WHAT’S NEEDED TO MAKE GOVERNMENT CHANGE SUCCESSFUL?
Chairman: David Edmison
President, The Empire Club of Canada
Head Table Guests
Jeya Nadarajah, CAC student, Western Technical School; Tom Harpur, Journalist, The Toronto Star; The Rev. Dr. Douglas Lobb, Senior Minister, Timothy Eaton Memorial Church; Paul Singleton, Partner, Ernst & Young, specialising in tax; Erik Peters, Provincial Auditor; Donald K. Johnson, Vice-Chairman, Nesbitt Burns Inc.; Douglas Derry, Partner, Price Waterhouse, a Past President, The Empire Club of Canada and President, The Empire Club Foundation; Gareth Seltzer, Vice-President, Private Banking, Guardian Capital Advisors and a Director, The Empire Club of Canada; Elizabeth Loweth, Executive Director, The Canadian Centre for Ethics and Corporate Policy; Bruce McMinn, Barrister and Solicitor, Farano Green; Michael Rayner, President, The Canadian Institute of Chartered Accountants; and Henry Pankratz, Deputy Chairman, Ernst & Young.
Introduction by David Edmison
I’ve heard it said: "The nine most terrifying words in the English language are ‘I’m from the government and I’m here to help." Indeed, for many in the private sector, a government auditor showing up at their place of business is as welcome as a June frost. The reception is no doubt just as chilly.
The one government official however who has found favour with the private sector and the taxpayers of Canada is our Auditor General. He is responsible for reporting to the House of Commons on just how effectively the "stewards" of our federal government are doing spending and collecting our money.
His report, published each year, includes a number of observations concerning departmental expenditures and tax revenues. Many issues are addressed which generally involve failure to comply with authorities and expenditure of money without due regard to economy. In his most recent report, our special guest Mr. Denis Desautels asserts that the federal government has spent $4 billion in regional economic development since 1988 with little certainty the money has accomplished the job for which it was intended.
He cites the following areas of concern: "a lack of information on which programmes have worked and which have not; the need for cost effective, risk-based project assessment; lengthy approval times; the need for continued co-operation among the entities; and the challenge of implementing changes to repayment policies while ensuring a balance between programme objectives and collection."
Quite obviously the job of Auditor General is a demanding one. It requires a person who is thorough, experienced, can focus on getting to the root of a problem or issue and possesses outstanding communications skills in both our official languages. Mr. Desautels is well qualified for this important responsibility. His background is impressive. Born in St. Bruno, Quebec, he attended school in Montreal. After earning a Bachelor of Commerce degree from McGill University, he joined the firm of Clarkson Gordon, now known as Ernst & Young. Well before the explosion in the use of computers, our guest spent his time as a computer specialist and lectured on information systems auditing at various universities and professional groups.
In 1973, Mr. Desautels moved to our nation’s capital to be the resident partner for Ernst & Young. It was here he began his long association with the office of the Auditor General. From 1974 to 1978 and 1978 to 1980 he actually worked at the office of the Auditor General on an executive interchange. He managed assignments which included auditing the Public Accounts of Canada, an audit of the United Nations in New York and Geneva, and a comprehensive audit of Canada Employment, to name a few.
In 1982, our guest moved to Quebec City to manage the office of Ernst & Young and acted as an advisor to the Auditor General of Quebec. In 1987 he moved to the Montreal office and three years later was appointed Regional Director of Consulting Services for the province of Quebec and National Capital Region. In April 1991, he was appointed Auditor General of Canada.
Mr. Desautels has been recognised by his peers for distinguished service to his profession and was awarded the designation "Fellow" by the Order of Chartered Accountants of Quebec in 1986 and by the Institute of Chartered Accountants of Ontario in 1991.
He has lectured at McGill University and the University of Ottawa. He is presently a member of the Canadian Comprehensive Auditing Association and sits on the Board of Trustees of the Ottawa General Hospital. Despite his busy schedule Mr. Desautels has found time to devote to the Red Cross, where he served as President of the Ottawa section, and to the United Way, where he served as Treasurer of the Quebec Branch.
Ladies and gentlemen, I ask you to welcome our very distinguished guest, the Auditor General of Canada, Mr. Denis Desautels.
Denis Desautels
It gives me great pleasure to speak to the members of The Empire Club of Canada today. I consider it a privilege to address this historic forum whose roster of speakers is particularly noteworthy. Thank you for your kind invitation.
Nineteen ninety-five brings us to the mid-point of the decade–a point when we can begin to see how the decade may eventually be remembered. I venture to guess that one of two words may be used when we look back on this decade.
