Audit of capital assets management: chapter 3

2. Findings

2.1 Governance/Management Framework

The TB Policy on Management of Materiel requires Deputy Heads to ensure that a materiel management framework^Footnote4 that clearly defines roles and responsibilities provides for adequate segregation of duties and ensures that procedures are in place.

The audit found that EC does not have a comprehensive Materiel Management Framework. The audit noted that while, in practice, it is clear that CSB is now the functional authority for the lifecycle management of capital assets, this has not always been the case. It is still not clearly defined in any departmental policy document.

While we found no overall framework for capital assets, we did observe that a fully developed framework exists for managing real property. Although this framework includes all the essential elements and is departmental in scope, it is currently fully implemented for those centrally managed real property assets only.

The establishment of roles and responsibilities for major activities that support the lifecycle management of capital assets is an important component of the framework. The audit noted that existing EC policies give little overall direction as to who is responsible for which function (e.g., planning, use, maintenance, monitoring and disposal). Roles that are not well articulated include the functional authority’s role, the custodian’s role, and the program manager’s role.

Consequently, there has been confusion about who should be designing the tools, processes and procedures needed to manage capital assets. Ror example, when the department decided to implement ALM for the lifecycle management of assets, the lack of clearly defined accountabilities led, in part, to the inconsistent implementation of the system across the department.

The lack of clarity about who is responsible for assuring the accuracy of the capital asset inventory over time is another issue. At the time of the audit, we were unable to find any departmental policy, directive or guidance that establishes who is responsible for maintaining the physical count of capital assets or describes how or how often it will be carried out.

As a consequence, inefficiencies have arisen due to duplication of effort and conflicting practices. In addition, some of the critical functions necessary to manage capital assets such as the disposal of assets or development of key information have either not been carried out or carried out inconsistently.

2.2 Lifecycle Management Processes

Treasury Board describes lifecycle management as the effective and efficient management of assets from the identification of program’s requirements through to the eventual disposal of the assets.

Planning

One of the most important processes for the management of capital assets pertains to planning the initial acquisition. The actual procurement of the asset was not included in the scope of this audit. Nonetheless, the audit expected that effective systems, processes, procedures and controls would be in place to ensure that investment decisions are based on program priorities, that they include all anticipated costs throughout the asset’s lifecycle and that investment decisions provide optimal value for the department.

As previously mentioned, EC undertakes a multi-year, department-wide integrated planning exercise for its capital asset investments each year known as the Integrated Investment Planning Process.

The audit found that the process requires that investment decisions and lifecycle maintenance of the existing capital asset base, be prioritized based on program priorities. The process is also used to prioritize the value received from new acquisitions, helping to ensure that optimal value is received. The process establishes the capital budget levels for all capital asset categories and ensures that resources for existing and new assets are allocated within existing departmental reference levels. At the time of the audit, the final output from the yearly IIP process was a three year Integrated Investment Plan approved by the Deputy Minister. The department has since converted to a five-year horizon to align with the five year Investment Plan that must be submitted to TBS.

Results of interviews further clarified that the program branches use the IIP process to do both top-down and bottom-up development of their capital acquisition plans while aligning these acquisitions to their objectives and priorities. In addition, branches are required to rank their demand using a number of criteria, one of which deals with the risk of not acquiring the assets.

The templates used to gather and consolidate requests for new acquisitions require managers to align their request to a departmental priority. However the template does not specify to which priority/outcome the request contributes and as a result it does not allow for a complete and informed challenge function, especially once the requests are consolidated at the department level. The investment planning process would be improved if the planning tool provided more information about the outcome and relative priority of each request for investment.

At the time of the audit, although Asset Category Leads were reviewing investment proposals, there was no independent review taking place. Explicitly integrating an independent peer review into the process would strengthen decision-making by incorporating a more meaningful challenge function. Since the audit, senior managers reported that the department has established an ADM Capital Steering Committee to provide strategic direction to the capital planning process, to review proposed investments to ensure they are aligned with departmental priorities and to ensure the capital plan includes the right mix of investments by asset category.

Additionally there is an annual capital planning workshop with the Asset Category Leads to review each line of the plan for relevance, risks and costs.

The audit team also noted that the current method of circulating the template and gathering the responses during the IIP process might not be the most efficient way to capture this information. Interviews with managers indicated that version control was sometimes difficult during this process.

Senior executives also noted that a longer-term planning horizon would be useful as some of the assets have life spans of 40 years or more. They noted that having longer-term information available for decision-making would make it easier to plan for assets that take multiple years to acquire and replace.

Overall, the current planning process ensures that investment decisions are based on program priorities and that those decisions provide optimal value for the department. However, the improvement to the template used to consolidate investment requirements would further strengthen this process.

