The Committee met at 9:30 a.m. in room 5083.

CHAIR (J. BYRNE): Order, please!

I now call this hearing to order. For those of you who do not know me, my name is Jack Byrne. I am Chairman of the Public Accounts Committee. On my right is Tom Lush, Vice-Chair of the Public Accounts Committee. What we can do is go around the table and introduce ourselves, and then we can start from there.

MS MURPHY: Elizabeth Murphy, Clerk.

MR. NOSEWORTHY: John Noseworthy, Deputy Auditor General.

MR. ALLEN: John Allen, Audit Manager.

MS MARSHALL: Elizabeth Marshall, Auditor General.

MR. JANES: Claude Janes, Audit Manager.

MR. HOLLETT: Bruce Hollett, Deputy Minister of ITT.

MR. CONDON: Brian Condon, Director of Business Analysis, Department of Industry, Trade and Technology.

MS S. OSBORNE: Sheila Osborne, MHA for St. John's West.

MS THISTLE: Anna Thistle, MHA for Grand Falls - Buchans.

MR. NOSEWORTHY: Mark Noseworthy, Executive Officer, Public Accounts Committee.

CHAIR: Thank you.

Before we get into the hearing, we have the minutes of two previous meetings, October 8 and November 16. Could we have a motion to adopt those minutes?

On motion, minutes adopted as circulated.

CHAIR: The people from the Auditor General's Office have been sworn in before, so there is no need to swear those individuals in. Elizabeth, would you swear in the witnesses?

Mr. Don Allen

Mr. Bruce Hollett

Mr. Brian Condon

CHAIR: Thank you.

Just to start off, I do not know if the people representing the government would be interested in making any opening statements or anything concerning the privatization of Newfoundland Hardwoods.

WITNESS: No, we had not intended to make an opening statement.

CHAIR: Okay.

What we will do is go around the table and have questions from the various members and possibly some questions from the Auditor General; or, if the members of the Committee feel they want to ask the Auditor General any questions they can do that also.

I think what we will do - it will not be too stuffy here - is just try to have a bit of a relaxed session and get some answers to questions that were possibly brought up in the House of Assembly or what have you, based on the Auditor General's Report, and anything else that might come to the forefront as we discuss the privatization of Newfoundland Hardwoods Limited.

Basically what we will do is just ask any Committee members if they have any questions they would like to start out with in the beginning.

MS THISTLE: Mr. Chairman, before we start, I would like to make an amendment to the minutes we just passed.

CHAIR: We have adopted them. Yes.

MS THISTLE: November 16: it was decided to hold the hearing respecting the privatization of - that should be Newfoundland and Labrador Computer Services.

CHAIR: Okay.

CLERK: It is noted.

CHAIR: It is noted. Thank you.

Regarding the privatization of Newfoundland and Labrador Hardwoods Limited, are there any questions? Does anyone want to lead off? Anna, do you want to?

MS THISTLE: Sure. Thank you, Mr. Chairman.

I was curious about a few questions after reading over this report, in particular in connection with the wood preservative part of Newfoundland Hardwoods. The majority of jobs are located in Clarenville, are they?

MR. CONDON: Yes, all of the jobs with respect to the wood preservatives - that is the pole and timber division - are all located in Clarenville. That is the only part of the operation (inaudible), the pole and timber division.

MS THISTLE: I see. How many jobs are actually out there now?

MR. CONDON: Approximately thirty, and I guess they are pretty well year-round positions versus the old hardwoods, which was basically a seasonal operation.

MS THISTLE: Originally, when privatization had begun, there were in excess of fifty jobs were there?

MR. CONDON: No, I think the fifty were the employees involved but a lot of those were seasonal people. Some of the people were on a very temporary basis. I think the total number of people they had to deal with was fifty but they were not permanent employees. There were people who were on maybe two or three weeks, people who had been used just to unload ships - pole ships or (inaudible).

MS THISTLE: You are saying now that what is out there are year-round positions. What type of work do they do out there? I know they creosote poles and preserve poles and other things. What else do they do? Have they expanded any of their operations since being privatized?

MR. CONDON: Yes, since they have taken over out there, in addition to the treatment of poles and timbers, they have made arrangements with two locate sawmills, A.L. Stuckless in Glenwood and Bloomfield Lumber. Both of those companies now ship their lumber into Newfoundland Hardwoods in Clarenville for kiln drying. Also, they had a deal with A.L. Stuckless. They are involved in the treating of local dimension lumber now for the local market.

As you may be aware, all the lumber that came in here previous to last year, all that green lumber came in from the mainland. Right now, through an arrangement with Newfoundland Hardwoods and A.L. Stuckless, that is all going to be done locally. That is the type of expansion they incurred out there. They have spent over a million dollars in the past two or three years in activating a kiln and constructing other kiln, and putting in a treatment plan to treat local lumber for the local market.

MS THISTLE: Have new markets been developed outside the Province for exporting?

MR. CONDON: Not that I am aware of.

MS THISTLE: All the timber that is preserved and so on is basically consumed or absorbed or sold within the Province, is it?

MR. CONDON: Yes, all of the timber. A lot of it, I guess, the stuff they are doing now, is the type of - we call it import replacement, where they are doing local lumber, selling it to the local market instead of bringing it in from the mainland.

MS THISTLE: I see. In the initial windup, government was supposed to receive roughly $7 million from the sale. I think up to the end of last year there was a shortfall of about 1.4 in different areas for winding up in pension and so on. Has that now been completed?

MR. HOLLETT: Yes, the sale has actually been completed. The Province has received all of the funds that were due from the sale, an amount which I believe is $5.6 million or $5.7 million. The $7 million that you refer to was an estimate that was done earlier, but all funds have now been received. I believe at the time the report was written, in November of 1997, the funds from the windup of the pension plan had not been received, but they have in fact now been received. Is that correct?

MR. CONDON: They will be received shortly. We just got a release a couple of weeks ago from the Superintendent of Pensions which approved the whole pension review process. (Inaudible) $500,000 will be released shortly.

CHAIR: Five hundred thousand you say?

MR. CONDON: Yes.

CHAIR: Shortly.

MR. CONDON: Yes. It is taking much longer, I guess, than we had anticipated; but the windup of any pension that goes through a process with Revenue Canada and the Superintendent of Pensions is a long-drawn-out process.

MS THISTLE: That would bring the sale to $6.1 million, I guess you are looking at then are you?

