Introduction

Background

1. The Atlantic Pilotage Authority (the Corporation) is a federal Crown corporation established in 1972. It reports to Parliament through the Minister of Transport and is one of four pilotage authorities established under the Pilotage Act.

2. The Corporation’s mandate is to establish, operate, maintain, and administer in the interests of safety an efficient pilotage service within designated regions. The Pilotage Act grants a monopoly to the Corporation to provide pilotage services in all Canadian waters in and around the provinces of Nova Scotia, New Brunswick, Prince Edward Island, Newfoundland and Labrador, and certain waters of Chaleur Bay in Quebec.

3. The Pilotage Act gives the Corporation the power to make regulations subject to the approval of the Governor in Council. The Corporation is responsible, among other things, for

• establishing compulsory pilotage areas;
• prescribing the ships or classes of ships that are subject to compulsory pilotage;
• prescribing the circumstances under which compulsory pilotage may be waived;
• prescribing pilot qualifications, as well as classes of pilots’ licences and pilotage certificates that may be issued; and
• prescribing fair and reasonable tariffs of pilotage charges, at levels that permit the Corporation to operate on a self-sustaining financial basis.

4. Pilotage is important to the safety of shipping in Canada’s border and coastal waters. According to the Pilotage Act, a pilot is “any person who does not belong to a ship and who has the conduct of it.” The Act requires the placement of pilots on some ships. Qualified professional pilots know the topography of the ports where they operate, along with local regulations and conditions, such as tides, that the vessel crews might not be familiar with. This local knowledge, backed by years of experience, helps a piloted ship reduce its risk of collision and complete its journey efficiently. In turn, because ships carry fuel and other hazardous goods, pilotage helps to reduce risks to the environment.

5. The Act states that “compulsory pilotage means, in respect of a ship, the requirement that the ship be under the conduct of a licensed pilot or the holder of a pilotage certificate.” Compulsory pilotage applies to certain vessels that pose an additional safety risk, such as ships not registered in Canada or Canadian-registered ships over 1,500 gross tons. Likewise, some waters that are difficult to navigate or have large volumes of marine traffic increase the safety risk, and are designated as compulsory pilotage areas. Vessels that are sailing in non-compulsory areas can still request pilotage services from the Corporation.

6. The Corporation has designated 17 ports within its jurisdiction as compulsory pilotage areas (Exhibit 1), and provides 24/7 service within these areas. It also provides pilotage services at 17 other ports in non-compulsory areas.

7. The Corporation charges the shipping companies that use pilotage services through tariffs that are approved by the Governor in Council. These charges must be fair and reasonable and must be sufficient to fund the Corporation’s operations.

8. In 2014 and 2015, the Corporation had significant operating losses (Exhibit 2). However, under the Pilotage Act, the Corporation cannot receive additional payments under an appropriation by Parliament except in emergency situations. This means that the Corporation must fund its operations, including debt payments and capital expenditures such as purchasing pilot boats, through its own revenue.

Focus of the audit

9. Our objective for this audit was to determine whether the systems and practices we selected for examination at the Atlantic Pilotage Authority were providing it with reasonable assurance that its assets were safeguarded and controlled, its resources were managed economically and efficiently, and its operations were carried out effectively as required by section 138 of the Financial Administration Act.

10. We selected systems and practices on the basis of our assessment of risks in the following areas:

• corporate management practices, and
• management of pilotage services.

11. The selected systems and practices for each of these areas and the criteria used to assess them are found in the various exhibits throughout the report.

12. More details about the audit objective, scope, approach, and sources of criteria are in About the Audit at the end of this report.

Findings, Recommendations, and Responses

Corporate management practices

There was a significant deficiency in corporate management practices

Overall message

13. Overall, we found that the Board of Directors, despite having strong competencies, did not set strategic direction for the Corporation, nor had it reviewed its mission, vision, or strategic objectives since 2003. Strategic direction is integral to ensuring the Corporation’s financial self-sufficiency. For three of the past four years, the Corporation reported operating losses.

