Introduction

Background

1. Atomic Energy of Canada Limited is a federal Crown corporation, reporting to Parliament through the Minister of Natural Resources. The Corporation’s mandate is to enable nuclear science and technology and fulfill Canada’s radioactive waste and decommissioning responsibilities. It receives federal funding and delivers its mandate through long-term contracts with a private-sector contractor for the management and operation of its sites.

2. Starting in 2009, the Corporation underwent a major restructuring, officially completed in September 2015. The initial goal was to leverage the experience and capabilities of the private sector in order to enhance efficiency and effectiveness, and to contain and reduce costs and risks for Canadians over time. The restructuring involved a competitive procurement process to select a contractor through which the Corporation would deliver its mandate.

3. The private-sector contractor selected was the Canadian National Energy Alliance (CNEA). With the completion of restructuring, the Corporation transferred ownership of its subsidiary, Canadian Nuclear Laboratories (CNL), to the CNEA. Under a Government-owned, Contractor-operated (GoCo) model, the Corporation delivers its mandate through long-term contracts with both the CNEA and CNL, together called “the contractor” (Exhibit 1). The Corporation retains ownership of all lands, facilities, intellectual property, other assets, and liabilities.

4. The GoCo arrangement consists of one general contract with the contractor and incorporates three specific agreements:

• Site Operating Company Agreement. This agreement covers the contractor’s decommissioning and waste management activities at Chalk River Laboratories and other satellite sites, its science and technology program at Chalk River, and the revitalization of the Chalk River campus.
• Whiteshell Laboratories Target Cost Agreement. This agreement covers the closure of Whiteshell Laboratories, in Pinawa, Manitoba.
• Nuclear Power Demonstration Reactor Target Cost Agreement. This agreement covers the closure of the Nuclear Power Demonstration reactor’s waste management facility, near Rolphton, Ontario.

5. At the time of our audit, the Corporation had existed in its new form for about one year. Since the restructuring, the Corporation monitors the contractor’s operations under the GoCo arrangement at eight sites across Canada. The Corporation has its headquarters in Chalk River, Ontario. The Chalk River site is the Corporation’s main laboratory campus and Canada’s largest research and development complex. The site is also the location of research and development facilities, including the National Research Universal reactor (planned to close in March 2018). The Corporation’s work is conducted by a small group of approximately 40 full-time employees. Federal funding for the 2016–17 fiscal year was set at $969 million, to be used toward the contractor’s operating expenses and the Corporation’s operations. The amount consisted of $530 million for decommissioning and waste management, and $439 million for nuclear science and technology (including $160 million for capital investments).

6. The monitoring of the GoCo arrangement involves engaging with the contractor so that the Corporation can achieve a number of tasks, including approving long-term (5- and 10-year) strategic plans, reviewing and approving annual work plans, negotiating annual performance incentives, and ensuring compliance with the GoCo arrangement.

7. One element of the Corporation’s mandate concerns decommissioning and waste management to deal with the results of decades of nuclear activities at the Corporation’s sites and with the cleanup of waste at orphan sites for which the federal government has assumed responsibility. The cost of this work is estimated at over $7.9 billion as of 31 March 2016.

8. A second element of the Corporation’s mandate concerns providing nuclear science and technology in order to sustain and develop Canada’s capabilities in both the federal government and the private sector. In support of this objective, the government is investing in infrastructure renewal projects to make Chalk River Laboratories a world-class science complex.

Focus of the audit

9. Our objective for this audit was to determine whether the systems and practices we selected for examination at Atomic Energy of Canada Limited 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. Based on our assessment of risks, we selected systems and practices in the following areas:

• corporate management practices, and
• contract management.

The selected systems and practices and the criteria used to assess them are found in the exhibits throughout the report.

11. 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

Except for a significant deficiency in Board renewal and some other improvements needed, the Corporation had in place good corporate management practices

Overall message

12. Overall, except for a significant deficiency in Board renewal and some other improvements needed, the Corporation had in place good corporate management practices. The significant deficiency related to the delays in the appointment of Board members, over which the Corporation did not have control. During the period covered by the audit, the Corporation was operating with an interim Board and without a President and Chief Executive Officer while developing long-term strategic plans. In addition, the Board had not yet implemented a formal, systematic process for monitoring and reporting on the risks identified in the corporate risk register.

