PACC Committee Report

INDIAN AND NORTHERN AFFAIRS CANADA

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

FOURTEENTH REPORT

The Standing Committee on Public Accounts has considered Chapters 35 and 36 of the December 1997 Report of the Auditor General of Canada (Follow-up of Recommendations in Previous Reports –Indian and Northern Affairs Canada – On Reserve Capital Facilities and Maintenance ---1995, Chapter 23; Other Audit Observations –Escalating costs of on-reserve water supply projects not adequately justified and Lack of compliance with funding arrangements) and the Committee has agreed to report the following:

INTRODUCTION

The on-reserve capital facilities and maintenance activity is an element of the Indian and Inuit Affairs Program administered by Indian and Northern Affairs Canada (the Department). It provides funding and support for Indian and Inuit communities to acquire, operate, and maintain basic non-residential facilities across Canada. The applicable budget for this activity for 1997-98 was $806 million.

In Chapter 23 of his November 1995 Report, the Auditor General presented the results of his audit of the Department’s management of the on-reserve capital facilities and maintenance activity. At that time he noted that the Department was devolving responsibility for the delivery of this activity to First Nations communities. The Auditor General observed that the Department had not identified and controlled areas of high risk and recommended a series of corrective measures. In its response, the Department agreed with the audit observations and indicated a willingness to take appropriate action. The Department reiterated these commitments in somewhat more detail in a letter to the Standing Committee on Public Accounts sent during the summer of 1996.

As an integral part of the audit cycle, the Auditor General reviewed the actions taken by the Department two years after the publication of the results of the original audit and presented his findings in Chapters 35 and 36 of his December 1997 Report.

The Committee believes that it is important to review the results of follow-up examinations conducted by the Auditor General. In this instance, because of the importance of this activity to First Nations’ communities and its cost, the Committee decided to study the results of the follow-up. Accordingly, on 10 March 1998, the Committee met with Mr. Denis Desautels, the Auditor General of Canada, and Mr. Grant Wilson, Principal of the Audit Operations Branch, from the Office of the Auditor General. Mr. Scott Serson, Deputy Minister, and Ms. Cynthia Williams, Assistant Deputy Minister of Socio-Economic Policy and Programming and Program Redesign Sector, appeared on behalf of Indian and Northern Development Canada.

OBSERVATIONS AND RECOMMENDATIONS

Following his review of the actions taken in response to his 1995 audit, the Auditor General reported that the Department had mostly focussed on internal studies and reviews. Actual results were disappointing. In terms of capital facilities projects, the Auditor General found "no significant improvements from key findings in 1995." (35.248) He indicated that improvements are still needed in areas such as project risk assessments, monitoring, evidence of project completion and evaluation of project results. With regard to maintenance, the Auditor General reported that many fundamental problems remained unresolved. For example, he cited a 1997 departmental assessment showing that some First Nations lacked the training and expertise needed to maintain capital assets. Incentives to maintain these assets were absent and certain funding arrangements lacked a requirement for maintenance plans. The Auditor General pointed out, as well, that although responsibility for maintenance is being devolved to First Nations, not all of them have the capacity to identify their maintenance needs as required by the Department.

In June 1997, the Department issued draft compliance guidelines for the operation and maintenance of capital assets on reserves. The guidelines are meant to ensure that maintenance funds are spent for the purposes intended, that the conditions of facilities are assessed on an annual basis and action taken when needed, and that advice and assistance on maintenance are provided to First Nations. The Department expects that the guidelines will have been fully implemented for fiscal year 1998-99.

In his response to the Auditor General’s observations, Deputy Minister Scott Serson told the Committee that "significant progress has been made on each of the Auditor General’s five recommendations," and that "several initiatives are ongoing and [the Department]expect [s] full implementation within the next few weeks." (1545) In further testimony, he agreed to provide the Committee with a list of the Department’s initiatives and the target dates for their implementation.

The Committee recognizes that the Department faces certain challenges in effecting change in this area. The Committee believes strongly, however, that a more concerted effort by the Department would have significantly minimized the problems revealed by the follow-up review. The Committee therefore welcomes the Department’s commitment to fully implement --- if belatedly --- all of the Auditor General’s recommendations within the very near future. In early June, Mr. Serson informed the Committee by letter that the Department has now put measures in place to address the Auditor General’s 1995 recommendations. However, in light of the Department’s record, the Committee, will require concrete assurances that these commitments have been achieved and are producing the intended results. Accordingly, the Committee recommends:

The follow-up uncovered two cases that the Auditor General told the Committee were "typical of some of the difficulties that relate to on-reserve infrastructure development." (1545) Rather than being isolated instances, Mr. Wilson confirmed similar cases could be found in other situations. (1630)

In the first case, the Department had given preliminary approval for a $1 million for a new water supply development project. Estimated costs rose to $2.3 million by April 1997.

