TABLE OF CONTENTS

REPORTS OF THE STANDING COMMITTEES

AND OTHER COMMITTEES

As Considered by

The Council of the City of Toronto

on December 16 and 17, 1998

AUDIT COMMITTEE

REPORT No. 2

1Auditor General's Office

2Chemical Pricing

3Other Items Considered by the Committee

City of Toronto

REPORT No. 2

OF THE AUDIT COMMITTEE

(from its meeting on December 1, 1998,

submitted by Councillor Doug Mahood, Chair)

As Considered by

The Council of the City of Toronto

on December 16 and 17, 1998

1

Auditor General's Office

(City Council on December 16 and 17, 1998, deferred consideration of this Clause to the next regular meeting of City Council to be held on February 2, 3 and 4, 1999.)

The Audit Committee recommends that:

(1)City Council continue with the present City Audit structure which includes a direct reporting relationship through the Audit Committee to Council and not establish a separate Auditor General's office; and

(2)the matter be reviewed in December, 1999.

The Audit Committee submits the following report (November 5, 1998) from the City Auditor:

Recommendation:

It is recommended that City Council continue with the present City Audit structure which includes a direct reporting relationship through the Audit Committee to Council and not establish a separate Auditor General's office.

Background:

The Strategic Policies and Priorities Committee received the following transmittal letter from the Audit Committee:

That City Council adopt, in principle, the establishment of an Auditor General's office and:

(1)request the Chief Administrative Officer and the City Auditor to prepare a report on the timing and establishment of an Auditor General's office; and

(2)include the Agencies, Boards and Commissions under the purview of such office.

City Council struck out and referred this Clause back to the Audit Committee, "for further consideration, in conjunction with a report from the City Auditor regarding the City of Ottawa model."

Comments:

City Of Ottawa Audit Model:

Prior to the restructuring of the City of Ottawa's audit function in 1997, Ottawa's Audit Department reported directly to the Chief Administrative Officer. The audit process at that time was designed to serve both City Council's governance needs for audit assurance and the need of corporate management to identify opportunities for improvement based on objective assessments. The Department had the mandate to advise both City Council and Senior Management on the efficiency, economy and effectiveness of management policies, practices and controls. The scope of the work encompassed all aspects of the City's operations, including financial, administrative, operational and organizational. The objectives of the Department were twofold:

(a)first, to provide assurance to City Council on the adequacy of controls, managements compliance with regulation and policy and the reliability and adequacy of information; and

(b)to provide Senior Management with recommendations for improvement.

City Council at that time were concerned about the limitations on the independence of the audit function in that:

(a)the Chief Administrative Officer and the Committee of Department Heads could exercise administrative control over the Audit Department (e.g., budget guidelines, staffing of positions, etc);

(b)the Chief Administrative Officer could direct that particular audits be included in the Audit work plan. These specific audits would not necessarily relate to priority issues identified by the City Auditor; and

(c)the City Auditor, as a Department Head, participated in Corporate decision making. These decisions might subsequently be subject to audit. Similarly, Audit Department staff participated in, or led, various Corporate initiatives.

In addressing these concerns Council determined that the organizational independence of the audit function could be enhanced by:

(a)direct presentation for approval of the audit budget to the Audit Committee;

(b)authority with the City Auditor to staff within the approved budget and complement;

(c)discretion to do audit work requested by the CAO resting with the City Auditor and the Audit Committee;

(d)performance evaluation of City Auditor undertaken by the Audit Committee;

(e)the City Auditor no longer participating on the Committee of Department Heads; and

(f)Audit staff not participating in the leadership of Corporate initiatives.

In considering the above, the City of Ottawa considered two options for a more independent audit structure. These options were the establishment of an:

(a)Office of the City Auditor; and

(b)Office of the City Auditor General.

Office of the City Auditor:

The first option envisaged an Office of the City Auditor reporting directly to the Audit Committee and through to Council. Its mandate would be similar to the previous mandate of the City Auditor, i.e. providing service to both Council and to senior management.

Other details in relation to this option were as follows:

(a)the City Auditor has no reporting relationship to the Chief Administrative Officer;

(b)the City Auditor reports directly through the Audit Committee to City Council;

(c)the budget for the Office of the City Auditor is presented directly to the Audit Committee by the City Auditor and recommended to City Council by the Audit Committee;

(d)the Audit Committee and City Council approve the work plan of the City Auditor and the Audit Committee monitors the performance of the work plan;

(e)the City Auditor is not a member of the Committee of Department Heads and does not become involved in significant Corporate decision-making; and

(f)The Office of the City Auditor does not participate in Corporate initiatives outside its mandate.

