Audit of Municipal Works

May 2016

7050-71 (ADM(RS))

Reviewed by ADM(RS) in accordance with the Access to Information Act. Information UNCLASSIFIED.

Acronyms and Abbreviations

ADM(RS)

Assistant Deputy Minister (Review Services)

ADM(IE)

Assistant Deputy Minister (Infrastructure and Environment)

DND/CAF

Department of National Defence and the Canadian Armed Forces

FY

Fiscal Year

DRMIS

Defence Resource Management Information System

IEBM

Infrastructure and Environment Business Modernization

Overall Assessment

  • Structured processes are not fully developed or implemented to support the consistent management of municipal works.
  • ADM(IE) recognizes the need for transformative change in real property management, and its current initiatives present opportunities to address the sustainability of the municipal works portfolio.

Results in Brief

As one of the largest federal holders of real property in Canada, the Department of National Defence and the Canadian Armed Forces (DND/CAF) manages an infrastructure portfolio that is key to enabling the delivery of its programs and activities. Real property life cycle management includes planning, acquisition, operation, maintenance, recapitalization and disposal services to ensure the continued availability of the Department's portfolio; that is, lands, buildings, operational infrastructure and municipal works.

Of particular significance is the municipal works component of this portfolio, which provides essential support to the operation of other real property and which has been identified through internal departmental assessments as requiring additional attention. For this reason, the management of municipal works was included in the Chief Review Services1 Risk-Based Internal Audit Plan for fiscal years (FY) 2015/16 to 2017/18.

Assistant Deputy Minister (Infrastructure and Environment) (ADM(IE)), ADM(RS), and the Office of the Auditor General have studied the management of the Department's real property portfolio extensively. Many of the issues they have previously identified would apply equally to municipal works. These include the sustainability of the portfolio in the face of an aging asset base and the declining suitability and condition of the assets within a period of limited resources.

A number of major initiatives are underway within the Department to transform the management of real property. Principally, responsibilities for real property are being centralized under a single authority, ADM(IE). Projects are also underway to modernize real property information systems and for targeted improvements to municipal works.

In the context of these changes, the DND/CAF has the opportunity to establish a new business model and make improvements to existing business processes. It will be important to take on these changes in a deliberate and coordinated manner. The audit findings and recommendations highlight areas to be considered in order to support the success of these initiatives.

Findings and Recommendations

Governance and Strategic Management. The management of real property, including municipal works, has been structured under a decentralized management model. As the functional authority, ADM(IE) was responsible for issuing strategic direction, policy and advice, and for exercising oversight. Nine custodian organizations were responsible for the direct management of the properties under their control. Following this model, ADM(IE) had limited ability to directly communicate and implement its strategic intent. Decentralized control over base construction engineering sections led to inconsistent practices and management.

With the transition to a single custodian model, ADM(IE) will have greater responsibility and more direct influence over local operations. To ensure the success of this renewal, it is recommended that ADM(IE) develop and implement a management framework to clearly articulate the vision of a steady state and to coordinate and streamline the many programs and initiatives being undertaken. This framework should also include the definition of new business processes within the Canadian Forces Real Property Operations Group in order to determine the appropriate level of standardization and the extent of management influence that will be established.

Information Management. In order to support effective decision making in the management of municipal works, the DND/CAF must have an adequate understanding of the portfolio. It will need reliable information that provides a detailed description of the inventory held, its condition and suitability and the performance of the organization to allow for the determination of management priorities.

It is recommended that ADM(IE) continue to pursue the renewal of information systems in order to acquire modernized capabilities for real property management. To ensure the successful implementation of this project, ADM(IE) will have to clearly identify its information requirements and will need to develop, communicate and enforce a standard for data collection processes while also considering the costs and benefits involved.

Maintenance, Repairs and Recapitalization. The DND/CAF real property portfolio has experienced chronic underinvestment since the 1990s, and targets for maintenance, repairs and recapitalization have not been met. This has resulted in a decline in the condition of the portfolio that increases the risk of service disruptions.

ADM(IE) is attempting to address the long-term sustainability of the portfolio on several fronts. In communicating with senior management, it will have to clearly demonstrate the risks associated with inaction to ensure informed decisions can be made. In order to optimize available resources in the future, ADM(IE) will need to consider investment priorities and innovate the way that services can be delivered.

Planning for Requirements. The Department's limited focus on life cycle asset management for municipal works has affected longer-term planning for preventive maintenance and recapitalization. At the same time, development planning within the Department has not fully considered future demands on municipal services.

Increasing the planning process rigour will help to ensure that supply for municipal works continues to meet demand. Improvements to asset management planning will ensure the effective use of assets during their life cycle, while master real property development planning will allow the consideration of longer-term service requirements.

Note: Please refer to Annex A—Management Action Plan for the management response to the ADM(RS) recommendations.

1.0 Introduction

1.1 Background

In order to support its operating mandate, the DND/CAF holds a large and diverse real property portfolio. This portfolio provides the infrastructure needed to enable its mission, whether by accommodating personnel and materiel, providing workspace for operations and administration or for use in training. Real property held by the DND/CAF is concentrated primarily through 32 Defence establishments located across Canada.

The operation of this infrastructure requires the supply of municipal services. To some extent, that may be comparable to the running of small communities. Many of these services may be purchased from regional utility providers or neighbouring municipalities. In larger Defence establishments, the DND/CAF operates its own municipal works systems and may also provide these services to the surrounding areas.

