agreement did follow the public tender act.

MR. OSMOND: Yes, Sir, we asked the Department of Justice to review the actions that we had taken on this as well as the Auditor General's opinion on this, and their response, without being able to quote it chapter and verse, was basically that neither opinion should be given any more credence over the other. So, they were both equally plausible.

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

MR. NOSEWORTHY: I did not see any legal opinion that the Deputy Minister is referring to, but I did meet with his current legal counsel and the former legal counsel and they concluded that, in fact, it didn't support the $990,000. That is where it ended in my office and Mr. Janes is a witness to that. John Baker and Larry Cahill were there.

MR. JOYCE: So, there is a legal opinion stating that this is within the public tender act?

MR. OSMOND: Yes, we have a letter from the Department of Justice written by Mr. Bruce Piller and the end result of that letter is just as I stated.

CHAIR: At that meeting -

MR. JOYCE: Oh, no. I will ask one more question and I am gone then.

CHAIR: Sure. Go ahead.

MR. JOYCE: I am not trying to put anybody on the spot here, but is there any way that - then again, Works, Services, the one that oversees the public tendering for the Province, you have a legal opinion. The Auditor General is saying, well, we don't agree. Well, I am not sure what you are saying. Is there any way that Works, Services and the Auditor General can get together and say, okay, boys, how can we do this. Obviously you are going to follow Justice and if Justice says yes, you are following the Public Tender Act, you are going to do it. If the AG says, well, we don't feel that it is, that you contravened it, is there any way to get together, because Works, Services are the ones who oversee the public tendering for the whole Province?

CHAIR: The Auditor General already gave testimony here today that there was a meeting on July 11, 2001 in which the former and current legal counsel indicated that it was not in line.

MR. JOYCE: I can't ask the question?

CHAIR: I want to comment on information that has already been entered to avoid too much repetition, but if you want to ask another question, sure, go ahead.

MR. JOYCE: I am just asking: Is there any way that sometimes the AG can get together - because this is not just for this issue. I am talking about the public tendering for the whole Province which Works, Services is responsible for. This is just a suggestion more than anything else.

MR. NOSEWORTHY: We tried to work closely to come to an agreement. We had taken the position long before we met with the legal counsel and the Director of the Government Purchasing Agency. It was clear to us, based on our understanding and interpretation of it, and when we had the meeting I was open-minded and I was waiting to be persuaded, and it didn't happen. As a matter of fact, when I came back into the room I was told that they agreed with my position and the Director of the Government Purchasing Agency - now that person is in an awkward position and I might add that last year we recommended that consideration be given to moving that position away from the particular department and having it out into more of a autonomous role where they would probably be able to provide a more open opinion.

MR. JOYCE: Okay.

MR. OSMOND: If I may just add a supplementary to that. In my experience with government it is certainly very helpful to receive criticisms from the Auditor General. It certainly does help us improve the way that we do business and this is an exercise, I think, in that here today. Undoubtedly, when the Auditor General submits reports to us and gives us good criticism on how we do our business, it does help us improve things and we do continue to make amendments to our documentation and make amendments to the way we do business to try to be in conformance with proper procedures as identified by the Auditor General.

If I might make as well just a quick point on the Director of the Government Purchasing Agency, that agency, as the Auditor General points out, does indeed report administratively into our department and into the assistant deputy minister for works. In years gone by - maybe it was ten or fifteen years ago - there were some minor amendments made to our legislation at the time in terms of how that reporting relationship took place; however, there have been no real changes made to the legislation since that time, though I would indicate the important piece in this is that the Director of the Government Purchasing Agency is appointed by the House and can only be dealt with by the House. So within the department, or me as deputy minister, I do not have the power to change his position or anything of that nature. He does clearly have autonomy and independence from that perspective but reports within the department more for administrative purposes, and certainly there is legislation dealing with that. It has been well talked about in the past.

MR. JOYCE: Thank you.

CHAIR: Thank you.

I think the Auditor General has reported here from a meeting on July 11, and with legal counsel, and Mr. Janes, too, of the Auditor General Office. Maybe it is something our Committee would have to consider - we are supposed to meet after today, too - that maybe we should have more witnesses here - maybe the Director of the Government Purchasing Agency - because the Auditor General has reported that they agreed with him.

Who provided the letter from the department to works and services, indicating that it is in compliance with the Public Tender Act? Who did that letter come from?

WITNESS: We sought for and received the opinion from Bruce Pillar, who is a solicitor with the Department of Justice.

CHAIR: That would be the same Bruce Pillar who attended a meeting and indicated to the Auditor General that it was contrary.

I have not seen a Justice decision yet that really implicated its own government, because they do not do that. I have never seen it, in my time in here, publicly.

I want to continue -

WITNESS: Excuse me, Mr. Chairman. I would like to make a statement here as well.

I was at that meeting in July and I do not recall any statement saying that we contravened the Public Tender Act.

CHAIR: What statement did you understand to be -

WITNESS: Very similar to what we have received from the Justice department now. If you look at it in this light or if you look at it in that light, from different angles, yes, you could see some discrepancies there, but not very clearly come out and state that we are contravening the Public Tender Act.

CHAIR: In the departmental response here it is indicated, of course, that the Justice department has not necessarily supported government or the Auditor General in the response here. You are saying, subsequent to that, they are supporting government?

Is there a different response now from Justice than indicated in the submission on page 273 in the Auditor General's Report, page 18 here, "... the Department has received an interpretation from the Department of Justice with respect to the particular contract terms in question..... I do not think the terms of the document generally lead to a conclusion that either of the competing interpretations [that of the Department or the Auditor General] should be given more credence."

They have not refuted the opinion. By calling in and having meetings on the issue, wouldn't that give significance that they really had a concern? Would they have gone to that length if there was some doubt?

WITNESS: Mr. Chairman, I guess we have to go and check the letters, look at the dates of the meetings and so forth, but my impression was that the letter was written much later, subsequent to these meetings and so on, but clearly that is something we can clarify by just looking at the dates of these things.

CHAIR: Could the Auditor General shed any light on that, or Mr. Janes?

MR. JANES: I just wanted to comment that during that meeting they did not say that it directly contravened the act. All that was said is that the $990,000 was not meant to be covered under that tender, so they did not really use the words: contravened the act.

CHAIR: They said it was not meant to be covered?

MR. JANES: That is right.

WITNESS: Which is the same.

CHAIR: Those are the words they used.

Mr. Butler, I think you had a question, as well as Mr. Osborne, on this topic.

MR. BUTLER: I want to come back, Mr. Chairman, to a comment that you made. Maybe I misunderstood you, when you referenced a member of Justice - I failed to get the name - when you mentioned the letter that the department had received from a lawyer in the Department of Justice. I guess those people are going on what he stated in that. Are you saying that his judgement is taken out of context here, and he is not here to defend himself? Because you seemed to belittle it, that: would they ever do anything to go against government anyway?

CHAIR: No, what I indicated, what I asked, was it the same Mr. Pillar that was in on these meetings? We got a different interpretation from the Auditor General's office. I only said I have never seen a Justice department - I did not say Mr. Pillar - I said I have never seen a statement come out of the Justice department on an opinion that basically incriminated a government. In any lawsuit, or whatever you are going to do, that would not be -

MR. BUTLER: In essence -

CHAIR: I used that in a general context, yes. I was not referring specifically to Mr. Pillar.

MR. BUTLER: Really, Mr. Chair, what you are saying is, what the department stands on versus the Auditor General's report, it is one against the other. I think you are belittling the situation from that gentleman, whomever he or she may be.

CHAIR: We have heard a couple of conflicting reports.

Mr. Osborne had a question, and then Mr. Fitzgerald.

MR. T. OSBORNE: Thank you, Mr. Chair.

My question is simply that if the Department of Justice has indicated that neither of the positions should be given more credence, I mean, really it is a matter for interpretation as to whether or not the Public Tender Act as been breached. But, having said that, what is in the best interests of the taxpayers? If the department are saying, on a technicality, that the Department of Justice is saying neither of the positions or interpretations should be given more credence, what we are doing here is spending taxpayers' money. If, by going to public tender, we could have saved taxpayers' money, wouldn't that be the right thing to do?

MR. OSMOND: Mr. Osborne, perhaps my colleague, John Baker, can also respond as well, but I think what we were dealing with here was a situation where if you wanted to go to public tender, let's say, on this, if that was your choice then what are the pros and cons of doing that for the moment?

By going to public tender you would have to be removing it from the contractor's care, the same crew who have managed that vessel for the last eleven months of the year or what have you, who intimately know the vessel, in many cases have operated on that vessel for many years, have done this kind of work routinely at dockside in past years. So you would be dealing with the people who would know the vessel the best, if you would leave it in the contractor's care. So, when we talk about standards and practices and that sort of thing, that is what you would be trying to call into question here, whether or not it would be better to leave it in the care of those who have always done the work or to extract it from their care and to publicly tender for it to see if you could get someone else to do it cheaper.

The rates that are charged by the contractor are always highly scrutinized and, in these cases, we feel that we have gotten good value for our money and we got the work done by people who were very knowledgeable of the vessel and, indeed, in whose care the vessel had been for the last eleven months and would continue to be in their care for the next eleven months. So you were dealing with a group of people who also had an interest in making sure that the vessel was well maintained.

CHAIR: Mr. Osborne, and then we will get to Mr. Fitzgerald.

Just one other followup on this specific thing.

MR. T. OSBORNE: Thank you.

I thank Mr. Osmond for that response but, again, I have to ask specifically, considering the fact that if we are dealing with one individual who knows there is no competition and his best interest is also the bottom line for that company, would government have saved money if we had gone to public tender?

MR. OSMOND: I can only state, sir - it is a hypothetical question, I guess - we have scrutinized the costs that were coming from the contractor and felt that they were fair and reasonable, and felt we were getting good value for our money.

I might draw an analogy, if I may, to other circumstances in other contracts where work is done that is not contemplated specifically in the contract. When we are building buildings or building roads, the same things happen. Unexpected things occur or things that you could not define at the time when you go to public tender, yet you require that contractor to, nevertheless, do the work. It is the reasonable, proper and appropriate way to handle this extra piece of business as opposed to trying to remove it from that contract, getting another contractor to do it, and bringing it back to the original contractor. Then you are faced with liability questions over whether it was good enough, or whether it was done to a point where the older contractor would accept liability for it if there was a problem later on that occurred as a result of the work that was done by the other contractor; who is to blame, who is going to be culpable for it, all kinds of things that come into question. It is for those kinds of reasons that we oftentimes stay with the original contractor and do things like change orders when it comes to building contracts and so on as well.

