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1997 October Report of the Auditor General of Canada

Assistant Auditor General: Shahid Minto
Responsible Auditor: Alain Boucher

Main Points

20.1 The government made the decision to privatize the Canada Communication Group (CCG) and approved the sale process in April 1996.

20.2 The government's privatization objectives were to obtain best value for the sale of CCG, with minimum risk and liability for the government, and to minimize the impact on the printing industry while securing job continuity in the private sector for as many of its employees as possible. The government did not offer any guarantee of future business. However, to sell under the best conditions possible, it offered to prospective purchasers a business advantage, for a period of five years, in the form of privileged access to all government departments and agencies.

20.3 CCG was sold through a competitive sale process. The invitation to submit bids was made through the Open Bidding System. We found that the process was indeed open and attracted a significant number of bidders from the printing industry. The evaluation of offers received was conducted in accordance with the stated process and resulted in a proper evaluation of the bids. We therefore concluded that the offer submitted by the successful bidder, St. Joseph Corporation, represented the best value that could be obtained at that time under the conditions of sale specified by the government.

20.4 We found that there was satisfactory control over the transfer of assets and liabilities to the purchaser and that adequate revenue and expense cut-off procedures were used at the closing of the transaction.

20.5 CCG estimated the net cost for the divestiture of the organization at $45.3 million. However, certain costs to be absorbed by other federal government entities as a result of the privatization were not included in this amount. Those costs included the waiving of about $20 million to $25 million of pension penalty costs for those who benefited from early retirement, and costs related to pension protection. The inclusion of the pension penalty costs alone would have brought the net cost of privatization to between $65 million and $70 million. In addition, the pension penalty costs were not included in CCG's analyses of the various future options for the organization. The inclusion of this cost element could have had an impact on the results of the cost/benefit analyses conducted.

20.6 We tested a sample of cases related to the Work Force Adjustment program established for CCG and found that they all complied with the conditions of the program. As well, we determined that the CCG program was comparable with the programs of departments and agencies subject to the Treasury Board Work Force Adjustment Directive.

20.7 We consider that the privatization process was well managed within the parameters set by the government; however, it is too early to predict whether this privatization will be a success in the longer term. Fairness to prospective purchasers and employees and jobs for employees were important criteria for the government, but resulted in costs (such as Work Force Adjustment costs) exceeding those that would have been incurred in a private sector transaction.

Introduction

20.8 In its February 1995 Budget, the government announced its intention to examine the prospects for the divestiture of the Canada Communication Group (CCG). The following July, the Minister of Public Works and Government Services Canada (PWGSC) established a specialist committee, comprising public and private sector experts in privatization, finance and human resources, to make recommendations on which components of CCG should be privatized, the public policy implications, employee considerations and the process to be followed. CCG hired a financial advisor to establish a value for the CCG business lines and to identify strategies for its sale that recognized the costs of public policy issues.

20.9 The recommendations of the specialist committee and of the financial advisor formed the basis of the privatization plan that was approved by the government. In May 1996, the Treasury Board gave its approval and the Minister of PWGSC announced the decision to privatize the printing and warehousing/distribution operations of CCG. The objective, as stated by the Minister, was to get the government out of a business that could best be operated in the private sector.

20.10 A competitive sale process began in June 1996 and, on 12 December 1996, the Treasury Board approved the sale of CCG to the Canadian-owned St. Joseph Corporation of Toronto. The Agreement of Purchase and Sale was signed the following day and the actual transfer to the new owner took place on 7 March 1997.

Evolution of the Canada Communication Group
20.11 The Canada Communication Group changed from a directorate within the Supply Operations Sector of the then Department of Supply and Services to a special operating agency (SOA) in June 1990. It was one of the first five special operating agencies created by the government. It operated under a revolving fund with the statutory authority to use its revenues to cover its expenditures. Its financial statements were similar to those of a private sector enterprise. Exhibit 20.1 provides some key dates in the history of the government printing function.

