NPC Audit of Single Source Contracts and RGOs - Final Report 2011

8/6/2019 NPC Audit of Single Source Contracts and RGOs - Final Report 2011

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CONFIDENTIAL

MEDIUM SENSITIVIT Y

Minis t ry o f Tour ism and Cul t ure

Niagara Park s Com m iss ion

Final Report

Audi t o f Sing le Sourc e Cont rac t s and

Revenue Generat ing Opport uni t ies

June 2011

Ont ar io Internal Audi t Div is ion

Min is t ry o f Finance


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Niagara Parks CommissionAudit of Single Source Contrac ts and

Revenue Generat ing Opportuni t ies

June 2011

CONFIDENTIAL MEDIUM SENSITIVIT Y

Page 2 of 32 Serving: Minist ry of Tour ism and Culture

Table of Contents

EXECUTIVE SUMMARY-------------------------------------------------------------------------------------3DETAILED ISSUES AND ACTION PLANS-------------------------------------------------------------8

1.0 Procurement of Goods and Services ------------------------------------------------------81.1 Procurement Planning -----------------------------------------------------------------------81.2 Prior Approval Authority --------------------------------------------------------------------91.3 Business Case and Options Analysis ------------------------------------------------ 101.4 Contract Approval --------------------------------------------------------------------------- 121.5 Execution of Contracts -------------------------------------------------------------------- 131.6 Use of Appropriate Procurement Method ------------------------------------------- 14

2.0 Revenue Generating Opportunities------------------------------------------------------- 152.1 Completeness of RGOs-------------------------------------------------------------------- 152.2 Planning for RGOs -------------------------------------------------------------------------- 162.3 Prior Approval Authority ------------------------------------------------------------------ 172.4 Business Case and Options Analysis ------------------------------------------------ 182.5 Use of Appropriate Acquisition Method---------------------------------------------- 202.6 Contract Approvals and Renewals----------------------------------------------------- 21

3.0 General--------------------------------------------------------------------------------------------- 233.1 Flow-Through Arrangements------------------------------------------------------------ 233.2 Centralized Documentation -------------------------------------------------------------- 263.3 Training on the Procurement Directive and RGO Policy ----------------------- 283.4 Terms of Contracts-------------------------------------------------------------------------- 29

APPENDIX A ACKNOWLEDGEMENTS------------------------------------------------------------ 30APPENDIX B ENGAGEMENT OBJECTIVES AND SCOPE----------------------------------- 31APPENDIX C DISTRIBUTION LIST------------------------------------------------------------------ 32


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EXECUTIVE SUMMARY

Introduction

The Niagara Parks Commission (NPC) is an operational enterprise of the Government of Ontario.The NPC was incorporated by an act of the provincial legislature on April 23, 1887. The NPCs corepurpose is to preserve and enhance the natural beauty of Niagara Falls and the Niagara Rivercorridor for the enjoyment of current and future visitors while maintaining financial independence.

Pursuant to the Niagara Parks Act, the NPC has a legislated duty to manage, control and developthe parks. It generates revenues through commercial activities such as attractions, public transit,

golf courses, retail and food services to pay for its stewardship costs and visitor services. It alsoprotects key natural and historical attractions.

The Management Board of Cabinet (MBC) Procurement Directive (the Directive) dated July 2009replaces both the Procurement Directive dated November 2007 and the Procurement OperatingPolicy dated November 2007. The Directive applies, in part, to Operational Enterprise Agenciessuch as the NPC. The Directive refers to such agencies as Other Included Entities and stipulatesthe sections that are mandatory for such entities. Other Included Entities are permitted to establishand follow their own procurement policy and related processes and procedures provided that theydo not conflict with the Directives mandatory sections and are in keeping with the overall principlesof the Directive. The MBC Procurement Directive was further revised in April 2011. NPCs existingProcurement Policy should be updated accordingly.

As part of its Corporate Policy Manual, NPC has developed an internal policy for procurement. TheNPC Procurement Policy was updated in April 2010 and corresponds to the mandatory sections forOther Included Entities of the July 2009 Procurement Directive. Prior to April 2010, the NPCsinternal procurement policy reflected the principles of the MBC Procurement Directive, November2007.

The Ontario Internal Audit Division (OIAD) previously completed an audit of the NPCs procurementand leasing processes in June 2009, to determine whether the NPCs policies and controls wereappropriate and consistent with best practices. The audit completed in June 2009 was conducted inresponse to the recommendations raised by the Integrity Commissioner in her report dated March16, 2009. While the NPCs policies were found to be generally consistent with best practices, theaudit concluded that there were areas requiring improvement and notably there was an opportunityfor the NPC to strengthen its policies and processes when engaging in single source procurements.The audit also recommended the need for a Revenue Generating Opportunities (RGO) policy tooutline the process for the identification, development and approval of RGOs. The NPCsubsequently developed a policy in this area which received approval from the Board ofCommissioners in November 2010.

This audit was requested by the Ministry of Tourism and Cultures Audit Committee to support thecontinuation of efforts to restore public trust and accountability at the NPC through a detailed and


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focussed audit of single source contracts and RGOs. The scope of the audit covers the period fromApril 1, 2008 to December 31, 2010, although the scope was expanded as necessary to gain a fullunderstanding of the single source procurements and RGOs examined in the audit.

Conclusion

We conclude that the NPCs non-competitive procurements for the period under review do notreflect some of the applicable mandatory requirements of the Procurement Directive and the NPCProcurement Policy. In addition, we conclude that the decisions and accompanying support forsingle source RGOs were not in keeping with prudent business practises and governmentexpectations for agency activities given that a formal RGO policy was not developed by the NPC

until November 2010.

