Decoding KPMG’s Manitoba Fiscal Performance Review: Privatization

In a previous post we provided an overview of KPMG’s Manitoba Fiscal Performance Review (MFPR).  Here we focus on a theme that runs throughout the report –  privatization.

Department Input? 

But before we do that, we want to provide a bit of context to how the KPMG report was shaped.  KPMG was selected through a competitive bidding process and was awarded $740,000 for its work.  Its central task was to conduct a review and identify “potential areas of opportunity for efficiency and cost savings across core government departments (except Health, which will come as a separate report).

The KPMG report emphasizes the review and recommended actions were developed in  collaboration with government departments – namely the “Manitoba Team.”  While this would indicates broad involvement of government workers, this is not the case.  The report notes that it conducted 35 interviews, involving over 140 senior government officials, including central agency staff (Executive Council, Treasury Board Secretariat, and Priorities and Planning Secretariat), all Deputy Ministers of the 11 departments and departments’ Executive Financial Officers and Executive Management Teams.

While we don’t have specific information about who was interviewed, we do know that those involved will have been either politically appointed staffers and/or managers who are wise to know who butters their bread. And since a major objective is to control the growth of department expenditure (including “flattening of management”), those involved will have been keen to demonstrate they are onside with the Government’s mission.

Front line workers were NOT among those called upon for input. So make no mistake, the KPMG report is an ideologically driven document designed to justify the Pallister government’s austerity mission, including the elimination of at least 1200 positions..

And a big part of that plan is privatization.

Asset Management

One way that KPMG paves the way for privatization is through its prescriptions for Asset Management. The report identifies “Asset Management Planning and Rationalization” as one of its 12 “Areas of Opportunity.”   Phase 1 of the Report notes the “potential reduction in type/number of assets under Provincial Ownership.”  Not much more is said than this in Phase 1, however further reference to the selling-off of government assets can be found in MFPR Phase 2 report “Business Case-Social Housing” . We’ll have more on the implications of the KPMG report for social housing on a future post but suffice it to say that what we need is MORE not LESS social housing and KPMG report recommends the Government “transfer significant housing stock to private and community based providers where there will be no guarantee that it will remain affordable for low-income families.

Privatization ‘code’

Also look for language that is ‘code’ for privatization.  Sprinkled throughout the report you’ll find  strong hints of privatization. From more obvious statements like “transfer to the private sector” and “outsourcing of service delivery to the private sector”, to more subtle ideas such as “partnership opportunities” to reduce costs; “alternative” service delivery; and the less known private sector “solutions” such as “innovative approaches to funding” such as  “Social Impact Bonds” in  education, social service and justice  sectors.

Future State Opportunities?

If you are not up for reading the 270 page Phase 1 Report and the hundreds of pages in the 8 supplementary reports, you may want to check out the section titled “Future State Opportunities” (p. 100).  Here you will find the “Fiscal Performance Review Framework” that KPMG recommend for use across Government. They propose use of this framework to effectively change the “way all spending is looked at”.

You’ll also find a number of recommended practices that government departments are already doing, as well as an overview of “areas of opportunity” that may give you hints of what is to come (p 139) and how privatization may seep into service delivery.

But you’ll also find this useful tidbit that may come in handy when assessing the real “value” of the Pallister government’s policies and practices going forward. On page 113 of the report KPMG describes ‘value’ as including, “Financial, Social and Perceived” value.  We interpret KPMG’s definitions of ‘vale’ as the “math” the “heart” and the “spin”.

  • The Math
    • “Financial and economic value : the quantitative and tangible financial and economic value that is created as a direct result of programs/services based on revenue brought in, expenditures managed, or a return on an investment.”
  • The Heart
    • “Social value: the long-term value created by displacing costs that would normally be borne if social issues are not addressed, e.g the social costs of poverty, etc.”
  • The Spin
    • “Perceived value: the worth of programs/services in the minds of Manitobans, which is as important as the other dimensions of value. Since the recipients of programs/services are not generally aware of the cost, value to them may have more to do with how they perceive the results of the programs/services relative to others.”