CHAIR: Mr. Fitzgerald.

MR. FITZGERALD: Mr. Chairman, I was just going to make a comment because it seemed like we were getting bogged down there on who said what, what was said when, and that sort of thing. I just want to make a comment, but if we are moving away from that then I do not have anything to say.

I think, with all respect to both parties here, if there is documentation and a letter to show that the Justice Department had said there was not a contravention of the Public Tender Act, then we should accept that and move on from it. Having said that, I do not think we should ever be shy in going to public tender for anything in order to provide the people out there with the best value for their dollar. Far too often in the House of Assembly, especially as it relates to Marine Services - and I realize too that it is a different service and things need to be done when they need to be done. I think if you look at much of the documentation that has been tabled in the House, a lot of it is related to Marine Service and I think a lot of it could have gone to public tender rather than be classified as an emergency the way it was (inaudible). Those are just my comments at this time.

CHAIR: Before we move from there, I think the department's own response here in the Auditor General's report, to the Auditor General report and I reference on page 273: did not give any more credence, that is the Justice Department, to the Auditor General's view or the department's view. The question I just asked, and then I will move off this, was: When you are in doubt about whether something has to go to the Public Tender Act, why wouldn't you go to a Public Tender Act? If you use the argument that - I will just add by saying - because someone is familiar with it, they would have it forever. Whoever lays sods all the time in Pippy Park would have it forever, or whoever does an extension to government buildings would have it forever, because they are good at it and we like their work and we think it is fair - every contract. Wouldn't that eliminate and undermine the whole basis on which a Public Tender Act should be based?

MR. OSMOND: Mr. Chairman, we would certainly take the position that this work was tendered. This was all publicly tendered. It was contemplated under the contract that certain dockside refit work was going to be done by that contractor.

CHAIR: Okay.

Could you provide for our Committee copies of that tender, and the tender documents for that specific service? Does it state in that, that all refit work and so on would be done by the contractor? Is that in that document? Were there other people who submitted tenders on this, other companies that bid?

MR. BAKER: In the initial bid, when this went to tender, we had three companies -

CHAIR: The overall service, yes. I am not talking about the overall service. I am speaking about specific work that needed to be done on a refit basis to keep the boats operating. I am not talking about the general contractors. There were three bids. The lowest dropped out and then it came down to two other bids. I am very familiar with the background on that, but I mean the specific work as it went ongoing from year to year. That is what I am asking, was this work tendered? The $990,000, were there other competing bids on that? I understand there was not, from reading the Auditor General's report.

MR. OSMOND: Mr. Chair, as my colleague John Baker had indicated earlier this morning, the only time we would have gone to tender was when we were going to the dockyard. Whenever that instance arose, we would have gone to public tender. Otherwise, we did it within this contract.

CHAIR: Okay.

Thank you.

Mr. Noseworthy.

MR. NOSEWORTHY: Just one point. There is a section in this agreement, and I do not think you have this agreement, that says the owner - government - will be responsible for refit of the vessel during the refit period, and it says that the refit period may not involve dry docking. So, wherever the boat is, if there is refit of the vessel, then the owner is responsible for that.

It goes on to say: Including all costs, tendering - it is right here, tendering - the owner will be responsible for tendering and all arrangements for the work and overseeing the work. The contractor will provide a list of recommended items for refit approximately two months before the scheduled refit.

So it contemplates in the agreement, underneath is refit work, and refit does not mean that it has to be in dry dock. Refit period may not involve dry docking. It could be anywhere, so even when the boat is in service, and it clearly contemplates right here that the owner, government, will be responsible for refit of the vessel during the refit period, including all costs, tendering and arrangements. So it contemplates tendering right in here.

CHAIR: What section, Mr. Noseworthy?

MR. NOSEWORTHY: That is section 5-2-11-2.

CHAIR: Okay.

Is that a copy of the book for us, that was brought today? I wouldn't mind, Mr. Noseworthy, or somebody -

MR. NOSEWORTHY: That is a relevant section when you are talking about tendering.

MR. OSMOND: Mr. Chair, if I may.

CHAIR: Yes, Mr. Osmond.

MR. OSMOND: These are the very clauses and so forth that the Department of Justice was asked to review, upon which it rendered its opinion. Rather than us, I think, sitting here today tweezing apart the clauses and whatnot, we have gone to the Department of Justice and sought their opinion on this, and their opinion, as is included in our response to the Auditor General's report, is that neither interpretation should be given more credence than the other.

CHAIR: That is why, I guess, I asked the question, when you are in doubt, whether something should be tendered. Because someone just happened to be doing it, wouldn't it be in the public interest to go to a public tender when you are doubt? If you are clearly certain - the Justice department could not tell you with certainty that the Auditor General is wrong. He said, there is just as much credence as the department. Wouldn't it be prudent to go to public tender when you are in doubt?

MR. OSMOND: Mr. Chairman, I do not disagree with you, if we are in doubt. We frequently or usually would take the position that we will go to tender if we are in doubt. However, in this case, this doubt, if you will, although none on our side, arose after the work actually had been performed. When the work was performed, when it was implemented, we on our side were not in any doubt. We felt we had interpreted the document accurately and fairly, so we were not in any doubt - that what we were doing was contravening the Public Tender Act.

CHAIR: Thank you.

I think we have exhausted that topic, on that particular aspect of it, I think Mr. Fitzgerald indicated. I will just continue on page 5. At the top of page 5, page 216 of the Auditor General's report, there is reference made that there were no work orders issued for work to be done. Why wouldn't there be work orders issued? Why wouldn't that be the case?

MR. BAKER: Mr. Chairman, when a vessel goes into refit, and you are referring to dockside or dockyard, there is a refit list prepared and that document is followed right through - and we have copies here - the refit period. Now, whether it is done at dockside or dockyard, our superintendent of marine engineering is in control of that document. Yes, as the clauses state, the owner will be responsible for the refits, and the owner was responsible for the refits, and those documents were prepared.

Now, we have a project manager on site when those refits are taking place. The project manager will take the refit list and he will assign different jobs to the different engineers who are on the vessel. They will monitor that on a weekly basis and document the job completion and the percentage of work done, and each week there will be a progress meeting. Then, all of that work is documented: how much is done, what percentage is done, what percentage is left to do, and that will control the work on the refit and the progress being made.

CHAIR: I am wondering if the Auditor General could comment with reference to no work orders issued and so on, and the concern the Auditor General would have had with that?

MR. NOSEWORTHY: A normal part of commitment control in any government department, in any activity that you are working at, would be to have purchase orders issued in order to control your expenditures to make sure you have sufficient funds to anticipate receipt of an invoice so that it could be matched and paid, and that sort of thing. You know, if no work orders are issued, that is not a good thing so we pointed that out here. We also found, in the same context, that in fact there was an error, an $1,800 overpayment. In that a rate charge by the contractor was for a different vessel and they were overpaid $1,800.

Another overpayment is related to the billing of payroll and catering services while the vessel was being paid at the full daily operating rate of $6,967 per day. The contractor actually went and billed the department and they paid this $63,000 for payroll and catering costs. That is on page 270 of the Auditor General's report. So it is very important to have purchase orders issued to anticipate the type of expenditures that would be coming down to establish what the prices would be, what you would expect. It is a control mechanism. It is a requirement in government, so we put it in as an issue.

CHAIR: You basically feel if that was being done here these overpayments would not have happened, or it would have been picked up that they were billing for one boat when it should have been the other boat? Those thing were likely to have been -

MR. NOSEWORTHY: That is part of the process. Yes, you can anticipate what you would expect to pay and it would be set up that way. Then you would be able to match and you would supposedly identify overpayments. That happens a lot in government. They identify that and then they make the adjustment, but in this instance, no purchase orders, no work orders and it was not detected.

CHAIR: Those two you referenced there, that is the total of $65,000 - on page 260 in your report - the catering plus the rate charge that was wrong?

MR. NOSEWORTHY: Yes.

CHAIR: Okay, thank you.

The agreement -

MR. BAKER: Excuse me, Mr. Chairman?

CHAIR: Yes, sir, Mr. Baker.

MR. BAKER: With regards to what the Auditor General has just commented on, the $65,000 that was pre-season per diem and would not have anything to do with work orders. This is identified in the rate schedule of the vessels on a per diem. What happened there is that there were two days that were charged for pre-season and the wrong vessel was charged. The Northern Ranger rate was charged for those two days rather than the Sir Robert Bond.

CHAIR: My understanding, just to make sure we are correct, that they were charged the operating day of $6,967.08 which is the Sir Robert Bond operating. That is what the charge was but it should have been - because Mr. Baker indicated it wasn't an operating day, would that be - I ask the Auditor General, the rate that was charged was an operating day based on the Sir Robert Bond's operating day but it was a pre-season, it should have been $3,032.89, it was in the pre-season preparation period. Are you saying the difference from $6,967 to $3,032 is what should be charged? My understanding is that $6,967 was charged when it should have been the other boat.

MR. NOSEWORTHY: The rate that was charged was $3,944. It should have been $3,032, a difference of $912 for two days is $1,824; rounded to $1,800.

CHAIR: Okay.

MR. NOSEWORHTY: The $63,000 relates to a different issue. On page 270, what we have here is a situation where the Sir Robert Bond is now in operation at $6,967 per day. That is the operating rate. We have the Sir Robert Bond at an operating rate of $6,967 and it is here for twenty-four days receiving that. In addition to being paid that money we said that they should have been receiving a lay-up rate of $3,065 because they were not operating. We said the contractor was overpaid by $93,648 as a result of that because they received the operating rate versus lay-up because it was not in operation. Then, on top of that, even though they got the $6,967 per day they went and billed for payroll and catering services. It seemed unusual.

CHAIR: Was that money recovered if it was billed incorrectly?

MR. NOSEWORTHY: I do not know. You would have to ask the departmental officials if they recovered that.

CHAIR: Was that money recovered, I ask the department? That is right because you would not have done any subsequent audit to substantiate that. Was that money recovered where it was overpaid?

MR. OSMOND: Mr. Chairman, I guess, with the long-standing relationship like this one where there are invoices coming out every month or so, because occasionally errors in there are usually corrected then on subsequent invoices as a credit given. In this case staff advised the contractor of the overpayment. The contractor acknowledged and agreed that there had been an overpayment and there would be a future invoice adjustment accordingly. Regrettably, I do not have a copy of the adjusted statement at this time but it is certainly something that we could try to have for you in the next few days.

