Chapter 4
Crown Investments Corporation of Saskatchewan

Table of Contents

Provincial Auditor Saskatchewan
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Our audit conclusions and findings

.05 In our opinion:

• CIC's financial statements are reliable;

• CIC had adequate rules and procedures to safeguard and control its assets except where we report otherwise in this Chapter; and

• CIC complied with the authorities governing its activities relating to financial reporting, safeguarding assets, revenue raising, spending, borrowing, and investing except where we report otherwise in this Chapter.

 

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Contents of this Chapter

.06 This Chapter sets out our audit findings in several parts.

• In Part A Crown Corporation Reporting, we report on the need for CIC to give the Assembly essential accountability information.

• In Part B Corporate Activities, we report on CIC's need to improve its budgeting and interim financial reporting practices. We also report CIC needs to obtain proper approval for its investments.

• In Part C Investments in Commercial Enterprises, we report on CIC's system for managing its investments in large commercial enterprises.

• In Part D Investment in HARO-Crown Life, we report on CIC's investment in HARO-Crown Life and how it accounts for this investment.

• In Part E Matters of Continuing Importance, we report on CIC's need to report on its public policy objectives. We also report CIC needs to ensure all of its Crowns use standard assumptions to calculate their pension costs and obligations.

Essential public accountability information required

.07 CIC's annual report and its Crowns' annual reports require essential accountability information as described in paragraphs .08 to 18.

 

Comparison of planned and actual results required

.08 CIC's annual report and the annual reports of its Crowns do not include comparisons of planned activities to actual results. It is difficult to understand and assess the performance of these government corporations without knowing what they planned to achieve. We think this information is essential.

.09 We recognize CIC and its Crowns operate under a different management structure than other government agencies, e.g., government departments. By law, CIC and its Crowns raise revenues and spend public money without annual pre-approval of their budgets by the Assembly.

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.10 Providing planning information in a Crown's annual report does not disturb this different management structure. Other jurisdictions publish planning information for their Crowns. For example, Federal Crowns provide five year plans to Parliament and Alberta Crowns report budgets in their annual reports.

.11 Also, disclosing summarized historical planning information will not impede a Crown's viability or make it less competitive. For Crowns operating as monopolies, competition is less of an issue.

.12 CIC is responsible for overseeing a significant portion of the Government's activities. We think a clear and meaningful comparison of planned performance to actual results will help Members of the Legislative Assembly (MLAs) and the public understand and assess the performance of CIC and its Crowns.

.13 We reported this matter previously in our 1995 Fall Report and our 1994 Fall Report.

We recommend

.14 CIC should ensure its annual report and the annual reports of its subsidiary Crown corporations include comparisons of planned performance to actual results.

 

Payee lists required

.15 CIC and its Crowns did not provide the Assembly with a list of persons who received public money.

.16 The Standing Committee on Public Accounts (PAC) recommended that "Crown corporations should have the same public reporting requirements as do Government departments unless otherwise stated in the mandate of the corporation".

.17 Public accountability is strengthened when all government agencies provide a list of payees. Therefore, we believe CIC and its Crowns should also provide a list of payees. This way, the Assembly can review CIC's and its Crowns' use of public money. We think this information is essential. Most government organizations now provide this information to the Assembly.

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We recommend

.18 CIC and its subsidiary Crown corporations should provide the Assembly with a list of persons who received public money.

 

Financial statements should be provided to the Assembly

.19 CIC and its Crowns did not give the Assembly financial statements for all their subsidiaries and pension plans.

.20 To be accountable, the Government should give the Assembly financial statements for all its separate entities and funds. The PAC recommends all government corporations give the Assembly their financial statements.

.21 In 1995, CIC did not give the Assembly financial statements for CIC Pulp Ltd., National Pig Development (Canada) Co. Ltd., and the Capital Pension Plan. In addition, CIC's Crowns did not table all their subsidiaries' and pension plans' financial statements.

