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Risky Business by Libs Exposed

Privatizer given $149 million contract without cost benefit analysis: auditor general.

By Andrew MacLeod 25 Apr 2008 | TheTyee.ca

Andrew MacLeod is The Tyee's Legislative Bureau chief in Victoria. You can reach him here.

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NDP's Ralston: 'Outrageous.'

The NDP is accusing the Liberal government of privatizing services without doing proper diligence or even developing business cases to support their decisions.

The opposition bases the accusation on an auditor general's report released April 22 that they say raised troubling warnings about how the government has gone about contracting out. The report, An Audit of Joint Solution Procurement and the Revenue Management Project, recommended the government create a detailed business case for every project, strengthen conflict of interest measures for ministry staff and improve how it sets baseline information going into new contracts.

"I think there's some very sharp criticism, but it's couched in almost neutral language," said Bruce Ralston, the NDP finance critic. It's shocking the government would spend $149 million with no business case, he said. "It's outrageous."

The audit covered 10 major contracts, worth a total of about $1.6 billion, including ones with EDS Advanced Solutions ($572 million), Maximus ($324 million), IBM ($300 million) and Telus ($245 million).

The audit team did not look at whether the government had found the best way to do each job, but examined its process for reaching contracts and identified "risks to best value not being achieved." While the government "substantially meets" best practices, they said, there were several areas that "require improvement."

Business case needed

One of the projects the auditors looked at was the Provincial Laboratory Information Solution, a $149 million, 10-year contract with Sun Microsystems. The project will "transform" how information from medical tests is shared in the province. It's the most recently signed deal the auditors looked at, and therefore should have benefited from any lessons learned in earlier negotiations.

But before signing the contract the government failed to complete a business case for the agreement. "It had already been approved in principle as part of a broader health strategy," they wrote. "However, no separate business case or other detailed analysis of costs, risks and benefits was done for the PLIS."

The decision was made to contract out, they said, "without government really knowing whether it is the optimal solution."

Nor is the government calculating the full cost of contracting out. Even when a service is taken out of the government, it still takes provincial employees to manage the contract. Those costs should be included in the calculations, the audit team said. "A lack of reliable information on the internal cost of outsourcing could result in Treasury Board approving a project without complete costing information."

That means the government is making decisions based on ideology, concluded Ralston, not on a thorough analysis.

Independence declarations needed

The audit team also raised questions about conflict of interest and the need for more control of the relationships between government staff and the corporations with whom they are negotiating. When government employees and businesses sit down to design contracts together that the companies will eventually bid on, there's lots of room for real and perceived conflicts of interest, they wrote.

As Ralston pointed out, it's easy to imagine a company promising a future job to someone who is supposed to be negotiating for the government in the public interest.

The auditors found the government needs to do more to control that kind of relationship. As things are now, employees sign an oath of employment when they start work with the government. The terms are general.

Instead they should sign an "independence declaration confirming they have no conflicts of interest in any of the projects," they wrote. The declarations should be specific to each project and should be updated whenever their circumstances change.

The government could also include a "non-solicitation clause" in each contract that would bar the companies from offering a job or other benefit to a government employee. The clause should apply for at least two years, they said.

'Cozy relationship'

"One objective of such clauses is to prevent the 'capture' (that is, control) of government staff while they are in a position to influence the outcome of the project," they wrote. "Even the perception of capture after the contract has been signed can damage confidence in the outsourcing agreement and the relationship between the ministry and the vendor."

The government has included such clauses in some contracts, but not all of them, and they vary in wording.

"It's pretty obvious there's a concern it's a pretty cozy relationship," Ralston said. "They don't really give any examples of where this has happened or what their concerns are." He said he wondered if the auditors were responding to something that happened, or just raising the possibility of this kind of benefit.

A member of the audit team said there was nothing specific that led to the recommendation. "We didn't make that recommendation because we picked up any particular instances of that happening," said Malcolm Gaston, an assistant auditor general. But it easily could, he said. "It's a control that needs to be strengthened."

The oath is good, he added, but something more would be better. "We were wanting to make it more explicit."

'Windfall' profits

When the government signed the $572-million deal with EDS Canada to collect revenue, there were some areas where it didn't know how much money to expect. The underestimation led to "windfall" profits for EDS, the auditors found.

"The financial model for the deal relied in part on inaccurate Ministry of Health baseline information on Group Medical Services Plan payments," the auditors wrote. "This information underestimated the additional revenue that would be realized and, under the model, would have increased EDS Canada's profits well beyond those anticipated."

Ministry staff, according to the report, said that during the negotiation they believed the area was "lower risk" so "less work was performed to validate baseline information." The failure was "obviously" a miscalculation, the auditors found.

The government ended up renegotiating the contract "to align payments to EDS more closely with those originally anticipated." In the process they extended the contract from 10 years to 12.

The auditors said the government needs to figure out what the "existing performance levels" are before it tries to set targets for the vendor to meet. In the case of EDS the inaccurate baselines made the vendors' targets much too easy to meet.

Figuring out those baselines is an area where the government is weak, they found. "Having poor performance baseline information is a problem in any situation," they wrote. "But it becomes a more acute issue when monetary incentives are based on it. If it is used in business cases to justify a particular course of action, it can also lead to wrong decisions being made on whether to outsource at all."

Ministries vow 'ongoing improvement'

The response from the Ministries of Labour and Citizens' Services and Small Business and Revenue is included in the Auditor General's report. The province recognizes the need for "ongoing review and continuous improvement," it said.

Already the government has started requiring project specific conflict of interest declarations, it said, and will consider the two-year non-solicitation idea.

Ralston said these contracts need a closer look. "It's $1.6 billion in contracts that's being managed pretty loosely in my view," he said. "Big numbers that deserve more scrutiny, that's for sure."

The decisions to contract out have been made based on ideology, he said, not on rational assessments or sound business cases. "They have a political commitment or an ideological commitment to providing services to government this way."

Even the predicted benefits, some $550 million over 10 years, are calculated by the proponents, he said, not by the government and have not been audited. That the contracts provide value for money may well be "puffery," he added. "If they weren't afraid of that, they'd be able to demonstrate that."

The audit did not look at whether the government is getting value for money, or whether services have gotten better or worse since they were contracted out. And with reports from some government workers that it now takes several weeks to get a new employee's computer working, compared to within a day back when ministries had more of their own dedicated technology people, there is clearly more for auditors to examine.

"This is a significant area of government activity," said Assistant Auditor General Gaston. "I'd certainly imagine going forward we'll have a look at this area again."

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