PACC Committee Report

INTRODUCTION
OBSERVATIONS AND RECOMMENDATIONS
CONCLUSION

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

The Standing Committee on Public Accounts has considered Chapter 26 of the December 1998 Report of the Auditor General of Canada (Contracting for Professional Services: Selected Sole-Source Contracts) and the Committee has agreed to report the following:

As Canada’s largest corporate entity, the federal government spends significant amounts of money on contracts for professional services from outside suppliers. In 1995, for example, the government spent approximately $4.4 billion for this purpose.

The government pays for these services from public funds and the contracts contribute to the overall mix of goods and services that the government provides to Canadians. Seen from this perspective, it is essential that the government obtain the best services at the best cost.

For potential suppliers of services, government contracts represent an important source of income as well as an opportunity to demonstrate and improve their capabilities. There are additional benefits as well that flow to the communities in which suppliers are located. Viewed from this perspective, the importance of making sure that all potential suppliers have fair and open access to government contracts becomes plainly evident.

The needs of the various parties to contracts are recognized in the government’s policies that clearly specify that all contracts must be --- except in certain tightly defined circumstances --- open to competitive bidding. Through reliance on competition among suppliers government satisfies two indispensable principles --- that of best value and open access.

Because of the costs and important principles involved, the Committee decided to examine the results of an audit done by the Auditor General of Canada of a selection of sole-source contracts. In theory, these contracts are let to suppliers without competition provided they meet certain criteria. Accordingly, the Committee met on 9 March 1999 with Mr. Denis Desautels, FCA, Auditor General of Canada, Mr. Shahid Minto, Assistant Auditor General, and Mr. Hugh McRoberts, Principal, Audit Operations Branch to discuss the audit findings presented in Chapter 26 of the December 1998 Report of the Auditor General of Canada (Contracting for Professional Services: Selected Sole-Source Contracts). Mr. Colin Potts, Deputy Comptroller General, Mr. Alan Winberg, Assistant Secretary, Risk, Procurement and Asset Management Sector, and Mr. R.J. Kelly, Director of Contract Policy Division, appeared on behalf of Treasury Board Secretariat.

OBSERVATIONS AND RECOMMENDATIONS:

Government policy regarding the letting of sole-source contracts is a clear indication that the principles of best value and open access are paramount and that this form of contracting must be the exception rather than the rule. This policy is expressed in the Government Contract Regulations and in the Treasury Board Secretariat’s Contracting Policy, which establish the four exceptions under which competitive bidding can be set aside in favour of sole sourcing. Thus, according to regulation, departments can only sole source a contract when:

1. there is a pressing emergency;


2. the contract is valued at less than $25,000;


3. it is not in the public interest to solicit bids; or


4. only one person (firm) is capable of performing the work.

These four circumstances provide the only exceptions under which contracts may be sole-sourced. When these exceptions prompt a decision to sole-source, policy requires that there be a full justification. In previous reviews, both the Auditor General and the House of Commons Standing Committee on Government Operations reached the conclusion that these exceptions and the other regulations surrounding contracting are sound.

In order to verify compliance with the rules for sole-source contracts, the Office of the Auditor General audited a sample of 26 sole-sourced contracts with an initial value of $16 million from five departments.

The Auditor General summarized the results of the audit in his opening statement. In the cases examined, the evidence suggests that there was little preliminary analyses done before decisions were taken to sole-source, that two-thirds of the contracts examined did not satisfy the exemptions and thus should have been open to competition, that in most cases management had not taken sufficient measures to ensure that the price paid was reasonable, and that in 17 of the cases there was inadequate documentation to show that the contracted services were delivered on time and at an acceptable level of quality. (1540) Mr. Desautels concluded his statement with a strong endorsement of current contracting regulations and the principles of best value and open access that underlie them.

The Deputy Comptroller General agreed that the current regulations are sound and the introduction of new rules would not be appropriate. He stressed, however, that there are clear divisions of responsibility with regard to contracting. Treasury Board Secretariat establishes the policy framework; departments alone are responsible for implementing it. Mr. Potts then produced data showing that both the number and value of contracts above $25,000 that are competitively tendered has been increasing. For example, from 1993 to 1995 competition averaged at around 63 to 65% by value and number of contracts above $25,000. For 1997, 89% of the value and 82% of the number of contracts above $25,000 were competitive. Mr. Potts also asserted that Canada compares quite favourably with its trading partners with respect to its contracting practices. Mr. Potts concluded by outlining some of the steps that the Secretariat is taking to strengthen the contracting process. These steps include reforming and modernizing procurement, developing training and certification programs for those engaged in procurement, and establishing a mandatory orientation on procurement policy, principles, values and best practices for Responsibility Centre Managers involved in procurement. Additional measures include improving access to procurement information and strengthened monitoring.