.22 We reported this matter previously in our 1995 Fall Report and our 1994 Fall Report.

We recommend

.23 CIC and its subsidiary Crown corporations should ensure the Assembly receives financial statements for all their subsidiaries.

Corporate planning

.24 CIC's Board lacks essential information to manage CIC's activities on a consolidated basis and CIC III's activities. The Board does not receive a budget and business plan for CIC's consolidated activities or for CIC III.

.25 CIC reports its activities annually by preparing three sets of financial statements. The first set reports CIC's activities on a consolidated basis (i.e., it includes CIC's Crowns since CIC controls them), the second set reports CIC's parent company activities (i.e., it excludes CIC's Crowns), and the third set reports the activities of CIC's subsidiary, CIC III.

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.26 In 1995, the Board approved a budget and a business plan for CIC's parent company activities. But, the Board did not approve a budget and business plan for CIC's activities on a consolidated basis or for CIC III.

.27 An important part of CIC's mandate is to coordinate the direction of its Crowns. CIC's Board approves all its Crowns' budgets and business plans.

.28 CIC's Board needs to set goals and objectives for CIC's activities on a consolidated basis before the Board approves the budget and business plans of its Crowns. The Board needs this information to assess how each of its Crowns contribute toward CIC's overall goals. In addition, the Board needs this information to coordinate the direction of its Crowns.

.29 Also, CIC's Board needs a budget and business plan for CIC III. CIC's Board is responsible for the overall corporate strategy for CIC III. By approving CIC III's budget and business plan, CIC's Board fulfils this key stewardship function.

.30 We reported these matters in our 1995 Fall Report, our 1994 Fall Report and our 1993 Annual Report.

We recommend

.31 The Board should approve a budget and business plan for CIC on a consolidated basis (including its subsidiaries) and for the activities CIC plans to carry out through CIC III.

 

Better interim reporting required

.32 Management does not give the Board interim financial statements showing a comparison of planned and actual results for CIC III, or for CIC's activities on a consolidated basis.

.33 CIC prepares interim financial statements for CIC's parent company activities in addition to financial information on each of its Crowns. CIC does not prepare interim financial statements showing a comparison of planned and actual results for CIC III, or for CIC's activities on a consolidated basis.

.34 CIC should prepare interim financial statements for CIC's activities on a consolidated basis. Then, CIC could compare plans to actual results during the year and at year end. Comparing actual results to plans would help CIC's Board manage, direct, and evaluate CIC's activities on a consolidated basis.

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.35 Similarly, CIC should prepare interim financial statements for CIC III. CIC manages $1.1 billion in assets through CIC III.

.36 In February 1995, CIC III assumed the assets and liabilities of Saskatchewan Economic Development Corporation. CIC's Asset Management Division (AMD) is responsible for managing these assets totalling $117 million, comprised of hundreds of regular loans, participating loans, equity investments, rental properties and industrial parks. The AMD prepares detailed monthly reports. However, the Board did not review any financial or management reports on the activities carried out by the AMD. As a result, the Board has not monitored this key part of CIC's activities.

.37 We believe CIC should prepare interim financial statements for CIC III. These statements should compare planned and actual results during the year and at year end. Such information would help CIC's Board assess management's performance concerning the activities carried out in CIC III.

We recommend

.38 The Board should receive interim financial statements for CIC's activities on a consolidated basis and for the activities carried out through CIC III, including a comparison of planned and actual results.

.39 In November 1995, the Board directed management to provide a quarterly consolidated financial report. We will review these reports in our next audit.

 

Transactions need approval

.40 CIC had transactions during the year without the approval of the Lieutenant Governor in Council.

.41 When the Legislative Assembly creates a Crown agency, legislation defines the powers the agency may exercise. The Crown Corporations Act, 1993 requires CIC to obtain Lieutenant Governor in Council approval for the following:

• participating in joint ventures with other corporations;

• providing financial assistance to corporations in which CIC holds authorized investments; and

• acquiring shares in corporations.

