Public Accounts Committee on Oct. 28th, 2009

[The Chair, Liberal, Shawn Murphy]

I call the meeting to order.

Welcome, everyone.

This meeting has been called pursuant to the Standing Orders for today to deal with chapter 6, “Selected Contribution Agreements--Natural Resources Canada”, of the spring 2009 Report of the Auditor General of Canada.

The committee is very pleased to have before us this afternoon Ms. Sheila Fraser, the Auditor General, representing the Office of the Auditor General. She's accompanied by the deputy auditor, Mr. John Wiersema, and principal Linda Drainville. From the Department of Natural Resources we have the deputy minister and present accounting officer, Ms. Cassie J. Doyle; she's accompanied by Mr. Bill Merklinger, assistant deputy minister. We also have with us Mr. Richard Fadden, who was the previous deputy minister of the Department of Natural Resources.

On behalf of every member of the committee, I want to welcome each and every one of you. We'll get right down to business. We're going to ask the Auditor General for her opening comments. Then we're going to turn to you, Ms. Doyle. I understand, Mr. Fadden, that you do not have an opening statement.

Please go ahead, Ms. Fraser.

[Sheila Fraser, Auditor General of Canada, Office of the Auditor General of Canada]

Thank you, Mr. Chair.

We thank you for this opportunity to discuss our chapter on selected contribution agreements at Natural Resources Canada. As you mentioned, I am joined today by John Wiersema, deputy auditor general, and Linda Drainville, principal, who were responsible for this audit.

Our chapter raises issues related to the department's administration of contribution agreements in the area of energy efficiency programs. Between April 2003 and March 2005, Natural Resources Canada's office of energy efficiency entered into five contribution agreements with three private sector organizations to deliver programs designed to address greenhouse gas emissions in the transportation sector. These organizations were the Canadian Natural Gas Vehicle Alliance, the Canadian Energy Efficiency Alliance, and CEEA Transport. The total value of the five agreements was about $9.4 million.

When concerns with the contribution agreements were identified in August 2005, NRCan initiated internal audits of them. These audits highlighted several problems, including serious compliance issues with the claims submitted for payment and with the control framework in place at the time. We subsequently became aware that the department may not have addressed all the issues and we therefore undertook this audit.

We examined NRCan's actions in entering into and managing these five contribution agreements. We also considered whether controls the Department subsequently put in place in the affected program area would be adequate to prevent recurrences of the problems that were identified.

In this audit, we found that NRCan failed to identify a situation of conflict of interest when a consultant who had helped NRCan develop two contribution programs also worked for the organizations that received funding under the same programs. The department paid at least $110,000 to the consultant. The same consultant also signed a contribution agreement with NRCan as president of the recipient, CEEA Transport. CEEA Transport then entered into a contract for professional services with the same consultant. The contract included provisions to pay up to $712,000 for professional services. We are very concerned that knowing all of the circumstances, the Department went ahead with these contribution agreements without identifying this obvious conflict of interest.

In addition, in August 2005, NRCan's senior management became aware that CEEA Transport was not complying with some of the terms and conditions of the contribution agreement. CEEA Transport had not made payments to some of its subcontractors before submitting claims to NRCan four payment, and there was sufficient evidence available to NRCan to establish that CEEA Transport was insolvent. These matters represented violations of the contribution agreement.

We found that NRCan made about $3.2 million in payments to CEEA Transport despite evidence that it was insolvent and not paying the subcontractors. As a result, the Department did not satisfy its obligations under section 34 of the Financial Administration Act, which, in the case of a contribution agreement, requires certification that amounts are paid in accordance with the terms and conditions of the agreement. This is an essential control over the expenditure of public money.

As described in our chapter, we also found that the Department considered but did not implement other available options to resolve payment issues concerning the CEEA Transport contribution agreement. In short, while the Department attempted to do the right thing, it did not do it in the right way.

