Audit of the Federal Economic Development Initiative in Northern Ontario (FedNor) — Northern Ontario Development Program (NODP)

3.0 Background

3.1 Federal Economic Development Initiative for Northern Ontario

The Federal Economic Development Initiative for Northern Ontario (FedNor) was established in 1987 to promote economic growth, diversification, job creation, and sustainable, self-reliant communities in Northern Ontario by working with community partners and other organizations to improve small business access to capital, information, and markets.

FedNor has played a strong leadership role in partnership with community and business leaders to create stronger sustainable communities where businesses can grow and thrive. In 1997, FedNor moved from non-repayable direct contributions to businesses, to more community-based strategic investments that would provide a solid foundation for communities and businesses that are facing the challenges of today's new economy.

FedNor covers the delivery of the following programs:

• The Northern Ontario Development Program (NODP) which promotes economic growth, diversification, job creation and sustainable self-reliant communities in Northern Ontario through a range of initiatives aimed at improving small business access to capital, information and markets;
• the Eastern Ontario Development Program (EODP) Program which supports economic renewal in rural Eastern Ontario;
• the Community Futures (CF) Program which supports the development and growth of rural Ontario communities; and a new funding initiative to support the Social Economy throughout Ontario

3.1.1 Northern Ontario Development Program (NODP)

Created in 1987, the NODP is an ongoing program that promotes economic growth, diversification, job creation and sustainable communities in Northern Ontario through a community-based approach. The service area runs from the District of Muskoka to Hudson Bay and from the Manitoba border to Quebec — a large and diverse geographic area.

The NODP, the focus of this audit, helps communities gain access to services and assists in eliminating barriers to the global marketplace. By supporting trade, tourism, and business financing initiatives, it helps ensure that Northern Ontario excels in a knowledge-based economy.

FedNor's efforts to meet NODP's mandate focus on six strategic priority areas, which also act as a framework to guide investments:

• Community Economic Development;
• Information and Communications Technology (ICT);
• Innovation;
• Trade and Tourism;
• Human Capital; and
• Business Financing Support.

The expected results of the NODP include:

• Improved retention and development of youth to increase competitiveness in business;
• Increased capacity and ability to respond to local economic development opportunities and challenges;
• Enhanced technology infrastructure and innovation; and
• Improved business and trade skills through counselling and training activities.

According to NODP criteria, eligible recipients include: not-for-profit organizations, businesses, Aboriginal organizations, municipalities, and economic development organizations. A broad range of not-for-profit organizations located across Northern Ontario can apply. For-profit businesses and social enterprises can apply for human capital and innovation support.

There are two distinct types of contributions available under the Program, each with its own set of criteria and terms:

• Loan/Investment Fund Loss Reimbursement
• Other contributions

A) Establishment of a Loan/Investment Fund Loss Reimbursement:

• Higher risk commercial term loans to businesses or social economy enterprises, including loans for special projects of very high risk, such as start-ups, initial research and development, pre-commercial product development and pre-operational marketing studies, including mentoring assistance as identified by the capital provider on a case by case basis; or
• Loans to investment funds of secondary capital providers such as Community Futures Organizations (CFOs) (Community Futures Development Corporations and any special purpose, provincial or regional association of Community Futures Development Corporations) and Aboriginal Capital Corporations (ACCs) to enable them to make loans to businesses or social economy enterprises to acquire fixed assets, top up working capital, to establish or expand micro business enterprises, to develop or expand markets, to conduct research and development, to develop products, to undertake quality improvement initiatives or to support strategic and human resource development.

B) Other contributions:

• Special projects, such as start-ups, initial research and development, pre-commercial product development and pre-operational marketing studies, which would be unlikely to attract commercial debt due to the risk involved.
• Access to capital for the Aboriginal business community, contributions for other projects, to increase the number and coverage of Aboriginal financial institutions.
• Activities related to technological innovation, enhancement of telecommunications and information technology, expansion of markets, development of economic infrastructure, training, business management skills development, establishment and maintenance of economic development networks, feasibility studies, strategic planning or any other activities in support of business, social economy enterprises, entrepreneurship development or economic development; and
• Establishment or expansion of the capital base of CFOs or other non-profit community-based organizations providing investment in local businesses.

Normally, only applicants located in and providing benefits to this area may be assisted under these Terms and Conditions. Applicants who can demonstrate significant benefit to the Northern Ontario economy, but who are located outside of Northern Ontario, may be considered for assistance on an exceptional basis.

