Internal Audit Report - Internal Audit of the Inuvik to Tuktoyaktuk Highway Program – Management Control Framework

January 2015

Table of Contents

  1. Executive Summary
  2. Background
  3. Audit Objective and Scope
  4. Audit Approach
  5. Audit Findings
  6. Conclusion
  7. Statement of Conformance
  8. Management Response and Action Plan

1 EXECUTIVE SUMMARY

Introduction

On January 21, 2014, the Minister of Infrastructure, Communities and Intergovernmental Affairs entered into a Contribution Agreement with the Government of the Northwest Territories (Recipient) for the construction of the Inuvik to Tuktoyaktuk Highway. The Agreement specifies that the Government of Canada will provide up to $200 million and that costs will be profiled over a five-year period from 2013-14 to 2017-18.

This Internal Audit was included in the Infrastructure Canada (INFC) Risk-Based Audit Plan 2014-2017.

Audit Objectives and Scope

The audit objective was to assess the adequacy and effectiveness of the governance structure and management controls for the Inuvik to Tuktoyaktuk Highway Program.

The audit scope was determined based on Infrastructure Canada's roles in the management of the program and administration of the Contribution Agreement. The audit scope and criteria related to the following areas of focus:

  • Roles and responsibilities were clear and key governance frameworks in place were working as intended;
  • Program development complied with relevant policies and risks were managed effectively; and
  • Internal controls over program management were in place for Infrastructure Canada program staff to effectively carry out their roles and responsibilities under the Agreement and were working as intended.

The audit period covered the time frame from March 1, 2013 to August 1, 2014. Subsequent events between August 2, 2014 and October 31, 2014 were also considered.

Conclusion

The Inuvik to Tuktoyaktuk Highway Program governance structure and management controls were adequate and effective. Infrastructure Canada and Government of the Northwest Territories roles, responsibilities and accountabilities were clear and oversight committees were in place and working as intended. Program development complied with relevant policies and the Agreement was administered in a manner consistent with program terms and conditions. A risk framework and internal control structure was in place to manage program delivery and control key risks.

One area for improvement was noted. INFC Senior management should ensure that the departmental risk tool assessment that is generated by program analysts is reviewed and signed-off by the appropriate level of senior management to demonstrate management concurrence with the assessment results. This should be performed at key decision making stages such as the development of the Treasury Board submission, Contribution Agreement, Agreement Management Committee terms of reference and updated throughout a project's lifecycle.

2 BACKGROUND

INFC is the main department responsible for federal efforts to enhance Canada's public infrastructure. The department is a key funding partner, working with provinces, territories, municipalities, the private sector and non-profit organizations, along with other federal departments and agencies to help build and revitalize world-class public infrastructure from coast to coast to coast.

On January 21, 2014, the Minister of Infrastructure, Communities and Intergovernmental Affairs entered into a Contribution Agreement (Agreement) with the Government of the Northwest Territories (Recipient) for the construction of the Inuvik to Tuktoyaktuk Highway (ITH). The Agreement specifies that the Government of Canada will provide up to $200 million and that costs will be profiled over a five-year period from 2013-14 to 2017-18.

The construction of the all-season road between Inuvik and Tuktoyaktuk will occur mostly during winter seasons when there is less risk of damage or disruption to the permafrost. Construction is projected to end in 2018.

This Internal Audit was included in the Infrastructure Canada Risk-Based Audit Plan 2014-2017.

3 AUDIT OBJECTIVE AND SCOPE

The audit objective was to assess the adequacy and effectiveness of the governance structure and management controls for the Inuvik to Tuktoyaktuk Highway Program.

The audit scope was determined based on INFC's role in the management of the program and administration of the Agreement. The audit period covered the time frame from March 1, 2013 to August 1, 2014. Subsequent events between August 2, 2014 and October 31, 2014 were also considered. The work related to milestone payments in the report did not include an examination of the claim files.

4 AUDIT APPROACH

The approach and methodology used conforms to generally accepted practices, processes, procedures and standards of internal audit in the Government of Canada, and conforms to the Treasury Board Secretariat Policy on Internal Audit and the Institute of Internal Auditors Standards for Internal Auditing. Audit criteria were sourced from the Treasury Board Transfer Payment Policy and relevant elements of the Office of the Comptroller General's Audit Criteria Related to the Management Accountability Framework.

The audit work was conducted in three phases — planning, examination, and reporting — with deliverables prepared at key points. The planning phase included interviews, a high level modeling review, risk assessment and general documentation reviews. This knowledge formed the basis for determining the areas for detailed review in the examination phase.

