Solving the Ottawa – Ontario corporate bailout spat
SECRET – Advice to Premier
To: Premier Dalton McGuinty
From: Secretary to the Cabinet
Date: March 10, 2008
Re: Federal / Provincial Discussions Surrounding Corporate Grants and “Strategic Investments”
Further to our discussions and briefings on the abovenoted matter, we are all now aware that Prime Minister Harper has weighed in on the dispute between yourself and Federal Finance Minister Jim Flaherty. The Prime Minister is clearly supportive of his Finance Minister, and we are hearing nothing from our Ottawa contacts in the Federal-Provincial Relations Office or the Privy Council Office that suggests a change in their position is to be expected.
Having scored the points that we knew you would by cloaking yourself in the “I’m not reducing taxes to follow the Mike Harris choice of cutting grants to schools and hospitals”, it is my recommendation that we now change tactics. The original goal, as you’ll remember, was two-fold.
First, shift the blame to Ottawa. The strategy required Ontario to attempt to squeeze Ottawa for direct financial assistance, loan guarantees or other mechanisms specifically designed to assist Ontario’s manufacturing sector in light of the sustained rise in the Canadian dollar. Although it is not the Federal Government’s “fault” that the U.S. dollar has plunged against most world currencies, or that the Loonie has been specifically attractive to foreign capital in light of Canada’s strong resources (the concept of a “Petrodollar”), our polling data shows that your government has succeeded in convincing Ontario voters that the Provincial Government is not accountable for any of Ontario’s corporate challenges of late.
Knowing that the Federal Government wouldn’t be in favour of corporate
charity investments, you’ve still succeeded in painting Minister Flaherty as a supplicant of Corporate Canada by his suggestion that your government cut corporate taxes.
Well executed, if I do say so, Premier.
Our second goal, of course, was to actually attract federal funds for our manufacturing sector, among others. Winning the hearts of the voters would be a sweeter victory if you also could raise hundreds of millions of new federal dollars to prop up those companies that are having a legitimately difficult time with the Loonie at par.
Sectors that come to mind include automotive (to remind, Ministers Duncan and Pupatello hail from Windsor), furniture, clothing, automation (Kitchener-Waterloo) and technology (your hometown of Ottawa has 82,000 “knowledge workers” according to OCRI).
With this frame of reference, I have a new strategy to recommend, and it can succeed without any direct involvement of the Federal Cabinet. The new strategy will achieve our main goal of getting millions of dollars of federal funding into Ontario-based corporations, at well below market terms. Grants, if you will.
To top it off, it appears that the Federal Cabinet has no idea just how easy it is for your Government to access these funds.
I’m not referring to the many Canada-Ontario transportation, PPP or Infrastructure initiatives recently signed, but one of the Federal Government’s own Crown Corporations – with 33 storefront offices across Ontario. None other than The Business Development Bank of Canada.
It may surprise you to learn that the federal Conservatives, despite their strong free market views, have allowed the BDC to position itself as a post World War II throwback of a planned economy. The federal government, occupied with so many other matters to attend to, appears entirely unaware that BDC has become one of the most fiercely competitive lenders in Canada, growing its loan book by almost 50%, to almost $10 billion (as at March 2007), as compared to $6.59 billion in 2003.
What’s more, BDC’s Act allows the Crown Corporation to run its portfolio at a 12:1 debt-to-equity ratio. As of the recent financial year end, BDC’s leverage was were running at just 4.6:1, which means that Ontario companies can access almost $7 billion of new federally-backed corporate loans before the BDC needs to ask the federal Conservative government for more capital.
Who needs Minister Flaherty’s agreement to subsidize the shuttered Essex engine plant in Windsor if the BDC is already willing to put up dollars at rates cheaper than firms can borrow from private sector lenders? And with terms that far exceed the traditional risk management techniques of the private sector. My advice is to go around the Finance Minister, and tap into the growth capital firehose that is the BDC.
I will point out to you that other provinces have figured this out. Quebec, in particular (home of BDC’s head office). According to the last financial statement, Quebec companies have tapped BDC for 38% of all loans advanced by the Crown Corp., despite having just 23% of Canada’s population.
I must take responsibility for this oversight. During my career, I have watched federal governments of all stripes sell or privatize almost every federal Crown Corporation since 1985. Some highlights include: de Havilland Aircraft of Canada Ltd., Pêcheries Canada Inc., Canadian Arsenals Ltd., Canadair, CDC, Teleglobe, FPI, Varity, Northern Canada Power Commission, Northwestel Inc., Terra Nova Telecommunications, Cameco, Nordion International Inc., Telesat Canada, Civil air navigation system, Canarctic Shipping, Canada Communication Group…. All served a specific public policy goal. All were privatized nevertheless.
I have never taken it upon myself to recommend to First Ministers to tap into the loan largess available at the BDC as I, frankly, have been expecting that it would be privatized. My rationale has been to avoid getting Corporate Ontario hooked on BDC’s cheap loans, for fear that the day would soon come when the gravy train would end, and Ontario’s BDC clients would find themselves unable to transition to traditional private sector capital.
