Report of the
Provincial Auditor on the Andersen Agreement
Mr Kevin Costante, deputy minister, Ministry of Community and
Social Services
Ms Ann Szyptur, director, business technology integration,
business transformation project
Mr Ray Hession, Hickling Lewis Brod, third-party reviewer
Mr Eric Peters, Provincial Auditor
STANDING COMMITTEE ON
PUBLIC ACCOUNTS
Chair /
Président
Mr John Gerretsen (Kingston and the Islands / Kingston et les
îles L)
Vice-Chair /
Vice-Président
Mr John C. Cleary (Stormont-Dundas-Charlottenburgh L)
Mr John C. Cleary
(Stormont-Dundas-Charlottenburgh L)
Mr John Gerretsen (Kingston and the Islands / Kingston et les
îles L)
Mr John Hastings (Etobicoke North / -Nord PC)
Ms Shelley Martel (Nickel Belt ND)
Mr Bart Maves (Niagara Falls PC)
Mrs Julia Munro (York North / -Nord PC)
Ms Marilyn Mushinski (Scarborough Centre / -Centre PC)
Mr Richard Patten (Ottawa Centre / -Centre L)
Substitutions / Membres
remplaçants
Mr Joseph Cordiano (York South-Weston / York-Sud-Weston L)
Clerk pro tem /
Greffière par intérim
Ms Donna Bryce
Staff /
Personnel
Mr Ray McLellan, research officer, Research and Information
Services
REPORT OF THE PROVINCIAL
AUDITOR ON THE ANDERSEN AGREEMENT
The committee met at 1046
in committee room 1, following a closed session.
The Chair (Mr John
Gerretsen): Good morning, everybody. I'd like to call
this meeting to order. What I'm suggesting is that we take an
hour, which means 20 minutes for each caucus, to ask any further
questions, and then that we leave some time before the 12 o'clock
deadline in order to discuss what action, if any, we wish to take
with respect to recommendations so that there can be a limited
discussion on that. Otherwise, the time will just simply run out
at noon, if that's OK. I've just forgotten where exactly we-
Mr Richard Patten
(Ottawa Centre): Chair, I suggest 10, 10 and 10 for two
rounds, not 20.
The Chair:
Two rounds of 10 minutes of questioning. The last time we
started-
Mr Patten:
We started here last time.
The Chair:
All right. Ms Martel, would you like to start it then?
Ms Shelley Martel
(Nickel Belt): I'd like to go back to the early
opportunities project, which is, as we understand it, the first
task order that was arranged between Andersen and Comsoc and
paid. I go back to it because I continue to have serious concerns
about the ministry seeing this as work that Andersen did versus
work that the ministry's own staff did. I wonder, Deputy, if you
can explain to the committee what the early opportunities project
entails. Specifically, what changes to ministry technology
occurred? Who did the work? Was it ministry staff or Andersen
staff? The details of that, so we can determine what that first
task order was all about.
Mr Kevin
Costante: What I'm going to do is ask Ann Szyptur, the
project director, to talk about-
The Chair:
Excuse me. Just for the record, the person who's answering right
now is the deputy minister, Kevin Costante.
Mr Costante:
Oh, sorry. Do you want us to introduce ourselves first for the
record?
The Chair:
If and when somebody speaks, if they could identify themselves
the first time and maybe spell their name. It's just easier for
Hansard's purposes. Good morning, Mr Costante.
Mr Costante:
Good morning. My name is Kevin Costante, C-o-s-t-a-n-t-e.
There are a number of early
opportunities initiatives. There's the consolidated verification
process and also change reporting. Did you have one of those in
mind? Do you want us to talk about either one or both?
Ms Martel:
We'd like to know how many of them have to do with the enhanced
verification project, but if you can give us each of the
components, that would be helpful too.
Mr Costante:
I'll talk in general terms and then I will hand it over to Ann
Szyptur, who can give you more detail.
The consolidated verification
process essentially is a process to look at who is eligible for
social assistance. Andersen Consulting brought to that task
several new pieces of technology that they designed for it. I
know the initials for those are called MAT and NORA, and I'll ask
Ann to describe those in more detail.
They also brought to that
task a bunch of new business processes and a more rigorous
checking format. They worked with us in terms of the
implementation of that, both at the provincial and at the
municipal level, which it's now rolling out through. There have
been significant savings in that process. I believe it's in the
neighbourhood of $35 million to date.
It's essentially a very
rigorous process. We think it's one of the best processes in
Canada in terms of checking that people are indeed eligible for
social assistance, as defined by the legislation. With those
opening comments, I'll ask Ann to say a bit more.
Ms Ann
Szyptur: I'm Ann Szyptur. I'm the project director for
the business transformation project.
Let me talk about CVP or the
consolidated verification process. CVP represents a change from a
time-based to a priority-based approach to reviewing case files.
It also streamlines the current financial review process by
amalgamating several verification processes into one consolidated
approach. It uses third-party information sources to verify
participant information, and it uses new automated tools to
assist with managing the process. In terms of the automated tools
that are used to support CVP, there are three automated tools.
There's the monitoring and tracking tool, which we call MAT,
which tracks information on the status of case file reviews.
There's a numerically ordered ranking assessment, which we call NORA, which ranks cases in
priority sequence for review.
I think this is really
important in terms of a major change in the way the ministry did
business. Previously with the review processes, it was
time-based. Approximately every two years a review was to be
done. With the numerically ordered ranking assessment process,
the reviews are done based on priorities, and those are
priorities based on risks, for example, the number of times
people move. The level of rental income is a factor in terms of
contributing to risk around eligibility.
We also have automated
interfaces which allow for access to participants' financial and
asset information to third-party sources. Those are kind of the
major components of CVP.
CVP has been implemented, as
the deputy has said, across the provincial offices. It has been
implemented municipally in three pilot sites and is now being
rolled out across the province. The intent is that by the spring
of 2000 we will have implemented CVP in all of our delivery
sites, both provincially and municipally.