CHAIR: Did the contractor agree that the overpayment was as indicated here? Did the contractor agree on the amount?

MR. OSMOND: Yes, as far as I know.

CHAIR: Okay. It is your understanding it would have been adjusted, hopefully?

MR. OSMOND: Yes, that would be my understanding. I just, unfortunately, do not have the paperwork to confirm that right now.

CHAIR: Was Ms Hanrahan going to have a comment on that?

MS HANRAHAN: Yes, please.

We have three or four issues here. I just had a couple of points of clarification with respect to work orders. We do, routinely, use work orders for some projects. In this case what would happen is once the work order spec was determined and the work that was to be decided between dockside, dry dock, whatever was needed to be done and our marine superintendent realized what the vessel needed at that point, then they would determine a cost estimate and a permit would be put in place. The permit would block funds based on the estimate of what that work would cost and any future invoices would draw down upon that amount of money. In that respect, we did have commitment control and did have project estimates.

With respect to paying rates and having some errors in billings, as you can imagine the size of these contracts and the amount of transactions that occur, there are times when there are errors made. On subsequent invoices it was routinely done that adjustments would go through. They would be approved by the marine division as having been back and forth with the contractor.

CHAIR: Thank you.

On page 5 in this booklet. I think the department indicated earlier that - with reference to, "The contract envisions a refit period...". The first bullet there, the department - whether you really had a refit period. I am wondering why there was no refit period in 1998-1999? Referenced in the second indented paragraph down as per the agreement. Now, I know the interpretation of what you would consider a refit. A refit would not - the agreement is fairly clear, I think, in that statement, that a refit does not necessarily have to be a dry dock. It may be dry dock, or it may not be dry dock. I would assume that if it requires dry dock for underwater areas and things of that nature that it could not be done while it is in the water. It may necessitate that but it is not necessarily specified. Why wouldn't there have been a refit period designated? What would be the rationale or reason for that?

MR. OSMOND: Mr. Chairman, my understanding is that - again, if we go back to all these definitions and stuff - there was indeed a refit period. We are required to refit the vessel every season. The refit though was not defined as a dockyard refit. It was a dockside refit, and that is contained within the contract. I think what you might be referring to is defining a refit period that is outside the contract, whereas in this case there was a refit period that was within the contract.

CHAIR: Okay. In this case they received a daily rate of $173,385 during that period. Why would the contractor - got a daily rate and also the $91,000 for work that was done while they were being paid the daily rate? I understand that went directly to the contractor, right? It did not go out to a tender. I think that has been established. What was the daily rate they were paid in that period?

MR. OSMOND: Mr. Chair, indeed, that would have been a dockside refit being done. The contract contemplated that the contractor would continue to be paid for a lay-up day during that time frame. In addition to that lay-up period, in addition to the revision of the normal things that keep the vessel operating during that period, he would also be paid for the additional work that was being performed as part of the refit.

CHAIR: So that was depending on which boat, whether it was a little over $3,000 or $2,500 that they were paid the lay-up day for that boat, the contractor was, in addition to doing the $91,000 in work?

MR. OSMOND: Correct. I am not sure on the figures but yes, generally speaking.

CHAIR: Yes, as in this paragraph here on page - that we referred to.

In 1999-2000, also, I think there was no officially declared refit period. Was there in 1999-2000? That is a little farther down, I think in the next paragraph. There is no designated refit period. Once again, the same thing happened I guess the following year. The contractor got $323,000 for doing work and the daily rate of $680,000 he got during the same time. That was based on a lay-up day and the contractor received $323,000 also. Once again, that went, I am assuming, on the same basis as it went to the contractor? If it went to public tender, isn't it logical that whoever won the tender would seek to hire the personnel that would be there? I know people who retired from that service, when they worked with the federal government and were retired - I know people personally - who got called to come back and go to work on one of these boats. Wouldn't it be logical that the contractor would seek someone familiar with that, whether it is an engineer or whatever the case may be? Wouldn't it be logical to have at least somebody there who would be familiar with some of the work? That shouldn't be a basis, would it, to give a contract to somebody because they are familiar? I mean, there are other people out there, are there not, who know engines and boats and operations, people with expertise. Why would it have to be just confined to this, especially with such large sums of money involved?

With this transaction here alone, if you look at the lay up days which would have been paid anyway, but still $323,000 on top of that, I mean there was almost a million dollars during that period, in excess of a million. Why would that have to happen?

MR. OSMOND: Mr. Chair, when you say, have to happen, it was within the power of the department, according to the contact, to, at its discretion, make a decision. If we felt we were not getting good value for our money we might well have decided to do it in some other fashion. However, that was not the industry practice, if you will, and we were convinced that we were getting good value for our money. So we had no reason, in fact, to take it, remove it from this contractor and have a separate tender and a new contract assigned to it.

CHAIR: Is it possible you could have gotten better value for your money if you went to public tender? Do you have a comment on that?

MR. OSMOND: Mr. Chair, you may well be right. Hypothetically, anything could happen, I suppose. We felt convinced that we were getting good value for our money and the decision was made to carry on with the existing contractor on that basis.

As I said earlier in my remarks, frequently within contracts things come up that are in addition to what is specifically outlined in a contract, yet it makes good sense to carry on with that contractor and have them perform the additional work.

CHAIR: You mentioned discretion. Wouldn't it probably be in the best interest, where there is discretion, to exercise that? Who knows, if you do not try it? By not using discretion to put it out to tender, wouldn't that undermine the basic intent of putting services available to the public so we could have as many people as possible and even build an expertise maybe in that area rather than confine it? Wouldn't that be against the basis intents and purposes of the Public Tender Act - and to get a cheaper price for taxpayers, of course?

MR. OSMOND: The only response I could make, Mr. Chairman, would be that we did publicly tender this work. The additional work that we are talking about was contemplated within the contract and we followed the Public Tender Act to have this work performed.

CHAIR: Were there many tender submissions? When it was dockside refit, my understanding was that it did not go to tender.

MR. OSMOND: That is correct.

CHAIR: That part was not tendered?

MR. OSMOND: It was tendered within the original tender. The vessel operating contract contained provision, in our opinion and in our interpretation, to carry out dockside maintenance.

CHAIR: The same one that the Justice department indicated that the Auditor General's opinion has as much credence as the department's opinion.

MR. OSMOND: Correct.

CHAIR: Which meant, when in doubt -

MR. OSMOND: Mr. Chairman, if I may again, the doubt arose after the work had been performed.

CHAIR: What is happening now? Is it going to tender now for dockside refit?

MR. OSMOND: I will let my colleague, John Baker, speak to any new contracts that are coming up.

CHAIR: Maybe I could ask: Since this report that was tabled basically on January 31, 2002, has all the dockside refit work since then gone to the Woodward Group of Companies or have other people had an opportunity to tender on it?

MR. BAKER: When we compiled the document - I will refer back to that - again, we put together a document with industry standards and with the assistance of the Government Purchasing Agency and with the assistance of Justice. It was determined at that time that we were fully within our right and abiding by all the rules and regulations and procedures and whatever to carry out the document as it was written and approved. Therefore, once this was happening, we felt we were within our right and a document was drawn up for this specific reason. Not for a specific reason for any particular contractor, because it went to public tender, but it was drawn up very openly with everybody's eyes open, that, yes, this covers through our Government Purchasing Agency and the Public Tender Act, and we proceeded along those lines.

Again, as we stated, when we do a dockside refit, it is normal in industry standards that you have the crew carry out the work under the guidance of a project manager, and this work is carried out at dockside. Again, as the Auditor General pointed out, it is at the sole discretion of the owner, and the owner took full responsibility of each and every refit period. We felt that, because of this, and with both parties, the Government Purchasing Agency and Justice, advising us, that we were okay. A couple of years down the road we get an interpretation from the Auditor General's office that you are not in compliance, rather than, when we did it, we were in compliance.

CHAIR: Okay.

The question I really asked is, whether the refit is at dockside or whether it is on a dry dock, wherever it is, for a twenty-eight day period each year the vessel reverts to the owners, which is the government. During that period, since the Auditor General's report, since it is now after the fact, for the past two years has any work at dockside gone to tender, or has anyone received any work other than the Woodward Group of Companies for the past two years on dockside refit?

MR. BAKER: Yes, that is correct, they did. The Newfoundland Dockyard received work and the Marystown Shipyard received work from the Northern Ranger.

CHAIR: Was that on dry dock or at dockside?

MR. BAKER: That was at dry dock.

CHAIR: No, I asked on dockside refit. In the past two years, did any company other than the Woodward Group of Companies do work at dockside? Not on dry dock. When on dry dock, I think that has been answered. Has any other company had an opportunity to bid on dockside refit or work?

MR. BAKER: We have carried out the dockside refits as per the tendering document that we have.

CHAIR: So you are saying there is only once company that did that work. Would that be correct?

MR. BAKER: It was done through the contractors, crew member of the vessel, and under the guidance of our superintendent of marine engineering.

CHAIR: It has been established in an earlier question that the contractor is solely now the Woodward Group of Companies. I think that has been established.

We will just move on. On page 5, there was reference again, there was designated refit work from 7 May to 14 June. There was the contract which paid $154,000 for refit work. I guess you are stating for that also, that it is falling under the same thing? You are saying the original contract was out - this book here, you are saying, gave you authority, even though a specific section of that, 5.2.11.2, indicates that this work could be tendered? It was not really tendered as such. My understanding is that you figured you got fair rates from the contractors of that service and therefore you were not compelled to go on that either. I guess that is following from our previous items too. Would that be correct?

MR. BAKER: Mr. Chairman, if we follow along on that bullet there, there were designated refit periods from 7 May to 14 June, during which the contractor was paid $154,000 for refit work which was not tendered by the department as required. During this period, no daily rates were paid to the contractor and that is because the vessel would have gone to dry dock. As was stated earlier, even if it goes to dry dock, there is a requirement that we have so many vessel crew on board during that period, and this is why you see the two amounts there.

CHAIR: Okay, I follow that.

On page 6, with reference to the subsidy there with reference to freight, what procedures are in place to ensure that the payment of this subsidy is as per the contract? I know there was some reference made at the beginning. Could you tell us a little detail? How can you monitor to ensure that the amount of money that is payed is correct and accurate? Could somebody comment on that specific question?

MR. BAKER: We have what we call a Labrador Regional Manager who also oversees this operation during the operating period. During the season, he will do audits on the weights and billings of the contractor to determine that he is in line and everything is done properly.

