by Jack Diao, MPA '22 for Annotations Blog
With over six million Canadians under the age of 30, sound economic and financial management is crucial to Canada’s long run economic prosperity. One only has to look at the S&P 500’s (or Berkshire Hathaway's) long-term growth and returns to know that the compounded savings from financial discipline, if wisely invested, can have exponential impact and reach that could mean billions of extra dollars benefiting future generations.
Since 2015, however, the Government of Canada’s Phoenix pay system fiasco has paralyzed its public pay system, handicapped its civil service morale and efficiency, and caused half of its 300,000-strong civil service corps pay issues with financial consequences, in some cases up to foreclosure. Planned in 2009 with a $310 million budget, Phoenix was envisioned as a highly automated central system that would consolidate and modernize payroll for federal public employees in over 100 departments. With IBM as the primary contractor, the project sought to replace the existing 40-year-old payroll system and save the public $78 million in operating costs per year. Instead, it has become a high-profile debacle highlighting weaknesses in the Government of Canada’s procurement process, and a lesson on the importance of safeguards and oversight in public financial management.
The Price of Mismanagement
Within two years of Phoenix’s delayed launch in 2016, over 20,000 employees had reported being overpaid, underpaid, or not paid at all—sometimes for months at a time. The pay errors became so persistent that it soon became clear that Phoenix was nowhere near ready to handle the complexity inherent to the federal payroll; reporting 384,000 pay errors bearing financial impact in 2018 (Fig. 1). As the mounting human cost of these errors became publicized, the government’s ineffective response to redress the pay system resulted in both public outrage at the project’s failure and a loss of public confidence in Canada’s state capacity.
Figure 1: Phoenix Pay Errors Bearing Financial Impacts
Instead of the promised annual savings, Phoenix will now require an additional $2.2 billion just to stabilize operations and rectify its error backlog, and over $560 million in legal damages and compensation. Between setup overruns and unplanned costs, the system will now cost taxpayers at least $3 billion, nearly ten times its original budget (Fig. 2):
Figure 2: Phoenix at a Glance: Actual and Projected Costs
Although the government has acknowledged the severity of the blunder in 2018, this was a cold comfort to the Canadian taxpayers, who must shoulder a $4.7 billion write-off from the public purse—tantamount to 1.4% of the its public revenues and 34% of its 2018 budget deficit. In that same year, Phoenix still had over 607,000 total outstanding errors in its payroll of 300,000, many of which were still pending from 2016. The government’s inability to pay its own staff—in addition to the project’s deficit—led to an outcry in the civil service and the public and drew heavy criticism from Parliament.
Failures in Accountability
Phoenix shares common weaknesses with many other serious cases of public resource mismanagement: 1.) the lack of a systemic framework of accountability for managing and spending public funds, 2.) the lack of transparency and a workplace culture that enables suboptimal or wasteful spending and lacks transparency, and 3.) inadequate protection and reprisals for those who report wrongdoing.
While existing legislation like the Financial Administration Act (FAA) set a baseline standard for the disbursement of public funds, these efforts alone are insufficient to ensure full accountability of government officials and contractors, or that public projects are competitive and yield value-for-money. A major weakness in Phoenix’s early planning phase in 2011 was that the government had only considered one vendor—IBM—for this large-scale pay modernization. While this now-infamous sole-source contract was initially worth $5.7 million, weak oversight and controls allowed it to be amended 39 times. IBM eventually received $185 million, over 3,200% of the contract’s original value.
In May 2018, Canada’s Auditor-General deemed Phoenix an “incomprehensible failure,” citing “pervasive cultural problems” among officials who painted a rosy picture for fear of telling hard truths, and senior executives who buried problems and ignored repeated warnings to delay implementation. Fearing reprisal, government officials did not tell the Minister in charge of pay modernization that many departments were not ready for Phoenix's rollout.
Specifically, key executives in charge of implementation neglected to conduct sufficient testing, going so far as canceling a trial run that would have shown that Phoenix was unready for launch. Moreover, these executives either removed or delayed important pay functions to meet the schedule, prioritizing rollout over functionality and security. The workplace cultural aversion to speaking up, combined with the warning-muzzling executives’ lack of accountability, ultimately led to the release of a system that many knew would be incomplete, error-prone, and expensive to fix.