In response to findings from its internal audits, NRCan implemented a number of changes and improvements in its management practices for contribution agreements; however, at the time of our audit the practices did not include adequate independent monitoring to ensure that the management of contribution agreements respects the requirements of the Financial Administration Act, the Treasury Board of Canada policy on transfer payments, and the department's own policy and practices governing contribution agreements, nor had the department developed policies and guidance with respect to conflicts of interest in contribution agreements.

The committee may wish to ask NRCan what it intends to do to prevent recurrences of the issues identified by the internal audits and our audit and, in particular, what it intends to do to ensure that its staff are more sensitive to situations of potential conflict of interest in the management of contribution agreements.

Mr. Chair, this concludes my opening remarks. We would be pleased to answer any questions that committee members may have.

Thank you.

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Ms. Fraser.

Now we're going to hear from Ms. Doyle, NRCan's deputy minister.

[Cassie Doyle, Deputy Minister, Department of Natural Resources]

Thank you very much, Mr. Chairman.

I would first like to introduce my colleagues at the table. Mr. Bill Merklinger is the assistant deputy minister of corporate management and services sector and the chief financial officer at Natural Resources Canada. My colleague Mr. Richard Fadden has already been introduced. He was the former deputy minister prior to my time at NRCan. He is currently the director of the Canadian Security Intelligence Service.

I appreciate this opportunity to be here this afternoon on behalf of Natural Resources Canada to address and review the actions we have taken to address the Auditor General's spring 2009 report with respect to the management of NRCan's contribution agreements. The findings highlighted a situation that occurred between 2003 and 2005 and the potential for conflict of interest in the management of contribution agreements as well as the need for an increased level of active monitoring and oversight, as was just presented by the Auditor General.

As Deputy Minister of Natural Resources, I accept responsibility for the issues identified by the Auditor General, and I am pleased to report here today that we have taken action to address all the findings.

First and foremost, let me assure the committee that no money was lost, and there was no overpayment under these contribution agreements. I would like to also acknowledge the contributions of Mr. Richard Fadden, who while serving as Deputy Minister of NRCan, oversaw an internal audit on contribution agreements to transportation-based greenhouse gas reduction projects. All recommendations and management response commitments from this internal audit, completed in September 2006, have been implemented. As such, I am confident that NRCan has a robust system of financial controls in place to ensure that tax dollars are well used and are spent for their intended purpose.

My department is fully committed to and has demonstrated excellence in the management of grants and contributions. And we continue to learn and to make improvements in our systems of management and control. Of note, the Treasury Board Secretariat has accorded NRCan an improved rating on our 2008-09 management accountability framework for the effectiveness of our financial management and control. The department has developed a strong stewardship regime for managing contribution programs and for ensuring full compliance with government legislation, policies, and procedures.

Today I have submitted to the committee a summary of actions taken that provides details of the measures we have adopted. I would like to highlight a few to illustrate the actions taken since 2006 to improve all aspects of contribution agreement management and related conflict of interest provisions. These include the four action areas identified by the Auditor General in paragraph 6.25 of the report.

In September 2006, we created a centre of expertise on grants and contributions that provides advice on transfer payment administration and policies. This centre, which is headed by our financial management branch, reviews all grants and contributions agreements over $100,000. It assists in the design of program terms and conditions. It tracks, monitors, and ensures compliance, including preventing conflict of interest situations. Through the use of training and increased awareness, this has been conducted in collaboration with the department's values and ethics unit. We have also developed detailed checklists. The centre also promotes best practices among employees who are managing grants and contributions.

We also created a transfer payment review committee in October 2006 at the assistant deputy minister level. In fact, it is chaired by my colleague Bill Merklinger, who is the ADM of corporate services. This transfer review committee reviews all grants and contributions agreements over $1 million as well as any high-risk agreements over $100,000 that are identified and referred by the centre of expertise.

As a standard practice, Natural Resources Canada has added three conflict of interest clauses to all its contribution agreements. This further strengthens the department's management of transfer payments by ensuring that each agreement contains standardized language that limits the potential for any real or perceived conflict of interest from the perspective of both parties to the agreement.

