As owner of buildings and properties for NRCan, the Real Property and Environmental Management Division (RPEMD) is responsible for ensuring the physical integrity of the Department's real property holdings; providing safe and productive work environments; prioritizing and analyzing real property investments; ensuring compliance with the federal government's real property legislative framework; and, managing the risks inherent in operating a national real property portfolio.
NRCan’s real property portfolio includes 228 buildings, 41,370 hectares of land and 242,876 square metres of building space, representing an asset base with a replacement value of $1.1 billonFootnote 1. Approximately 70 per cent of NRCan’s real property portfolio is located in the Regions. Sectors with regional custodial properties include the Canadian Forest Service (CFS), Earth Sciences Sector (ESS), Minerals and Metals Sector (MMS) and Innovation and Energy Technology Sector (IETS). All NRCan property interests are reported to the Directory of Federal Real Property.
The purpose of this audit was to assess the management practices relating to real property. Specifically, the audit was to provide assurance that:
- NRCan’s real property management promotes sound stewardship and adheres to NRCan and Treasury Board (TB) Polices and Guidelines.
The scope of the audit was confined to the management of real property (land and buildings) situated within the National Capital Region and across Canada, for which NRCan is the owner. Leased premises were excluded from the audit. While the audit team reviewed the NRCan Investment Plan to confirm it included real property, funding for the investment plan and specifically major capital items was not included in the scope of this audit. An assessment of the efficient usage and adequacy of departmental real property was not conducted.
The Treasury Board Secretariat (TBS) carries out assessments of management performance annually throughout the federal government. Organizations are assessed against Areas of Management that measure each of the ten elements of the Management Accountability Framework and are given a rating based on an assessment scale. RPEMD has received a strong rating for real property management for the last two fiscal years. RPEMD has sustained performance for real property management that exceeds TBS expectations and suggests continued strong performance in such areas as governance, leadership and continuous improvement. This audit confirms this assessment.
AREAS FOR IMPROVEMENT
While processes are in place for managing buildings operations, repairs and improvements, some gaps in record management were identified. Better documentation is required in RPEMD’s information management system to ensure completeness, accuracy and integrity of NRCan’s real property portfolio.
AUDIT CONCLUSION AND OPINION
The audit results provide reasonable assurance that NRCan’s real property management promotes sound stewardship and adheres to NRCan and TB Polices and Guidelines. Current strategies are in place for effective life cycle management such as disposal of surplus properties and improved energy efficiency (via the Low Carbon Initiative). In order to ensure that scarce Departmental resources are funding the highest priorities, the Department, led by RPEMD, should explore the merits of alternative funding models. RPEMD has been proactive in ensuring a smooth transition to the new financial system. However, information management could be strengthened to ensure completeness, accuracy and integrity of real property data.
In my opinion, the management of real property has no material weaknesses related to governance processes. There is a minor risk exposure related to operations where funding models should be explored.
STATEMENT OF ASSURANCE
In my professional judgment as Chief Audit Executive, sufficient and appropriate audit procedures have been conducted and evidence gathered to support the accuracy of the opinion provided and contained in this report. The opinion is based on a comparison of the conditions, as they existed at the time, against pre-established audit criteria that were agreed on with management. The opinion is applicable only to the entity examined.
Christian Asselin, CA, CMA, CFE
Chief Audit Executive
TABLE OF CONTENTS
- EXECUTIVE SUMMARY
- FINDINGS AND RECOMMENDATIONS
- APPENDIX A – STANDARD INTERNAL AUDIT RISK TYPES AND RATINGS
- APPENDIX B – AUDIT CRITERIA
According to the Federal Real Property and Federal Immovables Act, real property is defined as lands, including mines and minerals, and buildings, structures, improvements, and other fixtures on, above, or below the surface of the land and includes an interest therein.
NRCan’s real property portfolio includes 228 buildings, 41,370 hectares of land and 242,876 square metres of building space, representing an asset base with a replacement value of $1.1 billionFootnote 2. Approximately 70 per cent of NRCan’s real property portfolio is located in the Regions. Sectors with regional custodial properties include the Canadian Forest Service (CFS), Earth Sciences Sector (ESS), Minerals and Metals Sector (MMS) and Innovation and Energy Technology Sector (IETS). All NRCan property interests are reported to the Directory of Federal Real Property.