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.42 In February 1995, CIC used CIC III to increase its participation in the Bi-Provincial Upgrader joint venture from 17.5% to 50% at a cost of $43.1 million without Lieutenant Governor in Council approval.

.43 In July 1995, CIC used CIC III to loan an additional $149.5 million to HARO Financial Corporation without Lieutenant Governor in Council approval.

.44 In October 1995, CIC used CIC III to acquire 68 million non-voting shares in HARO by converting $68 million of its convertible debentures in HARO. CIC acquired these shares without Lieutenant Governor in Council approval.

We recommend

.45 CIC should obtain Lieutenant Governor in Council approval for increasing its participation in a joint venture, for providing financial assistance, and for acquiring shares in a corporation.

Introduction

.46 We worked with CIC to identify areas important for its overall success. CIC views its management of investments in large commercial enterprises as important because of the significant effect they have on the Government's finances. We agree.

.47 CIC manages the following investments. The total cash outlay (carrying value where noted) for each investment as at December 31, 1995 is noted below. Loan guarantees are noted separately.

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($ millions)     HARO Financial Corporation (loans - $352.5 million, non-voting common shares - $68 million) 420.5     NewGrade Energy Inc. (Co-op Upgrader) (shares - $50 million, loans - $9.6 million, grants - $15 million, shares and loans written off on restructuring - $234.3 million, loans guaranteed by CIC - $166.5 million, loans guaranteed by the General Revenue Fund - $212.3 million) 308.9     Bi-Provincial Upgrader (partnership equity - $267.2 million, loans - $65.6 million) 332.8     Cameco Corporation (shares) - carrying value 288.4     Meadow Lake Pulp Limited Partnership (loans - $188.4 million, partnership equity - $9.8 million, grant - $50 million) 248.2     Saskferco Products Inc. (shares - $68.4 million, loans guaranteed by the General Revenue Fund - $229.5 million) 68.4     Wascana Energy Inc. (shares) - carrying value 63.4     Saskfor MacMillan Limited Partnership (partnership equity) - carrying value 40.2     Other 62.8     Total cash outlay $1,833.6     Total loan guarantees outstanding $ 671.3

 

.48 CIC is the organization that usually manages large investments on behalf of the Government. It is important for CIC to have adequate resources and procedures to professionally manage them. To be successful, CIC must manage its investments to ensure:

• the financial exposure assumed by the Government is reasonable;

• CIC meets the Government's objectives; and

• CIC appropriately manages secondary impacts on other government programs or priorities.

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.49 Managing in a time of fiscal restraint is a challenging task. This task is even more demanding in the public sector as governments try to accomplish several objectives. These include delivering public policies and programs it views as necessary or desirable, administering public resources competently, and maintaining a stable economic, political and social environment.

 

Audit objective

.50 The objective of our audit was to determine if CIC has adequate systems and practices to effectively manage its investments in commercial enterprises (excluding wholly-owned Crown corporations).

.51 Our audit covered CIC's systems and practices from January to December 1995. We did not assess if the Government's objectives for particular investments were appropriate.

 

Audit conclusion

.52 Overall, CIC's systems and practices to manage investments in commercial enterprises are adequate, except as follows.

• While CIC has stated general objectives for its major investments, it does not have a concise summary of its specific objectives for individual investments.

• CIC does not have written summaries of the program of procedures it uses for managing investments, in many cases.

• When CIC made an investment in HARO in 1992, CIC did not follow its policy to take an appropriate ownership interest when the terms of an investment are beyond normal commercial terms.

• CIC could strengthen the way it monitors its investment in HARO and HARO's subsidiary, Crown Life.

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We recommend

.53 CIC should:

• prepare a concise summary of its specific objectives for individual investments;

• prepare written summaries describing the planned program of procedures it uses for managing individual investments;

• follow its existing policy when negotiating future investment agreements, i.e., to take an appropriate ownership interest when the terms of an investment are beyond normal commercial terms; and

• strengthen the way it monitors its investment in HARO, and HARO's subsidiary, Crown Life.

