PACC Committee Report

HOUSE OF COMMONS
CANADA

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Introduction
Observations and Recommendations
Conclusion

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Federal Laboratories for Human and Animal Health Building Project

Pursuant to Standing Order 108(3)(e), the Standing Committee on Public Accounts has the honour to present its

SEVENTEENTH REPORT

The Standing Committee on Public Accounts studied Chapter 7 of the April 1998 Report of the Auditor General of Canada (Federal Laboratories for Human and Animal Health Building Project) and agreed to the following report:

INTRODUCTION

The new Federal Laboratories for Human and Animal Health in Winnipeg contain some of the most advanced diagnostic, research and training facilities of their kind in the world. The facility is the first in the world to combine laboratories concerned with both human and animal diseases, and the first in Canada capable of handling the most dangerous viruses known. The facility is to be used by Health Canada and the Canadian Food Inspection Agency.

The occupants are expected to take possession of the facilities in the fall of 1998, almost 11 years after the project was first proposed. In the opinion of the Office of the Auditor General (OAG), the project is approximately a year behind schedule and the estimated cost now stands at $176 million, $34 million more than the original estimate of $142 million. Contrary to Treasury Board policy, the originally proposed budget did not identify all project costs.

The Office of the Auditor General identified several areas where Public Works and Government Services Canada, the contracting department and project authority, could improve its practices in selecting and managing consultants on future complex projects like this one.

With a view to answering these and many other questions, the Standing Committee on Public Accounts decided to study the Auditor General’s findings and observations regarding the federal laboratories in Winnipeg. On June 4, 1998, the Committee met Denis Desautels, Auditor General of Canada, and Shahid Minto, Assistant Auditor General. Health Canada was represented by Robert S. Lafleur, Assistant Deputy Minister, Corporate Services Branch, and Dr. Joseph Z. Losos, Assistant Deputy Minister, Health Protection Branch. Dr. Norm Willis, Executive Director of the National Centre for Foreign Animal Disease in Winnipeg, testified on behalf of the Canadian Food Inspection Agency. Michael Nurse, Assistant Deputy Minister, Real Property Services Branch, and Bruce Lorimer, Director General, Architectural and Engineering Services, represented the Department of Public Works and Government Services Canada. Deputy Comptroller General Colin Potts appeared on behalf of the Treasury Board of Canada Secretariat.

OBSERVATIONS AND RECOMMENDATIONS

The federal laboratory project in Winnipeg was officially launched in September 1987. The two client departments, Health Canada and Agriculture and Agri-Food Canada, submitted their documentation to Treasury Board to justify the construction of new facilities and the need for high-biosafety laboratories (level 4). The Auditor General’s review confirmed that the two departments needed to upgrade and augment the existing facilities (7.38) in order to carry out their mandated programs efficiently and effectively. The audit also confirmed that part of the new facilities in Winnipeg fulfilled a capacity and program need that could not be met in any existing laboratories in Canada. However, the Auditor General observed that, at the time the decision was made to construct the new facilities in Winnipeg, no in-depth analysis of each department’s overall laboratory profile and capacity to meet current and future service and facility needs had been conducted.

In April 1996, Health Canada commissioned a study to assess current and future needs. The study did not take into account the capacity of the new facilities in Winnipeg even though they are considered a keystone of Health Canada’s microbiological laboratory services and capacity. The study concluded that the department was spending significant amounts of maintenance dollars on what appeared to be excess laboratory capacity and recommended that a laboratory space optimization study be carried out (7.39). In the past, the departments had tended to overbuild laboratory capacity in anticipation of future growth which often did not materialize. In July 1997, the Canadian Food Inspection Agency (CFIA) set up a task force to assess its future laboratory and quarantine support service requirements. The objective is to develop options for reducing the cost of laboratories and quarantine inspections with minimal impact on service. The CFIA informed the Auditor General that the scope of the study had been enlarged to include a broader consideration of options. The Auditor General does not know when the study will be completed.