The  KPMG report is clearly focused on the math – and in the short term. Selling assets and offloading services may help the Pallister balance the books in the short-term, but what about the long term implications of passing the keys and control to those motivated by profit?

We know that the Pallister government will also be focused on the ‘spin’.  It will need to find a way to convince Manitobans that massive spending cuts and privatization gives Manitobans the “most improved province” they were promised.

But what about the “heart” and how does this relates with the long term “math”? In further posts we’ll look at the social implications of the Governments obsession with cutting costs and raising revenue by selling  assets, privatizing services, and cuts to spending in areas, like education, that bring value to Manitoba.

 

 

 

Door opened for P3s in Manitoba

Until very recently, Manitoba has been somewhat sheltered from the scourge of Public Private Partnerships (P3s) that have hit other parts of Canada. But Pallister’s government let that genie completely out of the bottle with the announcement that 4 new schools would be “P3d”. This link explains what’s going on in Manitoba and why it’s not anything to celebrate. It also explains that getting rid of the P3 legislation that the NDP brought in is a really bad idea.

Bad idea or not,  as this CBC blog explains, on May 2, 2017 Pallister endorsed the funding model  at a conference in Winnipeg on P3s:

Pallister said Manitoba was well behind the rest of the country on this funding model for public works, noting there have been 56 such projects in Canada since 2012, but only three here.

“We’re playing catch-up,” Pallister said. “We are not that innovative here.

“We have to go beyond typical taxpayer funding,” Pallister told the crowd.

Pallister says Manitoba will follow the Saskatchewan lead in using P3s to build schools. Our neighbouring province claims it will save $100 million using a P3 model.

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To say that’s a leap of faith is an understatement; the schools haven’t even been started yet (as of May, 2017). It’s hard to know exactly what evidence our Premier is relying on, especially since P3ing schools in Alberta and Nova Scotia was such a disaster (see first and last links in this article).

Why are P3s such a powerful force in Canada despite the lack of evidence that they work in the public interest? Just check out this advertisement for the May 2nd conference and see who’s behind them.

As this story demonstrates, lots of experts remain unconvinced.

So what is it exactly we’re catching up to, Mr. Pallister?

Manufacturing Crisis

There’s nothing like an old-fashioned crisis to rally the troops, especially if the crisis means that people are going to have to pay more for something. As we explained in our last post, Manitoba Hydro does not have a debt problem and, the fear of rate increases is a red herring. We saw how the projected increase in revenues could potentially be used to offset rate increases, especially for low-income Manitobans.

So if we’ve known about these investments for years, the equity to debt ratio is reasonable and we have rate increases covered, why are some suddenly waving red flags and calling wolf? We can answer that question with one word: privatization.

It might seem hard to believe given how adamant the Conservatives have been that they would not privatize Manitoba Hydro. But don’t be fooled; had they admitted they wanted to privatize, they wouldn’t have been elected. So they’re holding their cards very close to their chest. But we’ve seen this game strategy before – it’s one former Conservative Premier Filmon used with great skill when his government privatized MTS.

Here’s how the strategy works, in ten easy to follow steps.

  1. Swear you have no intention to privatize _______________ (fill in the blank).
  2. Start reporting on _______________ (fill in the blank) in a negative way and ignore any evidence to the contrary.
  3. Swear you have no intention to privatize _____________ (fill in the blank).
  4. Look for allies to support your case about how things are out of control. They will inevitably come from the business community. If you’re lucky you’ll have a compliant media that is so awestruck with your business acumen and/or so uninterested in the public good that it uncritically reports everything you say.
  5. Pack the board with business types and those positioned to provide a means to start privatizing by stealth. Board Chair Sanford Riley is also CEO and President of Richardson Financial Group, so should a need ever arise for private finance, we know where to go. He’s also on more corporate boards than we can list here, including the previously privatized MTS which Bell Canada currently is trying to buy under bogus pretences (supported by Mr. Pallister). And just in case you need an ideological shot in the arm, Mr. Riley sits on the board of the Fraser Institute, Canada’s preeminent free enterprise cheerleader.
  6. Swear you have no intention to privatize _______________ (fill in the blank).
  7. Start carving off bits and bobs to private corporations. A new twist on that move is to sell up to 49% of shares to private investors and claim that the corporation is still publicly owned and still puts the public good ahead of private profit. Saskatchewan is musing about such a move.
  8. Slowly start changing the way you talk about how to fix “the crisis”.
  9. Continue the media campaign explaining what deplorable shape _____________ (fill in the blank) is in.
  10. Privatize.