Over and above the mandatory delegated authorities training, which is managed by the Canada School of Public Service, our department provides additional training for employees involved in grant and contribution programming. For example, we hold employee engagement sessions, with case studies, to promote a deeper understanding of the Values and Ethics Code for the Public Service as a means of preventing any real or apparent conflict of interest situation.

As our summary of actions taken demonstrates, NRCan has fully addressed all of the Auditor General's recommendations and, as a result, has benefited from this report by significantly strengthening our management practices for grants and contribution agreements.

Again, as deputy minister, the sound stewardship of public funds is my highest priority, while at the same time ensuring that the policy and programming priorities of the Government of Canada are implemented to meet the needs of Canadians.

Thank you, Mr. Chairman. I'd be very pleased to answer any questions the committee may have.

[The Chair, Liberal, Shawn Murphy]

Thank you, Ms. Doyle.

We'll proceed right to the first round of seven minutes each.

Mr. Lee, you have seven minutes.

[Derek Lee, Liberal, Scarborough—Rouge River, ON]

Thank you, and thank you to the witnesses for being here today.

Before I launch into this light questioning, I just want to say that I can appreciate the burdens over at NRCan and maybe other government departments when the whole country and the whole world decides it wants to go green, and says, “Over to you, Jack; make us go green.” That's a huge shift societally, and I appreciate those things.

I also appreciate your evidence today that in the context of these particular agreements, no taxpayer money went east, that the contracts were executed and there was reasonable value for money in terms of the objectives.

Could you confirm that in the context of this particular sequence of contracts that the Auditor General has pointed out, in fact the goals of those contracts were accomplished?

[Cassie Doyle]

Thank you very much for the question, and I appreciate your understanding of the context in which we operate.

Just to go a little further on the statement that no money was misspent, I can tell you that NRCan's staff completed a detailed review back in 2006 of all of the dollars claimed by the CEEA Transport organization. That included reviewing evidence of all work completed against 760 promised deliverables that were included under the contribution agreement. So we substantiated the true value against those deliverables and ensured that only work that was completed was paid for. In fact, it's important to note that as part of that due diligence, $800,000 of invoice claims was disallowed.

So I do feel confident that all the funds that were provided to the agency under our contribution agreement in fact reflected work performed.

[Derek Lee, Liberal, Scarborough—Rouge River, ON]

Most of my colleagues around the table are very pleased to see that things generally went okay in the spending, but we also want to look at the stuff that didn't go right, and as the Auditor General has correctly pointed out, there was a serious conflict of interest problem here.

I think everybody around the table will also recognize that lobbyists make their living based on connections--what they know, who they know--yet it is almost the very essence of conflict of interest rules that if you have a connection, it's a bad thing; it could be a potential conflict. So the people who truck and trade in connections and knowing government, if they're on the other side of the street, almost carry around liabilities with them. They might know too many people or they might have too close a connection to government.

In this case, there was a really tangible conflict of interest, a real patent, obvious, known conflict, yet the department went ahead. I don't even think it tried to paper it over. I don't think anybody tried to cover anything up. It just went ahead.

You've indicated what the department has done to try to avoid this, but how do we know in a real practical sense that all these knowledgeable lobbyists won't be able to find a way around all your skilled expertise and committees and make their connections work for them and their clients? How do we know that you've really solved the problem, or could you? Would you please point to what exists now that would have prevented this patent breach of the conflict of interest rule that we've identified here? Tell me how what's there now would actually prevent a recurrence.

[Cassie Doyle]

In my opening statement, what I was attempting to outline is some of the improved oversight we've put in place in terms of a conflict of interest situation that could arise from a relationship existing between one program official who in this case may have used a consultant who then later came back and used that expertise to secure a contribution agreement.