CHAIR: What is the department doing to ensure that Woodwards is complying with its contract as it relates to the quality of service? There is reference made here on the quality of service, like: the vessel must be maintained at a high state of cleanliness, repair, reservation services throughout the year, remove debris from various areas and so on, at least once a week stevedoring, facsimile machines are maintained at wharf points and terminals; they were lacking in areas and so on. Are those references here in the Auditor General's report now? What is happening now? Are they all corrected, and is everything complying with expectations of an appropriate quality of service?

MR. BAKER: Again, Sir, our regional manager for the Labrador services is a very hands-on person. He has at least twenty-five years of experience in this business and in that particular service. He spends very much time at sea with the vessels and with the Sir Robert Bond, the Ranger, and also the container vessels. He is monitoring this all the time. Also, I cannot remember ever receiving a negative response from any of the passengers travelling on the North Coast service with regards to the cleanliness or the service provided on the vessels.

CHAIR: In terms of having fax machines available at some of those ports there, do they all have these services now in terms of communication and so on? Has anything happened since this report? The Auditor General made reference to some of these items. Are there any changes as a result of this report?

MR. BAKER: Mr. Chairman, we did a followup on that after this report was received. They said there were a lack of fax machines on the coast. The response we received was that they were having problems keeping fax machines at freight sheds on the dock. Because the contractor had other offices in the ports that had fax machines, they maintained the fax machines at those facilities rather than at the dock site.

CHAIR: They basically had those services available in all ports. Would that be accurate, but not necessarily at the dockside location?

MR. BAKER: Not necessarily at the dockside location but they did have them in the ports.

CHAIR: In all ports and available?

MR. BAKER: Yes, that is correct.

CHAIR: The Auditor General, in your review, it was basically the dockside that you looked at, or is there anything that you can add to that from your perspective?

MR. NOSEWORTHY: When we did the review we inquired about this aspect and no one provided us with any information or could tell us whether these fax machines were at these locations. All we had was a list of fax numbers which did not include these locations. Therefore we made the statement that we did.

CHAIR: I was just wondering, and maybe ask the committee here, could we probably take a ten minute break and then we might be able to clue up after a break rather than a lunch break? Would that be more appropriate? It is entirely up to the committee what they -

WITNESS: The faster the better, sir.

CHAIR: Okay. We will take probably a ten minute break and stretch that -

MR. FITZGERALD: You are on page 5, Mr. Chairman, there are thirty -

CHAIR: No.

WITNESS: We are good for another month, Roger.

CHAIR: No. Actually, it is not. A lot of these items that were generalized there in conclusions are done in detail on the subsequent pages. Do not let that scare you, I say to Mr. Fitzgerald. It will not be too many more from my perspective.

We will probably take a ten minute break or so, just stretch and then we will get back and try to conclude it.

CHAIR: Order, please!

We will resume the meeting again and I will try to sum it up as quickly as possible. Most of the things, I guess, have been covered under the umbrella of other things. I should not take too long more in my line of questioning. Maybe that might mean all the questions have been asked and there might be nothing for anybody else.

With reference to page 7, page 262 in the Auditor General's report, when we look at government's estimated cost, it shows there 2002, $11 million. Then if we look at 2003, obviously they projected that it would cost about $11 million in these years and would decline then in 2004. If you look at the budgeted costs then - there were revisions, of course, along the way. We made some reference to it earlier, of $19.5 million. When you look at the last year of expenditure there, I think there was an actual cost in 2001 if $21 million. You know, that is a fair amount. We are almost double in what we anticipated. That is one of the basis - I know I asked at the beginning - when projections were done the Labrador Transportation Initiative, the $347 million, they hoped by taking over that service, getting the boats to the wharf and terminal there from the federal government and, hopefully, money in the road construction, that that would lessen the need along the way for increased coastal service and that they might be able to do it at a cheaper cost.

The costs have really gone out of whack from projections there, and I know we had some reference to it earlier. What went wrong basically, I suppose, and what might be future projections or corrective measures to get it back? Is it really that we missed the boat so much - it is going to cost so much that we are not going to go back to the federal government and ask them for another $100 million; it is going to cost more than we thought. I do not think that will be greeted with too much pleasure. What is the future, basically, in terms of cost control?

MR. BAKER: Mr. Chairman, as I stated earlier, those estimates in 1998 were done with the anticipation in mind that we would anticipate the service, more particularly, moving further north as the road was completed.

The first move would have been into Mary's Harbour and we would operate from there, but due to the construction starting, it started from both ends, from the Red Bay side and from the Mary's Harbour side and also with the increased activity on the fish plant there on the dockside in Mary's Harbour, it was felt that it could not accommodate a freight and passenger service into the Mary's Harbour port. That was one reason why we could not move further north. Following that, it was anticipated that we would probably be able to move further north then into Charlottetown but since that time, right at the dock site, and, I guess, good for Charlottetown, there was a fish plant built. Therefore, again, no lay-down area and no space to accommodate a passenger and freight service out of the Charlottetown area. With that in mind, we had no other choice but to carry on, status quo, until we could reach Cartwright. Those are the reasons for the difference in the amounts, because as we move further north then we could have made a change in the vessel configuration.

CHAIR: Do we now expect to see the cost come back in line, come back close to projections? I know there are revised projections that have occurred since the initial projections. Where do we expect it to take us in cost now? It has been reported that it is going to cost more now to operate from the new port as opposed to Lewisporte, for example? Is there any truth to that?

MR. BAKER: Do I understand the question, that it could cost more than from Lewisporte?

CHAIR: Yes. I guess I will just deal with the first one first. What do we expect to do to keep the cost in line? You know, we were way out in our initial projections, I guess, and even beyond the revised projections somewhat. What is the trend for the cost in the future? Have we turned the corner now? Are we going to see costs being contained and more in line with expectations initially, when we struck this deal?

MR. BAKER: We are expecting the cost to come down. Our projections are that the cost will come down. As I mentioned earlier, the tenders are not closed yet and I would rather hold off in stating any amounts that we would expect to pay in the coming year or future years until after those tenders have been closed and opened.

CHAIR: I guess the jury is out on whether it is going to cost more or less to deliver it from Lewisporte. That is basically what you are saying on that one.

Will there be extra stopoff points? There will be a facility now in Cartwright, I think, is it? Cartwright is going to be the new location. There would be drop-offs to Cartwright that will have to come by marine service, I guess, rather than by land. Then there are going to have to be movements from there, again, to other destinations, as opposed to coming from the Island portion itself. So, extra stoppage points: Would that bring on extra costs or do you expect to see economies? Generally speaking, wouldn't you think an extra stop would be an extra cost?

MR. BAKER: The freight and passengers traveling north of Cartwright would travel to Cartwright by road, then they would join the vessels at the Cartwright terminal and proceed on from there.

CHAIR: Yes, but the new highway begins in Cartwright, right?

MR. BAKER: Yes.

CHAIR: And it will link right up to the current one, I guess, at Red Bay where it ended before. So people using that service now would - south of there, you mean? South of there they would move by road to Cartwright? You said north of there, did you? You probably meant south of there, did you?

MR. BAKER: No. The people and freight moving north of Cartwright would travel to Cartwright to connect with the vessel to continue their voyage rather than picking up a vessel in Lewisporte or southern Labrador.

CHAIR: Okay, go by road. So they would cross on the Apollo, I guess, across The Straits?

MR. BAKER: That is correct.

CHAIR: The marine cost should be lessened, but I guess the road cost in comparison to marine is what remains questionable, whether it is going to be cheaper for the people of Labrador, for example, if you do it overland by trailer, cross on the Apollo, down to Cartwright and then by boat, or by going directly from Lewisporte. I guess time will tell what impact that has, I guess.

Just on first blush to me it looks like a long overland route across on a ferry in the Straits and into a terminal storage in Cartwright and then on to a boat further north might be an extra cost to the consumers and people might pay more for a product by the time it gets to Nain or Hopedale, or wherever the destination is.

If I am missing something, I would certainly like to have a comment on that because to me - and I spent over twenty years in business and we did the movement of goods and services all around the world, actually - it seems to be an extra level of cost we are adding to the system, not a reduction of cost.

MR. OSMOND: Mr. Chair, certainly there has been a study done most recently, the Abbott Report, on trying to determine whether it would be more expensive for the people of the North Coast of Labrador, or less expensive, as well as just the overall impacts. I think it is fair to say that it was difficult, even for a consultant going out and spending a lot of time at it, to really come up with a defined answer here. It really comes down to letting the marketplace do its thing and see what happens. The experience though, that we have seen on the South Coast, has been that prices in fact have declined and that customer convenience has increased. Because of the road connection going to the other locations on the South Coast of Labrador which were previously only served by boat, we have seen prices go down, not increase. The jury is still out. Hopefully, we will soon see how things go. It is certainly something that the department and government have been very concerned about. It is unfortunate that, in terms of a consultant looking at this sort of stuff, it is hard to come up with an exact answer because you have to sort of wait for the marketplace to react and see what competitive forces they play out there.

CHAIR: I guess there is a fair geography, where it is north, especially north, because there still are going to be no road links in the north. It is still going to be each port of call, the marine service they are going to depend on, whereas in the south it will be a combination, basically, of overland and marine. I will not belabour that anymore, but I think the point was worth asking.

On page 12, there is reference made to a replacement vessel. A replacement vessel was whose responsibility? Was the company responsible? Do they have any obligations in a replacement vessel, if a vessel is not available? Whose responsibility would that be?

MR. BAKER: Yes, the contractor would be the first to be obligated to provide a replacement vessel and get his own vessel back in service as quickly as possible.

CHAIR: That was not tendered for that replacement vessel, I understand. Is that correct? Would it have been required, that tender, under the Public Tender Act?

MR. BAKER: When the Northern Cruiser, at the time, ran into mechanical trouble and it was going to be out of service for some time, we went to the contractor and said: Okay, can you put your hands on another replacement vessel very quickly to pick up the slack? They said: No, not that we know of right away.

After that, we went to the other contractor and asked: Do you know of a vessel that we can get to replace the Northern Cruiser for a short period of time? After a short while they came back and said: Yes, we have another vessel, albeit somewhat smaller than the Northern Cruiser but then again less costly as well.

Being in a bit of a pinch and a bit of, I guess, an emergency situation, this being in the fall, we had to keep some service running there because the fall of the year is a very busy time, trying to get all of the winter supply in and trying to get it in before the ice arrives, before the ice forces us out of it. We very quickly put the vessel in place, in place of the Northern Cruiser, so therefore the payments stopped to the Northern Cruiser and continued on at probably half, or less than half, of a daily rate.