It might take more than one election cycle to implement all steps, but once you privatize, you will be able to increase rates far more than you would ever have been able to if ________________ (fill in the blank) had been kept public. You and your friends will be able to profit greatly from the rate increases because you will have been able to buy up stock in the new company. With any luck you’ll profit even more if you’re able to sell the company down the road (think MTS).

So readers, now that we think about it – maybe we really do need to panic. After all, we’re already at number five out of the ten steps.

We’ll keep you posted as events occur.

What’s the Deal With Manitoba Hydro?

11_2col_file-bjd062712power_lines_4The media is lapping up Conservative alarm bells about Manitoba Hydro. At issue is the amount of debt the utility is taking on to fund new capital projects. We believe Manitobans deserve a clear response to two pointed questions before the Pallister appointed board makes major decisions that will affect the sustainability of this critically important publicly owned utility.

Is there a crisis with Manitoba Hydro? Keep reading—we’ll explain that there is not. We’ll then answer follow up with another post about the second question: Why do the Conservatives want us to think there is a crisis?

There is no crisis

We have known for years that Manitoba Hydro was planning on taking on more debt to build the new Keeyask dam and Bi Pole III transmission line. The oft-cited Boston Consulting Group (BCG) which the Conservatives hired to evaluate Hydro’s plans agrees that going ahead with Keeyask is the best alternative to meet our increasing demand for energy and for ensuring energy security (see their report).

These projects are being financed in the normal manner – through borrowing, or taking on more debt. One measure experts use to see if a company can handle more debt is the “equity to debt ratio”. It works the same as when a bank looks at your income and assets to see if it should lend you more money. The higher the ratio, the more equity there is relative to debt. The lower the ratio, the less equity there is relative to debt. So generally speaking, the higher the ratio, the better.

We also need to make an important distinction between debt taken on by Manitoba Hydro vs a private corporation.

A provincial crown corporation is a much safer bet than a private corporation because the Province guarantees 100% of its debt. While that’s not to say that Manitoba Hydro should be reckless with how much it borrows, there is no magic formula to determine what too much debt might be for a crown corporation. The BCG report thinks the ratio will bottom out at twelve per cent. It also notes that the Public Utility Board/Needs For Alternatives To (PUB/NFAT) report found that: “Single digit equity ratios were not highlighted as a significant risk when projects (were) approved” and that the ratio should recover to twenty percent by 2025.

So do we really need to be alarmed?

Sanford Riley, the newly appointed Chair of the Hydro board argues that we should be alarmed. He is arguing that hydro rates must be increased so that Manitoba Hydro will have more revenue to increase the equity to debt ratio.

But hold on. Why is this suddenly a problem when, as explained by economist John Loxley, the experts have known and accepted the decrease in the equity to debt ratio for years? Manitoba Hydro’s financial staff updates a twenty year financial forecast every year: this is made public through the Public Utilities Board, and has been rigorously evaluated by external experts, including bond rating agencies who review these forecasts every year.

A projection from the PUB/NFAT report, page 225 also shows us, as Mr. Riley and Premier Pallister know, that once Keeyask is completed, Manitoba Hydro’s payments to the Province (paid via increased water rentals, capital tax and debt guarantee fees) will double by the early 2030s to $516 million per annum.

