PACC Committee Report

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

EIGHTH REPORT

The Standing Committee on Public Accounts has considered Chapter 8 of the April 2002 Report of the Auditor General of Canada (Other Audit Observations — Health Canada and Public Works and Government Services Canada) and has agreed to report the following:

INTRODUCTION

Following the 1994 Program Review, Health Canada (the Department) merged four clearing houses providing health information into one entity. In 1997, the Department decided that the clearing house (which had been using phones, faxes, and printed documents to disseminate information) would shift to a Web-based service to be known as the Canadian Health Network (CHN, the Network). Health Canada hired the same contractors who were running the clearing house to set up the Web-based initiative. The Department turned to Public Works and Government Services Canada (PWGSC) to assist in the contracting process. The final cost of creating the Web site amounted to over $25 million.

During the course of other audit activities, the Auditor General discovered that neither Health Canada nor Public Works and Government Services Canada had followed the government’s rules when commitments were made and contracts issued to create the website. As a consequence it is not possible to determine whether the departments obtained the best service at the best price when establishing the Web site.

The Committee has a long-standing interest in the government’s contracting rules and activities, and considers that $25 million is a substantial amount of money. Consequently it decided to review Chapter 8 of the April 2002 Report of the Auditor General of Canada (Other Audit Observations — Health Canada and Public Works and Government Services Canada) that contains the Auditor General’s findings. As part of this review, the Committee met on 30 May 2002 with Mrs. Sheila Fraser, Auditor General of Canada, and Mr. Ronnie Campbell, Principal, Office of the Auditor General of Canada. Mr. Scott Broughton (Assistant Deputy Minister, Population and Public Health Branch) and Mr. Patrick Borbey (Assistant Deputy Minister, Corporate Services Branch) represented Health Canada. Ms. Jane Billings (Assistant Deputy Minister, Supply Operations Service Branch), Mr. Michael G. Nurse (Associate Deputy Minister), and Mr. Michel Rancourt (Senior Director, Science Procurement Directorate) appeared on behalf of Public Works and Government Services Canada.

OBSERVATIONS AND RECOMMENDATIONS

The Canadian Health Network distributes health information to Canadians via the Internet. Health Canada manages the Network and content is provided by several organizations including the Department, other federal and provincial agencies, universities, and non-governmental agencies working in health-related areas. Links provide access to other organizations that offer useful health information. The Network is thus an efficient and effective means of offering accurate information from credible sources to those who need it.

Response to the Network has been good. According to the Department, the site receives approximately 5 million inquiries a month and is the third most popular site for Canadians searching for health information. Other countries, most notably the United Kingdom, are considering using the Network as a model for their own endeavours.

Yet Canadians have no assurance at all that best value was obtained from $25 million that was spent on establishing the Network because Health Canada and PWGSC did not follow either the spirit or letter of contracting procedures prescribed by government policy.

The government of Canada has established a contracting policy and regulations that combine simplicity, clarity, and common sense. The obvious intent is to ensure that the government and Canadian taxpayers get best value for money and that the contracting process is as open, fair, and rigorously honest as possible.

The Policy sets forth a clear objective that public servants are expected achieve when they contract for goods and services. All of their actions from the beginning to the end of a contracting process ought to be guided by this objective, which is

to acquire goods and services … in a manner that enhances access, competition and fairness and results in best value or, if appropriate, the optimal balance of overall benefits to the Crown and the Canadian people.[1]

The concept of best value is at the heart of this objective and is defined by the Policy as

The combination of price, technical merit, and quality, as determined by the contracting authority prior to the bid solicitation and set out in the bid solicitation evaluation criteria, and which forms the basis of evaluation and negotiation between buyers and sellers to arrive at an acceptable basis for a purchase and sale. (Emphasis added.)

