INTRODUCTION

According to the Office of the Auditor General of Canada (OAG), the Atlantic Pilotage Authority (the Corporation) is a federal Crown corporation established in 1972. It reports to Parliament through the Minister of Transport and is one of four pilotage authorities established under the Pilotage Act.[1] The Corporation’s mandate is to establish, operate, maintain, and administer in the interests of safety an efficient pilotage service within designated regions.[2] Moreover, the Act authorizes the Corporation to make regulations subject to the approval of the Governor in Council.[3]

The Corporation is responsible, among other things, for:

• establishing compulsory pilotage areas;
• prescribing the ships or classes of ships that are subject to compulsory pilotage;
• prescribing the circumstances under which compulsory pilotage may be waived;
• prescribing pilot qualifications, as well as classes of pilots’ licences and pilotage certificates that may be issued; and
• prescribing fair and reasonable tariffs of pilotage charges, at levels that permit the Corporation to operate on a self-sustaining financial basis.[4]

The OAG notes that according to the Act, a pilot is “any person who does not belong to a ship and who has the conduct of it.” Furthermore, the Act

[Requires] the placement of pilots on some ships. Qualified professional pilots know the topography of the ports where they operate, along with local regulations and conditions, such as tides, that the vessel crews might not be familiar with. This local knowledge, backed by years of experience, helps a piloted ship reduce its risk of collision and complete its journey efficiently. In turn, because ships carry fuel and other hazardous goods, pilotage helps to reduce risks to the environment.[5]

According to the OAG, the Corporation “charges the shipping companies that use pilotage services through tariffs that are approved by the Governor in Council. These charges must be fair and reasonable and must be sufficient to fund the Corporation’s operations.”[6]

In 2014 and 2015, the Corporation recorded operating losses of $618,000 and $551,000, respectively; however, “under the Pilotage Act, the Corporation cannot receive additional payments under an appropriation by Parliament except in emergency situations. This means that the Corporation must fund its operations, including debt payments and capital expenditures such as purchasing pilot boats, through its own revenue.”[7]

In the fall of 2016, the OAG released a special examination whose objective was “to determine whether the systems and practices that [the OAG] selected for examination at the Atlantic Pilotage Authority were providing it with reasonable assurance that its assets were safeguarded and controlled, its resources were managed economically and efficiently, and its operations were carried out effectively as required by section 138 of the Financial Administration Act.”[8]

On 29 November 2016, the House of Commons Standing Committee on Public Accounts (the Committee) held a hearing to study this special examination. The OAG was represented by Mr. Clyde MacLellan, Assistant Auditor General, and Heather McManaman, Principal. The Corporation was represented by Captain Sean Griffiths, Chief Executive Officer; L. Anne Galbraith, Chair of the Board of Directors; Peter MacArthur, Chief Financial Officer and Corporate Secretary; and, Brian Bradley, Director of Finance.[9]

In his opening remarks, Clyde MacLellan, Assistant Auditor General, OAG, highlighted the key findings of the special examination:

In our examination of the corporation, we identified significant deficiencies in both the corporate management practices and the management of pilotage services. As a result of the pervasiveness of the significant deficiencies, we concluded that the corporation had not maintained the systems and practices in a manner that provided it with reasonable assurance that its assets were safeguarded and controlled, its resources were managed economically and efficiently, and its operations were carried out effectively.[10]

However, Mr. MacLellan also acknowledged that the Corporation had agreed to all of the OAG’s recommendations and that eight months had passed between the conclusion of the audit work and the date of the hearing.[11]

In response, Captain Sean Griffiths, Chief Executive Officer, Atlantic Pilotage Authority, informed the Committee that of the OAG’s “10 recommendations, we are pleased to report that six are now completed, while the remaining four will be completed before the second quarter of 2017, in the next six to seven months.”[12]

It should be noted that the Corporation was previously examined by the OAG in 2007.[13] When questioned about the differences between the more positive special examination of 2007 and that of 2016, Mr. MacLellan stated the following:

[We] do our work and look at a period of time to find the evidence to support the criteria established to meet the objectives of the audit. When we look at each particular period, we look at and assess the conditions at that point in time. I think the first response to your question is, in 2007, looking at the window that we looked at, we found evidence supporting all the criteria. Fast forward, if you will, to nine or 10 years post that time, and when we looked at the same issues, the quality of the evidence and the rigour supporting those decisions was not the same as it was in 2007.[14]

For his part, Capt Griffiths added the following:

With respect to the audit back in 2007, I can't comment. I wasn't employed at the authority at the time. However, we did notice during the course of this audit, the level of detail. How evidence was presented and communicated to the Auditor General was unique and very detailed. I'm sure the line of questioning was different in 2007 from today, and the way evidence was presented was different.[15]