According to the Auditor General, the Winnipeg facility can accommodate significantly more than the number of scientists and support staff planned for occupancy. The Auditor General noted in his report that the Winnipeg facilities allocated approximately 100 net square metres per scientific staff member which is approximately double the national average (7.47). Also the building grew from 10,900 net square metres in 1991 to 13,000 net square metres in 1996, without any corresponding increases in program requirements (7.44). In his remarks before the Committee, the Auditor General said that 70 out of a total of 180 positions had yet to be filled, representing 40% of the staff that the client departments anticipate for the new laboratories in Winnipeg. At the end of the audit, the departments concerned still did not have an activities plan or a comprehensive strategy to ensure the full use of the Winnipeg facilities.

The issue of surplus capacity at the Winnipeg facilities, in particular the large number of still-vacant positions, was a major concern for the Committee members. They repeatedly asked the Health Canada representative, Dr. Joe Losos, what his department was planning to do to rectify the situation. Dr. Losos told the Committee that there is currently a memorandum of agreement between Health Canada and the CFIA regarding surplus capacity and that an activity plan for rationalizing the laboratory space (1605) is to be completed by late summer of this year. The Committee asked the witness about the fate of the existing facilities. Dr. Losos said he expected decommissioning of some of the existing facilities as staff and equipment move to the new laboratories in Winnipeg (1650). Finally, the Committee urged the Auditor General to review the activity plans of the departments concerned to ensure that they adequately addressed the issues raised in the meeting and convey its findings to the Committee. The Auditor General said he would be quite agreeable to review and comment on the departments’ activity plans (1700). The witness for Health Canada, meanwhile, agreed to the Committee’s request to report the Auditor General’s findings on the activity plan the next time the department appeared before the Committee.

Based on the findings, the Committee recommends:

That Health Canada and the Canadian Food Inspection Agency take the capacity of the Winnipeg laboratories into account in their ongoing evaluation of their national laboratory needs;

That Health Canada and the Canadian Food Inspection Agency submit as soon as possible but no later than January 31, 1999, to the Standing Committee on Public Accounts, a concise letter describing the memoranda of agreement on measures to eliminate the surplus capacity ;

That Health Canada and the Canadian Food Inspection Agency complete by March 31, 1999, their activity plans and strategies for phasing out the surplus capacity of the federal facilities in Winnipeg;

That Health Canada and the Canadian Food Inspection Agency implement their action plans, developed in response to the Auditor General’s findings and observations, and report the implementation of their action plans to the Standing Committee of Public Accounts by March 31, 1999.

With regard to the management and financial control framework, the Committee took particular interest in the Auditor General’s findings regarding the departmental "philosophy" of spending the entire approved budget (7.59 and 7.60) instead of seeking for potential savings. According to the Auditor General’s recommendations, the Treasury Board Secretariat and the Department of Public Works should develop incentives to encourage underspending of budgets. In its response to the Auditor General’s recommendations, the Secretariat said it does not believe that an incentive regime at the project level would be an effective way to encourage underspending of budgets. In the Secretariat’s view, it would be difficult to envision an incentive regime that would not have a potential downside in the absence of a much more rigorous [Treasury Board] approval process than the one that is currently in place (7.61). On the other hand, Public Works and Government Services Canada (PWGSC) is currently identifying ways to introduce into the overall contracting process a viable and meaningful incentive system for reducing costs where feasible (7.62).

The Committee questioned the witnesses from the Treasury Board Secretariat and Public Works and Government Services Canada about the measures they were planning to undertake to correct or change this departmental philosophy. Mr. Colin Potts, Deputy Comptroller General with the Treasury Board Secretariat, responded by saying, "the Treasury Board Secretariat agrees that the aim should be to achieve the most cost-effective result. As reflected in government policy, we believe this can best be accomplished by establishing budgets through benefit, cost, and option analysis, and by managing projects to ensure that approved objectives are met within budget" (1600). The witness went on to say that the Secretariat has begun a complete overhaul of the procurement function of government with the aim at making procurement better and more efficient, with emphasis on planning, options and ensuring the best value for the dollar (1725).

The witness for Public Works and Government Services Canada, Mr. Michael Nurse, said that incentive-based payment clauses and issues related to "errors and omissions" have been added to the agenda of the task force of the Association of Consulting Engineers of Canada and the Royal Architectural Institute of Canada, with which the department meets regularly (1555 ). The Committee was surprised to learn about this lack of consensus between the department and its consultants regarding a clear definition of design "errors and omissions". The Committee was concerned that this fundamental definition remained unresolved .

