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1994 Report of the Auditor General of Canada

Assistant Auditor General: David Rattray
Responsible Auditor: Bernard Barry

Main Points

34.2 To meet these challenges, the Department needs to improve its strategic management of real property. It should ensure that accommodation planning is better linked to government program plans and is carried out in close collaboration with Treasury Board and other key players who share this responsibility. The Department's two recent policy initiatives, the National Investment Strategy and Shared Accommodation Leadership, should help foster a strategic approach.

34.3 In general, the 28 office buildings we examined - some old and deteriorating, others quite modern - were reasonably well operated and maintained, providing an adequate quantity and quality of space to federal departments.

34.4 More efficient management of Crown-owned office buildings and opportunities for savings are possible through developing and carrying out a renovation policy to optimize space usage and implementing energy and water savings initiatives.

34.5 The government faces two fundamental issues: Should departments pay rent for accommodation? Should departments have greater freedom in choosing their own office space? These issues need to be addressed as a matter of urgency.

34.6 Since space is provided free to most departments, there is little incentive for them to limit their use of it. In order to ensure proper management of office accommodation, the government should hold tenant departments accountable for the efficient use of their office space.

34.7 Public Works and Government Services Canada should provide office accommodation and service to departments with clear and consistent delineation of staff roles and responsibilities and project leadership.

34.8 While carrying out initiatives to simplify and reduce the costs of its services and administrative practices, the Department should improve its management information on asset condition, building maintenance and operating costs and performance, and departments' use of space.

Introduction

34.10 The mandate of the Public Works component of the Department is to attend to the government's office requirements and other real property needs; to offer expert advice and services in the provision, management, operation and disposal of federal real property; and to help meet the nation's social and economic objectives.

Background

34.12 Under Treasury Board policy, Public Works has responsibility for administering general purpose office and certain common-use facilities for the government. As shown in Exhibit 34.1 , approximately 27 percent of the total inventory of federal space has been assigned to Public Works, with the remaining 73 percent assigned to other departments. Public Works is the mandatory provider or sole source of office space for departments and provides accommodation for approximately 165,000 full-time equivalent public servants. (In government terminology, a ``full-time equivalent" is one person working full-time for one year.) The Department is also custodian of a number of other facilities, including the Parliament Buildings and certain bridges and highways.

34.13 Public Works' inventory amounts to 6.9 million square metres for both office space and other federal facilities (see Exhibit 34.1 ). In 1992-93, Public Works provided about 5 million square metres (see Exhibit 34.2 ) of office space, of which 2.3 million square metres was in 367 Crown-owned buildings. The total cost of the Public Works Real Property Program in 1992-93 was $1.8 billion. Gross annual expenditures related to office facilities made up approximately $1,040 million of this amount, with about $700 million for leased office buildings and $340 million for Crown-owned office buildings. Gross expenditures for Crown-owned office buildings include operating and capital expenditures but exclude grants paid to municipalities in lieu of taxes.

34.14 In 1991, we examined the planning and acquisition of leased office space. Our current audit concentrated on the management and operation of Crown-owned office buildings.

Public Works Environment

34.16 Another important issue for the Department is the Federal Government Program Review, announced in the 1994 Budget. This review is examining government programs to ensure that they provide services in the most efficient and cost-effective way possible.

34.17 Each of these changes has created a unique challenge for the Department in a period of marked budgetary constraints.

34.18 As well, because of its broad mandate as a "procurement" department, Public Works has historically been one of the government's vehicles for achieving social and economic objectives, such as increasing employment and stimulating regional development. A recent example of such development is the construction of the new Goods and Services Tax Centre in Summerside, Prince Edward Island.

Audit Objective and Scope

• building services to tenants are provided in a timely and responsive manner;
• the buildings are adequately preserved and protected;
• the buildings are operated and maintained in an economic and efficient manner consistent with occupants' operational requirements; and
• applicable government policies, laws and regulations are complied with (for example, health and safety).

34.21 To examine the management, operations and maintenance of Crown-owned office buildings, we:

• visited 28 office buildings of various sizes and types and interviewed responsible staff at all levels in the five regions of the country;
• discussed office accommodation planning, management and accountability issues with senior Public Works officials at headquarters and in the regions;
• consulted with real estate professionals in the public and private sectors; and
• reviewed information on accommodation management from other jurisdictions.