 

Significance of the audit

.54 Investments in large commercial enterprises are important because they often involve large amounts of public money and have significant on-going financial effects on the Government.

.55 Currently, there is considerable public attention on the state of the Government's finances in general and large government investments in particular. Also, the Financial Management Review Commission said the Government needs a formal process for managing each significant transaction or commitment made by its Crown agencies.

.56 CIC has given priority to investment management. CIC has a Projects Division under the direction of a vice-president. This Division is responsible for investments where the governing agreements give CIC direct and active participation in managing the investee. The Finance Division, also under the direction of a vice-president, is responsible for investments where the governing agreements do not give CIC direct and active participation.

 

General criteria used

.57 Auditors need criteria to evaluate the matters they audit. Criteria are reasonable and attainable standards of performance and control against which they can assess the adequacy of systems and practices. Reasonable and attainable criteria are those that management can realistically expect to meet.

 

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.58 We jointly developed criteria with CIC after reviewing relevant literature on investment management.

.59 The criteria we agreed to are that CIC should:

• have a clear framework that outlines the methods it uses to manage its investments in commercial enterprises;

• have clear and measurable objectives for each investment approved by its Board of Directors;

• appropriately monitor each investment to maintain a current knowledge of its status and of variables that affect the achievement of its stated objectives;

• adequately evaluate each investment to assess progress being made towards achievement of its stated objectives and to consider if it should take additional action; and

• provide adequate reports about each investment to higher management levels (i.e., the President, Board of Directors and Cabinet) and to the Legislative Assembly.

 

Audit work

.60 The following procedures describe our audit work. We:

• examined information CIC received or prepared for specific investments;

• reviewed documents including reports prepared for management and others; and

• interviewed key CIC management.

.61 We did our examination in accordance with generally accepted auditing standards The Canadian Institute of Chartered Accountants recommends. We did procedures and tests considered necessary to meet these standards.

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Our audit findings

.62 The following is a summary of our audit findings set out in terms of our audit criteria.

.64 CIC's responsibility for managing investments is set out in The Crown Corporations Act, 1993. CIC has sufficient qualified staff and physical resources to carry out these responsibilities.

.65 CIC has a formal investment management system. It has clearly stated the key procedures it uses to monitor, evaluate, direct, and report on its investments.

.66 CIC's policy is that the risks and benefits of an investment should be proportionate. For each investment, CIC determines if it can best achieve this by investing in a company's debt, shares (ownership) or both. In many cases, CIC decides the best way to manage the investment and protect its interests is to acquire shares. In these cases, CIC views board of director representation as an important means of monitoring the investment. Board representation is generally proportionate to CIC's ownership interest. This gives CIC the ability to adequately manage its investments. CIC has documented the responsibilities and duties of its board representatives.

.67 In addition, job descriptions and other written materials document the corporation's procedures. These documents are comprehensive and describe the duties and responsibilities for monitoring, managing, and reporting on investments.

.69 CIC has stated general objectives for its investments. For example, the main objective of all investments is that they be commercially viable and provide a direct economic return on investment. CIC evaluates investments by reviewing plans prepared by the investee companies and comparing them to actual results. However, CIC does not have a clear and concise summary of its specific objectives for individual investments.

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.70 A secondary objective is that investments benefit the Province through additional tax revenue and spin-offs to related businesses. In addition, CIC has written public policy objectives for its investments. However, these secondary and public policy objectives are stated in general, non-specific terms. Without clearly stated objectives, it is not possible to measure the degree to which they are met.

.72 In most cases, CIC is adequately monitoring its investments. Also, for most investments we looked at, CIC has systems and practices to manage identifiable risks. Risks to investments and CIC can be economic, environmental or operational.

