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Table of Contents

I. INTRODUCTION

The Standing Committee on Government Operations has been examining the various aspects of government contracting for goods and services within the federal jurisdiction over the last two years. As a Standing Committee of the House, it saw the need to assure Parliament that government contracting is competitive; is accessible to all sizes of business in all regions of Canada; and that it is managed and operated by officials with due regard for economy, efficiency and effectiveness. As a consequence, this means that goods and services contracted out to Canadian businesses in all regions of Canada by the Government of Canada must reflect, among other things, the most economic price, value for money, the efficient delivery of services, and the realization of the Government's financial and budgetary goals.

Our Committee has noted in a recent Treasury Board report that approximately $8.6 billion was spent by the Government of Canada in fiscal year 1994-95 on contracting activity. Of this amount, over $3.2 billion (or 37%) for that fiscal year was for sole source or non-competitive contracts. This has been a major concern for the Treasury Board and our Committee and contrary to the government's contracting policy to encourage competition, easier access to government business, fairness and transparency in the contracting process. Our Committee therefore undertook to examine this.

To undertake this study, our Committee invited expert witnesses from federal government departments and agencies, business, labour unions and academic. Over a two-year period, 39 hearings were held; and over 68 briefs and papers were received.

The study was divided into three phases: in the first, our Committee considered the wide scope and definition of contracting in the public sector which in turn led to the identification of several problems and concerns in government contracting in the federal system. The second phase examined the competitiveness or non-competitiveness of government contracting, sole source contracts, the Open-Bidding Service, and the problems relating to small and medium-sized enterprises (SME'S) contracting with the Government of Canada. In the third phase, our Committee challenged the Government with some early findings and recommendations, and subsequently received some favourable and positive responses. As a result, much progress has been made by the Government to improve the government contracting process and introduce new measures in departments and agencies to reduce and control spending in government contracting.

With this report, our Committee recommends further action to be taken by the Government to improve the government contracting process.

II. SUMMARY OF MAJOR CONCLUSIONS

1. Much progress has been achieved by the Government in improving its contracting policies, procedures and practices over the last two years through our Committee's action and greater public awareness. However, there is much more to be done as reflected in the conclusions that follow.

2. The Treasury Board is not enforcing its policies, directives and guidelines for the approval and execution of contracts by departments, agencies and Crown corporations that fall within its jurisdiction.

3. There is a general lack of public awareness of the federal government's contracting process in many sectors of the Canadian economy, including the small and medium-sized enterprises (SME's) as well as a general lack of understanding of how to access it.

4. The Open-Bidding Service (OBS) does not serve adequately the needs of both the private and public sectors; for many firms, there are difficulties of access, cost, transparency and fairness; for many government departments and agencies, it is more economic and efficient to select bidders, on a competitive basis from their respective specialized source list of contractors and suppliers.

5. There is an over-proportionate volume of awards of sole source contracts by departments and agencies, thereby reducing competition in the private sector for government business.

6. There is an increasing use of contract amendments in most government departments and agencies which has led to unnecessary cost overruns.

7. The Government does not have an adequate database for government contracting that can serve both the public service management needs and Parliament.

8. The annual reporting by the Treasury Board Secretariat (TBS) of contracting activity in government departments is inadequate and not timely for parliamentary review.

III. SUMMARY OF RECOMMENDATIONS

1. The Standing Committee on Government Operations recommends that TB contracting policies be strengthened and enforced in the following ways:

2. Our Committee recommends an initiative called "Contracts Canada" be created within PWGS Canada to:

3. Our Committee recommends that the current Open-Bidding Service (OBS) be completely revised to improve access, competition, transparency and fairness and that the specifications for the new OBS in 1997 take into account improvements in the following areas:

4. Our Committee recommends that:

5. Our Committee recommends that:

6. Our Committee recommends that the Treasury Board:

FINAL RECOMMENDATION

Our Committee recommends that the Government implement all the above recommendations and report on the progress of implementation to the Chair of the Committee before March 31, 1998.

IV. FINDINGS

A. Progress to Date

1. Much progress has been achieved by the Government in improving its contracting policies, procedures and practices over the last two years through our Committee's action and through greater public awareness created by the central government agencies. Treasury Board and Department of Public Works and Government Services officials were most responsive to our Committee's earlier recommendations of December, 1995, and April, 1996, for strengthening the government contracting process and accepted most of them.