1.1.1 Description of Portfolio

As one of the largest holders of federal real property in Canada, the DND/CAF operates a real property portfolio that consists of 37,000 assets with a real property replacement cost of $26 billion. These assets consist of land, buildings, military-specific operational works and municipal works. In FY 2014/15, real property life cycle program expenditures totaled $1.96 billion.

Within this portfolio, municipal works consist of 10,000 assets with a replacement cost of $5 billion, including electrical systems, central heating systems, drinking water and waste water systems and road networks. These systems include utility plants and line networks to provide utility services across base locations.

1.1.2 Risks Associated with Municipal Works

The uninterrupted availability of municipal works is critical to the operations of base infrastructure and all supported activities. Failures in municipal works may therefore present a wide range of risks to the DND/CAF. These include the following:

  • Health and Safety. Services such as power, water and heating are necessary to keep residential buildings and workplaces inhabitable.
  • Business Continuity. Power fluctuations may affect computing and communications equipment, as well as the use of other plants and machinery. Water line breaks, sewage backups and road failures may also lead to damage to property and costly repairs.
  • External Parties. Mismanagement of liquid effluents may result in environmental contamination and noncompliance with environmental regulations. Furthermore, the DND/CAF assumes the risks for services provided to neighbouring communities, such as water supply safety or waste water treatment.

1.1.3 Real Property Management

The DND/CAF has historically operated its real property management under a decentralized model. Under this structure, ADM(IE) has been the functional authority for real property, providing portfolio oversight, management direction and technical advice to custodian organizations. ADM(IE) develops departmental policy and manages issues that may have impacts across the portfolio.

Until recently, custodian organizations consisted of nine DND/CAF groups, such as the Royal Canadian Navy, the Canadian Army, and the Royal Canadian Air Force, who had responsibility for the operations and management of real property under their control. Within the custodian organizations, group advisors for real property interpreted and applied functional direction and managed the allocation of funding to the divisions, formations or base organizations within their authority.

At the local level, base construction engineering organizations were responsible for the day-to-day management of real property within their areas of responsibility. Planning and requirements personnel were responsible for the management of personnel and financial resources to meet the infrastructure needs of users. Real property officers typically managed property records and agreements. Engineering sections provided technical expertise and project management support. Trades sections operated and maintained infrastructure, specializing in areas such as plant operations, plumbing and heating, electrical, mechanical and roads and grounds.

1.1.4 State of Real Property

Past audits, evaluations and studies have examined the real property portfolio and the state of real property management within the DND/CAF. ADM(IE) conducted three sets of assessments of the real property portfolio between 1999 and 2012. Despite some improvement shown in the most recent assessment, the results suggest that, over the three periods covered, there has been an overall decline in the condition and suitability of municipal works from a "fair" rating to a "low fair" rating. The condition and suitability of municipal works was noted to be in poorer condition than other types of real property. Similar observations were made in the 2008 ADM(IE) National Portfolio Management Plan that identified municipal works as a specific area of concern. This report noted that 61 percent of municipal works were over 50 years of age, and that there was a continuing deterioration of the condition and suitability of the real property portfolio.

To examine the underlying cause of this decline, a number of studies have been completed that assess the state of real property management. Internal studies conducted by ADM(IE), as well as audits and evaluations by ADM(RS) and the Auditor General have highlighted challenges and proposed improvements to the way that real property is managed. Key observations related to planning and performance measurement, information management, underinvestment in the portfolio, human resource requirements and project approval processes have been previously reported to management.

1.1.5 Current Initiatives

Real property management in the DND/CAF is undergoing a significant transformation as a result of government direction and in response to the various studies, audits and reviews in this area. In pursuing the centralization of real property management, ADM(IE) will become the sole authority for functional leadership, strategic direction and real property services. ADM(IE) is assuming responsibility for real property previously held by nine custodian organizations through a phased approach that began in April 2014 and that will be completed by April 2016.

Centralization of real property management will also include the implementation of the Infrastructure and Environment Business Modernization (IEBM) program, which will integrate real property management tools, applications, and processes. Phase 1 of this initiative involved the migration of three legacy information systems into the Defence Resource Management Information System (DRMIS) in 2013. Phase 2 will provide additional functionality for portfolio management, plant maintenance, visual representation and enhanced reporting for real property by December 2016.

As part of the Defence Renewal program, ADM(IE) has further committed to rationalize the real property portfolio, optimize facilities management service delivery and improve real property project delivery. Specific to the municipal works portfolio, ADM(IE) has initiated the National Underground Municipal Works Program, which focuses on the recapitalization of selected underground works identified as being in poor condition, with the investment of $500 million for a series of projects to be completed by 2025. The Federal Infrastructure Investments Program, announced in 2014, also includes a small number of projects for the repair and upgrade of sewers and roadways.

1.2 Objective

The objective of the audit was to assess the governance, risk management and control practices in place that support the life cycle management of municipal services.

1.3 Scope

For the purposes of this audit, municipal works or services refer to roads, electrical distribution, heating and cooling, water, sanitary sewer and storm sewer systems. Municipal works do not include building components and building systems. They do not include other services, such as telecommunications, police, fire fighting, sanitation, recreation or other services that may be included in other common definitions of municipal works. Furthermore, municipal works do not include operational works, such as marine structures, ranges or airfields.

The scope of the audit included ADM(IE) processes for governance and strategic management, information management, maintenance, repairs and recapitalization, and planning for requirements, as well as local custodian management of these areas at three large bases. The audit did not include an examination of acquisition or disposal processes. This audit considered the management of municipal works within the DND/CAF up to October 2015.