As the years go by, I can only blame myself for the fact that Ontario has accessed just 31.7% of BDC’s entire loan portfolio, despite being home to 39% of Canada’s population (see prior memo “BDC Fact #7” December 7-07). That’s a $650 million capital deficit, which is more than the funding we’ve been seeking from Minister Flaherty for the Essex engine plant, among other recently targeted situations.
But now is the time to reach for this Federal piggy bank. I understand that despite private sector rumblings that it is acting outside the parameters of its governing legislation, BDC feels totally comfortable lending to firms with more than 1,000 employees, for example, and is happy to put money out at rates as low as barely over prime (see prior memo “BDC Fact #8” December 8-07). The strangest bit of news of all is that the BDC will undercut the private sector to win lending business. Under the nose of a Conservative Government, no less!
I am concerned that Minister Flaherty will soon put a stop to these hyper-competitive practices, and I recommend that we arrange for each and every Ontario corporation to call their local Ontario BDC branch at the earliest opportunity.
Software firms suffering from depressed US$-denominated revenues but steady CDN$ costs, Tier One and Tier Two auto suppliers that are challenged by the Big 3’s contraction, just about everyone in manufacturing, Lake Erie fishermen, Seaway frieghters, etc., etc. They all could benefit from some cheap federal cash, and you’ll be able to take all of the credit for tapping into the BDC gusher.
And I am quite confident that BDC’s senior executives will be very supportive. They’ve set quite aggressive loan growth targets for themselves for 2008, and Ontario’s needs alone will more than satisfy BDC’s publicly-stated portfolio growth hurdle.
I need to remind you that we must ask quickly, and without media leaks. The moment that Ottawa finds out that we’ve back-doored them with their own Rogue Crown Corporation©, they might actually bring the BDC to heel and force it to follow its own legislation – and complement the private sector, rather than compete with it.
In the meantime, my advice is that we take advantage of this money tree before our automotive sector squeals any louder. Who needs corporate grants from Minister Flaherty, when his own Crown Corporation is prepared to give 5, 7, 15 and 20 year corporate loans at below market rates?
Minister Flaherty can recommend the your government consider corporate tax cuts until he’s blue in the face, but the irony is that the Federal Government has been running a corporate welfare scheme since the end of the Second World War. It took BDC more than 50 years to build a loan book of $4 billion by 2000, and has taken just seven years to grow that to $10 billion. All backed by the Full Faith and Credit of the Soverign.
Once we use the BDC to deftly solve our brewing economic crisis, my team will begin drafting a strategy calling for federally-owned automated teller machines. It would be a great vote-getter. Who in Ontario wouldn’t want subsidized ATM machines?
If the BDC can compete for corporate business, we could well be successful in lobbying for the BDC to get into retail activities. That is, of course, if the Federal Government doesn’t rein them in first.
Secretary of the Cabinet and Clerk of the Executive Council
Forget about the BDC, lets get the federal government to treat Ontarians on a per capita funding basis as they do to every other province.
Let’s do the math (very simple):
– 2006/07 Ontario corporate income tax revenues was at $9.85-billion (at a 14.5% rate).
– If the federal government properly disbursed EI to Ontario unemployed workers(instead of forcing those workers onto the provincial welfare tab), Queens Park would save between $1.5-1.7 billion.
– The CHT (Canadian Health Transfer) sends $60/Ontarian ($750-million) less than the national average (which is actaully quite large considering Ontario represents 40% of the population).
So if the federal government was to correct just these two items (and there’s a good dozen more, like education transfers, that show Ontario as a real outlier), Ontario could instantiously cut its corporate tax rate to 11% without affecting overall government revenues.
There’s no question that you make excellent points. Unfortunately, any time Ontario raises a concern about the differing treatments of various regions across Canada, it is painted as being anti-Confederation.
Today’s post was more tongue-in-cheek than a prescription for solving Ontario’s status as a recently underfunded Founder of Canada.
But, as with tech startups, the Founders rarely get their just reward at the end of the build-out phase.
So long as: 1) the transfer payment formula is maintained, and 2) natural resources are ignored as a real source of provincial revenue, 3) Ontario politicians are trapped representing the needs of “Canada” versus “Ontario”, Ontario will continue to suffer.
And before someone makes the point that Ontario has benefitted from the Auto Pact for the last few decades, let’s not forget that Detroit is across the river from Windsor, Ontario, and not Richmond, B.C.
Mark, on the topic of the BDC, dunno if you’ve seen Budget 2008’s entries on the subject.
“Innovative businesses play a crucial role in translating knowledge into world-leading products and services, opening new markets and creating high-value jobs for Canadians. Budget 2008 sets aside $75 million for the Business Development Bank of Canada to support the creation of a new privately run venture capital fund.”
“Begun to implement the consolidation of the borrowings of three Crown corporations: the Business Development Bank of Canada, Farm Credit Canada and Canada Mortgage and Housing Corporation.”
The latter could lower their borrowing costs even more.
I complete understand that your comment was tongue-in-cheek, but the more I wear my amateur policy wonk hat and realize how things actually work in this confederation, the more I realize that the joke is completely on us.