2. Two public statements by former chairmen of our Committee helped to focus on those areas in the contracting process where immediate action was needed, namely: government contracts to former public servants or surplus employees; and accessibility to government contracts for small and medium-sized enterprises (SME's).

3. With respect to the former, TBS issued specific directives and comprehensive guidelines in July 1995 on the post-employment regime to prevent abuse of the contracting process by former public servants or employees who, having become surplus through downsizing, had been awarded government contracts. Our Committee was assured by TBS that these directives had been monitored closely by government departments and agencies since July 1995. As for the latter, TBS has lowered the threshold for non-competitive contracts to $25,000 to allow more competitive bidding for government contracts. Also, suppliers accounts are now paid no later than 30 days after billing in response to small business complaints of the government's late payments of accounts.

4. In the last two years, TBS has successfully used the INTERNET to display the Government's contracting policies and TB circulars for the world to examine. Much has yet to be done in a future consolidation of the electronic version of TB Contracting Policies; however, such measures can only better inform those who want to do business with the federal government as well as ensure that all managers with contracting authority are fully aware of current TBS policies, directives and guidelines.

B. Need to Strengthen Treasury Board Contracting Policies

5. Witnesses before our Committee expressed concern that TBS is not enforcing strongly enough its policies, directives and guidelines for the approval and execution of contracts by departments, agencies and Crown corporations that fall within its jurisdiction.

6. In 1995, our Committee found no evidence in government departments of formal measures or procedures to evaluate the need or the cost benefit of the work to be contracted out. Neither had it any substantive evidence of any process by which contracts are monitored independently on a regular basis either by departments or by the TBS or by the Auditor General.

7. Since then, our Committee has been assured by TBS that with budgetary constraints and improved performance reporting and audit, contracting authorities in departments are more aware of Government Contract Regulations, TB Contract Directives and federal procurement policies. Furthermore, departments are subject to closer examination, audits and other monitoring mechanisms to ensure that all contracts receive the optimum value for money.

8. Beyond this TBS assurance, our Committee has no evidence of improved performance or cost savings achieved through the contracting process obtained through either internal audits or legislative audits by the Auditor General. Much more monitoring in this area by TBS needs to be done to assure Parliament that TB contracting policies are being enforced and that the Government's competition policy is being implemented efficiently and effectively.

9. Furthermore, using the criteria of the Auditor General and the guidelines of our Committee presented to TBS in April 1996, our Committee believes that the need for contracting out services to the private sector should be adequately justified with analysis of costs and benefits, and be demonstrated by the contracting authority in departments before public funds are committed.

C. Lack of Public Awareness of the Contracting Process

10. There is a general lack of public awareness of the federal government's contracting process in many sectors of the Canadian economy, including construction and small and medium-sized enterprises (SME's). There is also a general lack of understanding of how to access it.

11. Several witnesses from the private sector have experienced difficulties in accessing federal construction or procurement information in order to compete for federal contracts. Many small firms were unaware of the Open-Bidding Service (OBS) and found access to the federal procurement process to be complex, costly and unproductive. Many federal departments, who do not use the OBS extensively, have their own respective source lists of suppliers or contractors; and many small firms find it difficult to obtain procurement information from those departments in order to compete with the current suppliers and contractors.

12. Witnesses from the private sector expressed the need for a central directorate within PWGS Canada that would act as an office of inquiries for all businesses who have individual problems with the contract bidding process and who need more detailed information about government contracting. Consideration should be given for the establishment of an office of a Contracts Ombudsman. This position would go a long way to serving those businesses and agencies that have specific contracting problems with the government.

13. Our Committee believes that a pro-active group is needed within the above central agency to advertise more effectively government contracting business and that an improved marketing approach be adopted to promote competition for government business in the private sector.

D. Open-Bidding Service

14. Our Committee heard several witnesses both from the private and public sectors on the current Open-Bidding Service. With few exceptions, our Committee found that many of the major government departments and agencies use the OBS for less than 10% of their contracting outside of PWGS Canada. Although the volume of OBS subscribers has increased significantly over the last three years, the major user is the Government's own procurement agent, PWGS Canada, which has a vested interest in the OBS, because it has contracted it out to a private sector provider.

15. Our Committee noted that a number of witnesses from departments and agencies, such as, Health Canada, Revenue Canada, CIDA, NRC and Correctional Services, when they appeared, stated that they did not need to use the OBS, as they had developed respective source lists of specialist suppliers and contractors for their own departmental needs. Our Committee believes that such lists should be made more public in order to improve the competition for such goods and services.

