How Ottawa Spends, 2006-2007: In From the Cold: The Tory Rise and the Liberal Demise 9780773576261

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How Ottawa Spends, 2006–2007

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How Ottawa Spends, 2006–2007 In from the Cold – the Tory Rise and the Liberal Demise Edited by

g . b ru ce d o e r n

Published for The School of Public Policy and Administration Carleton University by McGill-Queen’s University Press Montreal &Kingston • London • Ithaca

© McGill-Queen’s University Press 2006 ISBN-13: 978-0-7735-3126-0 ISBN-10: 0-7735-3126-2 Legal deposit third quarter 2006 Bibliothèque nationale du Québec Printed in Canada on acid-free paper that is 100% ancient forest free (100% post-consumer recycled), processed chlorine free. McGill-Queen’s University Press acknowledges the support of the Canada Council for the Arts for our publishing program. We also acknowledge the financial support of the Government of Canada through the Book Publishing Industry Development Program (bpidp) for our publishing activities. The opinions expressed by the contributing authors to this volume are the personal views of the authors of individual chapters and do not necessarily reflect the views of the editor or of the School of Public Policy and Administration at Carleton University.

Library and Archives Canada has catalogued this publication as follows: How Ottawa spends. 1983– Prepared at the School of Public Administration, Carleton University. Publisher varies. Continues: How Ottawa spends your tax dollars, ISSN 0711-4990. Includes bibliographical references. ISSN 0822-6482 ISBN-13: 978-0-7735-3126-0 ISBN-10: 0-7735-3126-2 (pbk) (2006-2007 edition) 1. Canada-Appropriations and expenditures-Periodicals. I. Carleton University. School of Public Administration HJ7663.S6

354.710072′2

This book was typeset by Interscript in 10/12 Minion.

C84-030303-3

Contents

Preface vii 1 The Harper Conservative Agenda: True Blue or Liberal-Lite? 3 G. Bruce Doern

pa r t i m a c r o c h o i c e s a n d c h a l l e n g e s 2 Trading Up or Treading Water? Federal Fiscal and Budgetary Policies in Search of a New Mandate 27 Geoffrey E. Hale 3 Offshore Energy Revenues and Equalization: Having Your Cake and Eating it Too? 50 André Plourde 4 Canadian Energy Policy: Supply, Sustainability, and a Policy Vacuum 73 Keith Brownsey

pa r t i i h o w o t tawa b u y s : p r o c u r e m e n t and ethics 5 How Ottawa Buys: Procurement Policy and Politics Beyond Gomery 95 Barbara Allen

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Contents

6 How Ottawa Does Business: Ethics as a Government Program 116 John Langford and Allan Tupper 7 Ottawa’s Spending on Public Opinion Research: Implications for Democratic Governance 138 Andrea D. Rounce 8 The Maritime Helicopter Project: The Costly Politics of Military Procurement 162 Tanya Neima and Christopher Stoney

pa r t i i i s e l e c t e d p o l i c y, p o l i t i c a l a n d b u d g e ta r y r e a l m s 9 How Ottawa Reviews Spending: Moving Beyond Adhocracy? 185 Evert Lindquist 10 Chasing a National Priority: Health Canada, the Public Health Agency, and a Canadian Strategy For Cancer Control 208 Michael J. Prince 11 Access to Emergency Medicines: How Ottawa Amends the Patent Act 229 Lisa Mills and Ashley Weber 12 Government Approaches to the Regulation of “Sin” 247 Malcolm Bird and Christopher Stoney Appendix A: Canadian Political Facts and Trends, 2005 269 Appendix B: Fiscal Facts and Trends, 2005 274 Contributors 291

Preface

This is the twenty-seventh edition of How Ottawa Spends. As always, we are especially indebted to our roster of contributing academic and other expert authors from across Canada for their insights and for their willingness to contribute to public debate in Canada. Thanks are also due to Kimmie Huang at the School of Public Administration for her excellent research and technical support and to Joan McGilvray and her colleagues at McGill-Queen’s University Press for their always professional editorial and publishing services and expertise. None of this work would have been possible without the continuing support and scholarly stimulation provided by my colleagues at the School of Public Policy and Administration at Carleton University and in the Politics Department at Exeter University. G. Bruce Doern Ottawa, February 2006

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How Ottawa Spends, 2006–2007

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1 The Harper Conservative Agenda: True Blue or Liberal-Lite? g. bruce doern

Through their 23 January federal election victory, the federal Conservatives under Stephen Harper came “in from the cold,” a metaphorical but also very real journey which had seen them reduced to two mp s in 1993 and then in the last two years under Harper saw him skillfully re-unite the political right into a new Conservative Party and then strategize and earn their way back into power as a renewed national party with strength in every region. The Conservative Tory rise was partly due to a simple desire for change but it was also due to a significant shift from their former Reform-Alliance-Progressive Conservative coalitional stances to an embrace of some broader politically centrist policies in order to gain acceptance in Ontario and also Quebec. The shift had begun in their March 2005 policy convention1 but was above all shaped and honed through an almost flawless election campaign. The Tory rise was necessarily counterpoised by the demise of the Martin Liberals. Their conduct of the election campaign was inept. Lumbered by both the real and imagined corruption charges arising from the Sponsorship scandal and the Gomery Inquiry, the still-divided Martin and Chretien wings of the Liberal Party seriously underestimated Harper and, despite presiding over a decade of economic prosperity, were unable to convince enough Canadians that they should be trusted with a fifth straight election victory. In some sense the Liberal election campaign also simply ran out of time, since in the last few days it succeeded to some extent in planting doubt about the socially conservative elements of the Conservative agenda and thus reduced the size of the Tory minority. Since 2002, Canada’s “natural governing party,” the Liberals, had been behaving unnaturally. It had become two parties, with Paul Martin’s core political staff being first the political predators that plotted

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the ouster of Jean Chretien and later the defenders of the barricade that the Martinites had become when in power in 2004 and 2005. The 2006 election has produced another minority government. Canadians were unwilling to give Harper a majority largely because of many understandable lingering doubts about whether his move to the centre was genuine or merely tactical. The House of Commons is composed of 124 Conservatives, 103 Liberals, 51 Bloc Québécois, 29 New Democratic Party, and 1 Independent. The popular vote percentages are 35.3 percent for the Conservatives, 30.2 percent for the Liberals, 17.5 percent for the ndp, 10.5 percent for the Bloc Québécois, and 4.5 percent for the Green Party. So once again Canada’s politicians must somehow collectively, but with new Conservative leadership, manage the minority. It is a mug’s game to try to guess how long this Parliament may last before another election. It is likely to last longer than the Martin minority government did since, with the resignation of Paul Martin, the Liberal party must elect a new leader and in the process heal itself and learn the lessons of defeat. Within the context of this crucial shift in the Canadian body politic, the 2006–2007 edition of How Ottawa Spends examines the central question of whether the Harper agenda is true blue or centrist Liberal-lite.2 My account in this chapter looks first at the three key factors and forces that have both reshaped federal politics and policy or are revealed more clearly by the election results. The second part of the chapter then sets out the Harper agenda and its likely fiscal stance. The opposition Liberal’s agenda and those of other opposition parties are also referred to briefly, given the need for the Tories to take into account these competing or complementary agendas in managing the minority. I then preview the chapters in this edition and finally, in the last section, offer overall conclusions and some conjectures about national priorities, challenges, and choices. The book as a whole examines many of the key policy, budgetary and governance issues confronting the new Conservative-led Parliament. Though the authors of these chapters crafted their analysis in terms of the period when the Martin Liberals were in power, all of them are germane to a Harper Conservative government, as several of the authors are careful to point out.

k e y fa c t o r s a n d f o r c e s Three key factors and forces helped shift the federal power structure in the January 2006 election and will undoubtedly contribute to changed and reconfigured national spending and policy priorities. These are Liberal corruption in the Sponsorship Program and the resultant exposure of it through the high profile Gomery Inquiry; the shifting votes and political views of Canadians living in major cities, the suburbs, and rural, small town and hinterland Canada respectively; and the Tory electoral breakthrough in Quebec at the expense of both the Bloc Québécois and the Liberals.

