Opening Statement to the Standing Committee on Public Accounts

Public Works and Government Services Canada - Alternative Forms of Delivery: Contracting for Property Management Services
(Chapter 18 - September 1999 Report of the Auditor General)

National Defence - Alternative Service Delivery
(Chapter 27 - November 1999 Report of the Auditor General)

Mr. Chairman, thank you for this opportunity to discuss Chapter 18 of our September 1999 Report and Chapter 27 of our December 1999 Report. Both chapters focussed on departmental initiatives to find new and better ways of providing support services and performing non-core activities.

Chapter 18 looked at the process used by Public Works and Government Services Canada to contract out the operation and maintenance of 300 government buildings. Chapter 27 examined 14 alternative service delivery projects at National Defence which involved contracting for the delivery of services.

Both departments pursued similar objectives. PWGSC wanted to contract out non-core activities that could be carried out by the private sector more cost-effectively and allow the Department to concentrate on its core roles. National Defence wanted to get the best value in its spending on non-core activities.

The objectives of our audits were to determine whether the departments:

• maintained the integrity of the contracting process by preserving openness, fairness and value for money;
• saved money as a result; and
• had an appropriate management framework.

The first aspect of these initiatives that I would like to discuss with you today is savings. Savings are usually a major factor behind such initiatives but it can be a challenge for managers to tell whether they actually save money. It was no different this time.

As indicated in Chapter 18, we found it too early to assess whether PWGSC will save annually 10 percent or $20 million on its property management costs. We could not reconcile baseline costs that the Department used to calculate expected savings. Nor could we ascertain whether the Department will receive the quantity and quality of services it is paying for.

The property management services contracts, however, contain features that should promote innovative business processes and help to produce savings. Based on the Department's extensive consultation with industry representatives, the 10 percent target seems realistic. Whether the initiative will yield intended savings depends on how well departmental personnel monitor the performance of the contractor.

PWGSC has designed a good performance evaluation framework for the initiative. But at the time the contractor took over operations, some important monitoring and control features, such as assessment criteria of building conditions and performance indicators on customer satisfaction, were not in place. This was partly because of tight deadlines. The Committee may wish to get assurances from the Department that it has fully implemented the framework to evaluate performance and that it has closed all loops.

National Defence claims savings of about $68 million a year. In 1996 the Department projected that annual savings would reach $200 million by 1999. The Department has since revised this projection to $175 million a year by 2004. We found that other countries that have undertaken ASD projects are also finding it hard to achieve their initial saving targets. In light of its situation, National Defence's projection seems ambitious. The Department is likely saving money, but the amount is open to question.

We were unable to verify the Department's actual savings in the projects we audited. Most projects had not been established long enough to measure savings. Baseline costs had not been set for a number of the projects. For the other projects, we were not convinced that the estimates of baseline costs were complete and accurate.

The basic tool for selecting the best available option and estimating savings is the business case analysis. At National Defence, we found that business cases were completed in only 8 of the 14 projects we audited. We also found that existing service levels had been established in only three projects. Baseline costs were set inadequately in 3 of the 12 projects we could assess. Without cost and performance measures, ASD projects cannot be properly managed.

Problems with business cases show that departmental staff lack the skills to assess complex projects. Business case analyses are unlikely to improve until staff acquire these skills. The Committee may wish to ask National Defence that it present its plan for developing or acquiring the appropriate resources and setting completion dates.

The second common theme of these two audits is the management of human resources. How well the effects of changes to jobs and on the people concerned are managed is a critical success factor in these initiatives. Both departments showed consideration for displaced staff.

PWGSC established the best possible protection for affected employees as a key guiding principle for its initiative. It received the support of employees and union organizations. This contributed to the smooth transition of operations to the private sector.

Overall, National Defence also adequately consulted employees, and the unions participated in all the Department's ASD projects.

There was one exception where human resource aspects were not handled well. In the Goose Bay initiative, the Department underestimated the impact of change on human resources. Because staff was extremely dissatisfied, the Department had to resolve matters. In addition, National Defence did not obtain a timely legal opinion on the possible application of successor rights. The total cost related to the application of successor rights will reach almost $38 million at the end of the five-year period of the contract. This additional cost will reduce savings by about half the expected amount.

National Defence has recognized many of its problems and is focussing on fewer projects that are receiving more attention from senior management. It has also made several improvements in how it develops business cases.

My last point will be a topic I have discussed on several occasions before this Committee: contracting.

To contract out property management services, PWGSC used a bidding process that was open, transparent and fair. However, we found that some ASD projects of National Defence did not follow these principles. In fact, five of nine Defence contracts were awarded without competition and two, in particular, had problems.

Current contracting policy demands competitive contracting. However, we believe that it would be beneficial to go even further and insist that departments work to create a competitive business environment.

In the audit of PWGSC, we noted that the Department took several measures to promote competition and open access. It held extensive consultations with the industry, sent early formal requests for expressions of interest and gave contractors the time to make alliances or other arrangements to better compete. Furthermore, it broke down the portfolios of buildings into smaller geographical sections so that large real-estate companies and smaller regional entrepreneurs could bid. The successful contractor was a joint venture that was created specifically to bid on the alternative forms of delivery (AFD) contracts.

This was not a unique case. In a previous audit, we reported the proactive approach to encourage competition in the construction of the Confederation Bridge. In that case, extensive consultations were held with a large number of potential contractors before the contract was structured.

We would encourage the Committee to recommend that departments not only use the competitive process wherever possible but also work to create conditions that will intensify competition in the marketplace.

A significant feature of PWGSC's contracting process was the use of fairness monitors to provide independent assurance that the process was conducted fairly and in accordance with the rules. This review mechanism was a key success factor of the AFD initiative and helped to prevent litigation and complaints. The Department used fairness monitors in a few other successful initiatives before, such as in the privatization of the Canada Communication Group. We would encourage the Committee to endorse the use of fairness monitors for all large and complex transactions.

National Defence and PWGSC are implementing additional similar projects and developing more. Our results show that the federal government has much to do before realizing the full advantage of contracting services. Some projects have been successful but the departments concerned need to address the deficiencies we have identified in our two chapters.

Mr. Chairman, that concludes my opening statement. We would be pleased to answer your Committee's questions.