The Real Property and Environmental Management Division (RPEMD), as the national owner-investor and custodian, is the steward of Departmental real property, setting real property strategy and providing real property corporate policy and direction. The Real Property Advisory Unit acts as a “single window” for sectors and service providers, working with Sectors to identify and understand Sector’s strategic real property and accommodation requirements. RPEMD is also responsible for liaison with TBS and central agencies, and providing required reporting.Footnote 3
The Shared Services Office (SSO) provides property, facilities and project management services, under Service Level Agreements, with RPEMD and Sectors. SSO provides select services using internal resources, and also contracts with other organizations (such as Public Works and Government Services Canada, other government departments, or the private sector) to provide services.Footnote 4
NRCan Sectors occupy real property or accommodations in support of program activities. Their primary focus is delivery of the Department’s mandate through science and policy activities.Footnote 5
The audit assessed the management practices relating to real property. Specifically, the audit was intended to provide reasonable assurance that:
- NRCan’s real property management promotes sound stewardship and adheres to NRCan and TB Polices and Guidelines.
NRCan’s Corporate Risk Profile 2010-11 rated the risk associated with real property as moderate. NRCan’s Risk-Based Audit Plan 2010-11 included an internal audit of Asset Management - Real Property and Fleet, which was rated as “High Audit Priority”. This audit was subsequently divided into two distinct audits and the Audit of Real Property was deferred to fiscal year 2011-12.
SCOPE AND METHODOLOGY
The scope of the audit was confined to the management of real property (land and buildings) situated within the National Capital Region and across Canada, for which NRCan is the owner. Leased premises were excluded from the audit as the Department is not ultimately responsible for these premises.
The audit approach included:
- A review of key documents and relevant background documentation including policies, directives and standards;
- Interviews with key personnel;
- Physical inspections based on information gathered, as required, and;
- Directed judgemental sample of real properties to examine operation, use and accounting of NRCan real properties.
While the audit team reviewed the NRCan Investment Plan to confirm it included real property, funding for the investment plan and specifically major capital items was not included in the scope of this audit. An assessment of the efficient usage and adequacy of departmental real property was not conducted.
Refer to Appendix B for the detailed audit criteria. The criteria were developed from the key controls set out in TB of Canada’s Core Management Controls and relevant policies, procedures and directives associated with real property. The criteria guided the audit fieldwork and formed the basis for the overall audit conclusion.
FINDINGS AND RECOMMENDATIONS
GOVERNANCE & STRATEGIC DIRECTION
The authority, responsibility and accountability for the management of real property are clearly defined. The building management plan process integrates Departmental needs and provides a strategic view of real property. While there have been some discussions on the existing funding model for real property, there has been no formal review in order to ensure that highest priority projects are carried out.
The Real Property and Environmental Management Division (RPEMD) of Corporate Management and Services Sector (CMSS) has developed a Real Property Management Framework in order to manage decision-making and risk, ensure that NRCan’s real property portfolio meets program needs and is sustainable over the long term, and ensure compliance with TB real property policies. This is in compliance with the TB Policy on the Management of Real PropertyFootnote 6.
Management Accountability Framework
The Management Accountability Framework (MAF) establishes the standards for management in the Government of Canada and is the basis for management accountability between departments/agencies and the Treasury Board Portfolio (TBP) [Treasury Board Secretariat (TBS) and the Canada Public Service Agency (CPSA)]. The Treasury Board Secretariat (TBS) carries out assessments of management performance annually for departments throughout the federal government by assessing tenFootnote 8 integrated elements outlined in the MAF and giving a rating based on an assessment scale. The audit team reviewed the MAF results for fiscal years 2009-2010 and 2010-2011 for RPEMD and found that they received a rating of strong for their area of management (real property management) for both of fiscal years.