CHAIR: Okay.

On page 14, page 269 in the Auditor General's report, the last paragraph, "invoices totalling $990,000 for refit work did not always indicate which vessel...", and so on, getting charged to the appropriate vessel. What system is now in place to ensure that if something is done on the Sir Robert Bond it is charged to the Sir Robert Bond, if something is done on the Northern Ranger it is charged to the Northern Ranger, to ensure that there is an appropriate accounting of costs applicable to each particular entity under the coastal service?

MS HANRAHAN: All of the vessels for marine have individual responsibility centres, which is unlike our roads or our works operations. For most of the operating costs, they are charged directly to a vessel. Specifically, when it comes to capital work, we have tracking codes that we use that specify the type of work done and the type of vessel. This particular thing that is noted here, I am not sure of the particulars of the invoice or if it was more than one. I do not know if the Auditor General would have additional information on that point, but generally everything is coded very specifically through oracle in a variety of different ways based on the vessel that was operated on, whether it was capital current, the type of work that was done, whether it be supplies, fuel or whatever. It is very specific.

CHAIR: Okay.

Would it be safe to say right now, since this particular point, that everything now is being identified to the appropriate use, and which boat it ties to? Have there been changes since the Auditor General's report to ensure that this does not happen again, that a cost to the Sir Robert Bond is a charge to that particular account? Has your system changed in your allocating those particular costs appropriately?

MS HANRAHAN: My understanding is that the system was originally driven by vessel anyway, and that there were some changes over the years with respect to where refits were coded, whether it be to one cost centre and then we use tracking codes, or if it was charged to individual vessels for the sake of using the comparative cost information for the sake of the refits being money that was taken out from operating.

CHAIR: Okay.

Did the Auditor General have a comment on that? Because, if you are looking at something happening on a boat and there are extra costs and it is all on one boat, you would like to know your cost of operating that particular entity. If it is getting to the point where the costs are becoming prohibitive, maybe it is time to start looking for another boat if we cannot properly identify it. That is my concern, that we need to apply it to the particular area. If the Auditor General could probably enlighten us on what the discrepancies were, the nature of them, or the magnitude, probably? If it is only of a minor nature, I am sure it is something that would not impact significantly on decisions in the future.

MR. NOSEWORTHY: The majority of the $990,000 that came in on the invoices did not have sufficient information in order to be able to make an appropriate distribution, so the department simply split those. So it would be the majority.

CHAIR: So if there was a $15,000 expenditure not identified, they probably based it on the size of the boat, or based on that they did equal splitting -

MR. NOSEWORTHY: It was equal split, and we even comment here: The department split the cost evenly between the Sir Robert Bond and the Northern Ranger, even though the Sir Robert Bond is a much larger ship.

Even though the accounting system can accommodate that sort of tracking, and that is what it was designed for, in order to accumulate the cost by boat for management purposes and for monitoring, as a result of the inadequate information in the invoices it was not possible.

CHAIR: Okay.

Well, if a freight cost, for example - if someone shipped it by a transport company and it cost $800 to ship something for both vessels there, I guess, rather than $800 going to the one, or saying we will take it $400 each, I could see minor things of that nature and saying: Well, what per cent of that shipment should go to this and that, if they are all on the one shipment, for example? I could see little cases like that, but were they big items?

MR. NOSEWORTHY: They relate to the $990,000.

CHAIR: A lot of that.

MR. NOSEWORTHY: The bulk of that.

CHAIR: Is that still happening? I would like to know. Or are we more specific now in allocating it?

MR. BAKER: Mr. Chairman, even when those refits were taking place, we had two different project managers on site: one on the Northern Ranger and one on the Sir Robert Bond. Anything that came in for payment from each of the vessels would have been signed off by each of the project managers.

CHAIR: So a signature by a project manager should have triggered to put it to a specific account?

MR. BAKER: Yes.

CHAIR: But that probably did not get done?

Mr. Noseworthy.

MR. NOSEWORTHY: That is right. It was split evenly, like we said, even though one boat was bigger than the other.

Furthermore, if you continue on that same little paragraph, the situation worsened in September, 2000, when the department began to charge refit charges to shore services. It even got worse. It is one thing to have the invoice come in and to split it evenly because there is not enough information to charge it to the proper boat, but then in September, 2000, it worsened and the refit charges were charged to shore services.

CHAIR: I guess it still comes back to my question: What is happening now? Is that correct? It that still happening that way or is it allocated appropriately to the specific entity?

MR. BAKER: I take it that was one invoice that was charged off to the freight operation. I can only think that may have been just an error in the coding number that went through, rather than a general practice.

CHAIR: Was that only one invoice?

Mr. Janes.

MR. JANES: No, it was most of the $990,000. An invoice would come in from the contractor saying: refit on the Bond and the Northern Ranger, say $40,000, and that would be split 20/20 and posted to the accounting system.

CHAIR: So there could be dozens of invoices?

MR. JANES: Oh, we have them here in front of us.

CHAIR: So that is the big percentage that was done.

If we could ask, maybe: Could t be applied appropriately in the future? If it is not done up to now, is it possible, in your opinion, to practice doing it for the future so we can properly identify costs pertaining to each entity? How can we - for example, when we look back here at the table, we look at the cost of operating back in Figure 1, for example, on page 258 of the Auditor General's report, and those things. When we look at the figures here, budgeted and actual, we do not really know if that is the actual cost of the Sir Robert Bond and the Northern Ranger when we do not get a proper allocation of invoices for those specific areas. It is really not very meaningful when we cannot get costs attributed to the source because we are not really getting information then that portrays what happened. I know it has happened and it is in most of the $990,000. All I am interested in seeing is that it does not happen again. If something could be done to stop it from happening and properly allocate it. Is that being done now and, if not, could it be done?

MR. BAKER: Mr. Chairman, when the invoices come in it may be called, for example, re-billable services for refit or whatever, but those invoices were accompanied with backups with so many hours and different things charged to the Sir Robert Bond and so many to the Northern Ranger. So I would like to think that this is more of a -

CHAIR: An accounting procedure?

MR. BAKER: An accounting procedure on a minimal basis.

CHAIR: Did the Auditor General's office see those breakdowns so they could attribute it correctly? Did the general invoice have a backup documenting support to show what you could have attributed to each boat?

MR. JANES: They had the backup for, for example, if they bought supplies. Now, for the salaries it was simply listing of staff and the rates. The title on the invoice was refit for Sir Robert Bond and the Northern Ranger. So they did not have it broken down by boat. They just had it summarized totally.

CHAIR: So, the supporting documents did not show that. It just showed -

MR. JANES: How much time.

CHAIR: Supplies were specific but all other areas, like salaries, were not. Would that -

MR. JANES: Well, it did not show if the supplies were specific to a particular boat. It just gave the documentation on the invoice for the supplies.

CHAIR: Okay, I have made my point. If you want to comment further, go ahead.

MR. OSMOND: I would just like to go back, Mr. Chairman. I think one your original questions dealt with the refit charge of the shore services. That was a question at one point and we were just sort of checking amongst ourselves and -

CHAIR: Yes, I think the Auditor General read that point.

MR. OSMOND: Mr. Baker, though, had indicated that there were only one or two instances like that, that he could recall, but then when the response was generated by the Auditor General I think we started then talking about the entirety of the $990,000 again. We were dealing initially just with the one or two recharges to shore services.

CHAIR: Mr. Baker.

MR. BAKER: As a clarification, as well, we were referring to invoices. When we get a split on the invoices that split could be because of the backups that are with the invoices. We are referring to invoices but are we also talking about the backups that accompany the invoices?

CHAIR: My understanding from Mr. Janes is that if an invoice was for labour, for example, of $40,000, it was written there or the backups indicated it was labour or salaries for both, not specified $24,000 and $16,000. So the split was done. That is the impression I got. Could we have it clarified? Mr. Baker, are you saying the supporting information, the backup, would have shown the actual appropriate amounts to each?

MR. BAKER: That is correct.

CHAIR: Was that the case, Mr. Janes? Did the backup information have the appropriate divisions?

MR. JANES: No, the invoices did not show which employees worked on which boats. They just showed a total of employees and the amount for these employees that worked on the re-billable service, as Mr. Baker referred to.

CHAIR: Okay.

MR. BAKER: Again, when you refer - I hate to be bringing this -

CHAIR: You are saying there is supporting information but the Auditor General has not seen it. Would that be accurate?

MR. NOSEWORTHY: The bottom line on this is that the accounting records are wrong. The accounting records are not accurate. Whether or not there was documentation supporting it, which we say there is not, we have it here, you cannot break it out. Even if it was, it was not posted properly. So it is not being tracked properly. That is really the point we are making, but notwithstanding that, you cannot break it out anyway. So the accounting is not right.

MS HANRAHAN: Are you talking about the accounting now or then?

MR. NOSEWORTHY: I am talking about it now. I think Mr. Sullivan asked about the accounting now.

CHAIR: Yes.

MS HANRAHAN: You are talking with respect to the re-billable, with it being charged to shore services. There was a change made several years ago with respect to a change from coding refit costs to the vessels to being coded to one responsibility centre and then sub-coded, as such, to a tracking code. We certainly do accumulate various types of information by a vessel. The reason that those refit costs were separated were to allow for management reports that provided different information with respect to operating versus refit.

When they were both mixed in there of course - John Baker has mentioned these blips with respect to refits - the costing numbers go up and down. So in order to get some decent, comparable information the refits would be pulled out and coded separately. However, any analysis by a vessel would include those costs as well because we would track them then by that tracking code.

CHAIR: Okay, we will move on.

On page 15. Why was a company, owned by a captain, paid $20,060 when the captain was also being paid as part of a refit crew requested by the department? That is in paragraph 3 on page 15, page 270 of the Auditor General's report.

MR. BAKER: From what I understand - and again, we dealt strictly with the contractor - the contractor may have engaged somebody else to carry out some of the work for them, but we had nothing to do directly with any company that a captain may have set up.

CHAIR: Was that tendered work?

MR. BAKER: That was as per our tender document. Again, like I said, we requested certain people from the contractor and those people were supplied. Now, how he supplied them was one thing but we dealt directly with the contractor.

CHAIR: That was, I am assuming, on the Sir Robert Bond?

MR. BAKER: Yes, that is correct.

CHAIR: Was the $20,060 paid to the Woodward Group of Companies, 10663, or was it paid to the company owned by the captain?