MR. CONDON: Yes.

MS THISTLE: The proceeds.

When you look at that $7 million, were you then looking at the expense of the consulting fees? Would they be coming off that? Because I know originally, when you hired the consultant for winding up the company, the original estimate, I think, was somewhere in the vicinity of $100,000 and it ended up to be about $500,000. Is that the final figure?

MR. HOLLETT: The final figure on the total consulting -

MS THISTLE: On the consulting fees.

MR. HOLLETT: No, the final figure on the consulting fees is closer to $1 million.

MS THISTLE: Is that right?

MR. CONDON: The final tally, and I guess there is no - Ernst & Young (inaudible) released back several months ago. The only consultant work done now is maybe some windup of the pension stuff, and that is pretty well completed; that would be W.M. Mercer.

As far as the consultant cost for the past year, it has been very little and there is very likely to be no more consulting required until the corporation is wound up.

MS THISTLE: Thank you.

CHAIR: Along that line, the consulting fees, according to the estimates there was supposed to be $39,000 or $40,000 for the divestiture and that is gone; now you are saying close to a million dollars. Again, in the Auditor General comments, I think the estimate for the privatization of Newfoundland Hardwoods would have been around $7 million to the government. So that million came off that $7 million and now we are down to $6 million, is that correct?

MR. HOLLETT: No, I don't think that is the right way to look at it. The $7 million, where that came from, I think there were offers on the assets of Newfoundland Hardwoods. There was also an estimate done of what the value of the inventory at Newfoundland Hardwoods would be. When you add the two together, the estimate that was done was $7 million, or roughly $7 million. In fact, once the assets were sold and all of the inventory was sold it came to something less than that. That is where the $5.7 million -

MR. CONDON: And that is net to the Province, Mr. Chairman.

CHAIR: I am going to ask the Auditor General to comment on this in a minute but I have a question with respect to - if you look at page 1 in the document that was presented to you, the first paragraph, the dividends to the Province a few years before that was a total of $4.7 million per year I think. Here we are now, by the time it is all said and done, it is going to be just over $5 million net to the Province, possibly. We have not gotten into all the facts and figures yet.

I just made a note here when I was reading this: Why do you even bother to sell it? It is not logical to me that we would sell something for $5.6 million when we can get almost that much in one year, approximately, from that company.

MR. HOLLETT: Government had made a decision - I believe it was in the 1992 Budget that it was announced - that there was going to be an effort essentially for government to privatize any of those businesses that government had which were better operated by the private sector, which essentially were private sector operations.

In proceeding with Newfoundland Hardwoods as one of the operations to be privatized, government established a process whereby private sector - it was an open bid process, too, which would presumably generate what is the fair market value of the business. So that is the amount that was realized.

The $4 million that you mentioned, Mr. Chairman, I believe was over a five year period. That was a dividend that was provided from 1991 to 1995.

CHAIR: Ms Marshall, do you have a comment on that?

MS MARSHALL: On the dividends?

CHAIR: Yes.

MS MARSHALL: Our analysis showed that the five years preceding the sale, the government received $4.7 million in dividends. From the actual sale, to date, what we had seen was they had received $5.6 million. If they were getting dividends of $4.7 million over a five year period and they only got $5.6 million when they sold it, it may have been better off if the government had kept that company and took the dividends (inaudible).

CHAIR: When we speak we should identify ourselves for recording purposes.

That begs another question. What criteria or guidelines are being used when government is deciding to privatize these types of operations?

MR. CONDON: With respect to the dividends that were paid out over that four year period, I guess you will probably note over the last couple of years of that there were declining revenues at the Hardwoods operation. We had seen competition coming into the asphalt section of it. I guess the writing was on the wall with respect to the Hardwoods operation because Irving and Ultramar were getting into the asphalt business, which was the money-making business for the operation for years. The timing of the sale was probably good in the sense that if Hardwoods was operating right now it would probably be basically a break-even operation.

CHAIR: (Inaudible) I have so many question to ask probably maybe I should move on, but there is one that I want to ask. With respect to this $1 million in divestiture consultant fees, that was just for that one group, right?

MR. HOLLETT: No.

CHAIR: That is the total amount for all of them, the $1 million? How could the estimates be out by so much? I just do not understand that. I asked questions in the House on this issue. To go from $40,000 or $50,000 up to $1 million, there is something drastically wrong here. Can you comment on that?

MR. HOLLETT: The $40,000 you are referring to, Mr. Chairman, was phase 1 of the process that the Divestiture Committee entered into. They went through a request for proposal process, and they received and evaluated I believe five proposals. That initial proposal was $39,000 for phase 1. Subsequent to that there were other phases of the consulting that had to be done. The Divestiture Committee, in assigning further contracts to Ernst & Young - that was the group which received the $39,000 contract - they looked at the fact that Ernst & Young had already done some work on this file and were familiar with the process, and were indeed selected as the most qualified for phase 1. Then they continued to carry on using that consultant.

CHAIR: That consultant, according to the Auditor General in the document that she presented, when this was completed had gone to $462,889. In actual fact, by the time it had been completed they received substantially more than that, I would imagine.

MR. HOLLETT: I believe the total figure that you have there should be the total figure that was paid to Ernst & Young.

WITNESS: Yes, I think it is.

CHAIR: The Auditor General.

MS MARSHALL: We have done some additional work. There were some more fees paid to that company -

CHAIR: Definitely, I would think.

MS MARSHALL: - after our report last year.

CHAIR: This was until March 31, 1996-1998. "Please note that the above includes all professional fees for the years ending March 31, 1996-1998." That is on Page 33.

MS MARSHALL: We have updated figures for that. About $580,000.

CHAIR: That is up till when?

MS MARSHALL: That would be up to?

WITNESS: To January 1998 (inaudible).

CHAIR: Again, to me, something seems wrong here when we are going to sell an operation for $5.6 million that should have been $7 million and maybe more, and it is going to cost us $1 million. If government is paying that out, that $5.6 now, to me, is down to $4.6 million, in that difference, just on that alone. Now, there are other issues we have to get into it. Do you want to comment on the point I just made.

MR. HOLLETT: One point I do want to note was that the figures that we have show that up to March 31, 1998, Ernst & Young was paid a total of $463,000.

MS MARSHALL: We can certainly provide you with our working paper.