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The sponsorship program scandal and then the long-playing and televised Gomery inquiry was the first key factor in the Liberal demise and the Tory rise. The greatest initial effect of the Gomery Inquiry was that Prime Minister Martin lost control of his government’s own agenda, even before the election of a minority Parliament in June 2004. The main political manifestations of the saga began when the auditor general was scathingly critical of the Chretien Liberal government’s failure to follow normal contracting practices in the sponsorship program during the period from 1997 to 2001. The sponsorship program was established after the 1995 Quebec referendum on sovereignty and was a vehicle to enhance federal visibility and presence in Quebec. Of particular concern to the auditor general was about $100 million that went to advertising firms to manage all dealings with the organizers of eligible events. In the wake of the sponsorship scandal and despite Prime Minister Martin’s personal commitment to get to the bottom of it through the Gomery Inquiry, the Martin Liberals plummeted in public opinion polls. Their minority government status in the June 2004 election can be significantly attributed to the scandal, along with other factors such as a lackluster campaign by Martin for most of the campaign and the inevitable heavy baggage of a party in power for 10 years. The sponsorship scandal also saw the Liberals split internally to an even greater extent as old wounds emerged between the Chretien and Martin wings of the Liberal Party. The FrenchEnglish interplay of the scandal also saw the Bloc Québécois surge ahead of the Liberals in the polls among Quebec federal voters because the scandal was seen there as an allegation against Quebec federal politics and politicians and because it was associated immediately with the 1995 Quebec sovereignty referendum and its narrow defeat. The 2004 election result meant that the Bloc Québécois was strengthened to an extent that few thought possible in the 2000 to 2003 period since the previous federal election. The first round of the Gomery hearings and testimony in Ottawa brought out serious revelations about corruption and financial mismanagement highlighted by the testimony of both former Prime Minister Jean Chretien and his successor, Paul Martin. The former had already taken legal action to try to close down the Gomery inquiry on the grounds that Justice Gomery had shown bias. And Chretien had been defiant in front of Justice Gomery. Martin, on the other hand, was cautious and circumspect in his testimony, arguing again that he had been the one who created the inquiry and wanted the issues aired and dealt with. He later argued publicly that his government would oppose Chrétien’s attempt in the courts. On the other hand, it was Martin who had called the 2004 election before Gomery had even had time to call witnesses. But when the Gomery inquiry shifted its hearings to Montreal and to the Quebec-centered source of the scandal, testimony raised allegations of raw corruption that were directed directly at the Liberal Party of Canada and its operatives. The inquiry received daily

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live tv coverage in Quebec, amplified by print and radio exposure and critiques, and damaged the Liberal Party severely, both in 2005 and in the 2006 election campaign. Prime Minister Martin’s dramatic televised speech to the nation on April 21, 2005 promised that an election would be called a month after the Gomery report was tabled in the late fall of 2005.3 Martin also took some of the blame for what he called a lack of vigilance on his part when he was minister of Finance. All of the opposition parties were thus armed and continuously condemned the Liberals both in Parliament and outside it. When the first Gomery report was released on November 1, 2005, Justice Gomery severely criticized federal contracting and management practices and pinned the blame broadly on Prime Minister Jean Chretien but more specifically on named officials and advisors.4 The report assigned no criminal or civil responsibility but it was clearly presented as Chretien era mismanagement, with Martin as Finance minister essentially absolved from blame because he had no direct ministerial control of the program. Judge Gomery also saw the scandal as something that had seriously weakened and betrayed public trust. The cities, the suburbs, and rural, small town and hinterland Canada also had a significant say in putting the Tories in power. The tectonic plates of Canadian politics did not shift but there was noticeably some important seismic activity. The Tories did not win seats in the core big cities of Toronto, Vancouver, and Montreal where the Liberals, the ndp, or the Bloc maintained their core voter support. Calgary again was an urban Tory stronghold and could also claim to be the nerve centre of the Harper Conservatives. In core inner big city urban Canada, there is still suspicion of the Tory agenda and of whether the new 2006 version of Stephan Harper as a centrist or more moderate politician is fully credible and reliable. Concerns about Harper’s and his party’s social conservatism on issues such as same-sex marriage also loom large in the urban core. The suburbs and several medium-sized cities, on the other hand, did shift solidly to the Tories, especially in Ontario. The Tories knew that they had to gain ground among suburban voters and thus they played on suburban concerns. The Liberal corruption and entitlement issues resonated here but so also did concerns about urban crime, including gun violence in the greater Toronto area. These translate directly into some of the “security” themes in the Tory platform (see more below). The Tories early election tax announcements on reductions in the gst, and other selected smallish, but electorally visible tax breaks aimed at families, played to middle class views that they may not have been doing as well in the years of Liberal prosperity. There was also some suburban resonance in both the Choice in Child Care Allowance promised by the Harper Conservatives and in the promise to hold a free vote on same-sex marriage. At the same time suburban voters and middle-sized cities sought reassurance from the Tories that overall social programs and

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health care would not be threatened by a Harper government, assurances which Harper went out of his way to provide as he sought to occupy more of the political centre ground. Rural and small town Canada stayed solidly Conservative and remained the core of Tory support, especially west of the Ottawa River. Most of the above noted suburban issues played well in rural areas. Of interest, however, is the way the Tories went out of their way to address the concerns of Canada’s traditional industries in the natural resource sector, forestry, mining, fisheries, and of course energy and agriculture, areas of the economy too often lumped carelessly or neglectfully into the glib language of “old economy” (see more below). The third factor propelling the Tory rise was the quite unexpected strength of the Conservatives in Quebec. Prior to the election, conventional wisdom had been that the Tories would be shut out of seats in Quebec and continue to live in the political wilderness they had occupied there since the downfall of the Mulroney Conservative government in 1993 and the rise of the Bloc Québécois. The Tories unexpectedly won 10 Quebec seats and garnered 24.6 percent of the vote while the Liberals captured 21 seats but only had 17.3 percent of the vote. The Bloc was still dominant with 51 seats but its 42.1 percent of the vote was reduced from its 2004 election totals and was certainly lower than the Bloc’s confident and often expressed view that it would get the breakthrough 50 percent of the vote. A 50 percent tally would be a considerable impetus for another separatist referendum to be held, if and when the provincial Parti Québécois won the next Quebec provincial election. The Martin Liberal’s had tried to make separatism itself the issue in the 2006 election campaign in Quebec, a tactic that failed miserably. The Harper Conservatives on the other hand appealed to soft nationalists. As one political columnist put it, “The surprising rise of the Conservatives in Quebec … showed that many Quebecers were thirsty for an honorable federalist alternative to the hated Liberals. Mr. Harper, in a sensitive and weighty speech, invited them to leave the Bloc enclave where they were parking their votes. He offered them ‘pride and power’ – the opportunity to get back into the centre of things with dignity and respect, instead of staying on the sidelines with the Bloc.”5 Harper also pitched his policy of dealing with or solving the fiscal imbalance problem, an issue which Quebec governments had raised for several years.6 Coupled with a Conservative preference for a much more decentralized federation, the fiscal imbalance issue found resonance in Quebec. These policies were discussed by Harper in Quebec much more than in the rest of Canada, a process that had begun when the Tories held their policy convention in Quebec City in March 2005. I comment further on the fiscal imbalance issue later in the chapter but there can be little doubt that it helped the Tories win sits in Quebec.

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t h e h a r p e r c o n s e r vat i v e a g e n d a Is the Harper agenda true blue or Liberal-lite? The notion of a true blue agenda would suggest policies on lower taxation, less government, decentralized federalism, and increased defence spending and security and law and order spending. The notion of a Liberal-lite agenda would suggest increased commitments to social programs and health care. As revealed in a series of election campaign promises made throughout the election campaign and then eventually in the publication of their Stand Up for Canada election platform, the evidence suggests that it is more of the latter than the former, particularly in terms of public spending. The true blue elements came in the form of early commitments to reduce the gst by one percentage point immediately and by another point over five years and then a later-announced promise to eliminate the capital gains tax for individuals on the sale of assets when the proceeds are reinvested within six months. Other small and targeted tax reductions or tax benefits for public transit users, apprentices and skilled workers, farmers, fishermen, and small business are also a part of the Tory tax plan. Overall these tax reductions are quite modest, although the capital gains tax item could prove to be quite costly, and there may well be more significant tax reductions once the Conservatives are in power for a while. The other tax element of the Harper agenda is the commitment to deal with and solve the previously mentioned issue of fiscal imbalance, an extremely expensive initiative whereby Ottawa would cede some of its tax room to the provinces (see more discussion below in the context of our discussion of decentralized federalism). The true blue socially conservative elements of the Tory platform are also found in the promise to hold a free vote in the House of Commons on samesex marriage. Its child care program is blue of a kind in that an allowance is being offered to provide families with choice on how to expend $1,200 a year on care arrangements for children under the age of six. But the Conservative version of “choice” seriously ignores whether there will be a sufficient supply of good child care to make most choices real. Increased defence spending certainly has a long Tory lineage as does Harper’s pledge to improve services and benefits to veterans. The Liberal-lite interpretation of the Tory agenda is found in their larger overall spending priorities and commitments, at least as revealed in their election platform. The Tories have basically promised to preserve social programs and to increase overall spending by $30 billion over five years. And after harshly criticizing Liberal financial forecasts for many years, Harper said on the release of the Tory platform that he now accepted Liberal fiscal projections and that his spending plans would be within about a billion dollars of the Liberal plan. Thus the main spending plans by the Conservatives include:

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• maintaining the currently projected growth rates for transfers to persons through elderly benefits and Employment Insurance, and transfers to other levels of government for health, social programs, equalization, and municipal infrastructure; • providing all families a new $1200 per year Choice in Childcare Allowance for each child under six, to be taxable for the spouse with the lower income; • increase spending on Canadian Defence Forces by $5.3 billion over five years • beyond the currently projected levels of defence spending; • $2 billion over five years to Highways and Border Infrastructure • limiting federal spending by departments (except for Defence and Indian Affairs) to the rate of inflation and population growth; • a $500 million increase for university research; • a $425 million increase in foreign aid.7 The particular narrative and discourse employed in the Stand Up for Canada document is of interest both for what it reveals and what it obscures. The Tories seek to stand up for accountability, opportunity, security, families, communities, and Canada. These are the Conservative’s thematic appeals, which cross-over the conventional policy field categories of economic, environmental, and social policy; defence; trade; and foreign policy. The opportunity rubric contains many of the tax relief provisions as well as promoting Canada’s regions and also Canada’s traditional industries. Previous Reform and Alliance wings of the Conservative Party had been fiercely critical of regional programs as clumsily disguised forms of welfare. r&d spending is mentioned here but there is no clarion call for an innovation agenda as there had been in the recent Liberal years in power. The stand up for security theme does not start with international security or terrorism, as one might expect in our post 9–11 world, but rather with law and order and effective gun control, perhaps reflecting long-standing conservative attention to this issue as well as a strategic recognition of the increased salience of gunrelated crimes in Canada just before and even during the election campaign. Within this section of the platform, the Harper Tories plan to put more police on the streets. For the otherwise decentralizing Tories, this theme includes promises for a new shared-cost federal spending program with the provinces to increase front line law enforcement, along with linked spending to increase the number of rcmp officers. Under the families theme, the Tory plan has grouped health care, including a patient wait times guarantee (as yet uncosted), their new Choice in Child Care Allowance, and mps free vote on same-sex marriage. Within the communities theme, the plan encompasses the urban infrastructure and highways proposals, but also arts, culture, immigration, charities, and the environment. The environment initiatives include a Clean Air Act and a

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decidedly non-Kyoto Protocol-centred “made in Canada” approach to reducing greenhouse gases with a focus on new technologies. In its final stand up for Canada section the Conservatives lead off with their concept of open federalism and a more decentralized form of federalism linked to the issue of fiscal imbalance. Better democracy provisions also emerge here, including the much greater use of free votes in the House of Commons, better processes for Parliamentary committees to scrutinize federal spending, and changes to party nomination races. This theme also includes one of the few campaign platform references to Canada-U.S. relations in its inclusion of commitments to defend Canada’s Arctic sovereignty. However, it is the accountability theme that leads the Harper Tory platform. As a direct result of the Liberal sponsorship program scandal and the Gomery Inquiry, the two events which more than any other gave the Tories their best chance for power, the new Harper Government will introduce an Accountability Act. It is promised as their first piece of new legislation. It will “clean up government” with regard to: • • • • • • • • •

the reform of party financing; toughening the Lobbyists Registration Act; banning secret donations to political candidates; making qualified government appointments; cleaning up government polling and advertising; procurement of government contracts; protection of whistle-blowers; ensuring truth in budgeting with a Parliamentary Budget Authority; and strengthening the power of the auditor general.8

While some new accountability measures can certainly be justified in the wake of the Gomery inquiry, several steps to increase accountability had already been put in place by the Martin Liberals. But the larger parallel feature to the Conservative Accountability Act is that it could just as accurately be titled the Accountability and Increased Bureaucracy Act. In addition to the procedural aspects of the Tory plan, there are several new bureaucratic agencies envisaged, all of theme being of the audit or “gotcha” variety. These include: the registrar of lobbyists being made an independent officer of Parliament; the establishment of a new Public Appointments Commission to set merit-based requirements for appointments to government boards, commissions and agencies; the creation of a procurement auditor; the creation of a Parliamentary Budget Authority; and a new director of Public Prosecutions. This is quite a new pack of watchdogs, presumably with real teeth and considerable capacity for sniffing and barking! The second Gomery report, tabled immediately after the 2006 election, made 19 recommendations to ensure that sponsorship-style abuses could

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never happen again. These were immediately endorsed, albeit in a qualified manner, by Stephen Harper and thus some Gomery recommendations are in principle at least now a part of an enlarged Tory accountability package. Gomery’s recommendations centred on issues such as limiting the power of the Prime Minister’s Office, reinforcing the independence of the public service and its deputy ministers, and limiting the ability of political staff to later become public servants.9 The chances of this accountability mix also producing ever more inefficient and procedurally choked government is also high. It is the Harper Tory’s own government that will be the first to get caught up in a tangled watchdog web of its own making. The authors of our set of four chapters (chapters 5, 6, 7, and 8) dealing with various aspects of public procurement and the already lumbering ethics program, offer a cautionary tale about wider issues that need to be taken into account. Meanwhile, the larger elements of the Conservative spending program that are the Liberal-lite elements are themselves likely to be the source of both concern and political battle. The Tory spending plans over five years virtually match those of the Martin Liberals and thus have generated the same questions and criticisms from interests and analysts. These are by far the largest federal spending increases since the 1970s and are now propelled by a bidding war. Some see this spending as “out of control.”10 Others see it as spending on areas such as health care, cities, and child care where money is being sent out the federal door without solid thinking about how reform will actually occur in “on the ground” performance terms. And these projections/ plans have not yet factored in the budgetary implications of the Tory’s solution to the fiscal imbalance question. However, the Tory’s overall electoral platform produced the results they sought. In this, the Conservatives also benefited from the unfocused nature of the Liberal electoral platform.11 It was three times the length of the Tory plan and was only laid out very late in the campaign. It actually addressed some important medium to longer term issues such as demographic change and the emergence of China and India as global super competitors and markets, but for electoral focus, in a defensive Liberal campaign, it did not register. The Liberal’s most coherent plan had actually emerged in November of 2005 but too early to have electoral impact. The minister of Finance’s annual fiscal update, crafted in the full knowledge that an election was looming, showcased past Liberal policies that had helped generate prosperity but also focused on a quite coherent set of themes.12 In fact, if anything it was “Tory-lite” in its orientation. It offered a range of tax cuts but also a series of initiatives to continue the innovation agenda, to ensure that Canadians had access to the skills needed to thrive in the global economy. On the other hand, as we have seen, the Liberal-lite aspects of the platform of the Harper Conservatives had scarcely mentioned these issues of the modern knowledge-based economy.

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As the new Tories took office, the nature of the Martin Liberal legacy became clearer. Paul Martin as finance minister had done two things of major importance. The first was to act as the slayer of the deficit and the generator of fiscal surpluses. This had helped produce economic prosperity but it also produced the surplus “build it and they will come” bidding war to distribute the spoils of the expanded budgetary largess. Martin had also been instrumental in promoting and fostering the innovation agenda and massive new investments in Canada’s universities and knowledge infrastructure.13 As prime minister, Martin’s record, in a minority government context, was much more mixed and hard to see, not nearly as bad as his critics argued and not nearly as good as Liberals had hoped or expected. Health care spending was restored (from its deficit-cutting drop in the mid-1990s) but without some of the needed discipline for real institutional change.14 The cities agenda was a Martin issue that he fostered and promoted. He spent his way into it but with results that are not yet discernable but which also look like the raw distributive politics of “sprinkle it around” spending. The child care and early learning agenda also became central for Martin and is likely in time to build into a considerable and needed achievement. It will be a central clash point and cash point for the Tory and Liberal-ndp-Bloc battles in a new minority Parliament, given the Conservatives’ plan for a Choice in Child care allowance and its decision to cancel the Liberal federalprovincial joint agreements signed up to in 2005. This was essentially a program to generate the right supply of child care facilities and spaces. But it is the savings from this Tory cancellation that essentially provides much of the fiscal room the Tories think they need for their own particular priorities, both of the true blue and Liberal-lite hue. The ndp and Bloc Québécois opposition parties will also fight hard to retain the Liberal five year commitments for child care funding.

an overview of t he chapt ers g e o f f r e y h a l e examines the political and fiscal environment for budgetary policies when the Martin government was seeking a hoped-for new electoral mandate and the major structural issues of budgeting amid current fiscal and political uncertainties. He considers the place of current budget rules and processes following the release of the O’Neill report in June 2005 and Finance Minister Ralph Goodale’s subsequent efforts to regain control of public expectations – if not necessarily federal finances. He also examines the effects of the politics of protracted surpluses on federal-provincial fiscal relations and the challenges of managing policy risks during periods of significant market uncertainties – particularly the medium-term effects of high energy prices and the impact of the income trust phenomenon on capital markets and federal revenues. The chapter concludes that the traditional