Products and services
20.12 CCG provided printing, distribution and warehousing, publishing and information management services to government departments and agencies on a fee-for-service basis. Some additional services were funded by annual appropriation, including a public reference service. CCG was also responsible for certain mandatory services such as the publication of the Canada Gazette and the Statutes of Canada, and the administration of Crown Copyright.

The Decision to Privatize

20.13 Until 1992, CCG's services were mandatory, which meant that federal departments were obliged to use CCG for their printing and communication needs. In 1992, the government changed this policy in response to recommendations made by the Public Service 2000 Task Force and made optional as many common services as possible. Henceforth, most services offered by CCG were provided on an optional basis, which meant that individual department managers had the right to choose their suppliers of printing services or to do the work themselves. Only the publication of the Canada Gazette and the administration of Crown Copyright remained mandatory services of CCG.

20.14 This shift in the Treasury Board's common services policy had a major impact on all common services units using revolving funds. CCG was expected to operate in a revenue-dependent mode in a competitive environment. It had to demonstrate to customer departments that it could provide the best-value services.

20.15 CCG faced challenges from competitors in the private sector claiming that it had an unfair competitive advantage because of its dual role as a broker and a provider of printing and communication services. Although an external review conducted at the time found that no conflict of interest had actually arisen, the printing procurement services (broker) function was nevertheless transferred back to the parent department to remove any appearance of conflict of interest.

20.16 The loss of its mandatory status and the transfer of the broker function to PWGSC (which accounted for about $150 million in sales alone) caused CCG's sales to decrease from about $400 million annually in 1993 to about $100 million in 1996. Exhibit 20.2 provides key financial results from 1993 to 1997.

20.17 In the summer of 1994, the Minister of PWGSC announced the establishment of an advisory committee composed of individuals from the public and private sectors to provide advice on the further direction of CCG. The committee tabled its report in December 1994 in which it recommended privatization of all functions of CCG that could best be done in the private sector, and the creation of the specialist committee to plan the privatization initiative. Subsequently, the Government Program Review Task Force made a similar recommendation.

20.18 CCG examined various options and carried out cost/benefit analyses on each of them before the final decision to privatize was made by the government. The four main options analyzed were closing the organization, maintaining the status quo, downsizing CCG (competitive model) and privatizing with incentives. As a result of negotiations and decisions between February 1995 and December 1996, a Work Force Adjustment benefit program comparable with those for the rest of the public service was implemented for CCG. Analyses of all options included estimated Work Force Adjustment costs.

Functions privatized and those retained by the government
20.19 The functions that could best be done by the private sector were privatized. Some others were considered core functions of the government or not yet ready for privatization and were transferred back to the parent department or to other departments.

20.20 The remaining corporate services employees in the areas of human resources, finance, engineering and information technology who were not offered a job with St. Joseph Corporation or with the government will be declared surplus when their positions are no longer required.

20.21 Exhibit 20.3 gives the list of the business units that were privatized and those that were retained by the government.

Government privatization objectives
20.22 In an address to the Canadian Printing Industries Association in May 1996, the Minister stated that the aims of the government were to obtain the best value for the sale of CCG, with minimum risk and liability for the government, and to minimize the impact on the printing industry while securing job continuity in the private sector for as many of its employees as possible. The Minister reiterated the position that the government was committed to competition, freedom of choice and fairness, and therefore would not offer the buyer of CCG any guarantee of business. Managers in individual departments would continue to choose the best-value supplier for printing services.

First privatization of a common services organization
20.23 The sale of CCG was the first privatization of an optional internal services unit in the Government of Canada and also the first unit that was not privatized as a legal entity. The government had no previous experience in this type of privatization. Earlier privatizations had involved mostly selling shares of Crown corporations such as Teleglobe Canada, Air Canada, Petro-Canada and Canadian National Railway. This time the government sold assets, rights and privileges.

