AUDIT OF THE ECOENERGY FOR BIOFUELS PROGRAM PROJECT

 

Reports 2011


AUDIT OF THE ECOENERGY FOR BIOFUELS PROGRAM PROJECT

AU1020

EXECUTIVE SUMMARY

INTRODUCTION

Natural Resources Canada (NRCan’s) Risk-Based Audit Plan for 2009-2012 included the internal audit of ecoEnergy for Biofuels in 2009-2010. Because of the significant changes made to the Program in 2009, Program management requested that the audit be re-scheduled to 2010-2011 to allow for the review of the application of the new Terms and Conditions.

The ecoENERGY for Biofuels Program, announced in July 2007, is an integral component of the Government of Canada’s Renewable Fuels Strategy. The Program was officially launched on 1 April 2008 and will end on 31 March 2017. The nine-year Program supports the production of renewable alternatives to gasoline and diesel and encourages the development of a competitive domestic industry for renewable fuels. It makes investment in production plants and facilities more attractive by partially offsetting the risk associated with fluctuating feedstock and fuel prices.

The Program provides an operating incentive?based on production/sales levels?to producers of renewable alternatives to gasoline and diesel produced in Canada. The Program has an allocation of $1.438Billion (B). It has volume targets of 2 billion litres of renewable alternatives to gasoline and 500 million litres of renewable alternatives to diesel.

In accordance with Program parameters and subject to funding availability, the Program enters into non-repayable contribution agreements with successful recipients that meet the Program’s designated criteria.

The design and delivery of the Program has undergone significant changes since inception. After 18 months of delivery, it became apparent that some of the Program parameters, coupled with the economic climate, were affecting the viability of biofuels projects. Six modifications to the Program design were implemented effective December 2009. In particular, the variable declining incentive rate was changed to a fixed declining incentive rate. These changes are intended to provide more predictable and stable payments for renewable fuel production and to ensure that the Program supports the most viable projects, leading to long-term sustainable growth in the renewable fuel industry.

Reaction to the Program changes have been positive. In fact, a higher than anticipated number of applications have been received, representing significant new production capacity.

The approved Program changes also necessitated amendments to the 21 contribution agreements signed under the previous Terms and Conditions for purposes of overall consistency across all Program agreements.

DEPARTMENTAL RISKS

The ecoENERGY Biofuels Program is part of the Energy Efficiency and Alternative Transportation Fuels Program sub-activity. This sub-activity is described in the Department’s 2008-09 Corporate Risk Profile as having a Major Risk in terms of NRCan’s inability to meet the rising expectations of stakeholders and partners to deliver new energy efficiency programs.

AUDIT PURPOSE AND OBJECTIVES

The purpose of the audit was to look at specific elements of the management control framework to provide reasonable assurance to senior management that the Program is being run effectively and efficiently. Specifically, the audit objectives included determining the extent to which:

  • the Program’s management strategies and practices, including risk assessment, oversight, monitoring and reporting, as well as its ability to manage the transition of its re-designed framework, supports the attainment of the desired outcomes and results; and
  • the management and payment processes for contribution agreements comply with the designated TB and NRCan policies, standards, guidelines and procedures.
INTERNAL AUDIT CONCLUSION

With the exception of some minor findings, the ecoENERGY for Biofuels Program’s governance and administration processes are operating well. The key recommended improvement pertains to updating the Program's risk management and recipient audit strategy in order to align it with changes made to the Program Terms and Conditions in December 2009.

The Program would also benefit from the timely implementation of a web-based application to facilitate the Program’s monitoring and reporting of its progress toward reaching its projected volume target of 2.5 billion litres and the allocation of $1.438B that is in place for the Program.

Management Response

The following textbox captures the summary findings, level of risk and related recommendations, as well as management’s response regarding the results of this audit.

Summary Findings Pg Recommendations Audit Risk Rating Management Response Timing

Governance

While the ecoENERGY for Biofuels Program generally has effective and efficient governance processes in place, opportunities exist to update the Program’s risk management strategy to more appropriately address its approach to performance monitoring and reporting. The Program’s original strategy was developed in 2007 and updated in 2009 - just before the Program’s parameters were updated. The Program is currently drawing from the 2009 strategy, and identifying more recent risks. It will then develop and implement a mitigation plan. In addition, the Program has employed third party reviews and assessments to validate program decisions whenever a decision presents a risk to the Program.

#5

 

 

1. Ensure that the Program’s risk management strategy is revisited and updated in a timely manner to reflect current Program risks.

 

Minor

1. ES accepts this recommendation.

The Program is in the process of updating its ecoEBF Risk Management Strategy (to factor in recent risks) and will develop and implement a mitigation plan to address those risks.

June 30, 2011

Program Control, Monitoring and Oversight

The Program exercises reasonable risk-based control, monitoring and oversight activities. Nonetheless, opportunities exist to enhance the risk-based approach to the tracking, monitoring and auditing of recipients by implementing the planned web-based monitoring and reporting tool, as well as by updating the Program’s recipient audit strategy.