So even if you were to agree that rates should go up to buoy the ratio, the large increase in provincial revenue could then be used to prevent large increases or as recommended, to help low-income earners pay their utility bills.

After all – and this is a point rarely mentioned – Manitoba has the second lowest hydro rates in North America, so there’s a lot of wiggle room there.

Why then are we being told that Manitoba Hydro’s debt is out of control? This is where it gets interesting.

We’ll explain more in our next post “Manufacturing Crisis”.

Measuring “Improvement”: Minimum Wage and Living Wage

How much money we make is important to us personally because our wages directly impact our lifestyle, happiness and health. Income is also important to the provincial economy in general because having adequate and stable household employment and income lets families buy goods and services. This spending keeps our economy strong. So being able to make a decent wage matters to each of us, but it also matters to everyone.

Average weekly earnings in Manitoba rose by 10% between 2011 and 2016 compared with 9% in Canada. This means that Manitobans fared generally well during this period.

Having growth in overall income is one thing, but we here at Value Manitoba are also specifically concerned about the economic security of the lowest income earners. That means we need to pay attention to two specific aspects of income: the minimum wage and the living wage.

Minimum Wage

In Canada, provincial governments are responsible for legislating a minimum wage that employers are obliged too pay their workers. This is an important way to protect low-wage workers against being paid even less.

Here’s how comedian Chris Rock describes minimum wage:

I used to work at McDonald’s making minimum wage. You know what that means when someone pays you minimum wage? You know what your boss was trying to say? It’s like, “Hey if I could pay you less, I would, but it’s against the law.”

One way to measure economic progress is to look how households with the lowest income are faring. The minimum wage in Manitoba will be an interesting indicator to watch.

The minimum wage increased to $11.00 in October 2015, up from $10.70 in October 2014. Manitoba saw increases in the minimum wage each year between 2001 to 2015: it has increased by 80% during this period. This chart shows where Manitoba currently sits compared to other provinces:

min_wage_map

The Pallister government has said it will not increase the minimum wage in 2016. This means that the minimum wage will actually decrease by the rate of inflation. Here’s how that works: “inflation” means that every year, prices will go up – that’s just what prices tend to do. But when wages stay the same, every dollar you make lets you buy less stuff because the stuff has gotten more expensive.

Living Wage

Minimum wage is a legislated protection against being paid even less. It’s usually pretty low, and many people making minimum wage live in poverty. This is where the idea of the “living wage” comes in: it’s what people need to make, based on where they live, to be able to meet their basic needs. Living Wage Canada argues that minimum wages should be set a level that raises families above the poverty line.

As described in this article (PDF), living wages can be achieved through wages alone, or through a combination of wages and other benefits  provided by employers or by governments. The minimum wage is part of what might provide a living wage, assuming there are strong additional support programs in place.

Because the cost of living varies depending on where you live, so to does the living wage. For example, in 2013 the living wage in Winnipeg for a family of four with two parents working was $14.07 /hour and in Brandon it was $13.41.

Researchers are now working to calculate the current living wage and we will update this post once the numbers have been crunched. It will be important to use the living wage as a yardstick to determine how government programs enhance family income thereby reducing the rate by which employers will need to pay their workers to ensure they are earning a living wage.

Manitoba’s Debt & Deficit

Value Manitoba will be following along as the new provincial government tries to make good on their promise to make Manitoba into the “most improved province”. One of the ways we’ll measure that improvement is the health of our government’s finances. So to start off, let’s take a look at what we know about Manitoba’s provincial deficit and debt.

Some definitions

When the government spends more on services and expenses than it earns in revenue, the difference is called the deficit. Governments, like households or businesses, borrow money to pay for expenses that they can’t pay for fully in cash. And, like for households and businesses, there are lots of good reasons to borrow money and to carry debt. Consumers buy large items such as cars and houses this way, and businesses get investors or banks to finance new equipment, new buildings, or other kinds of expansion.The total amount of money the government has borrowed over the years and has yet to finish paying back is the debt.