In terms of the key
components-and I think, Ms Martel, your question was around the
activities that were involved-there was new technology that was
developed, as well as new business processes. Andersen Consulting
had been involved in developing both of those, as well as
training staff in our regional and municipal offices in
implementing this new verification process.
Ms Martel:
If I'm correct, Andersen has said that the cost to do that, the
cost to them so far is about $14.3 million. Is that
correct?
Ms Szyptur:
That's the information they gave, and I'm sure it is.
Ms Martel:
So if Andersen's costs to do this were $14.3 million, why would
they have been paid up to $58.5 million so far?
Mr Costante:
Essentially, how the task orders work is that all of the
components of the business transformation project are spelled out
in task orders, which kind of chunk out the work. On some
projects there are more benefits than costs. On other projects
there are more costs and perhaps even no benefits. It's just the
way the entire contract works. You have to look at it as a
whole.
On this one here, it happens
to be the case that there are more benefits than costs. On
several of the other task orders that they have done, including
the design, they've spent tens of millions of dollars so far and
have received no benefit in respect of that. I believe at this
point in the contract Andersen's costs exceed the benefits that
have been repaid to them.
Ms Martel:
But the overall agreement says the ministry is under no
obligation to pay anything until all of the benefits in the pool
are higher than the cost, and that's never occurred yet.
Correct?
Mr Costante:
The agreement does allow for us to make an early payment.
Ms Martel:
OK, but you're under no obligation to pay Andersen's costs as put
in by them, not by anyone else. Andersen's costs as totalled by
them are $14.3 million. (a) The Ministry was under no obligation
to pay whatsoever, and (b) they were paid $58.5 million, when the
costs into the pool were some $14.3 million. Why a payment at
all, and why a payment that is so excessive over what their own
costs were?
Mr Costante:
First of all, Andersen's total costs have been $72 million as of
July 31 and they've only been paid $55 million, so they have
expended more costs than they've been paid. Second of all, as I
explained last time, the rationale around the early payment was
to reduce interest costs. Andersen is allowed to charge interest
costs; the province is allowed to charge interest costs.
Andersen's cost of borrowing is higher than our cost of
borrowing, and therefore it is of economic benefit to us not to
have them charging a large amount of interest into the cost
pool.
Ms Martel:
What are Andersen's costs of borrowing based on?
Mr Costante:
I believe they're based on prime, which I think is in the
neighbourhood of 6.5%, and I think the most recent government
borrowing cost is in the 5% range, so it is cheaper for us to
borrow.
Ms Martel:
Do you get an actual billing statement from them which outlines
their interest costs?
Ms Szyptur:
We have a letter from their bank informing us of their interest
cost.
Ms Martel:
Is it over a quarterly period, annual?
Ms Szyptur:
We have a letter that talks about their borrowing rate being at
prime.
The Chair:
That's ten minutes right there.
Mr John Hastings
(Etobicoke North): Thank you for coming back in, folks.
I have a few questions for you, Mr Costante, and you may want to
refer some of these back.
My concern focuses on before
the Andersen Consulting contract was negotiated. I would like to
have you report to this committee, probably in February, if
possible, what kind of historical critical problems amounted to
in the ministry before. I know we have some of this material from
the auditor in terms of the costs on the broad side, the costs on
the loose eligibility criteria that seemed to be in place during
the past 10 years. To me there's always a story behind the story
and I think it would be important for this committee to get some
of that kind of data on a per case handling basis for family
benefits and for general welfare allowance.
When you provide those kinds
of costs per unit, I'll leave it to you, but I suggest we need at
least some comparative basis between 1985 and 1995, leading up to
this situation we have today, in terms of the fraud issue, in
terms of the over-eligibility criteria or the loose
interpretation or application of that eligibility for both of
those situations.
Complicating that, I suspect,
is the whole situation of Canada pension plan eligibility and how
that came into play in some of these situations over those time
frames.
My aim here is to get a
handle on this situation from a historical, critical path
perspective, which I don't have a firm sense of on a per case
handling basis. You can do it per social worker, you can do it per client, you
can do it per 100,000. I'll leave you that kind of flexibility,
but we are getting all kinds of numbers here about the Andersen
Consulting contract.
I would like to know what,
were the challenges facing Comsoc prior to your arrival? Some of
these other folks were on this management team prior to your
arrival. Those data should be available and when you provide it I
would request specifically that where there are changes-if you're
going to use a graph or if you're going to use, for the fraud
example, the amount of fraud per family benefit case, can you put
footnotes or asterisks that clearly define where there are
variations? That's what I would like to know. Those would be my
specific questions.
1100
I have a further one I'd like
to ask you in terms of the re-negotiation of this contract which
you keep telling us is confidential, and I understand that, but
surely you could tell us, what are the specific parameters you
are involved in, in a general sense? Who is on your negotiating
team? What is the outcome in terms of the time you're expecting
to get this thing completed? Will there be specific penalties, or
the risk-reward thing the auditor uses, that we can see after
you've negotiated the contract?
My final question would be:
Will you get access to the New Brunswick experience in terms of
how they supposedly got a closer handle on their expenditures in
this whole area? Remember, the amount of welfare costs went
astronomically high in that time frame. I think we need to get
some historical perspective on the record before we arrive at
where we are with this Andersen Consulting thing.
Mr Costante:
I can try to answer some of your questions in broad strokes and
come back later with written, detailed, year-by-year information,
whatever we can provide. First of all, it's fairly well known
that the number of people on welfare and the cost of welfare
massively ballooned between the mid-1980s and the early 1990s.
The costs were around $1.5 billion in the late 1980s, and by
1994-95 we were over $6 billion. There was a large increase.
It's also not a secret that
at that point there was a large number of clients coming on to
the system. The staff, both at the provincial and municipal
level, were struggling to cope with the influx of people. Given
that large increase in demand, some of the checking was not
always done as thoroughly as possible, nor did they have the
types of tools that we now have as a result of the Andersen
contract to deal with eligibility. Therefore, the amount of
fraud, misrepresentation and error was high, and that error can
be both client error and staff error. The amount of problems on
the system, which we have been quite diligent in terms of trying
to address, rapidly escalated during that period.