The first word is uncertainty, something that never seems to be far from the minds of Canadians. Ask Canadians–especially young ones–about their outlook on life and they tell you of their hopes. But they also tell you of their worries–worries about the changing economy, the deficit, the environment, constitutional issues, and what this all means for the future.
No doubt some of the uncertainty comes from the changing role of government. For years, we have come to rely on government to provide an element of stability in a changing world. Now government, too, is changing–federally, provincially and locally. This change raises anxiety about cutbacks and the loss of key government services.
Uncertainty may be one word to describe the 1990s. Another word that may be used is transformation. Many believe we are witnessing change on a scale not seen since the industrial revolution. And just as the industrial revolution transformed society in the early 19th century, the transition to the "information age" may transform our society in the early 21st century.
Whether we remember this decade primarily as a time of uncertainty or as one of transformation largely depends on how we respond in the next five years to the issues before us.
I see many reasons to be optimistic, particularly when it appears that most Canadians now recognise the seriousness of the government’s financial situation and better understand its consequences. They recognise that change is needed. With that recognition has come broad support for re-focussing government. There is growing recognition, too, in Canada and elsewhere, that a sound government sector is key to a nation’s economic well-being.
Today, I would like to discuss our 1995 report. This has been an eventful year in the history of my Office. Following last year’s amendments to the Auditor General Act, we are no longer limited to one report a year. In May, we ushered in a new era with our first "additional report." We also published reports in October and November. My comments today will focus on highlights from all three reports.
The 1995 reports deal with many topics of concern to Canadians–ethics and fraud awareness in government, federal transportation subsidies, deficits and debt, the Air Transportation Tax, regional development programmes, managing the legacy of hazardous wastes–to name a few. This coverage reflects the Office’s commitment to making a difference for the Canadian people by promoting answerable, honest and productive government.
It would be impossible to give you, in a few minutes, an in-depth picture of the whole report, so I will focus on three core themes. All of these themes relate to government change. To begin with, I would like to address the government’s fiscal situation, the cause of much of the change it is undergoing. Then I will discuss ethical standards in government. Finally, I would like to talk about some key actions that are needed to improve government management if change is to be successful. I would also like to say a few words about the environment and some proposed changes to the Auditor General Act. I will conclude with some comments on the value of the Auditor General’s reports generally and, I will give some reasons why, in my view, these reports are positive agents of change in public administration.
Ten years ago, the federal budget deficit was $35 billion, or 7.2 per cent of GDP. This year’s deficit is projected at $33 billion, or 4.2 per cent of GDP Are we fiscally better off today than we were 10 years ago? The bond rating agencies don’t seem to think so. In 1985, our debt was universally rated triple A. We no longer enjoy that top rating.
Financial markets don’t seem to think so either. Ten years ago, our interest rates, in inflation-adjusted terms, were about the same as those in the US. Today they are more than two per cent higher.
The Canadian government and Canadians generally don’t seem to think so either. There is substantial consensus across the country and across the political spectrum that we can no longer coast along as we used to, that we must retrench and tighten our belts.
Why is that? Many things have changed over the past decade of course, but if I were to zero in on the single most important factor behind our weakened financial condition today, compared to 10 or 15 years ago, it would have to be our increased indebtedness. At 73 per cent of GDP, the federal debt burden today is roughly 50 per cent higher than it was in 1985 and more than two and one-half times greater than it was in 1980. Provincial debt burdens also grew very sharply over this period. As a result, Canada’s public sector indebtedness today is among the highest in the industrialised world.
High debt levels have harmful fiscal consequences. They reduce the flexibility of government to respond to adverse economic shocks, because they reduce the willingness of financial markets to lend us money except at increasingly higher prices. They constrain the ability of government to deliver public services, because of the large share of revenues absorbed by interest costs. And they render public finances more vulnerable to rising interest rates, because the higher the debt, the greater the impact of rising interest rates on debt service costs.
Twenty years ago, the debt-to-GDP ratio was about 19 per cent, just a little more than a quarter of what it is today. If we could have that same low debt burden today, at current interest rates, our debt service charges would be some $32 billion lower. This is about the same as our deficit is expected to be this year. In other words, given our present levels of spending and taxation, we would not have any deficit today. And our debt-to-GDP ratio would be on a downward trend. The meaning of all this is that the debt burden is a better summary indicator of the government’s financial condition than is the annual deficit. And government indebtedness, therefore, rather than the deficit over any particular period, ought to be the main focus of fiscal policy.