16. Moreover, witnesses from the private sector told our Committee they did not use the OBS because they found it too expensive in terms of time and cost; it was not "user friendly" for SME's; it lacked transparency, feedback and responsiveness to unsuccessful bidders; it did not meet the needs of the construction industry; and in some business sectors, it was not readily or directly accessible. In summary, the results from the private sector conveyed to our Committee are nowhere near the 54% subscription level or the $400 to $500 average annual OBS costs that were being quoted at the time by OBS proponents.

17. Several suggestions to improve the current OBS were offered to our Committee by several expert witnesses. Our Committee was advised by the senior management of PWGS Canada that these recommendations were being noted and would be considered in the specifications for a new electronic bidding service to replace the current OBS in May of 1997. Our Committee strongly recommends that these specifications be well tested not only by the current subscribers but also by those sectors in the economy that have not yet used the OBS for various reasons.

18. Our Committee concludes therefore that the current OBS does not adequately serve the needs of both the private and public sectors; for many firms, there are difficulties of access, cost, transparency and fairness. There is a clear need to revamp the current open-bidding system to ensure its universal application and furthermore, it obtains the best value for the Crown.

E. Competition and Sole Source Contracts

19. In accordance with Government policy that "competition is best", our Committee heard testimony that competitive contracting has been proven to yield the best solutions in terms of best value and lowest price. However, in a recent Treasury Board report, it was noted that over $3.2 billion or 37% of all federal government contracts in fiscal year 1994-95 were awarded on a non-competitive or sole source basis. These were justified in accordance with criteria laid out in the Government Contract Regulations. In our Committee's view the criteria for these Regulations are too general and open to potential abuse.

20. It has been a major concern of our Committee that this percentage of sole source contracts has been too high for too long. In fiscal year 1993-94, for example, it was higher at $3.5 billion representing 39% of total contracting activity in the federal government. It is our Committee's view that closer monitoring by TBS and departments is needed to ensure that contract awards on a non-competitive basis strictly adhere to the sole source criteria as laid out in the Regulations. Furthermore, our Committee suggests that where the same sole source contracts are awarded on a regular basis, they should be subject to a senior management review mechanism.

21. Our Committee concludes there is an over-proportionate volume of sole source contract awards by federal departments and agencies that in turn has reduced competition in the private sector for government business. This needs to be corrected.

F. Growth in Contract Amendments

22. Our Committee is also concerned over the increasing use of contract amendments in most government departments and agencies. In 1994-95, for contracts $25,000 and above, it was reported by TBS to our Committee that the number of amendments to contracts had not declined since the previous year and that the value of amendments had decreased only from $1.83 billion to $1.15 billion. This represents about 21% of $5.6 billion worth of original contracts.

23. Our Committee shares the Treasury Board concern over the large volume of contract amendments. In many cases, the amendments are necessary and justified; in others, cost overruns have occurred as a result of weak project management and poor financial controls. Our Committee believes that tighter monitoring of contract performance should be enforced by Treasury Board and by the contracting authority within departments and agencies.

G. Need for an Accurate Database for Contracting Activity

24. Throughout the course of its hearings, our Committee was faced constantly with the lack of statistical information about contracting activity in government. Witnesses from both the private and public sectors voiced the same concerns. TBS and PWGS Canada officials agreed that the existing standardised reporting framework for every department had to be improved so that a proven and accurate database for all contracting activity in the government be established by an acceptable target date. Our Committee believes that TB should place a high priority on this course of action.

H. Improved Annual Reporting to Parliament

25. Our Committee has found the TB Annual Contracting Activity Report to be a useful means of informing Parliament of a significant segment of annual public expenditures (over $7 billion in 1994-95). It has enabled Treasury Board ministers and officials to evaluate trends in government contracting activity, competitiveness as well as compliance with TB contracting policies and regulations.

26. For this annual report to be more useful for parliamentary committee review, our Committee respectfully requests that consideration be given to improving the format and presentation of the data so that parliamentarians may better understand the justification for the variances in contracting activity by department and agency. Brief explanations for non-competitive contracting over $25,000, contract amendments, and other significant variances would improve transparency and greatly assist our Committee. Furthermore, in keeping with TB's performance reporting, the tabling of the Contracting Activity Report should be regularised in the fall of each year.

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