We can come back to you and
talk to you about what we have found over the last number of
years in terms of our fraud investigations. It's always quite
difficult, and I think many systems struggle with the level of
fraud, because no one is going to stick their hand up and say,
"I'm defrauding the system."
Major systems like ours, like
the Canada pension plan, like unemployment insurance, I don't
think can give you an accurate forecast of the amount of fraud.
We can often tell you what we're finding through case reviews. It
gives you a sense of that. The accuracy and the percentages that
are thrown around vary from a couple of per cent right up to 20%
and 30% and you see a fairly broad range of estimates. The best
indication we can give you is what we're actually finding. We
will provide that information to the committee.
In terms of our most recent
discussions with Andersen Consulting, the negotiating team
consists of myself, Bonnie Ewart who is here with me, and the
chief administration officer for the ministry, Angela Forest.
It's hard for me to predict when we would conclude those
discussions. We hope to do it as soon as possible. Negotiation
discussions require both parties to agree. I don't have firm
control over that. Obviously we would like to get it done in the
next couple of months. We want to get it done quickly and get it
over with and move on with this project.
The other issue you had asked
about is what we are looking at doing. As I said last time, we
are looking at reducing costs to the government for this. I
should point out that as we reduce costs, the relative amount
that the government gets from the benefits will increase, as our
costs go up and as their costs come down relative to our cost.
That is our prime objective, to make sure that we get a good deal
in terms of this.
Obviously, you get into a
discussion or trade-offs on how far you can go and it's a
commercial deal. I don't think I can say more than that.
Mr Hastings:
Do you have anybody from Management Board on your negotiating
team in the renegotiations?
Mr Costante:
We do have a support team that assists us in terms of getting
information and providing us with advice and we will have
somebody from Management Board on that.
The Chair:
You've got one more minute left.
Mr Hastings:
I have a question for Mr Hession. He mentioned last week that
he's looked at this arrangement with Andersen Consulting and
mentioned something like $300 million anticipated savings over
the life of this project. What I'd like to know is, what specific
methodology or formula are you using to come up with that number
if it isn't coming out of policy changes? I believe you said last
week it's not also coming out of design benefit attribution. I'd
like to know how you achieve that and is that a really firm
figure or is it somewhat off on your percentage in terms of the
outcome?
Mr Ray
Hession: I did cite the $300-million number as the
forecast-I emphasize the word "forecast"-of benefits attributable
to all the effects of all of the measures being taken by the
project, and there are many, needless to say, two of which have
been discussed more specifically here this morning, the so-called
early opportunities, but there are many others.
At the end of the day,
specific to Mr Hasting's question, the effects take the form of
more accurate amounts in the cheques written to persons who are
deemed eligible-so the eligibility criteria are more rigorously
enforced-on time to the right person at the right place. Those
are essentially the effects.
Now, to get there, the
causes, meaning the measures taken I've just spoken about, are
modelled to show all of the relationship between the causes and
the effects. In this model there are probably on the order of 300
to 400 variables, so you can see the complexity of the
exercise.
Most profound in all of this
is the analysis of risk that arises when you contemplate a cause
and an effect. You say something's going to happen in the future.
Yes, but what's the probability of it happening in the future?
And you have to very judiciously assess that. That's why I was
putting so much emphasis at my first utterance on this last week.
That risk analysis is profound. So at the end, I say the probable
outcome, the expected outcome, the average of all the
considerations, is a $300-million outcome.
If you ask me, which I'm
quite prepared to deal with, "What would you tell me, Mr Hession,
if I said: `I want a higher sense of competence here. What's the
80% probability or the 90% probability of an outcome?'" The size
of the benefit, I will answer, is a smaller number. But I would
tell you most profoundly, this is a robust business case.
If you apply worst-case
scenarios of a break-even, it's less than 1% chance that this
thing will get to the point of break-even, where your costs and
your benefits are equal. That's not an outcome anybody wants but
it gives you a test of the robustness of the business case. I say
the expected outcome is $300 million based on what we knew back
then. I told you, forthrightly, that there are scheduled risks
involved. There may or may not be slippage. Andersen may slip;
the ministry may slip. That will affect the outcome.
Also, significantly, is the
size of the universe of eligible program constituents here. We
already know that's smaller because of the economic effects in
Ontario. There's some elasticity here, but the most important
thing is that it's intellectually complete as best we can humanly
achieve. It's auditable, and I again encourage that that occur.
Take a hard look at what's there. It's transparent, so
legislators can look at it and satisfy themselves that yes,
they've thought about all of the things that matter here. It may
transpire that there's human error in there, although we don't
think so. It has been tested over and over.
1110
The Chair:
Thank you very much. I let that run on for about three or four
minutes that I'll take off the next time just to get the answer
in.
Mr Joseph Cordiano
(York South-Weston): Let's deal with the questions of
what we knew back then and what we know now. One of the first
questions I have is with regard to the figure that was used by
the deputy minister with respect to Andersen's total cost. You
pointed out that it was $72 million, not $14.3 million as we've
indicated. As well, you've suggested that the government used its
borrowing capacity at a much lower cost, 5% versus 6.5%.
Can I ask you, did in fact
Andersen borrow those funds from the bank? Did you get
verification that there was any borrowing done, or have you
borrowed money on their behalf thus far, which you can verify for
us? What exactly has been borrowed?
Ms Szyptur:
In terms of the contract, the contract talks about interest going
into the cost pool. The interest is based on the costs that are
in the cost pool. It does not reflect any discussion of whether
the costs have been actually borrowed or not. In the same way if
I can talk about the ministry costs, there are interest costs
that go in the cost pool. We have not gone to Management Board to
actually borrow those funds, but there is still interest that is
accruing. This is done to balance the risks and reward that both
partners face in the contract.
Mr Cordiano:
I'm to understand, then, that no borrowing has taken place to
date?
Ms Szyptur:
We don't know that.
Mr Cordiano:
You can't verify that. You know for a certainty, however, that
Andersen's total cost is $72 million, but you don't know if there
has been any borrowing taking place.
