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.