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How the deal went awry

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Fire Paramedic Chief Reid Douglas (left) and CAO Phil Sheegl are no longer employed with the city.

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Fire Paramedic Chief Reid Douglas (left) and CAO Phil Sheegl are no longer employed with the city.

When the scandal over the construction of four new fire stations broke earlier this year, then-CAO Phil Sheegl told reporters he was aware of the deal between then-Fire Paramedic Chief Reid Douglas and developer Shindico only at "50,000 feet." But auditors Ernst and Young found Mr. Sheegl was involved from the start. Here is an edited version of their executive summary.

 

Our review indicates that the majority of project oversight, where oversight occurred, was done by the current CAO (Phil Sheegl). The current CAO has taken an active role in the project since the early stages and was involved in the design and construction budgets, obtained status updates from the Chief WFPS (Reid Douglas), participated in negotiations, was consulted and apparently approved the proposed land exchange. The current CAO was also who the Chief WFPS reported to regarding the project progress and budget issues.

The current CAO, as the individual tasked with oversight, was responsible for the Chief WFPS being tasked with managing the project and making decisions regarding building requirements and sizing. We believe that the Chief WFPS did not have the appropriate skills or training to do so. We note that the current CAO did attempt to supplement this lack of expertise via the retention of outside consultants.

  • The original capital budget of $15,340,500, for a project to construct four stations, as provided to Council in July 2010, had a number of significant deficiencies and appears to be largely based on representations from the current CAO to the CFO that the project could be delivered for $15,000,000, and a high level review by Corporate Finance and Planning Property & Development. The budget was not based on any established construction costing methodology. This should be viewed as inadequate for a project of this magnitude.
  • Financial information supplied by WFPS to Corporate Finance did not suggest a significant budget problem until the summer of 2012. We note that WFPS did have information in advance of this that, if analyzed appropriately, would have suggested a budget problem in October 2011 at the latest. The budget problem centered largely on the Portage-Station #11. WFPS and Corporate Finance at the time of setting up the per station budget in the Capital Project Reporting System had budgeted only $4.0 million, but had received costing of $6.0 million as part of Shindico's response to the original RFP. WFPS never looked to decrease the size of the station and received additional confirmation from Shindico in October 2011 that the station would cost at least $5.1 million before other additional costs were considered.
  • There appears to have been a lack of appropriate oversight by Corporate Finance as it relates to the assessment of the capital budget information and financial reporting information received from WFPS by Corporate Finance. We would expect greater financial accountability and scrutiny for a project of this magnitude.
  • Current total costs for the project, with $1 million assumed for the cost to acquire the Taylor property, are $18,575,102 as provided to us by Corporate Finance based on information available to us on June 10, 2013. This will exceed the original budget of $15,340,500, by $3,234,602.
  • In respect to the project, there were two procurement processes where Request for Proposals (RFP) were issued which we examined as part of our review. In both cases, our review has determined that significant issues existed which bring into question the openness and fairness of the processes used. Open and fair procurement is critical to ensure the best value to the City. The following are the primary issues identified in respect of the two procurement processes:
  • In respect to the first RFP, the City's decision to only allow bids from P3 qualified firms for a project that was only for the construction of stations, combined with the requirement that the bidder(s) identify land in three areas of the City had the effect of significantly limiting the competitive nature of the original RFP and resulted in only one bid being received. This restrictive procurement approach can be linked directly to all contracts being eventually awarded to Shindico via noncompetitive methods.
  • Materials Management Division (MM) and Legal Services indicate that the primary reason that the P3 bidders list was used was to allow for developers to bring forward potential sites for the new stations. We note that three of the four stations are now built on land the City owns or was in the process of acquiring prior to the RFP. In the case of the fourth, Taylor Ave., where the facility has been built on land not owned by the City, our review has identified a City owned site on Taylor Ave. that may have been suitable for the station and therefore there would have been no requirement for the Shindico site. The restrictions placed on the competitive nature of the original RFP, a $15.0 million plus opportunity, do not appear justifiable as steps were not taken to ensure the six prequalified firms were the only possible sources of land options.
  • For the original RFP and the Sage Creek RFP, Shindico had information not available to other proponents.