Mr Patten:
Not costs, that's their billings.
Mr Cordiano:
I'm going to get to that, but I just want a response to the
borrowing question.
Mr Costante:
The firm could potentially borrow internally. It is charging us
at its established rates for the individuals who are on the
project. Those costs and what they have incurred add up to $72
million. We have paid them from the earlier opportunities, I
believe it was $55 million up till the end of July. They are
then entitled under the contract to charge interest for the
difference between those two numbers at their borrowing costs,
which we understand are prime.
Similarly, the ministry has
incurred costs. We have got some savings. We have a gap between
what we have incurred and what we have been reimbursed for. We
are entitled to charge interest into that. Whether they actually
had to go to the market to get it, that is an internal
bookkeeping matter for the firm. They have thousands of partners.
They could be borrowing from that. I think you would actually
have to ask that question of the firm.
Mr Cordiano:
That's not really the question. You're stating categorically that
the costs for Andersen amount to $72 million. The auditor has
indicated that the costs are actually $14 million. There's a
statement in his report that suggests that, to date, as of July
1999, if I'm not mistaken-
Mr Costante:
I think you should check with the auditor on that. I think the
auditor would acknowledge that they have billed us for $72
million.
Mr Cordiano:
Let's ask the auditor the cost to the point of July 1999 for the
early verification project.
Mr Erik Peters: Chair, maybe I can
help out. If you go to page 8 of our report, this is the
minister's information, and the deputy is quite right, $72.655
million is the total project cost charged to the project by
Andersen Consulting at that particular time. What we were
relating the $14 million to was-this is the overall project-the
individual task orders. It is the early opportunities initiative
task order that had incurred costs of $14.3 million, which
is included. That's at their charge-out rate, though. In other
words, $14.3 million is included in that $72.655 million.
Mr Cordiano:
Right. Then the question is, is the $72 million at
Andersen's charge-out rate entirely?
Mr Costante:
That's correct.
Mr Cordiano:
So the early opportunities project, the verification process,
they billed $14.3 million-thereabouts-for that work that was
done. I'm sorry. They billed $55 million, and their cost was $14
million.
Mr Costante:
No, I think you have your numbers wrong. The costs for the
consolidated verification process were $14.4 million.
Mr Cordiano:
Right.
Mr Costante:
The amount they received in terms of savings was $35.7 million.
The 55 number that you're talking about is the overall, and that
$55 million relates to the $72 million. If you want to break it
down just to the consolidated verification, the correct numbers
are $14.4 million in costs and $35.7 million in savings. Those
are the numbers I have.
Mr
Cordiano: They were paid, totally, $72 million. But for
the early verification project, or that part of the work, they
were paid, to that point, $55 million.
Mr Peters:
Sorry, Chair, if I may. What is happening is, there was a
$66.7-million benefit identified to the so-called early
opportunities initiative, and of that benefit they received $55.3
million and the ministry retained $11.5 million. But on the early
opportunities initiative, which was allocated these benefits, the
actual billed costs at their rate for Andersen was $14.3
million.
Mr
Cordiano: In other words, their true cost for that work
was $14 million?
Mr Peters:
Yes.
Mr
Cordiano: That's what I'm saying and saying it over
again. I guess you can look at it from a number of different
points of view. Again, it relates back to the question of, if
they had to put out this amount of money, $14 million in costs,
presumably-I don't know if this relates back to the borrowing
function as well. Did they borrow for those costs and therefore
they're billing for that borrowing? You had to borrow what you
say you're accumulating in terms of savings. There's an interest
charge for that. All of this equates back to the $72 million that
is their billing rate. I'm trying to figure out what makes up
those figures.
Mr
Costante: I'll try to clarify the figures. So far, there
has been, to the end of July, $66.8 million of savings. Those are
comprised of $31.1 million from the change reporting early
opportunities, and the other amount, $35.7 million in savings, is
from the consolidated verification process, for a total of $66.8
million. Those savings were shared proportional to our costs.
Andersen Consulting received, of that $66.8 million, $55.3
million, and the ministry received $11.5 million.
Mr
Cordiano: Right, not between them.
Mr
Costante: If I can further clarify, then. I had
acknowledged earlier with Ms Martel that in the consolidated
verification process Andersen's costs were $14.4 million, and
they would have received their proportion of the $35.7 million in
savings.
I should also point out
that in terms of doing the design of the system, Andersen has
incurred $32.2 million in costs and has received nothing in terms
of benefits for that particular thing. That's why I was making
the point earlier that you have to look at the costs and savings
in a holistic manner and not task order by task order, because in
some of them there are going to be more savings than costs and in
some of them there are going to be more costs than savings. The
project has to be looked at in totality.
1120
Mr
Cordiano: Let's look at the early opportunities project.
There was obviously that cost for Andersen. However, it was
identified on the business transformation project schedule that
it would be finally completed, released to rollout-this is what I
have in terms of the schedule-by January 2002. In the original
estimates of the project, there was supposed to be an enhancement
made right at the very beginning for this verification process to
work.
So we're getting
conflicting information here with respect to completion of the
project at January 2002, and yet the CVP is being done here and
costed by Andersen as you go along. The project is not complete,
it's not working in its totality, so what is in fact taking
place?
The question that this begs
is: Has the ministry done the bulk of the work in the
verification in the early part of it and Andersen is receiving
the benefit for that? It goes back to the question of the mixing
of the benefit pool.
Mr
Costante: Let me speak about the notion behind early
opportunities. The notion behind early opportunities is similar
to any very large project of this nature being done. Essentially
all, or most-I can't make that broad a statement-try to get early
wins to try to start showing momentum both for staff and clients.
That is the notion behind early opportunities, that we start
making changes early, get some savings, show some momentum, show
some movement. That was the notion.
It was also understood that
we would get savings from that. The early opportunities
themselves, consolidated verification being a good example, is a
process and a set of tools that is going to be built in to the
final product that is developed by January 2002. It's not
something that we're doing and just throwing away. It's an
integral part of the final solution.
