Latest Leak
Released on August 01, 2013, 11:00 PM EDT
Tag #: 659
Corruption: Inside and Out

Recap
Transit Ticket Scandal: Nadorozny’s Sorry Saga
CAO Nadorozny, City Solicitor Canapini and Director Human Resources, Fowke should step down     

From Left - Canapini: Bad legal advice; Nadorozny: Lack of accountability, Fowke: Incompetent and negligence

The scandal concerning the contracts between Zio’s and the City of Greater Sudbury is a perfect example of how business malpractices leads to loss that is difficult to repair. This case also brought to light the importance of accountability, which has been neglected for far too long on behalf of the City. No one is held accountable for public funds. This allowance of no accountability, could obviously lead to additional fraud in the future. It is therefore necessary to ensure that accountability takes place. To aid with the recognition of when such a malpractice arises, there should be transparency regarding public funds. This monetary information should be available and open to public. Furthermore, officials working for the City should be more thoroughly investigated or be shown disciplinary action against them, as rather than attempting to find a solution, they have tried to cover up this issue. Kevin Fowke, for example, attempted to defend any disciplinary actions against employees involved in the Transit scandal. There should be no tolerance for such a mismanagement of public funds and for such unprofessional misconduct.  

Timeline: 

The City and Zio’s First Contract  
Tony Sharma is a director, president and secretary of the downtown transit kiosk. Under the company number 1211250 Ontario Inc., city signed its first contract with Zio’s In-Transit Cafe.

January 31, 2004
Expiry of the City-Zio’s contract
The company numbered 1211250 Ontario Inc., is now operating as Zio’s Tuck shop. The contract between this company and the City of Greater Sudbury, which permitted them to sell transit tickets on consignment at a kiosk at a downtown transit terminal, expired. Upon expiry of the contract, the company was more than 142,000 in arrears.

February 26, 2004
New Approved Contract
The new contract, allowing the company to sell transit tickets on consignment, had improved terms for the contractor compared the one prior. This contract, which was approved by the council, includes provisions for two single-year extensions.

June 1, 2004
Zio's new services
The new contract that the City signs with Zio’s allowed them to run a ticket counter and information boot. The contract’s renewal was based on adequate performance for the duration of the contract. During this period, Zio’s already owed $262,000.

September 30, 2004
Zio's debt
The company was close to $215,000 in debt.

December 31, 2004
Zio’s owes money to the city 
At this point, Zio’s owes the city $142,459.

January 31, 2006
Extension of Contract
At this point, the company owes the city more than $340,000. The 2004 signed contract expires yet it is extend again, for the third year.

January 31, 2007
Debt Continues
The company is close to $334,000 in debt. Still, the contract is extended for a fourth year.

March 31, 2007
Continued Debt Growth
Their debt has reached $387,634.

June 30, 2007
Debt Rises
Debt has reached $428,578.

September 30, 2007
Debt Rises Again
Debt has reached $581,818

December 1, 2007 — December 31, 2007
Initiation of External Audit
A review of the revenue processes is initiated at Greater Sudbury Transit by the city’s external auditor, KPMG. Some months later, it was discovered that the 1211250 Ontario Inc. owed more than $800,000. This discovery was made upon the City’s development on reporting and monitoring procedures related to ride card and pass inventory.

December 31, 2007
Debt Nearly $1 Million
The company reached $850,602 in debt.

January 31, 2008
Another Contract Extension
The first year transit kiosk extension expires. The City extends the contract for a second year. The company is $737,047 in debt.

January 31, 2009
Another Contract Extension.
The second year transit ticket kiosk extension expires. City extends the contract yet again, in attempts to regain their monetary loss. The company is now $824,025

March 31, 2009
Debt climbs to $1 million.
The company reaches more than $1.1 million of debt owed to the City.

August 11, 2009
After receiving only one applicant (Zio’s), City cancels transit kiosk bid
Upon issuing a tender for the new ticket kiosk contract, the city cancels it due to its only applicant being 1211250 Ontario Inc.

August 31, 2009
Notice of default letter
By providing post-dated cheques, the company agrees to pay the $832,050 it owes the city by September 10. This was in response to the Notice of Default letter that was sent to them from the City giving it two days to repay the debt.

September 1, 2009
Zio's sells more transit tickets
More than $22,000 worth of bus tickets is issued by Greater Sudbury Transit to the company.