#9 2. Ensure, in co-ordination with the Shared Services Office (SSO) Application Development Solutions group, the timely development and implementation of the Program’s web-based monitoring and reporting tool.  

 

 

Minor

2. ES and SSO accept this recommendation.

SSO will develop a work plan for development of the monitoring and reporting tool (database) and has confirmed development of the database will be completed by fiscal year end. They will also provide ongoing maintenance services for the database, as stipulated in a contract to be signed by fiscal year end.

ES will ensure timelines for development and delivery are respected, and a robust monitoring and reporting tool is launched.

March 31, 2011

 

 

 

 

 

 

March 31, 2011

3. Ensure that the Program’s recipient audit strategy is updated to reflect the recommendations of the 2009 risk management strategy.

3. ES accepts this recommendation.

The Program’s ecoEBF Risk Management Strategy is now being updated and this includes the strategy for the selection and conduct of recipient audits. The statement of work for conducting recipient audits has already been updated to reflect recent risks and requirements for additional elements to be assessed and validated.




June 30, 2011

Grants and Contributions Reform

The Program is making initial progress in meeting the requirements of the Grants and Contributions reform that is being phased in over the 3 years commencing in 2008. However, a formally documented recipient engagement strategy does not exist. In addition, as required by the 2008 Transfer Payment Policy, formalized service standards have not been documented and promulgated to all recipients.

#12 4. Ensure that an engagement strategy is formally documented to support recipients throughout the Program.

Minor

 

4. ES accepts this recommendation.

The Program will formalize its standard protocols for engaging proponents on payment, reporting and other contribution agreement issues in a comprehensive document.

June 30, 2011

5. As required by Transfer Payment Policy Section 6.5.9, reasonable and practicable service standards should be established and promulgated to recipients.

5. ES accepts this recommendation.

The Program will formally document and communicate its service standards.

June 30, 2011

Table of Contents


INTRODUCTION

In December 2006, the Government of Canada announced its intention to develop and implement federal regulations requiring a five-percent renewable fuel content, based on the gasoline pool by 2010, and a two-percent renewable fuel content in diesel and heating oil by 2012 (subject to technical feasibility), upon successful demonstration of renewable diesel fuel use under a range of Canadian conditions. The Government’s renewable fuels (biofuels) strategy aims to reduce the greenhouse gas (GHG) emissions resulting from fuel use; to encourage greater domestic production of biofuels technologies; and to provide new market opportunities for agricultural producers and rural communities.

Natural Resources Canada (NRCan) and three other federal organizations are responsible for implementing the strategy, which includes:

  • developing and implementing a federal regulation requiring renewable fuels (led by Environment Canada);
  • providing for farmer participation in biofuels production (led by Agriculture and Agri-Food Canada);
  • supporting next generation technologies via the NextGen Biofuels Fund (managed by Sustainable Development Technology Canada with oversight by Environment Canada and Natural Resources Canada); and
  • providing a production incentive to stimulate domestic production (led by NRCan).

The ecoENERGY for Biofuels Program, announced in July 2007, is an integral component of the Government of Canada’s Renewable Fuels Strategy. The nine-year Program supports the production of renewable alternatives to gasoline and diesel (reference Appendix C) and encourages the development of a competitive domestic industry for renewable fuels. It makes investment in production plants and facilities more attractive by partially offsetting the risk associated with fluctuating feedstock and fuel prices. The Program was officially launched on 1 April 2008 and will end on 31 March 2017.

As part of the Program, an operating incentive is provided to producers of renewable alternatives to gasoline and diesel produced in Canada, based on production/sales levels. The Program has an allocation of $1.438B to attain its volume targets of 2 billion litres of renewable alternatives to gasoline, and 500 million litres of renewable alternatives to diesel.

Treasury Board Secretariat (TBS) approval for funding and Program measures were initially obtained in October 2007. At the time, producers were provided a variable declining incentive rate?dependent on market conditions and average industry profitability—starting 1 April 2008. Individual producers could receive incentives for a maximum of seven years and incentive rates were capped at $0.10/litre for ethanol and $0.20/litre for biodiesel.

The incentive rate calculation methodology incorporated a variable payment regime designed to counterbalance the volatility in commodity prices, which are highly variable (e.g., feedstock, energy, fuel sale prices) and have a large impact on the operational decisions of the renewable fuels sector. The incentive rate was calculated based on operational data that was submitted by each producer and averaged to obtain an industry profitability margin. The intention was to pay producers more when market conditions were less favourable in order to provide industry the level of incentive it requires to reach, at maximum, an average 20 percent internal rate of return while preventing excess profits. A 20 percent rate of return, however, was not guaranteed as inefficient plants or those without access to provincial programs may perform worse than the industry average.

Nonetheless, the complexity of the incentive rate calculation, coupled with recipient reporting requirements, resulted in high error rates in recipient claims for payment. This created an unexpected administrative challenge and an additional workload for Program staff to develop indicators and processes to help identify, analyze and rectify reporting errors.