What we've done at NRCan, and I believe in many other departments, is to put in oversight mechanisms so that we are ensuring there is adequate review outside the program area, as was recommended by the Auditor General. There would be a review on those grants of over $100,000 by a committee, which includes legal services, under the directorship of our financial management branch. Then, for any of the higher-risk contribution agreements of over $1 million, there would be a committee chaired by an ADM of corporate services and our chief financial officer, which would involve three other ADMs not in the program area, and our chief counsel, who is our Justice representative, who would review not only the contribution agreement but a very detailed checklist to ensure that there has been an adequate review to prevent any conflict of interest, as well as compliance with the other policies in terms of section 34.

[Derek Lee, Liberal, Scarborough—Rouge River, ON]

So those were outside eyes, or at least external-to-the-department eyes, viewing this with, I presume, some relative independence.

I know it might not be appropriate to go into detail, but can you point to a recent case where these wonderful new mechanisms pre-empted an apparent conflict of interest situation? Are you aware of one? I know these new mechanisms are in place. Somebody must be spending some time on it. There are some FTEs being invested in this scrutiny. So is there any instance in the last year or two that you're aware of where a contract with a problem was identified and the problem pre-empted?

[Cassie Doyle]

There is one situation I am aware of that involves a perceived conflict of interest. It has certainly been brought to my attention and we are actively managing that at the present time.

In terms of the overall work of our oversight committees, I believe since 2005-06 there has been such an elevated level of attention to contribution agreements that there is, in a way, a culture that would not allow this kind of conflict situation to repeat itself.

[Derek Lee, Liberal, Scarborough—Rouge River, ON]

Thank you, Mr. Chairman.

[The Chair, Liberal, Shawn Murphy]

Thank you, Mr. Lee.

Madame Faille, vous avez sept minutes.

[Meili Faille, Bloc, Vaudreuil—Soulanges, QC]

Thank you, Mr. Chair.

I like the questions asked by my colleague on the new systems you have put in place and I will continue on the same issue.

At this time, there is a potential situation of conflict of interest that you are managing through this new mechanism, is there not?

[Cassie Doyle]

Yes, that's correct.

[Meili Faille, Bloc, Vaudreuil—Soulanges, QC]

All right. About the mechanism that you are referring to, you said that you have added in the agreements three specific clauses relating to conflicts of interest. Were these clauses already included when you discovered the present potential conflict of interest?

[Cassie Doyle]

No, it was not.

The clauses that have been added to our contribution agreement have come as a result of the attention from and the recommendations of the Auditor General. It has just been in recent months that we've included the clauses that now stand as standardized language in each of our contribution agreements.

[Meili Faille, Bloc, Vaudreuil—Soulanges, QC]

Very well.

I appreciate the efforts made by the Department but, as far as I know, this Department has been in existence for many years. Other Departments also have agreements to manage contributions.

Is it not usual practice in the various Departments to pay special attention to matters of conflict of interest?

[Cassie Doyle]

Thank you for that question.

In fact, the prevention or avoidance of conflict of interest is contained in the code of values and ethics that all public servants adhere to. So it is very much part of the way we operate, and thus we have mechanisms now, and checklists, and oversight to ensure that situations of conflict of interest are prevented. I also believe it is part of the overall development and training of public servants just to be aware of that in all aspects of their work.

[Meili Faille, Bloc, Vaudreuil—Soulanges, QC]

Did you have anything beforehand?

[Cassie Doyle]

We have had the Values and Ethics Code for the Public Service and now we have specific language that has been introduced right into the contribution agreement that is signed.

[Meili Faille, Bloc, Vaudreuil—Soulanges, QC]

When the Department starts an audit, does it ensure that all the meetings between program officers and registered lobbyists are officially recorded in the Register?

[Cassie Doyle]

We do have a system in place to record the meetings between officials, starting really at the assistant deputy minister level, and the lobbyists.

[Meili Faille, Bloc, Vaudreuil—Soulanges, QC]

Before such a meeting, are Deputy Ministers and program officers required to check that those persons are active lobbyists and are indeed registered as lobbyists?

[Cassie Doyle]

Mr. Chair, I believe the question relates to the obligations of lobbyists. The obligations rest with the lobbyists as opposed to the individual public servants.