Government Operations Committee on Dec. 14th, 2010

[The Chair, Liberal, John McKay]

Colleagues, I see a quorum, so we can commence our meeting.

To open the meeting I want to welcome our witnesses, Madame Trombetti and Mr. Hollander, and thank them both for coming this morning.

Before I turn it over to witnesses, I want the record to note that The Hill Times says this is the best committee on the Hill. Apparently that has nothing to do with the fact that Mr. Martin is a member of the committee and the votes were loaded by the NDP staff. I prefer to believe the narrative that we have the best clerk and the best staff on the Hill and that's why we are the best committee.

[Ed Holder, Conservative, London West, ON]

If I may, Chair, the quality of the chair certainly is—

[An hon. member]

In question.

[Some hon. members]

Oh, oh!

[The Chair, Liberal, John McKay]

I won't open it for debate on the quality of the chair.

I'm going to ask Madame Trombetti to speak and then turn to Mr. Hollander.

Mr. Hollander, can you hear us all right?

[Stephen Hollander, Program Coordinator, Economic Crime Studies, Centre for Forensic and Security Technology Studies, British Columbia Institute of Technology]

Yes, sir, I certainly can.

[The Chair, Liberal, John McKay]

That's good. Thank you.

It was very generous of you to come in at 5:45 in the morning where you are. Thank you for that. I understand you've also taken time off your vacation to come. So again, we appreciate that.

Madame Trombetti, please.

[Oriana Trombetti, Deputy Procurement Ombudsman, Office of the Procurement Ombudsman]

Mr. Chair, members of the committee, thank you for inviting us to be here today and for the continued interest that you have shown in the Office of the Procurement Ombudsman's work towards strengthening the fairness, openness, and transparency of federal government procurement.

Pending the appointment of a new procurements ombudsman, I have been tasked, as deputy procurement ombudsman, with specific responsibilities to ensure the continuity of the office. These are interim measures, as a competitive process to find a replacement was initiated in the spring following the announced retirement of the first procurement ombudsman, Mr. Shahid Minto, after a very long and distinguished career in the public service.

With me today is Paul Morse, who is currently the principal responsible for the reviews of procurement practices in departments and agencies.

I welcome the opportunity to meet with you today to discuss recent activities of our office, and in particular the subject of construction contracts. The mandate of our office is to review the procurement practices of departments to assess their fairness, openness, and transparency, to make recommendations for improvement, to review specific complaints regarding contract award and contract administration, and to provide alternative dispute resolution services for contractual disputes. The legislation also provides that the procurement ombudsman shall perform any duty or function respecting procurement practices of departments that may be assigned by order in council or by the Minister of Public Works and Government Services.

Our office became fully operational in May 2008. The foundation of the office rests on a core set of basic principles, two of which are independence and neutrality.

Not only does our office have a legislated mandate, which can only be changed by Parliament, but we have taken other steps to ensure our independence in our day-to-day operations. For instance, we have entered into a memorandum of understanding with the Department of Public Works, where we obtain core corporate services on a fee-for-service basis. We are responsible for our own risk management, communications, and legal services. We also decide which procurement practices to review unless specifically asked by the minister. Once our annual report is finalized, it is given to the minister and then tabled in Parliament.

Neutrality is also one of our core principles. We are neither a lobbyist for suppliers nor an apologist for government departments. Our aim is to stimulate discussions and to ensure that there is a balanced understanding of interests and concerns of government, suppliers, and parliamentarians.

Under our mandate to review complaints about contract award and contract administration, we have responded to 1,093 contacts since May 2008. Of those, approximately 67% were procurement-related.

Many complaints we receive are about contract award; however, they do not meet the criteria for review under the ombudsman regulations. This means we cannot carry out a formal investigation. What we do instead is follow our business model, which encourages suppliers to discuss their issues with us and allows us the opportunity to help them resolve quickly their issues through informal means.

Both suppliers and government officials benefit from a collaborative approach. As procurement processes continue in a timely manner, quality is not compromised and the parties maintain a good working relationship for future procurement contracts. If an informal approach does not work and the complaint meets the criteria set out in the procurement ombudsman regulations, we proceed with a formal investigation. To date, we have completed approximately seven formal investigations.

We apply the same approach to our mandate, to provide alternative dispute resolution services for contractual disputes. We try to resolve the issues through informal means before proceeding with the formal process. Since May 2008 we have had 16 requests, and of those, approximately 60% have been handled informally. We strive to ensure that our stakeholders know that we exist and are aware of the services we provide. We focus our outreach on both government and supplier communities. We have attended a variety of workshops, conferences, and other events to raise awareness of the office and the services it provides. We have also met with national procurement associations, industry associations, other ombudsman offices, and regional offices of government departments to discuss areas of mutual interest.