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pattern of Liberal governments, particularly when in political trouble, is to loosen the fiscal spigots when approaching an election and then reimpose fiscal discipline once safely re-elected. Ralph Goodale’s efforts to distract public attention from the government’s ethical and political troubles with promised election-eve tax reductions is examined. a n d r é p l o u r d e examines the treatment of provincial offshore energy revenues through various arrangements with the provinces and links these to developments on fiscal equalization. A key area of focus concerns the interaction between a province’s equalization-receiving status and its collection of offshore energy revenues. Several questions are addressed. How have policymakers reacted to this issue, and what types of special provisions have been made to deal with it? How successful have these provisions actually been in sheltering the provinces’ offshore energy revenues from inducing reductions in their equalization payments? What are the implications of these kinds of arrangements on the equalization system as a whole? The analysis shows that, overall, the Martin Liberal’s 2005 offshore accords with Newfoundland and Nova Scotia – and the earlier agreements on which they build – have been successful in putting in place arrangements that will almost certainly ensure that, at least until 2011–12, both provinces will get the full benefit of all the provincial-type offshore energy revenues collected since the onset of activities in areas off their shores. Over that period and for both provinces, it seems highly likely that cumulated offset payments will be at least as large as the sum of reductions in equalization payments induced by the offshore energy revenues collected. The bilateral agreements have effectively excluded, at least until 2011–12, the two offshore revenue categories from the determination of equalization payments. However, since it is difficult to develop a compelling rationale for excluding only those revenue categories, proceeding in this manner will naturally result in calls from other provinces for bilateral agreements aimed at excluding other revenue categories from equalization. As a result it will be difficult to have national policy driven by a series of bilateral deals. k e i t h b r o w n s e y examines the changing dynamics of Canadian energy policy. He argues that there is a vacuum in Canadian energy policy because the federal Liberal government has not been able to formulate a coherent energy strategy. This is due in part to a preoccupation with surviving a minority Parliament, a minister of Natural Resources who has been absent because of illness, and an emphasis on the issues of sustainability and the reduction of greenhouse gases through the Kyoto Protocol. The vacuum in energy policy has been filled by industry associations, the energy producing provinces, and the United States. From hydro electricity to oil and gas production these three sides of the energy sector have articulated a series of policies for the

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exploitation of Canada’s energy resources. Ottawa has been left on the sidelines, unable or unwilling to formulate much beyond contradictory commitments to sustainability and the Kyoto accord while promising to sell Canada’s energy to the United States and other potential customers in emerging Asian economies. The Ottawa vacuum is the result – at least, in part – of contradictory objectives. On the one hand, the federal government has committed to a policy of sustainable development and the reduction of greenhouse gases through the Kyoto Protocol. This is a multilateral image of globalization – “in which there are many participants with an effective voice” – and is a preferred option for the Martin Liberals. On the other hand, Ottawa has committed to a regional energy integration through the North American Free Trade Agreement and promises to sell Canadian energy to the United States. b a r b a r a a l l e n analyzes federal procurement policy and politics “beyond Gomery,” in short, beyond the implications of the Gomery Inquiry into the Liberal’s sponsorship program scandal which centred on procurement policy gone badly wrong. She develops two overall arguments in the chapter. First, there is a lack of coherent procurement policy in Canada and this has contributed to the most recent problems involving corruption and public mismanagement associated with the sponsorship affair. This argument is developed by looking at procurement policy, how it is articulated in Canadian public policy writ large, its varied elements and approaches, its core literature, and its interrelationships with other fields of policy. Second, she argues that the Gomery Inquiry has presented both a threat and an opportunity to the Martin government. On the one hand, the Liberal government reign itself is threatened by the series of scandals and issues of the past couple of years underpinned largely by problems with procurement policy. The issues implicate the entire Liberal machine and the only true solution may be to throw out them out and elect another party to govern. On the other hand, these scandals present the opportunity for any new post-2006 election government to thoroughly assess procurement policy and make changes that may improve the system and ultimately result in better government. a l l a n t u p p e r a n d j o h n l a n g f o r d analyze Ottawa’s multidimensional ethics initiatives and activities. They show how a comprehensive ethics “program” has emerged in Canadian government and politics. The ethics program involves many disparate processes, institutions, and policy objectives. Three characteristics of the ethics program stand out. First, the program is remarkably wide-ranging in its concerns and ambitious in its efforts to improve the quality of Canadian government. Second, the ethics program lacks the elementary characteristics of an effective government program. It pursues a range of different objectives, applies

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The Harper Conservative Agenda

unevenly to different officials and public institutions and embodies elements of conflicting strategic possibilities. The chapter shows that at present, the many dimensions of the ethics program lack effective coordination and there are few signs of collaboration to achieve common objectives. These features will make the future evaluation of the ethics program extremely challenging. Finally, the ethics program will become more prominent in the future. In response to the first Gomery report, the Conservatives unveiled a major ethics statement that demands a considerable extension of the status quo. It calls for greater powers for the auditor general and the ethics commissioner. In the Conservative’s view, political party financing needs even more stringent controls, Access to Information needs work, whistle blowing legislation requires fangs, and a permanent independent prosecutor should be appointed to ensure that miscreants are brought to justice. The relentless drives of partisan politics, interest groups, and public opinion combine to push up the ante and make the ethics program a continuing national preoccupation. a n d r e a r o u n c e explores how Ottawa spends on public opinion research, who undertakes this research, how this research is managed, and what public opinion research in a minority government situation all mean for spending in this area. She shows how it has become embedded in federal government structures, including performance measures and policy proposals, and the evaluation of social marketing and government products. The most recent Liberal governments, under Prime Ministers Chrétien and Martin, have spent an increasing amount of money on an increasing number of projects over the past twelve years. At just under $30 million, expenditures for 2004–05 were the largest under these two Liberal governments to date. Changes made by these governments, including reforms to allow an increasing number of research firms to have access to government contracts, have contributed to the growth in the country’s public opinion research industry. She analyses how links have been made between citizen engagement and public opinion but argues that it is unclear whether or not public opinion research counts as citizen engagement. She also argues that whether or not government chooses to respond to the public opinion research it commissions, it is vital to ensure that that research is of the highest quality and must be conducted according to consistent standards. The chapter concludes that there are clearly limitations to public opinion research. Debate over informed versus uninformed opinion and over what types of opinion impact both public servants and elected officials means that the role of public opinion in Government may change with a different party arrangement. Elected officials watch public opinion research (including polls) closely, although they may not admit to being influenced by it.

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G. Bruce Doern

ta n ya n e i m a a n d c h r i s t o p h e r s t o n e y analyze the Maritime Helicopter Project (mhp), as it became known in the early 1990s. On 23 July 2004, the federal government announced its long-awaited decision to purchase Sikorsky helicopters to replace the ageing Sea King fleet. The chapter examines a procurement process dating back over 30 years, which remains controversial and the subject of ongoing legal wrangling and charges of unfair competition rigging by the government. The authors show clearly the costly politics of defence procurement. It is highly political with investment inextricably linked to international relations abroad and regional patronage, employment and redistributive policies at home. The analysis uses the traditional criteria used to establish basic measures of performance such as “value for money,” efficiency and effectiveness and considers the implications of recent announcements by the government that it is moving away from a “best value” approach to a “least-cost compliant” approach. It also uses the mhp to demonstrate the limitations of conceptualizing defence policy and procurement decisions as rational exercises in strategic decision-making. By conceptualising the policy process and decisions that have produced the helicopter “fiasco,” the chapter provides a clearer analysis of the key procurement issues that need to be addressed if the Canadian military is to be supplied with effective equipment in a timely and strategic manner. At a time when the military faces rapidly changing threats and demands, it is unacceptable that procurement cycles should be taking in excess of 10 years to deliver much needed equipment. However, the authors are opposed to the growing military and political demands that competitive procurement processes be circumvented altogether in an effort to speed up the process. Because defence procurement is an expensive, confidential and high risk area of government spending, they argue that due process, accountability, and “value for money” are vital criteria and should not, as a matter of course, be sacrificed for political or logistical expediency. The authors advocate a number of suggested reforms that, if adopted, could strengthen and improve the existing procurement process. e v e r t l i n d q u i s t examines the Martin Liberal’s efforts at “creating a culture of continuous reallocation and realignment” of public spending, part of its overall strategy for “stronger financial management and accountability,” one of seven overarching themes of the Liberal Government. The chapter provides an account and analysis of the Expenditure Review Committee (erc) exercise, including a comparison of the e r c with previous review exercises and practice in other jurisdictions. Ottawa’s style of reviewing programs and the capabilities for coordinating them are characterized as “ad hoc.” The chapter also explores the possibilities for institutionalizing the review and re-allocation function and argues that this should be a top