After 18 months of Program delivery, it became apparent that some of the program parameters, coupled with the economic climate, were challenging the viability of biofuels projects. Therefore, a more adaptable federal response, designed to overcome the various difficulties, was required. Also, the Program needed to provide more stability for renewable fuel producers to ensure that the Program supports the most viable construction-ready projects.

Amendments to the Program’s Terms and Conditions were proposed and approved in December 2009 and include:

  • paying producers on a fixed, declining incentive rate, retroactive to 1 April 2008;
  • modifying Program eligibility criteria;
  • establishing new merit-based assessment criteria for project selection;
  • changing the facility construction deadline from 31 March 2011 to 30 September 2012;
  • modifying the application of the 30 percent cap on individual companies from a volume cap to a monetary cap for renewable alternatives to diesel; and,
  • re-allocating Program funds within the fiscal framework (ie across fiscal years for the life of the Program.)

The approved Program changes necessitated amendments to the 21 contribution agreements signed under the previous Terms and Conditions. All incentive payments made prior to the Program changes had to be recalculated to reflect the incentive rate calculation change and adjustments made.

Responses to Program changes were greater than anticipated, with 68 applications received by the application deadline of 31 March 2010, from both existing and new producers, which were well in excess of the remaining available Program funding.  New applications represented approximately $2.061B ($473 million was available when the call-out was issued in December 2009 for additional applications) and the potential production of 540 million litres of renewable alternatives to gasoline and 1576 million litres of renewable alternatives to diesel per year by March 2012.

Program staff worked diligently to review and assess the applications as quickly as possible enabling final funding decisions in the fall of 2010, and carrying out an extensive review process while effectively balancing the increased workload with the ongoing administration of the Program.

DEPARTMENTAL RISKS

The ecoENERGY for Biofuels Program links to the Department’s Program Activity Architecture’s Energy Efficiency and Alternative Transportation Fuels and to Strategic Outcome #2?Canada is a world leader on environmental responsibility in the development and use of natural resources.

The Department’s 2008-09 Corporate Risk Profile has identified the risk of the Energy Efficiency and Alternative Transportation Fuels program sub-activity as a Major Risk in terms of NRCan’s inability to meet the rising expectations of stakeholders and partners to deliver new energy efficiency programs.

AUDIT PURPOSE AND OBJECTIVES

The purpose of this audit was to examine specific elements of the management control framework to provide reasonable assurance to senior management that the Program is being run effectively and efficiently. Specifically, the audit objectives included determining the extent to which:

  • the Program’s management strategies and practices, including risk assessment, oversight, monitoring and reporting, as well as its ability to manage the transition of its re-designed framework, supports the attainment of the desired outcomes and results; and
  • the management and payment processes for contribution agreements comply with the designated Treasury Board (TB) and NRCan policies, standards, guidelines and procedures.
SCOPE AND METHODOLOGY

The audit’s scope covered Program activities between 1 April 2008 and 30 June 2010. The audit was conducted within the established parameters of the TB Policy on Internal Audit as well as the prescribed standards of the Institute of Internal Auditors. The audit methodology consisted of:

  • reviewing documentation relevant to the Biofuels Program;
  • conducting interviews with Program staff and senior management;
  • conducting interviews with managers in the Department’s Grants and Contributions Centre of Expertise (COE) and the Science and Policy Integration Sector’s Environmental Assessment Office; and;
  • conducting detailed file reviews of the 21 contribution agreements (or 100 percent) that were still in place, and a selected sample of 15 of the 68 applications submitted under the revised Program parameters (or 22 percent).

The focus of the audit was at the program level.  The audit results were used to provide program level information to program management as well as the Departmental Horizontal Transfer Payment audit that was being conducted concurrentlyFootnote 1.  The information provided to the Departmental Horizontal Transfer Payment audit was related to the implementation of Treasury Board and Departmental Policies, Guidelines and Procedures with respect to the ecoEnergy for Biofuels program.

A complete list of the audit criteria used by the Audit Branch to assess the adequacy of the ecoENERGY for Biofuels Program is included in Appendix B, while definitions of specific terms can be found in Appendix C.

FINDINGS AND RECOMMENDATIONS

GOVERNANCE
Summary Finding

While the ecoENERGY for Biofuels Program generally has effective and efficient governance processes in place, opportunities exist to update the Program’s risk management strategy to more appropriately address its approach to performance monitoring and reporting. The Program’s original strategy was developed in 2007 and updated in 2009 - just before the Program’s parameters were updated. The Program is currently drawing from the 2009 strategy, and identifying more recent risks. It will then develop and implement a mitigation plan. In addition, the Program has employed third party reviews and assessments to validate program decisions whenever a decision presents a risk to the Program.