WITNESS: These figures there do not include the amounts from 1994-1995. They started in December 1994. They only started in 1995-1996, so there is another $78,000, around there, in 1994-1995.

MR. CONDON: Our numbers came from the accountant or the auditor for Hardwoods, Derrick Drodge. He obviously did not pick up the previous year.

CHAIR: Does anybody else have questions?

MS S. OSBORNE: In the public request for proposals one interested party was asked to resubmit his bid in order to proceed to phase 2, while another bidder in the process was not given the same leeway. Can you comment on that for me?

MR. CONDON: I guess my only comment on that point is that one bidder, I think, just looked at the operation - I am just going on memory - (inaudible) be in Goose Bay. I think we were dealing at the time with Irving, which had put in bids on the other three asphalt operations in Stephenville, Botwood and in Goose Bay. I guess the Divestiture Committee at the time (inaudible) and probably figured: We do not want to sell this operation on a piecemeal basis.

I think they went back to Irving and said: Look, we realize you only put in a bid for the purchase of Goose Bay, Stephenville, and Botwood, and you talked about leasing the Clarenville operations. I guess leasing was not in the plans. In their view, I guess, Irving had the better chance of putting together an offer on the table that was acceptable to the Divestiture Committee and hence to government.

MS S. OSBORNE: This respondent thought that showed an interest in Goose Bay, and also indicated that subject to review it would also be interested in the Botwood and Stephenville locations but would analyze the transactions separately. I quote: They were excluded from phase 2 as the estimated purchase price for Goose Bay asphalt operations is well below the other offers. They were not asked to resubmit, as were, I guess, Irving was asked to resubmit.

MR. CONDON: That was, I guess, the call by the Divestiture Committee in consultation with Ernst & Young, I guess, which were government's agent at the time advising on the divestiture process. I guess it was in their view that they did not feel it was proper going back to (inaudible).

CHAIR: When I was going through this too I picked up on that. It is on page 10 in the document that was passed out. I highlighted a few things here.

In the left column on page 10, phase 2, it says: "In addition, this respondent was asked to evaluate the purchase, rather than lease, of the Clarenville location." The bill went from $250,000 to $1,950,000. "This bid included the purchase of all asphalt locations, including Clarenville."

Again, the comment that you just made was that the Divestiture Committee felt that Irving would have a better chance to put something together that was suitable, I suppose - I am not putting words in your mouth, I don't think - to government. That was a pretty broad call on behalf of the Divestiture Committee when the other group was not asked to. When they bid on the one area, and if they had gone back and said: Here is the situation, you have to go at the whole (inaudible), maybe they could have come up with a group to do the same thing as Irving did, you know. Any comments on that?

MR. CONDON: Mr. Chairman, I can only speculate that since Irving had a significant presence in the Province the Divestiture Committee felt that that would be the best bet, to get involved with them, and that they would put the best offer on the table for all the facilities. I do not think the notion was to, I guess, cut this up into a piecemeal operation. I think Irving was a serious bidder right from the start.

CHAIR: No doubt.

MR. CONDON: I guess the Divestiture Committee probably focused on them. I am just speculating at this point in time.

CHAIR: Maybe we should have the Divestiture Committee here.

MR. HOLLETT: Mr. Chairman, I would like to note that neither Brian Condon nor I were part of the Divestiture Committee. We are attempting to answer those questions about the Divestiture Committee to the best of our ability, but it would be difficult for us to, I guess, get inside the minds of the Divestiture Committee at the time.

CHAIR: Sheila, do you want to continue on with any more questions?

MS S. OSBORNE: No, not at the moment.

CHAIR: Not at the moment.

Mr. Lush.

MR. LUSH: I want just to go back to the comment that was made earlier about selling a Crown agency or a company that was making money. I think we said it was making $4.7 million in the four-year or five-year period from 1991 to 1995 and that the Province really netted just a little in excess of what this facility brought in in that five-year period. I think somebody questioned the wisdom of selling a facility or a company that was making a profit. I think you made the comment that this was probably a good time to sell it, because I gathered from that that had you tried to sell it at a time when it was not profitable, that would probably have been a very difficult position. Do either of you gentlemen want to comment on that further?

MR. HOLLETT: Yes, and in fact that is true. During the few years previous to the sale Newfoundland Hardwoods had done quite well. In arriving at the valuation of any business, essentially what prospective bidders on a business will do is look at the operations and estimate what they feel they will be able to earn from it over a forward period. Then they will discount that back, and that is the process of arriving at a business value.

Brian had mentioned that it appeared that the outlook, because of competition et cetera, that had come into the Province, that in fact the earnings for Newfoundland Hardwoods, had the operation continued as it was going during the 1991 to 1995 period, would not in fact have made the same degree of profit that it had over the previous five years.

CHAIR: Can I just interject something on that same line of thought?

MR. HOLLETT: Sure.

CHAIR: If government or a private company, Irving, decided to pay $5.6 million for that operation, that is a capital expenditure that government would not have had. If the government felt that was going to lose money in the long haul, and Irving is putting in $5.6 million on top of the expenses that government would normally pay for the operations, I would not see Irving or any company buying that if they were going to lose money on it. I do not know if that argument holds true.

MR. HOLLETT: No. Irving, I believe, is one of the companies that was in competition with Newfoundland Hardwoods. Is that correct?

MR. CONDON: Ultramar already had a presence here in the liquid asphalt division on the Avalon. You go back maybe ten years, Newfoundland Hardwoods was the only operation on the Avalon that had that liquid asphalt division. Then Ultramar moved into the area so there was competition. Irving had plans on hold for a number of years to start up its own liquid asphalt operation. Clearly, there was going to be a lot more competition in the area. Road work, particularly along the Avalon Region, was starting to be reduced so the demand for asphalt was reducing. I guess we have seen that in profits for Hardwoods over the last year of operations saw a subsequent decline, or quite a drastic decline, in their profits. I guess maybe the timing was probably quite good with respect to doing the best thing for the operation.

CHAIR: Mr. Lush.

MR. LUSH: Yes, I was just going to continue on by saying that I do not think that profitability, certainly marginal profitability, enters into the picture when a government decides to get into divestiture. It is a matter of philosophy, that governments do not believe they should be into things private enterprise can do better.