1.4 Methodology

The audit results are based on the following:

  • interviews with departmental authorities within ADM(IE) and custodian organizations;
  • review of legislation, policies, directives, manuals, instructions and guidance documents, as well as internal and external reports and reviews;
  • data analysis of information systems, including DRMIS, Canadian Forces Engineering Management System, SpillNet and WaterNet;
  • interviews with personnel and review of documentation from Canadian Forces Base Borden; and
  • site visits to Defence establishments at 5th Canadian Division Support Base Gagetown, 4th Canadian Division Support Base Petawawa, and 4 Wing Cold Lake, consisting of
    • interviews with functional personnel and subject matter experts at each site; and
    • walk-throughs of work processes and observation of operations at base construction engineering sections.

While considering the management of municipal works across the DND/CAF, observations relating to local management were specific to the sites visited.

1.5 Audit Criteria

The audit criteria can be found at Annex B.

1.6 Statement of Conformance

The audit findings and conclusions contained in this report are based on sufficient and appropriate audit evidence gathered in accordance with procedures that meet the Institute of Internal Auditors' International Standards for the Professional Practice of Internal Auditing. The audit thus conforms to the Internal Auditing Standards for the Government of Canada as supported by the results of the quality assurance and improvement program. The opinions expressed in this report are based on conditions as they existed at the time of the audit and apply only to the entity examined.

2.0 Findings and Recommendations

2.1 Governance and Strategic Management

While some elements of direction have been established, governance and strategic management are not fully developed to support the operation of municipal works.

Good Practices

  • Some base construction engineering sections have established management structures and practices that may be considered for implementation across real property operations detachments.
    • Long-term planning for municipal works was explicitly considered through a five-year plan at Canadian Forces Base Borden.
    • A dedicated triage response cell at 4 Wing Cold Lake provides initial action or assessment for service calls.

2.1.1 Functional Authority

As the functional authority for real property management, ADM(IE) is responsible for setting out functional direction, advice, guidance and oversight. This includes developing and communicating strategic direction, policies and procedures; providing supporting tools, such as information systems, work processes and technical advice; and ensuring appropriate monitoring of and reporting on compliance.

Given the complexity of the field of real property management, ADM(IE) exercises this authority through a wide range of activities and initiatives in a variety of subject areas. ADM(IE) is required to provide direction from a strategic perspective to manage portfolio-level issues and specific technical advice at an asset level.

Considering the significant volume of direction that has been issued and that is under development in ADM(IE), the coordination and effectiveness of policy direction are not always clear. In some instances, policies and tools were drafted but not fully approved or promulgated. Approved policies are not centrally available or published in a coordinated manner. Published policies were sometimes abandoned with the intent to pursue the development of new policies rather than to update existing guidance.

The following are some examples:

  • Key references such as the Realty Asset Management Manual and the Canadian Forces Construction Engineering Manual provide comprehensive resources for practical guidance but are not regularly updated or maintained.
  • Detailed checklists for preventive maintenance have been developed but have not been promulgated to base-level personnel.
  • Past studies on the real property portfolio have included proposed action plans, which have not been fully implemented.

Under the former decentralized model of real property management, ADM(IE) encountered difficulties in implementing its strategic intent due to its inability to directly influence the custodian organizations that were responsible for the implementation of functional direction. As a functional authority, ADM(IE) was separated from custodian organizations that reported to their own chains of command. Communication and acceptance of ADM(IE) policies and tools was at times hindered by this indirect relationship, and the policy direction that ADM(IE) provided did not always meet the needs of its clients.

The following are some examples:

  • Construction engineering personnel at one base did not understand the usefulness of a master real property development plan and sought guidance on how such a plan should be prepared despite the fact that ADM(IE) had published a standard in unapproved form.
  • ADM(IE) conducts a compliance inspection program for engineering systems but is limited in its ability to enforce or follow up on corrective actions as it does not set local base construction engineering priorities.
  • In a past survey, ADM(IE) found that base construction engineering personnel do not reference many of its policies, but rather defer to industry standards to guide their work.

The Treasury Board Policy on Management of Real Property requires the establishment of a real property management framework within departments to support management decisions and strategic program outcomes. The framework is to include definitions of authorities, responsibilities and accountabilities, policies, practices and processes. Systems are to provide program, financial and performance information. In its 2012 audit, the Office of the Auditor General observed that such a framework was not yet completed in the DND/CAF.

ADM(IE) published the Defence Real Property Management Framework in December 2013. However, many of the planned elements of the framework remain to be completed, and the framework has not been implemented as a management tool in the manner intended. Such a framework could be useful in articulating the strategic vision for real property management and coordinating efforts at policy development. ADM(IE) has recognized the need to orient its role in policy development. An initiative is currently underway to streamline the more than 400 policy instruments in its repertoire and to organize its advice through a policy framework.

2.1.2 Custodian Organizations

Real property custodian organizations are responsible for the management of property under their control in accordance with the strategic direction set out by ADM(IE) as the functional authority, as well as in legislation and government policies. Custodian responsibilities for real property include identifying requirements, life cycle planning, portfolio development planning and resource allocation.

Under the previous decentralized management model, group, division and formation-level real property advisors were responsible for interpreting and applying functional direction for implementation within base construction engineering sections. In practice, base construction engineering sections operate with a large degree of autonomy. Governance processes for these sections tend to vary between bases with differences in the arrangement of organizational structures, the establishment of policies and procedures, portfolio planning, business planning, workload prioritization processes and preventive maintenance programs. The development of local management processes at each base has resulted in inconsistencies across the DND/CAF and has impacted the quality of management at each location. For example, at the bases visited, standard operating procedures were not well developed, and performance management had not been implemented.