MR. BAKER: It would have been paid to the contractor, 10663 Newfoundland Limited.

CHAIR: That company paid the contractor, I would assume. That strictly went to the contractor. The contractor selected whom they wanted to do the work on behalf of the contractor.

MR. BAKER: We provided the classification and the contractor would supply -

CHAIR: The contractor had an outside company do the work. I know we have had a discussion earlier on tendering aspects. Here we have another company now doing work that is selected by the contractor to do the work, not the contractor itself. Was that the only instance of that?

MR. OSMOND: Mr. Chairman, if I may, we are talking about contracts and subcontracts here now and of course our relationship is with the contractor. The contractor goes and selects whatever subcontractors that they might want. That really is not part of any aspect of the tendering that we are doing or any aspect of the control that we would have over the contractor. They can go and subcontract out any aspect of their work, provided the subcontractor is qualified to do the work. It is really not part of any control within the contract from our perspective.

CHAIR: No, but a company owned by a captain who is being paid a salary for that boat does raise a certain concern. I think the Auditor General has made reference to that. Did you want to make a comment on that?

MR. NOSEWORTHY: About the subcontractor?

CHAIR: Yes, that particular - I think you probably got my attention for a question. Maybe we have moved on beyond that, I do not know, but with reference to having another company do the work for the contractor. Specifically, I mentioned that the captain was the owner of a company that did subcontract work for the contractor. On the appropriateness of that -

MR. NOSEWORTHY: We put that in here when we were looking at the invoices and that sort of thing and going through it. We thought it was strange that the captain who would be on a vessel and being included in a daily rate - because the contractor was receiving a daily rate for most of the time - that this person would be included in that and also would be participating in other work that government was paying for. We cited that as a potential conflict or something at least that the committee should be aware of; the House should be aware of.

CHAIR: Mr. Osmond did you have a -

MR. OSMOND: Yes, if I may, Mr. Chair. Contractual relationships, if you will, get very tangly and complex. Frequently we see contractors, who have tight business relationships with subcontractors, come together as a team frequently to carry out the work. Again, I stress our contract is with the contractor. Those relationships which take place and how they go about getting their business and work done is really outside the bounds of our contract.

CHAIR: Page 271 of the Auditor General's report, page 16, it indicates there in line three, "The Department does not perform adequate work on whether the contractor is complying with the contract when it bills for the freight subsidy." That is in the vicinity of - what? - $1 million a year, I think, the total cost. What is the department doing to ensure that the subsidy they are getting for freight is actually the subsidy that they should be getting paid? What controls and what balances are there to ensure that?

Maybe if we want to start with the AG, why it was referenced in your report, that might give some insight into it before you answer the question.

MR. NOSEWORTHY: We looked at the process, we enquired and said: How do you know what you are paying for a subsidy? We concluded that they did not perform adequate work. We said there was no formal process in place, no standard audit programs or any sort of representative sampling technique that you would need in order to quantify some analysis of the work conducted. It wasn't there.

Furthermore, the employee who was hired to do this was looking at the invoices and looking at the rates that were being charged to customers, and the rate being charged to the customer, while that is a nice thing to check to make sure people are paying the right rates, from the government's point of view, I think they should have been looking at the total rate being subsidized by the Province. That was not being reviewed at all. In summary we said: Look, this process is not adequate.

CHAIR: That might be exactly where they are coming from. If you could respond to that or what might be happening now.

MR. OSMOND: Mr. Chairman, this was something I tried to explain in my opening remarks, dealing with bills of lading. It is the industry practice to use these legal documents to account for, if you will, and have control over, the amount of weight, tonnage, that is being shipped. It is certainly an accepted practice within the industry to use those bills of lading to verify, if you will, what is being shipped. They continue to be an industry norm. As I said earlier this morning, particularly in dealing with bulk goods and containers and so forth, you don't take it all apart, figure out what is in it and reweigh everything and that kind of thing. You look at the bill of lading, which has onus upon the shipper to report all this information factually and correctly, and you take that and use that in determining what the total tonnage was that might have been shipped.

CHAIR: Do you have a practice, for instance, of just doing random checks, for instance, on that volume, to see if that complies with the bills of lading and so on, at least spot checks to ensure accuracy of that? What is done in that regard?

MR. BAKER: Again, as I stated earlier, our regional manager in the area, who is, again, a very hands-on person, has done spot checks in the terminals to verify that things are done in accordance with the contract.

CHAIR: Would somebody else like to ask a question?

Mr. Fitzgerald.

MR. FITZGERALD: Mr. Chairman, I just have a couple of questions. I think you have covered it pretty thoroughly there in your line of questioning.

On page 15, there is a question that I would like to see answered there, where the contractor charged the department the operating rate of $6,967 per day and kept the boat, the Sir Robert Bond, fully crewed while it was out of service for twenty-four days, whereas the lay up rate should have been $3,065 per day with an overpayment to the contractor of $93,648. I would think, if there is something wrong with a vessel, your car or whatever, if it is going to take a week or twenty-four days to repair I do not see why you would have to have the vessel fully crewed and have the government or the people of the Province paying that amount of money while the ship is lying up. Wouldn't it have made more sense to have had a skeleton crew, or just have the people there to deal with the problem on the vessel and the crew be recalled when the vessel is ready to sail?

CHAIR: Pay a lay up charge, you mean, instead of an operating fee?

MR. FITZGERALD: That is right.

MR. BAKER: At that particular time, the vessel was at dry dock. We have to give five days notice to the contractor to have the vessel fully crewed and ready to go as soon as the vessel is certified, gets her certificate, and ready to pick up the scheduled service. The vessel was in dry dock and we were given every understanding from the dry dock that this would be solved on a particular date, so we issued a notice to the contractor to have his crew on board on a particular date once this happened. The vessel was at dry dock. We have what we call valve gates for the thrusters. Those were installed and she was supposed to be ready to go. They did experience some problems with the gates but they kept telling us: Well, this will only be temporary, this will be done such and such a time. This carried on and it went to a point where, after a few days we were able to go to sea trials with the vessel only to find out that the gates were still leaking. Then we had to go back in, and again they told us that it would only take a little while, this would be corrected and the vessel would be ready for service again. This is what happened in that case.

It is very inappropriate to take approximately thirty to thirty-five men, send them home and, with a couple of days notice, to come back in again, when you are being told that the vessel is going to ready to sail at such and such a time. This is why, again, as we said earlier, the incorrect rate was charged. It was identified and agreed by the contractor that the inappropriate rate was charged at that time.

MR. FITZGERALD: It seems to be in excess to have a full crew of people there for twenty-four days while the ship is not in service. Would we have paid catering services and all those other costs at that particular time as well?

MR. BAKER: At that particular time it was only the operating day that was paid. In error, as was identified earlier, there was an extra charge but it was identified, considered as an error and corrected. We only paid the operating day which would include the full service of the Sir Robert Bond.

MR. FITZGERALD: Which would have been an overpayment of $93,648 versus what would have been paid if the ship had been in service at the time?

MR. BAKER: The lay day rate is $3,000 per day. What we are talking about here is a lay day rate, but it was not a lay day rate because the vessel was fully crewed, therefore it would be the operating rate.

CHAIR: Before you move to your next question, just on that one there: A five-day notification is given before you get into an operating day and before it is crewed up fully. Would you do the sea trials? The sea trials would come under your pre-season preparation, I would assume. In your fourteen-day pre-season preparation you would do your sea trial. Would notification be given to the contractor to crew up and be ready to sail after the sea trials or before the sea trials? Because if it was after the sea trials, this would have been detected and that particular operating day fee would not have even become an issue. Could you let us know, what is the normal procedure when you do your sea trials and when you give notification for the contractor to begin crewing and operating?

MR. BAKER: We give a five-day notice to them to supply the crew.

CHAIR: After or before sea trials?

MR. BAKER: Before sea trials because you need the crew on board in order to do the sea trials.

CHAIR: Full crew?

MR. BAKER: Well, the only thing is, what was anticipated at that time is that we do the sea trials and everything was supposed to be working out, so then you carry on the service. That was the plan. We were running behind because we were late getting the vessel on dry dock. Because the shipyard in St. John's or Halifax could not accommodate the vessel at the time we were late getting her on dry dock. Therefore, this is why everybody was in a bit of a panic to try and get the vessel back on schedule as early as possible. That is exactly the same time that the Northern Ranger kicked in a month earlier, as well, and the passengers and freight on the Labrador Coast were very much being inconvenienced because of this.

CHAIR: Wouldn't it be prudent to get the minimum crew that is needed during sea trials and then get the full crew after you know that she is seaworthy and everything is working and she is ready to go, because we went into - what? - a five-week period or so in which it could have been operating and you had to give notification? Is that still followed? You are still giving notification, basically, for full crewing prior to sea trials? For instance, was that done this past year?

MR. BAKER: They do their fire and boat drills when they get their full crew on board because they have minimum crews for the certificates that are offered and in order to get your certificates for the number of passengers that you have on board, then you require a certain number of crew. That is outside of our jurisdiction, so therefore we have to have a certain amount of crew and the vessels are operating on minimum crews.

CHAIR: Mr. Fitzgerald, I just wanted to finish that point before you moved to your other ones, so it is back to you.

MR. FITZGERALD: Just one other question. There is a fair amount of refit work done on those two boats while the boat is in operation. Now, I would think when the boat is in operation and in service, the money that is charged to government would reflect what those people get paid as a daily rate. Now, we have those same people carrying out refit work. I would assume we do. If the refit work is being done while the boat is in service, it is being done by the contractor. So does this mean that that employee gets paid extra for doing that work or does it mean that the total amount of money goes right back to the contractor and it is all being doing as profit because that employee is already getting paid the daily rate for which he is charging the taxpayers of the Province?

MR. BAKER: The only time I know that there was any extension to the refit work carried on while the vessel was in operating mode is when one of the auxiliary engines failed that was done at refit, therefore, after the vessel went into operation. We still have a couple of auxiliary engines that we can rely on. Therefore, that engine had to be rebuilt. While the vessel is in operation, they are crewed, as I said earlier, with minimum crew. You have your crew on board to do your monitoring on the engine room and different safety aspects of the other decks. If there is any engine rebuilding or whatever to be carried out, that would require extra crew. The only time I can remember requiring that is when this auxiliary engine failed and had to be done while the vessel was in service. At that time, the supplier of the parts reimbursed us several thousands of dollars against that repair job.

MR. FITZGERALD: Am I understanding correctly in hearing you say, there is no refit work being carried out while the vessel is in service.

MR. BAKER: No.