The examination phase included interviews with INFC program staff, meetings with representatives from the GNWT, examining relevant documentation, and site visits in and around Tuktoyaktuk and Inuvik, Northwest Territories to observe a Corridor Working Group meeting and road construction areas. Preliminary audit findings were communicated to the auditee to validate facts and to confirm the clarity, accuracy, and completeness of the information reported.

5 AUDIT FINDINGS

5.1 Governance

Audit criteria for 5.1 Governance

It was expected that roles and responsibilities were clearly defined and communicated and that an active, functional and appropriately composed Agreement Management Committee (AMC) existed to carry out and achieve the program's strategic objectives.

Governance

Conclusion:

Overall, INFC and Recipient roles, responsibilities, and accountabilities were formally defined and communicated. An Agreement Management Committee was established to provide program oversight and is supported by a Corridor Working Group.

INFC and Recipient roles and responsibilities for 5.1 Governance

The Agreement terms and conditions defined key project priorities as well as provisions and deliverables required to achieve objectives. It also defined the overall governance framework including the roles, responsibilities and accountabilities of each party involved.

Under the Agreement, the Recipient is responsible for the full implementation of the project, while INFC is responsible for program management and Agreement administration. This includes monitoring of Recipient compliance with terms and conditions, communications, information management, reporting, and reviewing and approving payments for claims submitted.

INFC staff – internal roles and responsibilities for 5.1 Governance

Within INFC, the design, management and delivery of the ITH program resides with the Program Operations Branch (POB) with a mandate to facilitate investment in public infrastructure through the delivery of various programs.

To ensure the proper identification and delivery of program requirements, POB officials liaised with internal stakeholders from Financial Management Advisory Services, the Policy and Communications Branch and Legal Services.

POB officials assigned to the program had an understanding of their roles and responsibilities based on their work experience at INFC and the fact that the program design was similar to another INFC program business model — Building Canada Fund-Major Infrastructure Component.

During the audit period, officials developed a program Management Control Framework, which was completed in July 2014. The framework defined procedures, controls and identified program officials' roles and responsibilities to deliver and monitor the program.

Project oversight for 5.1 Governance

The Agreement Management Committee (AMC) provides project oversight. INFC and Recipient officials established an AMC of four members, including a territorial co-chair, a federal co-chair, a territorial member, and a federal member to administer and monitor this Agreement.

The AMC adopted written guidelines with respect to the conduct of meetings and those of the sub-committees, the roles of the members, and other relevant matters.

The AMC's roles and responsibilities include overseeing the management and operations of contributions, accountabilities for performance measurement and evaluation, and ensuring comprehensive risk management. The AMC is to meet twice per year and has a process in place to consider additional meetings as required. INFC officials attended the first AMC meeting held on March 27, 2014 in Yellowknife. The AMC has held two meetings since that time.

The governance framework also includes a Corridor Working Group that was established to monitor progress on the Terms and Conditions contained in the environmental assessment. The Working Group's terms of reference specifies the roles and responsibilities of all parties involved.

At the June 2014 meeting held in Inuvik, members of the Corridor Working Group discussed and reviewed project updates and progress made during the first construction season. The results were subsequently shared with AMC members during a teleconference the following day.

5.2 Program Development and Risk Management

Audit criterion for 5.2 Program Development and Risk Management

It was expected that program development complied with relevant policies and risks were managed effectively.

Program Development and Risk Management

Conclusion:

Program development complied with relevant policies and the Agreement was administered in accordance with program terms and conditions. At the project delivery level, a risk framework was in place to control key risks. One area for improvement that was noted related to senior management concurrence with risk assessment tool results at key project decision making stages.

Program development for 5.2 Program Development and Risk Management

The ITH project was included in Federal Budget 2011 and 2013. In November 2013, the program was approved. Following approval, the Minister of Infrastructure, Communities and Intergovernmental Affairs entered into an agreement with the Recipient. The construction of the ITH is administered as a project-specific contribution program delivered by INFC under the "Investments in National Infrastructure Priorities" program in the departmental Program Alignment Architecture.

The Agreement was signed by the appropriate level of authority and the provisions complied with the approved program terms and conditions and the Treasury Board Transfer Payments Policy. During the design of the program and the development of the Agreement, program management considered lessons from previous programs such as the business model used for the Building Canada Fund-Major Infrastructure Component (BCF-MIC). In addition, key program parameters were outlined including roles and responsibilities, project monitoring and reporting requirements, eligible and ineligible funding allocations and performance targets.

Program Risk Management for 5.2 Program Development and Risk Management

Program management assessed standard infrastructure project risks during program design. These included cost overruns, schedule delays and the Recipient's capacity to deliver. Consideration was also given to the Deh Cho Bridge project in the Northwest Territories and the Recipient's risk profile.

