Crown external investments review: KPMG delivered two reports, only one made public; Crowns ordered not to provide information or talk to the media

Earlier this year the Saskatchewan Party government hired accounting firm KPMG to review Crown investments made outside the province by SaskPower, SaskEnergy SaskTel and SGI Canada (collectively, the “Subsidiaries”).

KPMG reviewed a total of twenty-six investments into which aggregate capital of approximately $465 million had or has been invested by the Subsidiaries.

On Oct. 28, 2008, Crown Corporations Minister Ken Cheveldayoff released the results of the $250,000 study and announced the province’s Crown corporations are moving to a Saskatchewan First investment policy.

KPMG’s 12-page report shows the overall performance of the Crowns in achieving financial goals:

– Approximately half of the Investments have performed materially below initial financial targets, driven primarily by the high proportion of total invested capital by SaskTel. Over sixty percent of the Investments have been below or materially below initial targets;

– Approximately twenty-one percent of the Investments have performed above or materially above initial financial targets; and,

– Approximately seventeen percent of the Investments have performed in line with initial financial targets.

The key findings by Subsidiary:

– Overall financial rate of return performance on the Investments of three of the four Subsidiaries, comprising thirty-two percent of total out-of-province invested capital, has been in line with initial targets; and,

– Overall financial rate of return on the Investments of SaskTel weighted by invested capital, which comprises sixty-eight percent of total out-of-province invested capital of all of the Subsidiaries, has been materially below initial targets while SaskTel exited investments have yielded a 41.6% return due to the proceeds realized on the Leicester Cable Ltd. (“LCL”) investment.

“Based upon our scope of review we concluded that strategic objectives were substantially or partially achieved on over eighty percent of the Investments,” KPMG said.

KPMG warned “that its analyses must be considered as a whole and that selecting portions of the analyses or the factors considered by it, without considering all facts and analyses together, could create a misleading view of the process underlying our findings. The preparation of our findings was a complex process and is not necessarily susceptible to partial analysis or summary description. Any attempt to do so could lead to undue emphasis on any particular factor or analysis.”

Cheveldayoff’s ministry ignored KPMG’s advice and included six examples “of the previous government’s problem investments” in its news release.

Through the selective use of KPMG’s findings the Brad Wall government justified its decision to impose an ideological straightjacket on the Crowns in the form of a new policy framework:

– The government supports a Saskatchewan First investment policy, which will focus the Crowns on investing within Saskatchewan;

– The Crowns will not invest out-of-province;

– Where feasible, existing out-of-province investments will be divested in a thoughtful manner with a goal to maximize returns; and

– There may be limited circumstances where an exception to this policy will be permitted if the Government determines the investment supports in-province operations.

Observers were quick to point out the folly and deceitfulness of the government’s new policy.

Leader-Post political columnist Murray Mandryk suggested the NDP-Opposition were right to view the Saskatchewan First investment policy as “an attack on Crown corporations that fits perfectly with the Saskatchewan Party’s long-term privatization view and may very well be the first step toward privatization.” [Using old excuses to mess with Crowns (Leader-Post, Oct. 29, 2008)]

In an op-ed, Heather Heavin, an assistant professor of law, and a member of the Johnson-Shoyama Graduate School of Public Policy University of Saskatchewan, asked “If investing outside the province is not an option and investing inside the province will only be allowed if there are no other private investors interested in a particular project or business venture, what left for the Crowns? High risk, low return projects?”

Heavin noted that “Investing in Saskatchewan can be a good strategy, especially at a time when Saskatchewan's economy is one of the strongest in Canada.”

“However, there may be opportunities outside the province that fit well within the business activities, skill-set and expertise contained within the Crowns. If the time is right to hold on to investments or invest in other opportunities, either outside or inside the province, those decisions should be made without unnecessary political interference.” [Restricting Crowns short-sighted (StarPhoenix, Oct. 30, 2008)]

Leader-Post financial editor Bruce Johnstone said the Saskatchewan First policy “is as clear as mud” and will leave the government with “little room to manoeuvre.”

The policy “attempts to reconcile the Sask. Party’s free enterprise ideology with Saskatchewan’s long and checkered history of public sector investment in the economy.

“Like putting lipstick on a pig, or trying to fit a round peg into a square hole, the result isn’t pretty and promises to get messy.” [Sask. First policy is clear as mud (Leader-Post, Nov. 1, 2008)]

In an editorial The StarPhoenix said “As long as Saskatchewan citizens continue to own this province’s major utilities… it’s counterproductive for politicians to adopt policies that prevent them from operating freely as commercial enterprises.”