Under our mandate to review departmental procurement practices to assess fairness, openness, and transparency, we have completed nine reviews and two studies since May 2008.

There's one review in particular that we carried out this past year that we think will be of interest to this committee. It is a review of procurement practices of departments and agencies with regard to construction contract amendments known as change orders.

By it's nature, construction is risky. To minimize the impact of these risks, contracting and project authorities alike must ensure that a sound management framework is in place to manage the construction contract amendment process.

Public Works and Government Services was a participant in this review, because it is the major player in the construction and management of real property for the Government of Canada and until recently the principal purchaser of construction services for all federal government departments and agencies, other than the Department of National Defence.

Our review also included regional offices of Fisheries and Oceans, Parks Canada, and the Royal Canadian Mounted Police, as those departments have now taken on a greater role in purchasing their own construction services.

We found that Public Works and Government Services Canada has identified the risks associated with construction contract amendments, and has developed detailed procedures, tools, and training programs to manage these risks. Contract amendments are made with the same care as new contracts. The department's framework is designed to promote fairness, openness, and transparency, and to protect the public purse while complying with government-wide rules for contract amendments.

We recommended to participants in this study that policies and procedures be sufficiently detailed to provide guidance and direction for personnel involved in the process, and that a matrix of roles and responsibilities be included within the policies and procedures.

We were also concerned that participants in our review did not build into their systems sufficient flexibility, as Public Works has done, to respond to requirements for contract changes in a timely manner. They were at risk of claims for delay from the contractor, as well as irregularities and non-conformance with their own procedures. We recommended that they carry out risk assessments and consider adapting Public Works and Government Services contract amendment pre-approval processes.

Keeping statistics on the categories and types of contract changes and number of amendments provides useful indicators of performance, as well as identifiers of systemic problems in the planning and management of construction contracts. We recommended that the organizations reviewed develop a capability to generate reports on this in order to analyze trends and improve processes.

Having provided you with some information about our office, its mandate, and a procurement practice review related to the issues raised in these hearings, I must clarify that our office has not reviewed any contracts to renovate buildings on Parliament Hill, or the contract awarded to LM Sauvé.

In closing, I would like to thank the dedicated staff of the Office of the Procurement Ombudsman for their efforts. They work diligently every day in all they do to improve the confidence of Canadians in the fairness, openness, and transparency of public procurement.

My colleague and I welcome any questions the committee may have.

Thank you.

[The Chair, Liberal, John McKay]

Thank you, Madame Trombetti.

Mr. Hollander, you have ten minutes.

[Stephen Hollander]

Thank you, sir.

In the procurement process the objective of the purchasing organization is to get the best value for money--the best possible work at the lowest possible cost. To this end, governments and large organizations establish formalized procurement processes involving competitive tendering in many instances. These formalized processes will have controls built into them to ensure that the employees of the organization act in the best interests of the employer.

Effective as these systems may be, they inevitably leave some margin of vulnerability to procurement fraud. By procurement fraud I mean largely the deliberate overcharging of the customer by the supplier, often in connivance with corrupt employees or agents of the victim organization. The factors that give rise to these vulnerabilities are numerous, but the following are the three chief ones.

First, controls can often be circumvented by employees acting in collusion with one another or with external actors. Second, senior managers often have the authority to override controls at crucial decision points. Third, as control systems become increasingly bureaucratic and complex, a point of diminishing returns is reached beyond which any further complexity or bureaucracy actually gives rise to an increase in the opportunities to commit fraud. The vulnerabilities to fraud exist at every stage of the process, as we shall now see.

I direct the committee's attention to slide three in the package I have provided and I trust your learned clerk has supplied to members. Is that correct?

[The Chair, Liberal, John McKay]

Yes, it is. Thank you.

[Stephen Hollander]

In slide three, we see that the procurement process is divided into clearly defined stages. The break points between the stages will vary from one organization to another, but the important point for my purpose today is that each stage carries particular risks of fraud.

In the needs identification stage, the objective of the corrupt employee or agent is to establish a need for expenditure where none exists or to exaggerate the amount of expenditure required with the intention of passing the benefit on to the preferred supplier. Some of the ways this can be done in the needs identification stage are shown in slide four of your bundle. I would point out, as we look at this slide and at the subsequent slides, that many of the actions listed need not be done by somebody who was very high up in the organization. Some of these actions could be taken by people who are at a decidedly junior level.

In the second stage, the development of statements of work and specifications, the objective is to ensure that insofar as possible the specifications will match the resources or product of a favoured supplier or that the supplier can be awarded the business through a non-competitive or sole-source mechanism. Some of the ways this can be done are shown in slides five and six. Again, one need not necessarily be senior in the organization to do some of these actions.