17

The Harper Conservative Agenda

transition priority for the next government no matter its composition. Fostering a culture of re-allocation involves regularizing the process, more aggressive action from the Treasury Board, a dedicated erc-type secretariat in the Treasury Board Secretariat (tbs) that can more fully draw on relevant expertise, and selective reviews each budget cycle. Most importantly, the next prime minister needs to allocate sufficient time of senior ministers to drive the e r c process and to strengthen the bureaucratic leadership for the budget office and review functions. m i c h a e l j . p r i n c e examines why the federal government has not fully funded the Canadian Strategy on Cancer Control (cscc). His chapter profiles cancer as a public issue and presents leading international practices for cancer control as a benchmark for understanding and evaluating Canada’s actions in this area. The chapter then describes and assesses Health Canada’s policy approach to cancer control and programming. Next, he discusses the Public Health Agency of Canada and the recently announced Integrated Strategy of Healthy Living and Chronic Disease and then considers the intergovernmental context, addressing how and where cancer control figures in recent federal-provincial/territorial health accords. The analysis shows that Canada’s approach to cancer control is multifaceted with open-ended priorities, generally informed by a population health perspective and significant investments in research. However, it is lacking in a comprehensive national framework that addresses adequately prevention, early detection and screening, treatment, rehabilitation and support, and palliative and end-of-life care. The creation of the Public Health Agency of Canada alongside, though separate from, Health Canada, among other things, unleashed a form of bureaucratic and ministerial politics that has undoubtedly shaped and most likely slowed implementation of the cscc. Underlying this politics is a policy debate between government officials and the cancer community over the desirability of a generic strategy on chronic diseases, under the direct control of federal authorities, as compared to disease-based strategies like the cscc that would operate at arms length from government. The Integrated Strategy on Healthy Living and Chronic Disease unveiled by the Martin Liberals in October 2005 tried to bridge this policy debate, yet compounded the problem with a very modest investment for the cscc. The Harper Conservatives, however, have promised to fully fund the cscc. l i s a m i l l s a n d a s h l e y w e b e r analyze the issue of access to emergency medicines through amendments to the federal Patent Act. Their chapter shows that Canada was the first country to amend its patent law to permit the export of generic medicines for public health emergencies such as hiv/aids in the developing world. Before 2003, the Agreement on

18

G. Bruce Doern

Trade-Related Aspects of Intellectual Property Rights (trips) did not permit the export of generic medicines that infringed patent protection, even in cases of national emergency. The Doha Declaration on trips and Public Health and the wto Council Decision opened the possibility for domestic legislation to facilitate drug export. The analysis shows that although development and public health ngo s were instrumental in getting the issue on the legislative agenda in Canada, and in removing clauses that would undermine the law’s impact, ultimately measures to protect patent holders have limited its potential. The authors argue that the legislation may have an important symbolic impact but it is unlikely to result in increased access to emergency medicines in the developing world. The policy outcome has been shaped by the structural position of the brand name pharmaceutical industry in Canada, its effective lobbying on the issue, and its perceived importance to the government of Canada. In this sense the current case builds on the historical politics of patent policy in Canada and globally through which the pharmaceutical industry and other interests had secured strong international protection for patent and other intellectual property rights against then quite weak user interests, including the health lobby. m a l c o l m b i r d a n d c h r i s t o p h e r s t o n e y explore the development and current state of the different regimes used to regulate “sin.” They look briefly at changing developments regarding tobacco, alcohol, and gambling. They show the degree to which the rules governing their use have changed and the extent to which they now reflect pragmatic choices rather than moral absolutes. They argue that governments, particularly provincial governments, are under intense pressure to provide more comprehensive levels of public services, especially in health care and education, but are unable, or find it impolitic, to increase revenues through direct income taxes on citizens and businesses. Consequently, they have become more dependent on profits from Crown-owned alcohol and gambling enterprises and non-direct taxes on all of these state sanctioned ‘sinful’ activities. They also show governments must also bear many of the costs that arise from consumer indulgence. The economic losses and health and social costs associated with each vice not only affect individuals, but also their families, communities and society at large. Governments and taxpayers are often left footing many of the bills. The benefits of revenue earned from these “sinful” activities must accordingly be balanced with the costs that are borne by taxpayers. The quantity and form of the problems arising from such activities, as well as the particular groups that indulge in them, significantly influence the rules governing each vice. This politically charged “cost-benefit analyses” of the revenues versus the costs of citizen indulgence are at the very heart of any discussion of how governments choose to regulate “sin.”

19

The Harper Conservative Agenda

challenges and choices The policy and fiscal issues examined in this volume will continue to occupy the attention of the Harper Tory government and the new minority Parliament. The Harper government is likely to work closely with the more decentralist provincial and industry forces in the energy sector portrayed in the Keith Brownsey chapter while still having to live with the energy equalization deals carved out and examined in the chapter by André Plourde. Harper has also promised to spend more on national Cancer policy as indicated in Michael Prince’s analysis. There is bound to be considerable Conservative interest in the possibilities of ongoing public expenditure review and the building of a culture of expenditure reallocation as examined by Evert Lindquist. As already noted, the four chapters dealing with procurement and ethics issues offer sound cautionary advice for a Conservative government determined to add new layers of bureaucracy to an already complex accountability agenda. All three opposition parties, the Liberals, the ndp, and the Bloc will have some leverage over the Tories but, at the same time, will not want to precipitate a new election in the next year or so. All three will basically support the Harper Conservative’s promised Accountability Act either as presented by them or as amended by all party agreement. All three opposition parties are likely to support the Liberal’s version of the pivotal child care program rather than that of the Tories. It is not impossible that this could result in some combined versions of the two since there will be pressure from the provinces to stick to the Liberal’s long-term funding package. However, as the next year unfolds, four challenges and choices are likely to loom large as the Harper Tories seek to put their stamp on national politics as a governing party with the discipline of power rather than an opposition party with the duty of protest: the fiscal imbalance and open federalism pledge; policies to show that the “West is in” means something and does not start to trigger yet another bout of western alienation and splintered Toryism; the new dynamics of Quebec politics; and Canada-U.S. relations in matters of security, sovereignty, and trade. The Harper pledge to deal with the issue of fiscal imbalance is simultaneously at the heart of both his Quebec policy and his overall policy on open federalism and more decentralized federalism. Fiscal imbalance implies that there is something structurally out of sinc between a level of government’s constitutional responsibilities and its fiscal capacity (taxing and spending) to carry out its tasks. Quebec in particular, but other provinces too, have argued that Ottawa is awash with surplus money due in part to its greater fiscal capacity and then, with these surpluses in hand, seeks to invent new ways to launch programs that are within provincial jurisdiction. It uses its spending power to stay in power and to maximize its identity and relevance to voters and citizens. According to this argument, the solution for fiscal imbalance is

20

G. Bruce Doern

for Ottawa to give tax room and tax powers to the provinces … all the provinces, not just Quebec, and also to focus on the constitutional areas of federal responsibility including national defence, security, and key areas of national sovereignty such as sovereignty in the north. Both conceptually and practically, however, these same kinds of arguments can be and are being made by Canada’s cities vis-à-vis the provinces. City mandates and challenges are growing but their fiscal capacity is well short of the tasks at hand. But Harper thus far seems to support the Martin cities agenda and the practice of direct federal funding of cities and related infrastructure. There is little doubt that at a basic level the fiscal imbalance and decentralized federalism argument would play well in Quebec since this is what pro-federalists and soft nationalists have argued is needed. But the counter arguments and raw realities of bilateral and asymmetrical federalism will quickly emerge, all the more so in a minority Parliament. A key counter argument will simply be that the provinces do have their own taxing and spending powers and if they want to support a given level of public services, they can tax their own citizens to pay for it. That too is decentralized federalism. Any effort regarding giving up tax room will also become embroiled, as chapter 3’s analysis by André Plourde shows, in the thorny issues of equalization policies and who gets how much and for how long. And more generally, the three opposition parties will stick to two contradictory lines of argument. The Liberals and ndp will defend federal spending power and the need for a strong national government. When the Joe Clark Tories of 1979 sought to make Canada into a decentralized “community of communities,” Liberal leader Pierre Trudeau ridiculed it as a process that would convert Canada into a coalition of “shopping centres.” Meanwhile the Bloc will argue that whatever fiscal rebalancing or decentralization is on offer or is achieved is simply not enough. So will the Parti Québécois in any possible new referendum context. With regard to the “West is in “challenge, several issues and dynamics are at play. The “west” as Alberta is already obviously in evidence given Harper’s own Alberta and Calgary-centred base, and also some key policies such as a technology first approach to climate change and an opposition to the Kyoto Protocol. So also are commitments regarding more decentralized federalism, the choice in spending child care allowance, a promised start to encouraging or appointing senators who are elected in a province, and the free vote on same-sex marriage. The west as all four provinces (and two regions, the Prairies and British Columbia) is a more complex picture. As a recent Canada West Foundation publication shows, the west is a complex mélange of views both at the level of citizens and provincial governments.15 Within the Harper Cabinet, which by definition is very inexperienced in holding office, there will also be important dynamics at play. Many mps from