Significant Issues Noted in the Audit

Procurement of Goods and Services

The NPC Board of Commissioners approves the annual business plan that includes high levelbudget information about the expenditures for the year. However, the NPC does not have aprocess for periodic procurement planning that is presented and approved by the Board of

Commissioners.

Although the NPC has a policy and process in place to obtain appropriate approval for eachtype of procurement, we noted instances where non-competitive procurements were notsupported by documented appropriate approvals (according to the procurement valuethresholds).

We were informed that NPC management considers its available options when deciding on aparticular single source procurement. However, in most instances, we observed that businesscases and options analyses were not adequately documented to support the single sourcedecisions. We noted instances where the business cases are documented but only focus on theadvantages of the selected option, and do not outline a comparative analysis or discuss

alternative options.

As per discussion with NPC management, the NPC generally attempts to achieve anappropriate level of competition to ensure fairness and to obtain value-for-money. For most ofthe single source procurements sampled, there was no documentation to justify the exceptionto fair competition.

We observed instances where the NPC contract signatories did not have proper delegatedauthority to sign the contracts or contract renewals as per the NPCs By-Law.


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The NPC generally establishes formal written contracts with vendors before the goods orservices are provided to the NPC. However, we noted some instances where there are nowritten contracts despite the fact that the NPC has been receiving goods or services from thosevendors for an extended period of time.

Acquisition of Revenue Generating Opportunities

Recognizing that the NPC did not have a Policy for RGOs in place until November 2010, werelied on prudent business practises, government expectations of agencies and the general

concepts of the new RGO Policy to assess the RGO single source decisions andaccompanying support.

During our audit planning process, we were unable to obtain a list or record from the NPC of allRGO arrangements maintained by the NPC. The NPC does not keep a centralized record of allcontracts pertaining to RGOs including pertinent information with respect to those contractssuch as the revenues expected, contract terms and other specific deliverables.

The NPC does not have a process to perform annual planning to ascertain which RGOs topursue during the year and in future years. In some cases, the NPC receives unsolicitedproposals from organizations that offer their products or services but in the absence of anappropriate annual RGO plan, the NPC may not be able to maximize the benefit to the NPC

from these unsolicited and solicited proposals.

We noted some instances where RGO files did not include documented prior approval from theNPCs Board of Commissioners. Approval by the Board of Commissioners is a requirement forRGOs per the Niagara Parks Act.

In most instances, business cases and options analyses were not adequately documented tosupport the single source decisions. We noted instances where the business cases aredocumented but only focus on the advantages of the selected option and do not outline acomparative analysis with other available options.

For most of the RGOs sampled, adequate documentation was not available to justify the

exception to fair competition at both the acquiring and renewal of RGO contracts.

We observed instances where individuals signed some single source contracts and extensionsfor RGOs when in fact the NPC By-Law does not permit these individuals to bind the NPC.These individuals did not have delegation of authority from the authorized signatories to signthe contracts or extensions.


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Renewal of RGO contracts are usually not supported by a documented market analysis todetermine if there were any other interested parties or to determine which entity/arrangementwould be most beneficial for the NPC.

General

In addition to the findings and observations above, the following issues were also identified duringthe course of our audit fieldwork that pertains to procurement of goods and services and RGOs.

The NPC should ensure that only authorized individuals enter into contracts with vendors evenin the case of flow through agreements. A flow through arrangement is a process in place atthe NPC whereby a number of partners come together to make a purchase jointly, usually for

park entertainment purposes. Where NPC acts as an Administrator for flow througharrangements, and the agreements are signed in the name of the NPC, the Administratorshould adhere and comply with all aspects of the NPC Procurement Policy and the members ofthe Flow Through Board should be made aware of the NPC policy and its contents.

The NPC does not have a single repository to retain key documentation regarding theacquisition of RGOs and procurement of goods and services. Instead, contracts and keyprocurement documents are dispersed among various business units. We observed caseswhere procurement documents could not be provided for review, although we understand fromNPC management that the documents existed but could not be located by the NPC.

The NPC has not conducted formal training on the principles, scope and application of the

Procurement Directive, NPC Procurement Policies and the RGO Policy for management andstaff. We understand from the Interim General Manager that this training is being planned inthe near future.

The NPC should negotiate contracts with terms that are in its best interests. The terms ofcontracts that we reviewed varied from 1 year to 10 years of duration. Some contracts alsohave restrictive clauses for example, requiring the NPC to give an exclusive first right of refusalto the incumbent before considering other options. Although the decisions regarding the aboveterms may have been based upon NPC management analysis at that time, no documentation isavailable to show how the terms of the agreements was determined to be in the best interest ofthe NPC.


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Conformance with Institute of Internal Auditors Standards

This engagement has been conducted in conformance with the Institute of Internal AuditorsInternational Standards for the Professional Practice of Internal Auditing.

Original signed by____________________________Charles Meehan

Audit DirectorCulture and Innovation Audit Service Team


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DETAILED ISSUES AND ACTION PLANS

1.0 Procurement of Goods and Services

1.1 Procurement Planning

Procurement planning supports business requirements as necessary to ensure sufficient time isallowed to complete the procurement process. Adequate procurement planning also assists inidentifying the potential supply source and procurement method as well as determining what andwhen approvals are needed to ensure sufficient time is allowed to complete the procurementprocess. The Procurement Directives dated 2007 and 2009 both identify procurement planning asa mandatory requirement for Operational Enterprise agencies such as the NPC. We observed

however that the NPC Corporate Policy on Procurement dated 2007 did not identify a separaterequirement for procurement planning. We do note that planning was identified in the revised NPCProcurement Policy dated 2010 to correspond to the requirements of Other Included Entities.