In 2013, the DND/CAF initiated the National Defence Real Property Management Renewal initiative. By April 1, 2016, ADM(IE) will become the sole portfolio manager for real property, assuming the responsibilities previously held by nine custodian organizations. The centralization of real property management should improve the ability of ADM(IE) to direct the activities of real property operations detachments, to ensure compliance with functional direction and to implement consistent management processes.

At present, ADM(IE) is focused on executing the transfer of resources and properties from the former custodian organizations. Despite the fact that ADM(IE) has begun to assume responsibility for a number of bases, management processes are not fully in place to define how the group will carry out these responsibilities in the post-transformation environment.

2.1.3 Conclusion

ADM(IE) would benefit from a more clearly developed strategic direction for the management of real property, including municipal works. The Defence Real Property Management Framework remains to be fully developed. However, it is needed to coordinate and guide the various initiatives underway.

With its new responsibilities as a real property custodian, ADM(IE) has the opportunity to develop and implement consistent business processes and decide on the extent of management control appropriate in the Canadian Forces Real Property Operations Group and its detachments.

ADM(RS) Recommendation

1.         As ADM(IE) transitions to become the sole custodian for real property, including municipal works, it should update and implement the Defence Real Property Management Framework, which incorporates a requirement for a performance measurement framework, to enable the development and delivery of this function in a comprehensive and effective manner.

OPI: ADM(IE)

2.2 Information Management

The quality of inventory, condition and performance information within the Department does not support effective decision making in the management of municipal works.

Good Practices

  • Some of the bases visited have begun to capture municipal works information using geographic information systems.

2.2.1 Inventory

Accurate information on portfolio inventory is fundamental to the ability to manage municipal works. At present, detailed inventory information is dependent on records held in base construction engineering sections. This may consist of original system drawings and schematics, supplemented by additional designs and drawings that reflect modifications made over time.

The audit found manual records to be incomplete and unreliable. Real property officers reported systematic difficulties in ensuring that contractors and construction engineering personnel provided updated drawings at the conclusion of every new construction or modification. Furthermore, manual records did not include the level of detail expected. Basic asset information was not maintained, including the number and locations of components such as utility poles, construction, maintenance and repair histories, as well as other data that would be useful in the life cycle management of municipal works.

In 2010, ADM(IE) launched the IEBM project with the aim to improve governance, policies, processes and enabling technologies in the management of the real property and environment portfolio.

With the implementation of Phase 1 of IEBM, DRMIS has become the official repository for real property inventory information. Personnel involved in the management of municipal works have noted that DRMIS is not well suited to capture information on these types of assets, nor was its predecessor legacy system. Such assets are better managed using a geographic information system, which would allow for greater precision when recording location information and provide a graphical interface. Phase 2 of IEBM, which is under development, will address this requirement through the integration of a visual representation capability.

ADM(IE) has reported the reliability of municipal works asset information within DRMIS to be low, a condition that has been carried over from the legacy system from which it was transferred. One of the key data fields in DRMIS is the real property replacement cost, which is used to allocate funding to bases and to establish spending targets. However, 45 percent of works records have a real property replacement cost of $0 in DRMIS. Data inaccuracy of this extent adversely impacts resource allocation decisions.

The quality of data collection processes and recordkeeping for real property varies. Base locations reported chronic backlogs in data entry in DRMIS, which were due in part to limited resources to maintain the data. Data standards in DRMIS were observed to be inconsistently applied, resulting in differences in the data fields used in each record. Additionally, bases employed geographic information systems to varying degrees, ranging from no usage to active efforts to maintain such records.

2.2.2 Condition

Information on the condition of municipal works is important to perform planning for life cycle management. Real property managers use this information to make informed decisions on resource allocation and to plan for preventive maintenance prior to infrastructure failure. While local construction engineering personnel develop some familiarity with the systems under their responsibility, reliable information on asset condition is not available for municipal works. There has been no requirement for real property custodians to conduct periodic condition assessments.

Since 1999, ADM(IE) has conducted three sets of condition and suitability assessments of real property in order to report on the state of the portfolio as a whole. Condition assessments may also be conducted on an ad hoc basis on specific systems or areas being targeted for repairs. However, condition information is not consistently maintained in an information system, and its use is limited to the specific purpose for which the assessments were conducted. The condition field is blank in DRMIS for 81 percent of real property records. The validity and comparability of this information is also in question as condition assessment methodology is not consistent across studies, and some stakeholders have questioned the methodologies employed.

Considering the above, ADM(IE) has recently initiated a five-year program to conduct condition assessments for the entire real property portfolio in order to develop the initial data to feed into decision support tools as part of Phase 2 of IEBM. This data will be aggregated in order to apply business rules that would support resource allocation decisions. However, this initiative does not currently plan to include municipal works infrastructure as assessment criteria have not yet been developed.

2.2.3 Performance

Performance data is another element of information useful to the management of municipal works. This data allows management to identify trends and patterns in the portfolio, which may signal areas that require increased attention. Performance data also allows the assessment of service quality. The Treasury Board Policy on Management of Real Property requires that the "overall performance of real property is regularly and systematically assessed for functionality, utilization and physical and financial performance. Key performance indicators and targets must be developed based on appropriate benchmarks."