Later on, in testimony, Mr. Winberg elaborated on some of these measures. He indicated that the Secretariat is putting in place a framework for evaluating contracting activities that will be implemented by internal audit groups in the departments. He further stated that the Secretariat would be assessing those departments that appear to be exceeding the norm in terms of percentages of sole-source contracts being let. Those departments whose sole-source contracts fall below the norm will also be contacted as a follow up. Lastly, the Secretariat is looking at ways to improve the accessibility and timeliness of contracting information. (1655) Mr. Potts made a commitment to provide a report to the Committee by mid-April detailing these and other measures. (1650, 1705)

In general, the Committee welcomes this series of initiatives but believes that additional measures must be taken to address problems identified by the audit. The Committee also welcomes the assertion that the number and value of sole-source contracts valued above $25,000 are declining. At the same time, however, the Committee notes that the data presented are unaudited and may rest upon disputed definitions of "competitive." When contracts are sole-sourced, departments may announce their intention to do so by issuing an Advance Contract Award Notice or ACAN. These notices inform potential suppliers that a decision to sole-source is imminent and offers them fifteen days in which to contest the decision. If no objections have been received during that time, the contract is then deemed to have been competitively let. The Auditor General stated unequivocally that the issuance of ACANs lend transparency to the process but does not make contracts let without tender competitive. (1550) Thus data that show progress in this area must be treated with caution because contracts that have been deemed competitive on the basis of the issuance of an ACAN have been included.

The Committee has some particular concerns with regard to the role of Treasury Board Secretariat in the contracting process. The first has to do with the monitoring and assessment of, and reporting on, departmental contracting activity. Section 5.1 of the Secretariat’s Contracting Policy deals with monitoring and states that in terms of reporting mechanisms and indicators:

Two mechanisms will be used: departmental audits and an annual report on contracting. Departments will be evaluated on their compliance with contracting policies and the level of competitive contracting. All departments and agencies awarding contracts and/or amendments are required to submit an annual report to the Treasury Board Secretariat on all contracting activities…. The Treasury Board Secretariat also conducts periodic reviews of contracts for the services of individuals, including those for less than $5,000.

At the time of the audit, the most recent Annual Contracting Activity Report from Treasury Board Secretariat was for calendar year 1995. (26.13) Following completion of the audit, the Secretariat posted unaudited data on contracting for the 1996 and 1997 calendar years on its Internet site in December 1998. Mr. Winberg told the Committee: "Every year we [the Secretariat] look at the contracting figures that come in from the departments on their contracting activity and we publish them on the Internet." (1640) As noted earlier, he also testified that the Secretariat is exploring ways to provide this data on a more timely basis.

In his Report, the Auditor General indicates that the Secretariat was asked for its own assessments of departmental compliance, and particularly its reviews of contracts for the services of individuals. He reports that his Office was told that no such assessments and reviews exist. (26.26) Mr. Winberg confirmed this, adding that the Secretariat relies on internal audit reports, which it analyses. (1640). However, the audit found that, with respect to the audited sample, the departments "have done some internal audit work on contracting practices, but generally not at a significant level." (26.26)

Throughout the better part of their testimony, Secretariat officials insisted that the sample size used for the audit was small when compared to the volume of government procurement. The Auditor General acknowledges in his Report that because a selected sample was used "the results cannot be generalized statistically." (26.20) In their initial testimony, the Secretariat witnesses appeared to take the view that since the sample size was not statistically relevant, all was well with the sole-sourcing process. The audit findings did not appear to cause them any significant concern. Yet the Secretariat has not been doing the kind of monitoring or analysis that would provide the evidence to justify confidence.

While the Committee agrees that the audit results cannot be generalized to departments as a whole, it believes that they are a clear signal that problems may extend beyond the boundaries of the sample. This is a possibility that warrants a more profound examination. Mr. Potts agreed, telling the Committee that he would "like it to be broadened to find out whether or not this is a more widespread issue." (1635) Mr. Potts, however, was asked at a later stage whether the Secretariat was going to conduct a full-scale review to find out the actual extent of the problem. He replied, "not at this stage, we have no plans to conduct any further reviews on a larger sample basis." He then confirmed again that the Secretariat was not interested in doing a large review. (1645)

From the Committee’s perspective, many of the problems associated with sole-source contracts would be eliminated through adherence to existing policies. This applies to the Secretariat’s fulfilment of its own responsibilities, which, if met, might have averted many of the problems reported in the audit. Accordingly, the Committee recommends:

RECOMMENDATION 1:

That Treasury Board Secretariat begin immediately to adhere to Section 5.1 of its Contracting Policy by:

1. Issuing a report on contracting on at least an annual basis, if not more frequently. Data contained in these reports must be audited;

2. Requiring all departments and agencies awarding contracts and/or amendments to submit annual reports to the Treasury Board Secretariat on all contracting activities;

3. Evaluating departmental compliance with contracting policies and level of competitive contracting; and

4. Conducting periodic reviews of contracts for the services of individuals, including those for less than $5,000. The results of these reviews must be included in Treasury Board Secretariat’s Contracting Activity Report.