Use and Maintenance of Capital Assets

Throughout the lifecycle of an asset, overall operational performance and condition should be regularly and systematically assessed, including the asset’s functionality, extent and nature of use, and physical and financial performance.

This audit addresses three of the four major capital asset groups that EC operates, uses and maintains to deliver on its mandate - real property, transportation assets (light-duty vehicles) and S&T assets which include those owned by MSC (primarily the atmospheric and hydrological assets) and S&T.

Overall, the audit found that key cost and performance information needed for operational decision making is generally available for the centrally managed real property and for the vehicle fleet. However such information is not as readily available for most science and technology assets and for the real property assets managed by the program areas. In addition, while the CESD audit recommended that the department develop the capacity to consider the full lifecycle cost of assets when making investment decisions, the department has not yet defined what full lifecycle cost means in the context of the various asset classes. Furthermore, in cases when cost information does exist, it is generally not readily available for analysis.

The audit concluded that the information generally available to manage capital assets during their operation is inadequate in some areas. This pose a risk that the department could make sub-optimal lifecycle management decisions about whether to repair or replace equipment, whether a particular asset type is as good as other assets in its class or whether new assets with additional capacity are required to meet expected demand. Insufficient information for decision making may also lead to higher levels of risk, as might occur when assets that support critical services fail leading to a loss in the continuity of those services.

The following provides a brief description of the assets in each asset group and findings regarding their operation and maintenance.

Real Property Assets

The department has unique real property holdings in the form of “special purpose space” such as laboratories and computer facilities. Approximately 65% of EC’s real property sites are air, climate and water monitoring stations, which span all regions of the country. The department also manages and operates research institutes and wildlife habitats. These assets are used to conduct environmental research, develop technologies, and protect critical wildlife.

We focused our audit on 17 of the most complex sites centrally managed by the Property Management Division (PMD) of the Corporate Services Branch. They represent about 70% of the total replacement value of all EC real property assets. These sites range in size from very large, at 56,212m² (Canadian Centre for Inland Waters) and 20,340m² (335 River Road Ottawa) to 149m² for a heritage farm house in Qualicum, B.C. Most of these sites have laboratory, warehouse, office and common use space.

The audit noted that all operating, maintenance and capital betterment costs are captured for each of these 17 buildings/sites. The only cost not captured directly is Payment in Lieu of Taxes (PILT). However, PMD maintains the record of PILT for all EC properties and therefore can easily determine the full cost for operating these sites.

The audit also noted that the performance information maintained by PMD for these sites included for instance reinvestment rates, site usage, vacancy rates, energy efficiency and Green House Gas intensity. PMD also uses the Facility Condition Index (FCI) to assess the condition of its buildings. The FCI rating provides evidence-based information to inform the annual reinvestment rates that will prevent the accumulation of deferred maintenance deficiencies. To ensure that the FCI truly reflects the condition of the facility, the Real Property Framework requires that PMD obtain independent building condition reports from third party specialists. The Real Property Framework recommends that these reports be completed every five years to ensure that investment decisions are on track and prioritized effectively. Results of the last independent building condition report completed in June 2013 were communicated to senior management.

Overall, the audit concluded that information regarding the performance and condition of centrally managed real properties was available. However, the audit team was unable to determine whether this was also the case for the remaining of the properties managed by program areas given that basic information to locate the manager for the individual property proved to be difficult. (Refer to roles and responsibilities under section 2.1.

Transportation Assets

EC owned 737 light-duty vehicles at March 31, 2013. Light-duty vehicles include passenger cars, vans, and light trucks which are consistent with PWGSC’s Government Motor Vehicle Ordering Guide.

EC’s Green Fleet Management Policy clearly states that “Program staff is to ensure that vehicles are in good operating condition”. This includes ensuring that vehicles are routinely maintained in accordance with the manufacturer’s specifications and subjected to emissions testing where testing facilities exist.

The vehicle fuel and maintenance costs for light-duty vehicle are all captured on vehicle-specific credit cards. The maintenance and fuel data for each vehicle is compiled electronically from the vehicle-specific credit card to a host database called ARI. EC is the owner of the data captured in this system, and the National Fleet Manager can access fleet-wide and individual vehicle data. ARI can be used to extract data listings and associated performance information.

The Green Fleet Management Policy also establishes a list of performance indicators to measure EC’s management objectives with respect to the vehicles and drivers. Particular attention is paid to environmental metrics such as fuel consumptions and use of alternative fuels.

Overall the audit concluded that EC captures the required information to properly manage its transportation assets. In addition, the recent vehicle consolidation undertaken by CSB has contributed to optimizing the management of the department’s vehicle fleet.