.73 Monitoring procedures generally arise from written agreements. CIC requires its staff to understand these agreements well enough to critically assess compliance with the stated terms and conditions. Also, CIC relies on the education and experience of its staff to appropriately monitor assigned investments. Accordingly, CIC does not have written summaries of the procedures staff use to monitor individual investments, in many cases.

.74 CIC's policy for negotiating investment agreements is to balance the risks assumed and benefits expected. When the terms of an investment are beyond normal commercial terms, CIC's policy is to take an ownership interest. This way, CIC can use its representation on the investee's board of directors to actively participate in managing the investment and take any steps necessary to protect its interests. For the following investment, CIC did not follow its policies.

.75 CIC loaned HARO $420.5 million which HARO used to provide capital to its subsidiary, Crown Life. The 1995 loan of $149.5 million is on normal terms. However, the 1992 loan of $271 million includes a formula for calculating repayments and allows payments to be deferred for many years. Although this loan is beyond normal commercial terms, CIC was unable to obtain an ownership interest or board representation due to laws restricting government involvement in life insurance companies. As a result, CIC is prevented from actively managing HARO and Crown Life. This exposes the Government to significant risks.

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.76 Although CIC is unable to actively manage its investment in HARO and its subsidiary, Crown Life, CIC does monitor the activities of those companies. However, CIC could improve its monitoring procedures. For example, we noted that HARO must provide, at CIC's request, quarterly reports on the business and affairs of Crown Life. Management told us they have periodic discussions with officers of HARO and Crown Life. We think CIC should receive written reports. Also, CIC should consider if other means could be used to better monitor the activities of HARO and Crown Life.

.77 For another investment, we observed CIC was not ensuring manufacturing costs paid by the investee were in accordance with the investment agreement. Management told us it will request this information so it can ensure the investee is paying properly calculated costs.

.79 CIC regularly evaluates its investments. In many cases, CIC's representation on an investee's board allows it to evaluate the investee's financial and operational results compared to its performance targets.

.80 CIC gives a significant amount of information about each investment to senior management and its board of directors. These update reports (exceeding 500 pages) include narratives, graphs, and copies of investee financial statements. Due to the volume of information presented, it may be difficult for readers to interpret the results without a clear summary for each investment. After our audit, CIC improved these reports by including a highlights page for each investment.

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.81 CIC could improve its update reports by summarizing the specific objectives for each investment. This would help management to focus attention on the progress being made toward achieving those objectives.

.83 CIC provides detailed reports about its investments to CIC's senior management and Board, senior government officials, and the Legislative Assembly.

.84 Investment managers regularly report information about the status of each investment to senior management. In addition, issues considered to be significant are reported to CIC's Board and Cabinet.

.85 CIC provides information on the status of investments in its annual report. Also, CIC appears annually before the Crown Corporations Committee to provide an update of its investments and to answer questions from Committee members.

.86 We think management could improve its reports to CIC's Board and the Legislative Assembly by providing a clear and concise summary of the primary, secondary and public policy objectives for each investment, the progress being made towards achieving them, and the risks affecting their achievement.

.87 CIC's management and staff gave us excellent cooperation throughout this audit. We appreciate their support and thank them.

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Introduction

.88 In 1992, CIC loaned HARO Financial Corporation $271 million to invest in Crown Life Insurance Company. As part of the consideration for this investment, Crown Life moved its head office to Regina.

.89 Several important events occurred in 1995. In February, HARO acquired a majority of Crown Life's voting common shares in exchange for its Crown Life preferred shares and warrants. In July, CIC invested an additional $149.5 million in HARO to finance a corresponding investment by HARO in Crown Life. In October, CIC acquired $68 million of non-voting common shares of HARO in exchange for a reduction of CIC's 1992 loan to HARO.

 

Audit significance

.90 Life insurance companies in Canada are governed primarily by the Insurance Companies Act. The Office of the Superintendent of Financial Institutions (OSFI) regulates them. In the U.S., the laws of individual states govern and regulate life insurance companies.