In just making the comment on the timeliness of the sale, all of us would be aware of the situation with Hibernia, with Petro Canada, when six or seven years ago it looked like the thing was going to fall through. We could not get a partner. Right now Petro Canada can sell its shares very easily. As a matter of fact, they are just waiting for the prices to go up so that they can unload their shares. I think anybody around the table will recognize that there is going to be no difficulty in them doing it. It is a matter of, in this case, hopefully or optimistically that it was reasonably well timed and that we were able to get the dollars that we did.

I would just like for you to comment again on the operation at Clarenville in particular, the timber and pole section. Again, one of the conditions of the sale - an optimistic condition - was the government's hope that this would improve. Both sides, both businesses, would improve. That came up when you were answering the question from the Member for Grand Falls-Buchans in relation to the section at Clarenville, the timber and pole section I think it was. Has there been any improvement in that area from the way it operated previously?

MR. CONDON: The pole and timber division was a marginal division, I guess, at best. The asphalt was where the money was, always.

I guess going back several years ago government had a number of offers to purchase the asphalt division but they kind of held off with the view that they figured that if they sold the asphalt division nobody would buy the pole and timber division, it would close down, and somebody coming from Nova Scotia would bring in stuff.

The operation under the old Newfoundland Hardwoods was a seasonal operation. It usually started in May and went to October, November, provided wharf timbers, and poles to Newfoundland Light and Power and the other utility companies. Since WPI came in there they activated a kiln that was there. They built another kiln. They made an agreement with two local sawmill operations in the area, neither of which had a kiln and consequentially could not access markets down in the U.S. for local lumber. Right now out there they have two sawmills in the area, they are trucking lumber into Clarenville on a regular basis, using the two kilns, and drying the lumber. Also, they are involved in the treating of local lumber, the dimension lumber for the retail market.

Instead of operating on a seasonal basis right now the operation out there is operating on a year-round basis and has close to thirty employees. Sales and revenues have increased substantially from the time when it was under the operation of the Crown agency.

MR. LUSH: Would you qualify that section as a success, as an unqualified success? How would you describe it?

MR. CONDON: Absolutely, Mr. Chairman. When the bidding process went out for Newfoundland Hardwoods there was only one company bid on the pole and timber division. There was no lottery provided. There was one company bid on it, and they bid on the basis that they were going to help grow the operation. I think based on the information we have, and we do site visits from time to time, they have done what they indicated they would do. I think at this point in time we are quite pleased with what WPI has done out there. I am sure if you talk to the people in Clarenville they are quite happy with it also.

MR. LUSH: There was no question about the asphalt section. That was the part that was a success in the beginning. Obviously with Irving it is a success now. Putting the two together, what has it meant for the Province?

MR. CONDON: The Divestiture Committee was aware there would be a number of bidders for the asphalt division. That is where the money was, even though the market was declining. Since Irving took it over the same level of people have been employed. I don't think there has been any loss of employment in the pole and timber division. As I indicated, it is doing quite well. I guess overall I think government's objective of diversifying and strengthening the economy in the area has been achieved, to this point in time anyway.

MR. LUSH: (Inaudible).

CHAIR: Thank you. I am going to ask a few questions here now. With respect to the financial statements, in the Auditor General's report she mentioned that up until March 31, 1996-1997, the statements had not been forthcoming. I think in the document they said they would be there by mid-December. Have the financial statements been received yet? Can you comment on that? Maybe the Auditor General would.

MS MARSHALL: Sure. We have the statements now for March 31, 1997, and also for March 31, 1998. What we are doing now is this. We were unable last year, because we did not have the information, to reconcile the $7 million with the $5.6 million, so Mr. Janes is working on that now.

CHAIR: With respect to the wood preservation industry, on page 1 again in the document you have, it says a part of the agreement was that government would receive up until October 31, 2000, 10 per cent of the net income. Can you comment on that? Has government received any funds from that section of the agreement? If so, how much?

MR. CONDON: Effective March 31, 1996, the fiscal year of the corporation, we received $29,000 and change. For March 31, 1997, I think their year end, we received about $10,000. So they are living up to that part of the agreement. We are provided on an annual basis with financial statements of their performance. We don't have a problem in acquiring those funds from the company. They are prepared to live up to that commitment.

CHAIR: A bit of a different tangent. I remember this being brought up in the House and it is just referred to here also. With respect to the position of the surplus storage tanks and some environmental problems there, can you comment on where we are, what the status is of that, and how much that will eventually end up costing government? Or will it cost government anything?

MR. CONDON: The surplus storage tanks were tanks left over after the sale. I guess nobody wanted them. There were five tanks out there that nobody wanted. They contain a combination of contaminated soil with fuel oil, creosote and liquid asphalt, all of which has crystallized like cement. We engaged a consultant to look at options for the decommission of those tanks. The consultant came back with a number of options with respect to how you dismantle those and how you dispose of it. One of the options was trucking that - what they call hazardous waste - out of the Province into Alberta somewhere, which would cost close to $750,000. The other option, the option they recommended, would be to dispose of that at a designated hazardous waste landfill site locally. We are working with the Department of Environment and Labour and the federal Department of Public Works and Government Services with respect to identifying an area where we may be able to dispose of that. That is still ongoing, Mr. Chairman.

CHAIR: So in actual fact we still do not know what the cost might be on that. We really do not know. We don't have a handle on that.

MR. CONDON: Mr. Chairman, we have estimates from the consultant and everything, from $750,000 to truck it out of the Province to somewhere around $200,000 to dispose of it locally.

CHAIR: To dispose of it locally. What do you mean by that?

MR. CONDON: As I mentioned, Mr. Chairman, to dispose of it locally there would have to be a designated site in the Province to dispose of that. To this date there is no such site. We understand that there will be over the next year or so. There will be a site designated within the Province to store this type of material.

CHAIR: These tanks, where are they located now? Is it in Clarenville?

WITNESS: (Inaudible).

CHAIR: Does anyone else have any further questions?

MS S. OSBORNE: Has Irving Oil met all of its obligations under the purchase agreement?

MR. CONDON: The latest information we have from Irving Oil is that they spent close to $750,000 in upgrading the tanks out there, which they have done. I think there was some other best effort clause in the agreement with respect to the trucks. I am not aware if they have met those particular requirements; but I guess certainly as far as upgrading the equipment and everything out there, they have done that, yes.

MS S. OSBORNE: Is anything being done to see if they have fulfilled the (inaudible)?

MR. CONDON: We, I guess, inquire from Irving Oil, the same as we do from WPI on an annual basis, asking what their capital expenditures have been for the year. We refer them to the particular sections of those agreements and they respond accordingly.