With respect to this point, however, Mr. MacLellan expressed the following:

There has been bit of a discussion about our past audit and this audit. I do what to inform the committee that all of our audits are done rigorously. We do, however, apply continuous improvement to our own work over the years, and we look at new risks and new issues and the expectations do change over time. But I do want to leave no doubt in your mind that all of our audits, even going back 10 years, are done rigorously and we seek evidence to support those, and when we don't find it, we call a spade a spade. That's always been the approach of our organization.[16]

FINDINGS AND RECOMMENDATIONS

A. Corporate Governance

According to the OAG, the Corporation is governed by a Board of Directors, comprised of the Chairperson, two retired pilots, two representatives of the shipping industry, and two representatives of the general public.[17]

The Board is supported by the following committees: Audit; Human Resources; Pilot Boat; Pilotage Risk Management Methodology Committee; and Governance, Nominating and Regulations.[18]

The OAG noted issues with the Board’s independence; specifically, that the Corporation could not demonstrate full compliance with its conflict of interest code, which required the Chairperson to review disclosures of actual or potential conflicts of interest and make recommendations to avoid placing Board members in actual or potential conflicts of interest.[19]

According to the OAG, this is important given that, generally, the Board includes former representatives of the shipping industry (the Corporation’s customers) and retired employees of the Corporation; this creates the risk of “real, potential, or perceived conflicts of interest, because they oversee amendments to tariff regulations, as well as collective bargaining and changes in contracts.”[20]

Thus, in light of this finding, the OAG recommended that the Board “ensure that its members comply with all provisions of the Corporation’s conflict of interest code, including the requirement to provide written disclosure to the Chairperson of all business and commercial interests where such interests might be construed as being in actual or potential conflict with their duties as Board members, so that appropriate mitigations can be put in place.”[21]

The Corporation agreed with this recommendation and stated in its action plan that since the period of the special examination, Board members and management have reported any actual, potential or perceived conflicts of interest to the Chairperson, and that going forward, the “Chairperson will continue to put in place appropriate mitigations as required.”[22]

As this matter has been properly addressed by the Corporation’s recent measures, the Committee has no recommendation on this issue.

B. Board Oversight, Strategic Direction and Decision-Making

The OAG found that the Corporation’s strategic direction was not clearly defined, and although “the 2003 strategic objectives were still in effect, they could not be easily measured and were not assigned to specific managers. The Corporation did not establish expected results for the strategic objectives or link them to management’s performance objectives.”[23]

Thus, the OAG recommended that the Corporation “periodically review its mission, vision, and strategic objectives,” and “ensure that its strategic objectives are easily measured and assign responsibility to specific managers for achieving them. The Corporation should also establish expected results for the strategic objectives and link them to management’s performance objectives.”[24]

The Corporation agreed with this recommendation, and stated that its “strategic objectives were updated in June 2016 and will be reviewed and updated annually during strategic sessions held each spring,” and that “performance of the review is included in [the Chief Executive Officer’s] strategic goals and performance measures.”[25]

As this matter has been properly addressed by the Corporation’s recent measures, the Committee has no recommendation on this issue.

C. Processes for Setting Tariffs

The OAG found that the “Corporation could not demonstrate that it had criteria and processes in place to ensure that its tariffs would enable it to be financially self-sufficient, as required by the Pilotage Act. The Corporation experienced operating losses in three of the past four fiscal years.”[26] This is important given that “one of the most significant risks identified in the Corporation’s Enterprise Wide Risk Management Framework is its susceptibility to external economic conditions.”[27] Thus, the Corporation must rely upon strong forecasting practices to better mitigate financial risk; for example, “forecasting traffic is necessary because the corresponding demand for pilotage services serves as a key input to the Corporation’s tariff-setting process.”[28]

When asked about the variance in the Corporation’s financial performance from year-to-year, Mr. Peter MacArthur stated the following:

As I mentioned, the industry tends to be cyclical. Just for background, we used to receive appropriations from the government. In 1995 that was cut off, so from 1996 forward, in the 20-year period, we have had profits of about $13 million. So, yes, we've had two periods during that time when we had downturns. In fact, when we had the last special exam, we were in the third or fourth year of four years, where we lost $2 million a year, but at that time, we still had cash reserves coming forward. Then we went on for a period of years where we made money. So it tends to be cyclical.[29]

Therefore, the OAG recommended that the Corporation “ensure that its tariff-setting processes take into account its legislated requirement to be financially self-sufficient.”[30]

The Corporation agreed with this recommendation and stated that at “the Corporation’s June 2016 strategic planning session, criteria were set to measure financial self-sufficiency based on annual targets to fund capital asset replacement and future severance payouts, while allowing for economic downturns,” and that these “criteria and targeted rate of returns will be reviewed and updated annually.”[31] “Tariffs will be set at a level intended to achieve the targeted criteria beginning with the 2017-2021 Corporate Plan.”[32]

The Committee recommends:

RECOMMENDATION 1

That, no later than 120 days after the tabling of this report, the Atlantic Pilotage Authority provide the House of Commons Standing Committee on Public Accounts with a report outlining the criteria and the processes that it has put in place to ensure that its tariffs enable financial self-sufficiency.