The newspaper said the new government’s policy is “ideologically driven and harmful to the interests of citizens.” It will “hamstring the companies to the point that their long-term viability is put at risk.”

“What Mr. Cheveldayoff ordered this week seemed more like ordering Crown executives to employ meat tenderizer mallets on the companies until they are soft enough to be sold, instead of measures that ensure the long-term well-being of the utilities.” [Sask. First policy will hurt viability of public utilities (StarPhoenix, Oct. 30, 2008)]

In the Saskatchewan legislature on Oct. 28, 2008, Cheveldayoff referred to the KPMG report as “an audit” and said the reason they were “engaged” was to keep an election campaign commitment. He appears to be wrong on both counts.

Page three of the KPMG study states that “The procedures we performed did not constitute an audit, examination or review in accordance with standards established by the Canadian Institute of Chartered Accountants (“CICA”) and we have not otherwise audited or attempted to verify the accuracy of the information we obtained and relied upon in preparing this report.”

As for the campaign promise there is nothing in the Saskatchewan Party’s 2007 election platform stating that a review of the Crowns external investments would be done and assets divested. Furthermore, the Nov. 21, 2007, mandate letter Cheveldayoff received from Premier Brad Wall doesn’t mention them either.

More disturbing is the recent revelation that KPMG delivered not one, but two reports; and that the Crowns were under a gag order not to talk to the media.

An Oct. 3, 2008, document called External Investment Audit Status Update, which was obtained from the Crown Investments Corporation (CIC) under The Freedom of Information and Protection of Privacy Act, states that “KPMG’s final reports, both a Detailed Confidential Report and a summarized Public Report, will be provided to CIC by October 9, 2008 and presented to the CIC Board of Directors on October 16, 2008.”

The government did not disclose in its Oct. 28 news release that there was a second report. Why? It was not reported in The StarPhoenix or Leader-Post so it would appear that the minister failed to mention it at the news conference as well.

It seems the CIC is concerned that the detailed report could end up in the wrong hands. The update states that “CIC’s Legal Unit is investigating whether KPMG’s Detailed Report can be requested under Freedom of Information legislation. Legal opinions from the Crown corporations and external counsel are being considered by CIC’s Legal Counsel and a position on this matter is expected next week.”

The update also states “The review findings indicate that a significant number of out-of-province investments have not been financial or strategically successful.”

This is inconsistent with KPMG’s final report which says the “Overall financial rate of return performance on the Investments of three of the four Subsidiaries has been in line with initial targets” and that “strategic objectives were substantially or partially achieved on over eighty percent of the Investments.”

It seems the Wall government was determined to charge ahead with its Saskatchewan First policy no matter what KPMG said.

The update states that “A Backgrounder will be developed to accompany KPMG’s Public Report. It will provide the public with additional and more non-technical information about out-of-province investments.”

The only additional information that was made available to the public was a lousy half page containing two tables identifying investments to potentially be divested and investments that support in-province operations. So for $250,000 all the public was allowed to see is 13-pages of material.

An Oct. 23, 2008, CIC memorandum regarding the release of the KPMG report indicates that a gag order was placed on the Crowns.

“The Minister will be the lead for all interviews. Crowns are requested to not participate in interviews or provide background material directly to the media,” the memo said, whose author’s name the CIC blacked out.

Where necessary a go-between would “contact the appropriate Crown Communication head to obtain the information and relay it to the media.”

Political meddling seems to be a hallmark of the Brad Wall government. In this case it’s not surprising given the embarrassing incident that took place in the spring between Cheveldayoff and former SGI CEO Jon Schubert.

At a news conference on Apr. 14, 2008, SGI announced that it posted a profit of $35.1 million in 2007, down from $52.1 million in 2006, largely due to summer storms that increased damage claims.

Fortunately, SGI Canada’s out-of-province investments helped cushion the blow, with profits of $9 million in 2007 and $13 million in 2005.

Schubert said the corporation planned to increase its out-of-province operations to 26 per cent of revenues by 2010 from 18.5 per cent at present.

“We’ll continue on with the existing markets that we operate in to diversify risk where it makes sense to do that,” Schubert said.

“What diversification allows is the spreading out of risk that provides for financial stability to the Saskatchewan operations. I think that it makes sense to continue doing that.”