13. These findings matter because this is a critical time for the Corporation, when it is attempting to set its direction for the next 10 years and beyond. To do this, it is important to have a full complement of Board members with an appropriate mix of skills and appropriate terms, who can guide the development of long-term, comprehensive strategic plans. Delays in appointing new Board members and the President and Chief Executive Officer can have an impact on their understanding and ownership of the Corporation’s strategic direction, including their ability to oversee its implementation. It is important as well for the Board to closely monitor risks, particularly during early implementation of a new business model involving a contractor. Continuing leadership from the Board and the Chief Executive Officer protects against the risk of not being able to achieve the initial goal of restructuring—that is, to leverage the experience and capabilities of the private sector in order to enhance efficiency and effectiveness, and to contain and reduce costs and risks for Canadians over time.

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

• Corporate governance and related practices
• Human resource management

15. Sound practices in corporate governance are essential to meeting the objectives that are outlined in Part X of the Financial Administration Act as it relates to Crown corporations. The Board is responsible for determining that the Corporation’s long-term strategy is clearly aligned with the Government of Canada’s objectives for the Government-owned, Contractor-operated (GoCo) arrangement. The Board is also responsible for determining whether the Corporation has identified the risks associated with the strategy and is mitigating them effectively and efficiently.

16. The full complement of the Board is from five to seven members, appointed by the Governor in Council, a process outside the control of the Corporation. Two committees support the Board: the Audit Committee and the Human Resources and Governance Committee. Expected Board competencies include extensive knowledge and experience in the areas of energy operations, science and technology, and international commerce. The Corporation’s business model also indicates a need for knowledge in the area of contract management.

17. September 2015 marked the completion of a restructuring process that implemented the Corporation’s new role and reduced its workforce from approximately 3,400 employees to 40. The Chief Transition Officer stepped down in March 2016, and the Governor in Council had not yet appointed a new President and Chief Executive Officer. In the interim, the Board named a vice-president to serve as Acting Chief Transition Officer. As a result of the restructuring and the related changes to the position of President and Chief Executive Officer, the Governor in Council approved a reclassification of that role with an associated decrease in salary of approximately $100,000.

18. It is important for the Board to engage in strategic planning and closely monitor risks, particularly during early implementation of the GoCo model. Under the new model, the contractor is currently developing 5- and 10-year strategic plans setting out a long-term vision of the Corporation. Upon Board approval, the strategic plans will provide the basis for future corporate plans and, in turn, for the Annual Program of Work and Budget, identifying all activities to be performed by the contractor for the year for the operation of Chalk River Laboratories and other satellite sites. In addition, the Performance Evaluation and Measurement Plan enables the Corporation to identify fees payable to the contractor by measuring work performance against a predetermined set of evaluation criteria and milestones.

19. The Corporation particularly depends on strategies for attracting and retaining talented employees. Currently, some members of the senior management staff are from outside Canada, where the GoCo model has been used in the nuclear sector for a much longer time. In addition, as a small organization, it is important for the Corporation to have in place a strong succession planning process to ensure continuity of its operations, especially since replacements might be needed for key senior management positions in the short term.

20. Our recommendations in these areas of examination appear at paragraphs 25, 26, 27, 28, and 33.

21. Corporate governance and related practices. Skills and expertise needed by Board members were identified; Board roles and responsibilities were defined; and appropriate and accurate information was provided to the Board for oversight and decision making. However, we found a significant deficiency in Board renewal (a process over which the Corporation did not have control). We also found weaknesses in the implementation of strategic direction, in risk monitoring, in the design of measurable performance indicators, and in communications (Exhibit 2).

22. Significant deficiency—Corporate governance and related practices. We found a significant deficiency and four weaknesses. Of greatest concern to us was the fact that the Board did not have a full complement of members, and those serving on the Board all held office on an interim basis. The Governor in Council had not yet appointed Board members to longer terms. It had appointed a new Board member for one year and had reappointed an incumbent, also for one year. In the case of the two other members, their terms of appointment had expired, and the incumbents were awaiting reappointment or replacement.

23. This significant deficiency matters because, to be effective, a board needs a full complement of members who have an appropriate mix of skills, knowledge, and experience, and who serve staggered terms to maintain board continuity. A full complement is needed for the Board to provide continuity during the development and implementation of the new GoCo model and the strategic direction.

24. We also found the following additional weaknesses:

• Implementation of the strategic direction. During our audit period, the Governor in Council had not yet appointed a new President and Chief Executive Officer. This was the situation at a critical time, when the new GoCo business model was in the implementation stage and the 5- and 10-year strategic plans were being developed. Strategic planning was still ongoing at the end of our audit period. On 17 February 2017, after the period of our audit, the Governor in Council appointed an interim President and Chief Executive Officer for a one-year period or until the appointment of a new President and Chief Executive Officer.