The Policy, which applies to all departments and agencies, also directs that its objective be achieved by means that are beyond reproach:

Government contracting shall be conducted in a manner that will stand the test of public scrutiny in matters of prudence and probity, facilitate access, encourage competition, and reflect fairness in the spending of public funds.[2]

The best way to ensure that contracts meet the requirements and objectives of government policy is through competitive tender. The government has determined, and the Policy states, that the competitive approach in selecting a contractor is to be the norm and that departments are to solicit bids before entering into a contract.

Competitive tender can be set aside and a contract awarded directly to a supplier, but only rarely. The circumstances under which this can occur are limited and well defined by Section 6 of the Government Contracts Regulations. Departments may only award a contract to a supplier without competition if at least one of the following conditions applies:

·        The contact is valued at less than $25,000;

·        There is a pressing emergency;

·        It is not in the public interest to solicit bids; or

·        Only one firm or person is capable of doing the work.

Section 10.2.6 of the Contracting Policy stipulates that “any use of the four exceptions to the bidding requirement should be fully justified on the contract file or, where applicable in submissions to the Treasury Board.” Furthermore, these conditions are mandatory since they are regulations pursuant to sub-section 41(1) of the Financial Administration Act.

All of the conditions surrounding contracting demand a strong degree of discipline at all stages of the process, which some may regard as a time-consuming nuisance. But, if one wishes to obtain the best quality at the best price, to do so fairly, and afterwards be able to demonstrate best value — and it is beyond certainty that this is what Parliament and Canadians want —, there is no room for shortcuts or non-compliance. Audit results, however, suggest that neither department paid much heed to these considerations when it came to establishing the Canadian Health Network.

Health Canada had no evidence on file to show that it had evaluated the capacity of the contractors to conduct the transformation to a web-based service. The Department did not have a plan setting out the objectives and budgets for the project or specifying the work that was to be done. It allowed the contractors to begin work and incur costs before a written contract was issued. In the absence of an appropriate contract, there were no formal limits to the scope, timing, or costs of the project. The contracts also lacked specific details on the scope of the work to be done, milestones, and performance indicators, leaving the Department without means to determine whether it received good value for money.

Health Canada also permitted a management structure to evolve that placed authority and responsibility that normally would belong to the Department in the hands of the contractors. Furthermore, the Department allowed the contractor’s representative to control many aspects of the initiative on behalf of the contractor — for example, defining project requirements, setting deadlines and performance measurements for the deliverables, defining the level of funding requirements, selecting subcontractors and negotiating their contracts. In the Auditor General’s view, “many of the elements common to an employer/employee relationship seemed to be present.” This contravenes section 4.1.9(a) of the Contracting Policy that states, “with respect to contracting for services, contracting authorities must ensure that an employer-employee relationship will not result when contracting for the services of individuals.”

Acting on Health Canada’s behalf, Public Works and Government Services Canada awarded 27 contracts with 21 amendments at a cost of $24.4 million for program management and informatics. PWGSC used two methods: Advance Contract Award Notices (ACANs) and a series of contracts for less than $25,000 each.

Government policy clearly states that ACANs “can only be considered if the proposed procurement meets one of the exceptions to solicit bids”; none of the contracts awarded through ACANs did.[3] There was no pressing emergency, the estimated expenditures involved did not fall below $25,000, there was no compelling reason why the work involved was such that it would not be in the public interest to solicit bids, and no effort had been made to determine whether other suppliers were capable of doing the work. Furthermore, the files contained no reference to any of the exceptions in order to justify foregoing competitive tendering.

Although ACANs are intended to alert other potential suppliers that the government intends to award a contract to a “pre-identified” contractor, they also are intended to allow potential suppliers to submit bids on the contract. Departments are instructed that ACANs “should provide sufficient information to allow a supplier to determine if the supplier can meet the requirements of a government contract.[4]” Yet one of the ACANs issued by PWGSC stated that the requirement was for “research and development — medical” when this was not the case. As the Auditor General noted, this “could have discouraged suppliers who otherwise may have challenged the ACAN.”