Lessons from Other Jurisdictions

34.23 The September 1994 report, entitled Real Property Management: Reforms in Four Countries Promote Competition , noted that the real property organizations in all of the countries were facing similar problems: "poor business practices; inadequate strategies for managing real property assets; conflicting roles as both the building service provider and the oversight agency; customer dissatisfaction; and barriers to the timely acquisition, maintenance, and disposal of real property." The real property reforms in these countries were characterized by: "(1) introducing competition for real property services; (2) providing more strategic management of assets, that is, in a manner that recognizes the need to manage these assets as investments and to meet customers' mission needs; and (3) separating building services from asset management (except for Sweden) and policy oversight and development roles."

34.24 The reform experiences in other countries can help Public Works and Government Services improve the structure and management of real property in Canada.

Observations and Recommendations

34.26 The costs of operating and maintaining Crown-owned office buildings are relatively fixed, at least in the short run. Consequently, there are no quick fixes to improve the management and operation of Crown-owned office buildings. The areas we have cited for improvement will require significant investment of resources, innovative planning and careful implementation on the part of Public Works and Government Services managers over the next decade.

34.27 Our audit observations and recommendations cover three main areas: strategic planning for accommodation, office building operations, and accountability and incentives in managing office buildings.

Strategic Planning for Accommodation

Ageing Crown-owned buildings

34.30 The average age of the Crown-owned office buildings in the Public Works portfolio is over 40 years. However, a significant portion, approximately one third, of the office space is in buildings that are less than 20 years old (see Exhibit 34.5 ). According to departmental officials, about 80 of the 367 buildings require upgrading of their structures and their lighting, mechanical, electrical and safety systems.

34.31 In 1986, the Treasury Board approved a management policy and framework for heritage buildings to be administered by the Federal Heritage Building Review Office under the Canadian Parks Service of the Department of Canadian Heritage. According to that policy, all government buildings over 40 years old require a heritage review prior to significant action. Since many of the buildings in Public Works' Crown-owned inventory fall into this category, the Department needs to consider the impact of the heritage policy in developing its long-term plans for facilities.

Funding requirements

34.33 During the past ten years, funding limitations have prevented the Department from undertaking the major renovations required to keep its asset base current. Based on industry averages, departmental officials currently estimate that additional funding of approximately $300 million will be needed over the next five years to carry out required upgrading of office facilities.

34.34 Recent renovation projects indicate that significant savings are possible through increasing the use of Crown-owned space so that less space must be leased. Further savings can result from the lower operating costs of updated mechanical, electrical, heating and ventilation systems.

34.35 The Treasury Board recently expressed concern over the rising costs of office accommodation. Exhibit 34.6 shows that expenditures on office facilities increased from about $740 million in 1989-90 to $1,079 million in 1993-94. The Board has directed the Department to develop a multi-year plan for achieving a 10 percent saving in both the amount of office space and the overall cost of the accommodation program over the next five years.

Impact of government accounting policies on capital expenditures

34.37 For example, no distinction is made between a $25 million outlay to renovate a building and a yearly $4 million outlay to lease equivalent space in a private building, even though the two types of expenditures are fundamentally different. The difference is that a capital expenditure for the renovation of Crown-owned buildings will provide future benefits by housing federal employees for perhaps 15 or 20 years, while an annual lease payment will have to be made year after year and will usually result in a higher overall cost to the government. However, because of the immediate needs of deficit management, major capital outlays are being deferred.

34.38 Departmental officials indicated that Treasury Board Secretariat has discouraged funding proposals for building renovation and space optimization projects unless they are required for health and safety reasons or have short payback periods. This situation has clearly hampered the Department's ability to obtain funding for space optimization projects that could result in substantial savings to the government over the longer term.

Accommodation planning in a rapidly changing environment

34.40 Despite significant difficulties in the current context of change and uncertainty, we believe that a strategic approach is necessary to provide a framework for making capital investment and disposal decisions on federal buildings and for entering into leases. To be effective, such a strategy must be carried out in close collaboration with the Treasury Board Secretariat and with the departments and agencies that require office space.

34.41 The Department has begun developing community-based investment strategies, but they have been generally limited to only its own holdings, with emphasis on office facilities. Broader-based regional plans that encompass all federal real property are the responsibility of the Bureau of Real Property and Materiel within Treasury Board. The Bureau needs to intensify its collaborative efforts with Public Works and other government custodians of real property to develop regional real estate plans.

34.42 To minimize risks in the current environment of uncertainty and government downsizing, a realistic strategy would focus on the retention of essential Crown-owned buildings and attractive long-term leases, based on a region-by-region analysis. The strategy would also necessitate decisive action to dispose of facilities that are no longer required or suitable for program purposes.

34.43 The proposed strategy should set out the desired mix, by region, of Crown-owned and leased space to meet office space requirements. Owning a building is generally considered less expensive over the long term than leasing it. However, leasing space offers flexibility when the long-term need for a building is uncertain or subject to fast-changing program requirements. A mix of "core" Crown-owned and "support" lease space would thus provide a trade-off or balance between cost and flexibility. There should not be a national "target" ratio; instead, an appropriate balance should be sought to meet the specific needs of each area of the country.

34.44 A more detailed accommodation plan would also be necessary to identify funding requirements for renovating the Crown-owned inventory and to indicate the savings expected through lower operating costs in the renovated buildings and through reduced leasing requirements. Without such an accommodation plan, there is limited assurance that appropriate decisions will be made in managing, investing and disposing of federal buildings or entering into long-term leases.

34.45 We recognize that preparing accurate forecasts of tenants' space requirements is a most difficult task, but we believe this is the opportune time for the Department to develop an appropriate strategic approach to the planning and management of office accommodation in collaboration with the key players who share this responsibility - the Treasury Board and federal departments and agencies.

Public Works' National Investment Strategy

• Invest in or divest of real property interests to achieve the best use of scarce resources.
• Plan and manage real property interests to meet client needs and minimize life-cycle costs.
• Retain only those interests in real property needed for approved program purposes.
• Base investment decisions on competent and comprehensive analyses of all reasonable options, addressing all financial and non-financial considerations.
• Establish appropriate performance indicators to monitor and evaluate investment decisions and interests.
• Take advantage of the full range of financing alternatives and opportunities for strategic alliances.

34.48 We believe that if the National Investment Strategy is appropriately implemented, bearing in mind the suggestions in this chapter, substantial improvements can be achieved.

34.49 The National Investment Strategy contains the following directions pertaining to office facilities:

• Reduce the total inventory to respond to the expected reduction in the demand for space over the next several years.
• Identify and dispose of facilities that do not warrant renovation or retention and make the most of opportunities to reduce costs and improve service to tenants.
• Ensure flexibility by having an appropriate balance of Crown, lease-purchase and lease holdings, taking into account life-cycle cost/benefit analyses.
• Bring Crown facilities up to full environmental, health, safety and accessibility standards as quickly as possible, subject to resource availability.
• Wherever practical, minimize the need for costly retrofits of both Crown-owned and leased facilities.

34.51 Public Works should take into account the impact of the heritage policy on its buildings in developing its long-term facilities plans.

Department's response: Consistent with the principles of the National Investment Strategy (NIS) (approved by Treasury Board, 23 June 1994) and the Real Property Branch Asset Performance Monitoring Policy (issued in April 1994), the custodial responsibilities under the government's heritage policy are acknowledged, understood and incorporated into the current asset management planning processes. In all future long-term facilities planning, Public Works and Government Services Canada (PWGSC) will identify, where possible, the full impact (cost and/or facility use constraints) of the requirements under the heritage policy for all capital and operating decisions.

34.52 The government should revise its current budgeting and accounting processes to remove the bias against capital expenditures and to take advantage of the long-term benefits of capital investments.

Treasury Board Secretariat's response: The Treasury Board Secretariat recognizes that the use of the annual deficit target as the government's principal tool for fiscal management frequently results in a bias against capital investment. Because of this bias, and in order to provide better accounting for the "cost" of government and to improve accountability for assets, the government is seriously studying capitalization of assets as an accounting policy. The study is also addressing negative aspects of a capitalization policy such as administrative cost of implementation and potentially weakened fiscal stewardship. A decision is expected in 1995.

34.53 The Treasury Board, Public Works and Government Services, and other federal departments and agencies should ensure that accommodation planning is better linked to government program plans, such as restructuring initiatives and regional investment plans. Accommodation planning should be carried out in close collaboration with the key players who share this responsibility. An appropriate balance should be sought in major areas of the country between core Crown-owned buildings and the flexibility offered by leased space.

Department's response: It should be noted that recently PWGSC has successfully undertaken a series of activities to better integrate long-term accommodation planning with strategic initiatives of government and individual departments. These activities have included the development of a comprehensive strategy to effectively manage the accommodation impact of government restructuring (June and November 1993) particularly in the National Capital Region. This particular activity involved collaboration with the Privy Council Office, Treasury Board Secretariat and senior officials of all affected departments. The resultant PWGSC proposal was approved by the Treasury Board on 2 August 1994 and, when fully implemented, will mitigate costs by some $20 million per annum and realize reductions in space utilization by approximately 78,000 square metres. PWGSC has also been recognized as a major stakeholder in the emergence of government initiatives such as the implementation of the Canada Business Service Centre concept, the InfoCentre initiative and the Income Security Program Re-Design. PWGSC was an active member of the interdepartmental task forces and identified real property issues associated with the planning, funding and implementation of these initiatives.

PWGSC will continue the improvement of its accommodation planning processes and further strengthen linkages to government initiatives in connection with the development of a strategy to achieve a 10 percent reduction in the overall use of government office accommodation. The strategy will consider the development of long-term tenant accommodation plans and will address the impact of government programs and policy reviews. It is expected that the strategy will be ready for Treasury Board consideration in connection with the 1995-96 Multi-Year Operational Plan and program review initiatives.

The Department's National Investment Strategy, used in conjunction with the long-term tenant accommodation plans and community investment planning, will ensure that the appropriate space solutions are analyzed and delivered to allow the effective delivery of tenant programs while minimizing the cost of government.

Office Building Operations

Services to tenants

Impact of budgetary restraints

34.57 According to Public Works officials, fiscal restraint over the past ten years has prevented the Department from undertaking the major maintenance and renovations required to keep its asset base current and at industry standards. They estimate that they would need capital funding of approximately $300 million over the next five years to accomplish this task. As noted earlier in the chapter, in the section entitled "Impact of government accounting policies on capital expenditures", the government's own accounting policies tend to favour operating expenditures over capital spending because it has a less immediate impact on the deficit. Further, without a long-term facilities plan, the Department cannot establish appropriate maintenance and repair priorities to manage and safeguard the value of its buildings.

Asset management plans

34.59 About five years ago, the Department began preparing asset management plans for each Crown-owned office building. The purpose of these plans was to provide a strategic framework to guide portfolio management decisions. The plans were to include a comprehensive, in-depth analysis of each building, including the identification of operation and maintenance requirements and capital expenditures.

34.60 To date, this exercise has cost the Department about $5 million, principally on external consultants. Our review of a sample of the asset management plans showed that they varied considerably in quality and substance. Some plans contained detailed assessments of the major building components and detailed estimates of the cost of needed maintenance and repairs. In other cases, however, the analysis of operating costs was inadequate because information on building conditions and operating costs was limited. We also found that no meaningful summaries of repair and maintenance backlogs had been prepared for the use of senior Public Works managers, for Treasury Board or for Parliament.

34.61 As new information systems are developed, the Department intends to update its asset management plans and correct these deficiencies so that the new plans will yield the type of information the Department needs to manage its portfolio of Crown-owned office facilities.

Preventive maintenance

• periodic inspection and assessment of building conditions;
• work standards for operating and maintaining major building systems and components;
• priority setting, budgeting and work scheduling; and
• management reporting on work performance.

34.64 Public Works introduced its Facilities Inspection Program in 1976. Maintenance routines and schedules were further refined and automated in 1986-87 with the implementation of the Preventive Maintenance Support System.

34.65 This system provides a formal program of scheduled inspections to service and test building systems and to identify maintenance deficiencies. The inspections and preventive maintenance routines are conducted by in-house building staff, tradespeople and technologists or private sector contractors. Property managers recommend the appropriate level of preventive maintenance on the basis of advice from the District Head, Technical Services.

34.66 Preventive maintenance for health and safety is obligatory. The Asset Manager in the Real Property Branch may choose from two other levels of preventive maintenance offered by the Realty Services Branch: basic upkeep of critical operating equipment and an enhanced level that includes all building components.

34.67 We found that practices varied from complete implementation of the Preventive Maintenance Support System in some regions to the use of a totally different local system in one region.

34.68 From a 1992 internal review of maintenance practices in the National Capital Region and our own audit, we noted that although minimum health and safety requirements were described, the following problems existed:

• There was no departmental policy on the appropriate level of maintenance for federal office facilities, and there were no policies and guidelines on the use of the Preventive Maintenance Support System.
• Except for the maintenance of life safety equipment, the use of the system was optional; the choice was left to individual asset managers and property managers.
• Major users and operators of the system had not received adequate training.

34.70 Conducting regular building inspections with appropriately trained technical staff is necessary to compile the information needed to plan and implement an effective maintenance program. In the absence of such a program, it is difficult to develop reasonable repair and maintenance budgets and make decisions on the division of resources between capital projects and maintenance operations.

34.71 Because of the emphasis on meeting short-term financial performance targets (contribution margins) in the management of Crown-owned buildings, some property managers are conducting annual building inspections without using the services of the Technical Services Division. Since property managers have very little control over other building operating costs, avoiding the use of technically qualified staff in conducting annual building inspections is one of the few ways in which they can reduce their costs and thus improve their financial performance over the short term.

34.72 We found that no clearly established quality control program existed to ensure "due diligence" on matters related to health, safety and operating requirements. In addition, some managers were not clear on accountabilities for these critical aspects of building management.

34.73 In summary, the preventive maintenance philosophy in the Department appeared to be inconsistent; it ranged from a proactive life-cycle approach to a reactive "wait until it breaks down" maintenance approach. In our opinion, the Department needs to ensure that appropriate maintenance standards, based on sound public and private sector practices, are in place and consistently applied in all regions.

Energy and water conservation in Crown-owned buildings

34.75 Due to the size and extent of Public Works' real property portfolio, the Department's operations have the potential to make a significant impact on our environment. In our audit of Crown-owned office facilities, we examined energy conservation initiatives and briefly surveyed water conservation measures.

34.76 In December 1992, Public Works issued its Environmental Management Plan and began a process of assessing all departmental operations to determine how it could carry out its mandate in a more environmentally responsible manner. As well, the initiatives put forward by the Green Plan were considered to ascertain their relevance to Public Works, and strategies were developed to address the relevant issues. The result of both these undertakings was a series of pledges outlining how the Department intends to address 26 important environmental issues.

34.77 The Federal Buildings Initiative for improvement of energy efficiency and conservation. One important vehicle for improvement of energy efficiency and conservation is the Federal Buildings Initiative. In February 1992, the Department of Natural Resources introduced the Initiative to provide custodian departments with the opportunity to realize the benefits of improved energy efficiency. Under the program, private sector firms, known as energy service companies, finance the capital requirements to retrofit government-owned properties to make them more energy-efficient.

34.78 One feature of the Initiative is performance contracting with a third-party financing mechanism that enables departments to undertake required energy efficiency improvements or to retrofit their buildings' mechanical and electrical systems. It should be noted that this is not necessarily the least-cost option for replacing or acquiring capital equipment and ultimately may cost more than direct government funding of a retrofit or replacement. However, the cost of the work and the related savings are guaranteed, a condition not available to retrofits directly implemented by the government.

34.79 Under the Initiative, a department requests preliminary proposals in a competitive-bid process from at least three energy service companies that have been pre-qualified for such work. Negotiations are then held with the company selected and a contract signed to undertake the retrofit or replacement. The capital costs are financed by the company and repaid from the energy savings realized as a result of increased energy efficiency due to the retrofit or replacement. The contractor guarantees the department a certain level of savings based on the building's current energy consumption, and the pay-back period (maximum of eight years) is established in the contract. Total energy costs are no higher than the current costs and, at the end of the pay-back period, the department benefits from reduced energy costs. The contract also specifies the adjustments that will be made to reflect inflation and changes in energy consumption not related to the project.

34.80 According to estimates prepared by the Department of Natural Resources, the federal government could save about $100 million a year on energy costs through the Federal Buildings Initiative. Public Works estimates that its potential share of these annual savings is between $12 and $15 million.

34.81 In addition to the potential for significant dollar savings, improving energy efficiency in federal buildings would make an important contribution towards achieving Canada's goal of stabilizing emissions of carbon dioxide and other greenhouse gases.

34.82 According to Public Works officials, there are about 80 Crown-owned office buildings that are suitable candidates for the Initiative. To date, Public Works has implemented one energy saving project on the Harry Hays Building in Calgary, Alberta, (see Exhibit 34.7 ) and is in the process of negotiating contracts for three other buildings.

34.83 Water conservation. Many of the principles employed in the energy conservation program are directly applicable to water conservation. Indeed, departments considering an upgrade to their facilities could simultaneously implement energy and water conservation measures. The Department of the Environment estimates that $30 million a year could be saved by improving the efficiency of water use in all federal facilities.

34.84 During 1993, the Environmental Services Division in Public Works conducted an audit of 116 of the Department's Crown-owned buildings across Canada. A February 1994 report concluded that energy and water audits had not been conducted at most facilities and that strategies for energy and water conservation had not yet been defined by Public Works.

34.85 Our discussions with officials at Public Works and the departments of Natural Resources and the Environment, along with our own observations, confirmed the need for Public Works to assess the results and risks of its pilot energy and water conservation projects and to plan similar measures in other suitable buildings.

34.86 The Department should:

a) develop a plan to provide more stable funding for major maintenance and renovation of its buildings;

b) be certain that it has appropriate management information on asset condition, building costs and performance, and the consolidated requirements for repairs and maintenance;

c) ensure that appropriate maintenance standards are in place and consistently applied in each region; and

d) assess the results and risks of its pilot energy and water conservation projects and, where appropriate, implement similar measures in other suitable buildings as quickly as possible.

Department's response:

a) The National Investment Strategy and the 1995-96 Multi-Year Operational Plan submission relative to the capital plan of the Real Property Program identify the requirement, and necessary funding levels, to deliver a program of renovating Crown-owned assets (office and common-use) at a rate of 4 percent per year. The ability to be successful in the delivery of this plan is directly related to the acquisition of the necessary incremental funds.

b) PWGSC, through its Asset Management Plan Policy and Building Management Plan process, has identified the management information required to appropriately manage the assets under its custodianship. What has been lacking to this point are effective management information tools. The tools (the Asset Planning and Asset Management systems) have been identified as business-critical in the departmental strategic information technology plan and are planned for development in the coming years as resources can be made available.

c) The Department is taking steps to enhance the quality of maintenance standards and their application across the country. The steps include: i) health and safety: safety requirements checklist and associated policy and periodic audits; ii) environmental regulatory and health and safety requirements: managerial framework including project prioritization, funding, implementation, audit and verification and reporting; iii) a workplan for maintenance with prudence and probity.

d) For both energy and water conservation, we now have existing processes that will allow us to take maximum advantage of existing opportunities. For example, the identification of savings possibilities has been incorporated directly into our annual building management planning process. In this fiscal year alone, we intend to initiate up to 25 Federal Buildings Initiative projects. Any quicker progress would not be consistent with the principle of prudence.

Accountability and Incentives

Accountability of tenant departments for office accommodation

34.88 In 1991, we recommended that Public Works seek government resolution of the question of charging tenant departments for office accommodation. In 1994, the Treasury Board Secretariat was asked by ministers to examine this issue and develop implementation options in consultation with Public Works and Government Services and other departments. In our view, resolution of this fundamental issue is urgently needed to facilitate essential reforms in planning and managing office accommodation.

34.89 User-pay systems for government accommodation are complex, and practices vary markedly within Canada and in other countries. Moreover, the concept of user pay has its supporters and opponents, depending upon various definitions of "good public administration".

34.90 With a user-pay system, tenant departments would receive appropriations from which they would pay rent to Public Works, based on the estimated market rate for space occupied.

34.91 Charging for accommodation has usually been a key element in past attempts to establish revenue dependency for Public Works. As the wording suggests, Public Works would depend on revenues generated from providing accommodation and other services to finance all of its activities, including capital repairs and acquisitions.

34.92 In 1985, the Nielsen Task Force on Program Review noted: "Instead of revenue dependency becoming an initiative to reform Public Works, it has become a vast exercise in financial and information system development." The Task Force observed:

"Revenue dependency has been oversold by its advocates....it is not a panacea for Public Works or government accommodation problems. It will not be very effective in controlling the demand of tenants for services. The money tenants will need for services and rental accommodation will, in most cases, come from appropriations and be ``passed through" to Public Works. Displaying accurate accommodation costs in departmental estimates is unlikely to improve discipline because such costs are so minor an element of departmental budgets. In the United States, Great Britain and the two Canadian provinces using Crown corporations to deliver accommodation, control of tenant demands is still exercised by versions of entitlement standards, enforced by central agencies."

34.94 Opponents of user pay argue that to introduce the concept without giving tenant departments "optionality" - the freedom to choose their own office space - and without forcing Public Works to compete with the private sector would simply add to the administrative process and create little overall savings in accommodation. Accommodation costs would merely be passed through to the tenant departments, using an elaborate accounting and billing system.

34.95 A further problem is that optionality is generally considered unworkable in areas where the federal government is a dominant user of office space, such as the National Capital Region. Public Works and Government Services holds 42 percent of its Crown-owned office space and 45 percent of its leased office space in the National Capital Region. In such a market, one common service provider (Public Works) who knows the local real estate market can deal most effectively with private sector real estate firms (the supply side) and optimize tenant requests (the demand side) with the available Crown property holdings. In our opinion, optionality for accommodation in the National Capital Region would be impractical and very likely lead to suboptimizing government resources for accommodation.

34.96 According to Public Works and Government Services officials, jurisdictions that have introduced optionality have suffered from an exodus to more attractive leased space and consequently have large inventories of vacant public sector buildings, which are difficult to rent out or to dispose of in glutted markets. Since the changes in real property organization in most jurisdictions are relatively recent, it is too early to fully evaluate their impact. Public Works continues to monitor the pros and cons of these organizational changes in Canada and abroad.

34.97 In 1988, when it was decided to transfer the administration of accommodation policies to Public Works, Treasury Board decided to defer consideration of the issue of charging rent to all departments until the end of the implementation process. Treasury Board will evaluate Public Works' increased managerial control of the accommodation program and assess the viability of user pay for accommodation. The evaluation had not yet been conducted at the time of writing this report.