Under this model, the Office of the City Auditor still has both internal audit and legislative audit elements. The City Auditor includes in his work plan audits designed to assist management in maintaining a cost-effective control regime as well as audits on the accountability of the administration to City Council. Any audits requested by management are conducted at the discretion of the City Auditor.

Office of the City Auditor General:

The second option envisaged an Office of the City Auditor General. This Office would focus solely on auditing the administration for Council and would be required to distance itself completely from Management. It would not provide internal audit services to management and would not involve itself in any management initiatives.

The City of Ottawa adopted the Office of the City Auditor model. The City Auditor now reports directly to Council through the Audit Committee. It did consider, and rejected, adopting an Auditor General model for the audit function. Rather, the City took certain measures to increase the independence of the audit function while at the same time allowing it to serve management by including in its work plan, audits designed to assist management in maintaining a cost-effective control regime.

The cost of implementing an Auditor General model is the loss of auditor expertise and perspective on Corporate initiatives and, exclusion of the City Auditor from the management decision making group. The introduction of an Auditor General model will likely result in management's perception of the position as adversarial rather than advisory. Council must weigh the benefits of increased auditor independence against the costs of losing the expertise of the Auditor and his staff in Corporate decision making and on Corporate initiatives.

City of Toronto Audit Model:

The City of Toronto audit function parallels that of the restructured City of Ottawa audit function as well as a number of other municipalities in Canada and the United States.

City Council on July 29, 1998 approved a change in the Council Procedural By-law to provide that:

(1)the Audit Committee report directly to Council; and

(2)the City Auditor report to Council through the Audit Committee.

The by-law was amended to recognize the importance of the independence from management of the City Auditor. Prior to the amendment of the by-law the City Auditor reported to the Commissioner of Corporate Services. When the issue of the establishment of an Auditor Generals office was first raised at the Audit Committee, one of the major concerns related to the independence of the audit function. With the change in the Council procedural by-law this has now been addressed. In addition, the mandate of the Department was extended to include the Boards, Agencies and Commissions.

If Council were to adopt a completely independent Auditor General model immediate consequences in relation to the establishment of the Office would be as follows:

(a)The Auditor General would be required to terminate involvement in all corporate initiatives including:

(i)Year 2000 project

(ii)Client Identification Benefit System at the Social Services Division

(iii)SAP accounting system implementation

(iv)Police Services Board - Audit Advisory Committee

(v)Various accounting conversion processes

(vi)Assistance to the external auditor. This would have an adverse budgetary impact of somewhere in the range of $100,000.00

(b)The Department would not be available to provide advice or assistance to management in relation to areas of concern. Assistance in relation to audit matters such as the investigation of fraud, etc. would have to be provided from external sources and not by the Office of the Auditor General

During the amalgamation transition process it is important that the City Auditor and his staff be available as a resource to management on a wide range of issues. Many of these issues involve day to day operating matters and over the past number of months have included such diverse issues as:

(a)preparation of request for proposal for external audit services;

(b)evaluation of responses to the request for proposal for external audit services;

(c)participation in the preparation of various Corporate policies and procedures;

(d)advice provided in relation budget variance reporting process;

(e)advice in connection with the analysis of financial statements from outside service providers;

(f)participation in the interview process for certain senior staff positions;

(g)training to staff in relation to budgetary controls;

(h)investigation in certain issues of management concerns;

(I)identification of issues relating to financial reporting; and

(j)participation in a Committee exploring the use of Corporate purchase cards.

The Chief Administrative Officer, as well as senior management requires an independent resource to address audit and financial related concerns on an ongoing basis. Because of its broad overview of the corporate picture, Audit Departments are generally called upon to provide advice and consultation on a wide range of issues, including accounting and procedural concerns, as well as broad operating and policy issues. It is important that this resource continue to be available to the senior corporate management staff. Adopting the Auditor General reporting model would compromise the benefits management receives from its audit function. Assisting management in resolving problems, as well as providing assistance in implementing change is one of the benefits of the current audit arrangements.

The Appendix to this report provides a brief description of the audit model used in various other cities. The degree of independence and reporting relationships in each city varies. At the most independent end of the range, particularly in the United States, is the elected auditor who reports directly to Council. The other end of the continuum has an audit function with appointed auditors who report to either a CAO or Board of Commissioners. Many of the auditors for large U.S. cities are elected and report to Council. By contrast there are no elected auditors in Canada and a number report directly to management while others report directly to Council.

Conclusion:

The general framework in which the City carries out its business is far different then that of the Federal or Provincial governments. The City government is an open one. All significant decisions in respect to staffing, awarding of contracts, purchasing of goods and services and other matters are either made by Council or within fairly restrictive guidelines laid down by Council. At the Federal and Provincial levels most of these decisions are made within the confines of Departments or Ministries or in private within the Cabinet structure.