14. This finding matters because effective strategic direction articulates where an organization is going, the actions needed to make progress—for example, to anticipate and adopt changes in marine technology—and how the organization will measure success. Otherwise, management cannot develop and execute plans proactively, and must react to situations when they arise, as the Corporation did by implementing a tariff surcharge in response to continued operating losses.

15. Our analysis supporting this finding discusses the following topics:

• corporate governance, and
• risk management.

16. The Corporation is governed by a Board of Directors composed of seven members:

• the Chairperson;
• two retired pilots;
• two representatives of the shipping industry, the Corporation’s customers; and
• two representatives of the general public.

The Board is supported by an Audit Committee; a Human Resources Committee; a Pilot Boat Committee; a Pilotage Risk Management Methodology Committee; and a Governance, Nominating and Regulations Committee.

17. Corporate strategic planning includes assessing and adjusting the Corporation’s direction in response to the risks and challenges in its changing strategic environment. Establishing a strategic direction with clear and realistic objectives allows the Corporation to optimize the allocation of its resources in the short, medium, and long terms so that it is able to fulfill its mandate. Risk management is critical to the Corporation’s delivery of safe, reliable, and efficient pilotage services. It is also of key importance to mitigate high-priority risks in the Corporation’s allocation of resources.

18. Our recommendations in this area of examination appear at paragraphs 22, 26, 33, and 38.

19. Corporate governance. We found a significant deficiency in Board oversight, strategic direction, and decision making. We also found that improvements were needed in Board independence, particularly in its mitigation of actual or potential conflicts of interest of Board members, and in processes for setting tariffs (Exhibit 3).

20. Weakness—Board independence. The Corporation could not demonstrate full compliance with its conflict of interest code, which required the Chairperson to review disclosures of actual or potential conflicts of interest and make recommendations to avoid placing Board members in actual or potential conflicts of interest.

21. This weakness matters because, historically, the Minister of Transport has appointed directors who were representatives of the shipping industry (the Corporation’s customers), as well as retired Corporation employees. Particularly in the case of directors, there is a risk of real, potential, or perceived conflicts of interest, because they oversee amendments to tariff regulations, as well as collective bargaining and changes in contracts. Steps to avoid conflicts of interest might include recusal from certain discussions or decisions.

22. Recommendation. The Board should ensure that its members comply with all provisions of the Corporation’s conflict of interest code, including the requirement to provide written disclosure to the Chairperson of all business and commercial interests where such interests might be construed as being in actual or potential conflict with their duties as Board members, so that appropriate mitigations can be put in place.

The Corporation’s response. Agreed. Since the period under examination, Board members and management have provided written disclosure of all business and commercial interests which might be construed as an actual, potential, or perceived conflict directly to the Chairperson as required by the Corporation’s conflict of interest code. The Chairperson will put in place appropriate mitigations as required.

23. Significant deficiency—Board oversight, strategic direction, and decision making. The Board of Directors provides important input to the Corporation’s strategic direction. Management owns the resulting plan and is responsible for its execution. The Board must understand the strategy well enough to have confidence that the plan is sound and warrants Board approval.

24. The Corporation’s strategic direction was not clearly defined. Although a strategic planning session was scheduled during the period under examination and subsequently held in June 2016, the Corporation had not reviewed its mission, vision, or strategic objectives since 2003. Though the 2003 strategic objectives were still in effect, they could not be easily measured and were not assigned to specific managers. The Corporation did not establish expected results for the strategic objectives or link them to management’s performance objectives.

25. This deficiency matters because without a clear definition of the Corporation’s strategic direction, we were unable to examine management’s execution of this direction. Also, providing strategic direction would encourage the Board to define the information it requires about the Corporation’s performance. Appropriate information would facilitate the Board’s relationship with management and allow the Board to perform its oversight role.