Mr
Cordiano: But this was work that the ministry was
supposed to have undertaken, was undertaking, and in fact the
benefits that accrued as a result of the consultants, Andersen, are not realizable
independently of what the ministry's work has shown.
The claim that's being made
here is that the benefits are accruing largely as a result of the
work that's been undertaken by the ministry, having very little
to do with the work undertaken by the verification project, and
yet Andersen has been able to bill at its bill-out rate to the
fullest.
Mr
Costante: I disagree with the contention. The principle
behind these-and I think we have gone through a fairly rigorous
examination of metrics-is that we do not charge into the pool for
things that were going on previously. This is the concept that
what they have provided us has resulted in incremental benefit
and they only get paid out on that incremental benefit.
We did have a verification
process in place prior to this. We established that. What we are
getting there is our benchmark. The savings that we're being
credited here are over and above that and are as a result of this
joint work that we're doing. I think we can show that, and when
the auditor comes back in I am positive, after today's
discussion, he will look at that and I'm confident he will say
it's there.
Mr
Cordiano: That is the problem. The main problem is that
the auditor does not agree with what you're suggesting.
Mr
Costante: Frankly, the auditor has not been back in to
have a look at our case. This is an interim report. He has to
come back. He has said he's coming back. He will look at it and
then I think he will be able to give you better confidence. We
think we've done it. We think we've gone through a rigorous
process that's auditable and we look forward to proving our
case.
The Chair:
Thank you very much. The Liberal caucus has five minutes left. I
let that go on because there was discussion going on. You've got
10 minutes, Ms Martel.
Ms Martel:
I would like to verify, just so I'm clear. You're saying to us
that the automated tool, MAT, was solely developed by
Andersen?
Mr
Costante: I'm going to ask Ann to answer.
Ms Martel:
Sure, whoever. MAT was solely developed by Andersen?
Ms
Szyptur: The technology was developed by Andersen
Consulting. The ministry, as with any large information
technology, was involved in terms of validating and providing
input in terms of the user requirement to ensure that the
business requirements are fully understood by the
consultants.
Ms Martel:
And NORA?
Ms
Szyptur: The same.
Ms Martel:
The third-party interfaces that you spoke about as the third
prong in this project, were those developed solely by
Andersen?
Ms
Szyptur: The same response that the technology was built
by Andersen Consulting-
The Chair:
I'm sorry, could you speak up. We can't hear you.
Ms
Szyptur: I apologize; we only have one microphone.
The technology was built by
Andersen Consulting. The ministry has been involved in terms of
providing input and validating the user requirement.
Ms Martel:
Let me go back to the interest. You're paying Andersen 6.5% at
this point. On interest charges? That's correct?
Mr
Costante: I believe they're allowed to charge in, or
their practice has been to charge in at prime and I think most
recently that's been at 6.5%. I assume it varies with prime.
Ms Martel:
But you're not sure what they've borrowed to date for the purpose
of the project?
Mr
Costante: That would be an internal matter whether they
borrowed it from within the firm or a bank or they had surplus
cash that they could use to do it. They were incurring this
thing. It was allowed under the contract and that's being
provided. Similarly, the ministry hasn't had to borrow for that;
the money was budgeted. We are also allowed to charge in interest
the difference between what our costs have been and what we've
been reimbursed by the efforts of the project.
Ms Martel:
So we have no idea what amount they may have borrowed, if they've
borrowed, from a bank to pay for this project. We have no idea
what that might be.
Mr
Costante: That's correct.
Ms Martel:
I don't understand why we're paying this. Am I missing something?
Why would we be paying Andersen interest charges on money we
don't even know where they're borrowing from or if the money
they're borrowing is for this project?
Mr
Costante: It's the difference between what they have
billed us, according to their rates, and what they have spent and
what they have been reimbursed. There is a gap there. Whether
they have had to borrow it from a bank or whether they had to
take that from surplus, there is an implied cost of that amount
of cash. I don't understand your question.
Ms Martel:
Wouldn't the interest rate vary depending on the amount of money
they have borrowed for this project?
Mr
Costante: The amount which we're paying interest on is
the gap between what they've been paid and the costs they have
incurred. That is the normal notion around interest.
Mr
Cordiano: I don't understand that.
Ms Martel:
I don't either. I will leave that for the auditor after.
The Chair:
The auditor might want to make a comment.
Mr Peters:
Only if you want me to.
Mr
Cordiano: Sure.
Mr Peters:
What we were referring to is that when we looked at, for example,
the New Brunswick contract, Andersen Consulting had to bring to
the government a statement from the bank showing both the amount
they had to borrow and the rate at which they were to borrow.
What we are hearing now is that in this particular case in this
province Andersen only has to bring a letter stating the rate at which they're
borrowing but not necessarily the amount to which that rate
applies.
Ms Martel:
Does that make sense to you?
Mr Peters:
No, I would prefer the New Brunswick solution.
Ms Martel:
Let me ask about your negotiations. Have these negotiations been
triggered because of the fact that we know Andersen has to have
at least another year to complete this project so that it's going
now from four to five? Is that what the trigger was for the
negotiations that are about to occur?
Mr
Costante: No. I'm not sure what the exact trigger was.
Certainly there was a statement last year by Minister Ecker that
there would be discussions around getting rates and costs down.
That was put on hold pending the final design. That design was
completed in August. Andersen Consulting did table with us a
proposal back in September and we've had some discussions since
then which are ongoing.
Ms Martel:
Minister Ecker's commitment on November 4 in the House was that
the billable rates would be negotiated. In fact, she said they
were being negotiated at that point. We are here almost a year
later to the day when you folks were last before us and we are
finding out now that nothing occurred in that whole entire year.
I cannot understand that.
Mr
Costante: I disagree that nothing occurred. What was
decided at that point, as I understand it, was that the
third-party reviewer was coming in. Discussions were put on hold
at that point. Discussions were further delayed until the
detailed design was done, so we would know what the ultimate
system looked like.