  This weakness matters because a temporary approach to filling the President and Chief Executive Officer position could seriously compromise the continuity of leadership needed during this time, when the Corporation is developing its strategic plans. A future President and Chief Executive Officer not involved in developing the strategic direction could significantly alter the established strategic direction or not support it. As a result, there could be an increased risk to the implementation of the strategic plans and to the achievement of the goals of restructuring.

• Information for decision making and monitoring risks. The Board had not yet implemented a formal, systematic process for monitoring and reporting on risks identified in the corporate risk register. We found limited evidence of discussions by the Board and the Audit Committee concerning the risks listed in the new risk register.

  This weakness matters because the Board needs to obtain information and react promptly to the major risks that the Corporation faces since restructuring. Proper risk monitoring and reporting will protect against the possibility of not achieving the initial goal of restructuring.

• Designing measurable performance indicators. The reporting framework in the Corporate Plan did not demonstrate how the Corporation would measure the overall objectives of restructuring, which were to enhance efficiency and effectiveness, and to contain and reduce costs and risks for Canadians over time. Although the Corporation included some performance measures in its most recent corporate plan, it had not developed a framework for communicating the performance of the new operating model.

• Communications. Since 2009, the Board had not met its statutory obligation to hold public meetings at which Board members and the President and Chief Executive Officer presented the annual report and answered questions from the public.

  These two weaknesses matter because a sound reporting framework and communication of results are important to inform Canadians about the Corporation’s success with the GoCo model.

25. Recommendation. The Corporation should continue to engage with the Minister of Natural Resources on the need for the timely appointment of the President and Chief Executive Officer and of a full complement of members to its Board of Directors. It should also reinforce the need for staggered terms of office to ensure continuity.

The Corporation’s response. Agreed. The Corporation shares the Office of the Auditor General of Canada’s noted concern. The Corporation will, as it has to date, continue to engage with the Minister of Natural Resources, as well as the Privy Council Office, on the need for the timely appointment of Board members who satisfy the skills and experience identified as important for the Board in its Board skills matrix. The Corporation is also reinforcing the need for staggered terms of office to foster continuity. The Corporation, as it has to date, will continue to engage with the Minister on the need for the timely appointment of a permanent or non-interim President and Chief Executive Officer.

26. Recommendation. The Corporation should plan for an orderly transition, during which the newly appointed Board members and the President and Chief Executive Officer have the opportunity to familiarize themselves with the initial goal of restructuring; the resulting Government-owned, Contractor-operated arrangement; and the Corporation’s strategic plans. They should also have the opportunity to provide guidance on modifying and implementing the plans.

The Corporation’s response. Agreed. The Corporation is planning for an orderly transition. It has in place an approach and materials, including a director orientation program, to support the orientation of new Board members and executives. This has already been used as part of the orderly orientation and onboarding of the Corporation’s most recently appointed board member in the fall of 2016.

As noted in the key findings, the new Board member appointed during the examination, for a term of up to one year, had access to orientation sessions providing information about the Corporation’s mandate and activities, as well as directors’ roles and responsibilities. More specifically, the orientation consisted of significant background materials regarding the Corporation’s governance framework and Government-owned, Contractor-operated (GoCo) model (including the Corporation’s mandate, role, and priorities). These materials familiarized the member with the Corporation, its overall governance, and the operation of the Board and its committees, as well as with related procedures, the management team, the history of the Corporation and the impact of its restructuring, Canadian Nuclear Laboratories’ vision for the future, 5- and 10-year plans, and ongoing key elements of the GoCo model. Background material was augmented with the member’s participation in a multi-day orientation program, which included, among other things, a tour of key operations under the Corporation’s oversight, one-on-one meetings with members of the Corporation’s executive team to orient the new member on the areas under their respective responsibilities, and participation in a quarterly Board meeting as well as a quarterly meeting of the Human Resources and Governance Committee and the Audit Committee.

The Corporation will continue to update its approach and materials as necessary in preparation for future appointments.

27. Recommendation. The Board should strengthen and improve its process for monitoring and reviewing risks listed in its risk register and should appropriately document discussions and actions.

The Corporation’s response. Agreed. Management and the Board have had, and will continue to have, regular engagement on the management of risks. For instance, at the 1 October 2015 meeting, the Stored Liquid Waste Project was presented to the Board as “A Case Study in Governance of Risk.” As one step in creating a risk management framework, the Corporation’s corporate risk register (developed in September 2015) was presented, reviewed, and discussed with the Audit Committee and Board in November 2015 and again after just over a year, in February 2017. Additionally, management undertakes a quarterly review and update of the corporate risk register. The Board also receives commentary on risk management issues in management’s quarterly corporate reports to the Board.