The Department was aware, however, that the existing water supply system could have been repaired at an estimated cost of $26,000. This would have avoided the need for a capital infrastructure project. The Auditor General asserted, however, that this option was not given due consideration. Furthermore, the Auditor General found that although the Department had given $30,000 to the community in question to implement the lower-cost solution, "no evidence was available in the Department to show what improvements had been made with these funds."(36.37). In his testimony before the Committee, the Deputy Minister was unwilling to claim that good value was achieved for the funds provided by the Department. (1645) This case demonstrates that the Department needs to do a better job of ensuring good value, monitoring projects and evaluating the results.

In the second case, the Auditor General found that the Department had approved an $8.9 million project to be constructed by a First Nation without public tendering --- in clear contravention of the funding arrangement between the Department and the First Nation that required public tendering for all construction contracts. The Auditor General told the Committee that "additional costs of up to $1 million may have been incurred with questionable benefits."(1545)

Mr. Serson told the Committee that the Department has implemented a policy requiring First Nations to publicly tender all federally funded construction contracts worth more than $500,000. Instead, however, of providing the Committee with the reassurance it was seeking that such cases will not occur again in the future, this statement gives rise to additional concerns. The Committee notes the following:

• The Department had a funding arrangement that required a public tender but did not enforce it. Instead, the Department permitted an $8.9 million contract to be awarded without competition.

• The decision not to enforce the public tendering requirement was taken at the regional level and was not reviewed by the Department’s senior management.

• The Deputy Minister stated, during testimony, that the Department tries "to encourage some creativity and flexibility" on the part of its regional offices with regard to the enforcement of tendering policies. (1645)

• The Auditor General reports that not all First Nations agree that bid tendering should be used to select construction contractors. (35.249)

Collectively, these factors strongly suggest that the Department may experience difficulty in obtaining compliance with its tendering policies.

An additional concern involves the $500,000 threshold established by the Department to trigger a public tendering process. As the Auditor General indicated several times, this threshold is very high and is above that established for federal government agencies and departments when they issue contracts for construction and maintenance. The Committee shares this concern; assertions by Ms. Williams to the effect that the Department does not discourage First Nations from going to tender on projects valued at less than $500,000 (1635) provide little comfort.

The Committee is of the firm belief that contracts for capital facilities projects and maintenance should be issued on the basis of rules that are clearly defined and communicated. The occasions on which such rules are modified should be extremely rare and subject to strict guidelines and review by senior departmental management.

The rules that apply to federal government departments and agencies --- including Indian and Northern Affairs Canada --- when they issue construction contracts are set forth in the Treasury Board Secretariat’s Contracting Policy. These rules and the principles upon which they are based make an interesting contrast with the Department’s policy on federally funded construction.

The Contracting Policy’s objective is to carry out construction in a manner "that enhances access, competition and fairness and results in best value or, if appropriate, the optimal balance of overall benefits." The Policy states that 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," and "support long-term industrial and regional development and other appropriate national objectives, including aboriginal economic development."

Under these rules, all projects valued at or above $25,000 must be subject to a public tendering process.

The Committee believes that the rules guiding First Nations’ tendering policies with regard to federally funded capital facilities projects must be similar to those to which the Department itself has to follow when it contracts construction services. The Committee therefore recommends:

Although it would prefer strict adherence to this policy, the Committee recognizes that in certain circumstances, a degree of flexibility will be required. Deviation from this policy must, however, occur only within the context of clearly established criteria and must be subject to review. The Committee therefore recommends:

The Committee has some additional concerns about the potential for contract or project splitting. Although the Auditor General told the Committee that his audit had not uncovered any instances of this practice (1655), the Committee believes that measures need to be put in place to manage this particular risk. The Committee is also concerned that non-competitive sole-source contracts might be monopolized by a small number of contractors. It therefore recommends:

CONCLUSION

The Committee was disappointed with the results of the follow-up review. The actions taken by the Department in response to the original audit were insufficient and slow. The two cases that were revealed during the course of the follow-up are proof of this.

The Committee fully expects that the Department will now make every effort to correct problems identified by the Auditor General some time ago. Actions taken on those recommendations as well as the Committee’s should ensure that on-reserve capital facilities and maintenance is properly managed and that those living in First Nations’ communities receive the full benefit of this vitally important activity.

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. 21 and 38) is tabled.

Respectfully submitted,