In this context an independent Auditor General function is of significant importance. It is also important to understand that at both the Federal and Provincial levels individual ministries have their own internal audit functions to provide audit services to management. In the City of Toronto environment the City Auditor, while maintaining his independence, is able to provide assistance to management at his discretion.

In the audit context the issue of independence is of vital importance. This independence is embodied in the recent changes to the Council procedural by-law. The current structure at the same time provides the City Auditor with flexibility to assist management in issues of concern. For those Canadian municipalities with the same reporting structure as the City of Toronto, the ability to assist and work with management has been recognized as an effective component in the administrative control structure.

Contact Name and Telephone No.:

Jeff Griffiths, 392-8461.

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Appendix

Local Government Auditors Roles and Responsibilities

Canada:

City Auditors Who Report to Management:

City of Edmonton:

The title of the Auditor of the City of Edmonton is in fact, "Auditor General". However, his role and responsibilities are not that of a traditional Auditor General. The Auditor General in Edmonton reports to the City Manager and assists both the City Manager and City Council, in providing assurance to City Council that operations are managed with due regard to economy, efficiency and effectiveness.

City of Calgary:

The City maintains a Management Audit Department which assists management in the effective discharge of their responsibilities, by providing them with analysis, appraisals, recommendations and pertinent comments concerning the activities reviewed. The Management Audit Department reports to a Board of Commissioners.

Regional Municipality of Ottawa-Carleton:

The Internal Audit Department reports to the Chief Administrative Officer. Reports are provided to the Chief Administrative Officer. A summary report is provided for the information of Regional Council at the conclusion of each major project.

City Auditors Who Report to Council:

City of Ottawa:

The City Auditor reports directly to Council through an Audit Committee.

City of Regina:

The City of Regina through a by-law has appointed a City Auditor General who reports directly to Council. The City Auditor General is responsible for all internal audit functions of the City. The by-law provides for the City Auditor General to respond to audit requests from the City Manager.

City of Saskatoon:

The City maintains an audit function which reports directly to Council through the Audit Committee. The purpose of the Department is to assist the Administration and City Council in the effective discharge of their responsibilities.

City of Winnipeg:

The appointment of the City Auditor is governed by the City of Winnipeg Act. The City Auditor reports directly to Council and conducts work in accordance with a Work Plan approved by the Audit Committee. The City Auditor has the authority to comply with audit requests from the Board of Commissioners or Department Heads.

City of Montreal:

The City Auditor reports directly to Council through an Audit Committee

United States:

Each of the following Cities has an independent audit function.

New York City:

New York has an elected Comptroller whose office includes Bureaus of both Financial and Management Audit. Audit reports are sent to City Council, the mayor and the Audit Committee.

City of Los Angeles:

The audit function is the responsibility of an elected Controller. The position reports directly to Council.

City of Detroit:

The City Auditor reports directly to Council. The Office performs audits of each City agency at least once every two years and performs special projects and other work as requested by Council, as initiated internally, or as required by City Code.

City of Seattle:

The City Auditor is appointed by Council. The Auditor has complete authority over the work to be undertaken and performs reviews in response to specific concerns or requests from the Mayor or City council members. If resources are available, the Auditor responds to specific requests from department heads as well as independently initiating reviews to fulfill the Department's mission.

City of San Jose:

The City Auditor is appointed by City Council and conducts and reports on audits as assigned by Council. The structure is similar to that of the City of Seattle.

City of Philadelphia:

An elected City Controller heads the Auditing Department which has broad authority and responsibility for protecting the public's interest in the handling of the City's money. The City Controller is the sole auditing agency of Philadelphia City Government as well as the auditor for the School District of Philadelphia.

The Controller is independently elected and, as an independent elected official, reports directly to the citizenry, not to City Council. The office does, however, respond to requests by both Council and the Administration, but must audit the Council and the agencies of the Administration every year.

City of Tampa:

The Auditor is appointed by, and reports directly to the Mayor. Audits are performed based on a risk assessment and audit time is made available for special assignments requested City Council.

Other Jurisdictions:

United Kingdom:

In 1982 the Government brought local authority auditing in England and Wales under the control of a single, independent body, the Audit Commission. Under the Local Government Act 1992, the Commission was given additional responsibilities in respect of the production of annual comparative indicators of local authority performance.

The Audit Commission aims to be a driving force in the improvement of public services by promoting proper stewardship of public finances and by helping local authorities to deliver economic, efficient and effective public services. The Commission has four main functions:

(a)appoint auditors to all local government and National Health Services bodies in England and Wales;

(b)to set standards for those auditors through the Code of Audit Practice;

(c)to carry out national studies designed to promote economy, efficiency and effectiveness in the provision of local authority and National Health Services; and

(d)to define comparative indicators of local authority performance that are published annually.