Highlights of the results include:
- Governance structures, approval processes and authority limits are documented and communicated;
- Internal policies are up to date and documented;
- The organization demonstrates practices that are innovative and noteworthy or display excellence in real property management;
- The organization displays leadership in the federal real property community;
- A culture of continuous improvement is in place.
- The condition of most essential assets is known. Contaminated site management is consistent with policy and program guidelines; and
- Certification of information in both the Directory of Federal Real Property (DFRP) and Federal Contaminated Sites Inventory (FCSI) is accepted.
Real Property Responsibilities and Accountabilities
RPEMD, as national owner-investor and custodian of real property, is responsible for the stewardship of real property, related policy, and real property strategy. RPEMD is accountable for real property delegations and executions of transactions, advice and direction on real property matters and implementation of the Real Property Management Framework, including compliance with the Federal Real Property and Federal Immovables Act and TB policy. RPEMD manages the operating and utilities budget for facilities in the National Capital Region.
The Science Sectors, as occupants or users of space and real property, focus on science and program delivery and work with RPEMD to define real property requirements. Sectors are accountable for identifying program and sector real property needs, including real property acquisition and disposal requirements. The operations and utilities budget for the Regions rests with regional science programs.
The Real Property Advisory Board (RPAB), chaired by the Executive Director of RPEMD, serves as the primary forum for communication of the investment plan and real property strategies, taking into account the existing portfolio and Sector and regional interests and requirements. This allows for integrated priority setting. Members of the board include the Executive Director of the Shared Services Office, Director General of the Financial Management Branch and Science Sector representatives.
Building Management Planning
Planning and investment are supported by the annual input of data via the Building Management Planning exercise. This plan was piloted in 2008-2009 with nine buildings and it now includes all Departmental buildings which are recorded as assets.
The individual Building Management Plans (BMP) are comprehensive plans for managing building operations, repairs and improvements. They identify national real estate investment priorities and options for the consideration of the building custodian. The plans are essential for identifying real property funding requirements and determining the allocation of funding across the NRCan national real property portfolio. The inputs into the BMP process include Asset Management Reports, Building Condition Reports (completed on a 5-year cycle), sector input, health and safety, and environmental concerns. Outputs of the BMP process include Operating and Maintenance Plans (which detail the resources required to operate the building on a day-to-day basis), a management analysis (which highlights key asset management issues) and a project plan (list of recommended capital and repair projects for the facility).
The National BMP is initiated with a call letter to Property Managers in September. The Review Committee is comprised of representatives from RPEMD, the sectors, and service providers. This Committee assesses sector-specific real property short-term and long-term requirements, reviews priorities, and ascertains availability of funding for client-identified projects. A priority ranking system accounts for both project and building priorities. The committee drafts and reviews the BMP, in order to produce a National Work Plan which is a detailed list of capital and repair projects with assigned funding. The target date for completion of the Plan is February/March of each year.
RPEMD manages the distribution of the capital and repair budget in the National Capital Region through the BMP process and includes special programs such as the Accelerated Infrastructure Program of 2010-11.
The BMP process is intended to provide:
- Compliance with TB policy and Government requirements with respect to accessibility, heritage, security, condition, and the environment;
- A national risk management approach (with scarce dollars going to the highest priorities);
- A consistent and national approach to help cash-flow restraints;
- Project prioritization which is transparent, defensible and applied consistently from coast to coast;
- The capture of information to strengthen the Department’s long-term capital planning process; and
- Forecasted operating and maintenance costs.
Real Property Funding Model
Although NRCan’s BMP process assesses NRCan’s entire real property portfolio and functional real property authority is centralized, it does not always ensure that real property investments address the highest risk priorities for the Department as a whole. This is due to NRCan’s decentralized financial authority for real property, in that RPEMD funds building projects in the National Capital Region whereas the Sectors fund building projects in the Regions. This model has its challenges for RPEMD as it means that work carried out in the Regions is decided by and paid for entirely by the Sectors. RPEMD does not control the funds put into the buildings outside of the National Capital Region. As a result, RPEMD can only recommend what projects/initiatives the Sectors should fund.