RISK AND IMPACT
Risk Type Audit Risk Rating Impact
Strategic Risk Minor Lack of an updated risk management strategy may result in the non-identification and mitigation of new risks.
Supporting Findings

ROLES AND RESPONSIBILITIES

In general, there is a sound governance structure in place in terms of roles and responsibilities. The participation of the Director, Fuels Policy and Programs Division (FPP) on the Renewable Fuels Regulation Board supports the strategic direction of the Program. Moreover, the Board’s mandate is to oversee steering committees and working groups to ensure the delivery of the Government’s Renewable Fuels Regulations commitments. An interdepartmental governance structure is also in place to oversee the regulatory development process and to ensure that science and demonstration projects supporting the regulations are coordinated to meet the Government’s commitments in a timely manner.

Roles and responsibilities for Program delivery are clearly defined to ensure accountability and that adequate oversight is provided through the participation of escalating levels of senior management. Primary responsibility for Program development and analysis lies with the Deputy Director, Biofuels. The Director, FPP is responsible for the ongoing reporting on program performance and progress, while senior management oversight is provided by the Director General, Office of Energy Efficiency (OEE) and the Assistant Deputy Minister (ADM), Energy Sector.

The Department’s Grants and Contributions Centre of Expertise (COE) and Legal Services contribute to independent oversight of the Program. All contribution agreements and any related amendments for the various types of eligible recipients (i.e., existing producers, new producers, producers of renewable alternatives to gasoline and producers of renewable alternatives to diesel) are reviewed by the COE and Legal Services. Final approvals are granted by the Director, FPP and the DG, OEE as well as the ADM, Energy Sector. Issues pertaining to recipient performance are dealt with in consultation with both the COE and Legal Services and decisions rendered are approved by the Sector ADM.

The Department’s Transfer Payment Review Committee (TPRC) is responsible for reviewing transfer payment proposals, agreements and amendments where the total value of the agreement is over $1 million. Under the initial Program parameters, 21 contribution agreements were signed with proponents for greater than $1 million dollars each. The initial Program templates and subsequent amendment templates were presented and approved by TPRC.  The original Biofuels contribution agreements were not submitted to TPRC for approval as this was not a requirement at the time.

The COE has recently introduced requirements to ensure that all new Program contribution agreements are approved by TPRC. Agreements have now been issued for many of the existing producers deemed eligible and are currently being developed for new producers that have met the advanced state of readiness and merit-based criteria assessments (reference Appendix C) based on applications submitted by 31 March 2010 under the revised Program parameters.

MONITORING AND TRACKING PERFORMANCE ACCORDING TO EFFECTIVE RISK ASSESSMENT/MANAGEMENT

The audit team determined that program performance is routinely monitored, tracked and captured in quarterly program performance reports that include the status of contribution agreements, milestone reporting and recipient audits. The reports are submitted to the DG, OEE, and the Deputy Minister is provided with a weekly “dashboard” report. It includes an overview of the number of incomplete or ineligible applications; complete applications; applications to be deemed eligible; contribution agreements signed; litres of gasoline and diesel in relation to program maximum; and program funds expended/committed/available.

Risk Management Strategy

The highest risk to the Program is considered to be the possibility of production falling short of the 2.5 billion litre per year target. As a result, mitigation measures have been put in place by adding provisions to the Contribution Agreement to provide NRCan with the option to invoke a default remedy if a proponent fails to produce ethanol or biodiesel for three consecutive months totalling 5 percent of the proponent’s maximum annual eligible sales. NRCan can also adjust maximum eligible sales for a producer that anticipates that its sales will be less than 70 percent in a given fiscal year. These actions will allow the Program to re-allocate funds to other viable projects, as the situation permits.

The Program’s performance management strategy has been governed by its 2007 Risk-based Management and Accountability Framework (RMAF). While the Treasury Board deemed that the changes to the Program’s terms and conditions, referred to previously, were considered to have no negative effect on the existing RMAF several years ago, the Program’s risk assessment now requires updating.

In November 2009 the development of a comprehensive risk management strategy was contracted out. This new strategy outlines the various points at which due diligence should be exercised for the purpose of identifying, assessing and containing or mitigating risk associated with the project or proponent (e.g., recipient selection process, regular monitoring process, recipient audit process).  This risk strategy was developed prior to the Program changes, and the Program plans to revisit the strategy in the fall of 2010. It should be noted that some of the key recommendations of the 2009 strategy developed are still valid and support good governance such as:

  • develop a formal risk assessment checklist that aligns with the Program’s key risk areas, as documented in the Program’s risk management framework;
  • conduct an annual risk re-assessment to ensure that the overall Program risk is maintained at an acceptable tolerance level, and;
  • review the risk assessment methodology on an annual basis to ensure sound governance of the Program.

Finally, to further measure the effectiveness of the Program, an evaluation has been identified for 2011-12 in the Department’s Strategic Evaluation Plan.

Recommendation

1. Ensure that the Program’s risk management strategy is revisited and updated in a timely manner to reflect current Program risks.

Management Action Plan and Time Frame

1. ES accepts this recommendation.

The Program is in the process of updating its ecoEBF Risk Management Strategy (to factor in recent risks) and will develop and implement a mitigation plan to address those risks.