The Commission also is responsible for an organization called "District Audit", which it appoints to carry out many of the audits for which the Commission is responsible. District Audit operates as an arms-length agency.

Operating independently of government, the Commission is self-financing; its income derives largely from fees charged to local authority and National Health Services bodies for audit work and it receives no government subsidy.

Individual local authorities may have their own internal audit function established to assist elected officials and management in the effective discharge of their responsibilities.

New Zealand:

New Zealand has a central Audit Office responsible for conducting the attest audits of all public sector organizations, including local government authorities. The Office issues opinions on the financial statements of the local governments and also reports to the management of each authority any areas of potential improvement identified in the course of the audit. In addition to the work performed by the New Zealand Audit Office, the City of Wellington, as well as other major cities in New Zealand, has an internal audit function that is included in it's Corporate Office. This office reports to senior management.

2

Chemical Pricing

(City Council on December 16 and 17, 1998, adopted this Clause, without amendment.)

The Audit Committee recommends that:

(1)(a)the Purchasing and Materials Management Division implement a more proactive price comparison process, which would include conducting regular price comparisons with other organizations and against published price lists and industry standards, where possible;

(b)the Purchasing and Materials Management Division consider adding a clause to the City's Request for Quotation, Tender or Proposal documents, alerting suppliers that pre-bid information exchange among competitors is a criminal offence. This should be done in consultation with the City Legal Services;

(2)(a)in the event two or more suppliers offer the same lowest bid for the provision of goods or services, the contract be awarded to one supplier based on other evaluation criteria;

(b)the Purchasing and Materials Management Division consult with Legal Services on any legal issues that should be considered in awarding a contract to only one supplier in the case of two or more tied low bids, and on any additional clauses that should be added to the City's purchasing documents (Request for Quotations, Request for Tender, etc.) to protect the City's interests accordingly;

(3)upon the expiry of the existing contract in December 2000, the purchase of ferric chloride (soluble iron salts) be done through an open bid competition, coordinated by the Purchasing and Materials Management Division;

(4)the performance bond be located and kept on file until expiration of the contract with Eaglebrook Inc. of Canada;

(5)the Purchasing and Materials Management Division consult with Legal Services to clarify whether the cost of renewal options are to be taken into consideration when determining the value of a commitment/contract for approval purposes, and that such clarification be communicated to all applicable the Purchasing and Materials Management Division staff and departments;

(6)(a)the Purchasing and Materials Management Division, in consultation with the Water and Wastewater Services Division, investigate the feasibility of having multiple chemicals included in a Request for Tenders/Quotations and whether there would be any price advantages of allowing suppliers to bid on more than one chemical on the same tender;

(b)the Purchasing and Materials Management Division, in consultation with the Water and Wastewater Services Division, consider requesting quotations for contract terms beyond one-year for all chemicals, as appropriate;

(7)(a)in order to minimize the number of purchase order adjustments issued, purchase orders should cover a full twelve-month period;

(b)staff allow for sufficient lead time for product testing and other procedures so that a decision is made on the award of a new purchase order before the existing one expires; and

(8)the Purchasing and Materials Management Division (City Purchasing) communicate to city departments the approval and other requirements under the interim financial control and purchasing by-laws, as well as related purchasing policies and procedures, and confirm the roles and responsibilities of the Division and user departments with respect to the procurement of goods and services;

(9)City Council request the Association of Municipalities of Ontario to encourage all Ontario municipalities to allow for the exchange of information on unit prices and bids for the supply of goods and services to municipalities, to facilitate price comparison, in the interests of municipal taxpayers; and

(10)the report (November 20, 1998) from the City Auditor be forwarded to the Works and Utilities Committee for information.

The Audit Committee reports, for the information of Council, having requested that the City Auditor be advised of all future chemical purchasing contracts prior to their being awarded, and having requested the City Auditor to advise the Audit Committee of any concerns he may have concerning the contracts.

The Audit Committee submits the following report (November 20, 1998) from the City Auditor:

Recommendations:

It is recommended that:

(a)the recommendations contained in this report be implemented;

(b)the Purchasing & Materials Management Division (City Purchasing) communicate to city departments the approval and other requirements under the interim financial control and purchasing by-laws, as well as related purchasing policies and procedures, and confirm the roles and responsibilities of the Division and user departments with respect to the procurement of goods and services; and

(c)this report be forwarded to the Works and Utilities Committee for information.

Background:

At its meeting of July 8, 9 and 10, 1998, City Council adopted Clause No.7 of Report No.6 of the Works and Utilities Committee, which referred the issue of chemical pricing to the City Auditor, with a request that a report be submitted to the appropriate committee on the matter.