21

The Harper Conservative Agenda

the west who fought the long battle to power have found themselves sitting outside the Cabinet room, their places taken by central Canadian mp s who have only recently joined the victory parade. Some of this displacement is necessary since Harper’s party as a renewed national party has to reflect the regional mix of the country in the construction of a new Cabinet. In the Cabinet he announced on February 6, 2004 (with 12 fewer ministers than the outgoing Liberal Cabinet of 39) Harper named 10 ministers (including himself) from Western Canada, nine from Ontario, five from Quebec, and three from Atlantic Canada. Of the 27 ministers in the new cabinet only six are women. One of his Western Cabinet ministers is David Emerson who, having just won his Vancouver seat as a Liberal, crossed the floor and became a Harper Tory minister. There still is and should be a deserved sense that the West indeed has a new presence in Ottawa and in a Harper Tory party. This is nothing but healthy for national democratic politics in an overall sense. But the glow of being “in” may well wear off quickly unless Harper can both serve and manage his Western political power base. The new dynamics of federal-Quebec politics is also a part of the equation. The Mulroney Conservative Party and cabinet from 1984 to 1993 was also a coalition anchored by strength in the west and support from soft nationalists in Quebec. There are five new Quebec ministers in the Harper cabinet and thus the dynamics of future policy making are likely to produce some unexpected outcomes. The 2006 election, as we have seen, has shaken up Quebec politics, but several other factors are also at play. The first is that the provincial opposition Parti Québécois has a new and young leader in André Boisclair. But Quebec also has a new left-wing separatist party as well born in February 2006 out of a belief in some labour union and other quarters that both the governing Quebec Liberal Party and the Parti Québécois have become too right wing in some of its key policies. A further dynamic in Quebec politics will centre on whether Quebec Liberal Premier Jean Charest can recover from his disastrous low ratings in opinion polls, buoyed by what seems like an alliance of convenience and belief with the Harper Conservatives. Charest has expressed broad support for the fiscal imbalance agenda, and, as a former Mulroney era Tory himself is quite supportive of other features as well. The immediate results of the 2006 election also helped produce as significant increase in public opinion polling support for the Charest Liberals, although not enough yet for it to win an election in 2007 or 2008. Also woven into the fabric of future Quebec politics will be the federal Liberal leadership race and whether a Quebec candidate emerges and whether that candidate, if successful, could also repair the deep lingering rift between the Martin and Chretien Liberals in Quebec. The final factor that will propel some Harper government challenges and choices centre on Canada-U.S. relations. As noted earlier, the Harper platform contains scarcely any reference to Canada-U.S. relations. The 2006 election did

22

G. Bruce Doern

feature the odd outburst of criticism by both Martin and Harper regarding the need to stand up for Canada on issues such as the softwood lumber dispute and related nafta trade dispute principles. Both leaders could afford to be selectively critical of the U.S. because of the deep unpopularity of U.S. President George W. Bush among Canadians. Harper carried this out after the election when, in one of his first press conferences, he went out of his way to criticize the U.S. over its views of Canada’s sovereignty claims in the arctic. Still a new Harper government is bound to make a serious effort at repairing some aspects of the Canada-U.S. relationships, at a minimum through greater civility in it and its mp s public discussion of U.S. issues. The Tory commitments to greater defence spending will find favor in the U.S. as would any positive Tory view of U.S. star wars defence agreements. There will also be considerable common ground on energy policy regarding the tar sands, energy exports, energy security, and a non-Kyoto approach to climate change. But like the Martin Liberal’s before him, the Harper Government will have to pay particular attention to the fact that Canadian issues simply do not resonate highly in a U.S. political system where the political power structure has shifted from the eastern and northern border states to those of the south and the west. Like government’s before it, the Harper Conservatives will have to chart a difficult path partly of their own choosing and partly based on the choices and pressures of others, both within a minority Parliament, within Canada, and in a larger continental and global setting.

notes 1 See Bruce Doern, ed. How Ottawa Spends 2005–2006: Managing the Minority (Montreal: McGill-Queen’s University Press), chapter 1. 2 Thanks are due to Susan Phillips, Michael Prince, and Geoffrey Hale for their constructive and useful comments on an earlier draft of this chapter. 3 Paul Martin, Text of Speech. Globe and Mail, April 21, 2005, 1. 4 See Commission of Inquiry into the Sponsorship Program and Advertising Activities (the Gomery Inquiry), Who Is Responsible? (Public Works and Government Services Canada) November 2005. 5 Lysiane Gagnon, “Harper Appealed to Soft Nationalists,” Globe and Mail, January 30, 2006, 6. 6 See Gilles Paquet, “Fiscal Imbalance as Government Failure,” in Bruce Doern, ed. How Ottawa Spends 2004–2005: Mandate Change in the Paul Martin Era (Montreal: McGill-Queen’s University Press, 2004) 25–45. 7 Conservative Party of Canada, Stand Up For Canada: Conservative Party of Canada Federal Election Platform 2006 (Conservative Party of Canada, 2006). 8 Ibid., 7–13.

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The Harper Conservative Agenda

9 See Commission of Inquiry into the Sponsorship Program and Advertising Activities (the Gomery Inquiry), Restoring Accountability: Recommendations (Public Works and Government Services Canada) January 2006. 10 See William B.P. Robson, “Out of Control: Reining in Soaring Federal Spending is a Critical Task for the Next Parliament,” C.D. Howe Institute e-brief, January 12, 2006. C.D. How Institute. 11 Liberal Party of Canada, Securing Canada’s Success (Liberal Party of Canada). 12 Department of Finance, The Economic and Fiscal Update (Department of Finance, November 2005). 13 Bruce Doern, ed, Innovation, Science, Environment: Canadian Policies and Performance 2006–2007 (Montreal: McGill-Queen’s University Press, 2006), chapter 1. 14 See Allan Maslove, “Health and Federal-Provincial Fiscal Arrangements: Lost Opportunity” in Bruce Doern, ed. How Ottawa Spends 2005–2006: Managing the Minority (Montreal: McGill-Queen’s University Press) 23–40. 15 See Canada West Foundation, “The Election Is Over: Now What?,” Dialogues, Winter, 2006.

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pa r t i Macro Choices and Challenges

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2 Trading Up or Treading Water? Federal Fiscal and Budgetary Policies in Search of a New Mandate geoffrey e. hale

Three broad themes framed fiscal and budgetary policies as the Martin government prepared to seek a more substantive electoral mandate in January 2006. The first was the need to stickhandle past the political challenges imposed by a minority government to seek the maximum electoral returns from the government’s still buoyant fiscal cushion. The second theme highlighted the government’s struggle to regain its policy focus despite its protracted preoccupation with internal conflict, electoral and parliamentary survival since the late Chretien years. Its fiscal policies since Martin’s rise to power suggest the persistence of two Liberal parties: one driven by the traditional tax-and-spend proclivities of distributive Liberalism and oriented towards broadening the politics of entitlement, the other by a more focused commitment to targeting continuing surpluses on medium-term fiscal priorities aimed at helping Canadians adapt to ongoing changes in the wider economic and social environment. Although the packaging of the government’s November 2005 Economic Statement clearly attempted to project the second set of messages, it was soon submerged by a flood of new and recycled pre-election spending announcements totaling more than $10 billion in the days before the government’s defeat in Parliament on November 28. The third broad theme highlighted the practical effects of the government’s earlier loss of focus, reflecting the efforts of Martin-era Liberalism’s effort to transcend its internal contradictions. Rather than renewing the sustainability of national social programs, as hoped and intended, its focus on buying short-term political fixes undercut previous incentives for fiscal discipline while contributing to an increasingly dysfunctional culture of federal-provincial relations characterized by competitive blame-shifting and

28

Macro Choices and Challenges

the externalization of policy risks. Other initiatives, such as federal energy policies, reflected a patient, targeted incrementalism aimed at laying the foundations for longer-term policy changes in cooperation with provinces and the private sector. Still others, such as Finance Minister Ralph Goodale’s handling of the burgeoning income trust sector – and its relations to broader issues of taxation – suggested a shifting mixture of benign neglect and uncertain political and economic responses to a changing economic environment. This chapter examines the political and fiscal environment for budgetary policies as the Martin government appeals for a new electoral mandate, and the major structural issues of budgeting amid current fiscal and political uncertainties. It considers the place of current budget rules and processes following the release of the O’Neill report in June 2005, and Goodale’s subsequent efforts to regain control of public expectations – if not necessarily federal finances. It also examines the effects of the politics of protracted surpluses on federal-provincial fiscal relations, and the challenges of managing policy risks during periods of significant market uncertainties – particularly the medium-term effects of high energy prices and the impact of the income trust phenomenon on capital markets and federal revenues.