Timing:  June 30, 2011

PROGRAM ADMINISTRATION
Summary Finding

The ecoENERGY for Biofuels Program is administered with due diligence and transparency in accordance with approved Program Terms and Conditions. As well, the audit team determined that the application review process under the revised Program parameters was also consistently and appropriately applied.

Supporting Findings

COMPLIANCE WITH THE APPLICATION REVIEW AND APPROVAL PROCESS

The Program adopted an escalating tier application review and approval process that was effective. Applications were assessed against Program eligibility and application criteria and then decisions were made at three stages in the review process?completeness review, internal review panel, and interdepartmental panel review?to determine whether or not the applicant met the criteria and the application could move to the next review stage.

Assessments were completed by various levels of Program staff, and participation of non-Program technical officers and representatives from Agriculture and Agri-Food Canada’s ecoABC Program were evident at the interdepartmental panel review and at the advanced state of readiness and merit-based criteria assessment stages.

Applications for new producers were assessed against additional advanced state of readiness and merit-based criteria.  Applications for existing producers were assessed strictly against eligibility criteria.

Finally, all contribution agreements and amendments go through four increasing levels of senior management approval, with the final approval resting with the sector ADM.

The audit team noted that the Program’s development and use of standardized tools to facilitate the assessment and approval process (e.g., assessment guides, checklists and Contribution Agreement templates) contributed to clearly documenting and supporting review panel decisions in the review of applications received after March 31, 2010. Decisions regarding meeting Program eligibility criteria for applications received under initial Program parameters were not as clearly evident.

The review of the 21 applications submitted under the initial Program parameters, and the selected sample of 15 applications reviewed under the revised Program parameters, determined that the application review process was also consistently applied and that the process ensured an adequate segregation of duties and independence as well as objectivity in the assessment of applications. Moreover, all approved contribution agreements were disclosed in accordance with the proactive disclosureFootnote 2 requirements.

PROGRAM CONTROL, MONITORING AND OVERSIGHT
Summary Finding

The Program exercises reasonable risk-based control, monitoring and oversight activities. Nonetheless, opportunities exist to enhance the risk-based approach to the tracking, monitoring and auditing of recipients by implementing the planned web-based monitoring and reporting tool, as well as by updating the Program’s recipient audit strategy.

RISK AND IMPACT
Risk Type Audit Risk Rating Impact
Operational Risk Minor Lack of identifying current Program risks may result in implementing inadequate risk mitigation measures.
Supporting Findings

RECIPIENT PAYMENT PROCESS

The terms and conditions for recipient payments and maximum annual eligible sales and incentive amounts are clearly defined and included in the approved Contribution Agreement schedules. Recipients are required to submit claims for payment on a monthly basis, within fifteen days after the end of the month. Details on the method for calculating the fixed declining incentive rate are provided in the schedules.

Prior to Program parameter changes in December 2009, recipients were required to submit claims for payment on a quarterly basis. At that time, a variable declining incentive rate was calculated based on the difference between the profitability margin and the industry average margin. The complexity of this calculation, the extent of data to be reported by recipients and the lack of understanding of the reporting requirements by recipients resulted in a high error rate. This translated into an additional administrative burden for Program staff to better ensure early detection and investigation of errors as well as additional work to correct undetected errors.

After 18 months of Program delivery, it became apparent that some of the program parameters, coupled with the economic climate, were challenging the viability of biofuels projects. Therefore, a more adaptable federal response, designed to overcome the various difficulties, was required. Also, the Program needed to provide more stability for renewable fuel producers to ensure that the Program supports the most viable construction-ready projects.

TRACKING, MONITORING AND REPORTING RECIPIENT PERFORMANCE

The Program has now put in place enhanced recipient performance reporting requirements, in addition to claims for payment requirements. Coupled with the December 2009 Program changes this has contributed to mitigating the risk of recipient reporting errors. The reporting requirements are clearly defined in the proponent’s approved contribution agreement template and include the periodic submission of complementary information reports, special purposes reports, and complementary environmental performance reports.

Recipient performance is monitored. The process currently employs a variety of complex spreadsheets to capture the extensive performance information reported by recipients. However, considering the extent of information reported on a regular basis, there is a risk that errors may go undetected both in the reporting of recipient data and in the Program’s recording of recipient data.

The audit team carried out a detailed review and analysis of performance data reported by recipients between April 2008 and December 2009. The results of analyzing and comparing the performance data reported by 21 recipients to that captured on the Program’s spreadsheets determined that, while Program staff has detected many errors and anomalies in recipient performance reporting, some errors have remained undetected. In particular, the Program compares expected sales with the actual sales as reported by the recipient. However, the reported eligible production sales (reference Appendix B) can only be verified at the time of an on-site inspection or audit, neither of which takes place regularly with proponents.

In addressing recipient performance concerns, the Program has consulted the COE and Legal Services regarding the development of operational policies to provide Program staff with guidance in resolving issues. The milestone feature of the Department’s financial system (GFS), Grants and Contributions module (GUFI) has been enhanced and a standard set of milestones has been established to track project activities.