The NPC Board of Commissioners approves the annual business plan that includes high levelbudget information about the expenditures for the year. However, the NPC does not have aprocess for periodic procurement planning that is presented to the Board of Commissioners. At aminimum as a best practise, an annual procurement plan should be developed by the NPC takinginto consideration current, ongoing and future business requirements, alternative options, anestimate of the procurement value and the necessary approvals required for authorization toproceed.

Recommendation

The NPC should establish a process for appropriate and timely procurement planning tofacilitate efficiency, effectiveness and value-for-money. Procurement planning should besupported by adequate documentation that may be amended, with appropriate approval, toaddress in-year business requirements.

Management Response and Action Plans

Agreed. Strategic Procurement Planning is a high priority. A new procurement organization has

been put in place to ensure timely procurement planning for the remainder of fiscal 2011. StrategicProcurement will be a major component of the 2012 NPC planning cycle. A draft procurementplanning process and templates have been developed. The Procurement Planning activity will beintegrated with the NPC planning processes and will include appropriate Board approval and reportback measures.


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1.2 Prior Approval Authority

For goods and non-consulting services, the procurement approval authority framework must reflectthe procurement method and procurement value and assign authority to the most appropriateaccountable authority in the agency as determined by the Board of Commissioners.

Per the NPC Procurement Policy dated 2007, exceptions to the procurement requirementsincluding single source arrangements were subject to the approval by the General Manager, and inthe case of goods over $25,000 or services exceeding $100,000 by the Board of Commissioners.

Per the NPC Procurement Policy dated 2010 revisions to the delegation of authority were made.The General Managers approval was generally required for non-competitive procurements and in

the case of goods over $25,000, or non-consulting services over $100,000 the approval of theBoard of Commissioners was required. The delegation of authority for the non-competitiveprocurement of consulting services was specified such that the General Managers approvalauthority is limited to $25,000; the Boards approval authority is limited to $100,000; and Ministryapproval is required over $100,000.

Although the NPC has a policy and process in place to obtain appropriate approval for each type ofprocurement, we noted instances where procurements were not supported by documentedappropriate approval (according to the procurement value thresholds) in order to commence thepurchasing process. This may result in increased risk that resources may not be effectivelymanaged. In one example, NPC entered into a contract with a single sourced vender for 2009 and2010. The contract amounts were over $100,000 however, the procurement file did not have anyevidence that the Board approved these contracts.

Recommendation

The NPC should ensure that an appropriate approval is obtained for all procurements as perits established delegation of authority before the start of the purchase process.


Agreed. The Delegation of Authority (DOA) Policy including risk assessment is currently being

reviewed and a draft framework has been developed. This draft delegation policy and frameworkincorporates procurement. Procedures to assign and document delegation will be put in place.This will provide clear documentation for those delegated authority and those with functionalresponsibility (i.e., purchasing) to ensure delegation has been exercised appropriately and signedby the delegated authority prior to initiating a procurement and prior to award.


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1.3 Business Case and Options Analysis

A formally documented business case to support a non-competitive procurement is required per theProcurement Directives dated 2007 and 2009. At a minimum, the business case must cite thecircumstance for the non-competitive procurement and clearly identify the allowable exception orrationale for an exemption to the Directive.

The NPC Procurement Policy dated January 2007 identifies some exceptions to the competitiveprocess but the NPC has not specified the requirement for a written business case as indicated inthe Directive. The revised NPC Policy dated April 2010 does now require documenting a formalbusiness case to support non-competitive procurements, which is consistent with the requirementof the Directive.

We were informed that NPC management considers its available options when deciding on aparticular single source procurement. However, in most instances, we observed that businesscases and options analyses were not adequately documented to support the single sourcedecisions. We noted instances where the business cases are documented but only focus on theadvantages of the selected option and do not outline a comparative analysis or discuss alternativeoptions. The business cases we examined were mainly in the form of Reports to the Commissionwhich provides a brief description of the procurement and a request for Board approval to proceedwith the procurement.

For example, a piece of equipment was purchased on a single source basis to support one of theNPCs commercial activities, but was sold approximately two years later at a significant loss. The

single source purchase was approved at the time, but there was no documented analysis orbusiness case to support the decision. There was also no documented analysis with respect tohow the market value was determined to support the subsequent sale of the equipment.

In instances where the procurement decisions were discussed and approved by the Board, theextent of analysis performed with respect to the information provided in the business cases was notclear. For example, an advertising campaign was approved by the Board based on a Report to theCommission that included estimates for certain targets of sales, but the rationale or basis for theestimates was not included. The outcome of this campaign was below the estimated targets andresulted in a significant loss to the NPC.

Recommendation

The NPC should conduct and adequately document for all single source procurements aprudent business, financial and options analysis with respect to its considerations at the time.These analyses should be formally documented in a business case that is supported byappropriate assumptions, estimates and identification of the allowable exception for the non-competitive procurement.


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Agreed. The NPC will formalize the requirements for and the elements of business cases for allnon-competitive approvals both being presented to the Board and those not requiring Board review.Key to the formalization is a more fulsome discussion of options and a risk assessment of eachoption with alternatives considered. The requirements of the business cases will comply with allrelevant sections of the MBC Procurement Directive.

Phase One of NPCs Procurement Modernization Plan (PMP) requires development ofstandardized documents including those associated with non-competitive approvals requiring Boardapproval. These documents will include a more fulsome discussion of the options and alternatives.The key document to be developed will be the Exception for Non-Competitive Procurements.


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1.4 Contract Approval

The NPCs By-Law No. 1 states that, Deeds, licenses, major contracts and engagements on behalfof the Commission shall be signed by the Chair and General Manager or in the case of absence,illness or incapacity, the Vice-Chair or Executive Director, Corporate Services respectively. TheBy-Law also states that, The Commission may at any time by resolution direct the manner inwhich, and the persons by whom, any particular instrument, contract or obligations of theCommission may or shall be executed.