CHAIR: Back to the environmental issue again, on page 3, it says: As a result of confirmed environmental issues, government provided environmental indemnities to both companies for all the locations involved.

That is page 3, the second paragraph there, the last sentence. I am concerned with `for all the locations involved'. Now we have been just speaking about the tanks in Clarenville. What about the other sites? Are there any environmental issues there that need to be addressed?

MR. CONDON: Mr. Chairman, prior to the sale being consummated, I guess the Department of Environment, obviously, and (inaudible) engineering, did a number of site tests particularly in Botwood, Stephenville and Goose Bay, where I guess asphalt had been used for years. There was a certificate, or approval or whatever, given by environment.

Newfoundland Hardwoods did have to do some additional work with respect to bringing them up to standard. I think there were some requirements for new tanks, which they installed. I guess at the end of the day the Department of Environment were satisfied that everything was up to scratch with respect to those other particular sites.

CHAIR: Those other sites that you refer to - they had to bring them up to standard - did Newfoundland Hardwoods do that before it was sold? If they did, what was the cost involved in that?

MR. CONDON: Yes, Newfoundland Hardwoods paid for that during, I guess, the term of the operating agreement. I think that is related to certain oil storage tanks, the self-dykeing ones. I think they cost about $15,000 or $20,000 each to have those tanks manufactured and installed at those particular sites. Those would be tanks that use the fuel to heat up the asphalt.

CHAIR: How many tanks are we talking about?

MR. CONDON: The oil storage tanks, I think there is maybe only one for each site. I think these are maybe 1,000 gallon fuel tanks.

CHAIR: How many sites in total?

MR. CONDON: There are three sites outside of (inaudible).

CHAIR: That could be another $50,000 that would come off what was the net difference again, so it is getting less and less all the time.

MR. CONDON: That is netted into the figure of $5.6 million.

CHAIR: Yes.

Let me see, what else? Again, I am just going through the pages here now, some of the notes I highlighted. I had a note here at the end of the page 3, how much did government really get after the completion of the sale? We do not know that yet, because it is not complete; and the more we investigate this with respect to cost, there are a number of questions yet to be asked. In actual fact that $5.6 million, to me, is down to somewhere around $4 million now maybe.

MR. CONDON: No, the $5.6 million - government has that now; that is in the treasury.

CHAIR: Yes.

MR. CONDON: We will get another $500,000 from the pension fund, and the hardwoods' account has $200,000 or $300,000 in its account to take care of environmental issues and other incidental expenses.

CHAIR: But the million that we paid out in divestiture fees, if government paid that out, that is $1 million. Am I looking at this wrong? Is that correct?

MS MARSHALL: I think the million in fees is already taken into consideration.

CHAIR: Oh, is it?

MS MARSHALL: Yes.

Could I ask just one thing for clarification along those lines? Mr. Condon or Mr. Hollett mentioned earlier about the environmental cost, and you mentioned a figure of $750,000 and another figure of $200,000; those are two separate amounts, right? That total estimate would be $950,000?

MR. CONDON: No. They were just options that the consultant gave us.

MS MARSHALL: Okay.

MR. CONDON: They said, if you want to truck the stuff out of the Province you are looking at $750,000.

MS MARSHALL: (Inaudible) similar to the $1.1 million that was estimated for environmental costs? Are they the same things? I am just thinking, what environment costs are going to come off that $6.4 million that we just worked up to?

MR. CONDON: That is, I guess, difficult at this point in time to state. There are environmental indemnity (inaudible) with both companies. I guess it depends on if there are any additional environmental issues that come to light out there. Right now we are dealing with the storage tanks, and if there is a designated site within the Province we expect that a couple of hundred thousand dollars will take care of that cost, based on the consultant's estimates.

CHAIR: Does anybody else have any question to ask? Anna?

MS THISTLE: One more question.

I noted that in the windup of the company, both Irving and WPI had made financial commitments to the Province. One of the ones from WPI was that they would not relocate the assets outside the Province within three years. Now they are past that three year commitment. They have been privatized, I guess, now since 1995 or 1996.

MR. CONDON: September, 1995.

MS THISTLE: From what you are saying now, they have a full-time workforce and are generating some profits so they do not have any plans to relocate. In other words, they are satisfied with the business decision. Is that correct?

MR. CONDON: To the best of my knowledge, yes. We have not had any information to the contrary. In looking at establishing somewhere else it is probably difficult to get a licence and permits for those type of industrial sites now. I suspect, from my discussions with the company officials, they are quite happy with their operations in this Province.

MS THISTLE: I would imagine that with employees who are working out there, knowing that they have surpassed this three year deadline is making them feel a lot more comfortable. I know the success of the company is far-reaching throughout the Province because loggers in my district supply logs to A.L. Stuckless. Not only are the people of Clarenville benefiting but throughout the Province.

I was just interested in that point, but you say they have surpassed that time frame and the company is viable and the long-term prospects look good. Is that correct?

MR. CONDON: To the best of my knowledge, yes. I suspect the employees are probably not even aware of the three year time frame. Based on my discussions with the company principals - I guess we are in contact with them on a fairly regular basis - they are quite happy with the operation.

MS THISTLE: Thank you.

MR. LUSH: I am just wondering, do you have any idea what volume is supplied by both those sawmilling companies? Because they are relatively big companies in Newfoundland today. Stuckless, and you say the other was Bloomfield, they are two large operations in Newfoundland terms.

MR. CONDON: A.L. Stuckless' annual volume would be 50 to 60 million board feet of lumber. They are a substantial operation. Bloomfield lumber, on the other hand, would probably be getting up there, probably close to 15 to 20 million board feet of lumber annually. They are a year-round operation probably employing, between both of them, maybe a couple of hundred people.

CHAIR: Okay.

I have further questions. This one is directed to Ms Marshall. On page 4, the last paragraph, it says, "Our work to date has indicated the following: Several consultants and advisors were retained to provide advice and assistance in the privatization of Hardwoods, at a cost in excess of $800,000 including GST. Neither the Board of Directors of Hardwoods nor Cabinet approved the retention of any of the consultants and advisors."

Just over across from that in the next column, in the last paragraph, mid-sentence, mid-paragraph, "There was no written contract between Hardwoods or Government and the divestiture consultant, although this is required by the Guidelines Covering the Hiring of External Consultants."