20.24 It was also the first time that a special operating agency had been sold. In a study of SOAs by the Auditor General of Canada and by the Secretary of the Treasury Board in 1994, it was observed that the SOA initiative might best be seen as an alternative service delivery regime, and also as a transitional state that could eventually lead to more independent organizational forms within the government or in the private sector.

Focus of the Audit

20.25 Our audit objectives were to review:

  • the openness and transparency of the privatization process;
  • the value obtained and terms agreed with the purchaser;
  • the control over the transfer of assets and liabilities to the new owner; and
  • the costs of the privatization.
We also examined human resource considerations.

20.26 The decision to privatize CCG was made by the government in April 1996. We did not examine the merits of the decision.

20.27 We conducted this audit by taking into account the objectives and parameters set by the government. Our audit work focussed on the period beginning with the Treasury Board decision of 16 May 1996, which approved PWGSC's submission for the divestiture of CCG, up to the closing of the transaction on 7 March 1997.

20.28 The fieldwork of this audit was completed in June 1997. The government is providing financial and information technology services to the purchaser on a cost recovery basis until December 1997. It is too early in the transition stage to offer any conclusion about whether measures adopted by management to identify and recover these costs are adequate.

20.29 Further details on our audit objectives, criteria and approach are presented in About the Audit at the end of the chapter.

Observations and Recommendations

Specifics of the Transaction

20.30 In the sale of CCG, the government sold physical assets, rights and privileges.

20.31 Physical assets . Physical assets included fixed assets (mostly printing and office equipment) and the inventories.

20.32 Rights. The rights sold were the Logo, the CCG Wordmark and the technology.

20.33 Privileges. Under the terms of the agreement, the government implemented the Privileged Administrative Arrangement (PAA), which will allow departments and agencies to do business with St. Joseph Corporation for a period of five years without soliciting bids or obtaining Treasury Board approval for contracts up to $100,000. Contracts below this threshold represented about 95 percent of CCG's business.

20.34 The agreement also includes Accommodation Arrangements for the purchaser's occupancy of leased space in 60 premises across Canada that were occupied by CCG. This will allow the purchaser to retain the advantage of collocating with its government customers.

20.35 Through these arrangements, the government essentially has recreated the business environment in which CCG operated. It provides the new owner with easier access to government business for five years (in their dealings with contractors other than St. Joseph Corporation, departments are governed by government contracting regulations that require procurement needs for goods and services to be tendered). The government has agreed to explain and promote the PAA as a procurement option for departments and agencies.

20.36 This five-year business advantage, which was offered to all prospective purchasers, will give the winning bidder time to structure its operations to face full market competition. However, the government did not offer any guarantee of business since government departments and agencies still retain the right to choose the best-value supplier for printing services provided that they go to tender should they wish to contract with a contractor other than St. Joseph Corporation.

Sale price
20.37 In consideration for these assets and entitlements, the purchaser agreed to pay or otherwise assume liabilities aggregating $10.7 million. This sale price comprised a cash payment, assumption of liabilities by the purchaser and an amount for cost avoidance by the Crown. The detailed breakdown of the sale price is shown in Exhibit 20.4 .

Offers of employment
20.38 St. Joseph made 570 offers of employment with a guarantee of employment of two years (551 operational employees of the business units, including 248 at the Main Plant in Hull and 19 from the Corporate Services Division). Further details about offers of employment are given in Exhibit 20.5 .

Sale Process

20.39 Once the decision to investigate the feasibility of privatization had been made, the CCG privatization team led the process. It developed principles to guide management decision making until such time that government direction was received. A team comprising officials from the central agencies, PWGSC and the Department of Justice, supplemented with private sector financial and audit advisors, drafted detailed bid evaluation and selection criteria that were approved by the government. The bid evaluation team also consisted of individuals from different departments. The financial advisor controlled liaison with the bidders.