The definition of major contracts is not identified in the By-Law. However, as per discussion with theInterim General Manager, potentially all NPC contracts with external parties are considered majorand that special consideration is always taken by the NPC when dealing with external parties. This

does not preclude that some contracts irrespective of value have a greater impact upon the NPCand are considered, evaluated and approved in this context. We also understand from the InterimGeneral Manager that the Board of Commissioners has not passed any resolution to delegateauthority for contract approvals to individuals other then those stated in the By-Law.

During the course of our audit fieldwork, we observed many instances where individuals without theappropriate delegated authority signed contracts on behalf of the NPC. For example,

An employee signed five contracts with an organization although we obtaineddocumentation that these procurements were approved by the Board of Commissioners.

Another employee of the Revenue Operations and Business Development Division

signed 12 contracts with three organizations. We did not note formal documentedapproval from the Board of Commissioners for 10 of these contracts involving two of theorganizations.

Recommendation

The NPC should ensure that only authorized NPC persons enter into contracts with vendorspursuant to the NPC By-Law. The term major contacts identified in the By-Law should beformally defined to ensure that the appropriate contract approvals are obtained.


Agreed. The term major has to be more precisely defined in order to remove any ambiguityaround exercising authority to approve contracts. The NPC Delegation of Authority policy willdefine the required authorization level for all contracts, including those considered major.


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1.5 Execution of Contracts

The NPC generally establishes formal written contracts with vendors before the goods or servicesare provided to the NPC. However, we noted instances where written contracts are not establisheddespite the fact that the NPC received goods or services from those vendors for an extendedperiod of time.

For example, one vendor has been providing services for graphic designing and printing ofbrochures and annual reports since the early 1990s; however, a documented contract with thisvendor does not exist. In another case, the NPC has been renting maintenance equipment from avendor since 1996, but there is no contract in place to identify items such as the servicerequirements and costs.

During the course of our audit fieldwork, we were also unable to locate two existing contractsalthough NPC management and staff identified to us that the contracts were in fact in place andsigned by both parties. In two other cases, the project work commenced prior to signing of theagreements which is contrary to the requirements of the Directive and good business practise. Inthe absence of a written contract, the roles and responsibilities of each party are not formallydefined which may result in delivery of goods/services that are not within the expectations and bestinterests of the NPC.

Recommendations

In order to ensure fairness, transparency, prudent management of funds and adequateaccountability, the NPC should ensure that formalized contracts with vendors are establishedand maintained to articulate the best interests of the NPC.

In order to establish appropriate roles, responsibilities and accountability, the NPC shouldensure that all contracts are signed before related goods/services are purchased.


Agreed. Use of formalized contracts will become a standard element of all procurements. This willinclude the use of purchase order contracts for purchase of goods and use of standardized

contracts dealing specifically with requirements for acquisition of non-consulting and consultingservices. Pro forma contracts are now incorporated into RFPs since April of 2011. Templates forcontracts are prepared by NPC legal services with any deviations from the template requiring NPClegal consultation.

A formal agreement will be required before purchasing goods and/or services. Most recentprocurements have included standardized pro forma agreements which are authorized prior tocommencement of services or receipt of goods.


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1.6 Use of Appropriate Procurement Method

As per discussion with NPC management, the NPC attempts to achieve an appropriate level ofcompetition to ensure fairness and to obtain value-for-money. The three procurement methodsidentified in the NPC Procurement Policy include: invitational competitive, open competitive, andnon-competitive.

For most of the single source procurements we sampled, there was no documentation to justify theexception to fair competition. We noted that the NPC Procurement Policy dated 2007 did notspecifically identify allowable exceptions for non-competitive procurements, although theProcurement Directives dated 2007 and 2009 contain such a list.

Typically, the allowable exception for non-competitive procurements should be clearly included inthe business case. For allowable exceptions where only one vendor is able to meet therequirements, the NPC must include documentary evidence in the business case to support thisexception. Where no allowable exception exists, prior approval must be obtained by the mostappropriate approval authority as determined by the applicable NPC Procurement Policy.

Inadequate documentation of the rationale for exception to fair competition increases the risk thatthe procurement process may not be perceived as open, fair, and transparent.

Recommendation

To ensure that goods and services are acquired with due regard for value for money, the NPCshould ensure that a non-competitive method is used only as per the allowable exceptions,and with appropriate, documented justification.


Agreed. The NPC will ensure that the non-competitive method is only used when allowableexceptions are applicable. Exception documentation will be formalized with greater disclosure asper the MBC Procurement Directive.


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2.0 Revenue Generating Opportunities

2.1 Completeness of RGOs

During our audit planning process, we were unable to obtain a list or record from the NPC of allRGO contracts maintained by the NPC. The NPC does not keep a centralized record of allcontracts pertaining to RGOs with other pertinent information such as the revenues expected,contract terms, and other specific deliverables.

We observed that the NPC has a process in place to record, only on an aggregate basis, fundsreceived from different sources, including RGOs and the sales revenues. Due to the aggregatenature of this process and the associated record keeping, the NPC was unable to generate a

complete list of all the sources of revenues or to determine and analyse the funds received fromany particular RGO.

As a result, we were unable to verify the completeness of the total number of RGO arrangements.Interviews with NPC management and staff were conducted by the audit team to understand andcompile a list of RGOs for the scope of the audit. The list formed the basis for selecting RGOs tobe examined in the course of the audit.

The NPC RGO Policy approved by the Board of Commissioners in November 2010 includes asection on Documentation Requirements which specifies that a logging and tracking system forRGOs will be maintained whether the RGO was successful or not.