Furthermore, the Committee recommends:

RECOMMENDATION 2:

That Treasury Board Secretariat proceed with timely implementation of its framework for evaluating contracting activities and that it make use of this framework to conduct a broader review of sole-source contracts along the lines followed by the Auditor General, the results of this review to be tabled in the House of Commons no later than 31 March 2000; and

RECOMMENDATION 3:

That in developing its framework for evaluating contracting activities Treasury Board Secretariat make use of the directions provided by the Auditor General on how best to measure contracting performance as contained in Chapter 6 of his April 1997 Report to the House of Commons (Contracting Performance).

The Committee notes that in his Report the Auditor General observes that "departments disregard the rules that apply to sole-sourcing" and that disregarding the rules "appears to involve no significant consequences for either the managers or their departments." (26.7) One way of providing a meaningful consequence would be through the introduction of positive sanctions to encourage adherence to the rules. In his testimony, the Auditor General indicated that the government is heading in the direction of introducing more performance factors into the remuneration of public servants in the executive category. Mr. Potts confirmed this. (1630) Bearing this in mind, the Committee recommends:

RECOMMENDATION 4:

That following development and implementation of its framework for evaluating contracting activities, Treasury Board Secretariat use contracting performance as one of the components to be used in any potential effort to assess the remuneration of senior public servants.

At several points in their testimony, Secretariat officials emphasized that individual departments bear the responsibility for implementing contracting regulations and policy. In recognition of this, the Committee recommends:

RECOMMENDATION 5:

That Treasury Board Secretariat encourage departments to include specific references to their contracting activities in their annual Performance Reports beginning with those reports issued for the period ending 31 March 1999.

Earlier, the Committee noted that departments may issue Advance Contract Award Notices (ACANs) signalling their intention to sole-source a contract. In both his Report and his testimony the Auditor General argues that the issuance of an ACAN does not by itself justify sole sourcing nor does it constitute competitive tendering. In contrast, Mr. Winberg told the Committee that "if the procurement is transparent, if industry is aware of the opportunity and if they have the opportunity to participate, we believe that the contract should be deemed to be competitive." (1645) It was brought to Mr. Winberg’s attention that a sample ACAN had the words "this is not a competitive bid solicitation" printed on it. The same ACAN states that the Crown "reserves the right not to open this procurement to competition." Mr. Winberg assured the Committee that the Secretariat would be ensuring that the statement "this is not a competitive bid solicitation" would be removed from ACANs in the future. (1645)

The Committee agrees with Mr. Winberg that the issuance of an ACAN makes the contracting process more transparent. Departments, however, are not required to issue ACANs when they intend to sole-source a contract and, in the audited cases, "few of the contracts had been advertised using an ACAN." (26.35) The Committee therefore recommends:

RECOMMENDATION 6:

That the Government Contract Regulations and the Treasury Board Secretariat’s Contracting Policy be amended to make the issuing of ACANs obligatory in those instances in which departments intend to sole-source contracts valued over $25,000 on the basis of an initial determination that only one person or firm is capable of providing the service;

RECOMMENDATION 7:

That Treasury Board Secretariat instruct all departments to remove immediately the words "this is not a competitive bid solicitation," and any references to the effect that the Crown is reserving the right not to open the procurement to competition, from all Advance Contract Award Notices; and

RECOMMENDATION 8:

That the Government Contract Regulations and the Treasury Board Secretariat’s Contracting Policy be clarified by clearly stipulating that the issuance of an Advance Contract Award Notice does not constitute a fifth exception making the letting of a sole-source contract permissible, and that all departments be advised of this fact forthwith.

The rules governing the government’s contracting practices are intended to support two complementary principles: best value and open access. The rules recognize that open competition is the best way to satisfy these principles. They also recognize that forgoing competition in favour of sole sourcing should only occur under tightly defined circumstances.

Although the views of the Committee’s witnesses diverged on several key issues, they were all in agreement that these rules are sound. The Committee adds its endorsement to theirs. A combination of adherence to the rules, improved scrutiny, assessment and reporting by Treasury Board Secretariat, and the adoption of measures recommended by the Auditor General of Canada and this Committee should result in contracting practices that all recognize as desirable.

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. 55 and 61) is tabled.

Respectfully submitted,

JOHN WILLIAMS