20.40 CCG followed a competitive sale process and the invitation to submit bids was made through the Open Bidding System, the government's electronic advertising system. Exhibit 20.6 shows the different stages of the sale process.

Bid evaluation
20.41 Given the government conditions of sale, best value was obtained. CCG hired a private sector financial advisor to assess the value of the business units to be sold and to advise on the sale strategy. According to the advisor, the real value of CCG, as a government common services agency, resided in its proximity to customers (collocation), its goodwill, its experienced employees with strong client relationships, employee security clearances and, most important, the ability of government departments and agencies to procure from CCG without tender.

20.42 At the same time, however, CCG did not have significant assets such as real estate, as it occupied government-leased premises. Although its printing equipment was well maintained, it was not modern. CCG was incurring losses. Its only client was the Government of Canada. However, with sales of nearly $100 million in 1995-96, we estimate that CCG retained about 20 to 25 percent of the government printing business market share.

20.43 The government ruled out the option of offering long-term contracts to the purchaser or offering a guarantee of business. Although such an offer might have generated a higher selling price, it would have been inconsistent with Treasury Board common services policy and would have limited the ability of government departments and agencies to choose the best-value suppliers.

20.44 Nonetheless, in order to sell under the best conditions possible, the government offered some transitional incentives to prospective purchasers in the form of special access to all departments and agencies, as described earlier.

20.45 The government set a minimum expectation or preference for the sale of CCG units - minimum of 400 job offers (150 at the main plant in Hull) for a minimum period of two years, and an amount of $13 million cash or equivalent benefits or savings for the government. The St. Joseph Corporation bid met the government's expectations.

20.46 In taking into account Work Force Adjustment costs for employees not offered a job and special incentives payments made to employees who accepted a job, the best-value bid would be the one that resulted in the least cost to the government. Factors other than cost, including financial capacity, the quality of jobs offered and risk factors, were also taken into account. Points were attributed to both cost and other factors, and the St. Joseph bid scored the highest number of points.

20.47 After the evaluation of the bids had been finalized, CCG found out that it had overstated the value of the St. Joseph bid by $464,000. This was caused by an incorrect classification in CCG's human resources records of certain employees between operations and corporate services. CCG recalculated the bid's points and concluded that the overstated amount was insufficient to offset the point advantage of the St. Joseph's bid over the next finalist's bid. This increase in the net implementation cost of St. Joseph's bid was not reflected in the information provided to the Treasury Board. However, the full impact of Work Force Adjustment costs of accepting the St. Joseph Corporation bid were calculated and disclosed to the Treasury Board.

Sale process properly managed
20.48 In conclusion, we noted that the sale process was properly managed, transparent and open to all potential buyers. We found support and documentation on all aspects of the process. All potential buyers received the same information, and the evaluation and selection criteria were applied consistently to all bids received.

20.49 In our opinion, the evaluations of both non-binding and binding offers were conducted in accordance with the stated process and resulted in a proper evaluation of the bids.

Final terms and conditions of the deal
20.50 Before closing the deal in March 1997, CCG and St. Joseph Corporation made an amendment to the Agreement of Purchase and Sale and, as a result, the number of job offers to be made for corporate services employees was reduced from 30 to 19. We were informed that only 19 individuals who had the skills needed by the purchaser were available to transfer to St. Joseph Corporation. The savings in Work Force Adjustment costs of 11 job offers were calculated at about $150,000 during the bid evaluation process. Again, even if that fact had been known at the time of bid evaluation, it would not have changed the result of the competition. But, as a result of this amendment, the government will pay some extra Work Force Adjustment costs for individuals who will not find a job elsewhere in the government. However, we consider that this amendment resulted from a negotiation process that is normal in such a transaction. We were advised by CCG that only a few of the corporate services employees will not find a job elsewhere in the government and will thus be entitled to Work Force Adjustment benefits.