Recommendation

A centralized record of all RGO contracts with pertinent information should be developed andmaintained by the NPC as part of their periodic RGO planning. A record of RGO contracts willassist with tracking of the RGO funds received compared to contract expectations,performance indicators, and upcoming contract expirations.


Agreed. The principle of centralization of contract documents, for RGOs makes great business

sense. A centralized database will assist NPC to track key contract commitments such as terms orkey deliverables, Contracts will become the responsibility of the functional department i.e.,contracts and purchase order will be maintained by the Procurement Department


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2.2 Planning for RGOs

A RGO planning process at the NPC would support business requirements, identify areas with apotential to generate revenue, and ensure sufficient time is allowed to complete the RGOcontracting process. Adequate RGO planning also assists in identifying the potential organizationsand the selection method (i.e. competitive or non-competitive) as well as determining what andwhen approvals are needed to ensure sufficient time is allowed to complete the process.

The NPC Board of Commissioners approves the annual business plan that includes high levelbudget information of the revenues for the year. However, the NPC does not have a process forperiodic RGO planning that is presented to the Board to ascertain which opportunities to pursueduring the year and in future years.

At a minimum, an annual RGO plan should be developed by the NPC taking into considerationcurrent, ongoing and future business requirements, alternative options, an estimate of therespective RGO revenue potential and the necessary approvals required to proceed. In somecases, the NPC receives unsolicited proposals from organizations that offer their products orservices. An appropriate RGO planning activity may facilitate the NPC to maximize its benefitsfrom both the unsolicited and solicited proposals.

Recommendation

The NPC should establish a process for appropriate and timely RGO planning to facilitateefficiency, effectiveness and value-for-money. Planning should include an analysis for

selecting the method of acquisition and the rationale for this selection. RGO planning shouldbe supported by adequate documentation and may be amended (based on appropriateapprovals) to address in-year business requirements.


Agreed. Advanced planning is critical to selection of business opportunities and that the selectionprocess should parallel an open fair and transparent approach, common to all procurements.

NPC will be developing a procurement activity plan, that includes RGOs, which will become part ofthe annual planning cycle. This is a component recommendation of the PMP. The plan will allow

for planning and approval and will integrate RGO into the procurement process. The integratedNPC Procurement Activity Plan will be created and populated, Summer 2011.


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2.3 Prior Approval Authority

Prior to November 2010, the NPC was not guided by a policy for its RGOs. We understand fromdiscussions with the Interim General Manager that the NPC Procurement Policy and its principlesare not used by the NPC in its acquisition of RGOs since RGOs are viewed by the NPC as distinctfrom procurements of goods or services. In its audit completed in June 2009, the Ontario InternalAudit Division recommended the need for a RGO policy to outline the process for the identification,development and approval of RGOs. The NPC subsequently developed a policy in this area whichreceived approval from the Board of Commissioners in November 2010.

In the absence of a formal RGO Policy, we were informed that prior to November 2010, the NPCmanagement generally obtained the prior approval from the NPCs Board of Commissioners before

proceeding with any RGO. However, we noted instances where RGO files did not includedocumented prior approval from the NPCs Board to proceed with the opportunity. If properapproval is not obtained during planning, there is increased risk that resources will not beeffectively managed or opportunities maximized.

The RGO Policy dated November 2010 identifies that the Finance and Audit Committee is to beupdated on the proposals for RGOs received, RGOs being considered and those with arecommendation for approval. The Policy also states that per the Niagara Parks Act, Regulation829 (section 9(e)) no person shall sell or offer for sale any article, thing or service unlessauthorized in writing by the Commission. Given that the Commission has not delegated thisauthority, all RGOs should be brought forward and approved by the Board of Commissionersincluding the opportunities prior to the development of the policy in November 2010.

Recommendation

The NPC should ensure that RGO decisions are supported by the appropriate prior approvalfrom the Board of Commissioners.


Agreed. RGO initiatives will be a component of the annual procurement planning process and willbe subjected to NPC policy approval requirements. Phase One of the PMP will be updating and

revising a number of procurement related policies including the RGO Policy.

RGOs will be subjected to public procurement based upon thresholds applied to the imputed valueas opposed to the return to the NPC. Once completed, the Procurement Activity Plan, submitted tothe Board will become a control mechanism to ensure Board approval.


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2.4 Business Case and Options Analysis

We were informed that NPC management considers its available options when deciding on aparticular RGO. However, in most instances, we observed that business cases and optionsanalyses were not adequately documented to support the single source decisions. We notedinstances where the business cases are documented but only focus on the advantages of theselected option and do not outline any comparative analysis or discuss alternative options. Thebusiness cases we examined were mainly in the form of Reports to the Commission whichprovided a brief description of the RGO and a request for Board approval to proceed with theopportunity.

The RGO Policy dated November 2010 contains a specific section on Documentation

Requirements to ensure that full and comprehensive documentation is available to the Board ofCommissioners to support business decisions relating to RGOs. The DocumentationRequirements include the development of a business case for each opportunity whichdemonstrates value-for-money, while preserving the Commissions mandate and operatingobjectives. An itemized list is included in the Policy for items to be included in the business case;however, the requirement for an options analysis in the business case is not specifically identified.

In one example we noted during our audit, the NPC entered into a three year RGO contract with anorganization (Company A) that was not supported by a documented business case or optionsanalysis, and approval by the Board of Commissioners was not formally documented. Per thecontract arrangements, the NPC is to pay Company A monthly charges for the use of their productand services, and paid approximately $100,000 over the period 2007-10. This cost was to be offsetby the revenue generated by Company A, but this organization was unable to generate anyrevenue.

In 2009, the NPC entered into a RGO contract with another organization (Company B) for similarservices as Company A. We noted that both organizations were managed by the same Presidentand that the Board approved the RGO contract with Company B. The Board was not made awareof the common management in the Report to the Commission. As of January 2011, neither of theorganizations was able to generate any revenue for the NPC, and resulted in significant losses forthe NPC.

