31.11 Our review of the government's Part III Estimates for 1997-98 identified planned expenditures of more than $32 billion over the time required to complete 159 projects, each costing $10 million or more. The magnitude of these numbers indicates the importance of sound management of this aspect of government operations. Improvements in the planning, design, acquisition, and operating and maintenance of capital projects over their life cycle can result in significant savings to the government.
31.14 Within the Department, responsibility and decisions relative to major capital expenditures are shared among the Department's Executive Committee, Physical Resources Bureau (the Bureau), the Geographic Branches and the missions.
31.15 The Bureau is responsible for strategic property planning, analysis and reporting to senior management and the Treasury Board, as appropriate; the implementation and delivery of major capital projects; and the provision of technical services to support the operation and maintenance of facilities abroad. It manages the Long-Term Capital Program, the acquisition (purchase or lease) and construction of chanceries and official residences, the purchase or construction of staff quarters, and major renovation and maintenance projects.
31.16 The Geographic Branches identify property needs, provide assistance and input to the Bureau in prioritizing those needs, and allocate the necessary resources to the missions for the day-to-day operation and maintenance of property abroad, including funding for leasing costs.
31.17 Missions are responsible for the leasing of staff quarters, for landlord-tenant relationships in leased chanceries or official residences, for the day-to-day operation and management of all property in their inventory and for minor maintenance projects. Missions also play an important role in identifying their property needs and assist the Bureau by providing information about local property markets. Other government departments identify their property needs abroad and work with the Bureau to fulfil those needs.
31.19 Our interest in departmental program issues was limited to obtaining a general understanding of the program requirements that the new facilities were designed to meet. Except for their role in the projects examined, we did not audit the Physical Resources Bureau, the Geographic Branches or the missions. Further details on the audit are found at the end of the chapter in About the Audit.
31.21 The Department also has an obligation to provide Canadian based staff with living conditions similar to those in Canada, with respect to quality of accommodation. This is particularly important at posts where measures of isolation, location conditions, climate, health, medical care, hostility and violence exist. The Department has developed a "hardship level" one to five rating (five representing the greatest hardship) that is intended to recognize the existence of undesirable conditions at the various posts and to reinforce the importance of providing appropriate accommodation that meets Canadian standards. The hardship levels for the missions that we examined are:
31.23 Although the government's policies and guidelines on capital projects are sound, problems continue to persist in their application. We noted that the Bureau has undertaken a number of initiatives to improve the planning, management and delivery of capital projects by the Department; however, we identified variances between preliminary cost estimates and final project budgets, as well as other problems related to scheduling and project planning. These indicate that opportunities for improvement exist and that management needs to continue to focus on this aspect of the property program. We also noted that the Inspector General's audit of three other capital projects identified similar concerns with project planning. Accordingly, we believe that management needs to address the concerns raised by both audits. We also encourage the Inspector General's Office to continue to give priority to this aspect of the Department's operations.
31.25 In Bangkok, the purpose of the relocation was to reduce the amount of space and to upgrade the quality of accommodation as the Mission had occupied the facility for over 20 years. We confirmed that the previous premises were old and were scheduled to have been torn down and redeveloped. The Ambassador reported that staff are very satisfied with their new work environment and morale has improved. The staff we spoke to confirmed these views.
31.26 The rented premises in Geneva were one of the Department's most expensive leases. We found that the Department acted appropriately in taking advantage of an economically viable opportunity to secure a long-term Crown-owned solution for its accommodation requirements. Mission management told us that the new facility will enable them to deliver their programs more effectively and to better accommodate the large number of government officials who conduct business in Geneva.
31.27 The need to seek alternative accommodation in Seoul, South Korea was in response to the landlord's request to vacate the premises in order to carry out needed renovations to the building, and to secure a long-term Crown-owned solution for the Department's accommodation requirements. The Mission and Geographic Branch initially approved the proposed project, consisting of one tower of office space and one tower for residential accommodation. However, current Mission staff have since expressed concern with the proposed project to combine office and residential accommodation in the same building complex. During our field trip, management and staff at the Mission reconfirmed the need to relocate and expressed a high level of dissatisfaction with their current office accommodation. They supported pursuing options to secure new alternative accommodation as soon as possible.
31.29 Exhibit 31.3 illustrates that the preliminary budgets of three of the six projects examined experienced increases, totalling $38 million and ranging from 64 percent to 153 percent over their initial estimates, due to changes in the projects' scope and to poor cost estimation. As a result, management and the Treasury Board did not have a reliable estimate of the project's cost prior to granting preliminary approval. Case study 1 provides an example of how a poor cost estimate was used to support an uneconomical investment option that may have led to an unproductive $15 million expenditure.
31.30 In the case of the New Delhi chancery, the Department informed the Treasury Board that the additional costs were necessary to correct deficiencies in the existing facilities. The costs were mainly due to upgrades to the mechanical systems in the existing building as a result of on-site inspections, to improvements in the recreational facilities, and to other unplanned costs for travel and on-site management. We believe that most of these costs could have reasonably been identified prior to seeking preliminary project approval.
31.31 We found that the budget increases for the New Delhi staff quarters were primarily due to poor cost estimation. For example, the unit costs did not reflect local conditions and insufficient allowances were made when determining the amount of gross space that would be needed to provide for the required net space. However, it is important to note that both the cost and quality of the new staff quarters are similar to those recently constructed for the British High Commission.
31.32 The Department of Foreign Affairs and International Trade should strengthen its capability to prepare preliminary cost estimates that have a sufficiently high degree of quality and reliability to support the Treasury Board's consideration of the project.
31.34 Geneva chancery. In December 1995, when it became apparent that the cost of the new chancery in Geneva would significantly exceed the approved budget, the project team proposed condensing the footprint of the building and adding a floor. It was estimated that this option could have saved between $2 million and $3 million. A smaller footprint would have also obviated the need to acquire additional land (which is currently under consideration) and to move the services on site to accommodate a pedestrian right-of-way. In addition, a smaller footprint would have addressed security concerns about the close proximity of the proposed walkway to the chancery. The cost of purchasing additional land and landscaping is estimated at $500,000.
31.35 Documentation supporting the decision to exclude the official residence in the chancery design is not available. We noted that on at least two occasions during March and April 1995, the portfolio manager informed Bureau management of the possibility of constructing an official residence on the new chancery site in Geneva. It was estimated that the additional cost would range from about $525,000 to $1.2 million. The Department is currently spending approximately $470,000 per year to rent and maintain its leased official residence.
31.36 Departmental officials told us that the planning process does not provide a number of equal and comparable design options, with pros and cons that can be applied against a cost framework. They also said that the architectural planning of a building is an evolutionary process, originating with the need to construct on a piece of land and subject to a prescribed set of requirements that aims to meet an approved budget within an agreed period of time.
31.37 In our opinion, the options analysis carried out for the new chancery in Geneva did not provide sufficient substantiation for the decision to pursue the existing design. We believe that the potential cost savings, which we estimate to be at least $7 million over a 20-year period, were of a nature and significance to warrant a formal review and consideration by senior management.
31.38 Bangkok chancery. In the case of the Bangkok chancery, we noted that there has been a long history of debate between the Physical Resources Bureau and the Mission over whether to lease or own space. Several Heads of Mission recommended a co-located, purchased property as an ideal solution to escalating rental costs, and poor environmental conditions. A lease-versus-purchase analysis for the chancery prepared by the Bureau in 1995 concluded that it was more economical to purchase than to lease. We noted that during the period 1995-96, the Department's preference shifted to a leased chancery solution. In support of this change, we expected to find an updated needs assessment and options analysis. The Bureau informed the Treasury Board that the selected lease solution was based on a careful screening of the various buildings within the Mission's locational parameters and a detailed evaluation was carried out. We noted, however, that a detailed feasibility report containing the needs assessment and options analysis does not exist. Consequently, the Bureau cannot demonstrate that the lease option was the most appropriate decision.
31.39 We also noted that a comprehensive options analysis of the planned project in Seoul, South Korea was lacking. For example, the option of including the official residence in the project was not formally evaluated. The Department has recently purchased the official residence that it had been leasing and is re-evaluating its need for office space and staff accommodation in Seoul.
31.41 The consultant's report, dated 31 March 1999, confirmed our concerns about the quality and reliability of the economic analysis. The report analyzed three different lease-versus-purchase scenarios, using the Bureau's own figures for the Seoul project, and concluded that the lease option would cost $3 million to $19 million less depending on the assumptions used. The report noted that while the formulae and calculations are sound, the following weaknesses exist in the investment analysis model:
31.44 As previously mentioned, the construction contract for the Seoul project has recently been terminated. We support the Department's decision to reassess its accommodation requirements and options in Seoul, South Korea because, in our view, the original project was poorly planned and could not be justified on economic grounds, as the Department had asserted.
31.47 Reduced energy use in New Delhi. The level of energy consumption has been significantly reduced in the New Delhi compound. As well, the chancery addition project included significant upgrades to the electrical and mechanical systems. As a result of these upgrades, energy costs of the chancery have remained essentially the same despite doubling the size of the facility. We also noted that solar water heating panels were installed at the official residence in an effort to reduce energy consumption. A recent energy audit and equipment assessment of the Canadian High Commission in New Delhi, India, conducted by Natural Resources Canada, identified the potential for further savings related to energy and water use, including sewer water reclamation. (See photograph)
31.48 Assessing air quality in New Delhi. The air quality in New Delhi is a significant problem and a serious concern and priority of the Mission. The World Health Organization described New Delhi as the fourth most polluted city in the world and the situation continues to worsen. We noted that the Mission has begun to gather data in order to analyze the quality of air in its facilities.
31.49 Minimizing energy consumption in Geneva. Efforts have been made in Geneva to minimize energy consumption. The project's design brief called for the selection of equipment that minimized life cycle costs, for projected maintenance, and for energy consumption over the equipment's life. We noted that a superior heating and cooling system was installed that is expected to significantly reduce energy consumption. However, the Department could not quantify the level of expected energy savings at the time of our audit.