20.51 In conclusion, we found that the evaluation of the business units carried out by the financial advisor to assist the government in designing the privatization plan and the resulting valuation report were most useful. We believe that the approach used for estimating the fair market value of each business unit (discounted unlevered free cash flow method) was the most appropriate method, given the history of CCG's lack of profit.

20.52 As discussed earlier, the divestiture process was competitive and attracted a significant number of bidders from the printing industry. We concluded that, despite the modifications noted above, the bid submitted by St. Joseph Corporation represented the best value that could be obtained at that time under the parameters and conditions of sale specified by the government. A corporate profile of St. Joseph Corporation is included in Exhibit 20.7 .

Human resources records
20.53 In a privatization process, human resources are an important part of the value of the business that is for sale, and the number of resources that can be absorbed by prospective purchasers is a significant element of the value the government is obtaining from the purchaser in terms of costs avoidance. It is therefore critical to have accurate and complete records about the work force for the prospective purchasers to prepare their bids. The data about CCG's work force were not adequate for the special needs of the privatization (support of bid evaluation and job offer processes). This caused several problems during the entire process.

20.54 In future privatizations, special attention should be paid to human resources records and specific measures should be taken early in the process to ensure the accuracy and completeness of the records to facilitate the sale process.

Benchmark used for bid evaluation
20.55 A general test applied to the sale of a government entity is that the government should receive greater value from the sale than it would receive from retaining ownership, taking into account the financial and other implications attached to continued ownership.

20.56 One of the options that the government examined for CCG was downsizing the organization. In analyzing this option, the government assumed that CCG would continue as a special operating agency with certain operational modifications, that is, the size of its work force would be reduced and CCG would be allowed to use more efficient pricing strategies to compete with the private sector for government business. This option is known as the competitive model.

20.57 The government used the net implementation cost of the competitive model as a benchmark to assist in evaluating the bids. In the event that it became apparent during the sale process that the government would not get at least what was expected under the competitive model, CCG would have to return to the government for further direction on its future.

20.58 We found that the calculation of the net implementation cost of the competitive model used as a benchmark during the bid evaluation process was questionable. The portion of the cost of the competitive model relating to future annual operating results took into consideration only financial forecasts for the next three years (discounting period) where losses were expected. CCG's calculation did not include the present value of future annual cash flows following the discounting period for which profits had been forecast. The other bidders without doubt considered profitability on a longer term than CCG did.

20.59 A method similar to the one used in the valuation report prepared by the financial advisor, adding terminal value and discounting operating results over a longer term, may have been more appropriate for the calculation of the net implementation cost of the competitive model to obtain a benchmark more comparable with bids received.

20.60 For future privatizations, the government should ensure that bids received are compared with reliable benchmarks that have been thoroughly assessed and reviewed.

Control over Transfer of Assets

20.61 We found that there was satisfactory control over the transfer of the CCG's assets and liabilities to the purchaser. Adequate revenue and expense cut-off procedures were used at closing to ensure that the government collected what it had earned and paid only its own costs to the date of transfer. The net book value of assets sold amounted to $7.4 million ($4.6 million for inventories and $2.8 million for capital assets).

20.62 PWGSC Real Property Branch took the necessary measures to arrange for 60 accommodation leases at fair market value with St. Joseph Corporation.

20.63 One problem was encountered before the privatization process began. The asset records and the physical asset count done by CCG in preparing for the privatization could not be reconciled. Assets of $350,000 were written off. These were items with a book value exceeding $1,000 each.

Costs of Privatization

20.64 The December 1996 estimate of the privatization costs provided by CCG was $45.3 million. This amount included costs of the sale of CCG's business units, the transfer to government departments of the functions not privatized, the closing down of the special operating agency, as well as Work Force Adjustment costs and operating losses incurred during the privatization period. We have not audited these costs. Exhibit 20.8 gives the breakdown of the privatization costs.

20.65 The organization had started to downsize in 1995 and related Work Force Adjustment costs are included in the cost of privatization. The total costs of Work Force Adjustment and Special Incentives programs appear in Exhibit 20.9 . These costs will be absorbed by the CCG revolving fund.

