February 15, 1999

To:Audit Committee

From:City Auditor

Subject:Chemical Procurement

Recommendation:

It is recommended that this report be received for information.

Background:

At its meeting of December 1, 1998, the Audit Committee requested the City Auditor to investigate with respect to chemical pricing:

1. whether the City can purchase chemicals from direct sources;
2. whether a consultant can be retained for a flat percentage fee to procure chemicals for the City;
3. the possibility of creating a buyers' consortium, and
4. the possibility of the City not necessarily accepting the lowest bid, but also considering other factors prior to awarding a contract for the procurement of chemicals.

Comments:

The bulk of chemicals purchased by the City are used at sewage treatment plants of the Water and Wastewater Services Division and water treatment plants of the Water Supply Division (former Metro). In 1998, awards totaling approximately $9 million have been issued by the Purchasing and Materials Management Division (PMMD) for the supply and delivery of major chemical products.

This report responds to the in camera requests of the Audit Committee. Our review included interviews with applicable City staff, discussions with a representative of the National Institute of Governmental Purchasing, a survey of procurement practices used by other municipalities, as well as an examination of relevant documents and other procedures deemed necessary. The results of our review are outlined below.

Purchase of Chemicals from Direct Sources

Awards totaling approximately $8 million have been issued for the supply and delivery of fifteen major chemical products in 1999. We have confirmed with PMMD and the Works Department that nine of the sixteen suppliers contracted (two suppliers for chlorine) are the manufacturers of the particular chemical they supply to the City (see Schedule A). The value of these nine contracts represents 50 percent of the total contract value awarded.

PMMD staff indicate that for chemical requirements as well as for other goods and services, they send Tenders/Requests For Quotations/Proposals to all firms who expressed an interest in doing business with the City. All bid opportunities are also listed on the City's Internet Website. Rather than restricting competition to manufacturers, PMMD believes that an open, competitive, non-restrictive process, in which all bidders are provided an equal opportunity to submit bids on City requirements, ensures maximum competition to achieve the best price possible. Municipalities that responded to our survey shared this opinion.

Our discussions with representatives of the Ministry of Environment, the National Institute of Governmental Purchasing and the Works Department confirmed that the option of direct purchasing of chemicals is not always viable. While some manufacturers may directly supply very high volume bulk orders, others prefer to stay solely in the wholesale business. Procurement sources of some chemicals may also be restricted to the manufacturer's choice of distribution and retail network. While adding a premium to the manufacturer's price, chemical distributors do, in some cases, offer value-added services such as hauling from more than one manufacturer, stocking, quality control and technical support.

In conclusion, the current process of procuring chemicals, with the exception of ferrous chloride, provides all interested suppliers, whether manufacturers or distributors, an opportunity to compete. Restricting the procurement of chemicals to manufacturers only, reduces the potential for getting the best possible price, since certain suppliers who could potentially offer a lower price would not be allowed to compete.

Feasibility of Retaining a Consultant to Procure Chemicals For a Flat Percentage Fee

Currently, contract awards for the supply and delivery of the fifteen major chemical products (with the exception of ferrous chloride, which is currently covered by a five year contract) are offered either annually or once every three years.

Using a consultant to procure chemicals and the process for evaluation raises a number of issues, such as:

• developing appropriate selection criteria for the consultant;
• establishing mechanisms to verify the validity of the proposed benefits/savings;
• determining the roles and responsibilities of City staff (namely PMMD and Works) and the consultant;
• establishing a process to ensure all City purchasing policies (e.g. Fair Wage, Canadian Content, etc.) are adhered to by the consultant;
• establishing a process to handle disputes with the consultant to guarantee that the supply of critical chemicals is not compromised;
• establishing performance guarantees;
• establishing a process to ensure that the lowest cost is in fact obtained by the consultant for all chemicals purchased and that these chemicals meet city specifications; and most importantly,
• developing a mechanism that effectively compares the consultant's proposals against the current situation whereby PMMD is responsible for the procurement of chemicals.

To effectively carry out this process, it would be necessary to issue a Request for Expressions of Interest to determine if there is any interest in providing these types of services and to assess the qualifications of respondents in this regard. A team, not including PMMD, would have to be established to develop and issue a Request for Proposals that clearly outlines the services to be provided, criteria for evaluation and other requirements. This team would also oversee the process, evaluate the proposals in comparison to PMMD and make a determination as to whether an outside proposal would result in a lower overall cost of chemicals to the Corporation. The end result, in our opinion, is a difficult, complicated and costly process that in the end may not accrue any additional benefits to the City.

The use of a consultant to procure chemicals for the City would effectively add another layer to the process as certain administrative responsibilities would still need to be carried out by City staff. Operationally, it is essential that the Works Department staff continue to be involved in defining technical requirements and closely monitor product quality through extensive testing, since chemicals applied at the water and wastewater treatment plants directly affect water quality and have critical public health and environmental impacts. In addition, City staff would have to be involved in evaluating the appropriateness of services proposed by the various consultants, their associated costs and proposed benefits.