.91 These laws impose significant restrictions on ownership by governments. For example, in Canada, a government cannot vote shares of a life insurance company that it owns directly or indirectly. Also, certain U.S. states do not allow life insurance companies to do business if they are government-owned.

.92 Due to these restrictions, private investors formed HARO to acquire an interest in Crown Life. CIC provided financing to HARO. Agreements between CIC and HARO restrict HARO's activities.

.93 Prior to 1995, CIC recorded the loan to HARO at its original cost. However, when HARO acquired voting common shares in Crown Life and CIC acquired non-voting common shares in HARO, we did not know if this policy was still appropriate. If the acquisition of shares resulted in CIC having control or significant influence over HARO's activities, CIC would have to change the way it accounts for this investment.

.94 As a result, we thought it was important to know if the events described in paragraph .89 changed the relationships among CIC, HARO and Crown Life, and changed the way CIC should account for its investment.

 

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Audit objectives

.95 Our audit objectives were to determine if CIC:

• acquired control of HARO and Crown Life in 1995, and

• properly accounted for its investment in HARO after the changes in 1995.

 

Audit work

.96 The following procedures describe our audit work. We:

• examined agreements with HARO;

• reviewed legislation including the Insurance Companies Act, the Office of the Superintendent of Financial Institutions Act, and Regulations issued under those Acts;

• inquired of OSFI, Crown Life, Michigan Department of Commerce, Michigan State Law Library, and Michigan Insurance Commission;

• reviewed accounting recommendations of The Canadian Institute of Chartered Accountants; and

• interviewed key CIC management.

.97 We did our examination in accordance with generally accepted auditing standards The Canadian Institute of Chartered Accountants recommends. We did procedures and tests considered necessary to meet those standards.

 

Audit findings

.98 We found HARO acquired control of Crown Life in February 1995 when HARO acquired a majority of Crown Life's voting common shares.

 

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.99 We found CIC did not acquire control of HARO in October 1995 when CIC acquired non-voting common shares of HARO.

.100 We found CIC did not acquire control of Crown Life as a result of the ownership changes that occurred in HARO and Crown Life in 1995.

.101 We found CIC properly accounted for its investment in HARO after the ownership changes that occurred in HARO and Crown Life in 1995.

Section contents

.102 In our 1994 Fall Report we reported we will monitor CIC's progress on several matters initially reported in our 1993 Annual Report. This section provides an update on those matters CIC has not fully addressed.

 

Public policy and business objectives disclosure required

.103 In the public sector, public policy matters are an important component of an agency's business. Boards must consider public policy and business objectives of their corporations when carrying out their responsibilities. For example, one of the components of CIC's business plan is "...to ensure policy objectives of the government are adhered to." It is important MLAs and the public know corporations' public policy objectives to understand and assess their performance.

.104 We continue to recommend CIC should ensure public policy objectives for CIC and its subsidiary Crown corporations are prepared and presented to the Crown Corporations Committee for review.

.105 Management told us CIC must define the criteria for identifying public policy initiatives before it can measure the financial impact of these initiatives.

 

Standard assumptions for pension liabilities required

.106 Management of CIC's Crowns record pension liabilities in their financial statements based on their assumptions about future events. Different assumptions can cause significantly different results.

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.107 We expect some assumptions, e.g., salary increases and fund earnings, to be different at each Crown. These assumptions are affected by different conditions at each Crown.

.108 We expect other assumptions, e.g., inflation rates and future ad hoc increases, to be the same at each Crown. These assumptions are not affected by different conditions at each Crown. However, these assumptions are not always consistent at CIC's Crowns. Since CIC prepares consolidated financial statements, we think it is inappropriate for CIC to use different assumptions to record its pension liabilities.

.109 We continue to recommend CIC should establish and document standard assumptions for use by its subsidiary Crown corporations.

.110 Management told us CIC will encourage the use of standard assumptions by its subsidiary Crown corporations.

 

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