Public Accounts Committee on Nov. 2nd, 2017

[The Chair, Conservative, Kevin Sorenson]

Good morning, everyone.

This is meeting number 76 of the Standing Committee on Public Accounts, and it's Thursday, November 2, 2017.

We are in our second hour today. In this hour, we will consider a special examination report on Defence Construction Canada from the spring 2017 reports of the Auditor General of Canada.

I will also say, as I mentioned earlier in the last meeting, that unfortunately, we are not televised. We are public and we have the audio, but because of a problem with the BOIE, we are not televised.

[David Christopherson, NDP, Hamilton Centre, ON]

The internal economy board?

[The Chair, Conservative, Kevin Sorenson]

Yes.

[David Christopherson, NDP, Hamilton Centre, ON]

What is the problem with the BOIE?

[The Chair, Conservative, Kevin Sorenson]

It has a televised meeting at 11:30, and it has the crew, so take it up with the whips.

[David Christopherson, NDP, Hamilton Centre, ON]

Okay, I hear you. I just needed to hear the reason.

[The Chair, Conservative, Kevin Sorenson]

From the Office of the Auditor General, we have Mr. Michael Ferguson, Auditor General of Canada; and Marise Bédard, principal.

From Defence Construction Canada, we have Mr. Robert Presser, board chair; Mr. James Paul, president and chief executive officer; and Ms. Mélinda Nycholat, vice-president, operations-procurement.

Welcome to you all.

I understand that this morning we have two opening statements. We will begin with the Auditor General of Canada.

Welcome on a rainy day. It's good to have you here.

[Michael Ferguson, Auditor General of Canada, Office of the Auditor General]

Mr. Chair, thank you for this opportunity to discuss our special examination of Defence Construction Canada.

Joining me is Marise Bédard, the principal who was responsible for the special examination audit.

As you know, a special examination seeks to determine whether a crown corporation's systems and practices provide reasonable assurance that its assets are safeguarded and controlled, its resources are managed economically and efficiently, and its operations are carried out effectively.

Our examination of Defence Construction Canada, or DCC for short, covered the period between November 2015 and June 2016.

We concluded that, based on the criteria established, there were no significant deficiencies in Defence Construction Canada's systems and practices that we examined for corporate management and management of contracts and services.

We also concluded that the corporation maintained these systems and practices during the period covered by the audit in a manner that provided the reasonable assurance required under section 138 of the Financial Administration Act.

While we provided a positive conclusion on the corporation's system and practices that we selected, I would like to draw the committee's attention to the weaknesses we identified that the corporation needs to address.

First, we found that the corporation's risk register didn't include all aspects of the corporation's exposure to fraud, such as the inability to detect or prevent fraud, corruption, and collusion. We found that the corporation's fraud-related systems and practices weren't complete, which in turn limited the ability of management and the board to manage the corporation's fraud risk strategically.

Second, we found that the corporation didn't manage or store required contracting information in an organized manner. This resulted in incomplete files.

Finally, despite having an internal process to verify that the corporation conducted its contract services according to its policies and procedures, the corporation didn't perform any verifications for the 2014-15 fiscal year. As a result, the corporation didn't know if it applied its policies and procedures as intended.

The corporation agreed with all of our recommendations and prepared an action plan in response to our concerns.

Mr. Chair, this concludes my opening remarks.

We would be pleased to answer any questions the committee may have.

Thank you.

[The Chair, Conservative, Kevin Sorenson]

Thank you very much, Mr. Ferguson.

We'll now move to Mr. Presser, please.

[Robert Presser, Board Chair, Defence Construction Canada]

Thank you, Mr. Chair.

Honourable members of the House of Commons Standing Committee on Public Accounts, it's a pleasure for me, as chair of Defence Construction Canada, to appear before you today in view of your study of special examination reports of the spring 2017 reports of the Auditor General of Canada, specifically that for DCC.