The DND/CAF does not maintain information on the performance of the municipal works portfolio. While a corporate dashboard of real property metrics was previously developed, this information is no longer being reported. Performance measures reported in the DND/CAF Departmental Performance Report for FY 2013/2014 include surplus property, progress against capital construction plans and expenditures on infrastructure recapitalization. In FY 2015/2016, the DND/CAF Report on Plans and Priorities identified targets for suitability and condition of real property, progress of large projects, surplus property, expenditure on maintenance and repair and the Coordination, Development and Control Performance Evaluation Index.

The DND/CAF also does not track information on service disruption incidents, such as power outages, sewage backups or water line breaks. While construction engineering personnel record service calls in the Canadian Forces Engineering Management System, they use this system primarily for work order management and do not analyze the data for trends in order to identify areas of recurring breakdown. Analysis of work order data by real property managers may provide insight on patterns in labour hours and costs by service type, but this information is not generated, and service standards are not established.

2.2.4 Conclusion

The DND/CAF does not systematically collect or analyze the information needed to support the management of real property, including municipal works. A lack of necessary information system capabilities and insufficient guidance on information gathering procedures have resulted in low quality of information on real property, including municipal works.

Without accurate and complete information on real property assets, ADM(IE)'s ability to make decisions that will result in effective and efficient real property management is limited. Information on asset inventory, condition and performance is necessary to provide input to management decision-making processes.

As a part of IEBM, ADM(IE) is making substantial improvements to real property information management. Planned capabilities include spatial management and resource management decision support. However, in order to achieve the full benefits of these planned system improvements, ADM(IE) will have to consider data requirements and collection processes, balancing the benefits of this information with the level of effort required to maintain it.

ADM(RS) Recommendation

2.         ADM(IE) should continue to pursue the development of a system to record and analyze information that supports decision making for the life cycle management of real property, including municipal works. It should develop and implement information management processes so as to ensure that relevant and accurate information on inventory, condition and performance of municipal works is collected and maintained.

OPI: ADM(IE)

2.3 Maintenance, Repair and Recapitalization

The Department is not making sufficient maintenance, repair and recapitalization investments to address all known issues related to the existing municipal works portfolio.

2.3.1 Targets and Spending

The DND/CAF has identified infrastructure as one of the four pillars on which military capabilities are built. Accordingly, the DND/CAF established targets in 2008 for spending on real property at 3.9 percent of real property replacement costs annually over the next 20 years. The aim is to replace 50 percent of existing infrastructure over 20 years or 2.5 percent per year on the recapitalization of the portfolio. The remaining 1.4 percent represents targeted spending on maintenance and repair.

Good Practices

  • A number of current initiatives are in progress to address the optimal use of available resources.

These targets were based on Treasury Board guidance on real property management, which suggests a targeted level of spending at 4 percent of real property replacement costs, consisting of 2 percent for recapitalization and 2 percent on maintenance and repair based on an expected infrastructure useable life of 50 years. This guidance is consistent with industry standards, which suggest a level of spending of 2 to 4 percent, with increases if there has been insufficient spending in the past. The DND/CAF established its targets of 2.5 percent for recapitalization, and 1.4 percent for maintenance and repairs given the age of the portfolio.

Maintenance and Repair. In spite of its intent, the DND/CAF has not met the maintenance and repair target of 1.4 percent for the past five years due to resource limitations, and it is unlikely to reach this level of expenditure in the future. ADM(IE) reports that spending from FY 2009/2010 to FY 2014/2015 has been around 1 percent annually, resulting in a notional maintenance and repair backlog to date of around $454 million. Over the next four years, the Department expects to further reduce spending on maintenance and repair to around 0.8 percent of real property replacement costs. This will add another $654 million to the spending backlog and will result in a cumulative effect of $1.1 billion in deferred maintenance and repair by 2018.

Two factors have the potential effect of compounding this shortfall in targeted maintenance and repair expenditure. First, the Treasury Board guidance and industry standards on which the target is derived is based on the assumption that the real property is kept for a useful life of 50 years, and that it has been historically well maintained. By contrast, ADM(IE) reported in its 2010 functional review that 61 percent of the municipal works portfolio had already exceeded 50 years in age, and that the overall condition of the portfolio was assessed as "low fair." The targeted rate of spending is therefore likely to be insufficient in itself. Second, the DND/CAF is aware that real property replacement cost values are unreliable. As a result, the targeted level of spending reported by the Department is likely to be understated because it is based on incomplete or undervalued replacement cost information.

Recapitalization. The DND/CAF is on track to meet its recapitalization target of 2.5 percent of real property replacement costs. Although spending has averaged 2.3 percent over the past five years, spending an average 2.7 percent is planned over the next five years.

Custodian organizations have consistently reported on funding pressures that have prevented them from reaching the targeted level of expenditure. While ADM(IE) has made efforts in the past to prevent the reallocation of funds to other uses, the budget allocation remains short of the level required. Chronic underspending on maintenance and repairs will lead to a continued decline in the condition and suitability of real property. As ADM(IE) assumes responsibility for the portfolio and the associated resources from custodian organizations, it will be in a better position to assess the requirements of the portfolio as a whole and the adequacy of the departmental investment.

2.3.2 Optimization of Resources

While recognizing that historical underinvestment in infrastructure is unlikely to be addressed, ADM(IE) is working on several initiatives to optimize the use of the resources available and to bring the real property portfolio to a sustainable state. In order to target spending to the areas most needed, in 2011 ADM(IE) initiated the National Underground Municipal Works Program. Responding to a portfolio assessment that had highlighted municipal works to be in poorer condition than other assets, this program is intended to provide a nationally coordinated investment of $500 million for selected works. After conducting more detailed assessments at targeted locations to define the work required, ADM(IE) is preparing to implement a series of recapitalization and replacement projects through this program.