In another instance PWGSC issued an ACAN on 10 March 1998 with a closing date of 20 March 1998, falling short of the government guideline of a minimum 15-day posting. This $300,000 contract was signed on 31 March 1998. The contract required the contractor to provide telecommunications technology and training by 31 March 1998. PWGSC asked Health Canada how it was possible to meet this requirement in one day. Although PWGSC did not receive an adequate response, it awarded the contract anyway.

Public Works also issued a series of contracts for less than $25,000 to the same contractors, for similar requirements, and for the same project. Government policy prohibits contract splitting, or dividing an aggregate requirement into a number of smaller contracts, which has the effect of reducing controls and avoiding the need for competitive tender.

The use of a combination of ACANs and contracts valued at less than $25,000 meant that no effort was made to identify other suppliers with greater expertise and who might have provided the required services at a lower cost. Furthermore, by foregoing competitive tendering, the departments lost an opportunity to compare bids and thereby determine what might constitute a reasonable cost for the services provided. They also deprived themselves of information — such as the going market rate for such services — that would have allowed them to negotiate terms with potential suppliers and to exercise better control over the project during the delivery phase.

Health Canada has reacted quickly to the audit, undertaking several measures to address deficiencies in its management of contracts. The Committee welcomes this constructive response. Audit observations do not contain recommendations but the Department — responding to an April 2001 report by Deloitte & Touche — developed an action plan focused on the same problems. It provided the Auditor General with a copy of the plan, and intends to make adjustments in response to her comments. It is encouraging that Health Canada recognizes that mistakes were made and is determined to learn from, and correct them. It is also encouraging that the Department has initiated a mandatory training program for its employees engaged in contracting since it is abundantly clear that those involved in this instance were thoroughly unaware of government contracting policies and regulations.

Health Canada will conduct an internal audit in 2003-04 to assess the effectiveness of its action plan. Although the Committee is aware that the Department is obliged to post the results of the internal audit on its Internet site, this may not occur until some time has elapsed following completion of the audit. Consequently, the Committee wishes to review the Department’s progress in implementing its action plan while awaiting the internal audit results. It therefore recommends:

RECOMMENDATION 1

That Health Canada submit interim reports to the Standing Committee on Public Accounts that assess the status of its action plan developed in response to Chapter 8 of the April 2002 Report of the Auditor General of Canada (Other Audit Observations — Health Canada and Public Works and Government Services Canada). The interim reports must make reference to the plan’s milestones, expected results, and target dates, and be submitted at six-month intervals, beginning in April 2003 until such time as implementation has been completed.

In contrast, the response of Public Works and Government Services has been disappointing. Like all audited entities, it had an opportunity to review the observation’s contents, to voice concerns, and to request changes prior to publication. If there were any lingering disagreements, the Department could have said so at the end of the audit note. It chose not to. In most circumstances, this would suggest at least tacit agreement with the audit results. At the same time, it remained silent regarding what actions, if any, it would take in light of the audit findings.

When it met with the Committee, the Department did not provide an action plan, nor was one offered. Instead, Ms. Billings testified that she found the audit useful. However, she informed the Committee “in her audit note the Auditor General made a number of observations that are of concern.” This came as a surprise to the Committee and the Auditor General since the Department had had an opportunity to identify and discuss its concerns prior to release of the audit results but did not.

The Assistant Deputy Minister then told the Committee that she believed that

The contracts we awarded using the ACAN process were in fact consistent with our interpretation of the policies defining the use of ACANs, the circumstances at the time, and the policies at the time.

She added that a number of improvements and clarifications had been made to the ACAN policy since 1997, thus suggesting that the Auditor General had assessed the Department’s actions against requirements that were either not in place or ambiguous at the time the contracts were awarded.

While it is correct to state that changes and clarifications have been made to the ACANs policy since 1997, these changes have not modified the exceptions under which ACANs can be issued in a way that would have made the Department’s actions permissible.

The rest of the Department’s testimony provided a curious contrast between what it claims its responsibilities concerning contracting are and what its actions in this case were.