Other municipalities surveyed indicated that they do not retain consultants to purchase chemicals. By using a consultant to procure chemicals, the City would effectively be outsourcing the services currently provided by PMMD in this regard. A consultant may have better knowledge of the chemical industry and therefore, may be better able to locate alternative sources of supply. This benefit would have to be evaluated against the City's current process, which is premised on the concept of fair and open competition and which uses various methods to secure bids for chemicals as well as other goods and services.

In the end, the City would have to determine whether using a consultant to procure chemicals would reduce the cost of chemicals beyond what PMMD could achieve. Performing the evaluation and making the decision could be problematic, in that it may not be possible to guarantee that the lowest possible cost to the City is in fact obtained, and that PMMD could not achieve the same or better results.

The City currently buys nine of the fifteen chemicals directly from the manufacturers. Based on the issues identified above and provided that PMMD continues to ensure a competitive environment for the procurement of chemicals and is proactive in sourcing potential suppliers, the use of a consultant would not appear to offer any added benefits to the City at this time.

Creating a Buyer's Consortium

Respondents to our survey of procurement practices in other regional municipalities (Niagara Falls, Waterloo, Durham) indicated an interest in the principle of forming a buyer's consortium. These municipalities believe that consortium members would enjoy lower prices, although the benefit would be more significant to small municipalities since the City of Toronto, which already has large volume requirements, should already be enjoying the price advantage from large bulk purchases.

Toronto Police Services staff have advised that the use of a consortium has resulted in lower prices and better value for the dollar with respect to their purchases of clothing, boots and supplies. These benefits are attributed to the fact that the strong purchasing power behind the consortium is forceful enough to demand better prices and customer services (e.g. delivery schedules, design). The Central Alberta Purchasing Agency operates as a consortium for local universities, colleges, schools, hospitals, municipalities and some private sector companies. A representative of the National Institute of Governmental Purchasing, Canada West Chapter (Edmonton) who is also a member of this Agency cautioned that despite the potential financial benefits to the consumer, a single supplier may be unable to accommodate the combined volume demand. In addition, the consortium approach tends to favour major suppliers and as such small operators could be unable to compete.

According to our survey respondents, one of the main issues to be addressed in forming a consortium is the establishment of a set of common specification requirements that can accommodate the diverse operational needs of its members. Success of the consortium depends on the participants' willingness to harmonize their specification requirements.

Noting the geographic distribution of municipalities across Ontario and that freight charges would be shared equally by all participating members, the City of Toronto could end up paying a higher price for some chemicals. To address this concern, bidders could be asked to disclose separately the commodity's unit price and distribution costs by regional segments and accordingly, members would pay for their relevant share of freight costs.

PMMD indicated that it provides centralized purchasing services to City departments, and designated Boards, Agencies and Commissions. As the purchasing agent for Toronto Police Services, PMMD has been an active participant in the Police Co-operative Purchase Group since its inception several years ago. It is also a member of the Universities Purchasing Group. Where a group purchase is being planned, PMMD consolidates the requirements from its various clients and co-operative groups and issues consolidated Requests for Quotations and Tenders in order to get the best price for bulk quantities of commodities. PMMD will be initiating discussions on the feasibility of establishing a GTA consortium for purchases of certain core products and services. We have been advised that the procurement of chemicals will be included in this discussion.

In summary, the use of consortiums to buy goods and services can be effective in obtaining lower prices and better value for the group. It should be noted, however, that in most cases, it is the smaller members of the group who benefit the most. Agreeing on a common set of specifications, especially for chemicals and accounting for differing freight charges could also be problematic. In our opinion, the use of a consortium for chemical purchases would provide minimal benefits to the City.

Consideration of the Lowest Bid and Other Factors Prior to Awarding a Contract

Our review of price quotations and award documents confirmed that chemical contracts are awarded

to the lowest price bidder who also met pre-established technical specifications. In addition, bid evaluation and award decisions are jointly made by PMMD and the user department. In the case of chemicals, an intensive review is done by the Works Department to ensure that the product meets all specification requirements, with particular emphasis on product quality, safety and reliability of supply. All significant factors other than the lowest bid are therefore considered prior to awarding a contract.

Conclusion:

This report has examined various issues related to the procurement of chemicals. Our conclusions are summarized below.

In reviewing the feasibility of procuring chemicals from direct sources, it is our opinion that the current process allows all interested suppliers the opportunity to openly compete for chemical contracts. Restricting the procurement of chemicals to manufacturers only would reduce the potential for getting the best possible price since certain suppliers, who could potentially offer a lower price, would not be allowed to compete.

At this time, the use of a consultant to procure chemicals for a flat percentage fee raises numerous issues and does not appear to offer any apparent benefits to the City. The use of a consortium would likely provide more benefits to small municipalities. However, PMMD has indicated that it will include the procurement of chemicals in its GTA consortium discussion.

Contact Name and Telephone Number:

Tony Veneziano, Senior Audit Manager, 392-8353.

Jeffrey Griffiths

City Auditor