To support portfolio management decisions, Phase 2 of IEBM will deliver the capability to optimize the allocation of resources through the exploitation of data using an analytical hierarchy process. Taking into consideration a number of portfolio data factors, including life cycle asset management plans, asset condition, function, etc., the system will apply defined business rules in order to provide recommendations for prioritization of spending. In anticipation of this capability, ADM(IE) is undertaking a five-year process to collect the portfolio condition information needed as an input to this system. Business rules are also being defined and implemented pending the delivery of this system through the development of prioritization scorecards for the objective assessment of projects.

ADM(IE) has committed to exploring service innovation through alternate forms of delivery as an initiative that forms part of the Department's broader Defence Renewal program. Studies are underway to explore the feasibility of delivering on municipal services through regionally bundled service contracts or other procurement strategies.

Another initiative of Defence Renewal involves rationalization of the real property portfolio. This involves examining the real property requirements of the DND/CAF in order to identify surplus properties for disposal. ADM(IE) has established the Capital Assistance Program to provide funding to facilitate the transfer of infrastructure, such as water and waste water treatment plants, to neighbouring communities. In order to be able to best support the portfolio with the resources available, ADM(IE) will need to continue to identify innovations and efficiencies in real property operations.

2.3.3 Conclusion

Over the years, underinvestment in maintenance and repairs will lead to the further deterioration of DND/CAF real property, including municipal works. The current inability to meet spending targets is aggravated by the age and condition of the portfolio and the quality of the real property replacement cost information from which the targets are derived. With the centralization of real property management, ADM(IE) is inheriting a situation where the resources available are unlikely to meet existing demands. As the sole custodian, ADM(IE) will have the opportunity to make the case for necessary portfolio funding by providing information to senior management on the impacts of service disruptions on DND/CAF activities. Concurrently, ADM(IE) will need to make better use of available resources by focusing on priorities, obtaining better value for money, and rationalizing the portfolio to a more manageable size.

ADM(RS) Recommendation

3.         ADM(IE) should ensure that it provides the Department with the requirements and risks relating to the municipal works portfolio in order to support resource allocation decisions.

OPI: ADM(IE)

ADM(RS) Recommendation

4.         ADM(IE) should further optimize its available resources by making prioritized investments in municipal works while continuing to pursue options for efficiency and rationalization of the portfolio.

OPI: ADM(IE)

2.4 Planning for Requirements

Planning for capital investments in municipal works is not aligned with life cycle requirements or the service demands of the real property being supported.

2.4.1 Master Real Property Development Plans

In order to be able to appropriately match the demand for municipal works with its supply, it is necessary that new construction projects take into account the existing capacity and incremental requirements of municipal works. While consideration of infrastructure requirements is a component of the project analysis and approval process, municipal works requirements have not always been considered. Some examples of undesirable results from inadequate planning include the following:

  • A new building was sited in an unserviced area, resulting in the requirement to extend utility lines to support it.
  • The capacity of storm water systems was unable to support a new development in another area, resulting in flooding.
  • Electrical switching capacity was exceeded through incremental development over time, resulting in the use of a secondary switch and the loss of backup capability.

ADM(IE) has established a requirement for bases to prepare master real property development plans. One objective of these plans is to identify long-term real property requirements to support mandated missions and operations, and to set out the future vision for the base. The intent of such planning is to ensure that proposed construction projects fit with the overall strategy for the base, and that municipal works will also be planned accordingly to support the anticipated level of development.

Locally, master real property development plans have been developed; however, staff at the sites visited indicated that the plans were not used or updated regularly. The plans include information on the condition of all base/wing real property, including an overview of municipal works. They do not include consideration of consumption or capacity of municipal works in reference to planned development. Master real property development plans have not always been incorporated into project approval processes and do not sufficiently allow for the need to include municipal works support in real property development.

2.4.2 Asset Management Plans

In order to ensure the continued availability of municipal works, life cycle asset management must be implemented to plan for preventive maintenance, in-service maintenance, recapitalization and end-of-life replacement. Preventive maintenance refers to work activities that are planned on regular cyclical schedules to help ensure safe, uninterrupted and efficient operation of systems, components and assets. For the bases visited, DND/CAF preventive maintenance programs for real property assets, including municipal works, were inconsistent. While preventive maintenance programs have been eliminated in the past due to resource constraints, there has been more recent emphasis on reinstating these activities. However, programs developed at different sites have varied in their comprehensiveness. ADM(IE) has developed some national guidance on preventive maintenance, but there has been limited awareness or adoption of this guidance at the base level.

The Treasury Board Policy on Management of Real Property requires that departments ensure the existence of "financially responsible management that maximizes the long-term economic advantage to the Crown and provides best value to the Canadian taxpayer." By undertaking reasonable levels of preventive maintenance, more costly expenses for corrective repairs or business interruption may be avoided or deferred. Appropriate planning for asset life cycle management ensures that maintenance activities are completed in a preventive or proactive manner, and that adequate lead time is provided for the delivery of replacement services.

2.4.3 Conclusion

Service requirements of new construction have not always been aligned with the supply of municipal services. Effective implementation of the master real property development planning process would ensure that planning for municipal works coincides with decisions for base development. Further, life cycle management for municipal works assets could be more explicitly planned to ensure that preventive maintenance, mid-life recapitalization and end-of-life replacement are coordinated to provide uninterrupted service.