The Committee was told:

PWGSC is responsible for the integrity of the purchasing process. It must normally ensure that the measures are compliant with the government policies or legislation. Clearly, these objectives and principles in awarding contracts allow the Department to fulfill its obligations, which consists of getting the most value for taxpayers’ money by ensuring a transparent, equitable and accessible process.

The Committee was told:

On the principle of accountability, as the acknowledged procurement experts in government, PWGSC accepts full accountability and responsibility for ensuring the integrity of its contracting activities, including those undertaken on behalf of or jointly with other departments.

The Department’s Supply Manual makes a similar statement, but more forcefully:

PWGSC is accountable for the integrity of the complete procurement process including all actions taken within the process: this also applies to actions originating from the client that are not in compliance with the Treasury Board or PWGSC policies, or applicable legislation.[5] (Emphasis added.)

Yet in this instance there was a considerable gap between what the Department says it does and what it actually did. And not only has it refused to accept any accountability for Health Canada’s actions, it has refused to take responsibility for its own. As the “acknowledged procurement experts in government” the PWGSC should have advised Health Canada whenever that department failed to follow the rules and should have refused to break those rules itself when doing work on Health Canada’s behalf. PWGSC did neither.

Mrs. Fraser indicated that at least part of the problem stems from tension between PWGSC’s service and control functions with regard to contracting. The former role consists of assisting departments with their procurements while the latter involves acting as the contracting authority.

The Committee believes that PWGSC needs to review these two functions carefully with the goal of clarifying them and, if possible, eliminating any contradictions between them. Therefore the Committee recommends:

RECOMMENDATION 2

That Public Works and Government Services engage the services of an entity outside government to conduct a thorough review of its role in contracting.

RECOMMENDATION 3

That at the conclusion of this review, Public Works and Government Services submit a report to the Committee outlining how it proposes to clarify its role in the contracting process.

The Committee believes that it would be useful for PWGSC to identify the lessons it has learned from this audit and draw up a plan to ensure that these lessons are applied. Accordingly, the Committee recommends:

RECOMMENDATION 4

That Public Works and Government Services Canada develop and implement an action plan to address shortcomings identified in Chapter 8 of the April 2002 Report of the Auditor General of Canada (Other Audit Observations — Health Canada and Public Works and Government Services Canada). This plan should list actions, milestones, target dates, and expected results, and should be submitted to the Committee no later than 30 April 2003.

The Committee is disturbed by the pattern, evident for some time now, of non-compliance with government contracting rules and regulations. The operating assumption has been that if the rules are sufficiently clear, and if they are communicated effectively through training and other measures, they will be followed automatically.

Yet there is wide agreement that the rules governing contracting are clear and not in need of significant improvement. As a consequence, each time a problem with contracting crops up, as happens quite frequently, the departments involved pledge to subject their employees to new training programs. Yet the same problems persist year after year, and with them, the failure of government and taxpayers to receive assurance of value for money from the contracting process. Another approach is required.

In the Committee’s view, the source of the problem lies in the absence of any sanction imposed upon those who do not follow the rules. The worst that could happen to an offender, it would appear, would be to be required to sit through a training session. It is therefore now time to seriously consider meaningful incentives to ensure compliance. The Committee accordingly recommends:

RECOMMENDATION 5

That the government of Canada develop clear, real, and verifiable consequences for non-adherence to the contracting regulations for goods and services, an outline of which must be in place by 30 April 2003.

CONCLUSION

This case is an outstanding illustration of how government contracts should not be managed. Almost every aspect of the contracting process was flawed. Neither department performed adequately and both engaged in practices that were clearly contrary to well-established government contracting rules and regulations. This is particularly disturbing because Public Works and Government Services Canada, as the common service provider for all government departments and agencies, is, or ought to be, the repository of expertise in contracting matters. It is vital that this department clarify its role in the contracting process in order to avoid repeating the way in which this series of contracts was handled.

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 (Meeting No. 57 of the 1st Session 37th Parliament and Meeting No. 7 of the 2nd Session 37th Parliament) is tabled.

Respectfully submitted,

JOHN WILLIAMS, M.P.

Chair