MR. OSMOND: If I might respond, as well, for Mr. Fitzgerald.

I think the question you were trying to ask - I do not know if I am misinterpreting it. When the vessel is in lay up, there is a much smaller crew, of course, attached to the vessel at that time. So there may not -

MR. FITZGERALD: I am talking about while it is in service, Sir, while she is sailing, not for refit work..

CHAIR: The question he asked was: When the boat is sailing, getting your operating day, the crew is on salary and if there is work done while it is sailing, these same people who are there could be doing the work. So while they are getting their salary, is the company getting paid for these people too? That was basically my understanding.

MR. FITZGERALD: That was the question. My question was: Are people getting paid for doing refit work and for doing their regular duties as well? If they are, then where does that extra money go, to the contractor or to the employee - I doubt it if it goes to the employee - and is this acceptable? I understand the Auditor General wanted to comment on that.

CHAIR: Mr. Osmond, finish yours and then we will hear from Mr. Noseworthy.

MR. OSMOND: I am sorry I did not understand your question the first time.

When the vessel is in service, then any activities that might happen - my colleague is aware of one particular instance where the piston blew out the side of the engine. While it is in service, that is the contractor's problem, and he has insurance to cover off the costs that would be incurred to restore that engine to operating condition. There are no additional fees paid from the department to have that work carried out.

MR. FITZGERALD: And there is no refit work being done?

MR. OSMOND: No, because that is done while the vessel is in service. The refit work will be done when the vessel comes out of service and is tied up to dockside.

CHAIR: Mr. Noseworthy.

MR. NOSEWORTHY: In 1998-1999, for the Bond and the Ranger both, there were thirty-one days when both were paid at a lay up rate when refit work was being done. In 1999-2000, there were eleven days on the Sir Robert Bond when the boat was receiving operating rates - eleven days at $6,967 - when refit work was done, so refit work was done when it was in receipt of full operating. In that particular year, it received some sort of a daily rate for 114 days while refit work was being done, but an operating rate for eleven. One hundred and fourteen also for the Northern Ranger in that year. For 2000-2001, thirty-seven days for the Sir Robert Bond when it was in receipt of the full operating rate of $6,967; thirty-seven days when refit work was done. In total that year, for that boat, it was seventy-eight, and in total for the Northern Ranger that year it was fifty. So there are days when the full operating rate is being paid and refit work is done.

MR. FITZGERALD: So I guess my question goes back to, if we are paying seventy-eight days to one vessel and fifty days to the other vessel as a reflection of operating days, then why are we paying them to have refit work carried out on those same days as well?

CHAIR: Why isn't the insurance company paying it out? It is in their hands during the operation.

MR. BAKER: To my knowledge, as I said earlier, the time that I can remember is when we had one of the auxiliary engines fail. The only time that refit work would be carried out, again, like I said, is if it was a failure from the refit work that had been done earlier and then the supplier would have been involved as well. I would have to check back on those particular days because, while the vessel is in operation, the contractor is fully responsible - and, as Mr. Osmond said earlier, they had a big expense on the Sir Robert Bond when we lost a thruster engine. That never cost the department one dollar. The whole engine was supplied by the contractor and his insurance company, and installed in the Sir Robert Bond, and that is the way it should be.

CHAIR: I will just add - it is not a question - the department, in its response, has not refuted that point - they commented on the Auditor General's assertion - if it was paid during that period. The department's response has not contested that point, I do not think.

MR. OSMOND: I would certainly appreciate a little more information on that before we would comment one way or the other. I do not know if that is referred to anywhere in the Auditor General's report. Just in quickly trying to find it, I have not, but that would be helpful and we could make a response.

CHAIR: Sure.

Auditor General, under which specific reference was that broken down in your report?

MR. NOSEWORTHY: If you look at page 268 of the Auditor General's report, you will see in the first sub-bullet relating to the year ended 1999, that they received a total of $91,000 for refit work while they were in receipt of daily rates totalling $173,000. So all the department has to do is go back and look at the rates that were paid when that refit work happened.

I have working papers on that here, all the details, but I cannot share those with you. If you cannot calculate those, if you call our office we can help you through it. It comes from those pages, 268 and 269.

CHAIR: Yes.

I think the Auditor General's comment is that the Auditor General's Act prevents him from sharing any working papers with anybody. They are strictly protected, but I guess reference to it so a department can identify it can be done by checking with the Auditor General.

MR. OSMOND: Thank you, Mr. Chair.

We would be happy to do so.

CHAIR: Okay, thank you.

Mr. Fitzgerald.

MR. FITZGERALD: Just one final point. It seems like this is a fairly lucrative contract. Is the contractor taking any risk in this contract at all?

MR. OSMOND: In a general way, this goes to public tender. Indeed, there are risks that all parties to a contract take. Many times we try to purposely minimize risk to a contractor because what that otherwise will do is increase our costs. They are going to try to guard themselves, or safeguard themselves, against sort of unknowns because they are going to be responsible for them if they happen. We frequently try to reduce risk to our contractors to, in fact, do just that, keep our prices down. There are other occasions when clearly the contractors are responsible and they do carry liability insurance and other kinds of insurances to cover off on those instances.

I have already mentioned one point where, when a vessel is in service, if something happens, as opposed to what my colleague John Baker mentioned, if it arises from some previous work that was done on refit, but if it is just something that happens while it is in service - that piston that blew out the side of the thruster engine was a good case in point - then the contractor is responsible for that. They have all the risk when it comes to something going wrong while the vessel is in service. Then, in that case, their insurance company would kick in and relieve them of it, and that is why they carry the insurance.

MR. FITZGERALD: We supply them with the boat, we supply them with the funding to pay the crew, the operating expenses of the boat. Once he knows his insurance costs, and what his dockage fees are going to be, then it seems like a good business to be in. It takes very little risk.

MR. OSMOND: Indeed, and hopefully that would result in lower prices to the government as a result.

CHAIR: Mr. Fitzgerald?

MR. FITZGERALD: That is it for me.

CHAIR: Mr. Butler.

MR. BUTLER: Just one question to the Auditor General. I do not know if you can answer - I know you can answer it, but - whether you were part of a comment that was made there. I was hoping that Ms Marshall would be here, because this is her report, but I guess you can probably answer on her behalf. It is on page 17 when it comes to the recommendations, and it states that, "The department should: monitor the levels of usage of the coastal Labrador marine service so that needed changes to the budget allocations can be made."

Is she suggesting here that there is too much service provided to the Labrador Coast and it should be cut back on for budgetary purposes, or there are more services required and it should be increased?

MR. NOSEWORTHY: Let me walk through this and start on page 270 of the Auditor General's report. At the very bottom of that page, it starts of by saying, "A 1997 report on how to best provide coastal Labrador with transportation services prepared by a private consulting firm...", and it goes on to say that they thought that by using the highway there would a reduction of 1,500 tons per year, et cetera. On the next page, 271, we show actually what happened. We show the estimated tonnage and the actual tonnage, and it shows that the tonnage actual is substantially higher than what they thought.

I take you back then, again, to the $347 million that was received from the federal government in April, 1997, to operate the service in perpetuity. What we find is that, based on the estimates from November, 1998, the department is exceeding all of those estimates and as a result there is a significant issue relating to the sufficiency of that fund. We reported last year - and I will refer to a bit of it; it relates exactly to this - in May, 2001, the Department of Works, Services and Transportation estimated that the Labrador Transportation Initiative Fund would be depleted by 2014-2015. In November, 2001, government increased its estimated cost to operate the ferries. So, for 2001 and 2003 they expected increases and, as a result, November 1, estimated 2002 to be $19.5 million, which we saw earlier in the chart. We say then, as a result of this, the fund will likely be depleted earlier than 2014-2015 as first thought by the department.

What we are dealing with here is an issue of sustainable funding to operate this. So, back to the recommendation, it says, "monitor the levels of usage of the coastal Labrador marine services so that needed changes to the budget allocations can be made...". This is in the context of: How are we going to sustain a service here with the Labrador highway and the boats so that the Province can do everything it has to do up there? It is in that context that we have to monitor the levels of usage and make some decisions as to how to go about it, because the funds are going to be depleted. Somebody has to fund it. If the boats are going to continue to operate and the road is going to be built, somebody is going to have to come up with the money. That is what it relates to.

MR. BUTLER: In essence, what it means is that the usage that is provided there is too great.

MR. NOSEWORTHY: Well, the consultant was hired and said that the tonnage from the marine service point of view should decrease. It has not. It has increased. So what is the implication of that? Are people using more boats? Why is that happening, if the road is being built and that sort of thing? We are putting it back to the department and saying: Look, you have to look at this and monitor the level of usage with a view of your budget, available funds, and what it is going to mean to the Province in the future.

CHAIR: That is a good point. My interpretation, when I read that, was that the Auditor General was recommending - and maybe Mr. Noseworthy, who was Deputy Auditor General at the time, who oversaw the audits - the Auditor General is not indicating whether the service should be less or greater but that, whatever that level is, there should be necessary budget allocations to deal with it. That is my interpretation, because it would be a policy issue to deal on what type of service they would get, but put in the necessary money to deal with that policy decision. That is what I drew from it. I think that is basically - would I be correct in -

MR. NOSEWORTHY: Yes, we certainly do not comment on the merits of government policy. It is up to government which way they go. All we are saying is that this has to be rationalized, the budget has to be considered and funding has to be available.

CHAIR: Thank you.

Ms Hodder?

MS M. HODDER: I do not have any questions but seeing it is probably the last time I will be meeting with this many members from the Works, Services Department I would certainly like to thank each and everyone of you for your cooperation for the number of years that I have been in government, and before that of course when I worked in council.

Again, I thank you and wish all of you well.

CHAIR: In case we do not meet again, Mary, with the same department - Mary, it could be a long year yet.

MS M. HODDER: No, but I mean with the (inaudible) we probably will not get together.

CHAIR: As you know, Ms Hodder is going to retire when the time comes.

Mr. Osborne, back to you in case you have questions.

MR. T. OSBORNE: Just a couple of questions. It relates to -

MS M. HODDER: Excuse me, before we go ahead, could you tell me just how long we are going to be because I have another meeting.

MR. T. OSBORNE: I just have a couple of questions.

CHAIR: If we could, we made a request at a meeting - I guess to the Auditor General - if we could take just a couple of minutes with them right afterwards to deal quickly with something.

MS M. HODDER: I had better go out and make a phone call then. I will come back.

CHAIR: If you could, sure. If that is okay.