Neither deficit nor debt is necessarily bad. What really matters is if the public is getting good value for government spending, and if the government can afford to make debt payments while continuing to pay for the many services it provides to its citizens.

Political claims

The Pallister government is making much of Manitoba’s financial situation. Manitobans need to know what is true and what is merely Conservative political spin to justify spending cuts. For example, the Pallister government claimed that we faced a $1.011-billion deficit shortly after taking office in May 2016. We now know that the actual deficit was far lower. Clearly, the Pallister government’s strategy is to paint the situation as worse than it is in order to blame future actions on the past government.

How large is the debt?

The following baseline numbers will ensure we have a more factual understanding of government finances moving forward.

According to the Manitoba Finance report for the first quarter of 2016, the deficit in the NDP’s final year in office totalled $846 million. This is higher than the NDP had forecast ($686 million in 2015-16) but also much lower than the $1.011 billion deficit the Pallister government claimed.

It’s always challenging to understand budgeted deficit numbers because they often include projected income. For example, the NDP government claimed that employment and income growth generated by the infrastructure program would result in higher tax revenues that would offset its costs. The Pallister government has a reduced commitment to infrastructure, so we will have no way of knowing whether previous deficit projections for this year were accurate, because now the goalposts have been moved.

Most importantly, although deficits and debts are often reported in simple amounts like that, they are best understood relative to income, say as a percent of the province’s Gross Domestic Product (GDP, a measure of the total economic activity – income – in the province).

Why’s that? Well, it’s common sense that when you have more income, you can afford more debt: a young part-time service worker can’t afford a $2-million mortgage, for example, but a wealthy executive can. It’s the same with government finances: knowing that the deficit is $846 million doesn’t by itself tell us if that’s affordable or way too much. We need to look at debt relative to income to really make sense of it.

For provincial comparison purposes, we used RBC Economics Research, Canadian Federal and Provincial Fiscal Tables, October 3, 2016 to establish the following baseline data:

The deficit in 2015-16 was $846 million, or 1.3% of GDP.

Net debt in 2015-16 was $21.4 billion, or 32.5% of GDP.

This debt percentage (32.5% of GDP) in 2015-16 is the same as it was in 1997-98, and was the 4th lowest in Canada for 2015-2016. So although those look like big numbers, when you consider them relative to the size of the provincial economy they are pretty modest. And contrary to the kind of scary language our new government likes using, Manitoba is in a much better debt-to-income position than most of Canada.

Can we afford to keep paying the debt?

An even more direct way to talk about debt and deficit is how much it of our income we spend paying back what we owe. Governments make regular payments on debts, much like a homeowner or a business might make monthly payments towards a loan or a mortgage. And just like when the bank decides if someone can afford a mortgage by figuring out how much of their income goes towards housing, the best way to look at these payments is through percentages. The bank wants to make sure we  can really afford the mortgage. Similarly, what really matters for debt payments is how well the government can afford them, based on how much money it takes in.

In 2015-16, only 5.7% of government’s revenue went to paying off principal and interest on the provincial debt. That means about 19 dollars out of every 20 that the province spends goes directly to services, front-line workers, and so on. Paying for debt only costs one dollar out of twenty. This is pretty low. And it’s even lower than it was a few years ago: debt payments were 6.1% of provincial expenses in 2012-13, for example, and back in the 90s it was over 8%.

Just like a mortgage, how much we pay depends on both how much we borrow and what the interest rates are. Right now interest rates are very, very low, and the global financial situation makes it look like they will stay that way for a long time. In other words, right now and for the foreseeable Manitoba can easily afford to keep paying its debts.

Manitoba’s debt burden, then, is actually not very severe or onerous. This means we should take a very careful look at the Pallister government’s claims that we “need” to make cuts because of the debt or the deficit.

And that’s the real deal on Manitoba’s debt and deficit.

Look for future posts that measure our progress using this and other social and economic indicators that measure whether the Pallister government is really improving the quality of life of all Manitobans.