Canada: Procurement And The Challenge Of Municipal Governance

A short while ago, a client called to share the details of a procurement process gone wrong. The facts were unusually ghastly. The client, a just-declared unsuccessful bidder, had spent a princely sum of money – not to mention considerable time and effort – preparing and submitting a proposal, the kind that was supposed to knock the competition out of the box. Of course, had the script played itself out, these words would never have been written.

The difficulty was not with the merits of my client’s proposal, which by everyone’s account were impressive. Rather, the problem was with the tendering process. The tender document was a Request for Proposals (RFP). The issuer was a municipality. Throughout the tendering process, the issuer made no apparent effort to define the rights and obligations of either the bidders or itself. The RFP was pretty much silent on the issues of process, and the municipality offered no guidance to bidders after the closing of the bids. As result, the bidders never ceased making arguments to the municipality, and the municipality never ceased listening to the bidders’ arguments, even going so far as to counter publicly with its own remarks on the merits of each of the bids received. By the time a decision was announced on the outcome of the competition, the process, such as it was, had deteriorated into an unseemly public spectacle. The process was neither fair nor transparent and, as might be expected, it significantly increased the municipality’s risk profile.

To be sure, some municipalities discharge their procurement responsibilities very well. Through competitive tendering, these municipalities generate optimal value-formoney for their stakeholders, they treat bidders fairly and with respect, and they do not needlessly increase their municipality’s exposure to liability.

There is enough waywardness around municipal procurement, however, to make anyone wonder why, with the current heightened concern globally over corporate governance and public accountability, so many municipalities are allowed to so frequently ignore the existing procurement rules. One can only imagine the fate of senior executives in the private sector today who would so systematically abdicate their responsibility in any area so central to their company’s operations, as procurement is to any municipality’s mandate.

Part of the explanation for the current disarray is that public sector procurement is often not supported by the necessary governace structure. A report released last July by Deloitte & Touche LLP makes the case. The report, which examined management practices at Canada Post, points to a number of instances where the CEO breached the rules and influenced the procurement process. The problem tends to be exacerbated at the municipal level, where governance structures are more often improvised, with the not unsurprising result that municipal procurement activities are frequently vulnerable to challenge. Lack of rigour in procurement can easily lead to lawsuits, or to such things as the RIM Park Financing Inquiry, the just-completed Toronto Computer Leasing Inquiry, and the just-started Toronto External Contracts Inquiry.

A more robust governance structure supporting the procurement mandate of municipalities is therefore badly needed. Measures need to be put in place that shore up the procurement legal framework. We now take a brief look at the body of rules that support and define municipal procurement, and then review some of the measures that can help municipalities improve their procurement risk profile.

The procurement legal framework is not fixed in time, or in place. There is a common core to it, a body of laws, that applies in both the public and private sectors across Canada. Beyond the core, however, the framework varies from municipality to municipality, from province to province, and it is subject to updates and amendments from time to time. There is also a large body of decisions that are issued by the courts each year in Canada that provide guidance, and make procurement a dynamic, if unpredictable area.

The 1981 decision of the Supreme Court of Canada in Ontario v. Ron Engineering and Construction (Eastern) Ltd¹ ushered in the new procurement era. While the case significantly improved the bargaining position of issuers of tender documents, it went on to revolutionize the procurement process in Canada – in both the public and private sectors – by addressing tendering problems using something other than traditional contract law. The multitude of cases that have followed since have attempted to balance the rights and obligations of the parties to the procurement process by introducing a variety of implied terms that reflect the reasonable expectations of the parties.

2. The Agreement on Internal Trade The next major development for municipalities was the passing in 1999 of Annex 502.4 to the Agreement on Internal Trade (AIT), which requires that Canadian municipalities (among other public sector bodies) "… establish a framework that will ensure equal access to procurement for all Canadian suppliers…".

In broad terms, the AIT aims to ensure that all Canadian suppliers have equal access to procurement opportunities and that public sector entities receive the benefit of the significant business advantages that flow from the competitive bidding process. For all of this to happen, the procurement process must be open and transparent, and participants must have confidence in the integrity of the process and those who operate it.

The most recent major development in municipal procurement in Ontario, and undoubtedly the most ambitious, is section 271 of the Municipal Act, 2001, which requires that municipalities in Ontario put in place a comprehensive procurement regime by January 1, 2005. Specifically, subsection 271(1) provides as follows:

"Before January 1, 2005, a municipality and a local board shall adopt policies with respect to its procurement of goods and services, including policies with respect to:

the types of procurement processes that shall be used; the goals to be achieved by using each type of procurement process; the circumstances under which each type of procurement process shall be used; the circumstances under which a tendering process is not required; the circumstances under which in-house bids will be encouraged as part of a tendering process; how the integrity of each procurement process will be maintained; how the interests of the municipality or local board, as the case may be, the public and persons participating in a procurement process will be protected; how and when the procurement process will be reviewed to evaluate their effectiveness; and any other prescribed matter."

The rationale behind the new provision is not entirely clear. On the one hand, it may simply reflect the growing concern globally with good corporate goverance and accountability. On the other, it may have been intended as a mechanism to implement the tendering requirements of the AIT. In this regard, some important issues arise regarding the application of – and potential conflict between – the principles and practices prescribed under section 271 and those set out under the Agreement, which need to be harmonized.