We will probably need about ten minutes as a committee, Ms Hodder, afterwards when we conclude here and that should be able to hopefully deal with it.

Mr. Osborne.

MR. T. OSBORNE: I would like to ask the department, The Sir Robert Bond now is nearing thirty years old, the Ranger is nearing twenty years old, I am just wondering if you could give some indication as to vessel replacement? What do you anticipate the lifespan of those two vessels to be? When do you anticipate the replacement of those vessels or do you have alternate plans as opposed to replacement?

CHAIR: Mr. Osmond?

MR. OSMOND: I think the Bond is actually twenty-nine years old now. These vessels, or certainly the Bond, we had, in fact, originally thought that we would not be operating that vessel this year. Our original intention was to - when we called tenders for this service last year - have a contractor provide different vessels, newer vessels perhaps as well. That having not been able to be done due to the results of that tender call, we are now utilizing the Bond and the Ranger for the next few years I guess. Until at least the next phase of the Trans-Labrador Highway is completed.

When Phase 3 of the Trans-Labrador Highway is completed, that is now linking Cartwright Junction with Happy Valley-Goose Bay, we will then have a road link all the way from Western Labrador to Southern Labrador and no breaks in between. We will not require the Sir Robert Bond then at that point, or any other vessel, to make that very critical run between Happy Valley-Goose Bay and Cartwright which is what the Bond will be doing.

The Ranger certainly has lots of life left in it. We will likely end up just simply selling that on the open market and seeing what we can get for it when its time comes. However, there will continue to be a need to serve Northern communities of Labrador and there may well be a place in that plan for the Ranger.

Needless to say, when it comes to age of vessels, obviously, that is something very sensitive for us. We are certainly very focused on replacing our older vessels within the department, but the safety of the public is very much assured by the federal regulatory authority that oversees all of this stuff. These vessels have to routinely pass fairly rigorous federal inspection and require refits and repairs to be made to ensure that they are seaworthy. They will not go out to sea unless we have all those certificates in place. So there is no fear from the public perspective that these vessels will get too old to the point where they should not be used. They will certainly continue to be refitted to the point where they can be used; and if they cannot, then they will not be.

MR. T. OSBORNE: The other question I have is in regards to infrastructure. The costal service has been operated by the provincial government now for some eight years. When do you anticipate infrastructure upgrades or replacements, and can you give us some idea as to the costs associate with that?

MR. BAKER: We are making some modifications to the infrastructure in Cartwright which will be completed this year. That is approximately between $300,000 and $400,000 for that area.

Also, with regard to some infrastructure in Postville and Black Tickle, that needs some attention as well, and those are being carried out this year. They have been tendered and they have been awarded. Each one is dock work and we are looking at approximately $800,000 for each dock.

MR. T. OSBORNE: So, you are looking at approximately $2 million, in total, for infrastructure upgrades, I guess, over the next two or three years?

MR. BAKER: For this year and, no doubt, that will bring us up to date then. The infrastructure, then, for the coastal service will be in good shape and we should get a number of years out of it.

MR. T. OSBORNE: Marine Atlantic was hired to operate the service up to December 31, 1997 at a cost of $11.6 million. From April 1 of 1998 to March 31 of 2001, the cost of operating the service was $62.5 million, and from April 1, 2001 to March 31, 2002, $11.87 million. There is a period in there that, in reading through the book, maybe I missed, but I did not see it there. From December 31 of 1997 to April 1 of 1998, what was the cost of operating the service and what arrangements were there for that period of time?

CHAIR: I guess that is the period when Marine Atlantic or the federal government stopped, the end of December until the boat was starting up, during that winter, I guess. Is that, I think, Mr. Osborne's -

MR. T. OSBORNE: Yes, to April 1.

MR. BAKER: (Inaudible) January of 1998.

CHAIR: Yes, it would be January 1, 1998, because I think it is the fiscal year, April 1 to December 31, they continued to operate and were paid eleven point some million for that year. On January 1 of 1998, the responsibility for the operation, until the tenders were finalized, I guess - the date is referenced here anyway. I know the Auditor General referenced, she was tied up in Lewisporte at the time.

Is that the picture that is shown, when both of them were tied up there? That is shown here in -

WITNESS: In this one?

CHAIR: Yes. No, it is not, is it?

WITNESS: No.

CHAIR: Okay.

MR. BAKER: I am not sure what year. That would have included some, I guess, provisions for the extension of the vessels, in security -

CHAIR: Mr. Baker, could you adjust your microphone please? Start again.

MR. BAKER: During the period from January 1 to the end of March, 1998, that was a period during which time we had to find somebody to very quickly get in place to look after and protect the vessels until a contractor was identified and put in place. What we did at that time was, we put a person there to look after the security of the vessels. Again at that time, during that period, we also went to tender for the upgrading and the maintenance and inspection and check of the shore-base equipment before it was passed over to the contractor to operate. Unfortunately, I do not have those numbers here with me but we will be able to provide them for the Committee.

MR. T. OSBORNE: Okay. I appreciate that.

From April 1, 2002, to - I realize we are not at March 31 yet, but do you have any indication as to the cost of operations for the fiscal year ending March 31 this year?

MR. BAKER: The fiscal year, this year, saw us come in right on budget at $18.5 million, during which time, for this year, in order to have the work done on the Sir Robert Bond and have her ready, we had to start early in this fiscal year rather than wait until the next fiscal year, so $1 million was also pre-approved for this year which, in actual fact, made it $1 million extra over and above our budget.

CHAIR: Mr. Osborne.

MR. T. OSBORNE: The concern I have at this point, as the Auditor General mentioned a little bit earlier, in 2014, we are probably not going to get to that with the money that is remaining in that fund. We are nearing at this point, I guess, about one-third of that fund being used. That is of concern, obviously, for whoever is going to be in government for that period of time. What concerns me, and I realize that you folks were not the people who had made that decision, this certainly seems to me to be a one-time fix in taking over that service, and the fund that was negotiated to operate that service in perpetuity certainly was not adequate. In my estimation, we are not going to get to 2014 with that fund.

CHAIR: If the bill before the House goes through, Mr. Osborne. We will not get to 2003, basically, because there is a bill still on the Order Paper, as you are probably aware.

MR. T. OSBORNE: What plans does the department have, or what projections at this point, for operating that service once that fund is gone?

MR. OSMOND: I will certainly make an attempt to answer your question. It is a very difficult one to answer, of course. That is a long ways off into the future, and so many things can happen between now and then. The government's fiscal position may change dramatically, and let's hope it does, over the next ten years or so. Perhaps this will not be a problem. Other than that, I really do not know what else to say to your question. It is difficult to project that far ahead, and we will be continuing to operate a much more diminished service in the years to come, of course. There may be efficiencies, even on the service side, that at this stage we are not aware of nor have contemplated. All we can hope for is that, when the time comes, if there are additional monies needed, that there are ways and means that they can be found. There are many agreements that the Province enters into, as I am sure you are aware, that are long term, and things change along the way. Even within our own department the Roads for Rail Agreement, which has been very beneficial to the Province in terms of upgrading our road and surface transportation needs throughout the Province, is completed this year. We could certainly use additional monies from the federal government in terms of sustaining that system that we have built. The federal government has a responsibility, we believe, to assist in all forms of transportation. I know we write a lot of letters to the federal Department of Transport asking for and seeking assistance in doing these sorts of things.

So it is sort of a long answer to your very curt question but there are a lot of things, I guess, that are in the mix that we would hope for to sustain this thing into the future.

CHAIR: Mr. Osborne?

MR. T. OSBORNE: Thank you, Mr. Chair.

CHAIR: Is there anything expended from that fund on those services from the Labrador Transportation Fund? I know it was budgeted to move the money into general revenue in the Budget but the legislation did not ensue. So I am assuming the money is still in that fund, and to operate the services the revenue is coming from that fund still. Would I be accurate in saying that or has money been coming out of that fund for purposes other than set down in legislation when the fund was set up, or do you know that? I know I made reference earlier. I do not know if -

MR. OSMOND: I am sorry -

CHAIR: You figure I should direct that to Treasury Board, I think you mentioned.

MR. OSMOND: Mr. Chair, we do not control the fund so we do need to make drawdowns from it and it is all approved through Treasury Board.

CHAIR: Okay. I have just one last question, and that is on the general service itself. I know there is a Hull 100, Ahelaid has not been put into service yet. I think the target was in June, I believe, to have it ready. I think, at last count, we were looking at probably a little over $7 million including acquisition costs on that. What is the figure now at, basically, based on what is tendered and projected that it would cost?

MR. OSMOND: It is kind of hard to - I do not have the figures right at the top of my head, Mr. Chairman. Unfortunately, we did not come prepared for that question today. I can tell you, however, that we are projecting that the vessel will go into service in August as opposed to June. The vessel is still in refit at the Clarenville Shipyard so we are still incurring expenditures and so forth there. I do not know if I could give you a better answer than that at this point unfortunately.

CHAIR: No, I was wondering if you had an accurate - because I know from our previous Public Accounts hearings there was an estimate, and with decisions since it was in the, I think, the low $7 millions; in the first half of the $7 million at the time, I think it would have been projected. If you do not have it specifically that is fine. We do not know if it is going into the Labrador service or what the plans are anyway. So I will leave it at that.

Does anybody else have a question?

Mr. Osmond.

MR. OSMOND: If I may, Mr. Chairman, if we are closing I have a couple of short remarks I would like to make.

CHAIR: Yes, certainly. If yourself or the AG need closing comments I will certainly afford that opportunity.

MR. OSMOND: Thank you very much, Mr. Chair.

I would like to close by saying that the department feels that it has properly tendered for and carried out the work that has been reviewed here today by the Auditor General. It has all been done in accordance with the Public Tender Act. Indeed, it is the most stringent act - as I have already mentioned - legislation in the country.

Furthermore, we believe we interpreted and implemented the contract terms correctly, which concurred with accepted industry practice. Indeed, calling tenders for dockside refits from time to time is not necessarily also going to result in cheaper prices being achieved.

Finally, while we would certainly say that additional auditing staff would very much be welcome to our department we feel that sufficient controls were in place to ensure the contract payments in this regard were made properly and were made in accordance with the contract terms and conditions.

Thank you, Mr. Chairman.

CHAIR: Thank you.

Does the Auditor General have any concluding comments?

MR. NOSEWORTHY: No.

CHAIR: I think we have addressed it. I thank you all for your time. I have asked if the Auditor General's office could just stay behind because we had a specific request come in that we want to discuss.

The Committee stands adjourned.