I am joined by DCC's president and chief executive officer, Mr. James Paul, as well as DCC's chief procurement officer, Ms. Mélinda Nycholat, vice-president, operations-procurement.

I would first like to remind the committee that Defence Construction Canada exists to provide procurement and contract management services required for infrastructure and environmental projects for the defence of Canada. Our services are highly specialized to support the rigorous technical and security requirements of the Department of National Defence, or DND, and the Canadian Armed Forces, or CAF.

DCC is responsible to Parliament through the Minister of Public Services and Procurement, the honourable Carla Qualtrough. The special examination report clearly demonstrates that the majority of DCC's systems and practices are successful in meeting government goals, as there were no significant deficiencies found. We fully met 23 of 27 audit criteria in the report, with the remaining four of 27 meeting the criteria with improvement needed.

This resulted in four recommendations received from the Office of the Auditor General, all of which DCC fully supports. In fact, we have already completed many actions arising out of the Office of the Auditor General’s four recommendations and have provided our action plan for implementation of the remaining recommendations.

The most important recommendation, in our view, is related to DCC's ability to manage fraud risks strategically. DCC's initiatives to counter fraud risks and promote transparency and accountability, including the benefits of its electronic procurement, or e-procurement, system, now ending its second year of use, support the important priorities expressed by the Government of Canada for stronger financial controls, modernization in government procurement practices, higher ethical standards of conduct, and initiatives to assess, monitor, and address fraud risks across all government activities.

Further, as chairman of the board, I was also interviewed during the special examination. I can confidently communicate to Parliament, to whom we as a board are responsible, that we are actively supporting our management team in improving service delivery and performance, while at the same time ensuring the highest integrity standards for the conduct of the corporation's business affairs through strategic oversight of DCC's management of fraud under its integrity management framework, including the code of business conduct for employees, the procurement code of conduct for suppliers, and our integrity verification process for all awarded contracts.

The action plan details further steps we are taking beyond the extensive suite of processes and procedures already in place to enhance our ability to detect and prevent fraud from occurring in our procurements. This is an extremely important priority for the Government of Canada, one that we are committed to fully supporting in our work.

In closing, honourable members, we are very proud of the achievements of this corporation exemplified in this report, and we are ready to answer your questions, both generally about the activities of DCC and specifically on the findings of the report.

Merci.

[The Chair, Conservative, Kevin Sorenson]

Thank you very much, Mr. Presser.

We'll now move into the first round of questioning, and that comes from the government side.

Mr. Lefebvre, you have seven minutes.

[Paul Lefebvre, Liberal, Sudbury, ON]

Thank you, Mr. Chair.

Thank you, everyone, for being here this morning.

In your opening statement, Mr. Presser, you gave yourself good marks, and that was interesting. Usually we give out the marks, but at the same time, I agree with you that, in general, this is a good audit in the sense that we have seen many audits come before us that were not as well achieved as yours was. However, as you know, there are concerns.

What I do appreciate as well are the efforts you have put in to come up with the action plan. I've read your action plan, and basically you only have two items left, which are dated for March 2018.

One of the things that we've seen many times in front of this committee is more and more audits revealing the risk of fraud and making sure that is properly addressed as you move forward. Certainly in this case, there's more on protecting data.

With respect to your action plan items that you've addressed, where are you with the remaining items that are due in March 2018, and how are you coming up with those items to adjust those?

[Robert Presser]

Let me make some general comments about where we're going and then I'll ask my colleagues to fill in some detail.

If you look at the initiatives we had under way that were highlighted in the Auditor General's report, many of these initiatives were started well before the auditor's report. For example, the e-procurement system that would allow us to better measure, better quantify the trends in bidding in order to be able to detect fraud was under development and began its implementation almost concurrently with the release of this report. So it's not as if the report came out and then we started to do something. We were aware that you can always do more.

As the volume of contracts has increased over the years under FIIP and now infrastructure 2016, we've had to ramp up to be able to deal with this kind of volume effectively, and having the e-procurement tool is both helpful to manage contracts and helpful to detect fraud.

