Transparent Choices

Posted March 28, 2014

The fun part of being a newly elected government is to commission reports on activities that the previous government handled badly. It gets harder when the time comes to make choices.

The report from former Dalhousie president Tom Traves provides a number of important recommendations on what instruments should be used in support of economic development, and on how their use should be managed. His thinking was informed by an extensive review of best practices in other North American jurisdictions.

His report is clear and decisive on some issues, but less so on others. Let’s look at them individually:

  1. Equity Investments: Until now these have been made by Innovacorp, Nova Scotia Business Inc. (NSBI), and the Department of Economic and Rural Development and Tourism (ERDT). We will shortly receive another report on how equity investments have performed, and it is likely to paint an ugly picture. The least bad and arguably the most necessary are small early-stage venture capital investments made by Innovacorp.  Traves advises that only these be continued and only through Innovacorp, eliminating duplication and potential competition between agencies.
  2. Grants: The report recommends that these only be provided if highly leveraged and recommended by an independent board. That means that the recipient company is putting in much more than Nova Scotian taxpayers, as has been the case with Michelin. By implication the same rules would apply to “forgivable” loans which really only differ from grants in postponing cost disclosure to future years. These are fundamental changes and would have prevented many of the poor choices of the past.
  3. Repayable Loans: Traves is rather less clear on these but the implication is that again an independent board would inspect them for credit-worthiness and only recommend the good ones.
  4. Payroll Rebates: These have been the core business of NSBI and Traves recommends that they continue to be so. The NSBI board would have greater authority to make choices but the results of those choices would be disclosed.

Transparency is a welcome and pervasive theme. The government enacted legislation in the fall to require disclosure of funding agreements and how the recipients subsequently perform. There is a troubling clause that allows exceptions for any reason. It is therefore extremely important that the regulations tightly restrict how and when exceptions can be made.

The new legislation only applies to deals since October of last year. That should be supplemented by a parallel report on the financial status of prior deals, to the extent possible without violating confidentiality agreements. The numbers in the ongoing reports should be regularly verified by the Auditor General. The prospect of being embarrassed by such disclosure will improve the ongoing stewardship of past investments.

Dr. Traves has further expanded the transparency theme. The size of transactions that can be done by agencies such as NSBI to act without going to cabinet would be expanded. Decisions on larger files would only reach cabinet if they had been recommended by an independent board. It would be rather awkward for a government to publicly overrule a rejection by a thoughtful and knowledgeable group.

Even that is not a sufficient test. The previous government had an advisory board (whose advice was not revealed). Members of it have complained that the criteria by which they were asked to judge were so loose that it was hard to imagine a proposal that did not qualify. It is crucial that the independent board have sound financial criteria for making recommendations.

Traves recommends that every program be reviewed for effectiveness on a five year cycle. Explicit recommendations are to be made to continue, reform, or close the program or agency.

In total this has potential to be a sound package. The minister’s comments to date have been supportive of “streamlined programs, clearer objectives, and arm’s length decision-making.”

And yet we have been down this road before. The previous government promised that the new Jobs Fund board would be “… distinctively different from the Industrial Expansion Fund…”. In fact, it was similarly opaque and made even worse decisions.

It will therefore be important to watch what choices the new government makes. Is the process more tightly focused and duplication eliminated? Does cabinet only act after receiving a recommendation from a knowledgeable independent board? Will the criteria for new investments separate promising opportunities from those unlikely to be worthwhile? Is there public disclosure of every deal when it is made, and how it subsequently performs?

The government has received some excellent advice and has been making all the right noises. Following that advice will mean rejecting many deals that would have been approved in the past.

Applauding the advice is easy. Making the necessary choices is harder. The minister advises that he will respond this spring. Stay tuned.

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Most Recent Comments

  • I sent a copy of my article below to our Premier and received this response:

    Thank you for your email to Premier McNeil.

    This is an automatic confirmation your email has been received.

    Warmest Regards,

    Premier’s Correspondence Unit

    Suffice to say, Stephen’s minions will never show him the email and this becomes a mute issue. That is too bad as the program was utilized in the late 80s to revitalize a struggling agriculture industry. Possibly it makes too much sense. And another question, how many people are in the Premier’s Correspondence Unit and what are their salaries? Another huge government blackhole.

    Richard Randall | April 1, 2014

  • Mr. Traves certainly has hit the nail on the head with the way NS governments just continue to hand out money without any realistic way of monitoring results. My take on this situation is that neither government near government people have any real financial knowledge. Most loans are likely done strictly for political reasons, which usually results in huge write-offs when these companies go bankrupt and close their doors. I would like to present a different solution, one in which I participated in during the 70s and 80s in Alberta. There simply is no reason the government should be lending money to anyone, but providing loan guarantees. The government needs to set up a program with strict objectives and guidelines, for the benefit of the province. All the companies then looking for government assistance would have to make application at a bank or credit union, who then reviews the history and projections provided. If the application makes financial sense and is within the stated objectives of the governments program, the bank or credit union would provide a copy of the application and credit decision to the government and request the government provide either a partial or full guarantee for the loan or loans. By proceeding in this manner, the proposals are reviewed by people with credit granting knowledge, not political animals intent on looking good. I would guess this method would result in substantially reduced write-offs for the province and also provide the borrowers with the financial expertise banks and credit unions would provide. Banks and credit unions are much quicker to respond when a company is approaching insolvency, due the having far more financial information than the government requires. I see this as a viable alternative to Mr.Traves recommendations.

    Richard Randall | March 31, 2014

  • Much of what is contained in the Traves report is very good and could certainly provide the basis for an improved way forward but really a lot of what it suggests has the ring of ‘ same ol’,’same ol’.. Unfortunately the end result is always the same because Political Considerations and Sound Business Decisions tend to be mutually exclusive.

    bob mackenzie | March 28, 2014

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