ADM(RS) Recommendation

5.         ADM(IE) should improve the portfolio planning process to ensure that consideration is given to municipal works requirements to support operational real property through master real property development plans.

OPI: ADM(IE)

ADM(RS) Recommendation

6.         ADM(IE) should improve the portfolio planning process to ensure that life cycle requirements for municipal works are identified and addressed through asset management plans.

OPI: ADM(IE)

3.0 General Conclusion

The management of real property within the DND/CAF, including municipal works, represents an area that has undergone extensive study with consistent identification of key areas that require attention. The need to improve governance and strategic management, information management, portfolio investments and longer-term planning are well understood.

The Department does not have the required processes in place to fully understand the nature of its portfolio nor the means to execute its strategic intent. Given the size, condition and suitability of the portfolio, demands are not being met with the current level of funding in support of the existing business model.

ADM(IE) recognizes the need for transformative change to address these areas of concern and has several significant initiatives in progress. ADM(IE) plans to centralize the management of real property, modernize information systems and business processes, make targeted investments in priority areas and find innovations in service delivery. This offers a promising means to address the long-term sustainability of the portfolio.

In the context of these changes, many of the governance, risk management and control practices needed to support the life cycle management of municipal services are under review. The establishment of governance and strategic management would benefit from adherence to a comprehensive real property management framework in order for services to be more effectively planned and delivered while remaining affordable to the Department.

To improve the likelihood of these efforts to succeed, ADM(IE) needs to ensure that its objectives are clearly defined, that processes are in place to support the actions required, and that performance is monitored to ensure progress towards intended results.

Annex A—Management Action Plan

ADM(RS) uses recommendation significance criteria as follows:

Very High—Controls are not in place. Important issues have been identified and will have a significant negative impact on operations.

High—Controls are inadequate. Important issues are identified that could negatively impact the achievement of program/operational objectives.

Moderate—Controls are in place but are not being sufficiently complied with. Issues are identified that could negatively impact the efficiency and effectiveness of operations.

Low—Controls are in place but the level of compliance varies.

Very Low—Controls are in place with no level of variance.

Governance and Strategic Direction

ADM(RS) Recommendation (High Significance)

1.         As ADM(IE) transitions to become the sole custodian for real property, including municipal works, it should update and implement the Defence Real Property Management Framework, which incorporates a requirement for a performance measurement framework, to enable the development and delivery of this function in a comprehensive and effective manner.

Management Action

Agreed. As noted in this report, the ADM(IE) group and the approach to real property management in Defence are undergoing significant transformation. It should be noted that the Defence Real Property Management Framework was developed and promulgated in December 2013. At that time, the framework was identified as an evergreen document, with further refinement and continuous improvement to ensue as Defence Renewal efforts, which include the centralization of real property management, progressed.

Final operating capability for centralization of real property management will be in April 2016. Thus, the modifications to integral elements of the Defence Real Property Management Framework are currently underway. Such activities as the policy instruments review, the restructuring of Infrastructure and Environment governance bodies and memberships and holistic portfolio planning approaches will continue to be refined throughout the inaugural year of ADM(IE)'s sole custodianship to better address the challenges of having a vast and diverse portfolio under the management of a single custodian.

OPI: ADM(IE)

Target Date: April 2017

ADM(IE) will refresh its performance measurement framework to better measure and monitor the results of these Infrastructure and Environment governance and policy efforts. ADM(IE) is working with members of the Defence Team to ensure initiatives like the IEBM project succeed, which will provide relevant and timely information on the Defence real property portfolio to enable the right decisions at the right time.

OPI: ADM(IE)

Target Date: June 2017

Information Management

ADM(RS) Recommendation (High Significance)

2.         ADM(IE) should continue to pursue the development of a system to record and analyze information that supports decision making for the life cycle management of real property, including municipal works. It should develop and implement information management processes so as to ensure that relevant and accurate information on inventory, condition and performance of municipal works is collected and maintained.

Management Action

Agreed. As part of the ongoing IEBM project, a system to record and analyze information that supports decision making for the life cycle management of real property, including municipal works, will be developed. This will include the development of a real property spatial data warehouse that will complement DRMIS. It will also include a standardized approach to capture and centrally manage geospatial information. Highly granular municipal works data will be captured at the segment level—a key element for the management of "linear" municipal works. Location and attributes of the segments, including description, dimensions and condition, will be captured in the Real Property Spatial Data Warehouse and/or in DRMIS. This will be done by standardizing and cleansing existing drawings, recording known properties and conditions of existing assets and capturing new information on an ongoing basis for future works projects. IEBM deliverables also include the development of processes to manage the portfolio information (including municipal works). The processes will aim to ensure that reasonable, relevant and accurate information on inventory, condition and performance is collected and maintained. This data will be used to inform decision making by reflecting the state of the municipal utilities and will support portfolio investment strategies at the Infrastructure and Environment program level.

Training for the capture of this information, as well as supporting the specialized tools needed, will be developed by March 2017 and executed on an ongoing basis by the ADM(IE) in-service support team.

OPI: ADM(IE)

Target Date: March 2017

The asset condition information, including municipal works, will be collected on an ongoing schedule, with significant progress achieved by March 2020.

OPI: ADM(IE)

Target Date: March 2020

Maintenance, Repair and Recapitalization

ADM(RS) Recommendation (High Significance)

3.         ADM(IE) should ensure that it provides the Department with the requirements and risks relating to the municipal works portfolio in order to support resource allocation decisions.