This does not mean that we ignore the deficit of course. After all, it is only through deficits that we accumulate debt. But the deficit is only the change in the debt over a single accounting period. It can vary for a host of reasons, from changing economic conditions to one-time fiscal impacts like natural disasters or some other unanticipated claim. Focussing on the debt allows us to take such temporary detours without being thrown off the long-term course.
The Unpleasant Arithmetic of Growing Indebtedness The huge run-up of public debt over the past two decades occurred because fiscal policy did not adjust to a deterioration in economic circumstances since the mid-1970s. In the early post-war decades, economic growth had, on average, exceeded interest rates. In those favourable circumstances, it is possible for government to borrow to pay the interest on its debt and still have its debt ratio fall. In fact the federal government over this period generally ran operating surpluses, bringing the debt ratio down markedly, from over 100 per cent at the end of the war to 19 per cent in 1975.
Since the mid-1970s, this economic condition began to reverse itself leading to a situation where interest rates over the last 15 years have persistently exceeded economic growth. When that happens, interest charges cause the debt to grow faster than the economy, and the debt burden to rise, unless we run offsetting surpluses between revenues and programme spending. In fact, the reality is that we recorded operating deficits rather than surpluses over most of the past 20 years. If interest rates stay higher than growth rates in the future, we will need large operating surpluses merely to stabilise the public debt ratio at its current level. To lower that ratio, the surpluses would have to be even larger.
The dilemma is that there is no one right answer about what is an appropriate debt ratio. Is 73 per cent too high? Is 50 per cent too low? How long should we take to achieve a lower ratio? These are the decisions that government will have to make in consultation with Parliament and the public. For that consultation to be meaningful, the government will have to give Parliament information that lays out the meaning of different long-term debt scenarios. This would include the revenue and spending consequences associated with each scenario. Individual budgets could then be judged against this long-term perspective. In the absence of longer-term debt targets, individual budget balances are less meaningful and, as in the past, may well lead us to places we did not want to go.
I would like to take a few minutes to explain why I think ethics is an important topic for Canadians.
Most of you in the audience have had to address the question of ethics in business. Here in Toronto, just last week, at a conference at the Canadian Centre for Ethics and Corporate Policy, it was noted that over half of the largest corporations in North America have codes of ethics and over 25 chairs in business ethics in business schools are funded by corporations. It is notable that the conference was attended by representatives of major Canadian companies including Ontario Hydro, the Bank of Montreal, Royal Trust, Hudson’s Bay Company, IBM Canada, Canada Trust, Imperial Oil and the Royal Bank.
In talking about ethics, one runs the risk of seeming to have a smug, holier-than-thou attitude. I hope I do not. But people expect the Auditor General to be a watchdog with respect to honesty within the public service–remaining vigilant to see that public funds (your moneys as taxpayers) are spent honestly, efficiently, economically, effectively, and for purposes properly authorised by Parliament. It is for this reason that the first of my new periodic reports, tabled in May of this year, contained a chapter on Ethics and Fraud Awareness in Government. In it, I reported that, although I believe Canada’s public service compares favourably with that of other countries, and although there was evidence of a strong base of ethical standards among public servants, nonetheless we found some areas of vulnerability. I do not believe all such vulnerabilities can be cured solely by a whistle-blowing audit approach. There must be an internal discipline as well. I therefore proposed an ethical framework consisting of seven discrete elements designed to maintain and promote ethics in government.
What I would like to address for a moment is the point that ethics in government needs leadership–and not only from Parliament. It also needs leadership and cooperation from Canadian citizens–from each of us, for example, in this room.
Two months ago, an article in "Maclean’s" magazine ("Offshore Billions") talked about how "Canadians are finding new ways to hide their money from the tax man." The article discussed the growing popularity of seminars, self-help books, and professional advisors who make it easier to tuck money away in offshore tax havens out of reach of Revenue Canada. "The hitch, of course," as wellknown author Stevie Cameron pointed out, "is that anyone who does that is breaking the law" But apparently many Canadians are willing to do just that. The article noted that a recent Financial Post/COMPAS poll found that "77 per cent of Canadians would cheat on their taxes if they could" and the reasons given were high taxes and disgust with politics and politicians.
But, of course, taxpayers who cheat on their taxes are not really punishing politicians and government.
Ultimately they are punishing (stealing from) their fellow citizens. It is like going out with friends to lunch and then cheating on your share of the bill when it comes around. It does not hurt the restaurant; it hurts each of your friends around the table whom you cheated.