Policy Reforms Needed
To improve efficiency and integrity in public procurement, the Government of Canada should implement a formal decision framework and mandate competitive bidding for major projects. It should also establish measures to compel officials to flag problems early and ensure that executives are made to acknowledge and resolve them.
First, Canada should establish a public procurement framework that mandates accountability for all parties involved. Having checks and balances will ensure that both officials in charge of implementation and senior executives regularly review progress against a project’s request for proposals (statement of requirements) established at the outset, and that the government and contractors are at arm’s-length. Without independence requirements, we are likely to see more sole-source deals like the IBM contract or the 2020 WeCharity scandal, where a $912 million contract was awarded to an organization with close ties to Justin Trudeau and his family.
Additionally, there should be safeguards against the sunk cost fallacy, where organizations use past expenditures to justify further commitments to projects that have clearly undesirable outcomes. To address this, a review should take place any time a contract is amended, and thresholds should be introduced to cap contract values. Beyond these risk tolerance thresholds, contracts should face summary review or cancellation.
Furthermore, executive performance reviews or bonuses should also tie into a project’s budget and timeframe. An emphasis on executive accountability will incentivize leaders to find and correct problems as early as possible. Finally, the statement of requirements should also clearly define the scope and timeline of any contract to avoid expanding it beyond what is necessary to accomplish its goals.
Second, Canada should adopt competitive bidding. Mandating transparency and free-market competition in public procurement will be essential to the integrity of the bidding process. In addition to value-for-money for taxpayers, increased transparency checks political partisanship and favoritism, and allows stakeholders to examine the bidders’ proposals against the statement of requirements, thereby ensuring that the winning bidder is held accountable. Independent project managers and auditors should also review major bidding processes to guarantee that both the procurement office and private contractors follow through in letter and spirit.
Third, Canada needs to enact effective whistleblower protection. In 2019, a whistleblower accused then-President Donald Trump of engaging in illegal quid-pro-quo in the Trump-Ukraine scandal, but was able to maintain anonymity thanks to strong legal protections. However, unlike the United States, Canada lacks any effective channel for complaints, and its so-called whistleblower protection has been internationally ridiculed as ineffective and treacherous—their two most famous whistleblowers both lost their jobs and careers after a lengthy and costly legal battle, and over 300 other whistleblowers have reported suffering reprisals between 2009 and 2019.
Enacting effective legislation will help instill a social norm of dutiful disclosure and empower officials to raise concerns without fear of reprisal. To supplement this reform, Canada should also introduce formal requirements that senior leaders investigate anonymous complaints, as well as sign-off on the issues raised. A culture shift toward honest, anonymous feedback and required responses from executives will improve the integrity of the civil service corps and minimize problems that will become exponentially harder to rectify downstream.
The landmark Phoenix case highlights the complex challenges facing Canada’s public financial management, as well as its need for reform. In response, it needs to establish a clear framework of checks and balances that ensures accountability and defines the scope of future public projects.
Canada can ill afford another Phoenix. Entering fiscal year 2021-22 with a $312-billion deficit and forecasting a $145-billion deficit by fiscal year-end, prudent financial management will be more important than ever in ensuring the well-being of future generations. Public funds support Canada’s higher education, scientific research, as well as its vaunted public healthcare and social protection programs. Despite prior setbacks, if senior leaders in the Government of Canada can learn their lesson, establish checks and balances, overhaul the bidding process, and legislate whistleblower protection, they can still greatly improve the stewardship of public funds in the long run and regain the confidence of Canadian citizens.
Meet the Author: Jack Diao
Jack Diao, CPA, CGA, is an MPA ‘22 student at Princeton University’s School of Public and International Affairs, where he studies Economics and International Development. At Princeton, his focus has been on quantitative economic analysis and econometrics, as well as researching policies enabling developing countries to achieve sustainable growth. His goal is to help design fiscal and economic policies for both developed and developing nations so that all may enjoy stability and have an opportunity to succeed.
As an experienced professional in public finance, Jack has led projects promoting fiscal responsibility, small business support, poverty reduction, as well as contributed to fiscal reforms to improve the collection efficiency of tax systems.
Over the last year, Jack worked for the World Bank analyzing FDI trends and researching policies enabling resilient growth and green private sector development. He also helped diagnose the causes of COVID-19 vaccine hesitation and design behavioral interventions to improve vaccination rates in Sub-Saharan Africa.
Jack speaks Spanish, Mandarin, and French, and aims to continue working at a multilateral institution after graduation.