The observations of the Auditor General and the witnesses lead the Committee to recommend:

That, for future capital projects, the Treasury Board Secretariat establish a more rigorous approval process that would introduce a project-based incentive regime aimed at saving money and rectifying the departmental philosophy of "building to budget";

That, for future capital projects, the Treasury Board Secretariat set up systems and procedures that will enable it to identify options for saving money in the overall budget when departmental submissions are reviewed;

That, for future capital projects, Public Works and Government Services Canada complete its consultations with its private-sector partners as quickly as possible so that it can integrate viable incentives into its contracting process in order to reduce costs;

That, for future capital projects, Public Works and Government Services Canada complete its consultations with its private-sector partners as quickly as possible so that they can come to terms on a common definition of the concept of "errors and omissions";

That the Treasury Board Secretariat and Public Works and Government Services Canada report on the progress in these areas to the Standing Committee on Public Accounts by March 31, 1999 and annually thereafter in their Performance Reports to Parliament.

For a financial management and control system to work properly, budget estimates "need to be reviewed rigorously and challenged by senior managers and Treasury Board officials when approving projects" (7.52). For the Winnipeg laboratory project, the Auditor General noted that the preliminary budget was incomplete and subsequent increases were not well supported. In his report, the Auditor General stated that the $142 million budget approved in August 1992 for the project did not include all the related costs, which, by the Auditor General’s current estimate, now totals $176 million. (See exhibit 7.5) The Auditor General found that the precise nature and extent of activities intended to be financed by the budget were not made clear.

The Committee asked Mr. Colin Potts, Deputy Comptroller General with the Treasury Board Secretariat, about the budget increases. The witness replied that the procedure is to take the information submitted by departments in good faith, and there was no reason to question the information at the time it was submitted to the Treasury Board. In principle, the Treasury Board reviews the information and considerable discussion takes place between its analysts and the particular departments involved. The Committee then asked the witness about the measures the Treasury Board would have to take in order to ensure that such a situation would not arise again in the future. Mr. Potts acknowledged that the Treasury Board Secretariat would have to remind departments to provide it with full and accurate information and to talk to Treasury Board officials to ensure that the systems that are put in place provide complete budget information (1645). In light of this information, the Committee recommends:

That, for future capital projects, the Treasury Board Secretariat, before approving budget requests, conduct a rigorous and comprehensive review of all the budget information provided by the departments in order to ensure accuracy and completeness of budgetary data ;

That, for future capital projects, the Treasury Board Secretariat ensures, as stipulated in its own directives, continuous monitoring of project status and requires the departments concerned to provide it with complete and accurate progress and cost reports, and that these reports be submitted to the Treasury Board Secretariat at regular intervals or when predetermined project milestones are reached.

In his report, the Auditor General noted several instances of non-compliance with Treasury Board policies: specifically, instances where Public Works exceeded its spending authority, and examples of inadequate reporting of progress and of project costs, all in violation of Treasury Board policies (7.65 and 7.66). The Committee asked the witness for Treasury Board, Mr. Colin Potts, why this non-compliance was tolerated and that no penalty was imposed. The Committee had noted the Auditor General’s observation that Treasury Board guidelines do not contain any provision for monitoring compliance with Treasury Board policies and guidelines (7.30). The Committee holds the view that it is not enough to have rules; provisions on monitoring and penalties are also needed to ensure that the rules are observed. The Committee therefore recommends:

That, for future capital projects, the Treasury Board Secretariat ensure the application of monitoring provisions for its guidelines and also ensure the consistent application of penalties in the event of non-compliance with policies and directives, and that it submit a full account of its progress in this area to the Standing Committee on Public Accounts by March 31, 1999 and annually thereafter in its Performance Report to Parliament.

The Auditor General noted several deficiencies in the project management and control framework for the Winnipeg laboratory project. The Committee focused on the absence of primary authority over the Project Steering Committee and of extremely high consulting costs.

The Project Steering Committee was responsible for the overall direction and conduct of the project. At the outset, it comprised three assistant deputy ministers, one from each of the client departments and one from Public Works. In 1995, the Committee was enlarged from three to five assistant deputy ministers: two from Health Canada, one from Agriculture and Agri-Food Canada, one from the Canadian Food Inspection Agency and one from Public Works. The Auditor General further noted that, over the life of the project, 13 different members served on the Committee. A high turnover rate coupled with the need to make decisions by consensus slowed the decision-making process.