September 4, 2009
Termination of Contract
To this date, the city had not been paid since April 28, 2009 and is owed $866,537. $287,910 was recovered by the city through letters of credit, a certified cheque cash on hand and $96,000 in unsold transit tickets. The contract with Zio's Tuck Shop is henceforth terminated.

March 31, 2010
Judgement
City of Greater Sudbury wins $578,816 through a judgment. They additionally gain costs of $1,211 against 1211250 Ontario Inc., money the city has still not been able to collect.

July 12, 2011
Auditor General’s transit audit
Brian Bigger, Auditor General, handed in his audit concerning the Greater Sudbury Transit Kiosk to city management. Management’s delays in getting back to him with comments, caused his plan to present the report at the August 9 Audit Committee to fall through.

August 30, 2011
Emergency meeting.
The deadline for the city to sue Sharma to get its money back is quickly approaching. When Bigger informs Mayor Marianne Matichuk, an emergency meeting is held the next day, to discuss the matter.

October 5, 2011
Audit is presented.
More than a month ago, the two-year deadline for the city to sue Sharma has expired. Bigger finally gets to present his report to the Audit Committee

October 11, 2011
Apology.
“All staff who has had an involvement in the matter acknowledges, as we did in 2009 when the matter was first brought to council, that better business decisions could have, and should have, been made.” This is the statement issued by the city to apologize for how staff handled the transit tickets contract.

June 12, 2012
Investigation is handed to OPP.
The following is a statement made by Greater Sudbury Police Chief Frank Elsner when, at a city council meeting, he informed the councillors that Ontario Provincial Police investigators were in town to look into what happened with 1211250 Ontario Inc.: “I've asked them to do whatever they can to expedite this, as ... we could really use some closure,” he says.

June 12, 2012 — May 10, 2013
OPP investigation
In April, the OPP was asked for an update on the situation. The response was simply that it was still ongoing and had no additional information to share.

May 14, 2013
Investigation conclusion
The following is a statement that Greater Sudbury Police Service Chief Frank Elsner read to city council from a letter from the OPP: “Investigation has revealed there was evidence of poor business practices and a lack of management oversight with the vendor,". Furthermore, the letter states that “Evidence also confirms both the vendor and the City of Greater Sudbury failed to follow the terms and conditions set out in the contract, which allowed this situation to manifest to the extent that it did."

This statement was made after a year-and-a-half investigation when the OPP determined that there were no grounds to criminally charge anyone, including city staff.

June , 2013
Kevin Fowke attempted to defend any disciplinary actions against employees involved in the Transit scandal.
This is yet another attempt at an internal cover-up by the Human Resources department.

July 2013
Mayor intends to apply Freedom of Information request.

Mayor intends to apply for Freedom of Information request. Bureaucrats working for the City are likely not allowing proper procedures to follow, and are likely setting obstacles to prevent the release of this information to the public.

• Important Questions remaining:
  (1) Who altered the cheques that were originally issued to the account of 1211250 Ontario Inc. and instead deposited them into Tony Sharma’s personal account?
  (2) Why did City staff not notice this practice in advance? Who is responsible for the lack of oversight?
  (3) Who is responsible for the continuous renewal of the contracts?
  (4) Why did City want to hide any disciplinary actions taken against it’s employees? 
  (5) Did the man at the centre of the scandal – Nodorozny - receive any disciplinary actions against him?
  (6) Did the man who attempted to cover up this scandal – Canapini - receive any discipline?
  (7) Did any of the missing money divert to City's bureaucrats private bank accounts?
  (8) Should their personal property and any bank account information be revealed to public, and should it be investigated?
  (9) How is it still a mystery how this much money went missing from public funds, and how is no one responsible?

The City of Sudbury Citizens have the right to know the answers to all of these questions. On this note, Nodorozny, Canapini, Fowke must stepdown. It is incredible that the city waited until 1211250 Ontario Inc. reached arrears of over $1.1 million before even attempting to take any actions. They have shown a disservice to the public by wasting public funds and must thus be held accountable.

But based on the official wall of silence that surrounds the investigation, discipline,  and alleged  missing of transit ticket money, it seems inevitable that someone knows more than they are saying. Lawyers representing several media groups and civil organizations are fighting in court and with City hall bureaucrats for details of the case to be released to the public.

The waiting game continues.

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Editorial
Released on August 01, 2013 at 11:00 PM

The original article initially published on Regulation & Governance, 5, 368–385. and Journal of Public Economics, 96 (9-10),712-726. Excerpts from the article as follows.