In the absence of a documented business case to support the approvals for these single sourceRGOs which includes relevant information such as the common management in both organizations,the process may not appear to be open, fair and transparent.

Recommendation

The NPC should conduct and adequately document prudent business, financial and optionsanalysis with respect to its considerations of any revenue opportunity at the time. Theseanalyses should be supported by appropriate facts, documented assumptions and estimatesfor proper analysis and consideration by the Board of Commissioners.


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Agreed. There has to be a more comprehensive review with the aid of a business plan whichexplores alternative options and outlines all assumptions. In addition risk assessments of eachoption and in particular the preferred option will be conducted and mitigation strategies will bedeveloped.

In phase two of the PMP, following development of the standardized templates, documentationrequirements and revised policies training directed at internal managers will be delivered on acompulsory basis. This training will focus on the procurement principles, new policies,documentation preparation and most notably on risk assessment and risk management strategies.Initial training on key procurement principles; specification development; evaluations and service

management will commence, Summer 2011.


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2.5 Use of Appropriate Acquisition Method

For most of the RGOs sampled, adequate documentation was not available to justify the exceptionto fair competition at both the acquiring and renewal of RGO contracts. Although a RGO Policywas in place in November 2010, best practise for the acquisition of RGOs prior to November 2010would have been to document the rationale for proceeding without a fair and open competition.

The RGO Policy dated November 2010 identifies that the current preference will always be toestablish contracts with RGOs through an open, competitive process, unless circumstances dictateotherwise. The Board of Commissioners are responsible to approve exemptions from thecompetitive process as outlined in the Policy with full documentation and rationale for the decision.

Inadequate documentation of the rationale for exception to fair competition increases the risk thatthe acquisition process may not be perceived as open, fair, and transparent.

Recommendation

To ensure that RGOs are acquired with due regard for value-for-money, the NPC shouldensure that non-competitive acquisitions of RGOs are supported by adequately detailed anddocumented business cases and options analyses.

Management Response and Action Plan

Agreed. Proper documentation for non-competitive RGO needs to be improved and must complywith the MBC Procurement Directive.

Phase One of the PMP includes the development of standardized procurement approvaldocuments. Before a procurement begins there will be a signoff document with approvalsaccording to the DOA. Exception approval documentation will be a standardized as well. RGOswill be subjected to the same list of exceptions as apply to all procurement activities.

The requirements of the business cases will comply with all relevant sections of the MBCProcurement Directive.


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2.6 Contract Approvals and Renewals

The NPCs By-Law No. 1 requires the General Manager and/or the Chair to sign all majorcontracts. The By-Law allows the Executive Director, Corporate Services and Vice Chair of theCommission to sign contracts in the absence or illness of the General Manager and the Chair,respectively. Any other exceptions to these signing authorities must be passed by a Boardresolution. The definition of major contracts is not identified in the By-Law. However, as perdiscussion with the Interim General Manager, potentially all NPC contracts with external partiesare considered major and that special consideration is always taken by the NPC when dealing withexternal parties. This does not preclude that some contracts irrespective of value have a greaterimpact upon the NPC and are considered, evaluated and approved in this context.

During the course of our audit fieldwork, we noted instances where an employee of the RevenueOperations & Business Development Division signed contracts for three RGOs. For two of thesecases, approval from the Board of Commissioners to proceed with the RGO is not formallydocumented in the file.

In another case, an employee was the signatory on behalf of the NPC, for the original RGOcontract and three subsequent extensions. Documented approval from the Board ofCommissioners is not in the file for the original contract and the extensions.

We were informed by the Interim General Manager that NPC management considers its availableoptions at the renewal of a RGO contract. However, the RGO files we obtained in the course of ourfieldwork were not supported by a documented market analysis to determine if there were any other

interested parties or to determine which entity would have been most beneficial for the NPC.

The new RGO Policy identifies that the NPC will conduct a market analysis of new or existingarrangements prior to the consideration of other opportunities to determine any changes to theoperating environment and to determine what is in the best interests of the NPC. There is norequirement in the RGO Policy that the market analysis be documented before proceeding with acontract or a contract renewal although this is a standard business practise.

Recommendations

The NPC should ensure that only authorized NPC persons enter into contracts with vendorspursuant to the NPC By-Law. The term major contacts identified in the By-Law should be

formally defined to ensure that the appropriate contract approvals are obtained.

The NPC should conduct requests for information and market surveys/analysis andappropriately document this research to support any decisions made with respect to theinitiation or renewal of contracts.


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Agreed. Contracts should govern activities that the NPC enters with external parties and that theterm major contracts will be more discretely defined in the delegation.

Programs will research market conditions and conduct surveys/analysis to support initiation andrenewals for existing RGO.

A component of the internal training will focus on developing effective market research related tonew and renewal RGO and reporting requirements associated with Board approvals.


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3.0 General

In addition to the findings and observations noted in the previous two sections, the followingadditional issues and matters were identified during the course of our fieldwork that pertain to singlesource procurements and RGOs.

3.1 Flow-Through Arrangements

A flow through arrangement is a process at the NPC whereby a number of partners come togetherto make a purchase jointly, usually for park entertainment purposes such as the Falls FireworkSeries and the New Years Eve event. Through these arrangements, the NPC or one of the

partners takes on the lead responsibility and becomes the overall Administrator. The Administratoris responsible for executing the contracts with and paying suppliers on behalf of the whole group.Funds from the partners flow through the Administrator to the suppliers. Festivals and events maybe organized as well by third party groups (excluding the NPC) where the third party selects andprocures the entertainment.