Scientific and Technological Assets

There are more than 6,000 items in this capital asset category, which includes both S&T and MSC capital assets. The assets owned by the S&T Branch fall into two groups - the first is scientific equipment which produce data (laboratory and field analytical instruments) or directly support the production of data (e.g., samples and storage equipement, pumps chillers, etc. The second group does not produce data or directly support the production of data, but is still needed to undertake scientific work e.g. lathes, milling machines, A/V equipment , ice augers, GPS systems, and generators.

We focused our audit efforts on a sample of the former asset group and in particular on the high price data producing instruments. These included items such as specialized mass spectrometers, gas chromatographs and similar instruments which generally cost between $100 and $700K each. We visited laboratories in Ottawa and Burlington to determine how these instruments are operated, used and maintained.

The instruments we chose to review were all being operated by lab technologists and scientists at the time of our visits. The audit noted that the use and operation of these highly sophisticated, complex instruments typically were directed by a specific document which outlines all the steps and considerations necessary to ensure the validity and reliability of the analytic results.

The audit also noted that in practice, unlike real property assets such as buildings, these scientific instruments are maintained on a continuous basis and performance verification checks are done each time the instrument is used. These instruments continuously provide quality control data to the operator as to how well the instrument is doing what it is supposed to be doing. No performance information is maintained for this type of equipment other than the data continuously compiled by the scientist or technologist who is operating the equipment. We observed that the custodians of assets usually knew how well specific assets were performing and how much money was being spent to maintain them; we also observed that neither cost nor performance information for these assets was presented in the context of comparable information for other assets in the same class.

Results of interview with S&T officials further clarified that although no management information system exists to track the individual maintenance and repair cost of individual equipment items, the information is accessible and tracked at the Unit Head/Section Manager level. Furthermore, in some laboratories, the laboratory/site Management Committee reviews non-conformance reports related to instrumentation issues at least annually. If relevant, increased individual equipment costs are discussed at that time to determine appropriate actions.

Therefore, while generally performance and cost information is available to the technician for the purposes of operational and maintenance decision making, it is not readily available for the overall planning at a consolidated level.

Meteorological Services of Canada (MSC) Assets

MSC’s primary capital assets are its atmospheric and hydrological networks. We focussed our audit efforts on the Canadian National Radar (Weather Network) and the Marine Networks.

The Weather Network consists of 30 radar sites - 28 owned by EC and 2 by the Department of National Defence. Of the 28 radar stations owned by EC, 27 are operated by the MSC’s Weather and Environmental Monitoring Directorate. The 28^th radar station is a research station operated and maintained by CSB and is located in King City, Ontario.

Results of documentation review demonstrated that MSC’s maintenance function is carried out through both corrective actions and preventative maintenance protocols. All radar stations are continuously monitored electronically. Most fault conditions do not emerge as gradual performance degradations but occur suddenly. If there is a malfunction at a radar station it is immediately recognized electronically and the National Monitoring Desk becomes aware of the situation.

A preventative maintenance routine is performed by regional radar technicians in accordance with a list of maintenance protocols for bi-monthly inspections. All maintenance actions and inspection reports are monitored from the National Radar Information System website.

The key performance measure for the Weather Network is “System Up- Time” which provides senior management with trends in system availability over time by individual radar sites and for the network.

In terms of lifecycle costs, we expected to find the kind of information which would allow management to make optimal repair or replace decisions. The kind of cost information we were looking for included repair and maintenance costs for individual radar sites and for network cost trends across the network, the type of LCM information as recommended in the CESD December 2008 Report. We found that cost information is not yet available by individual radar site and were unable to find an Asset Condition Index which EC had undertaken to develop in response to the CESD recommendations. Although the Radar staff stated that lifecycle costs and some performance information exist, obtaining such information would require a data mining exercise.

In its response to the 2008 CESD audit, MSC committed to develop an Asset Condition Index. Initial work in that area has led to the identification of important deficiencies into the MSC’s radar network. This resulted in funding commitments in Budgets 2011 and 2013 to improve the radar network. Furthermore, MSC expects to undertake a thorough lifecycle costing and performance exercise as part of its network modernization and renewal exercise to ensure lifecycle cost information reflects the components of an upgraded network.

Lifecycle cost information should be regularly compiled by radar site to assist management in making repair or replace decisions. Radar staff should be able to demonstrate that investments in radar assets are prudent and that money is not being “wasted” on excessive asset renewal, or in continuing to maintain an asset when it is no longer prudent to do so.

The Marine Network consists of three sets of capital assets: Moored Buoys, Automated Volunteer Observing Ships (AVOS) and Drifter Buoy stations.

As of August, 2013 there were 48 moored buoys on station in the water and of these half are seasonal as they are taken out of the water in the fall. The buoys are inspected and maintained by a combination of MSC trained technicians and a contractor. The contractor is responsible for modifying, substituting or upgrading parts to meet the physical or electrical specifications required by EC’s Technical Authority. Furthermore, the contractor is required to provide training to EC staff. Detailed inspection checklists with work orders are maintained in the Asset Lifecycle Management Module.