Management Action

Agreed. ADM(IE) has continued to work on Defence Renewal initiatives regarding centralization to optimize the Department's resources.

Work is ongoing on a facilities condition assessment to address the knowledge gap ADM(IE) has regarding the condition of the entire portfolio. This study is currently contracted to take two years with a completion date of December 2017. Although focused on above ground structures, it will necessarily be followed by an assessment of additional linear and underground works. Individual bases and wings currently plan and execute municipal works projects in their own areas of responsibility. However, only once comprehensive knowledge of the entire portfolio is achieved post-transformation, and only once the data is collected and analyzed, will it be possible for the municipal works asset class to be prioritized for resource allocation across the portfolio based on the definitive data. This information, via IEBM and in concert with the asset class management plan being developed, will allow ADM(IE) to better plan maintenance and recapitalization of municipal works and to develop long-term plans to manage this class of infrastructure.

OPI: ADM(IE)

Target Date: March 2017

ADM(RS) Recommendation (High Significance)

4.         ADM(IE) should further optimize its available resources by making prioritized investments in municipal works while continuing to pursue options for efficiency and rationalization of the portfolio.

Agreed. ADM(IE) has continued to work on Defence Renewal initiatives regarding portfolio rationalization to optimize the Department's resources.

Efficiency and rationalization initiatives across the breadth of the portfolio will only be achievable once the data for the entire portfolio is available. Until the data is available, individual initiatives, including the Capital Assistance Program, energy performance contracting and public-private partnership initiatives, will continue to be proposed, studied, validated and implemented on an individual basis.

The Capital Assistance Program continues to be used to facilitate the transfer of infrastructure, such as municipal works, to neighbouring communities to assist in further rationalizing the portfolio.

In the context of energy performance contracting, ADM(IE) will examine the potential savings of incorporating retrofits to the underground infrastructure when considering the replacement of any central heating plant. ADM(IE) is looking at a number of potential projects in 2016/17.

ADM(IE) is completing a public-private partnership business case for the upgrade to the municipal works at several locations. It will analyze the technical and financial benefits of combining the upgrade of the municipal works with the provision of heat to the bases. The business case will be ready by the fall of 2016.

The entire portfolio will be considered as a whole, once data is available, and a framework will be established for the implementation of whole-of-portfolio initiatives once the data collection is underway.

OPI: ADM(IE)

Target Date: March 2018

Planning for Requirements

ADM(RS) Recommendation (High Significance)

5.         ADM(IE) should improve the portfolio planning process to ensure that consideration is given to municipal works requirements to support operational real property through master real property development plans.

Management Action

Agreed. ADM(IE) continues to ensure that this recommendation is being addressed, as follows:

A new Master Real Property Development Plan standard is currently under development and will be promulgated in 2016. In this new standard, consideration is given to municipal works where each DND establishment will have to assess the condition of the infrastructure, including municipal works, and identify issues that may impact the current and future capacities of the establishment to carry out its mission. The development of master real property development plans for each DND establishment will support long-term land use planning, including municipal works, and will assist in the prioritization of municipal works requirements for recapitalization and development. Once the standard is issued, a continual refresh of the entire portfolio's master real property development plans will be instituted in which all plans will be updated on a rolling five-year cycle across the portfolio.

OPI: ADM(IE)

Target Date: December 2016

ADM(RS) Recommendation (High Significance)

6.         ADM(IE) should improve the portfolio planning process to ensure that life cycle requirements for municipal works are identified and addressed through asset management plans.

Agreed. ADM(IE) continues to ensure that this recommendation is being addressed, as follows:

The Strategic Asset Management Plan, which is expected to be completed in the fourth quarter of FY 2016/17, will review the asset groupings in terms of physical, functional, operational and financial performance within the context of policy and program requirements. Asset management plans for specific classes of assets will integrate municipal works and will include concepts such as life cycle management principles, criticality, mapping (spatial) and data improvements so that prioritized investments can be planned over a multi-year time-frame within the approved ADM(IE) and overall departmental Capital Investment Plan. The asset management plans will govern site-specific life cycle management decisions by establishing and reporting on performance targets (levels of service).

OPI: ADM(IE)

Target Date: March 2017

Annex B—Audit Criteria

Criteria Assessment

The audit criteria were assessed using the following levels:

Assessment Level and Description

Level 1: Satisfactory

Level 2: Needs Minor Improvement

Level 3: Needs Moderate Improvement

Level 4: Needs Significant Improvement

Level 5: Unsatisfactory

Objective

1.   To assess the governance, risk management and control practices in place that support the life cycle management of municipal services.

Criteria

  • Governance and strategic management is in place to ensure accountability and results in the delivery of municipal services.

Assessment Level 4 – Significant improvement is required in this area to ensure that new structures and processes being implemented through the National Defence Real Property Management Renewal and the IEBM are developed in a deliberate and coordinated manner.

  • Municipal services are effectively managed to provide services to clients.

Assessment Level 4 – Significant improvement is required in this area to ensure an appropriate understanding of both the level of demand for services and the asset life cycle investment needed in order to optimize the allocation of available resources.

Sources of Criteria

  1. ADM(IE). Defence Real Property Strategy, 2013.
  2. Treasury Board of Canada Secretariat. Management Accountability Framework, 2014.

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Footnote 1 Effective May 13, 2015, Chief Review Services has been renamed Assistant Deputy Minister (Review Services) (ADM(RS)).

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