We reviewed an example where a collective group was brought together in May 2010 to serve asthe Regional Tourism Organization (RTO) transition team until the final full Board was established.The NPC was designated as the lead of the transitional RTO by the Ministry of Tourism andCulture. A NPC Executive Director was to act as the Co-Chairman and Treasurer of the InterimRTO. The NPC responsibilities included leading the transition to a permanent RTO Board, and tobe the funds administrator in the interim.

The first initiative of the interim RTO Board was to launch a promotional project with the objective toenhance and generate awareness of the Niagara Regions many offerings and to boost tourismrevenues by increasing travel to the Niagara Region. The Interim RTO chose to produce adestination magazine of approximately 100 pages with articles and photographs of interest on theentire Niagara region. The project included production of the magazine and distribution of themagazine via mail and strategically located boxes at commuter train stations. We noted that theproject was discussed as an option in the RTO Board meeting on May 13, 2010 and at the nextRTO Board meeting on May 28, 2010 a contract with a selected vendor had already beenestablished and finalized through a single source arrangement. The contract was negotiated by theCo-Chairman of the RTO Board and was established between the NPC and the vendor. We notedthat the Co-Chairman of the RTO Board is not in a position however to bind the NPC legally and

execute contracts on behalf of the NPC.

The Interim RTO Board was not given the opportunity to discuss the procurement and to approvethe single source decision. At the May 28, 2010 meeting the concern over the single sourcing wasraised by a RTO Board member; however, the minutes explain that given extreme time constraints,a proper competitive process would not be feasible to get advertising in place for the start of theseason within the next month. The discussion was not pursued further in the meeting and abusiness case outlining alternative options and the allowable exception for a non-competitiveprocurement was not documented formally. The NPC Board of Commissioners did not approve


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and were not made aware of the single source procurement by the RTO Co-Chairman when thecontract was established in May.

Subsequently in June 2010, the NPC on behalf of the Interim RTO submitted a Project Proposal tothe Ministry of Tourism and Culture in order to request transfer payment funding for 75% of theproject costs. The proposal identified that all project management including the design, writing,production and distribution is included in the services provided by the selected vendor. However,the Ministry was not made aware at this time that the procurement of the vendor was singlesourced.

In August 2010, the Ministry became aware of the single source procurement approach and raisedconcerns as to why the vendor was single sourced. The explanation provided was that theselected vendor is the sole Niagara publisher that maintains and services commuter boxes and hasexclusive advertising contracts with key tourism businesses. We note that although the selectedvendor is identified as the sole Niagara publisher, a comprehensive business case of other optionsand alternatives is a better practise that was not documented to research whether other publishersoutside of the Niagara region could have achieved better value-for-money for the RTO.

The project proposal was accepted by the Ministry of Tourism and Culture and a transfer paymentagreement between the NPC and the Ministry of Tourism and Culture was signed in September2010 with appropriate approval authorizations.

Recommendations

The NPC should ensure that only authorized individuals enter into contracts with vendorseven in the case of flow through agreements.

The NPC should explore alternative contracting options on how best to manage the risksrelated to the administrative role associated with flow through arrangements.

Where NPC acts as an Administrator for flow through arrangements and the agreementsare signed in the name of the NPC, the administrator should adhere and comply with allaspects of the NPC Procurement Policy and the Flow Through Board should be madeaware of the policy and its contents.

As with all procurements, a documented business case for all single source flow througharrangements should outline the rationale for using a non-competitive procurement processincluding the circumstances that prevent the use of a competitive process. The businesscase must also document a description of the pool of potential vendors that might haveresponded to a competitive process and reasons for not pursing these other vendors.


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Agreed. A memorandum of understanding of NPC obligations will clarify the responsibilities. Onceestablished NPC policy will govern the assigned obligations/responsibilities.

All flow through arrangements will have a memorandum of understanding which clearly outlines theresponsibilities of each party with respect to obligations and administrative requirements.

Where obligations and administrative requirements are the responsibility of the NPC, then NPCpolicy will dictate how these are accomplished and policies related to procurement will be followed.The NPC Board is to provide oversight when NPC acts as the Administrator for a Flow-throughagreement.

Before the NPC becomes Administrator of a Flow-through agreement, NPC counsel will beconsulted on the terms of the appointment and opportunities to reduce NPC risk.


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3.2 Centralized Documentation

All decisions related to the acquisition of RGOs and procurement of goods and services are to besupported by adequate documentation. A central repository of procurement contracts and relateddocuments allows an organization to effectively and efficiently manage procurement processes.

We noted that the NPC does not have a single repository to retain key acquisition and procurementdocumentation, including signed contracts, supporting documentation (e.g. business cases andoptions analyses), insurance certificates (where required by the relevant agreement) and taxcompliance certificates, as applicable. Instead, contracts and key procurement documents aredispersed among various business units. We observed cases where procurement documents could

not be provided for review, although we understand from NPC management that the documentsexisted but could not be located by the NPC. In addition, we noted that the procurement files didnot always contain the required insurance and tax compliance certificates to support therequirements of the contract agreement and the NPC Procurement Policy.

The lack of a centralized repository makes it difficult for the NPC to effectively manage theirprocurements and document retention processes. In addition, this makes internal quality controlefforts more difficult. Adequate retention and availability of procurement documents is important tosubstantiate that a fair and transparent process was applied throughout the acquisition andprocurement processes. In the absence of key documentation, the NPC may not be able torespond to requests for information, vendor inquiries, or legal concerns, in an effective and timelymanner.

We also noted that NPC senior management usually reports its analysis about significant mattersfor the Boards deliberations and/or approvals. These reports are titled Reports to theCommission. We noted that these reports usually have the name of the preparer and the date ofsubmission; however, we noted instances where these reports are not dated. This does notfacilitate identifying the final version of the document, or to confirm whether a particular version wasshared with the Board.