Could you elaborate on that, on your concerns there?

MS MARSHALL: Yes, there are guidelines which have been put out by government - which is effectively government policy - which indicate to departments and organizations what policies and procedures they should follow when they retain consultants.

One of the requirements is that there be contract between the two parties. Another requirement is that if the cost of the consultant is going to cost more than $100,000 it should be approved by Cabinet. In this case these consultants were not approved by the Board or by Cabinet.

CHAIR: Would you like to comment on that, or respond to that?

MR. HOLLETT: The initial contract under page 1, as I had indicated earlier, was for $39,000. I have been told that any further contracts - there were regular updates to Cabinet that were provided in terms of what... The Divestiture Committee was making the decisions in terms of what consultants would be engaged and when and (inaudible), but there were regular updates provided to the department, and through the department to Cabinet.

CHAIR: In the response from the department to those points brought up on page 5, in the first paragraph, two-thirds of the way down, you said, and you are addressing this to the Auditor General, I would imagine, this: "Notwithstanding the Board's involvement, you also fail to understand that the privatization effort was being directed by the shareholders and paid for by the company at the direction of the shareholders; not the Board." In the next paragraph down it says: "...the involvement of the Divestiture Consultants (including an acknowledgment that costs would be in excess of $100,000)." What is being said there? The way I am looking at it, it still falls under the jurisdiction of government. Maybe the Auditor General will respond?

MS MARSHALL: Perhaps I can just refer you a little earlier in that paragraph. The department, when they responded, did indicate that yes, "the Board of Directors did not approve the retention of any of the consultants..." In fact, when we reviewed the minutes of the Board of Directors there was concern expressed by the board regarding the escalating cost of consultants for the privatization of the company. So there was some concern on the board itself.

MR. CONDON: Mr. Chairman, as indicated there, there were a number of submissions to Cabinet throughout this whole process by the Divestiture Committee outlining the process and indicating that consultant's fees, yes, were going to be much higher than anybody had anticipated, but because of the complexity of the transaction, the environmental issues, all of this fairly expensive expertise in view of the Divestiture Committee was needed. In some cases even one of the law firms had to engage environmental lawyers out of Toronto to look at the environmental (inaudible) agreement. Ernst & Young from time to time brought in their specialists in chemical industry analysis out of Montreal and Toronto to address issues of environmental liability. Concerns were expressed by the purchasers, WPI and Irving. I think they relied heavily on the advice from these consultants in order to put the deal together.

CHAIR: It is almost 10:30 a.m. Do we want to stop for a coffee for ten or fifteen minutes?

MR. LUSH: Sure.

CHAIR: I think we can do that and get back at it. Because I have a number of questions. Maybe some members of the Committee would like to have a few more questions.

CHAIR: I believe I was on about the environmental issues and what have you and the costs associated with that. I will ask a few questions. Again, I am trying to get to the bottom of how much government will actually receive from the privatization of Newfoundland Hardwoods. I think I said earlier on that it seems to me there is going to be substantially less than what was anticipated and what is actually here in the figures.

I was talking about the environmental consulting and remediation costs with respect to the three sites, the tanks and what have you. On page 13, figure 4, the bottom number there, it could actually cost $1,100,000. The Anticipated Net Proceeds was $7,016,014 but the actual looks to be $6,245,187.

Also, the $1 million paid out in consulting fees should be really on top of that $6,245,187. I am still getting that impression. We still don't have a handle on the environmental situation with the three sites. You mentioned $250,000. If we have to take those tanks down, if we have to move them outside the Province, if we don't get a site within the Province, $250,000 seems awfully low. I could anticipate that $5.6 million being used up for environmental purposes. Can you comment on that?

MR. HOLLETT: Mr. Chairman, the best that we can say is the advice that we have been given by our environmental consultants. That is, if there is a suitable site within the Province they estimate the cost will be in the order of $200,000 to $250,000. If they have to be trucked outside the Province, the cost would be $750,000. That is really the sole remaining item to be resolved in the sale of Hardwoods, the disposal of those tanks. The advice that we have is that that is the range of the cost. If you do it in the Province it is one amount. If you have to move it outside the Province, to a site outside the Province, then it is another amount. Those are the boundaries we have been given by the consultants for the total cost.

CHAIR: Would the Auditor General like to comment on those figures that I just referred to, that $1,100,000 for environmental consulting and remediation costs, the $7 million versus the $6,245,187? On the bottom of that page also there are the dividend from working capital, consultant fees, administration and so on. Could you comment generally on those figures?

MS MARSHALL: Sure. The $1.1 million was a figure provided to us by the department. At the time we did our audit that cost had not been paid out. We are assuming if that $1.1 million has to be paid out it is going to reduce the net proceeds of the sale. Based on the information Mr. Hollett and Mr. Condon just gave earlier this morning, you could take the $5.6 million that has been received to date, there is another $500,000 coming in for excess pension money, and there is $300,000 in a bank account. That would be proceeds then of $6.4 million. If we assume that $1.1 million is going to be paid, then I think the net proceeds will be about $5.3 million. You are saying you do not think it is going to be $1.1 million now, so it looks like the net proceeds might be $5.5 million or $5.6 million.

MR. HOLLETT: Yes. The $1.1 million, as I understand it, was an estimate provided some time ago of what total environmental consulting and remediation cost would be. The numbers that we have talked about here this morning, with the exception of the $200,000 to $700,000, are the full amounts including all consulting fees including consulting fees paid to environmental consultants. The only item that is left now is the actual disposal of the tanks. As I've mentioned earlier, if those tanks are disposed of within the Province then the estimate is $200,000 to $250,000.

MS MARSHALL: The estimate as of today then looks like it is going to be around $5.4 million or $5.5 million, but time will tell. We will just keep our review open (inaudible) the actual cost (inaudible) incurred and then we will find out what the net proceeds were for sale.

With regard to the other column that you were speaking to, Mr. Chairman, the cost of the consultants is already taken out of that actual column, that column that adds to $6.2 million. If you look at the third line you will see Anticipated Net Proceeds. If you can look at the column that says $2.8 million, then it will say that the actual was $759,673. If you go down to the bottom of the page, note 4, it will show that while we anticipated $2.8 million, actual expenditures were incurred for consultant fees of $850,000, administration and operating cost of $832,000, some improvement cost of $218,000, and miscellaneous cost of $144,327. Really, the net actually proceeds ended up to be $759,000 instead of the $2.8 million.

