ESTIMATED NET SHORTFALL ON CADC PROJECTS ($ Millions)

projected shortfall of $1.77 million.

EXHIBIT 4.4

ESTIMATED NET SHORTFALL ON CADC PROJECTS ($ Millions)

CN land $2.77

CN Station (1.57)

Visitor Information Center .26

Waterfront Development 1.77

$3.23 4.40 In November 1998, CADC advised the Province of an expected shortfall of $2.77 million for 1999-2000. We were advised by CADC that provincial officials were considering the request to fund the shortfall. Management of CADC plans to fund the balance with conventional financing and/or sale of assets.

4.41 In 1998-99, CADC has written off $3 million pertaining to the refinancing of BDC place and the Confederation Court Mall. The Province has guaranteed additional debt of $11.8 million for these projects. The Province is considering the request from CADC to fund the shortfall of $2.77 million pertaining to the CN land project. This does not include the interest forgone on the non-interest bearing loan of $3.6 million between CADC and the Department of Transportation and Public Works pertaining to this property.

4.42 In November 1997 Citizenship and Immigration Canada performed a compliance review of the Island Funds. They found that the Island Fund II $8.5 million investment in CADC was not in compliance with the regulations because CADC is 85 percent owned by the Province. In short, the Fund was lending money to a government-owned entity which is not in accordance with the rules of the Program. Island Investment Development Inc. indicated they considered investments in CADC to be eligible because previous investments had been made and they were unaware of any resistance to the funding in those instances. The federal officials have not

directed that any action be taken on this issue such as repayment of the loans and re-investment in other eligible projects, however, they have precluded further investment by IIDI in CADC projects.

Hillsborough Bridge 4.43 Public/Private Partnering (P3) projects in their broadest Public/Private definition are any arrangement where private sector expertise and Partnering resources are used to meet a public policy need. A variety of arrangements in terms of their complexity may exist in the form of contracts with the private sector. At the more complex end of the spectrum are projects which have been traditionally owned, financed, and operated by governments that are designed, built, financed, and operated by the private sector under a leasing arrangement. When the leases associated with P3 projects are structured as operating leases, the liability or debt associated with the related capital project is not recorded. There is currently significant debate over the most appropriate accounting and reporting treatment for P3 projects. The Policy and Evaluation Division of the Department of Provincial Treasury has recently issued a report intended to assist government in formulating a set of principles and a process for selecting and implementing P3 projects. We have been advised that this report will be used as a guide for any P3 projects the Province decides to explore. We reviewed the Hillsborough Bridge expansion project which was a P3 project that accessed Immigrant Investor Program financing. The project financing was initiated in 1996 although some design work had previously been completed.

4.44 In January 1996 Executive Council approved the request by Strait Crossing Development Inc. (SCI) to use the Immigrant Investor Program to finance construction costs associated with adding two traffic lanes to the Hillsborough Bridge. The project required sale of the Bridge to the developer with the Province then leasing it for the five year term of the immigrant investor financing with an option to purchase at the end of five years. It was stated in the Executive Council memorandum that the proposed sale/lease back arrangement would produce savings to the Province in the range of $1.5 million to

$3 million. Management could not provide us with an analysis to support this projected savings. In addition, it was expected that the Province could defer recording the $21 million expenditure for five years and therefore delay the impact on the Province’s debt.

4.45 Initially, government intended to account for the financing arrangement as an operating lease which means that only the lease payments totalling $6.8 million over five years would be expensed

during the five year term. However, after consultation with our office and reference to the pronouncements of the Canadian Institute of Chartered Accountants, government officials agreed the more appropriate accounting treatment was to record the cost to expand the bridge as a capital expenditure. The nature of the transaction was such that all the benefits and risks of ownership stayed with the Province and therefore the costs were appropriately recognized when construction occurred.

4.46 The date of closing for the financing arrangements was August 1996, when the legal documents were signed. We compared the cost to the Province under the current financing arrangement versus the cost of financing the construction through conventional means and determined that the estimated project savings at the date of closing were considerably less than originally anticipated.

4.47 The lower savings than the amounts referred to in the Executive Council Memorandum resulted primarily from a general decline in interest rates which lowered the Provincial borrowing rate by over 1 percent during 1996. This would have made the self-financing option less costly. Another factor was that only 81 of an expected 138 immigrant investor units were sold. These units netted

$12.8 million which could be invested in the project rather than $21.7 million as required. As a result more costly conventional financing had to be obtained for a portion of the project at rates as high as 8.3 percent instead of 3.9 percent.

4.48 The risks to the Province for this project were significant.

When Executive Council approval was initially provided to this Project, it was on the understanding that the Province would only be required to assist in obtaining take-out financing when the immigrant investor funds came due in five years. Initially, a twenty-year lease was proposed with take-out financing being required for years six to twenty. It was subsequently decided to limit the term to five years.

However, as events unfolded, it became apparent in June 1996 that the Fund would not be fully subscribed. Additional financing was needed and a privately incorporated financing company came forward. This corporation structured a financing arrangement which would use immigrant investor capital to the extent possible and access conventional financing from a large private sector financing corporation.

4.49 This new financing source set terms which added costs and required substantially more security than the Province had originally anticipated it would be required to provide. The Province was required to provide: indemnification for possible losses resulting from fixing the interest rate; a $140,000 administration fee; payment of legal costs totalling approximately $175,000; and indemnifications for any claims, costs, expenses or damages attributed to any act or omission by Hillsborough Bridge Development Inc. (HBDI). The Province’s lawyer indicated these indemnifications could be considered guarantees within the spirit and intent of the Financial Administration Act. Executive Council provided the approvals for these additional requirements in August 1996.

4.50 The financing arrangements between the Fund and the other financing corporations were extremely complex. However, our focus is on the expected impact of these financing arrangements on the Province’s finances. Hillsborough Bridge Development Inc., a subsidiary of SCI, entered into a development agreement with the Province to expand the Hillsborough Bridge. HBDI required $21.735 million in total for construction costs and the purchase of the Bridge from the Province. The financing for the project was obtained from a private sector fund (Opportunities Fund) in the amount of $14.18 million less 10 percent placement fees for a net of $12.77 million.

HBDI borrowed $8.97 million from the private sector financing corporation in order to net $21.7 million as required for the project costs. Exhibit 4.5 summarizes the financial obligations of the Province for the Bridge project.

EXHIBIT 4.5

HILLSBOROUGH BRIDGE