20.66 Other costs resulting from the privatization and not included in the above-noted estimated figure will be absorbed by the government.

Waiving of actuarial reduction on pension allowances
20.67 The actuarial estimate made by the Treasury Board of pension penalties waived for government staff taking early retirement is $125,000 per employee. We estimate that for CCG the cost ranges from $20 million to $25 million; this money will come out of the government superannuation account. Although CCG disclosed the fact that eligible employees of CCG would have access to the pension waiver, it did not provide estimates of the costs. The inclusion of this cost element would bring the total cost of privatization between $65 million and $70 million from CCG's latest estimate of $45 million.

20.68 In addition, costs related to waiving of pension penalties were not included in CCG's analyses of the various options for the organization's future. The inclusion of this cost element could have had an impact on the results of the cost/benefit analyses conducted.

Pension protection clause
20.69 CCG employees who transferred to St. Joseph had to leave their pension with the government superannuation account. The government designed and implemented a pension protection clause for employees transferred to the private sector. In virtue of this clause, these employees will have their period of service with St. Joseph Corporation added to their period of service with the government for the purpose of determining pension eligibility. This means that a certain number of employees will be eligible for their pension earlier than if this clause had not been approved. (The government pension plan stipulates that an employee is entitled to an unreduced pension if he or she has a minimum of 30 years of service and is at least 55 years old; otherwise the employee has to wait until the age of 60 to get an unreduced pension.) This provision is another cost to the government superannuation account that has not been included in the calculation of divestiture costs.

Income tax considerations
20.70 The purchase price includes a cost avoidance item of $3.7 million, the value of making offers of employment to 552 employees at 100 percent of prevailing salaries instead of 86 percent as initially bid. This is the amount that the government would have had to pay to employees if the offer had remained at 86 percent. Indeed, the calculation of this amount reflects the fact that the CCG Work Force Adjustment program would have required the government to assume salary differences for periods up to 18 months.

20.71 We saw no evidence that the Crown analyzed the tax implications of this element or other elements of the price structure and their potential impact on government tax revenues.

20.72 In future privatizations, cost/benefit analyses of options and cost estimates prepared by the government should include all direct and indirect costs to be absorbed by government departments and entities to the extent that they are material and can be practically assessed.

Human Resources Considerations

Work Force Adjustment program
20.73 In April 1993, CCG became a separate employer under the Public Service Staff Relations Act . CCG employees had different classifications and salary scales than the rest of government. Also, because CCG was a separate employer, the Treasury Board Work Force Adjustment Directive did not apply to its employees.

20.74 The Treasury Board, CCG and the unions worked at establishing a Work Force Adjustment program for CCG. As a result of a series of government decisions between February 1995 and December 1996, the CCG program contained provisions very similar to those of departments and agencies subject to the Treasury Board Work Force Adjustment Directive. It included a provision for a lump sum payment of six months' pay to employees who accepted a job offer from the purchaser, to compensate for differences in the purchaser's pension plan and in other benefits. It also contained provision for the payment of severance pay at lay-off rates, which is the highest rate for severance pay. Exhibit 20.9 provides the breakdown for Work Force Adjustment costs.

Early Retirement Incentive program
20.75 The Early Retirement Incentive (ERI) compensation regulations became effective for Public Service employees on 1 April 1995. By amendment to these regulations, ERI compensation was extended to CCG employees on 15 June 1995.

20.76 On 15 July 1995, the Chief Executive Officer (CEO) of CCG guaranteed ERI compensation to 50 key employees if they were eligible as of that date and if they remained on staff until privatization. The granting of ERI compensation to others was restricted by CCG in October 1996, because the number of employees remaining was approaching the level needed to maintain CCG as a viable entity.

20.77 Using the Treasury Board model as a guide, we determined that the CCG Work Force Adjustment program was adequate and our test on a sample of cases revealed that they complied with the conditions of the program.