The project delivery risk framework includes an engineer's sign off on reimbursement claims, Working Group meetings, Recipient audits, reviews of financial statements, financial audits, site visits, AMC bi-annual oversight meetings, and monthly reporting during construction seasons. Departmental officials analyze this information and use it to update the risk assessment on a periodic basis. In addition, the Recipient developed and updated its own risk matrix to monitor and manage project risks, which is shared with INFC program officials.

The AMC also has a risk management role and is responsible for reviewing potential project risks as they arise and determining whether the Recipient is taking appropriate action in response to key risks.

Environmental risk management for 5.2 Program Development and Risk Management

As the project was subject to an environmental assessment under the Canadian Environmental Assessment Act, 1992, and pursuant to the Inuvialuit Final Agreement between Canada and Inuvialuit, environmental risks were formally assessed before the Agreement was signed with the Recipient.

During program delivery, INFC officials monitored project environmental risks using an environmental tracking matrix to monitor the implementation of recommendations and commitments resulting from the Environmental Assessment. Working Group meetings have occurred and AMC members have been briefed on project environmental monitoring.

Departmental risk assessment tool for 5.2 Program Development and Risk Management

Departmental officials use the Program Operations Risk Tool (PORT) to assess project risks. The tool calculates a risk score based on responses to a variety of input questions, resulting in a corresponding project monitoring strategy. Project monitoring parameters include frequency and composition of AMC meetings, frequency of invoice verification, the number of site visits required, informal monitoring measures, and the amount of the project funding holdback.

The PORT assessment is a key project risk management tool. While the INFC program management business model does not require senior management sign-off on PORT assessments, the document includes a management signature block which is to ensure management's concurrence with the program monitoring strategy.

During the program development stage, PORT was used to assess risks; however, due to concerns with the tool, other documents and information were taken into consideration to develop the project risk assessment. The issues with the tool include the fact that it is a basic spreadsheet that has been updated over the years but the previous versions are also still accessible to analysts through various file directories. These and other issues related to PORT are being addressed as a result of an internal audit of the departmental Project Review Panel (October 2014).

In June 2014, POB staff used the most current version of PORT to update the ITH risk assessment. The update was based on information obtained from the Recipient, AMC members and members of the Working Group. Specific risk factors related to construction in the North were identified and taken into consideration. These included such factors as constructing on permafrost, the time required to move heavy machinery to the construction locations, and to train a large workforce. It was noted, however, that the PORT assessment documents on file had not been signed-off by the appropriate level of management as of the end of August 2014.

Recommendation 1:

  • INFC Senior management should ensure that the departmental risk tool assessment that is generated by program analysts is reviewed and signed-off by the appropriate level of senior management to demonstrate management concurrence with the assessment results. This should be performed at key decision making stages such as the development of the Treasury Board submission, Contribution Agreement, Agreement Management Committee terms of reference and updated throughout a project's lifecycle.

Management Response to Recommendation 1:

Agreed. Program Operations Branch (POB) will ensure that all finalized risk tool assessments for all projects will be reviewed and signed-off by the appropriate level of management. This would include the initial risk assessment results and anytime there is a significant change to the risk assessment. Project risk is assessed on an ongoing basis and also occurs at critical points throughout the project's lifecycle. In addition, Infrastructure Canada is updating its project risk assessment tools which will include a review of the management sign off processes.

5.3 Internal Control and Program Management

Audit criteria for 5.3 Internal Control and Program Management

It was expected that internal controls over program management were in place for INFC staff to effectively carry out their roles and responsibilities under the Agreement and were working as intended. Specifically, it was expected that:

  • Monitoring processes used to evaluate program performance and reporting mechanisms to management complied with relevant policy and Agreement terms and conditions, and
  • Payments were made in compliance with the terms and conditions of the Agreement.

Internal Control and Program Management

Conclusion:

Internal controls over program management were in place for program staff to carry out their roles and responsibilities and were working as intended.

Project monitoring and reporting for 5.3 Internal Control and Program Management

During the first year of construction, INFC monitored the project to ensure that the Recipient complied with the Agreement terms and conditions. This was mostly done via participation in Working Group and AMC meetings, site visits, milestone payment claim reviews, weekly updates from the Recipient during the construction season and ongoing communications. In addition, INFC had access to the Recipient's internal document management system that provides up-to-date project information.

The Recipient is responsible for providing timely and accurate reports on the progress of road construction activities by preparing an Annual Progress Report, and for reporting financial and / or compliance audit results. These documents are submitted to INFC through the AMC.

