Government Operations Committee on June 1st, 2006

[The Chair, Liberal, Diane Marleau]

I'm going to call the meeting to order.

I want to welcome back the Auditor General, Madame Fraser, and Mr. Marshall from Public Works. Perhaps you could introduce the officials who are with you. It will give everyone a better idea of who's with you. Then I'll let you make your statements. You know the drill.

Please, go ahead.

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

Thank you, Madam Chair.

We thank you for this opportunity to present the results of chapter 7 of our May 2006 status report, called “Acquisition of Leased Office Space”. I'm accompanied today by Ronnie Campbell, assistant auditor general, and Bruce Sloan, principal, who were responsible for this audit.

PWGSC manages 6.6 million square metres of rental space and spends $3 billion annually to manage real property. As the department handles as many as 500 lease transactions every year, it needs complete, accurate and timely information to support its decisions.

The department's commitment to achieve the government's cost-reduction goal makes strong management practices even more vital for the Real Property Branch.

This audit has raised a number of important issues that affect the cost of office accommodation, and I would like to briefly elaborate on them.

Currently, Public Works, client departments, and Treasury Board share the responsibility for decisions that affect the cost of office accommodation. The shared responsibility makes it difficult for Public Works to impose and enforce government-wide standards for the quantity and quality of office accommodation. In our report we have noted instances where the department has not always enforced those standards, resulting in additional costs for taxpayers.

The committee may wish to ask the department about the steps it will take to ensure that its standards are enforced.

The second factor that has an impact on the cost of office accommodation is the fact that the current funding mechanisms do not always allow the selection of the most cost-effective accommodation options. In our current audit, we found that the department had made satisfactory progress and identified the most cost-effective options to meet the accommodation requirements of its customers.

In assessing the various options for office accommodation, PWGSC considers the full cost of each option over the expected life of the requirement. Accommodation requirements often are for 15 to 25 years and include crown construction, lease-purchase, purchase and lease.

The committee may wish to ask PWGSC and the Treasury Board Secretariat to establish a timeframe within which they will establish funding mechanisms that will allow the department to select and implement the most cost-effective accommodation options.

In 2002, we reported that Public Works needed to strengthen the integrity and availability of information to support the management of the acquisition of office space.

In our report this year, we reported unsatisfactory progress in this area. To make the right decisions, managers need information that is timely, accurate, and complete. We found that the basic information property managers need does not exist, is inadequate, or is difficult to get.

The committee may wish to ask the department to describe the steps it is taking to streamline the management of the real property portfolio and that it will take to establish the information systems needed to support its strategy.

Finally, Madam Chair, I would like to raise the following issue. Often government managers view office accommodation as a free good or service. However, at present, the cost of office accommodation is being paid by PWGSC and is being reported in the departmental public account as a service that is provided without cost. The government should ensure that the system provides the right incentive for good management, including selecting the most cost-effective options.

Madam Chair, that completes my opening statement. We would be pleased to answer any questions the committee members may have.

Thank you.

[The Chair, Liberal, Diane Marleau]

Thank you.

Perhaps we will have Public Works now.

[David Marshall, Deputy Minister, Department of Public Works and Government Services]

Thank you, Madam Chair.

Madam Chair, members of the committee, thank you for inviting us to join you to discuss the Auditor General's status report on leased office space. With me today is Mr. Tim McGrath, who is the acting assistant deputy minister for the real property branch.

I think it is well understood by all, as the Auditor General has pointed out, that meeting the accommodation needs of federal public servants across the country is a very complex operation. It involves some $3 billion a year, thousands of transactions, and many trade-offs that have to be made. Among these is the need for the government as a whole to consider various budgetary demands and pressures and various priorities for federal programs themselves.

As well, Public Works and Government Services must deal with the volatility of the real estate market in every region of the country and various pressures that arise on the cost of accommodation from one source or another. Despite these challenges, PWGSC has been making steady progress over the years. You will find as you examine our estimates, for example, that despite an increase in demand from our clients the cost of our accommodation program has not only levelled off but is actually going down as a result of actions that have been taken by our managers.

We've made good progress on most of the recommendations made in the last Auditor General's report on this subject, issued in 2002, notably in the area of better forward planning, and as the Auditor General has pointed out, in assessing the full cost of various options for office accommodation before we make a recommendation.

As well, over the past two years we've taken several steps to improve the management of the real property program, and these are yielding concrete results. Included among these steps is enforcing a tighter space allowance, as the Auditor General has just mentioned, for public servants and a less expensive fit-up package than previously allowed. I must say we are receiving very good cooperation in this matter from the Treasury Board Secretariat, and as well from our clients. The result is a saving of several millions of dollars to the Crown on an annual basis.