From time to time there are indeed examples of unethical acts within the public sector. Such acts should not be tolerated. But we don’t cure the problem by each of us going out and doing likewise. It is not my business to tell Canadians how they should behave. That is a matter of individual conscience. I simply observe that it will be harder to create a framework of ethical behavior in government–which is my legitimate concern–if it becomes commonplace for individual citizens to both practice and boast about cheating the government.
I have said that I believe the Canadian government compares favourably with others in terms of integrity. But this does not mean that we need not be vigilant. Complacency is a real danger. We must work to improve the public’s confidence. I agree with those that believe that the ethics we teach our children must be the same as the ethics we practice at work.
Ethics in government is a complex and controversial subject. That is why discussing it openly and working actively to promote it–by words and by actions–is so important.
Now I would like to present some actions that I believe are needed to make changes in government successful. In the February 1995 budget, the government announced a series of cuts and programme changes. The Minister of Finance said that these changes are "by far the biggest set of actions in any Canadian budget since postwar demobilisation." Many provincial governments are taking similar action.
The budget reflected decisions from an exercise called Programme Review. That exercise asked six searching questions about each government programme. I am encouraged that the process moved toward a fundamental rethinking of each programme and away from "across-the-board" cuts.
Whether it comes quickly or not, major change seems inevitable. But with so much attention drawn to programme changes and expenditure cuts, there is a risk that the basic functions of government will be under-managed and that needed improvements will be postponed. From my perspective as Parliament’s auditor, and supported by the findings of audits conducted by my Office, I believe I am able to make some important recommendations that can contribute to the worthwhile goal of government renewal. The recommendations I want to discuss today deal with: management of information technology, financial management and control; accountability for joint programmes; and, regional economic development.
Manage Information Technology Better. Information technology is a critical part of government renewal. It offers improved services while also helping government cope with resource reductions. At the same time, information technology is a risky business.
In October we reported on our review of four major information technology initiatives. The picture that emerges is that much needs to be done to manage the formidable risks of information technology development projects. Consider the following scenario.
Imagine that you are a senior government executive faced with major budget cuts, unrelenting demands for new services and an aging computer system. Your computer system staff, after many months of planning, present you with a proposal to develop a new system. It would be a massive project, requiring a large investment and several years to complete. But the projected benefits in resource savings and improved client service are extremely attractive.
Tempting, isn’t it? There has been a strong tendency to opt for such large computer mega-projects, with costs typically in excess of $100 million. Almost everything about these large projects increases the risk of failure. In our view, only one of the four systems we reported on is currently being managed to deal satisfactorily with project risks.
Experience in the private and public sectors suggests that more modest or phased projects can yield the benefits of information technology at considerably less risk. For information technology projects to realise their potential contribution to government renewal, we must manage their risks better. We must be realistic about what they will actually cost and what they can deliver.
Improve Financial Management and Control. You may recall that 20 years ago, former Auditor General J. J. MacDonell said that financial management and control was "grossly inadequate." In 1987, my predecessor, Kenneth Dye, found significant improvements, but also that serious problems remained.
The questions we have been asking are as important as ever. Are financial controls adequate? Do managers fully understand what government services cost? Do ministers and deputy ministers have available the financial information, advice and support they need?
Unfortunately, my auditors continue to find serious problems in financial management and control across a broad range of government operations. For example, over the past three years we have found the following:
There is no question that the last 20 years of effort to improve financial management and control have brought some success. But it is time for the government and my Office to take a different tack, and we will be doing just that. We have agreed to work with the Treasury Board and the senior financial community to help make financial management more effective.
Improve Accountability for Joint Programmes. Improving accountability has been the aim of numerous government initiatives over the past 10 to 20 years. But results–as opposed to talk–have been disappointing. The subject of accountability and its practice are ever more important as the public sector moves away from excessive pre-controls on the dollars spent and authorities used and moves to a focus on the results accomplished in relation to expectations. Improved accountability is necessary for all types of government programmes.
Part of the changing nature of government is a much greater involvement by other parties in the design and delivery of federal programmes. Examples abound–joint federal-provincial programmes, contracting-out, programme delivery by non-governmental organisations, delegation of programmes to client groups–to name a few.
Joint programmes offer many potential benefits. The interplay of different parties, each with different strengths and perspectives, can do much to improve client service and save money. But it also brings additional challenges. For some time, I have been concerned about accountability in these programmes.