Comments:

The bulk of chemicals purchased by the City are used at sewage treatment plants of the Water Pollution Control Division and water treatment plants of the Water Supply Division (former Metro). Prior to January 1, 1998, the Purchasing and Material Supply Section, Finance Division, Corporate Services Department of the former City of Toronto, being the purchasing agent for the then Metropolitan Toronto, was responsible for the procurement of services and materials, including chemicals. The Division continued to provide this service following amalgamation. In 1998, awards totalling approximately $9 million have been issued for the supply and delivery of sixteen major chemical products.

The objectives of this review were to determine whether current procedures for the procurement of chemicals are effective in ensuring fair market competition and economy, and that corporate policies and procedures are consistently observed.

Our examination included a review of corporate procurement policies and procedures, interviews with representatives of the Purchasing & Materials Management Division and Water & Wastewater Services Division, an examination of relevant purchase transactions and other procedures deemed necessary during our sample period of 1995-1998. The results of our review and applicable recommendations are outlined below. We have reviewed the findings with staff from the Purchasing and Materials Management Division, City Finance as well as with staff from the Water and Wastewater Services Division, and have included their responses to the recommendations.

Due Process for Fair Market Competition:

We have examined procedures with respect to product sourcing, awareness promotion, bid evaluation and awards. Our review confirmed that interested persons and firms are provided open access to business opportunities with the City. They are adequately advised of related procedural requirements and quotation/tender requests through venues such as video presentations, newspaper advertisements and the Internet. The supplier database has been regularly updated to include leads from trade magazines, professional contacts and other sources. Bid evaluation and award decisions are made by City Purchasing and the user department, taking into account both price and established technical specifications.

Except for the procurement of ferric chloride (which is addressed later in this report), chemical contracts were awarded through open competition and with the involvement of City Purchasing.

Chemical Pricing and Contract Awards:

During our review of price quotations and related correspondence from 1995 - 1998, we determined that there was general compliance with established procurement procedures, and that contracts were awarded to the lowest price bidder who also met pre-established technical specifications. We also noted that suppliers that have an existing contract with the City have a higher success rate in securing a new contract for the same chemical product.

A survey of chemical pricing practices followed by other municipalities indicated that they compare prices with other organizations, as required. Some also obtain published price lists such as the Camford Chemical Report or other applicable information through the Internet. These procedures provide added assurance that quoted prices are reasonable. City Purchasing does conduct price comparisons on an "as required" basis. However, these comparison, in many cases, are done in reaction to circumstances or events. To ensure the City is obtaining fair and reasonable prices for the goods and services it buys, a more proactive price comparison approach should be adopted. In the case of a sole bid, this process will assist City Purchasing in determining the reasonableness of the quoted price. To further strengthen the process and discourage any potential collusion among bidders, the National Institute of Governmental Purchasing suggests that organizations include a clause in their Request For Quotation, Tender or Proposal documents, alerting suppliers that pre-bid information exchange among competitors is a criminal offence.

Recommendation No. 1:

It is recommended that:

(a)City Purchasing implement a more proactive price comparison process, which would include conducting regular price comparisons with other organizations and against published price lists and industry standards, where possible; and

(b)City Purchasing consider adding a clause to the City's Request for Quotation, Tender or Proposal documents, alerting suppliers that pre-bid information exchange among competitors is a criminal offence. This should be done in consultation with the City Legal Services.

Response from Purchasing and Materials Management Division:

Established purchasing procedures require that all goods and services be obtained as the result of an open, competitive, non-restrictive process in which all bidders are provided an equal opportunity to submit bids on City requirements. This ensures maximum competition to achieve the best price possible. The Purchasing and Materials Management Division follows such procedures.

The purchase of chemicals for water and wastewater treatment are not discretionary purchases that can be delayed. These are essential requirements. We question the value of subscribing to industry publications or other information to confirm if the pricing being offered to the City is reasonable, if they will not affect the decision of whether to buy or not buy the commodity at the quoted price.

With respect to a clause alerting suppliers that pre-bid information exchange is a criminal offence, the Purchasing and Materials Management Division will consult with Legal Services on the form and content of such a clause.

With regard to comparing prices with other municipalities or organizations, the Purchasing and Materials Management Division has had recent discussions with other GTA municipalities on this point. The GTA municipalities have indicated that they do not make public unit prices or bids, thus making a price comparison between the City and the other GTA municipalities not possible.