But Cheveldayoff quickly shot down the idea saying expanding SGI Canada’s operations outside the province would “not be a priority” of the new Saskatchewan Party government, which opposed Crown corporations investing outside the province when in opposition.

“We’ll not be seeking out any expansions outside the province,” Cheveldayoff told reporters. “There’s lots of room to expand, especially in Saskatchewan.” [Storms dampened SGI's profits (Leader-Post, Apr. 15, 2008)]

In an interview with StarPhoenix reporter James Wood, Cheveldayoff said later that the Saskatchewan Party government’s aversion to new out-of-province investments extends to all of the province’s Crown corporations.

Cheveldayoff said existing out-of-province operations would be able to expand but it’s highly unlikely cabinet will allow new acquisitions.

In cases such as SGI Canada, he wants to keep the existing ratios of in-province to out-of-province operations.

When asked about criticism the government is not letting the Crowns operate in a business-like fashion, Cheveldayoff responded that “we see the government as the facilitator of growth, not necessarily as the engine of growth.

“We’re going to be putting the emphasis on facilitating growth in the private sector and the public sector but not an emphasis on the government as the growth initiative within the Crowns.” [Crowns should focus on Sask. operations: Cheveldayoff (StarPhoenix, Apr. 19, 2008)]

The StarPhoenix blasted Cheveldayoff saying the “government is now making decisions that put at risk the public’s money.

“The claptrap heard [on Apr. 14] from Crown Corporations Minister Ken Cheveldayoff regarding SGI Canada’s investments outside Saskatchewan is a prime example of the government abandoning rational business practices at the altar of a political philosophy that eschews the concept of Crown-run utilities,” the editorial said.

“It’s perfectly reasonable if the Saskatchewan Party and Cheveldayoff think the government shouldn’t be in the insurance business or if they think the public’s money shouldn’t be put at risk by investing in companies. If that’s the case, they should be clear with the voting public about their philosophy and accept the verdict at the voting booth.

“But it’s another thing for them to pay lip service to the notion of public ownership of utility companies and to then prevent the companies from operating in a manner that protects the taxpayers’ investment and creates long-term viability or for the minister to embarrass the CEO of a Crown corporation at a press conference by publicly cutting him off at the knees, as Cheveldayoff did to Schubert on Monday.” [Remove politics from the business of gov’t insurance (StarPhoenix, Apr. 16, 2008)]

Then, on Oct. 9, 2008, SGI issued a news release saying that Minister Cheveldayoff “today accepted the resignation of SGI President and CEO Jon Schubert effective October 31, 2008.

“Schubert has accepted a position as President and CEO of the Insurance Corporation of British Columbia (ICBC). ICBC is a provincial Crown corporation established in 1973 to provide universal auto insurance, driver licensing, vehicle registration and licensing to B.C. motorists.”

In the article Gov’t to hire new SGI president (StarPhoenix, Oct. 10, 2008) James Wood reported that both men said what happened in the spring “played no role in Schubert’s departure, citing instead the opportunity presented at ICBC.”

It’s interesting to note that Schubert’s resignation came on the same day KPMG delivered its final report to CIC officials. And this is just a coincidence?

An Oct. 9, 2008, ICBC news release indicates that Schubert’s appointment as the corporation’s new president and CEO came “after an extensive four-month national search that involved a number of interviews to find the right candidate,” according to T. Richard Turner, chair of the ICBC board of directors.

The position had become vacant on Apr. 4, 2008, when Turner announced that the then CEO Paul Taylor was moving to a new position in the private sector.

On May 2, 2008, Turner announced that the ICBC’s board of directors had engaged Ray & Berndtson, an executive recruitment firm, to conduct a search for a permanent president and CEO.

Thanks to CIC Minister Ken Cheveldayoff, Saskatchewan’s loss would soon become British Columbia’s gain.

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Note: The Oct. 29, 2008, access to information request submitted to the Crown Investments Corporation of Saskatchewan asked for copies of any briefing notes and memorandums regarding the Saskatchewan First investment policy and the KPMG examination of Crown Sector External Investments for the time period of Aug. 1, 2008 to Oct. 29, 2008. The CIC’s Dec. 2, 2008, response provided just seven pages of information all dated in Oct. 2008. The cover letter advised that some records have been withheld from release in their entirety citing the following sections of the Act as the reason:

– Section 17(1)(a)(b): Advice from officials
– Section 22(a): Solicitor-client privilege

The CIC’s letter does not say how many records and pages are involved. The decision will be appealed to Saskatchewan’s Information and Privacy Commissioner in Regina.