26. Recommendation. The Corporation should periodically review its mission, vision, and strategic objectives. The Corporation should ensure that its strategic objectives are easily measured and assign responsibility to specific managers for achieving them. The Corporation should also establish expected results for the strategic objectives and link them to management’s performance objectives.

The Corporation’s response. Agreed. The Board and management held a strategic planning session with a facilitator in June 2016. The mission, vision, and strategic objectives have been updated and will be reviewed annually. The Corporation’s updated strategic objectives are easily measured and have been assigned to specific managers to achieve them.

27. Weakness—Processes for setting tariffs. The Corporation could not demonstrate that it had criteria and processes in place to ensure that its tariffs would enable it to be financially self-sufficient, as required by the Pilotage Act. The Corporation experienced operating losses in three of the past four fiscal years (Exhibit 2).

28. Management stated that the Corporation relied on a 1995 decision of the Canadian Transportation Agency, related to an objection to tariff increases, to guide what was “fair and reasonable.” Neither the 1995 decision nor the legislation specify that, in setting tariffs, the Corporation must consider the interests of both the Corporation’s customers and its own legislated need to maintain financial self-sufficiency.

29. Interpretation of the “fair and reasonable” concept has considerable influence over the Corporation’s operations, particularly when the Corporation is experiencing operating losses. It therefore warrants a formal position that is commonly understood by the Board of Directors, management, and external stakeholders.

30. In 2015, the Corporation established tariffs that budgeted for some areas to generate small margins of profit, on the basis of changes in marine traffic anticipated by industry sources and prior-year traffic levels. However, the Corporation did not leave any allowance for unforeseen changes in traffic or expenses.

31. In March 2016, the Corporation also implemented a 1.5 percent surcharge for a period of three years on certain fees payable for pilotage services in 11 of the Corporation’s 17 compulsory pilotage areas. However, this surcharge is insufficient to cover the Corporation’s recent operating losses.

32. This weakness matters because one of the most significant risks identified in the Corporation’s Enterprise Wide Risk Management Framework is its susceptibility to external economic conditions. Forecasting traffic is necessary because the corresponding demand for pilotage services serves as a key input to the Corporation’s tariff-setting process. However, that demand depends on factors outside of the Corporation’s control, such as changes in companies’ shipping routes. The Corporation’s ability to set tariffs at an appropriate level, taking into account the anticipated volume and nature of traffic as well as fixed expenses and capital requirements, is critical to maintaining its financial self-sufficiency, as required by legislation.

33. Recommendation. The Corporation should ensure that its tariff-setting processes take into account its legislated requirement to be financially self-sufficient.

The Corporation’s response. Agreed. As part of the Corporation’s June 2016 strategic planning session, criteria were set to measure financial self-sufficiency based on annual targets to fund capital asset replacement and future severance payouts, while allowing for economic downturns. Tariffs will be set at a level intended to achieve the targeted criteria beginning with the 2017–2021 Corporate Plan.

34. Risk management. We found that the Corporation had some systems and practices in place for good strategic planning and risk management. However, we found a weakness in risk mitigation (Exhibit 4).

35. Weakness—Risk mitigation. Formal processes were not in place for management and the Board to monitor implementation of the mitigations set out in the Corporation’s Enterprise Wide Risk Management Framework.

36. The related risks ranged from the ongoing risk of susceptibility to external economic conditions (Exhibit 3), to operational risks such as injury to pilots and pilot boat crews when embarking and disembarking from vessels (Exhibit 5). While we found some evidence of reporting on such risks, this was an ad hoc rather than a regular activity.

37. This weakness matters because risk management is essential to setting long- and short-term objectives. The Corporation is facing strategic challenges that may bring significant changes to its current business model. These include assessing and forecasting potential risks to the long-term demand for and supply of pilotage services, and to maintaining financial self-sufficiency.

38. Recommendation. The Corporation should regularly monitor implementation of its risk mitigations and formalize its reporting on these mitigations to the Board.