Given the decentralized funding model, the audit team found that lower priority projects from one Sector can be funded over a higher priority project in another Sector depending on the availability of funds within each Sector. For example, in fiscal year 2011-12:
- A low priority project from one Sector, with an estimated value of $241 thousand, received funding yet six higher priority projects, with an estimated value of $213 thousand from two other Sectors, were not funded. Based on RPEMD’s project priority rating system, there is risk that these six projects, if left uncorrected next fiscal year, could become an even higher priority. Five out of the six projects have been carried over into next year’s BMP planning process.
In fiscal year 2008-09, in order to ensure “maximum use of limited capital” RPEMD committed to review, “with the intention of consolidating funding”, the current funding modelFootnote 9. Beyond funding model discussions at RPAB, this review was not completed and no alternative funding model has been proposed.
Despite the recent injection of $84 million in fiscal year 2010-11 to improve NRCan’s infrastructure under the Accelerated Infrastructure Program, more work is required for many real properties. Real property management indicated that NRCan is unable to sufficiently fund the ongoing cost of ownership of real property. The funding levels required for the upkeep of some of the older buildings are not sustainable. The building investment annual shortfall for fiscal year 2011-12 is approximately $4 million, and its’ projected accumulated shortfall to fiscal year 2013-14 is approximately $75 millionFootnote 10.
While a different funding model will not eliminate this shortfall, it may ensure better distribution of existing funds.
Disposal of Real Property
In dealing with the shortfall of real property investment, RPEMD’s current strategy is to dispose of surplus buildings and lower utility costs.
Surplus “routine” real properties are generally properties or a portfolio of properties with a lesser value that can be sold easily without any substantial investment. Surplus “strategic” real properties are properties or portfolios of properties with the potential for significantly enhanced value, those that are highly sensitive, or a combination of these factorsFootnote 11. The audit team identified and reviewed an example of each type of disposal at different stages of the process. One disposal will involve nine buildings at the Booth Street Complex in Ottawa and the other a trailer at the Great Lakes Forestry Centre in Sault Ste. Marie.
With respect to the Booth Street disposal, the appropriate steps were taken and are in accordance with the strategic disposal process outlined in the TB Guide to the Management of Real Property. Specifically:
- The ADM Interdepartmental Committee recognized the property as a strategic disposal;
- RPEMD completed its preliminary due diligence including appraisals, environmental assessment, heritage review and aboriginal risk assessment;
- Canada Lands Company preliminary studies were in progress; and
- First Nations notification and circulation to other government Departments were underway.
The proceeds of sale will be reinvested in the Department’s real property portfolio through the TB’s established estimates process.Footnote 12
A routine disposal of real property occurred during fiscal year 2011-12. This disposal involved the demolition of a trailer (known as PG04 Building C) at the Great Lakes Forest Centre. It was removed from the financial system on January 4, 2012. The asset had a nil net book value as it had been fully depreciated. The Department did not incur any costs related to disposal as these were assumed by a third party constructing a building on this site. The audit team confirmed that this building is no longer in the database.
NRCan’s Low Carbon Initiative
As part of reducing costs for maintaining NRCan’s real property portfolio, RPEMD current strategy is to move forward with the Low Carbon Initiative (LoC). The long term vision of this initiative is to:
- Position NRCan as a Government leader in the implementation of state-of-the-art energy-efficiency programs in all of its major buildings;
- Utilize some of these buildings as living laboratories to showcase energy efficient practices and technologies; and
- Achieve 17 per cent net Departmental greenhouse gas emissions (GHG) reduction by 2020 (2005-06 baselines). This will involve 17 building sites that produce about 94 per cent of NRCan’s GHG emissions.
Some of the energy projects affecting NRCan buildings include building retrofits and undertaking an ISO 50001 Energy Management Standard Pilot Project. The greening of NRCan facilities will reduce utility costs in the long run. In fiscal year 2011-12, ten LoC Initiative projects were approved for funding at an estimated total cost of $358 thousand.
RISK AND IMPACT
The existing decentralized funding model allows for the completion of lower priority projects over higher priority projects. This could result in scarce dollars not going to the highest priorities. In addition, continued deferral of high priority projects could lead to a regulatory violation or could pose a risk to human health, safety and/or the environment.