31.51 Using departmental estimates where available, we calculated that the cost of internal resources substantially dedicated to the New Delhi chancery expansion and staff quarters project totalled at least $800,000 and $560,000 respectively, excluding the cost of related travel and other out-of-pocket expenses. A similar calculation for the planned Seoul project resulted in a figure of $522,000. The Department could not provide us with the estimates for the Bangkok and Geneva projects.
31.52 With respect to the Geneva project, we found that the Bureau was in the process of establishing separate projects for landscaping and the purchase of additional land at a total estimated cost of $500,000. In our opinion, these activities are directly related to the new Chancery and their cost should be charged to the project.
31.53 We noted several weaknesses in the reporting of project performance to senior management. Reports that monitor project progress (scope, cost and schedule) against plans were not produced on a regular basis. Officials told us that project completion and evaluation reports are seldom produced in a timely manner due to lack of resources. Bureau management relies primarily on meetings and discussions with officials and on a weekly review of the Long-Term Capital Plan monthly cash flow reports to keep apprised of the status of projects. There is also a view within the Department that capital projects do not receive sufficient attention by senior management. We believe that formal reporting and review practices would result in better project management.
31.54 The Physical Resources Bureau should track and allocate all costs specifically identifiable with a particular project. The Bureau should prepare reports that monitor project progress (scope, cost and schedule) against plans to allow decision makers to address any significant variance or exception.
31.56 In a second instance, the Department had amended a consultant agreement by $2.4 million without prior Treasury Board approval.
31.57 Finally, as illustrated by case study 2 and as also noted in paragraph 31.30, we are concerned about the accuracy and completeness of statements in various Treasury Board submissions, such as those justifying project budget increases; they appear to be inconsistent with our audit evidence.
31.58 The Department of Foreign Affairs and International Trade should ensure consistent compliance with its delegated authorities.
31.61 New Delhi chancery. Funds were allocated for commissioning in the project budget. Although a formal commissioning plan was not prepared, commissioning activities were appropriately carried out and we did not observe any significant problems. Users indicated that they are generally satisfied with the building's services.
31.62 Geneva chancery. We found that the project budget did not include funds to plan and carry out commissioning. In fact, a commissioning plan had not yet been prepared just days before the building was scheduled for substantial completion. We noted that four different commissioning officers had been involved with the project during the prior eight months. Without a sound commissioning plan and testing, the Department would not have independent assurance that the building's systems will function as intended. Also, there is a greater risk that deficiencies will not be identified prior to acceptance of the building. Project officials have recently informed us that a $130,000 commissioning contract was awarded on 7 July 1999. Commissioning is expected to be completed by the end of October 1999.
31.63 The Department of Foreign Affairs and International Trade should ensure that projects are commissioned so that program requirements are satisfied with minimum cost and disruption.
31.65 In Bangkok, departmental officials expressed concerns over a lease signed in 1995 relating to fixtures and furniture for the official residence. During our field visit, we noted that the project files did not indicate whether these concerns had been addressed. In the case of the New Delhi official residence, various options had been presented and discussed for the development of this site prior to the recent renovation. However, we noted that important information supporting the decision was not documented in the project files.
31.67 Capital projects commit the Crown to large one-time capital expenditures and often to even greater ongoing operating and maintenance costs over the life of the asset. It is therefore crucial that reliable estimates of the projects' total costs be provided to senior management and the Treasury Board before the projects become committed. It is equally important that all reasonable options for significant cost savings be explored and reported to senior management and the Treasury Board. We noted weaknesses in both these areas.
31.68 The quality of analysis and documentation used to support investment decisions fell short of that required by the Department's own policies and established methodologies for managing capital projects. The Physical Resources Bureau needs to further improve the way it tracks and reports project costs and budget variances. In addition, we noted two instances in which the Department had exceeded its delegated contracting authority and the Treasury Board approval was granted retroactively. Recent internal audits of three capital projects have identified similar concerns about the Department's project management practices. In our opinion, all of the above-noted factors may have resulted in additional costs ranging from at least $8 million to $15 million over a 20-year period.
31.69 The Physical Resources Bureau has taken initiatives in the past few years to improve its project management systems and practices. We would expect that the Bureau would take into account in its management improvement initiatives the concerns raised by this audit as well as those raised by the Department's Office of the Inspector General. We also encourage the Inspector General to continue to give priority to this aspect of the Department's operations. We plan to monitor future projects delivered by the Physical Resources Bureau and report to Parliament, as appropriate.
Department's overall response: The Department agrees with the Auditor General's recommendations. Project delivery performance has focussed on ensuring that projects are viable and justified based on final cost estimates prior to proceeding. However, preliminary cost estimates have sometimes failed to predict the evolution of program requirements, or market forces during subsequent project planning stages.
The Department will continue to re-evaluate the rationale for capital projects whenever cost estimates change and, as in the case of Seoul, whenever indicated by volatile local property markets.
Project documentation, investment analysis, and reporting to the Treasury Board will continue to be improved.
Rodney Newcombe
Elizabeth Fox
For information, please contact Joe Martire.
The Department of Foreign Affairs and International Trade provided the following action plan in response to our recommendations.