20.78 The ERI program was in place for employees who would not be offered employment by the purchaser. Thus the CEO's guarantee of ERI compensation to 50 employees would appear to be an inconsistent application of the program. However, the ERI regulations specify that eligibility may be extended by the deputy head as required to meet operational requirements. The guarantee by the CEO meets this condition.

20.79 The October 1996 restriction on granting ERI compensation is reasonable. It was done to maintain CCG as a viable operational entity and in anticipation of offers of employment being made by St. Joseph Corporation to a substantial number of employees. Such offers, when made, would negate eligibility for ERI compensation. Those not receiving such offers would continue their entitlement to compensation.

Job offers
20.80 In general, we found that the approach to determining the final number of people receiving offers from the purchaser was fair and consistent.

20.81 The job offers by St. Joseph Corporation were 100 percent of substantive salaries. The letters of offer to employees conformed with the Agreement of Purchase and Sale.

Conflict of Interest Policies

Employee takeover groups
20.82 The sale process allowed employees to submit bids. Employee takeover (ETO) groups were reimbursed up to $25,000 for expenditures on financial and legal advice required to develop their proposals. Their bids were considered at the same time and on the same basis as all others. The "Code of Conduct for CCG Employees" was in force and CCG issued "Supplementary Guidelines Regarding Employee Takeover Groups" in 1996. Employees were required to certify that they had read the Code and to disclose any activity that could place them in a situation of conflict of interest, such as participation in an ETO group.

20.83 Certain participants in ETO bids who occupied sensitive positions within CCG were temporarily reassigned to PWGSC by CCG in order to protect the integrity of the sale process and the employees from potential criticism.

20.84 We found that CCG's policy adequately described the risk management measures for ETO bids, and those measures were applied.

Individuals involved in the privatization process
20.85 St. Joseph Corporation needed personnel in areas such as human resources, information technology and finance to complete its management team for the newly acquired entity. It therefore made offers of employment to corporate services employees in February 1997.

20.86 After the Agreement of Purchase and Sale was signed (13 December 1996), St. Joseph Corporation approached the Crown for permission to make job offers to two employees with close involvement in the privatization process. The Crown gave the Corporation this permission. We found that, while CCG obtained legal advice and took precautionary steps, these individuals participated in some discussions toward the end of the process, before closing of the agreement (7 March 1997).

20.87 CCG advised us, however, that from the moment these individuals were approached, they participated only in providing information and not in any decision making affecting the remainder of the privatization process (for example, the job offer process, and compliance with closing conditions). We noted that while the appearance of some conflict of interest existed, there was no evidence of any actual conflict occurring.

20.88 While we recognize that one objective of the privatization was to transfer as many jobs as possible to the purchaser, individuals having a sensitive role in a privatization process and who accept an offer of employment from the purchaser should not be allowed to participate in any further discussions with the purchaser, in order to remove any appearance of and potential for conflict of interest.

Experience in Other Jurisdictions

20.89 Privatizing government internal services organizations is complex because the business units to be sold are not always adequately defined or severed from the rest of the government. The process is also difficult because of the various stakeholders' objectives and the sometimes conflicting interests.

20.90 Other countries have privatized their internal printing services. We are aware of at least two examples where difficulties encountered in the privatization process led to full inquiries: the British government's sale of Her Majesty's Stationery Office (HMSO) and the privatization of the Government Printing Office in New Zealand.

20.91 In the case of HMSO, press reports indicated that the sale price was less than a third of that initially expected and the successful buyer was allowed extra time to renegotiate the price after being named the preferred bidder. A month after the privatization, the new company announced that the work force would be reduced by more than a third and that additional work force adjustment costs for staff could not be ruled out. The National Audit Office has confirmed that it is carrying out a full inquiry into the transaction.