The Corporation’s response. Agreed. Since the period under examination, a committee of the Board has been tasked with oversight of risk mitigations. The first meeting of this committee is expected to be held during the fourth quarter of 2016.

Management of pilotage services

There were significant deficiencies in the management of pilotage services

Overall message

39. Overall, we found that, despite its history of having few safety incidents, the Corporation needs to formalize and fully implement systems and practices that would demonstrate that it has been diligent in maintaining its pilotage operations. Doing so would minimize the risk of compromising the Corporation’s record in the future.

40. This finding matters because strong systems and practices are necessary to the Corporation’s delivery of its mandate, which includes prevention of possible harm to pilots, users, and the environment.

41. Our analysis supporting this finding discusses the following topic:

• pilotage services.

42. At the end of 2015, the Corporation had 80 employees, including 47 pilots. The Corporation had three collective agreements with two unions representing the pilots, launchmasters, dispatchers, and deckhands. The Corporation also used the services of 11 entrepreneurial pilots—that is, pilots who were not members of the union representing the Corporation’s employee pilots and whom the Corporation considered to be independent contractors.

43. The Corporation’s training and development program for its employee pilots consists of two main elements: on-the-job training for trainee pilots and courses for both experienced and trainee pilots.

44. On-the-job training begins as soon as a pilot is hired as an apprentice and continues until he or she earns a Class A (unlimited tonnage) licence. This process takes about two years.

45. The need for extensive training presents challenges to recruitment. The Corporation considers factors such as potential retirements and future traffic levels when recruiting. However, as discussed in paragraph 32, these traffic levels are difficult to forecast. The long training period requires anticipation of demand for pilotage services years in advance.

46. The Corporation owned nine pilot boats, which were used to transfer pilots to and from vessels. Its pilot boats were located in Halifax, Sydney, Saint John, and Placentia Bay. In Halifax and Saint John, the pilot boats were manned by employees of the Corporation. In Placentia Bay and Sydney, the Corporation contracted the manning of its pilot boats to third parties. In all other pilotage areas, the Corporation contracted pilot boat services from third parties. In 2015, the Corporation conducted 8,062 pilotage assignments in compulsory pilotage areas and 286 in non-compulsory areas.

47. The Corporation reported four shipping incidents in 2015, involving vessel contact with wharves or port equipment. This means that 99.95 percent of pilotage assignments were performed without incident. There were five incidents in 2014, meaning that 99.94 percent of assignments were incident-free.

48. Our recommendations in this area of examination appear at paragraphs 52, 53, 57, 60, 65, and 68.

49. Pilotage services. We found significant deficiencies in recruitment and staffing of pilots and pilot boat crews, and in performance management of pilots and pilot boat crews. We also found that improvement was needed in the training and development of pilots, designation of areas and vessels subject to compulsory pilotage, and pilot embarking and disembarking processes (Exhibit 5).

50. Significant deficiencies—Recruitment and staffing of pilots and pilot boat crews. In some instances, the Corporation was unable to provide documentation to demonstrate the fulfillment of the ongoing health and competency requirements of pilots and pilot boat crews involved in the delivery of its pilotage services. The Corporation had no information management rules for documentation of this kind, making it difficult to determine whether such documentation was complete or even existed. Furthermore, the Corporation delivered pilotage services in seven pilotage areas by using entrepreneurial pilots, who did not have documented contracts specifying terms and conditions. This amounted to 630 pilotage assignments in 2015.

51. These deficiencies matter because the health and competence of the Corporation’s pilots and pilot boat crews are essential to its mandate to establish, operate, maintain, and administer an efficient pilotage service in the interests of safety. Moreover, the Corporation’s customers trust that its pilots and pilot boat crews are healthy and competent. In the interests of transparency and accountability, robust information management is needed to provide an important record of the actions taken and decisions made.

52. Recommendation. The Corporation should implement information management that facilitates its ability to demonstrate the health and competence of its pilots and pilot boat crews.