This operational risk is rated as minorFootnote 13 as the deferred high priority projects do not pose an imminent threat to employees. The majority of these projects will be considered in this year’s BMP process.
1. The Department, led by Real Property and Environmental Management Division, should complete a review of funding models for real property at NRCan. This review should include the strengths and weakness of the existing funding model as well as the strengths, weaknesses, risks and impacts of moving to a centralized funding model and ensure that all high priority projects are funded. A funding model should be recommended to Executive Committee for approval.
Management Action Plan
A two phased approach is proposed.
Phase 1: In order to ensure that the department’s highest priority projects are carried out, RPEMD will seek concurrence from RPAB (RPEMD’s advisory board) to commit to fund all highest priority projects in the coming year (in both the NCR and the Regions). The recommended plan will be presented to the department's Executive Committee for approval. A mid year review will be presented to Executive Committee to review projects undertaken and to prioritize new emerging projects if required. Projects above and beyond those identified as the highest priority will be at the discretion of the sector. The next RPAB meeting is scheduled for week of April 23rd.
Completion date: Phase 1: Completed
Phase 2: RPEMD will prepare a report outlining the strengths and weaknesses of the current and alternative funding models. RPAB will be consulted. Report and funding model recommendation to be presented to Executive Committee.
Completion date: Phase 2: Fall 2012
RPEMD has been proactive in ensuring a smooth transition to the new financial system. However, documentation to support decisions or track projects was not always available.
Transition to the New Financial System
NRCan adopted a new financial system as of April 1, 2011. The audit team reconciled building accounting information from both systems (old and new) and found less than a $10 thousand difference in the total net book value of NRCan buildings. This amount was considered immaterial.
To assist with the transition, RPEMD distributed a guide to support and direct staff who are responsible for real property financial coding. It included information such as:
- How to code real property commitments and expenditures in the new financial system;
- Excerpts of the coding manual – real property general ledger accounts;
- WBS elements by building and property; and
- Building codes.
RPEMD also provided training on coding requirements for real property related transactions such as Low Carbon Initiatives and BMP projects in the Fall of 2011 and Winter of 2012.
RPEMD has worked with the Financial Management Branch (FMB) to create a method of reporting comprehensive real property cost information. RPEMD is responsible for creating project codes unique to each building in the Project System module of the new financial system. In order to associate a transaction with a specific building, transactions must be coded to a unique project code.
Through document review, the audit team found that RPEMD has assigned unique project codes to all NRCan buildings.
An audit of the Delivery of the Accelerated Infrastructure Program (AIP) was conducted in the Fall of 2010. This audit identified a system limitation with respect to the recording of bettermentsFootnote 14. The financial system at that time could not extend the useful life of an existing asset. The current audit team verified that this limitation has been addressed in the new financial system.
By examining the Invasive Species building project, which was funded under AIP, the audit team found that the betterment was treated as a separate sub screen of the original asset and capitalized and depreciated separately based on the useful life it was assigned. Although the new financial system allows for the extension of the useful life of an asset without affecting previous periods, as required by NRCan’s Capital Assets Accounting Standards, discussions with FMB indicated that a decision has been made not to increase the useful life of the original asset but to account for it separately. This accounting method is in compliance with the standard.
RPEMD’s Information Management group is responsible for the development and maintenance of information systems to support national and regional real property requirements. Outputs from this group include data quality and integrity, on-demand information, and historic and forecasting data in support of portfolio management.Footnote 15 RPEMD uses the ARCHIBUS Web Central database to store required information on projects (proposed studies and/or activities to improve, repair or replace building components) by unique event numbers.
As of November 2011, the database is available to SSO Regional Managers for updating and verification purposes. RPEMD provided training and an updated guide to the users in the Regions in the Fall of 2011 and Winter of 2012.
The audit team reviewed 63 eventsFootnote 16 relating to the judgemental sample (six buildings) to ensure that they were recorded in the database. RPEMD confirmed that eight out of 63 events were not in the database and that these types of events would be removed for the following reasons:
- The event was no longer required because of work on another project;
- The event was funded under another budget; and
- The event was merged with another project and therefore recorded in another event number.