20.92 Similarly, the Government of New Zealand inquired into the circumstances surrounding the sale of its printing office. Concerns were raised about the length of time it took for the process, which caused additional costs for the government and led to a reduction in the sale price.

Conclusion

20.93 It is too early to predict whether the privatization of CCG will be a success in the longer term and whether all of the obligations under the agreement will be met. However, our review of the privatization process shows that it was open and transparent and that it was properly managed within the context of the sale conditions of the government.

20.94 The government had to consider various stakeholders' interests, such as value for the taxpayers, fairness for the prospective purchasers and employees, and jobs for employees. These objectives and considerations sometimes conflicted and their resolution depended on the respective weight placed on them. From a public policy perspective, fairness and jobs were important factors, but resulted in costs (such as Work Force Adjustment costs) exceeding those that would have been incurred in a private sector transaction.

20.95 The privatization was achieved within a reasonable period of time. The initial target was to complete the sale within 36 months. The period was revised to 19 months and it actually took 25 months to privatize CCG from the Budget of February 1995 to the closing in March 1997. Delays encountered were, among other things, to ensure that the government could comply with its various trade agreements, and comply with the Work Force Adjustment program, which requires that employees be given 60 days to analyze job offers and make a decision.

20.96 Completing a privatization in the shortest possible period is essential because of the uncertainty that such a process creates and the difficulty of maintaining the morale of the work force, as well as the challenge of maintaining the business volumes (especially for an optional service), which are essential to obtain maximum value for the entity. CCG's gross revenues generated by the business units that were sold went from $97.7 million in 1995-96 to $80.1 million in 1996-97 (on an annual basis). This represents a reduction of 18 percent for the last year of operation.

20.97 Some key success factors. The following factors contributed to the overall success of the privatization of CCG.

20.98 The fact that CCG was established as a special operating agency in 1990 allowed better severance of the organization from the rest of government and provided CCG with some valuable experience in operating in a quasi-commercial environment as a stage on the way to privatization.

20.99 The identification and resolution of authority and policy issues and the extensive consultation conducted with all stakeholders before starting the sale process were essential, especially as there was no previous government experience or privatization framework to draw upon.

20.100 The openness and transparency of the process was a success factor.

20.101 The many dimensions of an exercise such as this one require diversified expertise. The presence of advisors from central agencies and other departments as well as external consultants to give advice on legal, financial, audit and fairness matters contributed to the results.

20.102 Responsibility was given to the privatization team to make or obtain decisions related to the sale of CCG and to resolve procedural difficulties as they arose. This reinforced accountability for results in this privatization endeavour.

About the Audit

Objective

The objective of our audit was to examine the privatization of the Canada Communication Group in order to determine whether appropriate procedures were followed to protect the interests of the government and taxpayers and to ensure that the process was well managed, open and transparent. We also wanted to identify the key lessons learned from the privatization.

Scope

Our examination focussed on the period from May 1996 when the privatization process was approved to the actual transfer to the purchaser on 7 March 1997. The scope of the examination did not include the decision to privatize. It consisted of interviews with CCG management and other involved parties, the review of relevant documents and the tests that we considered necessary.

We did not audit any of the bidders and accordingly express no opinion on their activities.

Criteria

  • Sale Process
We expected that the sale process would be well managed, open and transparent.

  • Bid Evaluation
We expected that the best-value bid would be the one that resulted in the least cost to the government, and that non-cost factors would also be considered in determining the best bid.

  • Control over Transfer of Assets
We expected that there would be adequate procedures and controls in place to monitor the transfer of assets and to ensure that there has been a correct allocation of revenue and expenses between CCG and the buyer.

  • Costs of Privatization
We expected that the costs would be appropriately disclosed to decision makers.

  • Human Resources Considerations
We expected that an approved Work Force Adjustment program would be implemented consistently across the Agency, and that conflict of interest would be appropriately managed.

Audit Team

Janet Hatt

For information, please contact Alain Boucher, the responsible auditor.