Bypassing public procurement regulation: A study of rationality in local decision making

The use of private contractors engaged through procurement is common in most public sector areas. One major goal of public procurement through competitive tendering is to increase public sector (cost) efficiency, reducing costs while keeping quality constant or getting higher-quality service at the same cost as before. The laws and regulations pertaining to public service procurement are designed to ensure that the objective – increased efficiency – is attained. Although research has demonstrated that costs usually fall by 20–30 percent as public procurement is introduced, the process does entail some problems. One problem is that government officials are tempted to give preferential treatment to special interests. These actions usually take the form of giving local firms preferential treatment to foreign firms or firms from elsewhere in the showed that contracting provides new opportunities for special interests to influence policymaking.

As will be demonstrated here, local officials are tempted to take measures, some straight forwardly illegal, others on the borderline between legal and illegal, to circumvent procurement regulations, often resulting in local firms being awarded contracts. The aim of the article is to examine the strategies used by local governmental decision makers to bypass procurement regulations and to analyze the rationality underlying their actions. It has also been demonstrated that decision makers favor local or domestic firms. A substantial amount of cases where the local government has deviated from (or broken) procurement regulations or competition laws can be found in many public undertakings, such as child and elder care, and construction.

Many research findings highlight the complexity underlying decisions to deviate from procurement regulations. It will demonstrate that deviation from procurement directives is often not due to mistakes or lack of knowledge, but reflects intentional strategies and can therefore be seen as the product of rational decisions and actions. From the legislators’ point of view, these actions undermine the intent of the law, and the public in these municipalities will have to pay more for services than otherwise. The facts also suggests that regulations stressing economic efficiency alone, to the exclusion of other values, are not infrequently regarded by local governmental officials as impeding their efforts to serve what they see as their communities’ public interest, even if it is not economically efficient to do so. Studies of these practices are therefore of general interest both in terms of the implementation of laws and regulations and from an accountability point of view.

The main tool of the central government for promoting the use of public procurement is passing laws that demand the local level authorities to use competitive tendering when procuring goods and services. The policymaking by the local government is subject to central government regulations, but at the same time the central government’s ability and possibility to realize its own goals is dependent on the cooperation of the local government. This means that the local government has to undertake tasks that are based on the central’s government orders/decisions where the central and local goals and interests are converging as well as tasks where central and local interests/preferences do not coincide. In addition to the tasks delegated by central government, local authorities have the responsibility to take initiatives on matters of local interest.

There are examples of when a local government deviates from procurement regulations, so it would be of interest to determine whether there are instances in which such actions might be optimal in terms of economic efficiency (i.e. obtaining the best possible service at a given cost). If decision makers deviate from procurement principles for such reasons, they are in violation of the spirit of the law, but are actually increasing efficiency. Therefore, actions taken for such reasons are desirable in terms of economic theory and could be seen as motivated by the efficiency value of local self-government, despite the deviation from the procurement principles.

First, consider the case when the number of competing firms is small. If there is only one outside bidder with costs well below those of local firms, it has the incentive to enter a bid just below the expected bids of local firms to secure the contract and still make a substantial profit. In such a case, giving local firms a discount when bids are compared (violating the first principle) would force outside bidders to make lower bids, closer to their actual costs, thereby saving local taxpayer money. Note that the discount must be known in advance and that, if the strategy succeeds, the outside firm will still end up with the contract. If the contracted firm is located far away, it might be more expensive to monitor its actions and harder to enforce any needed sanctions; this could be especially true if the outside firm is from another country. This might form the basis of an argument for preferring local firms, as using local firms might reduce the costs of monitoring the compliance of contracts and the costs of enforcement in the event of breaches, resulting in a lower total cost even though the price of the service itself might be higher.

Although there are situations in which deviations from procurement regulations might be theoretically optimal, the overall conclusion in the literature is that such situations are rare and that the benefits of favoring local firms are small even in those cases. Allowing preferential treatment of local firms may give rise to rent-seeking behavior that reduces economic growth, leading to higher taxes and distorted resource allocation. Overly rigid procurement laws might result in the shutdown of businesses in unexpected areas if some firms lose contracts in other areas. The possibility of such occurrences raises the question of whether current procurement laws might be harmful to economic activity and overall efficiency in rural areas. The answer to that question, however, exceeds the scope of this article and must be saved for another time.

Editor
WikiLeaks Sudbury
August 01, 2013

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