At the pre-qualification stage, the objective is to restrict the trawl of potential suppliers in a way that will favour the preferred one. If you take a look at slide seven, you'll see some of the ways this can be done.

In the solicitation phase, the objective is to ensure that the favoured vendor is successful by limiting or sabotaging the competition. There are numerous ways this can be done and has been done in the past. This is covered off in slides eight and nine.

When it comes to evaluating the bids and proposals, the objective is to ensure the work will be awarded to the favoured vendor. If a selection interview was part of the process, the interview will be used by the corrupted employee for the purpose of discrediting competitors and shining a bright light on the favoured vendor. I've shown some ways this can be done in slides 10 and 11.

As we approach the end of the process, we arrive at the negotiation stage, and the objective at the negotiation stage is to provide a second chance to steer business to the favoured vendor and to sweeten the pot. I've shown how this can be done in slide 12.

At the contract award stage, the corrupt employee or agent will work to release the favoured and by now successful vendor from penalties, audit clauses, and other provisions for contract or accountability that would normally appear in a contract. Another objective at this stage is to prepare the ground for overcharges in the work that will be performed in the future.

Once the contract has been formally awarded, the vendor is now in a position, often without any collusion with corrupt employees inside, to engage in fraudulent actions that will increase the profit at the expense of the victimized purchaser.

I've included some notes on measures that may help to prevent this type of abuse, but I believe that my allotted time is close to expired. I'd be pleased to take any questions that members of the committee might have.

[The Vice-Chair, Conservative, Chris Warkentin]

Mr. Regan, for eight minutes.

[Geoff Regan, Liberal, Halifax West, NS]

Thank you very much, Mr. Chair.

I would be interested at some point, if we have time, to hear some of your suggestions, Mr. Hollander, about what some possible solutions there are to this and how you prevent it, particularly in view of the fact that you said if you have too many rules you actually increase the risk of fraud. Am I correct in understanding that?

Rather than allowing you to give the full exposé in terms of how we can prevent it, perhaps you can provide me a fairly brief answer.

[Stephen Hollander]

Controls have their place and we must have them, but controls can be circumvented by collusion, or by senior management overriding them.

With regard to the complexity, there is a point where the system becomes so complex that the opportunities for fraud are increased. For instance, there's what's known as the downstream effect. If you have too many people involved, and if one corrupt employee is successful in committing a crime, the people downstream will not be aware that anything is wrong. For example, at the pre-solicitation phase, a corrupt employee could remove the entries for qualified vendors from the database, so that the vendors don't get the request for proposals or the call for tenders. If the trawl has been restricted this way, so that only the favoured vendors and some obviously unqualified ones get the RFPs, the people who are responsible for bid evaluation won't know this, and they'll proceed as if everything were correct

As to methods of prevention, there is the segregation of duties. There is also the performance of parallel checks and critical points. For instance, prior to the issue of a request for proposal, an independent person reviews the log of changes to the database to make sure no changes have taken place that shouldn't have. Also at this stage, an independent agency performs a background check on the short list of bidders and their senior management and directors.

[Geoff Regan, Liberal, Halifax West, NS]

That is an interesting point. The focus of our committee has been the renovation of the West Block and the allegations that someone rigged the bid. The suggestion was that the LM Sauvé company hired Mr. Gilles Varin to help them get the contract. They ended up getting the contract after paying something between $118,000 and $140,000. Is this the kind of thing you're talking about?

[Stephen Hollander]

If there had been anything adverse in the background of the Sauvé construction company, presumably a background check would have discovered it. We're talking about a reasonable due diligence here. We're talking about looking at things like court records to see if the company has been in and out of court a lot. One would look at complaints registered with workers' compensation as well as open source information about possible organized crime connections. This is the sort of thing you would do if you were looking to enter into a business relationship using your own money.

[Geoff Regan, Liberal, Halifax West, NS]

In this case, there is evidence of an organized crime connection that wasn't uncovered, so it's not clear that there was much of a check in advance.

Let me ask you another question. Is it legal to have an agreement whereby a contractor hires someone and the payment to that person depends upon obtaining a contract? This appears to be what has happened between Mr. Sauvé and Mr. Varin.

[Stephen Hollander]

I am not a lawyer, so I'm afraid I can't give you a legal opinion.

[Geoff Regan, Liberal, Halifax West, NS]

Do you have any more comments, Mr. Hollander?

[Stephen Hollander]

No.

[Geoff Regan, Liberal, Halifax West, NS]

Ms. Trombetti.

[Oriana Trombetti]

I can't give you an answer on that either.

[Geoff Regan, Liberal, Halifax West, NS]

Ms. Trombetti, are you aware of the RCMP investigation into this affair?

[Oriana Trombetti]

Yes, I am.