Splitting of Contract Awards:

In July, 1998, the contract for the supply of liquid chlorine was awarded to a new supplier. Prior to this recent award, two suppliers had been sharing the annual contract for a number of years These two companies offered identical prices each year and were the two lowest bidders since 1992. Purchasing and the former Works Department made the decision to split the annual award. Respondents to our survey indicated that splitting an order in the case of two tied low bids is not common practice. In the event that two companies offer the same lowest bid, other criteria are taken into consideration in making the decision, and the contract is awarded to only one supplier. The National Institute of Government Purchasing indicates that a contract should be awarded to only one supplier in the case of tied bids, and advise that suppliers should be made fully aware of the City's policy in this regard. Staff from the Competition Bureau, Industry Canada also recommend that in the case of suppliers offering the same low bid for a commodity or service, it is in the best interest of the City and the competitive process to award the contract to one supplier, as this would reduce the risk of companies colluding on a bid.

Recommendation No. 2:

It is recommended that:

(a)in the event two or more suppliers offer the same lowest bid for the provision of goods or services, the contract be awarded to one supplier based on other evaluation criteria; and

(b)City Purchasing consult with Legal Services on any legal issues that should be considered in awarding a contract to only one supplier in the case of two or more tied low bids, and on any additional clauses that should be added to the City's purchasing documents (Request for Quotations, Request for Tender, etc.) to protect the City's interests accordingly.

Response from Purchasing and Materials Management Division:

The splitting of contract awards is only considered after it is determined that all criteria taken into consideration have been evaluated as identical, not just pricing. As a result, the splitting of a contract award is done quite infrequently.

However, there is an advantage to splitting contract awards. Having two suppliers proving a good or service can provide an increased security of supply so that if one of the suppliers has unexpected problems or delays in delivery of the commodity at any time during the contract period, there is an immediate back-up source of supply. In the case of chemicals for water purification and wastewater treatment, where continuity of supply is critical, this can be a distinct advantage.

Also, if two firms submit identical bids for a good or service, then each is the "low bidder" and is entitled to be awarded a contract. In such a case it may not be wise to look for factors upon which to award a requirement which may be considered minor.

This may result in legal action by a bidder not awarded a requirement for loss of business. It may be useful to consult with the City Solicitor on this point.

Procurement of Ferric Chloride:

Ferric Chloride, in the form of soluble iron salts, is required for the precipitation of phosphate compounds contained in the sewage flow at the Main, Humber, Highland Creek and North Toronto sewage treatment plants. Eaglebrook, Inc. of Canada (previously known as Mineral Recovery Company) has been the sole supplier of this chemical to the Works Department (former Metro) since January 1, 1981. Purchases totaling $1.5 million were made in 1997.

Our review of this contract identified the following concerns:

(i)Lack of Purchasing Involvement:

Various Council reports indicated that in September, 1980, the then Metro Council adopted the proposal to award a 5-year contract, commencing January 1, 1981, to Mineral Recovery Company, a division of Eagle Brook Investment Limited (currently known as Eaglebrook, Inc. of Canada), the lowest bidder. At the time, sixteen firms were invited to submit quotations and four quotations were received. The annual contract value was estimated at $900,000.00 in 1981. The agreement included a renewal provision for a period of five years.

In August 1985, the then Metro Council approved a 5-year contract extension to December-31, 1990. The unit price was discounted by $0.0648 per kilogram in return for a reduction in the performance bond requirement (from $750,000.00 to $500,000.00). The contract was further extended by 5 years in 1990 (to December 31, 1995) and again in 1995 (to December 31, 2000). Both extensions were approved by Metro Council.

According to correspondence reviewed, Eaglebrook has been dealing directly with Works Department staff regarding the supply of this product. A Pre-bid Contract Proposal to the Director, Water Pollution Control dated January 9, 1995 indicated that Eaglebrook offered a price reduction of 17.88 percent in return for a 5-year extension, or a 6.36 percent price reduction for a 3-year extension. A reference check done by the Works Department on another major supplier at the time identified various operational concerns. In view of these concerns and potential savings of between $2 million and $2.6 million over the 5-year period, staff recommended and Metro Council approved a further 5-year extension to the Eaglebrook contract in May 1995.

City Purchasing was not asked to participate in the procurement process for ferric chloride subsequent to their involvement in 1980. Price quotations were not publicly solicited from interested suppliers. To assure the presence of open and fair competition in all procurement matters, as well as conforming to due process, it is important that City Purchasing participates in all procurement related decisions.

Recommendation No. 3:

It is recommended that upon the expiry of the existing contract in December 2000, the purchase of ferric chloride (soluble iron salts) be done through an open bid competition, coordinated by City Purchasing.

Response from Water and Wastewater Division:

Agreed.