The Corporation will formalize the Board’s regular review of the corporate risk register, or appropriate risk management program, and the Corporation has engaged an expert third party to improve its risk monitoring and review procedures. The periodic review of the corporate risk register is now a formal part of the Audit Committee Annual Work Plan and meeting agendas.

28. Recommendation. The Corporation should develop a more detailed reporting framework so that it can better measure and demonstrate to Canadians that it is enhancing efficiency and effectiveness, and is containing and reducing costs and risks over time. The Board should hold periodic public meetings, as required by the Financial Administration Act, to present its annual report and provide information on the Government-owned, Contractor-operated model.

The Corporation’s response. Agreed. With the restructuring now complete, the focus in the Corporation’s Corporate Plan will naturally move from the restructuring process itself to performance against the stated objectives. With this in mind, the Corporation is already collecting and assessing information across a broad range of metrics, including the performance of Canadian Nuclear Laboratories (CNL) against milestones and other performance objectives. Over time, this will provide the data needed to evaluate the extent to which the objectives of the restructuring were met. Currently, the Corporation reports on the performance of CNL under the Government-owned, Contractor-operated contract within its Corporate Plan. This will be further developed as sufficient data is available and collected, and appropriate baselines are established through CNL’s long-term planning and the implementation of Earned-Value Management, which are now in the process of being put in place.

During the period of restructuring, between 2009 and 2015, the Corporation engaged regularly with stakeholders and the public, and held more than 40 stakeholder engagements. These engagements included regular meetings of its Public Liaison Committee and Environmental Stewardship Council, and numerous public open houses and joint updates on restructuring with the Department of Natural Resources and the Department of Public Works and Government Services. Now that the restructuring has ended, while CNL leads on some of these ongoing engagements, the Corporation remains a participant, and a public meeting was held in May to discuss the Corporation’s first annual report since restructuring, as well as corporate planning for the coming five years.

29. Human resource management. We found that the Corporation had good systems and practices in succession planning for key positions, and in training and development. However, we found a weakness in compensation (Exhibit 3).

30. Weakness—Compensation. In 2013, while restructuring was under way, the Corporation acknowledged that before hiring employees, it needed to know the new salary level for the President and Chief Executive Officer position of the restructured Corporation, which informs the salary structure for the rest of the Corporation. Starting in December 2014, the Corporation hired its senior employees, referring to an external compensation review, which presented a salary structure aligned with the President and Chief Executive Officer’s salary level before restructuring. The Board approved this salary structure. Subsequently, the Governor in Council approved a decrease in the President and Chief Executive Officer’s salary of approximately $100,000; this took into account changes in the responsibilities of the President and Chief Executive Officer, changes in the role of the Corporation, and the resulting reduction in the number of its employees (40 instead of 3,400). As a result, at the time of our audit, some elements of the Corporation’s salary structure were not aligned with the President and Chief Executive Officer’s remuneration as established by the Governor in Council after restructuring.

31. This weakness matters because the salary level of the President and Chief Executive Officer is established by the Governor in Council in accordance with the Financial Administration Act and is a key parameter that informs the design of the classification and compensation system in Crown corporations. The assigned salary level of the President and Chief Executive Officer informs the salary ranges of senior management and staff, for whom the Board has the authority to establish remuneration. At the same time, it is important to recognize that some positions may require specialized expertise with appropriate compensation.

32. Aside from payments under the contract, compensation arrangements are the Corporation’s single biggest expenditure item. In our opinion, to ensure transparency, it is a good practice for the Corporation to disclose its compensation framework as well as total compensation for senior managers in its annual report. Enhanced disclosure of the compensation framework would provide stakeholders with more detailed information on the process followed in setting remuneration and on the results of that process.

33. Recommendation. The Corporation should address the alignment in remuneration by engaging with the Minister of Natural Resources. In its annual report, it should consider providing additional insight and disclosure concerning its compensation framework.

The Corporation’s response. Agreed. The Corporation will continue to engage with the Minister on remuneration. The Corporation has been actively reviewing its salary structure and has hired external consultants—both before and following restructuring, as well as before and following the change in level of the Chief Executive Officer—to advise it on this matter.

The Corporation continues to work with this external consultant to review its salary structure, taking into account all relevant factors, including appropriate market comparators, the geographical location of its employees, specialized expertise needed, and the President and Chief Executive Officer salary level. The Corporation will consider the advice of the external compensation consultant and will make adjustments to the salary structure, as appropriate, for the Corporation to achieve the goal of attracting and retaining those employees needed to fulfill its mandate. This consideration will include the review and approval of any changes by the Board of Directors and its committees, as required by the Board’s governance requirements. Additionally, the Corporation will continue to engage with the Department of Natural Resources on the remuneration of the President and Chief Executive Officer.