In that period of time-and
I think this is information we provided to the committee-the
average hourly rate for Andersen Consulting, through the mix of
staff they have on, has been declining and is forecast to
continue to decline. We have gone to the table to talk about
getting costs down.
1130
Ms Martel:
Deputy, I don't see what difference it made, one way or the
other, if the project design was underway or not. The fact was
very clear to all members of this committee, and your own
minister at that time said, that the rates Andersen was billing
were unacceptable. She said in the House that negotiations were
underway.
I don't understand what the
design work has to do with this. The issue is what they're
billing, and that has not been dealt with for an entire year.
Mr
Costante: It's in the process of being dealt with, and
the costs, as we've shown, have been declining, as the
third-party reviewer has shown.
Ms Martel:
No, Deputy. What we have are rates that are still 63% higher than
Andersen's original cost estimate when they came to bid on this
project in 1995. Is that correct?
Mr
Costante: Yes, it is.
Ms Martel:
So there's been no change in terms of the grossly inflated rates
they are billing this ministry for this project.
Mr
Costante: There is a difference between rates and actual
costs, because the rates-some of the people they have are not
charged at the top of the range and are charged at lower rates. I
repeat, we've been seeing those costs go down.
Ms Martel:
Deputy, would you agree their rates, billed today, are 63% higher
than they estimated they would bill when they came to ask for
this contract in 1995?
Mr
Costante: I have confirmed that already.
Ms Martel:
This leads to the negotiations. You have said to this committee
that you really can't divulge too much. But we are not talking
about a request for proposals; we're talking about a vendor
that's already in place, and we're talking about serious, serious
financial problems that the auditor has noted. So I think we are
entitled to ask questions about the parameters of the
negotiations that are a little more detailed than you have been
prepared to give.
For example, I would like
to know: In your negotiations, are you going to negotiate
Andersen back down to the billing rates they put forward in their
own RFP in 1995, their rates?
Mr
Costante: Ms Martel, I can't possibly answer that. A
negotiation is a negotiation. There are two sides. We have a
position or positions; obviously, they will have. Again, I don't
intend, nor do I think it is prudent for me, to discuss my
negotiating positions in public. I think that does the government
and the taxpayer a disservice.
Ms Martel:
I think the contract in place is already doing the taxpayer a
hell of a disservice, and the problem this committee has is that
we are here a year later with many of the same problems the
auditor identified in 1998 and clearly no change in some of the
major problems. We are concerned that you will go off and have
some more negotiations and we will be stuck with a contract that
is as ridiculous as the one we are currently examining.
Surely you can give us some
indication, for example, as to whether the maximum rate they are
allowed to bill at under the contract, which is $180 million or
the maximum rate they can receive, is one you are going to try to
ratchet down. Again, in their early estimates to you, their
maximum cost was in the order of $50 million to $70 million, not
$180 million.
Mr
Costante: Let me clarify the $50 million to
$70 million. The $50 million to $70 million was never an
estimate by Andersen Consulting of the cost for this project.
They were not allowed to come in and look at what the costs would
be. As well, at that point we were looking for a partner. The
legislation had not been tabled. We were looking for a partner to
develop a solution with. The $50 million to $70 million was based
on their experience, what they thought a ballpark amount would
be. When they got in and with the increase in rates, the amount
is higher. To say that $50 million to $70 million-as has been repeated, this is not a
traditional procurement process.
The Chair:
Thank you very much. The 10 minutes have expired. Mr Maves.
Mr Bart Maves
(Niagara Falls): I actually want to continue with some
of Ms Martel's line of questioning. I think I'll address my
question to you, Mr Hession, because I know we talked last time
about your great deal of experience in contracts and procurement,
particularly in this type of industry.
I think everyone agrees
that one of the obvious flaws of this contract was not having a
very good handle and control on rates. Ms Martel just talked
about going back to a 1995 rate. When you have a project like
this that is over a long period of time, in an industry like this
one, where I imagine there's the Y2K and probably a great deal of
business out there right now and over the past five years for
these types of firms and this type of work-I think the layman
would say an inflation rate of 3% is normal over a period of
time. This obviously goes way beyond a 3% increase and just
inflation, and 63% is obviously high. I think everyone in the
room believes that. Can you give some idea of a fair or expected
rate of increase over that period of time?
Mr
Hession: Yes, Mr Chair. First, let me say that
Andersen's rates are high. That statement is certainly obvious to
everybody in this room and to anyone observing this transaction.
They're high because I perceive they're deploying on this project
a certain quality of personnel to achieve the project's aim.
Those persons do command the kind of fees we are seeing applied
here. The shock was the differentiation between the rates in the
original proposal versus those that arose in September 1997. Why
that happened is a question I don't hear being asked. I would
like to try to offer an explanation for that.
It's important to
understand that the margin of profitability in consultants' rates
in this industry is primarily found in the range of 25 to 35%.
The lower end of that range is typically found when the nature of
the project is heavily focused on hardware and software; that is,
the provision of commodities of that sort. The higher end of the
range arises when the proportion of effort is in professional
services. That happens to be the case here.
I postulate that, back in
1995-96, when the proposal activity was active and when Andersen,
like other bidders, were assessing their risk, they thought a
normal margin of profitability here, and hence the fees they
proposed, would be in the order of 35%. I postulate that that's
about what they bid. I know something about competitive rates. I
know the rates in other companies with whom I've done business
over the years, including my own, and that's about right.
Why, then, did the rates
suddenly jump so dramatically, causing legislators and officials
to be alarmed? I believe the answer is found in the assessment of
risk. If, as a commercial enterprise, you're facing the
appearances of, first, a cap-the $180-million cap-and a
protracted process to get from where you are acknowledged to be,
a difficult problem to be solved-as I think Mr Hastings pointed
out in his earlier commentary-to the point where five years
later, or four years later in the context of the original
contract, you have a deliverable that will yield to you, the
commercial partner, a normal margin, back to my 35%.