The $6.2 million that was anticipated, now that was at the time that we did our last review. If you look down at note number 3 you will see that we expected it was going to be $6.2 million coming in; $5.6 million had already come into the government's bank account; and we are expecting another $640,000. Whether that will actually materialize I do not know. We will determine it as we go on with our review.

CHAIR: Will that review complete for your report today, January, whenever you present your report?

MS MARSHALL: The report that we are doing now will take the numbers up to - what date, Claude?

MR. JANES: Right up to date, if the tanks are removed and (inaudible) by the time we do our report. Otherwise we cannot conclude it if the tanks have not been -

CHAIR: The question is when will the report be presented?

MS MARSHALL: The report is due to the House by January 31. I would think the numbers will bring us up to probably the end of September or the end of October. If the environmental costs are not incurred we will still only have an estimated figure as opposed to an actual figure.

CHAIR: Is that likely to occur before -

MR. CONDON: No.

CHAIR: I did not think so. Does anyone else have questions?

MS S. OSBORNE: Are there any sites in mind for the disposal of those tanks?

MR. CONDON: I am not aware of any at this point in time. I know there is some suggestion that the Argentia area may be a designated site because they involved in an environmental cleanup right now. Other than that I am not aware of any other sites (inaudible).

MS S. OSBORNE: Thank you.

CHAIR: On page 6, again back to the Reassessment of Purchase Price. There seems to be a difference of opinion between the department and the Auditor General's office. I will just refer you to two statements or two sentences. In the second column in the second paragraph, the last sentence says: "If this profit sharing estimate of $2.5 million had been considered, the sale of shares would have provided higher proceeds to the Province."

Then there is the Department's Response: "We are at a complete loss with your assessment that the sale of shares would have provided higher proceeds to the Province." Would the Auditor General like to comment on that?

MS MARSHALL: Sure. If you look at figure 3 on page 11 of the document that you have, you will see where there is a comparison made of the two options. One is the sale of the assets of Hardwoods. It looks like they would get benefits of $8,347,434. If you look at the shares of Hardwoods that they sold they were going to get $7,282,200. When they came up with $8,347,434 for the sale of assets they included $700,000 for future income tax, and there is also a $250,000 figure of profit sharing in that $3,162,000. They did not include that $2.5 million on profit sharing down in the sale of the shares of Hardwoods. If you had added the $2.5 then you would have had really $9.7 million which you would have gotten from the shares of Hardwoods.

CHAIR: In actual fact, we even got less than was anticipated from the selling of the company anyway.

MS MARSHALL: That is right.

CHAIR: Would Mr. Condon like to respond to that?

MR. CONDON: The only thing I can say to that, Mr. Chairman, is the point that I think the offer from McAsphalt, which was talked about in the purchase of the shares, I think McAsphalt also wanted to keep whatever cash was in the Newfoundland Hardwoods account. I think that was probably discounted because I think at the time there was probably a couple of million dollars in Hardwoods' account. I think that may be one of the reasons why McAsphalt's offer, when you take that into account, probably was not equivalent to what was on the table from the other groups.

CHAIR: Ms Marshall, do you need to comment on that or anything?

MS MARSHALL: No. The only other comment I have on when you compare the sale of the assets and sale of the shares is that they sold the assets, and it looks like now they are going to get maybe $5.6 million, maybe $6.2 million, from the sale of the assets.

CHAIR: Maybe.

MS MARSHALL: Maybe if they had gone with the sale of the shares - and I realize it is hindsight, and hindsight is a wonderful thing - but if they had sold the shares, it looks like they would have gotten $7.2 million, which is more than the $6.2 million which (inaudible) actually transpire.

CHAIR: If anybody wants to ask a question, please put your hand up or let me know, Committee members,.

On page 7 in the first column in the last paragraph it says: "The sales agreements required substantial commitments from the two successful companies over the next several years. At the time of our review, there was no process established to monitor compliance with the terms and conditions of the sales agreements."

Would the Auditor General like to refer to that or comment on that?

MS MARSHALL: That refers to the income tax that the government was going to benefit from, and also the profit sharing arrangement. I believe (inaudible) and the $1 million (inaudible).

MR. CONDON: Yes, there is, I guess, regular monitoring of both operations and, as I mentioned earlier, WPI has lived up the terms of the agreement with respect to the profit-sharing and with respect to certain capital expenditures.

We, on a regular basis - on an annual basis, in fact - are required to submit reports to government on their operations, copies of their financial statements, and any other information which I guess they feel would be valid to government with respect to expansion plans, capital expenditures and the like.

I think with respect to that comment we are keeping a close eye on the operations out there as far as the monitoring is concerned.

CHAIR: On page 9, it says in the second column, Department's Response, "Consulting Services - your comments that you did not have access to all of the consultants' invoices and that accounting records were not complete at the time of your review is misleading. It was explained to your auditors that as a result of new operators moving in, many pieces of information were in different locations...". It goes on to say, "As such, if you could provide us with the list, we will commit to getting them."

When I read that, I said to myself: How could they request a list? If what the Auditor General was looking for was in different locations, how would she know what to ask for? Is that a fair assumption to make, I say to the Auditor General?

MS MARSHALL: What we were looking for were the accounting records. We were also looking for the audited financial statements, and we had quite a lot of problems getting the information that we needed. I spoke to the department - I cannot remember which official it was - but we were referred to the consultants. The department did not have the information and they suggested that we contact the consultants.

It was a very lengthy process trying to get the information from the consultants. I think I am going to refer you to Mr. Allen, who spoke directly to the consultants. He can probably give you some insight as to the type of difficulty that he had in getting the information we required.

MR. ALLEN: We were basically looking for the information that related to Figure 4. Other than the accounting records and things, we wanted to find out what the actual figures were that are showing up in Figure 4, on page 13. The last going off, as the Auditor General just indicated, it was a time-consuming process. We provided a table and then we were directed to go to the consultant and they would have the information to fill in here for what was actually received, because they had most of the records.

MS MARSHALL: We requested the information on several occasions and finally, in an effort to try to get a handle on exactly what the revenues and expenditures were surrounding the privatization, we formatted this chart. The numbers that we did not have, we just left blank and sent it down to the consultant and said: Look, please just fill in the numbers.

We were getting quite frustrated toward the end, so that is where some of the numbers came from. We gave it to the consultant and said: Look, fill it in because we just could not get the information on our own.