As of August, 2013 there were 52 AVOS stations installed on either a Canadian Coast Guard ship or a commercial vessel. AVOS stations are inspected annually on a non-scheduled basis while ships are in port. Some repairs and inspections are carried out by MSC technicians while other repair work and training are provided by contract with the same manufacturer who holds the service and repair contract for the Moored Buoy Network. Under the terms of the contract, the contractor is responsible for the supply of parts, subsystems and systems. As is the case for the Moored Buoy Network, detailed inspection checklists with work orders are maintained in the Asset Lifecycle Management Module.

There were 27 Drifter Buoy stations active as of August 2013. This number varies as buoys are deployed and expire on a month by month basis. EC will know when the buoy expires as it will no longer be sending signals to the network. The average useful life of a drifter buoy is between one and two years. EC does not maintain these buoys once they are set to sea and rarely ever sees them again.

The audit concluded that overall the practices were generally sound.

Disposals

The TB policy on Management of Materiel states that the overriding disposal objective is to ensure that the disposal of surplus assets is concluded as effectively as possible after they become surplus to program requirements . When an asset is being replaced as a result of a lifecycle management decision, it is not only important to monitor the acquisition of the new asset, but to also follow-up on the disposal of the replaced asset.

The audit noted that while the IIP demand templates allow managers to identify assets being replaced, 77 out of 212 (36%) replacement requests did not provide this information. Furthermore, the audit team observed little or no follow-up after the fact to ensure that replaced assets were, in fact, disposed of. The audit also noted that the EC’s FA module contained a record of many assets that no longer exist in the department. Most EC personnel we spoke with acknowledge that the disposal process is a long standing challenge, as some replaced assets are not disposed of, and as the FA module is not always updated when an asset is disposed of. Our discussions with the EC staff that are currently performing the physical capital asset count also concurred with this.

Overall, the audit concluded that the procedure on proper disposal of surplus assets needs to be strengthened.

2.3 Asset Systems

The TB Policy on Management of Material requires departments to ensure that a materiel management information system is in place to facilitate the collection and generation of complete and accurate data on asset holdings (capital assets, inventories and materiel in use). The system should be integrated with departmental financial information systems and support timely and informed materiel management decision making.

Before a department can manage its capital assets throughout their lifecycle, it first needs to know what assets it has, where they are located and who their custodian is. The Fixed Asset (FA) module of EC’s financial system is the only system-of-record for the existence of the asset. It records what assets exist, who the custodian of the assets is, and what the remaining value of the assets is for financial reporting. A physical count and reconciliation of the assets in the FA module has not been conducted for many years.

To resolve this issue, Finance Branch began work on a number of parallel initiatives in 2012. For the purposes of this audit the most important of these initiatives is the project launched in fall 2012, to complete a risk-based^Footnote5 physical count of EC’s capital assets. The exercise is not complete and the changes to the assets resulting from this initiative was therefore not known at the time of the audit; however, validation of asset existence will improve the completeness and the accuracy of the information recorded in the FA module.

The ALM module is the current system used to track/manage capital assets. It is meant to track information about the capital assets throughout their life in the department. For example, it is intented to establish where an asset is at any given point in time, to whom it has been assigned, how much it is being used, what it costs to operate and maintain, and how it is performing. The information in the ALM module should always reconcile with the information in the FA module.

The audit noted that the ALM module currently contains information for a sub-set of EC’s capital assets only: five of the six weather monitoring networks (the radar network being the outlier), and a subset of IT assets (workstations and printers) used in the department.

Interviews with users of other asset classes (S&T) indicated that the module lacks the functionality to satisfy their needs. Taxonomy (i.e., the ability to categorize assets) was the major concern. The managers of the module noted that while the existing taxonomy may not have provided for the required breakdown of assets, the ALM module does accommodate multiple taxonomies and that a separate taxonomy could have been implemented for use by STB.

In addition, the audit noted that the functional authorities for the vehicle fleet and for real property continue to use independent tools to manage the lifecycle of the assets under their stewardship because these tools provide additional functionality and are capable of providing clear indicators of costs and operational performance specific to the class of assets they manage.

The audit concluded that the ALM module, as currently implemented, does not capture cost information in a way that allows it to be analyzed and used; furthermore the information from these two standalone systems (for Real Property and Fleet) is not available from ALM. In addition, given the state of the information in the ALM module, we found that reconciliation with the FA module was not possible for most of the asset categories. However, as previously noted, EC is now moving to a SAP implementation with the intention of developing and implementing an ALM module with this new environment.