The Corporation’s response. Agreed. The Corporation intends to develop a more robust information management structure by the end of 2016.

53. Recommendation. The Corporation should ensure that documented contracts are in place with entrepreneurial pilots to specify the terms and conditions of pilotage service delivery.

The Corporation’s response. Agreed. The Corporation will act to formalize the service agreements with the Corporation’s entrepreneurial pilots with a target date of the first quarter of 2017.

54. Weakness—Training and development of pilots. To determine when a trainee pilot is ready to advance to the next class of licence, the Corporation’s practice was to obtain consensus among a committee of senior pilots within the trainee’s district (eastern Newfoundland, for example). This good practice, however, was not documented. For 4 in our sample of 5 trainee pilot advancements, the Corporation did not have documentation of the consensus of the committees (aside from a recommendation letter from the committee chairperson).

55. The Corporation tracked when employee pilots completed training courses, but this process did not document whether pilots completed the required training courses at the appropriate times. The Corporation has begun developing a more comprehensive management tool to document its training curriculum, identify upcoming required training, and confirm that training courses have been taken. We acknowledge the Corporation’s efforts and encourage the Corporation to implement this tool fully.

56. This weakness matters because, taken in conjunction with the performance management deficiency described in paragraphs 58 and 59, it limits the Corporation’s ability to demonstrate the acquisition, maintenance, and development of pilot skills and competencies essential to the safe and efficient delivery of its pilotage services.

57. Recommendation. The Corporation should formalize its good practice of requiring consensus among its committees of senior pilots before advancing the licences of trainee pilots. The Corporation should maintain documentation of this consensus, along with the final recommendation letter issued by the committee chairperson.

The Corporation’s response. Agreed. The requirement of obtaining consensus from the committees of senior pilots will be formalized. Effective immediately, the Corporation will also maintain documentation of this process along with the recommendation letter from the committee chairperson.

58. Significant deficiency—Performance management of pilots and pilot boat crews. From our sample of 27 cases, the Corporation did not complete 2 employee pilot performance reviews, and lacked complete documentation for 10 of them. Furthermore, there was no mechanism in place for pilot boat crews and the 11 entrepreneurial pilots to have performance reviews. As a result, there was a risk that corrective action was not taken to address poor performance and that good performance went unrecognized.

59. This deficiency matters because complete performance assessment information on pilots and pilot boat crews would better enable the Corporation to adjust its training for the purpose of maintaining skills and competencies. Furthermore, performance assessment information is crucial to maintaining safe pilotage services.

60. Recommendation. The Corporation should ensure that it fully implements and consistently applies a performance management process for all pilots and pilot boat crews. The Corporation should also assign responsibility for reviewing performance management information, with the aim of ensuring proper oversight and follow-up of actions.

The Corporation’s response. Agreed. Since the period under examination, the first cycle of performance reviews of each fully licensed pilot has been completed. There are operational and logistical challenges that affect the planning and timing of these reviews. A second cycle of performance reviews has begun with every fully licensed pilot to be assessed by the end of 2018. As this will be the second cycle of performance reviews, lessons learned from the initial cycle will be implemented.

Since the period under examination, a clause to facilitate performance reviews with employee launchmasters has been negotiated in the most recent collective agreement. A similar clause was included in the collective agreement for employee deckhands in 2015. The performance review process for employee pilot boat crews has been approved and all employees will be assessed by the end of the first quarter of 2017 and annually thereafter.

61. Weaknesses—Designation of areas and vessels subject to compulsory pilotage. The Corporation uses the Pilotage Risk Management Methodology (PRMM) to assess the changing circumstances in marine areas and determine inherent risks. In 1999, the Minister of Transport endorsed a recommendation, made by the Canadian Transportation Agency (CTA) in its report on outstanding pilotage issues, for recurrent five-year reviews to assess changes in factors and circumstances in compulsory pilotage areas. Despite accepting this recommendation, the Corporation has put no process in place to cyclically review the compulsory designation of pilotage areas, to determine whether the designation is still warranted.