D. Risk Mitigation

Although the OAG found that the “Corporation had some systems and practices in place for good strategic planning and risk management,” it also found that “processes were not in place for management and the Board to monitor implementation of the mitigations set out in the Corporation’s Enterprise Wide Risk Management Framework.”[33]

Thus, the OAG recommended that the Corporation “regularly monitor implementation of its risk mitigations and formalize its reporting on these mitigations to the Board.”[34] The Corporation agreed with this recommendation and stated that “a committee of the Board has been tasked with oversight of risk mitigations. The first meeting of this committee is expected to be held during the fourth quarter [of] 2016.”[35]

As this matter has been properly addressed by the Corporation’s recent measures, the Committee has no recommendation on this issue.

E. Recruitment and Staffing of Pilots and Pilot Boat Crews

The OAG found that in some cases, the Corporation was unable to provide documentation to demonstrate the fulfillment of the ongoing health and competency requirements of pilots and pilot boat crews involved in the delivery of its pilotage services. The Corporation had no information management rules for documentation of this kind, making it difficult to determine whether such documentation was complete or even existed.[36] Moreover, pilotage services in seven pilotage areas were provided by entrepreneurial pilots without contracts specifying terms and conditions.[37]

In light of these findings, the OAG made the following two recommendations:

• The Corporation should implement information management that facilitates its ability to demonstrate the health and competence of its pilots and pilot boat crews.[38]
• The Corporation should ensure that documented contracts are in place with entrepreneurial pilots to specify the terms and conditions of pilotage service delivery.[39]

The Corporation agreed with these recommendations and reported the following measures to address them:

• In August 2016, the Corporation implemented Helm Connect, a “marine information management system that is used to store the records associated with the health and competence of the pilots and pilot boat crews.”[40] “Further to these initial steps, an internal audit project is in progress for 2016 to evaluate the current structure and status of the Authority’s document management and provide recommendations for further improvement. The corresponding recommendations will be implemented by June 2017.”[41]
• “A legal opinion regarding the contracting of entrepreneurial pilots was received in November 2016,” and the Corporation will meet with Entrepreneurial pilots by 31 March 2017 “with the goal of having contracts in place to specify the terms and conditions of pilotage service delivery.”[42]

Although the Committee is satisfied with the Corporation’s progress with respect to the first of these two recommendations, the Committee is still concerned about the second; therefore it recommends:

RECOMMENDATION 2

That, no later than 120 days after the tabling of this report, the Atlantic Pilotage Authority ensure that it has in place proper contracts with entrepreneurial pilots that clearly specify key terms and conditions, and that it provide the House of Commons Standing Committee on Public Accounts with a report detailing what progress has been made in this area.

F. Training and Development of Pilots

The OAG found that the Corporation did not adequately document and manage information pertaining to pilot training and advancement.[43] However, the OAG noted that the “Corporation has begun developing a more comprehensive management tool to document its training curriculum, identify upcoming required training, and confirm that training courses have been taken.”[44] Notwithstanding this, however, the OAG recommended that the Corporation “formalize its good practice of requiring consensus among its committees of senior pilots before advancing the licences of trainee pilots. The Corporation should maintain documentation of this consensus, along with the final recommendation letter issued by the committee chairperson.”[45]

The Corporation agreed with this recommendation and stated that the consensus requirement will be formalized and that the Corporation will immediately begin to “maintain documentation of this process along with the recommendation letter from the committee chairperson.”[46]

As this matter has been properly addressed by the Corporation’s recent measures, the Committee has no recommendation on this issue.

G. Performance Management of Pilots and Pilot Boat Crews

The OAG found, from a sample of 27 cases, that “the Corporation did not complete two employee pilot performance reviews, and lacked complete documentation for ten of them.”[47] “Furthermore, there was no mechanism in place for pilot boat crews and the 11 entrepreneurial pilots to have performance reviews. As a result, there was a risk that corrective action was not taken to address poor performance and that good performance went unrecognized.”[48]

Therefore, the OAG recommended that the Corporation “ensure that it fully implements and consistently applies a performance management process for all pilots and pilot boat crews. The Corporation should also assign responsibility for reviewing performance management information, with the aim of ensuring proper oversight and follow-up of actions.”[49]

The Corporation agreed with this recommendation and stated that “the first cycle of performance reviews of each fully licenced pilot has been completed,” and that a “second cycle of performance reviews has begun with every fully licenced pilot to be assessed by March 2017.”[50] The Corporation also committed to ensuring that, after March 2017, performance reviews for all pilots will be conducted on a three-year cycle, and annually for pilot boat crews. Performance review language has also been included into the most recent collective agreements for the boat crews.[51]

As this matter will be properly addressed by the Corporation by March 2017, the Committee has no recommendation on this issue.