CHAIR: If the numbers were filled in - you do not know if those numbers are accurate or not, do you?

MS MARSHALL: I think most of the numbers are starting to bear out, and we are looking at the audited statements now. The statements for 31 March 1997, and 31 March 1998, are available now. The consultant did not have them at the time we were doing our review. We have them now and we are trying to recheck the numbers and trace them through that way.

CHAIR: So there is no point in asking questions here further on that because you still have to review those numbers.

MS MARSHALL: That is right.

CHAIR: On page 12, the first paragraph, I just had it highlighted. "Given the details surrounding the transactions, which were provided to you and which have previously been noted, there was no relevance between the two situations and as such we cannot agree that the Divestiture Committee was inconsistent." I think we have pretty well addressed that haven't we?

On page 14, Monitoring the Privatized Operations, the first dot, we say, in that first paragraph there, "Irving must provide $1 million in capital investment for upgrading the asphalt assets. If viable, Irving must put an asphalt delivery service into operation...". `If viable' are the words I am interested in there. Mr. Condon, can you comment on that, on what is going on there?

MR. CONDON: Irving - the last information we had, I think, was probably in March of this year - indicated that they spent close to $750,000 in upgrading the asphalt plant at Clarenville.

Some of the other conditions with respect to the asphalt delivery service and asphalt trucks, I think, were mostly a best-efforts issue. There was no reference in our correspondence from Irving that they had indeed addressed that issue.

CHAIR: So is that going to be followed up on?

MR. CONDON: We write Irving on an annual basis just outlining the terms and conditions of the contract, the staffing, how they have addressed it. They came back last year and indicated that they spent $750,000 dollars. Maybe this year they may indicate that they are going to do something with respect to the asphalt delivery and the trucks.

CHAIR: If Irving comes back and says, `Well, it is not viable, we are not going to do it.' What happens?

MR. CONDON: I think, Mr. Chairman, that is kind of a best-efforts clause. I don't know if we have any way to enforce it other than the fact that if Irving demonstrates to us that it is not viable to do that, I guess - they satisfy the terms of the agreement.

CHAIR: Going to the next paragraph, "Irving must provide a pension plan and begin discussions with the union on the form of the pension plan." What is the status on that?

MR. CONDON: Those issues have been resolved, Mr. Chairman.

CHAIR: On page 15, there are four points at the top of the page. "WPI must pay 10 percent of its net income...". We addressed that, but the second sentence, "An adjustment amount for the period during the Operating Agreement, 5 June 1995 to 19 September 1995, must also be paid." Was it paid?

MR. CONDON: To the best of my knowledge - and I guess we have confirmation of that from our consultant and from the auditors - everything that was owing from WPI was paid over to the Province.

CHAIR: The next point, "WPI purchased the inventory for $3,331,240 and must pay Hardwoods based on an established formula." Is that $3.3 million part of the $6.2 million that we might (inaudible), and that has been all received?

MR. CONDON: Yes, Mr. Chairman, that has been received.

CHAIR: The next point, "WPI, having been granted EDGE status, must fulfil obligations and commitments in its EDGE application." Would you be familiar with that application?

MR. CONDON: Mr. Chairman, yes, they have satisfied the requirements of the EDGE status in that they have responded to us on an annual basis with respect to their operations, with respect to the number of jobs they have created -

CHAIR: Jobs, that is what I was curious about.

MR. CONDON: - capital expenditures and copies of the financial information.

CHAIR: The last one, "WPI must not relocate the assets outside the Province within three years." Is that a possibility, that they may do that?

MR. CONDON: I guess the assets that they purchased was the building out there and then they took over the treatment plant. To move something like that - I guess you could move it. They have two kilns out there, and that stuff could be dismantled and removed, but some of the rest of the stuff just would not be feasible to move.

CHAIR: I would think - WPI, are they out of Quebec?

MR. CONDON: They are out of Montreal.

CHAIR: Montreal, Quebec. Could they not in the future decide - four years from the time of the agreement - to just close her down here now and move, and all the jobs will be gone and what have you. That is a possibility, I suppose. There is nothing in the agreement to say that they cannot do that?

MR. CONDON: No, Mr. Chairman, there is not. Once they satisfy the three-year things, I guess they could.

CHAIR: So in actual fact they could basically decide to buy out their competition in Newfoundland, and within a three- to four-year period they could say: Okay, we have bought out our competition - worth the effort - gone.

MR. HOLLETT: Mr. Chairman, every indication is that WPI is doing quite well at that location and that is really a hypothetical situation.

CHAIR: It is.

MR. HOLLETT: They are doing well and there certainly seems to be no reason for them to do that. They are making a profit and they have expanded the operation.

CHAIR: They have expanded.

Those are the questions I have. Do any other committee members have any further questions they would like to ask the Auditor General's staff? No questions? Tom?

Mr. Condon, Mr. Hollett, are there any further points you would like to make, a clue-up statement, or anything of that nature?

MR. CONDON: No, Mr. Chairman. I guess we are reasonably satisfied that the divestiture process went quite well. Government is quite happy to get somebody of the calibre of WPI in there for the pole and timber division. That company has been in operation since 1934 out of Montreal, and they have operations down in, I think, New York. They work well. They have done what they indicated they would do. They are providing employment and they have a good working relationship with a number of sawmills in the area. They are value-adding to the lumber that is going out of this Province. They are enabling small, relatively small, lumber producers to be able to access the U.S. market by being able to kiln dry their lumber.

To the extent that they have been able to contribute to the economy in the area, we are quite pleased with it. We have a good working relationship with WPI and we monitor the situation out there on a regular basis. As far as we are concerned, they are good corporate citizens.

CHAIR: Okay, thank you.

Does anybody else have any comments they would like to make? I would like to basically make the comment that we still really don't know the end result with respect to the financing, the situation on the privatization of Newfoundland Hardwoods. It could be months, possibly years, before we do know that, depending on the environmental situation with the tanks and the cleanups and what have you. That is just a point I would like to make before we adjourn.

I would like to thank everyone for coming today: Mr. Hollett, Mr. Condon, the staff, the Auditor General, and the Committee members. We will be presenting a report in the House, I would imagine, on this hearing, and making any recommendations and what have you. Probably early in the new year, I would think, it would be expected. Once again, thank you for coming out.

Committee adjourned.