62. Since the previous special examination, the Corporation has conducted preliminary risk analyses of the non-compulsory ports in Nova Scotia, New Brunswick, and Newfoundland and Labrador to determine whether a PRMM review was warranted for any of the ports. A 2010 preliminary risk analysis of non-compulsory ports identified two Nova Scotia ports as having medium-high risk, and recommended PRMM reviews for them. As of 31 March 2016, the Corporation had not completed PRMM reviews for these ports.

63. In 2013, in response to a PRMM review, the Corporation proposed an amendment to the Atlantic Pilotage Authority Regulations to designate the port of Belledune, New Brunswick, a compulsory pilotage area. Two notices of objection to the amendment were filed with the Minister of Transport. During the period of our examination, the Corporation was still waiting for the Minister to appoint an investigator to review the proposed designation. Meanwhile, this port has remained non-compulsory.

64. These weaknesses matter because factors such as technology, environmental protection, ship standards, and traffic patterns can change, introducing new risks or eliminating previous ones, which may affect whether a port should be designated compulsory.

65. Recommendation. The Corporation should implement a cyclical review to demonstrate reconsideration of the designation of every compulsory pilotage area under its responsibility at least once every five years. The periodic review should also demonstrate reconsideration of the size and types of vessels subject to compulsory pilotage. The Corporation should also ensure that recommendations from preliminary risk analyses of non-compulsory pilotage areas are addressed promptly.

The Corporation’s response. Agreed. A review was conducted in July 2016 by management and the Board. This review examined each compulsory pilotage area for changes in traffic volume and vessel types. The Board evaluated each area to determine if further examination was required at this time and the Risk Committee was tasked with proceeding on the recommendations. This process will be conducted annually by the Board as part of the strategic planning sessions.

Since the preliminary risk analysis of non-compulsory ports in Nova Scotia, the Corporation also performed similar analyses for New Brunswick and Newfoundland and Labrador. Since these scans began in 2010, the Corporation completed preliminary scans on 22 ports—18 non-compulsory and 4 compulsory areas. The findings of the preliminary risk analyses were weighted by the Board and PRMM reviews were prioritized as resources to conduct these reviews are limited. The preliminary risk analysis for Nova Scotia has been updated for any changes in risk factors and a decision will be made in 2016 whether to move forward with full PRMM reviews.

66. Weakness—Pilot embarking and disembarking processes. The Corporation did not have a process in place to ensure that it performed its own annual inspections on all pilot boats, owned and contracted, in keeping with its past practice to provide assurance over quality and continuous improvement.

67. This weakness matters because the Corporation’s most significant risk, as identified in its Enterprise Wide Risk Management Framework, was injury to a pilot or pilot boat crew member when embarking or disembarking from a vessel. Inspections would address several factors in the likelihood of such an injury: a malfunction in the pilot boat during embarkation or disembarkation could lead to injury; and, if a pilot falls into the water, the immediate availability and condition of rescue and first aid equipment could be critical to safety. The lack of a structured approach to performing inspections on all owned and contracted pilot boats compromised the Corporation’s ability to demonstrate due care and diligence in ensuring the health and safety of its pilots.

68. Recommendation. The Corporation should perform annual inspections on all pilot boats, owned and contracted.

The Corporation’s response. Agreed. Since the period under examination, management developed an annual pilot boat inspection schedule and all inspections will be completed by the end of 2016 and annually thereafter.

Conclusion

69. In our opinion, based on the criteria established, there were significant deficiencies in the Atlantic Pilotage Authority’s systems and practices that we examined for corporate management and the management of pilotage services. As a result of the pervasiveness of the significant deficiencies, we concluded that the Corporation had not maintained these systems and practices during the period covered by the audit in a manner that provided the reasonable assurance required under section 138 of the Financial Administration Act.