  • In respect to the Sage Creek RFP, the City had information from two sources, one of which was Shindico, which suggested that the (London-based architectural firm) Murphy & Murphy Architects design specifications, used as the basis under which bidders were asked to respond to the RFP, could not be built in Winnipeg for the City's budget prior to the issuance of the RFP. In spite of this the RFP was still issued. All bids received in response to the RFP, which were based on the M&M design, were deemed too expensive.
  • The City received bids from seven firms in response to the Sage Creek RFP, indicating there was significant interest in this type of project and therefore a competitive environment should the City have sought competitive bids for other aspects of the project.
  • Prior to the issuance of the Sage Creek RFP, it appears that Shindico discussed the preparation of a cheaper alternative design with a representative of the City. Shindico submitted an alternative design in response to the RFP. While it was determined to be non-responsive to the RFP requirements, it did form the basis under which the City then proceeded with single source negotiations with Shindico.
  • As the City was willing to consider an alternative design, this should have been the subject of a separate RFP process to ensure the best alternative design at the best value to the City was identified...
  • We are surprised by the delegated level of authority given to the CAO in a single source negotiation situation. In this case, the CAO had the authority to approve single source negotiations and then also the resulting contract for a number of multimillion-dollar contracts to one supplier...
  • In spite of Council being informed that the budget they were approving was for "a project" consisting of the constructions of four stations City administration has managed the "project", from a contracting delegated authority perspective, as if there were four separate projects.
  • As each station contract was less than $10,000,000, MM and the CAO do not believe that Council Approval was required for any contracts awarded to Shindico related to this project. It would have been clear to those involved (Materials Management, CAO, Legal Services and WFPS) that the City would be awarding to Shindico contracts which in total were in excess of $10,000,000 of contract value. We believe that Council should have been informed of the intention to award contracts in excess of $10.0 million to Shindico. The splitting of the contract value into a number of contracts should not be a means to bypass Council Approval.
  • The contract for Portage -Station #11 was split into two contracts, one for the foundation and one for the remainder of the building. We have been informed that one of the primary reasons for this was the fact that it was recognized by those involved that the remaining funding available under the Council approved budget was not sufficient to allow for the awarding of one contract for the whole building. By proceeding in this manner, Council's ability to appropriately consider a budget increase was effectively eliminated...
  • Our review indicates that Legal Services was aware that WFPS had authorized work to take place on Taylor-Station #12 and Portage - Station #11 without contracts in place and without obtaining appropriate contract award authorizations...
  • The City commenced construction on the Taylor- Station #12 in advance of having an agreement in place to acquire the property on Taylor Avenue from Shindico. This fact was known by WFPS, Legal Services and apparently the CAO and COO. The conditional land exchange that was eventually negotiated was documented via a Letter of Intent (LOI), a land exchange agreement whereby the City would transfer three properties to Shindico for the Shindico site on Taylor Avenue. The condition contained in the LOI was that it had been signed by the City subject to Council approval. The LOI, which was drafted by Shindico, was signed on behalf of the City by the Chief WFPS and the Director PP&D.
  • Had PP&D been asked to do so they could have identified that the City owned property on Taylor Avenue that could possibly have been a site for Taylor- Station #12.
  • WFPS was expecting to undertake a land exchange regarding the property on Taylor Avenue in September 2010. Shindico preferred a land exchange over a cash purchase as they indicate that they are in the land development business. WFPS required a land exchange as it was a non-cash cost that would not have resulted in a charge against its approved capital budget for the project.
  • The negotiations for the land exchange were led by the Chief WFPS, not PP&D who has responsibilities for such transactions.
  • Both the CAO and the COO were informed by the Chief WFPS of the specifics of the land exchange and the CAO told the Chief WFPS, via email to "Get it done". The current CAO was subsequently informed by the Chief WFPS that it was done and the current CAO was thanked for his help.
  • The Chief WFPS signed the LOI after receiving direction not to do so by Legal Services. The Chief WFPS believed that he received the approval to do so from either the CAO or the Manager of Real Estate with PP&D, but both deny the Chief WFPS's position...
  • It was known from the time of signing the LOI that excess value was being transferred to Shindico. WFPS initially believed that this would be dealt with via a reduction in the cost to construct Portage- Station #11. After the LOI was signed, PP&D apparently informed the CAO that the excess value transfer to Shindico could be as high as $1.0 million. Eventually the gap was reduced to approximately $250,000 to $500,000 in 2012. We have no basis to believe the valuation gap is any greater than that range.

Republished from the Winnipeg Free Press print edition October 22, 2013 A9

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