Also, on the documentation side, if you look at the comments of the Auditor General regarding the loading and organization of documentation for contracts, you will see that we were also already developing a more rigorous and easier to use document management system.

Our ability to address these points, legitimate points that we agree with, that were raised by the auditor had already been identified internally and were already being worked on. I would invite my colleagues perhaps—

[Paul Lefebvre, Liberal, Sudbury, ON]

That's fine. I'm happy with that answer. We have little time to ask questions.

One of the concerns, however, that was raised at paragraph 9, and now you say it's in the report, was that you didn't perform any verifications for the 2014-15 fiscal year with respect to internal processes to verify that you conducted your contract services according to your own policies and procedures.

What happened there that resulted in this non-performance?

[James Paul, President and Chief Executive Officer, Defence Construction Canada]

I'll give the initial response. My VP, procurement, would perform those verifications.

That was a calculated decision we made at the time in light of a very large volume of contracts that we were dealing with under the FIIP. We approached those verifications on almost a normal audit sampling type basis.

We absolutely accept the finding and recommendation of the Auditor General that there is risk in doing that, and we did go back and perform those verifications. So you're right. Within that fiscal period, in light of the load and priority of getting the FIIP contracts out, it was something we decided to come to but not in the normal scheduled time. Normally, all those verifications are performed. We did take that risk and we accept the recommendation.

[Paul Lefebvre, Liberal, Sudbury, ON]

What measures have you put in place now for if there is another workload that is basically beyond your capacities? You've already lived through the experience, so what measures have you put in place to avoid that for the next time?

[James Paul]

That was a management decision that was made in respect to that. The system does require that we verify every year and we will. That was a very unusual situation, that volume of business, and you're right that we continue to grow our capacity.

We're a non-appropriated entity, so we do operate on fee for service, and we do have to manage our staffing resources carefully. As program dollars rise and fall, we adjust staff accordingly.

With the growth that has come over the last few years in program delivery, we now have five billion-plus years forecasted in our program. We have added staff capacity there, but we would never use the excuse of staff capacity to say we couldn't do it. We will absolutely perform all those verifications every year going forward, and the risk might be a few procurements are delayed. We measure our performance on procurements out the door, projects completed according to spec, schedule, and giving value for money for taxpayers. If you look at our metrics, we delivered over 94% of the FIIP program for National Defence. We take a lot of pride in that, but if necessary, the priority is the verifications and we would perform them in the future.

[Paul Lefebvre, Liberal, Sudbury, ON]

Perfect. Thank you.

That's it, Chair.

[The Chair, Conservative, Kevin Sorenson]

Thank you, Mr. Lefebvre.

We'll now move to Mr. Deltell, please, for seven minutes.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

Thank you, Mr. Chair.

Welcome, ladies and gentlemen, to your House of Commons.

My main question is for the people from the defence group.

Mr. Chair, as a citizen of Quebec and someone who used to be a member of the province's legislature, I am highly attuned to the matter of construction contracts and spending.

It stems from the debacle involving Quebec's construction industry, which was rocked by a massive scandal related to so-called extras, or add-ons. The municipal or provincial contract would be awarded to the lowest bidder, and then extra costs would be piled on throughout the construction process to inflate the bill. That was the context for the misappropriation of funds that occurred. As everyone knows, the mayors of a number of municipalities resigned as a result, which is a big deal in Quebec, especially when you're talking about cities like Montreal and Laval. I won't name all the municipalities involved, lest I make a mistake, but the list is far too long.

Mr. Presser, I bring this up because your corporation's mandate is directly tied to the construction sector. I know you are a responsible person and have taken the matter seriously. However, I make no bones about the fact that, while I am not worried per se, I am somewhat concerned that you didn't have any real fraud-detection or prevention measures in place.