t h e f i s c a l f r a m e wo r k : m o v i n g ta r g e t s , s h i f t i n g p r i o r i t i e s In comparative terms, the federal government’s fiscal performance during the past decade has been the envy of the industrial world. Following more than 30 years of chronic deficits which undermined the capacity and credibility of federal economic policy-making, Ottawa is likely to report its ninth consecutive budget surplus in 2005–06. As noted in Table 2.1, the federal debt-to-gdp ratio has dropped from 68 per cent in 1994–95 to 38.7 per cent at the end of 2004–05. Interest payments on the federal debt have dropped from 36.1 percent to 17.2 percent of federal revenues during the same period.1 Economic history suggests that strong economic and fiscal performance in one decade is rarely a reliable guide to future trends. However, it does provide prudent governments with a wider range of choices in dealing with new challenges. Federal fiscal priorities have gone through three major phases since achieving balanced budgets in the 1997–98 fiscal year. (See Table 2.2.) Fiscal policy during the immediate post-deficit period (1998–2000) focused on restoring fiscal margins for maneuver and carefully targeted reinvestments in social benefits, skills, and education designed to address concerns over both incentives and equity in responding to ongoing changes in labour markets. New investments in education, research, infrastructure and innovation, and a more competitive tax system were the key priorities of the later years of the Chretien-Martin era. This phase (2000–2002) was characterized by

29

Federal Fiscal and Budgetary Policies

Table 2.1 Fiscal Snapshot: Key Chretien-Martin Years Ratios to gdp 1994–95

1998–99

2002–03

2004–05

68.0

61.0

44.1

38.7

5.7

4.7

3.2

2.6

Program spending to gdp

14.9

12.0

11.5

12.6

Revenues to gdp

15.9

17.1

15.4

15.4

Net debt to gdp Interest charges/gdp

Source: Canada. Department of Finance (2005a), Fiscal Reference Tables (Ottawa: September).

Table 2.2 Shifting Fiscal Trends and Priorities Average rate of change* 1995–1997

1998–2000

2001–2003

2004–2005

−4.7

+2.4

+6.8

+10.4

Total spending (%)

−1.0

+0.8

+3.8

+7.4

Total revenues (%)

+6.7

+5.7

+2.5

+5.6

−25.1

+6.0

+11.4

+5.4

Program spending (%)

Year-end budget balance ($billions/year)

Source: Canada, Department of Finance (2005a), Fiscal Reference Tables (Ottawa: September). * Fiscal year ending March 31

modest spending increases and a phased, but broadly-based program of tax reduction in response to the fiscal sacrifices of the previous decade. Since 2003, the government has pursued a much more activist agenda, using buoyant revenues, especially from corporate taxes, to finance rapid increases in spending at a level last seen during the 1970s – more than 15 percent in 2004–05 alone.2 Years of relative spending constraint had created pent-up demands for “catch-up” spending, particularly in intergovernmental transfers. The leadership race of 2003 to replace Jean Chretien and the political pressures created by the Liberals’ loss of their parliamentary majority in the 2004 election reinforced political incentives to spend and undermined the capacity of Finance Ministers and central agencies to impose fiscal discipline during an era of relative prosperity. Prime Minister Martin promised the provinces substantial increases in federal transfers to finance rapidly growing health spending. New deals were negotiated to increase federal transfers of gasoline tax revenues to municipalities over several years, and to initiate a national child care program. Sizeable spending increases already included in the 2005 federal

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Macro Choices and Challenges

budget were further augmented by commitments of $4.8 billion over two years in Bill C-48 to secure ndp support and prevent the budget’s defeat and an early election in May 2005. Even without these increases, federal spending in 2004–05 increased faster than at any time since the days of the great inflation during the 1970s. An October 2005 analysis by economic consulting firm Global Insight notes that since taking office, the Martin government had spent 74 percent of the $44 billion in “unanticipated” surpluses, “leaving only 17 percent for debt reduction and 9 percent for tax relief ”3 before the retroactive tax reductions belatedly announced in Goodale’s November 2005 economic and fiscal and economic statement. The Martin government’s near-death experience prompted a serious rethinking of its priorities, and the wholehearted embrace of rhetorical activism subject only to the constraints of continuing to balance the federal budget. In a speech to senior civil servants in late September 2005, Martin acknowledged the overriding need for the federal government to prepare for two major structural shifts in the environment for social and economic policies: the effects of an aging society on Canada’s labour force and demands for public services, and competitive pressures arising from the rise of China, India, and other “emerging economies” in global markets. The result was a spreadeagle proclamation of at least 20 major policy priorities facing the government in its pursuit of a new mandate.4 Most of these commitments – carefully repackaged around four major themes aimed at providing a clearer sense of focus in response to the government’s critics – resurfaced in the fall fiscal statement: • “creating opportunities for all Canadians,” particularly in access to postsecondary education, skills acquisition, labour force participation; and immigrant adjustment; • continuing to foster an “innovative economy” through investments in research and the diffusion of technological change; • a trade promotion agenda to “position Canada at the centre of global commerce and networks,” while investing in infrastructure to expand key “gateways,” and • “building the right environment for private investment” and future “prosperity.”5 The combined effects of spending and tax announcements contained in the February 2005 budget, post-budget negotiations designed to secure ndp support for the initial budget, and the November update, projected almost $140 billion in additional federal spending and tax commitments until at least the end of the decade, and in some cases, for years beyond that. The subsequent avalanche of pre-election spending announcements

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Federal Fiscal and Budgetary Policies

represented efforts to repackage, if not necessarily to operationalize, these commitments for electoral consumption. By comparison with other countries – or with some provinces – Ottawa’s challenges in managing and setting priorities continue to reflect the problems of affluence rather than the rather larger problems of scarcity which defined much of the 1990s. However, they also point to the government’s core problems in defining its priorities and translating them into effective policies. How does it manage the political cross-currents created by chronic budget surpluses? And how does it balance short-term political pressures with the need to address broader structural issues critical to maintaining Canada’s prosperity and competitiveness over the longer-term without squandering its hard-won fiscal discretion?

m a n a g i n g t h e m i n o r i t y: balancing the political a n d b u d g e ta r y “ g a m e s ” Minority parliaments and the prospect of an early election have increased the relevance of public opinion and the competing agendas of opposition political parties – particularly in appealing to pockets of swing votes. Although there are few current pre-budget surveys in the public domain, trends in public opinion suggest that about 25 to 30 percent of the population are strongly oriented towards market-based economic policies and constraints on the growth of government, another 25 to 30 percent towards anti-market and systematically redistributive policies, and the balance towards selectively redistributive policies that provide them with valued services or increased benefits of other kinds. The brokerage nature of Canadian political parties as coalitions of overlapping interests ensures that these groups do not align precisely with voting preferences, although Conservatives and “business” Liberals are more likely to be in the first group, and “social” Liberals and New Democrats are more likely to be in the second group. All parties compete for the philosophically eclectic group in the middle. Broader strategic agendas are subject to adaptation or revision depending on prevailing tendencies in public opinion and the perceived benefits of tactical opportunism in the pursuit of soft or wavering supporters of other parties and relatively small groups of genuinely undecided, as opposed to disengaged, voters. Under minority parliaments, budgetary politics involve a three-level game. Political leaders attempt to define the political agenda through “front-page” politics that may either reflect the public moods discerned by their pollsters or attempt to steer it. At the same time, on a second level, parties seek to address sectoral and niche issues either to broker solutions to policy problems or to exploit areas of perceived governmental vulnerability in piecing together a

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Macro Choices and Challenges

“coalition of the outs.” The perceived shift of Conservative strategists during the fall of 2005 from an emphasis on broadly-based tax cuts to more targeted measures aimed at specific constituencies reflects the second kind of strategy – pending the release of a more extensive platform closer to an election (see chapter 1). The packaging of the fiscal statement’s relatively modest tax reductions as a “$30 billion tax cut” – mainly by multiplying the annual effects of Goodale’s $5.1 billion retroactive tax reductions for 2005–06 over six years6 while recycling several previously announced business tax measures shelved after the 2005 budget – is an example of the first approach. At a third level, civil servants, sometimes in consultation with technical policy specialists from particular policy communities, attempt to piece together administratively and economically viable policy measures within the political space available to them. Although this political space is constrained by the realities of minority government, it also reflects the government’s ability to maintain some degree of fiscal flexibility within its broad commitments to annual balanced budgets and ongoing debt reduction. Facing imminent defeat in Parliament, the government accelerated a series of planned policy announcements in its November 2005 fiscal statement in the hope of framing a more substantive agenda capable of securing a mandate from voters.