By doing more forward planning on lease negotiations and negotiating leases more aggressively in the market, we've reduced our average lease cost to below the industry average in most markets across Canada and we are now ahead of our plan in meeting our savings goals in this area. We've also been reducing our own overhead, taking out something close to 400 to 500 person years in the process from the effort. Finally, we are improving the management of our inventory, where we already have one of the lowest vacancy rates of any major real estate operation in the country.

Notwithstanding these achievements, much remains to be done. The Auditor General has pointed out that we need better information systems, and we fully agree.

Probably the most important issues that the AG has raised are, first, the shared or split responsibility for the cost of office accommodation that now exists, and secondly, the various anomalies of annual funding cycles.

In terms of shared responsibilities, decisions must take into account the operational needs of a department and so cannot entirely be assigned solely to Public Works or to one or the other party. As well, budgetary trade-offs need to be made, in this case by the ministers of the Treasury Board. So there's no simple solution to this problem. However, I do believe that improvements are possible and necessary, and we are working with the Treasury Board Secretariat to see how far we can go. In fact, in my opinion this area is probably the single most important area contributing to time delays and costs for the portfolio over the longer term.

Madam Chair, I would be pleased to answer questions you or any members of the committee may have.

[The Chair, Liberal, Diane Marleau]

Thank you.

I'll turn it over to Mr. Alghabra.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

Thank you, Madam Chair.

Good morning, everybody. Thank you for coming here. Good morning, Madam Fraser. It's good to see you again.

This is probably one of the very few subjects where there are not necessarily any ideological ways of interpreting the audit or finding ways of getting it done. Hopefully, all of us today have the same goal, to understand specifically what the report is all about and to work with all of you here to ensure that we make it better.

I come from the private sector, in fact, from a large international corporation that always tries to balance between centralization and decentralization. This is an ideal case study, where the combination of centralization and autonomy is at play. How do you see this combination, the fact that different departments work with Public Works on identifying facilities and spaces? Is this the ideal way, or do you think there are ways of making it better?

[Sheila Fraser]

Thank you, Madam Chair.

At the Auditor General we are always reluctant to comment on what we call machinery of governments. Government can organize itself as it wishes. That being said, I think there are advantages obviously to having more centralized service and expertise in leasing of office accommodation.

The difficulty we were raising here is the department's view that this is a free good. Actually the charge comes into the department as charge without costs, or services provided without cost. So they don't in many cases actually see themselves as managing this cost. There's actually no incentive in the system for a government department to reduce its space, to find cheaper accommodation. They don't get any real benefit from that. What we're saying is yes, there can be the shared responsibility, but you have to have an incentive in the system so that people will move to reduced space or to a less expensive area of town. Otherwise why would they do that?

The other difficulty we note is the way the funding works. In many of the cases we present in the report, the analysis done by Public Works would show that purchasing is the least-cost option. We were told in many cases it's because the funding isn't available in that year to actually purchase, whereas there is a smaller amount available for a lease so leases are signed over a longer period of time. There needs to be better incentives to go to the less expensive options.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

Again, from the private sector, especially since I have been involved in several quality audits, typically the quality auditor puts forth afterwards a checklist of follow-up items that need to be improved on before giving the final okay. Is that something that perhaps we can implement in the future? Based on serious shortcomings or recommendations, maybe there needs to be some follow-up checklist to make sure it gets done and so a second visit could happen.

[Sheila Fraser]

Most definitely. In fact the whole purpose of this report is to follow up on previous audits to see what has been done with regard to recommendations that had been made in the past. We note that there is improvement in some areas, less improvement in others. What we are encouraging departments to do, and other committees of the House are also asking for, is a specific action plan to address the areas of improvement with clear responsibilities, clear timelines. We are encouraging committees as well at times to ask for updates on the action plan to make sure that the department remains focused on this. We use that action plan to determine when we will go back and re-audit an issue. If the department says they will complete the work within two years, we might go back in the third or fourth year to give them the chance to address it. Then we go in to see if it has actually been done.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

Thank you.

I have another question about one of the case studies or situations that you've looked at. I can't remember what it was. There was a bid that you looked at. I think it's the 800 Place Victoria in Montreal. They've been in that office for years. They've had an open bid and the current place where they were at was the fourth bidder. Did they take into account their relocation? Was that another cost that would have been accounted for, and would that have made a difference?

[Sheila Fraser]

The relocation costs would be considered in the analysis of the bids. In fact, in this case, as you mentioned, where the department or the agency was located was classified fourth on the list. The winning bidder was notified, and then there was a request to remain where they were, so government ended up having to pay two rental spaces. At the end of the day you have to ask, if there really was the significant need to stay where they were, why did they go out for a bid? If you're going out for a bid process, then you should respect that process.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

Do I have more time?

[The Chair, Liberal, Diane Marleau]

You have half a minute.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

I was going to ask, Mr. Marshall, if you could elaborate a little bit more on this case.

[David Marshall]

From time to time there are reasons for clients, for departments, to change their minds and request that they not move. We've had that in very significant cases. The Department of Agriculture faced a crisis with the mad cow situation. They didn't want to spend money moving while they had to fight an operational requirement. We can cite many situations like that. It's not unusual for a department or client to say they have changed their mind.