The finding in the Auditor General's report reads as follows:

The register did not include a risk related to detecting or preventing fraud, collusion, or corruption. This in turn limited the information that senior management and the Board had about fraud, to inform their risk management and decision making.

How do you respond to that?

[Robert Presser]

You raised a number of things.

I can tell you, right off the bat, that none of our contracts were affected by the scandal in Quebec.

You mentioned the matter of extras. Some projects do have additional costs, but, in my nine years as board chair, I've learned that they are usually the result of changes to the project design.

Delays are also a common occurrence. It's possible to have a project on a particular base not even begin until eight years after it was put forward, for instance. Often, the needs of the base will have changed in that time, and so changes to the contract will be necessary. Unforeseen events also factor into that.

We spend some one billion dollars a year, and the vast majority of the contracts we are able to carry out to completion involve projects that came in under the initial estimate approved by Treasury Board.

Sometimes, changes are necessary as a result of specification changes. Unforeseen events are also possible, including inaccurate soil surveys, so further work is required. Broadly speaking, though, that doesn't happen too often.

What was the second part of your question about?

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

I asked you about the measures you use to prevent fraud. The Auditor General indicated that you didn't have any real mechanisms in place to detect potential fraud.

[Robert Presser]

To use the language in our risk register, I would say we weren't successfully assimilating fraud-related information. I can assure you, however, that the board frequently discusses fraud risks as they relate to contract management. As we carry out $450-million, or $200-million, infrastructure projects, we talk about the importance of monitoring those expenses.

Regardless of the language used in the report, the board was aware of the risks. We agree with the Auditor General that we can always do better. In fact, we are in the process of tightening up our oversight mechanisms and adding to them.

Ms. Nycholat, did you want to add to that?

[Mélinda Nycholat, Vice-President, Procurement, Defence Construction Canada]

All right.

Since then, we've done a lot of research, especially in terms of the data analysis you mentioned, and we found that it wasn't a very common practice in Canada. We had to broaden our research to look at other countries. We've developed a three-step data analysis system.

In the first step of our process, we're going to apply some statistical formulas to our data. Right now, to date, we've closed about 700 contracts on our e-bidding system, worth about $200 million, and that's for our construction contracts worth less than $10 million. We were able to apply the statistical analysis to all that data.

It starts with a coefficient of variance, if you'll allow me to be a bit technical. The coefficient of variance measures the distance between bids. Research has shown that when there is a collusive environment, the bids tend to be closer together. The coefficient of variance will measure that, and if the coefficient of variance is lower than roughly 0.04 to 0.06, it is an indicator that there's a potential collusion.

Then we apply another series of data analyses, and if there's a trend showing that contractors show up on each of the analyses, then we know we need to proceed to a further, deeper investigation.

We look at the relative distance between bids. This is another measure, and research has shown that when there is a collusive environment, usually there's a larger distance between the low bidder and the second bidder versus the distance between the second and the following bidders. When the relative distance is larger than one, it's another indicator of a possible collusive environment.

These multiple supporting data analyses will then identify if there's a trend with a particular contractor or contractors.

That's generally how our system will work. Once we've done that, then we'll move to a second step, which will be the drilling down of the data to the regional, sub-regional, and local levels. Many of our contracts are at the local level, so then we'll be able to further identify the local problem or the specific problem.

Further to that, we can do a further investigation into the files. We'll look for things like whether a competitor was hired as a subcontractor by the winning bidder. We'll look at who the plan takers were. Are the ones who were bidding also taking the plans for the bidding process? If not, perhaps they got it from their colluder. That's a general description or overview of the system we've developed so far.

We are now in the consultation process with our peers and colleagues at PSPC and the Competition Bureau. We want to make sure that once we turn the light on this process, it will provide us with data that's reliable and that an authority like the Competition Bureau or the RCMP will be able to act upon.

[The Chair, Conservative, Kevin Sorenson]

Thank you. That was very interesting.

We'll move to Mr. Christopherson, please.