Again, my assessment, which
was based on a lot of interviews and detailed analysis of data,
would lead me, if I were faced with that commercial proposition,
to say, "My margins are too low. The risk is far higher than I
anticipated from the get-go," which was at the point of the
niceties of a request for a proposal and meeting with my
potential partner and assessing the relationship and so on. Now,
I'm faced with the stark reality of the moment. The stark reality
of the moment said there's delay, and there was a delay right
from the get-go on this project, caused by, among other factors,
an unready public sector partner, caused by-at that time, history
will show-a great deal of legislative change, the effect of which
was to alter the definition of the outcome, which itself was not
that well defined at that stage, but still sitting there with
that $180-million cap.
1140
In normal commercial
decision-making, the company said, "We have the facility inside
the contract to mitigate our risk. The way to do that is to
increase our fees, the effect of which is to increase our
margin." In the capitalist society in which we live, margin is
the principal measure of risk. So I say to you, what we're
witnessing here is a company that is essentially banking risk in
anticipation of more delay, more risk to them associated with the
changes that appeared to be arising at that point, moving to
different programming, different arrangements in the area of
public policy, over which they have no control.
That, in my mind, explains
what happened. The order of magnitude is really your question. I
have to say that probably today the margins cumulatively in that
contract are well above 35%. So then I say, what is the
probability of this company delivering this product within the
$180-million cap? I say it's low. So they're going to run up
against the cap, and the only defence they have at that stage is
to begin to eat into the accumulated margin that's now on the
table, to bring it back to, hopefully, a normal margin. I then
say that if in their minds, commercially, they can't get that
normal margin and they see no fault in their execution of this
contract, then there's going to be a tough decision for the
ministry and the government to make. Andersen's going to say,
"Just a minute. We've done our job to the best of our ability.
Yes, our rates are high. Yes, we've tried to manage risk," in the
manner that I've described. "What would you do?" You certainly
wouldn't do anything suicidal in a commercial context.
I would say that this whole
rate issue has to do with risk. I would say that risk, in terms
of levers, is largely in the hands of the government first, the
ministry second, and the Legislature itself. This ministry, in my
opinion, at this stage in this project needs support to deliver
the promised benefits of this project. What it doesn't need is
a lot of public airing
of what everyone has acknowledged is an appearance of overly high
rates. The real issue, I say, from a public policy point of view
is, what are the costs and what are the benefits? If the benefits
well exceed the cost, surely that smacks of good public
policy.
Mr Maves:
One of the points that I was getting at with my question was, if
you took someone's rates in this industry in 1995 and looked at
them now in 1999, all those factors of this particular contract
aside, what kind of increases have there been for rates in this
industry over the past five years?
Mr
Hession: They've been significant. The Y2K pressure that
you spoke about is quite real. I was personally involved in
organizing the federal and Ontario governments' Y2K contract
arrangements. The truth of it is, there is a dearth of skilled
people in this marketplace.
It's notable, for example,
that the highest-paid official in the Ontario public service
today is the chief information officer: paid more than deputy
ministers. That's indicative of a problem in the marketplace.
It's indicative too that we're importing people, and have been
for the better part of 18 months or so, from the Indian
subcontinent and that part of the world to help us with Y2K
issues. It's also indicative, those of us who do it from the
sidelines, watching the effects of the wealth creation in the
stock market. In this industry particularly, that drives
valuations of people as well. So, yes, there's a lot of
pressure.
But having said all of
that-and Andersen's rates are high; that's true. They're in the
top quartile of the distribution of rates, in my opinion, in
today's marketplace. The question you have to ask is, are you
getting value for that money? I say, in this project, yes, you
are.
The Chair:
We have five minutes for Mr Cordiano.
Mr
Cordiano: All of us in this Legislature would like to
say, "Yes, we're getting value for money." That's why we're here,
to be convinced, but we're a long way away from being convinced
of that on this side, at least in our party, that this is a
contract that makes any kind of sense. It appears to be
open-ended in terms of costs. I can guarantee you that there have
been other colossal failures in government before with respect to
working with the private sector. This appears to be right on
track for that.
Let's look at the cap, for
example. By your estimates, Mr Hession, if you take your 35%
profit margin and apply that to the cap for Andersen, that would
imply that of the $180 million, the cost for Andersen should be
about-sorry, the cap is $180 million?
Mr
Hession: Yes.
Mr
Cordiano: Given your figure of 35% for a profit margin,
that would leave $117 million for costs. What I see here is that
Andersen has already billed $72 million to date, yet there are,
what, a couple of more years to go, three, four? How many years
to go before this runs out?
Mr
Hession: Two more years.
Mr
Cordiano: Can you estimate then, or take a guess? Do you
have any idea what the actual cost is going to be for this
project? Do you have an end figure at the end of all this? Do you
have any sense of that?
Mr
Hession: First, on what I think is the simple point
you're making, the $70-odd million versus the $117 million, that
$70-odd million includes their margin. That's not pure cost. That
includes their margin. I've already acknowledged that in my
opinion the margin today is not the margin that was in the
original proposal. It's a higher margin.
Mr
Cordiano: Higher than 35%, is what you're saying?
Mr
Hession: The 35% is what I believe to have been the
margin in the price that was their original bid price.
Mr
Cordiano: The original bid price.
Mr
Hession: Yes.
Mr
Cordiano: And now we're 63% over that.
Mr
Hession: Yes, it's a higher margin.
Mr
Cordiano: Wow.
Mr
Hession: Again, not to get too philosophical on it, the
reason for the higher margin is that there is a deemed higher
risk. So the company appears to be banking margin in order to
mitigate risk, and the risk they see is the risk they've seen:
There has been profound evidence of schedule slippage here.
Mr
Cordiano: So that profit margin in proportion would have
to be increased by some 63% or thereabouts, and that may not be
an accurate figure either because we're applying it to profit
margins. What you're telling me in effect is that if I took a
ballpark estimate, their profit margin on this is-let's just be
conservative and say well in excess of 50%.
Mr
Hession: It's high, and it's higher than 35%. I perceive
it's going to run up against the cap, at which point, again from
a risk management standpoint, Andersen is going to see its margin
begin to erode as you go past the $180 million so that you can't
charge any more costs.