(ii)Payment Controls:

A purchase order was issued in October 1980 for the supply and delivery of ferric chloride for a 5-year period commencing January 1, 1981. Related payments during 1981 - 1997 were processed with reference to the same purchase order. New purchase orders were issued for 1998. In March 1998, City Council authorized a 0.3 percent price reduction for 1998 in accordance with the Consumer Price Index, as stipulated in the contract. Invoices paid in September 1998 were processed at the higher price as quoted on the purchase orders which Purchasing issued in February 1998. The potential overpayment for 1998 is approximately $4,000.00. The Water and Wastewater Division has indicated that it is in the process of taking action to recover the overpayment and will confirm the adequacy of procedures to prevent a recurrence.

We also found that the Water and Wastewater Services Division is unable to locate the supplier's performance bond (in the amount of $500,000.00) which was stipulated in the contract.

Recommendation No. 4:

It is recommended that the performance bond be located and kept on file until expiration of the contract with Eaglebrook.

Response from Water and Wastewater Division:

We have verbally requested Eaglebrook to provide a copy of the bond to complete our records. However, in the event that one was not issued, the division would like to clarify the appropriateness of this request in light of the terms and conditions of the other chemical contracts and to achieve consistency.

Authorization of Purchase Awards:

On March 6, 1998, City Council adopted an Interim Purchasing By-law To Establish Interim Procedures And Authority for the Procurement of Goods and Services (By-law No.57-1998). In defining the reporting relationship of the Purchasing Agent to Council and designated committees, Section 5(3)(b) states that "the Bid Committee is authorized to make an Award if the amount of the Award is equal to or less than the funding approved by Council and is equal to or less than $1.0million."

Council further directed that "quotations and tender calls over $1.0 million shall be reported to the appropriate Standing Committee of Council and/or Community Council, and subsequently submitted to Council for approval." This by-law was amended on June 5, 1998 (By-law No. 304-1998) such that a Standing Committee or Community Council is authorized to make an Award if the amount of the Award is less than the funding approved by Council and is equal to or less than $2.5 million, or make a recommendation to Council.

Our review found that in April 1998, the Bid Committee approved an award for the supply and delivery of hydrofluosilicic acid. The award, in the amount of $747,900.04, was made to Lucier Chemical Industries Limited for the period ending December 31, 1998. The contract includes an option to renew for a further one or two year period, should all the terms and conditions be agreeable to both parties. Purchasing staff are of the opinion that further approval from the Bid Committee is not required if the Department elects to award a one or two year extension.

The Interim Purchasing By-law (No.57-1998) defines an "Award" as "the acceptance of a Tender, either by the Bid Committee pursuant to the terms of this by-law or by Council in adopting the recommendation of a Standing Committee of Council". Since the potential amount of this contract, if extended, will exceed $1.0 million, it is our opinion that this award requires Standing Committee approval.

Recommendation No. 5:

It is recommended that City Purchasing consult with Legal Services to clarify whether the cost of renewal options are to be taken into consideration when determining the value of a commitment/contract for approval purposes, and that such clarification be communicated to all applicable City Purchasing staff and departments.

Response from Purchasing and Materials Management Division:

This matter had been reviewed with Legal Services earlier this year who have advised us that it is acceptable for approval purposes to include renewal options in Reports when determining the value of a commitment/contract. However, the Purchasing and Materials Management Division will again review this matter with Legal Services to clarify this issue.

Request for Tenders:

Currently, tenders are requested on an individual basis for each chemical. There be some economies to the supplier and in turn some price advantages to the City by packaging the tender requests so that a supplier could bid on multiple chemicals at the same time. We also noted in our review that the contracts for some chemicals extend beyond one year. It may therefore be advantageous to the City to request pricing on other major chemicals for different contract duration terms (for example one-year, three-year and five-year terms), after taking into account factors such as price volatility, changing technical specifications and general quantity requirements for each chemical.

Recommendation No. 6:

It is recommended that:

(a)City Purchasing, in consultation with the Water and Wastewater Services Division, investigate the feasibility of having multiple chemicals included in a Request for Tenders/Quotations and whether there would be any price advantages of allowing suppliers to bid on more than one chemical on the same tender; and

(b)City Purchasing, in consultation with the Water And Wastewater Services Division, consider requesting quotations for contract terms beyond one-year for all chemicals, as appropriate.

Response from Purchasing and Materials Management Division:

Requirements for chemicals are issued separately to avoid confusion on the part of suppliers. Individual mailing lists are prepared for each requirement and suppliers are included on each mailing list according to their response to the Purchasing and Materials Management Division's "Bidders Application Form", which asks suppliers to indicate for which goods or services they wish to receive Requests for Quotation.

As indicated in the City Auditor's report, approximately $9 million is spent annually on the purchase of sixteen major chemical products. Combining these commodities, each with its own unique specification, may lead to confusion by the suppliers when they are completing the bid documents for submission to the Purchasing and Materials Management Division.