In June 2014, the Recipient submitted their annual report for fiscal-year 2013-14. The Report indicated that construction season one was shortened to about 53 days in the Southern portion (approximately one third of a normal construction season). As such, only 29 kilometers of road out of the targeted 40 kilometers was constructed. A revised schedule to cover the shortfall during the second construction season was planned and provided by the Recipient to allow the project to still be completed by 2018, as originally planned. Given the need for the Recipient to implement a revised construction schedule for the 2014 winter season, POB program management have established strategies to monitor these risks by increasing their site visits and frequency of communications.

Milestone payments for 5.3 Internal Control and Program Management

The ITH program terms and condition require that payments be made by INFC to the Recipient on the basis of project milestone achievements. Each milestone is funded by the Government of Canada at 75 percent of eligible project expenditures up to the maximum federal contribution of $200 million.

INFC established a detailed cash flow schedule for each milestone for payments over the four-year time frame, and required the Recipient to demonstrate satisfactory progress (via the independent engineer sign-off on milestone completion certification) before it would process a payment. This requirement provides INFC with the information it needs to determine whether project activities were on track to meet the project deadline and whether spending was on target. In addition, INFC senior management sign-off on the milestone claim supported by the milestone completion certification constitutes formal acceptance of the project deliverable requirements.

For the period audited, up to seven milestone payment claims could have been submitted along with a Declaration of Milestone Completion Certification for each completed milestone signed by the project Engineer/Architect. As of August 1, 2014 the Recipient had submitted claims for milestones one, two and three along with declarations of completion and requests for payment to INFC.

INFC did not make any milestone payments in 2013-14 as per a condition in the Agreement, which required the signing of the Land Exchange and Royalty Agreement between the Inuvialuit Regional Corporation and the GNWT before payments could be made. The agreement was signed on July 31, 2014 and subsequently payments for milestones one and two were made in August 2014 and for milestone three in September 2014, for a total of $22.275 million. INFC also received approval to re-profile $41.025 million from fiscal-year 2013-14 to fiscal-year 2014-15. As of October 8, 2014 INFC and the Recipient were negotiating a new milestone payment annex to the Contribution Agreement.

As the project enters the second year of construction, one of the key risks to the Department relates to the monitoring of the achievement of the updated milestone and cash flow schedule. This is important as project delays could impact INFC's abilities to manage its program funding commitments and potentially lead to re-profiling funds to future fiscal-years. Departmental officials are managing these risks in collaboration with the AMC.

6 CONCLUSION

The Inuvik to Tuktoyaktuk Highway Program governance structure and management controls were adequate and effective. Infrastructure Canada and Government of the Northwest Territories roles, responsibilities and accountabilities were clear and oversight committees were in place and working as intended. Program development complied with relevant policies and the Agreement was administered in a manner consistent with program terms and conditions. A risk framework and internal control structure was in place to manage project delivery and control key risks.

One area for improvement was noted. INFC Senior management should ensure that the departmental risk tool assessment that is generated by program analysts is reviewed and signed-off by the appropriate level of senior management to demonstrate management concurrence with the assessment results. This should be performed at key decision making stages such as the development of the Treasury Board submission, Contribution Agreement, AMC terms of reference and updated throughout a project's lifecycle.

7 STATEMENT OF CONFORMANCE

The audit conforms to the International Standards for the Professional Practice of Internal Auditing and the Internal Auditing Standards for the Government of Canada as supported by the results of the quality assurance and improvement program.

8 MANAGEMENT RESPONSE AND ACTION PLAN

# Recommendation Management Response and Action Plan OPI and Due Date
1 INFC Senior management should ensure that the departmental risk tool assessment that is generated by program analysts is reviewed and signed-off by the appropriate level of senior management to demonstrate management concurrence with the assessment results. This should be performed at key decision making stages such as the development of the Treasury Board submission, Contribution Agreement, Agreement Management Committee terms of reference and updated throughout a project's lifecycle. Agreed. Program Operations Branch (POB) will ensure that all finalized risk tool assessments for all projects will be reviewed and signed-off by the appropriate level of management. This would include the initial risk assessment results and anytime there is a significant change to the risk assessment. Project risk is assessed on an ongoing basis and also occurs at critical points throughout the project's lifecycle. In addition, Infrastructure Canada is updating its project risk assessment tools which will include a review of the management sign off processes.

OPI: Program Operations Branch

Marc Fortin, Assistant Deputy Minister, Program Operations

Due Date: This change will take effect immediately.

Annex A: Construction in North Section (Tuktoyaktuk)

Construction vehicles on the Inuvik to Tuktoyatuk Highway Dump truck pouring materials at construction site on the Inuvik to Tuktoyatuk Highway

Annex B: Construction in Southern Section (Inuvik)

Construction vehicles on berm being built for the Inuvik to Tuktoyatuk Highway Surveying tools at construction construction site on the Inuvik to Tuktoyatuk Highway
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