The following table represents total NODP spending for each fiscal year within the scope of this audit:

Total NODP spending

	2002/03 ($M)	2003/04 ($M)	2004/05 ($M)	2005/06 ($M)	2006/07
Grants & Contributions	47.3	41.3	37.7	38.4	36.2
Operating	13.1	11.8	11.3	13.5	12.4
Total NODP	60.4	53.1	49.0	51.9	48.6
Northern Ontario School of Medicine (one year investment)	-	-	-	6.0	-
Total	$60.4	53.1	49.0	57.9	48.6

The following table represents the number of projects entered into by the NODP between April 1, 2002 and March 31, 2007 by dollar threshold category:

Number of projects

	Below $25,000	$25,001– $100,000	$100,001– $500,000	$500,001– $1,000,000	Greater than $1,000,000
2002/03	135	143	90	2	5
2003/04	92	206	107	0	0
2004/05	51	181	60	0	0
2005/06	57	200	143	0	1
2006/07	60	173	78	1	3
Total	395	903	478	3	9

Based on current priorities, the following is a breakdown of fiscal 2005/06 and 2006/07 grants and contribution spending by strategic priority:

Strategic Priority

Strategic Priority	2005/06	2006/07
Information & Communications Technologies	11.5	10.3
Trade & Tourism	4.6	5.6
Innovation	4.1	4.5
Community Economic Development	11.6	9.1
Investment Financing Support	3.6	3.6
Human Capital	3.0	3.1
Total	$38.4	$36.2
Northern Ontario Medical School (one-year investment)	$6.0	$0.0

The Audit and Evaluation Branch's (AEB) 2005–2008 Multi Year Risk-Based Audit Plan, approved by the Departmental Audit and Evaluation Committee (DAEC), includes an audit of the FedNor NODP.

This report sets out the results of the audit conducted from March to August 2007, including the audit observations, conclusions reached and recommendations for management consideration.

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3.2 Audit Objectives

The objectives of this audit were as follows:

1. To provide assurance to senior management on the design and operation of the management control framework — including management and operational practices, risk management practices, and information management and reporting for decision making in the achievement of overall objectives of the NODP; and
2. To determine whether transfer payments are managed in accordance with the Treasury Board Secretariat (TBS) Policy on Transfer Payments and to assess the adequacy of the departmental processes to track whether recipients have complied with the requirements of applicable contribution agreements.

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3.3 Audit Scope

The scope of the audit covered the Program's operations from April 2002 to March 2007 in all three regional offices — Sudbury, Thunder Bay and Sault Ste Marie where the Program is delivered. The audit focused on the areas of highest risk facing the achievement of Program objectives.

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3.4 Audit Methodology

The audit of the NODP was conducted in three phases:

• Planning phase;
• Fieldwork and analysis phase; and
• Reporting phase.

The following steps were completed during the planning and fieldwork phases of the engagement:

• Review of relevant background documentation and applicable policies
• Preliminary interviews with key program management and representatives
• Detailed interviews and process walkthroughs with a sample of Project Officers, Monitoring & Payment Officers and Program Management
• Audit criteria were developed based on the established audit objectives. For the details of the audit objectives, see Appendix A. Testing was performed in accordance with the agreed-upon criteria
• Compliance testing on a statistical sample of 100 projects between fiscal years 2002/03 and 2005/06:
  • Testing of compliance of selected key controls for entire 100 projects
  • Detailed testing of key controls for judgmental sample of 25 projects from 2004/05 and 2005/06
• Compliance testing on a judgmental sample of 25 projects within fiscal year 2006/07 in order to test the effectiveness of the controls designed into the management control framework.

For testing of the Program files to support the design of the management control framework, a statistically valid, stratified sample of 100 contribution agreements entered into between April 1, 2002 and March 31, 2006 was selected — with the stratification defined by fiscal year.

To further test the effectiveness of key processes within the sample, a judgmental sample of 25 projects from the original 100 randomly selected projects (restricted to the fiscal years 2004/05 and 2005/06) were selected for a more in-depth review and compliance testing. In order to evaluate the existing management control framework, a second judgemental sample restricted to the 2006/2007 fiscal year was selected for testing.

The audit of NODP was conducted in accordance with the Standards for the Professional Practices of Internal Auditing as per the Institute of Internal Auditors (IIA) and in accordance with the Federal Government Policy on Internal Audit. Audit criteria developed for this audit are listed in Appendix A to this report.