In addition to the above framework, the procurement process at the municipal level is typically supported by a multiplicity of rules internal to the municipality. These include the policies, procedures and other controls and requirements put in place by the municipality itself. It is also supported by the practices established in specific industry sectors, such as those applicable in the construction industry, for example, and the fiduciary obligations that apply equally to the employees of the municipality and its elected officials.

When it comes to governance, whether in the corporate environmnent or in the field of public sector procurement, no single initiative is sufficient. A proper goverance structure normally involves putting in place a series of steps that complement each other and that support the overall objective. What this series of steps should include is not self-evident and varies from municipality to municipality. From a practical perspective, the challenge is made more complicated by the varying sizes of municipalities and the related imbalance in the resources available to each municipality.

Still, some things can be done to help to reduce the exposure to risk that municipalities experience. Some of these include the following:

Councillors elected for the first time across Canadian municipalities generally know little about procurement. This is in no way a reflection of their personal professional capabilities. On the contrary, because procurement is a complex area, it is not realistic to expect that elected officials will be well versed in, or even have a passing acquaintance with, the complex web of rules that support the procurement framework in Canada.

A realistic expectation is for elected officials to understand enough to know what steps need to be taken in respect of procurement. To help elected officials meet this expectation, a best practice is for the senior municipal staff to prepare a short program on the fundamentals of procurement at the start of the new mandate. The purpose here is not to make procurement experts out of every newly-elected official. Rather, the goal is to allow the elected body to apply good judment and to take a proactice approach to the municipality’s procurement mandate. A little knowledge on the part of the elected officials can go far in reducing the risk of liability to the municipality.

Some municipalities do not internally house the expertise required to run the municipality’s procurement processes. This is a matter that goes well beyond having a purchasing by-law in place. Having a robust and well-considered purchasing by-law is not a trivial matter, but the real risks in procurement arise from the complexity of the issues that arise from the competitive bidding process, and which require a fine balancing of the rights and obligations of the parties. It is therefore important that each municipality allocate the resources required to build up the procurement function.

The personnel performing the procurement function within a municipality must ensure that it is continuously learning and staying abreast of the many developments and requirements in the area.

Continuous education is one thing; broader education is another. The skills set of procurement officers will continue to evolve rapidly. Being competent now means having a grasp of the financial, operational, and stragegic considerations that relate to a procurement process. In addition, because procurement personnel typically have no formal authority over the various business units with which they deal on an ongoing basis, having strong people skills will continue to be an important tool in the procurement officer’s toolkit. The procurement officer of tomorrow will also need to be highly skilled at working with senior executives.

Many believe that municipal procurement activities have historically been suboptimized, in part because the connection between procurement and strategic planning has often not been made. It is fair to say that the private sector is well ahead of the public sector in this area. Many large companies have developed elaborate sourcing strategies that integrate procurement into the overall strategic planning process of the company.

Thorough annual audits of the procurement process must be conducted to identify the problem areas. That way, improvements can be made, and best practices can be introduced. No audit process will serve any real purpose, however, until a centre of expertise in procurement has been established within the municipality. Obviously, the expertise must be in place internally before standards can be set and audited.

Even with the best of intentions and commitment, it is unlikely that the smaller municipalities across Canada will ever have the resources required to significantly mitigate procurement risks in an increasingly complex environment. Those municipalities that are operated by part-time councillors who are supported by a dedicated but small band of generalists do not have the critical mass to develop the proficiency that the area requires. For these municipalities, the answer may be to outsource some, if not the bulk of the procurement function.

For these municipalities, the advantages of outsourcing include (a) risk mitigation, through certainty of compliance with the caselaw, (b) cost control, through cost avoidance (in not having to build and maintain a new internal center of expertise, and not having to pay out on successful bid challenges), (c) new value generation, through the dynamics of the competitive bidding process, which leads to the submission of quality, competitive bids, and (d) predictable, fixed costs for the services provided. With outsourcing, the municipality benefits from superior quality services at a fixed price, with much reduced concerns over claims from unsuccessful bidders.

The importance of complying with the procurement caselaw cannot be overstated. The many cases that have appeared before the courts make clear that the consequences for failing to comply can be severe, as each procurement process creates a single successful bidder, and many unsuccessful bidders, whose purpose in submitting a bid was not to participate in a lottery. Having spent time and effort – and sometimes considerable sums of money – in preparing their bids, bidders expect a fair and equal process, conducted in accordance with rules that are both predictable and that they understand. In most cases, the business risks of getting it wrong are not worth the cost savings associated with non-compliance.

Running a business, including a municipality, means having to assume some risks, not just any risks, but risks that are commensurate with the activity being undertaken. By definition, this means that certain controls must be in place to assess the magnitude and the appropriateness of the risks being assumed in the circumstances. In these post-Enron, post-Nortel and post-MFP Inquiry days, nothing less will do. Risk assessement and risk mitigation strategies form an integral part of any sound approach to governance, whether in a publicly-traded company or in a municipality.

Sadly, in municipal procurement in Canada, anecdotal evidence suggests that all too often the appropriate controls are lacking. At times – such as in the tale of my client’s mid-summer municipal debacle – procurement is conducted in ways reminiscent of the far-west, where even those in positions of authority appear not to be aware that rules actually exists.

With the attention that the procurement scandals have brought to the area lately, and with the new demands under section 271 of the Municipal Act, 2001 in Ontario, now then is good time to re-assess the municipality’s procurement risk profile.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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