Spending billions without adequate financial analysis
By Markham Hislop
Reading yesterday’s Wildrose press release calling for a balanced budget law made me think of a year-old interview with then Finance Minister Ted Morton. Something about the 2011 Alberta budget had struck me as odd and I was looking an answer. Morton, ever the straight shooter, provided it.
Most Albertans will remember that fiscal hawk Morton presented a budget forecasting a $4.4 billion deficit. That’s right folks, the guy calling loudest for smaller government, lower taxes and balanced budgets, the MLA frequently rumoured to be flirting with Wildrose, presented the Legislature with a whopping shortfall.
That irony aside, the justification for the deficit was that Alberta could save 20 per cent on construction costs by building infrastructure (e.g. roads, bridges, buildings, etc.) during the downtown, when there was less competition from the oil industry for contractors and labour. The $6.6 billion capital budget accounted for the entire deficit and then some.
I asked Morton if his deputy minister, or someone in his department, had prepared a cost-benefit analysis proving out the 20 per cent saving.
Fact is, I already had the answer. The week before I had asked an infrastructure department (yes, they actually have a stand alone bureaucracy devoted to infrastructure) media flunky to track down the aforementioned analysis. After several days of shaking trees, he reported that no such analysis had been done.
Nothing. Nada. The entire rationale for going over budget by $4.4 billion had basically been worked out on the back of a cocktail napkin.
Morton admitted as much.
“There might be some difference of opinion over how much material and labour prices dropped, but we had all sorts of examples of them coming in at 15, 25, 30 per cent lower on essentially the same project from 18 months earlier. There was anecdotal, but concrete evidence that things were much cheaper, particularly in the road paving business,” Morton said.
Perhaps costs had dropped from their peak of 2008, but the $4.4 billion wasn’t available from incoming revenue. It had to paid from the Sustainability Fund, money set aside for rainy days. What was the opportunity cost of that money? What if the government postponed some or all of the capital costs a year or two, would construction costs have been lower yet? Were all the capital projects really needed or could some be axed? Assuming every last one of them was necessary, were there alternative methods of financing, such as the government’s own vaunted P3 approach?
Albertans don’t know because, apparently, no one bothered to ask the questions.
Lest you think this was an isolated incident, let’s return to my interview with Finance Minister Morton.
The original topic was Bill 50, the Electric Statutes Amendment Act, which among other things authorized the Alberta government to build electrical transmission lines estimated to cost between $6 billion and $16 billion, depending on who you talked to. Morton, who was running for leadership of the PC party at the time, supported industry’s higher estimate and criticized his own government for being $10 billion low. He argued the department of energy simply hadn’t done its homework and had resisted efforts to explain its numbers.
“There’s a huge discrepency between what the costs are and what it’s going to do to both residential and commercial users over the next couple of years,” he said. “If the higher estimates are accurate, it would triple costs over the next three to six years.”
Morton was quite concerned about the effects of Bill 50 on commercial users, so later in the interview I suggested to him that his concerns sounded suspiciously like those raised during the hue and cry over changes to the oil and gas royalty structure introduced by Ed Stelmach shortly after he became premier in 2006.
Morton agreed. And once more he pounced on bureaucrats for not doing a thorough analysis of the industry they were regulating.
“The department of energy did not spend nearly the time it should have with the first run at royalty review, determining what the cost of those steep curves (increase in royalties) would be in terms of destroying profitability and driving out investment,” he said.
What we have here are three examples (2011/12 capital expenditures, wildly under-estimated construction costs for power lines, and the bungled royalty review) that point to a disturbing trend: a PC government that doesn’t spend enough time thinking about the best way to spend taxpayer’s dollars.
Ask yourself this question. Would a private corporation plan to spend billions of dollars on a project without conducting a comprehensive analysis of the costs, risks and benefits? Do you think the TransCanada board of directors gave the $7.8 billion (only slightly more than Alberta’s projected deficit last year) a green light without reviewing a substantial amount of background data and analysis from its management team?
Danielle Smith has missed the mark with her proposal to reform provincial finances. Capping increases in annual government spending to the rate of inflation plus population growth and reinstating mandatory balanced budget legislation are all well and good.
But the first priority has to be better financial planning. If the premier wants to spend a billion bucks of taxpayer money, she or he should be able to produce the numbers to back it up.
The Alberta government is a $40 billion a year corporation. Let’s start running it like one.