Web-based Monitoring and Reporting Tool Required

The Program has determined the business and functional requirements for the development of a web-based monitoring and reporting tool. Work was completed by the Department’s Shared Services Office (SSO) Application Development Solutions group between April 2009 and January 2010. However, implementation was deferred pending identification of modifications because of Program parameter changes. A new statement of work (SOW) with SSO has been developed and the new tool is planned for March 2011. Work task deliverables and associated costs are specified in the SOW; however, timeframes for task completion and sign-offs by Program management, to ensure a timely launch, have not been established.

Risk-Based Recipient Audits

The Program is applying the risk-based recipient audit strategy outlined in the Program’s September 2007 RMAF. The approach used to determine whether or not an audit should be conducted is based on the following audit risk factors:

  • value of contribution,
  • recipient unlikely to be audited by others,
  • experience with recipient, and
  • general uncertainties exist relating to recipient and its environment.

The Program’s 2009 risk management strategy recognizes this approach to be appropriate but recommends considering the following in its audit approach and sampling process:

  • link the initial assessed/re-assessed risk of each project to the audit risk rating system;
  • consider establishing the number of audits to be performed per year?target coverage can range between 45 to 65 percent of the Program’s annual spending; as the audit process continues to evolve over the Program life cycle, add additional risk elements, as required, to modify the audit risk rating system.

Consideration of both the Program and the Department’s recipient audit strategy would ensure more complete coverage when selecting files for recipient audit.

A recipient audit strategy was updated in 2009. The Program completed three recipient audits in 2009-10 and plans to conduct another five in 2010-11. Actions to effect the adjustments identified in the results of the recipient audits, completed in March 2010, were not implemented at the time of the audit. Program management has advised that issues pertaining to substantiation of recipient audit results are in the process of being resolved.

Incentive Payment Review

Examination of 50 incentive payments found that all are in compliance with the Financial Administration Act requirements, as well as the TBS Directive on Account Verification. Controls over the financial review and approval process are adequate.

Recommendations

2. Ensure, in co-ordination with the Shared Services Office (SSO) Application Development Solutions group, the timely development and implementation of the Program’s web-based monitoring and reporting tool.

3. Ensure that the Program’s recipient audit strategy is updated to reflect the recommendations of the 2009 risk management strategy.

Management Action Plan and Time Frame

2.  ES and SSO accept this recommendation.

SSO will develop a work plan for development of the monitoring and reporting tool (database) and has confirmed development of the database will be completed by fiscal year end. They will also provide ongoing maintenance services for the database, as stipulated in a contract to be signed by fiscal year end.

Timing: March 31, 2011

ES will ensure timelines for development and delivery are respected, and a robust monitoring and reporting tool is launched.

Timing:  March 31, 2011

3.  ES accepts this recommendation.

The Program’s ecoEBF Risk Management Strategy is now being updated and this includes the strategy for the selection and conduct of recipient audits. The statement of work for conducting recipient audits has already been updated to reflect recent risks and requirements for additional elements to be assessed and validated.

Timing:  June 30, 2011

GRANTS AND CONTRIBUTION REFORM
Summary Finding

The Program is making initial progress in meeting the requirements of the Grants and Contributions reform that is being phased in over 3 years commencing in 2008. However, a formally documented recipient engagement strategy does not exist. In addition, as required by the 2008 Transfer Payment Policy, formalized service standards have not been documented and promulgated to all recipients.

RISK AND IMPACT
Risk Type Audit Risk Rating Impact
Compliance Risk (TPP 6.5.9) Minor Non-compliance with the Treasury Board Transfer Payment Policy to establish reasonable and practicable service standards for the Program, leads to lack of clarity for stakeholders regarding program delivery.
Supporting Findings

Recipient Engagement Strategy and Service Standards

The TB Policy on Transfer Payments states that departmental managers are responsible for transfer payment programs and for ensuring that recipients are engaged throughout the Program. Although a formal recipient engagement strategy has not been developed, the audit noted a number of activities that encourage recipient engagement including:

  • maintaining active communication with recipients and promptly responding to recipient questions;
  • proactively issuing reminder and instructional emails for key deliverables;
  • addressing and resolving any Contribution Agreement process issues in a timely manner; and
  • modifying recipient reporting tools periodically to facilitate improved reporting.

The 2008 TB Policy on Transfer Payments also requires departments to establish reasonable and practical service standards for transfer payment programs. This applies to all new and continued transfer payment programs approved after March 31, 2010 with earlier adoption encouraged.

The audit team noted that although timelines and processes are generally communicated in emails to recipients, an engagement strategy and service standards have not been formally documented and promulgated to all applicants and recipients.

Recommendations

4. Ensure that an engagement strategy is formally documented to support recipients throughout the Program.

5. As required by Transfer Payment Policy Section 6.5.9, reasonable and practicable service standards should be established and promulgated to recipients.