In its annual report, the Corporation will provide additional disclosure about its compensation framework and how compensation is determined so that the Corporation is able to provide effective oversight of the Government-owned, Contractor-operated contractual arrangement. The Corporation will also continue to disclose the total compensation for senior managers in compliance with the accounting and reporting standards under which the Corporation reports.

Contract management

The Corporation had good contract management practices, but improvement was needed in the area of skills and competencies

Overall message

34. Overall, we found that despite the challenges it faced throughout its transition to a Government-owned, Contractor-operated (GoCo) business model, the Corporation did a good job in implementing systems and practices to monitor its GoCo arrangement. However, we found that the Corporation still faced challenges in acquiring a contracting team with the necessary skills and competencies to monitor the GoCo model.

35. This finding matters because under a GoCo model, which is relatively new to the Canadian nuclear sector, the contract management team must have a sufficient number of staff members who are qualified to oversee operations and properly manage contract performance.

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

• Contract management

37. Since September 2015, the Corporation has had in place a GoCo arrangement with the contractor, which manages the operation of its sites according to the Corporation’s mandate and priorities. The Corporation provides direction, sets performance measures, oversees performance, and issues payment to the contractor.

38. Since the restructuring, the Corporation’s role consists primarily of monitoring the GoCo arrangement, as follows:

• Site Operating Company Agreement. The Corporation monitors the contractor’s decommissioning and waste management responsibilities at Chalk River Laboratories and other satellite sites, its science and technology program at Chalk River, and the revitalization of the Chalk River campus. Each year, the Corporation reimburses the contractor for actual costs and also pays a performance fee, based on a predetermined set of evaluation criteria.
• Target cost agreements—Whiteshell Laboratories and the Nuclear Power Demonstration reactor. The Corporation monitors the contractor’s activities related to the decommissioning and closure of Whiteshell Laboratories, in Pinawa, Manitoba, and the closure of the Nuclear Power Demonstration reactor’s waste management facility, near Rolphton, Ontario. Each year, the Corporation reimburses the contractor for actual costs and issues an advance on the performance fee payable if the work is completed ahead of schedule.

Under the GoCo arrangement, approximately $866 million for contractual expenses was paid or payable by the Corporation in the 2016–17 fiscal year.

39. The success of the GoCo model depends on the Corporation’s ability to oversee the arrangement through an adequate contracting framework that includes key systems and practices. In addition to this framework, successful oversight requires managers with the necessary skills and competencies. Another essential factor is the contractor’s ability to deliver on its commitments.

40. Our recommendation in this area of examination appears at paragraph 45.

41. Contract management. We found good systems and practices in most aspects of contract management. However, we found a weakness in contracting skills and competencies (Exhibit 4).

42. Weakness—Contracting skills and competencies. Except for the Lead Contracting Officer, the Corporation’s contracting team had limited experience working with the GoCo model in the Canadian nuclear sector. The model was new in that sector, and relatively few individuals had the unique skill set required. It was a challenge for the Corporation to find someone with the right expertise and experience. In the end, the Corporation hired the Lead Contracting Officer from abroad for a three-year term. At the time of our audit, the Lead Contracting Officer was the only member of the contract management team who had previous experience with the GoCo model.

43. This weakness matters because a successful shift to a GoCo model depends on the Corporation’s ability to oversee and manage the arrangement and to maintain alignment with the Government of Canada’s objectives for the GoCo arrangement. An experienced team well versed in GoCo and similar large, complex procurement practices would help ensure that the contractor fulfilled all the tasks required and would provide proven solutions to any problems that arose.

44. This weakness also matters because if the only team member who had previous GoCo experience and was responsible for providing strategic leadership to the team left earlier than expected, the Corporation would be at risk of not having sufficient expertise and corporate knowledge to fulfill its monitoring and management functions.

45. Recommendation. The Corporation should strengthen the skills and competencies of the contract management team to manage the overall performance of the contractor in the context of the Government-owned, Contractor-operated model.

The Corporation’s response. Agreed. Work is already under way to strengthen the skills and competencies of the contract management staff through formal classroom training and on-the-job mentoring. In addition, the Corporation will continue to further mitigate the risk described in the weakness by implementing the Corporation’s succession plan, including those aspects specific to planning for the replacement of the Lead Contracting Officer, should it be necessary.

Conclusion

46. In our opinion, based on the criteria established, with the exception of the significant deficiency we found in Board renewal, there were no significant deficiencies in Atomic Energy of Canada Limited’s systems and practices that we examined for corporate management and contract management. We concluded that the Corporation has 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.