34.98 In our 1991 chapter on federal government building leases, we concluded that:

"The revenue dependency concept can work for common service agencies in some situations, but it is not a panacea. These agencies invariably require good management practices, appropriate management information systems, adequate controls and realistic performance measurement systems no matter how they are organized or how their services are financed."

34.100 Monitoring departmental space usage and providing better performance information. For many years, Public Works has been responsible for monitoring compliance with Treasury Board policies on the amount, quality and location of office accommodation for tenant departments. In its control role, the Department must ensure that requests for space are met with optimal use of existing inventory (Crown-owned and leased), best value for money and integrity in the tendering process.

34.101 In September 1993, the responsibility for the development and enforcement of office accommodation policies was transferred to Public Works and Government Services. Under the new framework, called Shared Accommodation Leadership, the Department is working in partnership with tenants to establish benchmarks and standards for office accommodation (see Exhibit 34.8 ).

34.102 Concurrent with the establishment of this framework, the Treasury Board directed the Department to develop a comprehensive plan, in consultation with tenants and Treasury Board, to achieve a 10 percent reduction in the amount of accommodation used by the government.

34.103 The framework offers tenant departments certain choices: it enables them to take a lead role in defining their accommodation requirements and to be accountable for how their space is used. In addition, tenants are able to negotiate exceptions to standards but are required to pay for those exceptions.

34.104 Since 1963, Public Works has been showing the imputed value of accommodation provided without charge to tenant departments. Despite the disclosure of this information, it is generally recognized that since the space is free to most departments, there are few strong incentives for them to limit their use of space. For example, there is no disclosure of space usage against a baseline standard.

34.105 In our opinion, there has to be more "bite" to the accountability system for tenant departments. This might include, for example, a self-assessment or self-monitoring system to ensure that each tenant keeps its space within a predetermined range.

34.106 Public Works and Government Services has an important regulatory role at a macro-level in the central management of government accommodation. However, it is impractical and too expensive for the Department to monitor tenant departments at a micro-level. Departments have to provide accurate occupancy information to Public Works and periodically validate information on their space usage.

34.107 Our 1991 audit of leased office space, externally prepared asset management plans and departmental internal studies have noted the problems with the Department's property management information. Our observations from this audit reaffirm that there is still a need for better property management information, including tenant occupancy data.

34.108 To monitor the current use of space by each tenant, Public Works and Government Services prepares summary accommodation performance reports using three indicators: square metres per person, costs per square metre and costs per person. (In this context, "costs" are imputed market-based rents, not actual cash expenditures.) Public Works and Government Services has provided this information to tenant departments as of March 1994 and intends to publish the performance indicators along with external benchmarks, by tenant department, in its 1995-96 Estimates. We support this initiative to report accommodation information to Parliament and encourage the Department to report actual expenditures by tenant department, as well.

Accountability within Public Works for managing buildings and projects

34.110 Officials of the Real Property Branch, the custodian of office and certain other government facilities, believe they are accountable for those facilities and that the service branches should provide them with services, as would any third-party supplier. They pointed out, however, that, unlike owners/investors in the private sector, they do not have the option to use other suppliers if they are not satisfied with the internal service branches. They also stated that a quality assurance program is not in place to ensure that the branches comply with the terms of internal service contracts. In brief, they believe that a more businesslike approach with an arms-length relationship is needed.

34.111 Departmental and interbranch charging for realty, architectural and engineering services was initiated to encourage cost awareness on the part of both tenant departments and the Real Property Program within Public Works and Government Services.

34.112 The application of the buyer-seller model within Public Works has contributed to the establishment of a complex system of interbranch service agreements, memoranda of understanding and internal charging practices. Rather than making the Department more businesslike and clarifying accountability, it has had the opposite effect, diverting efforts from managing buildings to managing internal processes. In particular, it has made the departmental programs bureaucratic and costly to administer. Departmental officials cited the following problems:

• the tendency to defer repairs and maintenance to improve the short-term financial performance of buildings;
• unproductive internal competition between service branches in the face of a shrinking workload; and
• excessive internal paperwork and complicated administrative processes.

34.114 Recent client surveys and client consultation workshops indicated that clients still felt that too many people were involved in certain projects and, often, it was unclear who was in charge. For example, respondents to a survey conducted in one of the regions stated that "more work needs to be done in this area in order to ensure that there is true accountability of the Real Property Branch personnel for all services provided by Public Works and that this accountability is recognized and supported by the other branches in the region, that is, by the Realty and Architectural and Engineering Branches."