Management Action Plan and Time Frame

4. ES accepts this recommendation.

The Program will formalize its standard protocols for engaging proponents on payment, reporting and other contribution agreement issues in a comprehensive document.

Timing:  June 30, 2011

5.  ES accepts this recommendation.

The Program will formally document and communicate its service standards.

Timing:  June 30, 2011

APPENDIX A - STANDARD AUDIT RISK RATING

STANDARD RISK TYPES

Our standard risk types are classified based on the COSOFootnote 3 Internal Control-Integrated Framework as follows:

Strategy – High-level goals, aligned with and supporting the Department's mission.

Operations – Effective and efficient use of resources.

Monitoring – Accurate assessments or evaluation of activities.

Reporting – Reliability of operational and financial reporting.

Compliance – Compliance with applicable laws, regulations, policies and procedures.

STANDARD AUDIT RISK RATINGS

Audit findings are rated as follows:

Major:  A key control does not exist, is poorly designed or is not operating as intended and the related risk is potentially significant. The objective to which the control relates is unlikely to be achieved. Corrective action is needed to ensure controls are cost effective and/or objectives are achieved.

Moderate: A key control does not exist, is poorly designed or is not operating as intended and the related risk is more than inconsequential. However, a compensating control exists. Corrective action is needed to avoid sole reliance on compensating controls and/or ensure controls are cost effective.

Minor: A weakness in the design and/or operation of a non-key process control. Ability to achieve process objectives is unlikely to be impacted. Corrective action is suggested to ensure controls are cost effective.

APPENDIX B - AUDIT CRITERIA

The Office of the Comptroller General’s standard audit criteria for transfer payment programs were applied to this audit. Actual performance was assessed against the audit criteria resulting in either a positive finding or the identification of an area of improvement. The following audit criteria were used to conduct the audit:

1. Governance

The Department has in place effective and efficient governance processes for grant and contribution programs

1.1 Management has an effective control framework for the design and delivery of grant and contribution programs.

1.2 Roles, responsibilities and accountabilities are clearly defined and communicated.

2. Program Administration

Programs are administered with due diligence and transparency in accordance with the approved terms and conditions

2.1 Program promotion and recipient application is conducted in a manner that is fair and accessible.

2.2 There are transparent control processes to ensure the consistent assessment and approval of projects to meet the objectives of the program.

2.3 Recipient agreements are consistently developed through a process that is tailored to address risk and recipient requirements.

2.4 Grants and contribution over $25,000 are disclosed in accordance with proactive disclosure requirements.

3. Control, Monitoring and Oversight

The Department exercises risk-based control, monitoring and oversight activities over grant and contribution programs

3.1 Recipient payments are made in compliance with the requirements of the Financial Administration Act (FAA) and the Directive on Transfer Payments.

3.2 Monitoring, reporting and auditing of individual recipients are performed proportionately to their risk level and in accordance with the terms and conditions of the program.

3.3 There are monitoring and reporting processes in place to support program review and the departmental performance measurement strategy.

4. Grants & Contributions Reform

The Department is making initial progress in meeting the requirements of grants and contributions reform

4.1 Collaboration exists within and among departments to harmonize grant and contribution programs and to standardize recipient requirements.

4.2 The department has a strategy to implement service standards.

4.3 Recipients are engaged in support of transparency, innovation and continuous improvement.

APPENDIX C - DEFINITIONS

Renewable alternative(s) to gasoline means a fuel accepted under the Program, made from renewable feedstock, meeting the most current national or international standards for quality specification, and that can be blended with gasoline (at least 5 percent blend) or used in its pure form in gasoline applications as generally accepted industry-wide.

Renewable alternative(s) to diesel means a fuel accepted under the Program, made from renewable feedstock, meeting the most current national or international standards for quality specification, and that can be blended with middle distillates (at least 2 percent blend) or used in its pure form in middle-distillate applications as generally accepted industry-wide.

Eligible Recipients
Program Terms and Conditions – October 2007

An eligible recipient is a for-profit legal entity with ownership over an individual plant or facility that produces renewable alternatives to gasoline and/or diesel in Canada and that is not subject to a controlling interest by a federal, provincial or municipal government and that meets the criteria set out in the Program Terms and Conditions.

Program Terms and Conditions – February 2008

Eligible recipient is a for-profit legal entity

  • with ownership over an individual plant or facility for the production, in Canada, of renewable alternatives to gasoline and/or diesel and that is not subject to a controlling interest by a federal, provincial or municipal government and that meets the criteria set out in the Program’s Terms and Conditions; or
  • in the process of developing engineering plans and financing strategies for the construction of an individual plant or facility for the production, in Canada, of renewable alternatives to gasoline and/or diesel and that is not subject to a controlling interest by a federal, provincial or municipal government and that meets the criteria set out in the Program’s Terms and Conditions.
Program Terms and Conditions – December 2008

Existing producer isdefined as a business organization that

  • has full ownership of the equipment and/or structure housing the equipment necessary for the production of “renewable alternatives(s) to gasoline and/or diesel”, in Canada; and
  • carries on or executes the entire “end-to-end production process” (as defined by the program) of the “renewable alternatives(s) to gasoline and/or diesel” solely in Canada; and
  • will be producing by March 31, 2010, “renewable alternatives(s) to gasoline and/or diesel”; and
  • is not subject to a controlling interest by a federal, provincial, or municipal government; and
  • that meets the criteria set out by the ecoENERGY for Biofuels Program.