Mr
Cordiano: I understand that, except that with any
project in the private sector, the upfront costs and the start-up
costs are the greatest, so their costs for this project will be
coming down. Their risk will be reduced over time as they've
ascended that learning curve. Everything I've ever been taught
about economics and business practices, any business model you
would like to use, would indicate that, that in fact start-up
costs are the greatest. So what you're telling me just doesn't
add up in the sense that the risks involved with this project
have already been borne by the government.
Andersen has looked after
itself by increasing its margin right at the very beginning.
You're saying they're banking all of that. What I'm saying to you
is that those margins, as indicated by my colleague Ms Martel,
the rate has to be renegotiated and ratcheted down. That's what
we're suggesting, because it's quite extraordinary in terms of a
profit margin for this type of work, well over 50%. This may be
unique, unprecedented, but by the same token, anything you could
see out there in the private sector doesn't begin to compare to
this.
1150
Mr
Hession: I respect very much your point. There is
something, though, that is critical to understanding risk
today. This company has
signed a deal that has a cap. It has little or no control over
the two most significant risk factors to the success of this
project: schedule slippage and the diminution in the size of the
caseload. It has no control over that.
So while I agree with you
theoretically that the start-up costs typically are higher than
the downstream costs as you come down the learning curve, in this
case that's not true. In this case, the two most significant risk
issues are not controlled by the contractor, they're controlled
by the ministry.
Will the ministry provide
the resources necessary for the contractor to perform the work?
In the past, that hasn't happened. There has been slippage. So if
you're the contractor, you're going to defend yourself against
that future prospect.
Mr
Cordiano: On the other hand, the ministry does have
control over that schedule along with the consultant. I would say
that the consultant has all the control in terms of that schedule
with respect to the project, developing the technology. It's in
the hands of the consultant. It's not in the hands of the
ministry. The bulk of the work that would have been provided for
by the ministry has been completed in terms of verification and
eligibility.
Mr
Hession: That's simply not true and the risks are higher
in the future than they have been in the past. We've got to build
this system, we've got to roll it out, we've got to ramp it up.
There are 47 municipalities, there are 7,000 public servants
involved. This is a huge undertaking involving very significant
public sector schedule risk. That's the truth of it. I think
they're defending themselves.
The Chair:
We'll just have to leave it at that. Mr Peters, you wanted to
make one final comment?
Mr Peters:
Yes, two very quick ones. The Deputy Minister has rightfully
challenged my office to come in and do an audit.
Mr
Costante: You don't have to take me up on that, if you
choose not to.
Mr Peters:
I would like to put you on notice too that when we reported in
1996, the ministry told us and told this committee-the report is
before this committee-that the ministry has already
introduced-and recently, March, 1996-and fully implemented a
process to monitor all ministry policies and procedures,
including the enhanced verification process.
So one of the things, based
on the comments, that we will be looking for is how much of this
was already done and how much is actually attributable to
Andersen, because the attribution to Andersen is where we have
the main problem.
Secondly, talking about
that attribution, and I hear Mr Hession's comments about risk,
these rates that were charged, that we are comparing with at 63%,
were charged with the September 1998 risks, at which point the
slippage that was supposed to be the replacement of the system
was supposed to be rolled out in July 1999. In other words, since
those rates, you're quite right, are predicated on risk, they
were probably high because there was a high risk that they would
not be.
Now we are renegotiating
and the rollout of CIMS is now scheduled for January 2002. Are
you telling us effectively-or, putting it this way, I would urge
you to include in the re-negotiation that there must be somewhat
of a reduction of the slippage risk, if you give yourself two and
a half years more to complete something that you said you would
complete in July 1999, and you are now saying you do in 2002. I
would strengthen your resolve in that area.
The Chair:
Mr Costante, you've got the final word.
Mr
Costante: Just in response to the auditor's final
comment, I think that is the piece that we are going into these
discussions with. We are saying to our partner, Anderson
Consulting, that we have taken a number of steps in the last year
to reduce that risk and therefore we think we can get a lowering
of their costs based on being able to demonstrate that we're
serious about delivering and keeping on schedule and that's what
we hope to do. We welcome the auditor coming back and I thank you
for your questions here today.
The Chair:
Thank you for attending here today. Just to the committee, if I
could just have a moment, since it's not quite 12 o'clock yet, if
I could just have the attention of the committee members, it
looks as if we may be getting some time in February. It may be
the two weeks we requested, or something less than that. Do I
take it that the committee is then interested in finalizing this
matter in one session, and also the other five issues that were
identified earlier: the Family Responsibility Office, the office
of the public guardian and trustee, provincial personal income
tax revenue and related credit and reductions, Cancer Care
Ontario and the provincial highway maintenance situation? So we
would schedule one of these topics for each day, together with
the finalization of this matter. Is that the sort of thing we can
agree on?
Mrs Julia Munro
(York North): I'm not sure, given what we've just heard
in terms of negotiation and the invitation and the acceptance of
the invitation by the auditor, that at this point we would be
able to hear anything further on this topic.
The Chair:
No, I don't think the idea is to hear anything further from them.
You may recall that the auditor had some recommendations to make
and we may want to discuss that with the committee during the
intersession hearings.
Ms Marilyn
Mushinski (Scarborough Centre): This is in February
before we come back.
The Chair:
It's not expected they're going to be there.
Mr Maves:
You want to bring back the auditor's recommendations?
The Chair:
Bring back the auditor's recommendations at one of those sessions
that we may have, and the other five sessions we would be dealing
with the five topics that were identified earlier.
Mr Maves:
There may be a problem in that some of those recommendations may
need to be brought forward today so that they can be sent over to the
ministry as they go through the negotiations.
The Chair:
That's what I was hoping to do earlier but time is pressing.
Mr Maves:
I think we all heard them. I don't have a problem with them. I
don't think my colleagues did. We talked about them. Can I move
that we accept those recommendations and have them forwarded to
the ministry?
The Chair:
Is that agreed? Carried by everybody? Agreed.