However, the Purchasing and Materials Management Division will again review this matter to determine if any of these commodities can be combined in one bid package.

Response from Works and Wastewater Division:

The Water and Wastewater services will consider this recommendation, however, as different chemicals have different evaluation criteria, e.g. Polymer requires extensive testing prior to acceptance, awarding of the purchase orders may be delayed until all issues for all chemicals are resolved.

In addition to this, there are few contractors which could supply all chemicals used by the Division. Such contractors would most likely subcontract some of the supplies to others. This in turn would cause a price increase due to additional overhead and profit margins added.

The Water and Wastewater Division will consider contract terms beyond one-year provided that agreements incorporate a process which will ensure fair price throughout the contract and the interests of the division are met with regards to quality, delivery and technical assistance.

Purchase Order Adjustments:

During our review we noted that numerous Purchase Order Adjustments were issued during the first quarter of each year. Our discussions with Purchasing staff revealed that due to extensive product testing and delayed responses from the Works Department, purchase orders for chemical products are historically issued around April or May of the year, but with a December 31 expiry date. Consequently, it is necessary to issue Purchase Order Adjustments to the same supplier in the new year to authorize invoice payments until the award of a new purchase order.

Recommendation No. 7:

It is recommended that:

(a)in order to minimize the number of purchase order adjustments issued, purchase orders should cover a full twelve-month period; and

(b)staff allow for sufficient lead time for product testing and other procedures so that a decision is made on the award of a new purchase order before the existing one expires.

Response from Purchasing and Materials Management Division:

The Purchasing and Materials Management Division encourages the Works Department to forward their requirements for chemicals well in advance of the commencement date of the annual contracts. In the past, there have been instances where the contract did not commence exactly on time due to delays caused by the lack of scheduled Works Committee meetings in the former Metro Toronto and the relatively low threshold ($100,000.00) above which all purchases had to be approved by Committee and or Council.

In the new City of Toronto with the Bid Committee having regular weekly meetings and being able to award contracts up to $1 million in value, together with closer co-operation with the Works Department, these instances of delayed contract awards will diminish.

The Purchasing and Materials Management Division has issued in July of this year, procedures to all departments which outline the process that is to be followed for all purchasing activity handled by the Division.

Conclusion:

Current procedures for the purchase of chemical products are effective in extending fair and equal opportunities to interested persons and firms wishing to do business with the City of Toronto. There is also general compliance with established policies and procedures. By implementing the recommendations in this report, Purchasing can further protect the integrity of the process and better ensure that the City is obtaining the best prices for chemicals purchased.

The Purchasing & Materials Management Division performs an important role in ensuring that the City's procurement process is fair and open, that due process is followed and properly administered, that departments are receiving quality goods and services at the best prices, and that laws and regulations with respect to procurement matters are observed. In the transition to the new city, not all departmental staff may be aware of by-laws that have been enacted to establish financial control and procurement requirements. It is therefore important that City Purchasing communicates its mandate to departments, including roles and responsibilities in the procurement process, as well as applicable by-law and policy requirements.

Contact Name and Telephone Number:

Tony Veneziano, Senior Audit Manager, 392-8353.

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Councillor Jakobek appeared before the Committee in connection with the foregoing matter.

3

Other Items Considered by the Committee

(City Council on December 16 and 17, 1998, received this Clause, for information.)

(a)1998 Audit Planning Document

The Audit Committee reports having received the following report for information:

(November 19, 1998) from Ernst & Young, External Auditors entitled, "City of Toronto - Report to the Audit Committee, 1988 Audit Planning" and recommending that the report be received for information.

The following representatives from Ernst and Young, Chartered Accountants, made a presentation to the Committee:

-Mr. Ian Bowell;

-Mr. Mike Connolly;

-Ms. Karen Kinnaird; and

-Ms. Diana Brouwer.

(A copy of the report was forwarded to all Members of Council with the agenda of the Audit Committee meeting of December 1, 1998, and a copy thereof is on file in the office of the City Clerk.)

(b)Corporate Variance Reporting

The Audit Committee reports having received the following report and having forwarded same to the Budget Committee for information:

(November 20, 1998) from the City Auditor respecting Corporate Variance Reporting and recommending that this report be received and forwarded to the Budget Committee for information.

(c)Corso Italia Business Improvement Area

The Audit Committee reports having received the following report and having forwarded same to the Budget Committee for information:

(November 20, 1998) from the City Auditor respecting Corporate Variance Reporting and recommending that this report be received and forwarded to the Budget Committee for information.

Respectfully submitted,

DOUG MAHOOD,

Chair

Toronto, December 1, 1998

(Report No. 2 of The Audit Committee was adopted, as amended, by City Council on December 16 and 17, 1998.)