New producer is defined as a business organization that

  • has or will have full ownership of the equipment and/or structure housing the equipment necessary for the production of “renewable alternatives(s) to gasoline and/or diesel”, in Canada; and
  • carries on or executes the entire “end-to-end production process” (as defined by the program) of the “renewable alternatives(s) to gasoline and/or diesel” solely in Canada; and
  • although not producing by 31 March 2010, “renewable alternatives(s) to gasoline and/or diesel”, is able to demonstrate an “advanced state of readiness” (as defined by the program) by 31 March 2010; and
  • is not subject to a controlling interest by a federal, provincial, or municipal government; and
  • meets the criteria set out by the ecoENERGY for Biofuels Program.

Eligible production means, in the case of,

  • “renewable alternatives to gasoline”, the undenatured anhydrous ethanol Footnote 4 portion of total production, in litres, that is produced in Canada and is accepted under the Program for an incentive, as per maximum limits described in the contribution agreement, and sold by the eligible recipient during the reporting period.
  • “renewable alternatives to diesel”, the portion of total production, in litres, that is produced in Canada and is accepted under the Program for an incentive, as per maximum limits described in the contribution agreement, and sold by the eligible recipient during the reporting period.
Incentive Rate Calculation
Program Terms and Conditions – October 2007 & February 2008

Incentives will be provided for number of litres of renewable fuels produced in Canada, as agreed upon in each contribution agreement.

Incentive provided (in Canadian dollars) will be calculated (separately for renewable alternatives to gasoline and diesel – Feb/08 change) by taking into consideration, Eligible Production and Incentive Rate (IR), as follows:

Incentive = Eligible Production in litres x Incentive Rate in dollars

To determine the Incentive Rate, the program will use two variables: “Industry Margin” (IM) and the “Profitability Margin” (PM). The Profitability Margin is an operating margin that the industry requires to achieve an attractive rate of return of no more than 20 percent for a typical plant. The Industry Margin is the actual operating margin the industry has achieved (on average, including provincial support – Feb/08 change). For the purpose of the program, “industry” is defined as the sum of Eligible Recipients.

The Incentive Rate will be equal to 50 percent of the difference (The Incentive Rate will be the difference – Feb/08 change) between Profitability Margin and Industry Margin. If the Profitability Margin is smaller than Industry Margin, then there will be no incentive. The formula will be represented as follows:

IR = (PM – IM) x 50% (IR = (PM – IM) (Feb/08 change)

The variable incentive rates will decline over the life of the Program from 0.10 in 2008-09 to 0.04 in 2016-17 (gasoline) and 0.20 in 2008-09 to 0.06 in 2016-17 (diesel).

Program Terms and Conditions – December 2009

Amendments to the Program’s Terms and Conditions include

  • paying producers on a fixed, declining incentive rate, retroactive to April 1, 2008;
  • modifying Program eligibility criteria;
  • establishing new merit-based assessment criteria for project selection;
  • changing the facility construction deadline from March 31, 2011 to September 30, 2012;
  • modifying the application of the 30 percent cap on individual companies from a volume cap to a monetary cap for renewable alternatives to diesel; and
  • re-allocating Program funds within the fiscal framework.

Incentives will be provided for the number of litres of “renewable alternative(s) to gasoline and/or diesel” produced in Canada and sold, as agreed upon in each contribution agreement.

Incentive provided (in Canadian dollars) will be calculated separately for renewable alternatives to gasoline and diesel by taking into consideration eligible production and incentive rate, as follows:

Incentive = Eligible Production (in litres) x Incentive Rate (in dollars)

The fixed incentive rates will decline over the life of the Program from 0.10 in 2008-09 to 0.03 in 2016-17 (gasoline) and 0.26 in 2008-09 to 0.04 in 2016-17 (diesel).

Advanced state of readiness means meeting specific criteria as defined by the Program that could include, but are not limited to:

  • detailed business plan (including project plans, company and management structure, detail construction schedule, confirmation of arrangement of feedstock procurement, letter of intent from technology suppliers, and confirmation of fuel purchase arrangements); and
  • site selection (appropriately zoned for the intended use); and
  • select permit requests in place; and
  • evidence of some secure financing.
Merit-based Assessment Criteria

New producers, who are successful in demonstrating the minimum threshold of an “advanced state of readiness”, will undergo a full merit-based assessment against all Program criteria.

The assessment criteria are as follows:

  • financial (35 percent)
  • project details (20 percent)
  • environmental (15 percent)
  • management (10 percent)
  • contractual arrangements (10 percent)
  • economic impact (5 percent)
  • long-term viability (5 percent)