During the first few years of the project, the Project Steering Committee had difficulty preventing or resolving disagreements between the client departments. This lack of teamwork is partly to blame for cost overruns and construction delays on the project (7.80). The Auditor General added, however, that teamwork and cooperation improved significantly from mid-1995, when Health Canada reorganized its project management staff and approach (7.81).

The Committee members questioned Mr. Michael Nurse of Public Works about the lack of leadership within the team. Mr. Nurse replied that the project was very complex and difficult to coordinate, but the client departments did a fine job meeting their obligations considering the availability of information and the circumstances. He agreed, however, that from a learning point of view, it would be better to have a single primary authority to resolve disagreements between client departments (1615).

When questions were put to him, Mr. Colin Potts said that the role of the Treasury Board Secretariat is basically to ensure monitoring. Once the Treasury Board approves funding for a project, it is up to the respective client departments to implement management policies. Mr. Potts added, however, that the Treasury Board had put in place in 1994 a new policy requiring a single authority to represent the interests of all client departments (1645). Mr. Potts said that the new policy did not apply to the Winnipeg project because the construction of the facilities started in 1990-91. The Committee therefore recommends:

That, for future capital projects involving more than one client department, the Treasury Board Secretariat apply its new policy of designating a single authority to represent the interests of all client departments and that it be held accountable for the project results, in accordance with Treasury Board policies.

The Auditor General noted that the cost of consulting services totaled $38.8 million, or 38% of construction costs. The report states that project officials agreed the costs were higher than expected and attributed the increase to several factors, such as programming and construction delays that required more on-site personnel for longer periods than planned and extensive travel by consultants between their offices and the project site (7.76). The Auditor General believes that departments should do more to ensure that consultant agreements are tailored to take into account contractual issues specific to the project (7.75). The Auditor General also noted that, throughout the Winnipeg project, there were contract disputes between Public Works and the prime consultants, and at times with sub-consultants, over issues that had not been set out clearly in the outset in the consultant agreement and which resulted in additional costs (7.75).

In response to questions from the Committee, the witness for Public Works and Government Services Canada, Mr. Michael Nurse, said that the cost of consulting services was reasonable for that particular project given its unique and complex nature. However, the Committee asked Mr. Shahid Minto, the Assistant Auditor General, for his opinion on this issue. Mr. Minto said that during the audit, the project managers themselves agreed that the consulting costs were far higher than projected (1715). Based on what it heard from the witnesses, the Committee recommends:

That, for future capital projects, Public Works and Government Services Canada ensure that agreements between it, the prime consultants and sub-consultants are tailored to the specific project needs, and that the department submit a full report on the progress of this issue to the Standing Committee on Public Accounts by March 31, 1999 and annually thereafter in its Performance Report to Parliament.

CONCLUSION

The Committee recognizes the importance of the new Federal Laboratories for Human and Animal Health in Winnipeg. The facility is sure to contribute to national and international efforts in the scientific research and health education sectors. This major project required the participation and cooperation of at least five departments and agencies, as well as many consultants and sub-consultants who were involved in designing, planning and building the laboratory complex.

Considering the number of participants and the scope and complexity of the project, it is hardly surprising that there were problems and disagreements that resulted in delays and extra costs. However, the Committee believes that there would have been fewer cost overruns and delays if all the departments and agencies involved had been more rigorous in their practices related to financial management and control of the project.

What struck the Committee in particular was the reluctance of the Treasury Board Secretariat to apply its own directives and guidelines regarding monitoring, control and auditing. Given the scope of its mandate, it is essential that the Treasury Board Secretariat ensure rigorous control and closer monitoring so that capital projects stay within their approved budget.

The Committee now expects all the departments and agencies to do everything in their power to rectify the problems and deficiencies noted in the Auditor General’s report. The measures taken as a result of the Auditor General’s recommendations and those made by the Committee should ensure better management of major capital projects in the future.

Pursuant to Standing Order 109, the Committee requests that the government table a comprehensive response to this report.

A copy of the relevant Minutes of Proceedings (Meetings Nos. 36 and 41) is tabled.

Respectfully submitted,

JOHN WILLIAMS

Chair