34.115 A November 1992 operational review by external consultants and our own audit work have found that there is an excessive amount of complexity involved in the day-to-day management of Public Works. According to estimates provided in the review, annual savings of $12 million could be achieved through reduction and simplification of administrative practices.

34.116 We observed that in regions where Public Works branches generally co-operated with each other and worked toward a common goal, it was reflected in operational results. There were fewer problem projects, less chance of duplication of services and a sense that technical specialists were consulted when they were needed. In brief, the commitment to providing office accommodation and to serving tenant departments encouraged staff to better manage interbranch activities.

34.117 We believe that the moment is opportune to examine once again the assumptions that underlie the structural and operational changes that have been implemented over the past decade.

34.118 The re-examination should include the roles, responsibilities and accountabilities of the current branches of Public Works. In June 1994, the Deputy Minister appointed a task force to study the organization of the Public Works branches. The task force is expected to submit its preliminary recommendations by the fall of 1994.

34.119 The government should address the fundamental accommodation issue of whether departments should pay rent for accommodation and the question of whether to give departments greater freedom to choose their own office space.

Treasury Board Secretariat's response: The government is actively re-evaluating the issue of user pay for office accommodation. Until now, the government has made a conscious decision not to implement such a system for office accommodation due to the need to resolve the complexities and issues that are raised by the Auditor General. It should be noted that all special purpose accommodation has always been subject to a user pay regime.

Department's response: The issue of corporate autonomy and control over accommodation costs as for other overhead items of government programs - such as salaries, telecommunications - is a fundamental issue of governance. The question is whether the government-wide goals of cost containment and broader objectives are best met through centralized or decentralized control. Government in Canada has made decisions on both sides of this issue. Arguably, where standards and reporting exist, the value added of user pay is doubtful. PWGSC has committed to reporting to the Treasury Board Secretariat on the feasibility of user pay for accommodation following its assessment of the success of Shared Accommodation Leadership (SAL), which is in the early stages of implementation. SAL provides tenant departments with greater degrees of flexibility and choice related to accommodation standards (and therefore satisfaction) together with greater accountability for the consequences of choice. Treasury Board Senior Advisory Committee and Treasury Board endorsed SAL as a valuable incremental step towards the evaluation of user pay.

34.120 The government should ensure that tenant departments are held accountable for the efficient use of their office space.

Department's response: The Shared Accommodation Leadership policy framework developed by PWGSC clearly states that tenants are accountable for the efficient use of space during occupancy and share a responsibility for the identification of space optimization opportunities. (The development of space optimization strategies will be led by PWGSC, in consultation with the tenant department.) PWGSC is attempting to increase tenant sensitivity to their accountability for space use by annually communicating and publishing key indicators on tenant accommodation utilization and to ensure that this utilization is consistent with normative benchmarks for other organizations with comparable operational requirements. Consideration will be given to the re-affirmation of the principle of tenant accountability for the use of office space in connection with the development of the strategy to achieve a 10 percent reduction in accommodation.

34.121 Public Works and Government Services should:

a) make certain that its various branches co-operate and co-ordinate their work to provide office accommodation and service to departments, with clear and consistent delineation of staff roles and responsibilities and project leadership; and

b) in carrying out initiatives to simplify and reduce the costs of its services and administrative practices, improve its management information on departments' use of space.

Department's response:

a) A current organizational review is identifying ways and means of re-engineering the Public Works components of the Department in a manner which makes it more efficient and clarifies lines of accountability. Project roles and responsibilities will be re-examined within the new framework of accountabilities.

b) PWGSC has realized considerable progress over the last few years through a concerted effort to improve the quality of management information captured in its accommodation information system.

As noted, PWGSC will formally publish key indicators on tenant use of accommodation in the 1995-96 Estimates (Part IIIs). PWGSC experience has been that tenants have acknowledged the criticalness of this information and have attached a high priority to ensuring data accuracy. It is the intention of PWGSC to publish this information on an annual basis and therefore initiate a systematic annual validation of the accuracy of tenant information contained in departmental accommodation inventory management systems. It is felt that the sensitivity and visibility of this data is such that departments will ensure that the PWGSC information continues to reflect current and accurate information.

PWGSC also has under way systems initiatives to upgrade management of tenant demand (implementation beginning September 1994) and occupancy agreements (implementation in 1995). It is expected that the implementation of these systems will significantly enhance the capacity of the Department to effectively and efficiently manage information on departments' use of space by making the information readily accessible to all real property officers through a direct automated interface with the data base.