In this case the client came to us and said they didn't believe they really needed to expand. They wanted to stay where they were and didn't want to have the move take place. Since we had already advanced quite far in the bidding process, we felt it would be very unfair to the bidder to now renege on the lease, so we went ahead. As the Auditor General has pointed out, that resulted in paying for space that wasn't used for a while, until we were able to fill it. On the other hand, if you look at our portfolio as a whole, we have the lowest vacancy rate of any major real estate operator in the country. Some anomalies might exist, but it's certainly very small.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

Thank you, Madam Chair.

[The Chair, Liberal, Diane Marleau]

Thank you.

Mr. Kramp.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Madam Fraser, I've listened to you before when you've expounded upon the virtues of accrual accounting. Now we have a situation with accrual budgeting, or the lack of it.

My question then would be to Mr. Marshall. Why has there been such a reluctance or lack of decision on behalf of the government and/or your department to adopt the full measures of accrual budgeting? Has it been strictly a budgetary reason--cashflow requirements from the Treasury Board? Are they the problem, or is it reluctance in your department to accept the principles of accrual budgeting?

[David Marshall]

Madam Chair, we are providing a real estate service, which really involves long-term considerations to determine best value. It's not an annual consideration. From our point of view, a long-term funding envelope is by far the better solution. As well, when we look at the anomalies of annual funding, it causes a great deal of difficulty to try to maintain the portfolio as it should be and also to realize the theoretical business cases that we put forward, so our point of view is that we are certainly in favour of accrual appropriation and accrual accounting.

On the other hand--and we've been working with our colleagues in Treasury Board Secretariat--we do realize that the government's financial accounting and funding mechanisms and so on are very complex. We're mindful of the fact that in one case it might be a good thing, but it might introduce other complexities. I believe the secretariat of the board is examining this very issue.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

My point is about a measure of consistency. You have to have one system or another. If you're going to have conflicting systems of accounting, conflicting systems of money management, you can't properly evaluate the effectiveness of the system unless there's some form of consistency. I honestly believe we should either go one direction or the other. You can't take an expenditure of a building for x amount of millions or billions of dollars and decide you're going to expense it in year 14 when expenses are ongoing all the way through. I find it totally not acceptable that all of a sudden we can't have some form of consistency. When I see a reluctance to do that, I really want to know if it is coming from your department or from Treasury Board.

[David Marshall]

I would have to say it is more a case of trying to ensure that by switching from where we are today--an annual funding mechanism--the government is not going to introduce complexities or some other problems in its overall accounting. I think that's the issue the Comptroller General is trying to address, but if you wanted to know from our point of view, we would be in favour of portfolio accounting, and we are working with the secretariat on that basis.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you very much.

[The Chair, Liberal, Diane Marleau]

Madam Fraser wanted to add something.

[Sheila Fraser]

I know we're studying the chapter on leasing, but I'd just like to add that there's another chapter in this report, the first one, on the whole question of managing financial information. The Government of Canada has moved to what is called accrual accounting, where you capitalize fixed assets, as one of the big differences for financial reporting purposes. At the end of each year, the public accounts are produced on this basis.

We note in that first chapter that departments, in their ongoing day-to-day management, do not really use accrual accounting, largely because the appropriations process is not on an accrual basis. We have been bringing this forward, I would say, for close to 10 years. Other committees of the House have made recommendations in this sense; the government continues to say they are studying it. What we're saying in this chapter is: enough study; it's time to get on with this, because as long as you have these different bases of accounting, you will never use the full accrual method on a day-to-day basis. And I think the acquisition of property is one example of that.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Well, thank you for your clarity. I don't think anything could be clearer. We have to get on with it.

You're right, Madam Fraser, I sat on another committee when accrual accounting was once again discussed, and you expanded upon the virtues. We have seen so many examples where we have to have some form of consistency in our accounting procedures. So I would hope this committee would take a very serious look at this matter, because the information we are going to report--and for this government the importance of the Auditor General's report--has to be accurate in its finance and has to be consistent in its delivery. Unless we have one consistent method of reporting and managing our functions, it's not going to work.

So thank you very kindly, Madam Fraser, for the recommendation on this. I would hope this committee would take a very serious look at seeing if we can come up with some form of recommendation so we could have some enforcement procedures for this kind of process.

I would like to go back, if I could, to 800 Place Victoria. It's a sad example.

Mr. Marshall, you gave a reason why the client changed their mind, or changed their direction, or changed their thought. Quite honestly, it sounds like a cop-out. It looks as though we've had some interference in this bidding process or in this tendering process. I hope I'm wrong, but that's just what I would read from this.

Can you give me the name of the individual who made this decision to go ahead and waste $4.6 million by double-tendering a process? Who is responsible for this, so we could look further into this?