H. Designation of Areas and Vessels Subject to Compulsory Pilotage

The OAG found that the Corporation employs its “Pilotage Risk Management Methodology (PRMM) to assess the changing circumstances in marine areas and determine inherent risks.”[52] However, the Corporation has yet to implement a recommendation of the Canadian Transportation Agency to assess changes in factors and circumstances in compulsory pilotage areas, and thus has no “process in place to cyclically review the compulsory designation of pilotage areas, to determine whether the designation is still warranted.”[53]

According to the OAG, this weakness matters “because factors such as technology, environmental protection, ship standards, and traffic patterns can change, introducing new risks or eliminating previous ones, which may affect whether a port should be designated compulsory”[54] for pilotage.

Thus, the OAG recommended that the Corporation “implement a cyclical review to demonstrate reconsideration of the designation of every compulsory pilotage area under its responsibility at least once every five years. The periodic review should also demonstrate reconsideration of the size and types of vessels subject to compulsory pilotage. The Corporation should also ensure that recommendations from preliminary risk analyses of non-compulsory pilotage areas are addressed promptly.”[55]

The Corporation agreed with this recommendation and stated in its action plan that a “review was conducted in July 2016 by management and the Board which reviewed each compulsory pilotage area,” and that this “process will be repeated each year at the annual strategic sessions held each spring.”[56] For example, the Corporation noted that a “full PRMM study has begun for Sheet Harbour, NS with a decision on Pictou, NS to follow by March 31, 2017.”[57]

As this matter has been properly addressed by the Corporation’s recent measures, the Committee has no recommendation on this issue.

I. Pilot Embarking and Disembarking Processes

The OAG found that the “Corporation did not have a process in place to ensure that it performed its own annual inspections on all pilot boats, owned and contracted, in keeping with its past practice to provide assurance over quality and continuous improvement.”[58] According to the OAG, this is important given that “the Corporation’s most significant risk, as identified in its Enterprise Wide Risk Management Framework, was injury to a pilot or pilot boat crew member when embarking or disembarking from a vessel. Inspections would address several factors in the likelihood of such an injury: a malfunction in the pilot boat during embarkation or disembarkation could lead to injury; and, if a pilot falls into the water, the immediate availability and condition of rescue and first aid equipment could be critical to safety.”[59]

Moreover, the OAG noted that the “lack of a structured approach to performing inspections on all owned and contracted pilot boats compromised the Corporation’s ability to demonstrate due care and diligence in ensuring the health and safety of its pilots.”[60]

Hence, the OAG recommended that the Corporation “perform annual inspections on all pilot boats, owned and contracted.”[61]

The Corporation agreed with this recommendation and stated in its action plan that “management developed an annual pilot boat inspection schedule and all inspections will be completed by the end of 2016 and annually thereafter.”[62]

As inspections have been taking place throughout 2016, the Committee is satisfied that this matter has been properly addressed by the Corporation and hence has no recommendation on this issue.

CONCLUSION

In this special examination, the OAG found several areas of significant concern, including matters pertaining to financial planning, risk management, and human resources management. However, the Committee has noted the positive measures that the Corporation has implemented following the OAG evaluation. Notwithstanding this progress, in this report, the Committee made two recommendations to obtain the information that is necessary to assess whether the Corporation has put in place criteria and processes that ensure that its tariffs enable financial self-sufficiency and whether it has put in place proper contracts with entrepreneurial pilots.

SUMMARY OF RECOMMENDED ACTIONS AND ASSOCIATED DEADLINES

Table 1 – Summary of Recommended Actions and Associated Deadlines

Recommendation	Recommended Action	Deadline
Recommendation 1	The Atlantic Pilotage Authority needs to provide the Committee with a report outlining the criteria and the processes that it has put in place to ensure that its tariffs enable financial self-sufficiency.	No later than 120 days after the tabling of this report
Recommendation 2	The Atlantic Pilotage Authority needs to ensure that it has in place proper contracts with entrepreneurial pilots that clearly specify key terms and conditions, and to provide the Committee with a report detailing what progress has been made in this area.	No later than 120 days after the tabling of this report