Recommendations

The NPC should consider developing a centralized repository to retain key procurement

documents.

NPC should consider standardizing the template for the Reports to the Commission andrequire that they be dated in all cases. The NPC should also consider electronically attachingall Reports to the Commission with the corresponding board meeting minutes to facilitate acomplete documentation record.


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Periodic internal spot checks of procurement and RGO files should be carried out by NPCmanagement to ensure that documentation is complete and consistent with the NPC Policiesand applicable Government Directives.


Agreed. The principle of centralization of contract documents, including procurement documents,makes great business sense. A centralized database will assist NPC to track key contractcommitments such as terms or key deliverables. Contracts will become the responsibility of thefunctional department i.e., contracts and purchase order will be maintained by the PurchasingDepartment.

A standardized template of Procurement activities will be prepared for each NPC Board meeting toupdate the Board in a timely manner of all NPC Procurements in process.

NPC Internal Audit will provide oversight of Corporate Purchasing to ensure proper delegation andadherence to NPC policy.


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3.3 Training on the Procurement Directive and RGO Policy

The NPC has not conducted formal training on the principles, scope and application of theProcurement Directive, and the NPC Procurement Policies, and the RGO Policy for managementand staff. We understand from the Interim General Manager this training is being planned in thenear future.

Given the recent changes to the Procurement Directive, NPC Procurement Policy and the newlydeveloped RGO Policy, it is critical that management and staff receive proper training tounderstand the complexities in these documents and how to effectively implement compliance withmandatory provisions in these documents.

Recommendation

Regular training on the Procurement Directive, the NPC Procurement Policy and the RGOPolicy should be provided to all the NPC staff to ensure that the requirements are fullyunderstood and complied with.

Management Responses and Action Plans

Agreed. RGO policy will be communicated to all staff involved in RGO administration.

In phase two of the PMP, following development of the standardized templates, documentationrequirements and revised policies a training and communications plan directed at internalmanagers will be delivered on a compulsory basis. This training will focus on the procurementprinciples, new policies, documentation preparation and most notably on risk assessment and riskmanagement strategies.


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3.4 Terms of Contracts

The NPC should negotiate contracts with terms that are in its best interests. The terms of contractsthat we reviewed varied from 1 year to 10 years of duration. Some of the contracts also haverestrictive clauses for example, requiring the NPC to give an exclusive first right of refusal to theincumbent before considering other options. This type of clause limits the NPC with respect to itsdecision to continue with the same organization or to seek other options.

In one case, the clause states, The term of this agreement shall commence on the date of thisagreement and shall continue until the services are completed or this agreement is terminated ashereinafter set out. This contract was signed in 2002 and continues to date.

Although the decisions regarding the above terms may have been based upon NPC managementanalysis at that time, no documentation is available on file to show how the terms of the agreementwere determined to be in the best interest of the NPC.

Recommendation

NPC should establish a process consistent with applicable NPC Policies for appropriate seniormanagement to perform and document the due diligence and analysis with respect to theterms of contracts.

Management Responses and Action Plans

Agreed. Terms of contracts should be based upon business requirements that evaluate alternativeoptions from all perspectives, business environment, financial environment, market trends and riskassessment.

Optimal terms will be considered in all cases and will be approved according to the NPC DOAaccordingly. Documentation requirements will be established in Phase One of the PMP andtraining will commence in Phase Two.


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APPENDIX A ACKNOWLEDGEMENTS

We would like to take this opportunity to thank the management and staff of the Ministry of Tourismand Culture and the Niagara Parks Commission for their assistance during this engagement.

.

Conducted by:

Original signed by

______________________________Asif JanjuaRisk and Assurance Consultant

Reviewed by:

Original signed by

______________________________Sonia GigliottiSenior Audit Manager


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APPENDIX B ENGAGEMENT OBJECTIVES AND SCOPE

Objectives

1. The objective of this audit is to determine whether the NPCs non-competitive procurements forgoods, consulting services and non-consulting services were in compliance with:

a) The mandatory requirements for Other Included Entities per the MBC ProcurementDirective, July 2009 and the internal NPC policies for non-competitive procurementsundertaken by the NPC subsequent to July 2009.

b) The NPCs internal policies and the principles of the MBC Procurement Directive, and

Operating Policy, November 2007 for non-competitive procurements undertaken by theNPC prior to July 2009.

2. The objective of this audit is to determine whether the decisions and accompanying support forsingle source revenue generating opportunities were in keeping with prudent business practises.

Scope

The scope of this engagement was for the period from April 2008 to December 2010 and includes:

Reviewing files, records and documents associated with single source procurements and

RGOs including the business case requirements and the proper approvals to support the non-competitive process.

Interviewing relevant management and staff at the NPC, the Ministry and other applicableparties to obtain clarifications and additional information where required to supportprocurement and RGO decisions.

Single source contracts were selected on a sample basis based on professional judgment.

The engagement was conducted in compliance with International Standards for the ProfessionalPractice of Internal Auditing as well as Ontario Internal Audit Division and Culture & InnovationAudit Service Team Standards.


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APPENDIX C DISTRIBUTION LIST

This Report has been distributed to the following individuals:

Steven Davidson, Deputy Minister (Acting), Ministry of Tourism and Culture

Shirley Phillips, Assistant Deputy Minister, Tourism Planning and Operations Division

Janice Thomson, Interim Chair, Niagara Parks Commission

Robert McIlveen, Interim General Manager, Niagara Parks Commission

Richard Kennedy, Chief Internal Auditor and Assistant Deputy Minister, Ontario Internal AuditDivision, Ministry of Finance

Audit Committee Members, Ministry of Tourism and Culture

Documents

NPC Audit of Single Source Contracts and RGOs - Final Report 2011