Some of you may remember that there have been major disagreements in past years between CIDA and my Office on the issue of accountability. In Public Accounts Committee hearings in 1991, CIDA refused to accept responsibility for problems with a coal scrubber plant in Pakistan. CIDA argued that many factors were out of its control because the project involved other parties.
In October we reported on our efforts to help CIDA manage for results and improve accountability through better reporting of results. I am particularly encouraged that CIDA has clearly recognised that it is responsible for achieving and reporting results. The initial steps CIDA has taken at its headquarters toward results-based management are in the right direction. The next steps are crucial. CIDA must work with those in the field who deliver its projects to define and become responsible for results.
Measure Results Achieved from Regional Economic Development Programmes. The history of regional economic development programmes in Canada is one of frequent change. Changes are being made again, some as a result of the February 1995 budget. This year we devoted considerable attention to these programmes with five chapters in the November report.
The chapters describe a number of significant operational problems. The other set of problems faced by these programmes concerns public confidence. A good part of the answer to both sets of problems lies in putting more emphasis on achieving results and on having good information about results.
Sound information on results should also help elevate and inform the debate about these programmes. Are proponents of regional economic development correct, or are the critics? Are the benefits in job creation and expanded economic activity worth the cost to the taxpayer? Do projects provide long-term benefits? Do reports of individual problem cases represent isolated examples, or widespread problems? Without sound results information, and sadly we don’t have much, Canadians have little basis to weigh the merits of the programmes. As well, decision makers have little information on results to help guide change. I am convinced that better results information is possible, and essential.
Mention the Office of the Auditor General, and most people think accounting. Or maybe they think of the three "Es": economy, efficiency and effectiveness. Many are surprised to learn that in recent years we have put considerable emphasis on a fourth E-the environment, an issue that ranks high among the concerns of Canadians.
In the past decade, in a succession of audit chapters, we have explored environmental issues from almost every conceivable angle-operations, financial, legal and accountability issues. This was done as part of our mandate to report matters of significance to Parliament. This year was no different with three chapters on environmental issues.
One of the most important messages in those chapters is the need for a much greater sense of urgency in tackling the issues because there are considerable risks in postponing action. Consider the evidence:
I am particularly concerned that too little has been done to protect the interests of present and future taxpayers. In many cases, companies have been unwilling or unable to pay the costs of cleaning up the waste they have produced, leaving the bill to the taxpayer. The costs of waste management are staggering: disposing of radioactive waste alone is expected to cost at least $10 billion. Canadians expect government to deal with problems expeditiously. I realise that this presents a considerable challenge to government, but it is a challenge that must be met.
In April, the government introduced amendments to the Auditor General Act as part of the move toward "green" government. As of today, the amendments are being discussed in the Senate, and we hope that they will be accepted and passed before Parliament adjourns for the Christmas recess.
The changes would place new responsibilities on departments to prepare sustainable development strategies and action plans for tabling in Parliament by the responsible minister. The changes would also place important new responsibilities on my Office, responsibilities that are a natural extension of our present environmental work. The amendments would create the Commissioner of the Environment and Sustainable Development, appointed by and reporting to the Auditor General. On behalf of the Auditor General, the Commissioner would monitor the departmental strategies, action plans and the status of responses to public petitions. The Commissioner’s work would be reported in a new annual "green" report. The proposed amendments maintain my Office’s traditional independence and role; there is no requirement for the Commissioner to judge the merits of policy, to arbitrate disputes as an ombudsperson, or to examine matters outside the federal government.
I look forward to continuing to serve Parliament and Canadians in this most important area.
The Usefulness of Our Reports
I would like to say a few words about the general usefulness of our reports. Some people think that we report the same thing each year, and that, in fact, nothing really changes. Allow me to show that this perception is far from the truth. Many things do happen both while we are auditing and preparing our reports and also once the reports are released.
There is, first of all, a deterrent effect. This is difficult to measure, but common sense tells us that the existence of the Office of the Auditor General and the fact that it audits government programmes have a considerable impact on government operations.
Various entities make corrections during the auditing process, simply because the process itself entails a critical review of their systems and practices and they discover ways to do things better. Departments also want to soften the criticism of their activities mentioned in our reports. We hold many discussions with departments as we conduct our audits and write our reports. Based on our discussions and draft reports, departments often make a commitment to take corrective action or begin to make changes even before our reports are made public.
In all of this, we should not underestimate the significant impact of the fact that ours is a public report. A public report helps bring about change. Public opinions can move politicians to act, and politicians can influence the behaviour of the machinery of government. The Auditor General’s reports are permanently referred to the Public Accounts Committee of the House of Commons.