Although events are only removed from the database on the recommendation of qualified experts such as Regional Facility Managers or RPEMD, missing information makes tracking, monitoring and reporting on these events difficult. In addition, it may impact operational efficiency and decision making when details and justifications corresponding to an event are not in the database or when they are merged with other events without documentation to track their location.
Building Condition Reports (BCR)
The overall performance of real property is regularly and systematically assessed for functionality, utilization, physical and financial performance.Footnote 17 BCR reports contain descriptions and assessments of the physical condition of each building component, as well as recommended repairs or work projects.Footnote 18 BCRs are to be completed on a five-year cycle.Footnote 19
The last BCR cycle was completed in 2007, wherein approximately 54 of NRCan's main buildings were evaluated. The cost for completing the BCR was $1 Million. This BCR program covered 90 per cent of NRCan’s real property portfolio by squared metres.Footnote 20
The audit team found that five out of the six buildings sampled had a BCR completed.Footnote 21 One building did not have a BCR completed because it was deemed to not be a major interest at the time. According to RPEMD, BCRs are used as a baseline to determine a given asset’s recommended program of work. The BCR is supplemented on a yearly basis with input from facility managers and occupant representatives. According to Public Works and Government Services Canada and their contracted service provider SNC Lavalin, approximately half of the actual yearly program of work will originate from the BCR and half will be the result of input from occupants and the facility manager.
After a review of the BCRs for the five buildings, the audit team identified eight high priority projects. The audit team found one out of these eight high priority projects was not complete. There was insufficient documentation on file to justify why this project was not completed. This project involved cleaning ductwork and rebalancing ventilation systems, scheduled for 2028, at an estimated cost of $30 thousand, pending the replacement of the ductwork in 2008. The ductwork was neither replaced nor cleaned. In 2011, an Indoor Air Quality AssessmentFootnote 22 was completed and found no indoor air quality issues in the building and, as a result, no further action was required. This information was not on file at the time of the audit. RPEMD has subsequently added this justification to the file.
BCRs are carried out by multi-disciplined technical experts at a substantial cost to the Department. If high priority projects identified in these BCRs are not completed, there should be a documented rational and approval to clearly support the decision not to complete the project. This documentation would facilitate real property decision makers to understand and evaluate the history behind why certain high priority projects had not been completed, thereby helping in the investment decision making process and solidifying the life-cycle management process. Proper documentation would aid the monitoring and reporting on high priority projects and would strengthen the overall BMP process.
RISK AND IMPACT
The removal of building events from the database results in real property information gaps. This could potentially lead to ineffective tracking, monitoring and reporting of NRCan’s real property portfolio.
Lack of documented justifications to support decisions not to carry out projects may jeopardize the transparency and defensibility of why high priority projects were not completed.
This reporting risk is rated as minorFootnote 23 as senior management has since documented the one instance found.
2. RPEMD should ensure that building projects are not removed from the information management system without sufficient documentation to ensure completeness, accuracy and integrity of real property data.
3. In cases where high priority projects identified in the BCR and are not carried out, RPEMD should, in addition to its existing business processes, ensure that a documented justification is systematically kept on file.
Management Action Plan
Information practices have already been implemented to address recommendations 2 and 3. Projects will no longer be removed from RPEMD’s information system, even if it is no longer required. Instead, the project will be tagged as being no longer required and a justification field will have to be filled out.
Similarly, high priority projects that don’t receive funding will require a completed justification field.
New data integrity reports have been created that will identify projects that do not have justifications on file. Review of data integrity reports is part of the yearly BMP process.
Completion date: Completed
APPENDIX A – STANDARD INTERNAL AUDIT RISK TYPES AND RATINGS
Standard Risk Types
Our standard risk types are classified based on the COSOFootnote 24 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 CRITERIAFootnote 25
1.1 Authority, responsibility and accountability support the effective management of real property.
1.2 Planning and resource allocations consider risk information.
1.3 Assets are life-cycle managed.
1.4 Transactions are coded and recorded accurately and in a timely manner to support accurate and timely information processing.
- Date Modified: