Indigenous contracting program went years with no ‘after-the-fact’ audits despite calls for more oversight

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The federal government went years without launching an after-the-fact audit of any of the companies that benefit from an Indigenous procurement program, in spite of calls for increased oversight.

According to information provided to The Globe and Mail by Indigenous Services Canada, the department has approved four such audits under the program since 2016, and all of those were launched within the past two years amid heightened scrutiny of federal procurement practices. The department said audit data prior to 2016 could not be immediately provided because the information is stored on a legacy system.

The value of government contracts awarded under the program has risen sharply to $862-million in the 2022-23 fiscal year, up from $170-million five years prior. Ottawa has also said it awarded $1.6-billion in contracts to Indigenous businesses in the 2022-23 fiscal year through the procurement program and other categories.

Two of the four audits involve Dalian Enterprises and Coradix Technology Consulting, which the department agreed to review in December after leaders of both companies faced questions from MPs about their involvement with the ArriveCan app, as well as allegations of contracting misconduct.

Indigenous groups, as well as one of the public servants who helped develop the program, have said in interviews that Ottawa needs to do much more to ensure that the winners of these contracts are fulfilling the policy goals – namely the requirement that at least one third of the work is performed by Indigenous workers.

The Procurement Strategy for Indigenous Business (PSIB) has become a focal point of broader parliamentary hearings into how Ottawa spends billions of dollars each year on outsourcing.

The committee hearings, as well as various studies by parliamentary watchdogs, were inspired in part by questions over how the cost of the government’s ArriveCan app grew from an initial cost of $80,000 to an estimated $59.5-million through heavy use of private contractors. The app for cross-border travellers was rolled out during the height of the pandemic.

Dalian, which describes itself as an “aboriginally owned” company, received $7.9-million to work on ArriveCan. Dalian has just two employees and has won millions of dollars of federal contracts under the PSIB over the past two decades by partnering with Coradix, a larger non-Indigenous business.

The government’s procurement strategy allows non-Indigenous companies to qualify provided they partner in a joint venture with an Indigenous company and that the Indigenous partner or Indigenous subcontractors perform at least one third of the work.

The founder of Dalian, David Yeo, is a great-grandson of David Franklin, a former chief of Alderville First Nation, which is about a 90-minute drive northeast from Toronto.

Dalian, Coradix and the primary contractor on ArriveCan, GCStrategies, have all been suspended from further federal contracting work. The federal government has not provided a detailed explanation for the suspensions.

During his two appearances before parliamentary committees, Mr. Yeo has referred to the role he played in helping shape the program. He has twice invoked the name of a former public servant, Allen Frost, who he said he collaborated with to devise the terms of the policy.

“Allen Frost, many other Indigenous leaders and I created this policy that guides the Government of Canada today in supporting Indigenous businesses with federal government procurement opportunities,” he told MPs in October.

Mr. Yeo made a similar comment about Mr. Frost when he appeared again before MPs in March, after it had been revealed that Mr. Yeo was working for the Department of National Defence while Dalian was engaged in contract work for DND.

Mr. Frost, 68 and now retired, told The Globe that the program was launched many years before he ever met Mr. Yeo and disputed his contention that he was involved in creating the policy.

Mr. Frost said the original idea for the program came from a line in the 1993 Liberal campaign platform, known as the party’s Red Book, during the election that saw Jean Chrétien become prime minister.

Mr. Frost was working as a policy adviser at Public Works, the federal department responsible for procurement. Shortly after the election, he was part of a team that helped craft a program in line with the platform pledge.

Once it was ready to launch in 1996, Mr. Frost was moved over to the department, then called Indian and Northern Affairs, to help launch the program. He helped guide it for several more years, including as a senior program manager overseeing its operation.

He said it was not until the early 2000s that he first met Mr. Yeo as part of meetings the department held with stakeholders to receive feedback on the program.

“He did come to some of those, but to say that he helped develop the policy is a fallacy,” said Mr. Frost. “He had nothing to do with the development.”

Mr. Yeo did not respond to a request for comment.

Several Indigenous organizations have issued public statements and reports expressing concern that the program is vulnerable to abuse, particularly when large non-Indigenous companies access the program by partnering with a smaller Indigenous company.

The Canadian Council for Aboriginal Business said in a report that this creates the risk of “phantom joint ventures” in which an Indigenous partner is used as a front by a non-Indigenous business.

Last year, a group of more than 50 Indigenous finance institutions warned in a report that the program was encouraging the use of “shell companies and other modes of obfuscation to gain an advantage in procurement processes, and more – all to the detriment of legitimate Indigenous Peoples of Canada, communities and businesses.”

Mr. Frost said he agrees that joint ventures are vulnerable to abuse given how rarely the companies involved in the program are audited.

“In reality, it hardly ever happens,” he said.

The federal government adopted a rule requiring that, as of this year, five per cent of all government contracts must be awarded to Indigenous companies, which builds on the goals of the PSIB.

Mr. Frost questions whether that target can be genuinely met, given the lack of oversight.

“I don’t think that’s going to work out,” he said. “They haven’t got the capacity to actually conduct enough audits to determine if they are aboriginally-owned and controlled and if they meet the 33-per-cent requirement.”

Federal Indigenous Services Minister Patty Hajdu recently announced that her department is planning a major review of the procurement policy.

A 2014 internal audit of the program by what was then called Aboriginal Affairs and Northern Development recommended that the government should “increase numbers of pre-award audits, post-award audits and random audits.”

Karine Vetvutanapibul, a spokesperson for Indigenous Services Canada, said ISC generally only audits a company upon request by a department that is responsible for the contract awarded under the program.

“Similar to how the government does not audit all tax filings, ISC does not conduct post-award audits on all PSIB contracts. Post-award audits are performed, when requested, but relatively rarely. Given their complexity, post-award audits are generally performed by third-party contractors,” she said.

In addition to Dalian and Coradix, the department said audits have also been approved for Neptune Security Services Inc., in joint venture with numbered company 13024105 Canada Inc., and a partnership between Coalta Starr Consulting and Jasper Concrete Ltd.

Quebec’s provincial contracting authority announced last year that it was investigating Neptune’s practices. Indigenous Services said an audit found the joint venture involving Neptune was not compliant with the program’s Indigenous ownership and content criterion and has been removed from the government’s directory of Indigenous businesses.

Coalta owner Bill Pambrun said the audit involving his company is related to delays on a construction project with Parks Canada to build a Jasper Indigenous Exhibit in Alberta.

Indigenous Services said that joint venture has also been removed from the directory after the companies failed to provide requested documentation.

The government operations committee approved a motion last month calling on Indigenous Services to provide MPs with detailed information about the program by May 20.