m a nagi n g a m i d st a f f lu e n c e : t h e p o l i t i c s o f s u r p lu s e s The fiscal triumphs of the Chretien-Martin era were built on a combination of fiscal discipline and carefully managed fiscal illusion. Having inherited a fiscal regime in which Finance officials always under-estimated deficits and Finance ministers usually over-promised results, the Martin-era Finance Department always kept a surplus of fiscal cushions in stock. Growth rates were estimated conservatively. Spending projections – particularly for Employment Insurance – were often padded. Estimates of interest rates were usually pessimistic. And if all else failed, Martin maintained a $3 billion Contingency Reserve against unanticipated economic shocks.7 These budgetary games had three major purposes. By managing and consistently exceeding public expectations, they helped to restore public confidence in the managerial competence and economic leadership of the federal government. Within the government, they increased internal incentives for prudent management in setting priorities and aligning departmental priorities with government-wide goals. As a matter of fiscal policy, they enabled the reallocation of fiscal savings to serve longer-term priorities and improved coordination of economic and social policy goals.8 However, arguments for fiscal discipline – whether in resisting demands for further spending increases or tax reductions – lost much of their urgency

33

Federal Fiscal and Budgetary Policies

Table 2.3 Balancing Prudence and Fiscal Illusion: Variations Between Forecast Budget Balances and Actual Outcomes: 1994–95 – 2003–04 (in $ billions)

1994–95

Balance forecast in budget before fiscal year began

Actual Balance (outcome)

Difference*

−39.7

−37.5

−2.2

In-year policy initiatives

“Adjusted” balance (outcomes without policy initiatives)

0.0

−37.5

1995–96

−30.3

−28.6

−1.7

0.0

−28.6

1996–97

−21.8

−8.9

−12.9

−0.7

−9.6

1997–98

−13.3

3.5

−16.8

+5.9

9.4

1998–99

3.0

2.9

0.1

+5.7

8.5

1999–00

3.0

12.3

−9.3

+6.2

18.5

2000–01

4.0

17.1

−13.1

+5.3

22.5

2001–02

8.2

8.9

−0.7

+3.6

12.5

2002–03

2.0

4.0

−2.0

+7.3

11.4

2003–04

4.0

9.1

−5.0

+4.8

13.8

Source: O’Neill (2005), 123. * Negative figure indicates actual budget balance better than forecast. ** Positive figure reduces potential surplus. Figures may not add due to rounding.

as Ottawa regularly posted annual surpluses well in excess of its own forecasts. The auditor general repeatedly chided the government for its use of accounting tricks such as parking surplus revenues designed to finance ongoing spending in arms-length foundations lacking any effective accountability to Parliament. The government repeatedly resorted to major in-year announcements of “additional” or reallocated spending (or, less frequently, tax reductions) as fiscal performance exceeded projections – often to address short-term political pressures. Such initiatives accounted for about 40 percent of variations from budget estimates between 1997–98 and 1999–2000, and about 50 percent of such variations between 2000–01 and 2003–04. (See Table 2.3.) These practices, while demonstrating considerable political pragmatism and flexibility in managing public finances, drew greater attention to the largely nominal character of the cabinet’s accountability to Parliament, and offered greater credibility to competing fiscal agendas. Following the election of a minority parliament in 2004, the opposition-dominated Commons’ Finance Committee demanded the equivalent of the Congressional Budget Office in the United States to monitor and comment on Finance’s fiscal forecasts.

34

Macro Choices and Challenges

New Democrats, provincial governments and other habitual beneficiaries of government spending argued that these tactics short-changed needed spending on major social priorities. Conservatives, business interests and market-oriented think tanks argued that disguising surpluses led to overtaxation, underinvestment in growth and productivity-enhancing measures, and excessive spending on short-term political priorities. Finance Minister Ralph Goodale responded by appointing Bank of Montreal Chief Economist Tim O’Neill to report on the factors that had contributed to federal surpluses consistently exceeding previous forecasts. Reporting in June 2005, O’Neill estimated that federal surpluses had exceeded budgeted forecasts by a yearly average of $10 billion since 1998 – including the in-year spending increases mentioned above. Rather than a product of deliberate deception or technical inadequacy, he suggested that the main cause of forecasting failures was the cumulative effect of a culture of fiscal caution on federal budgeting and management practices resulting from the de facto “no deficit” rule built into Ottawa’s budgetary policies.9 Key factors that have contributed to the difficulties of forecasting surpluses noted in the O’Neill report included variability of corporate income tax revenues and major Crown Corporation profits due to changing economic conditions; statistical reporting lags in gdp figures; variations between cash and accrual accounting systems, budgetary provisions for contingent liabilities, such as the uncertainties of litigation; and variations in estimates of amounts collected for and dispersed to the Canada Pension Plan or other governments under tax collection agreements. Although underestimates of revenues were the largest sources of forecasting discrepancies, 75 percent of overall revenue variations occurred in three of the eleven years covered by the O’Neill study.10 O’Neill recommended the elimination of the “no deficit” rule in favor of a formal policy of requiring the government to report modest fiscal surpluses over an economic cycle. Anticipating the widespread criticism that greeted this recommendation, not least from within the government itself,11 he suggested that – as a fall-back policy to provide greater transparency and public accountability – the government should build into its budget policies for the allocation of “unanticipated surpluses” for approval in advance by Parliament. Finance Minister Goodale’s response to the O’Neill report was the introduction of Bill C-67, the “Unanticipated Surpluses Act” in October 2005. The bill – which had not yet received Parliamentary approval before the government’s defeat – provided for the equal division of surpluses in excess of the $3 billion annual Contingency Reserve among debt reduction, tax reduction and increased spending. It “grandfathered” the $4.8 billion in additional spending provisions contained in Bill C-48 to secure ndp support for the Liberals’ 2005 budget.12 Its heavily cosmetic character was also suggested by the retroactive character of the main tax measures announced in the November 2005 fiscal

35

Federal Fiscal and Budgetary Policies

statement and the opaque mixture of previously announced and unbudgeted measures included within subsequent pre-election spending announcements. Bill C-67’s provisions for tax reduction may take the form of a one-time “surplus allocation” effectively providing a refundable tax credit to each of the roughly 21 million Canadians who have filed tax returns in the current and preceding years. Ironically, this approach paralleled that taken by the Klein government in announcing its plans to give all Albertans a $400 “Resource Rebate” from record provincial oil and gas revenues. Alternately, if considered “fiscally sustainable,” these amounts may be used to increase basic income tax thresholds13 below which no income taxes are payable. However, it is unclear whether the bill will resurface following an election and, if it does, whether it will have any practical effect. The debate over surplus allocation mingles three competing sets of issues: the size of projected budget surpluses, the challenges of balancing of medium-term priorities with those of short-term distributive politics, and the degree to which proposed policy changes can be sustained long enough to have significant economic, not just political effects. The surplus forecasts of economic analysts testifying before the Commons’ Finance Committee in October 2005 ranged between $8.5 billion and $12.4 billion for the 2005–06 fiscal year, reflecting continuing high rates of employment and corporate profits, and between $7.2 billion and 12.5 billion for 2006–07, before the Finance department’s typical provisions for fiscal contingencies. Surplus forecasts commissioned by the Department of Finance and tabled as part of the November Economic Statement were even higher, averaging $13.4 billion in 2005–06 and $15.0 billion in 2006–07, after adjustments for recent policy announcements and revenue windfalls.14 The proposed allocation of almost half of the projected surplus (after provisions for debt reduction) to tax cuts, subject to the results of the election, underlines the ongoing challenges of balancing short-term considerations of distributive politics with longer-term efforts to promote increased productivity, living standards, and economic growth. Hard budget constraints, such as firm limits on spending growth as suggested by some economists and business interests, are hard to enforce politically in the absence of legislated tax reductions that benefit a majority of the population. This reality is reflected in Goodale’s November 2005 decision to cut the lowest personal income tax rate from 16 to 15 percent immediately, providing a net benefit of $5.1 billion targeted mainly at the majority of tax filers earning less than $35,000 annually, while deferring additional rate reductions for taxpayers earning between $35,000 and $200,000 until 2010 – sooner if permitted by continued surpluses.15 It is also reflected in the Conservative election proposal to trump Liberal tax cuts with an additional 2 point reduction in the gst, half to be legislated immediately, the second to be implemented within five years.

36

Macro Choices and Challenges

Table 2.4 Incidence of Taxation, by Income Group: 2001 Number of Taxpayer Total Income Level

Total Income

Federal Tax Payable

percent of total

Effective Federal Tax Rate (%)

$35,000 or less

55.0

32.3

15.7

6.5

$35,000 – $70,000

34.4

36.9

37.3

13.4

More than $70,000

10.7

30.6

47.0

20.4

Source: Canada Revenue Agency (2003), Income Statistics (2001 Tax Year); Geoffrey Hale (2005), “Making Progress on Taxes in Canada?” www.policy.ca, 26 April.

The debate over tax cuts hinges, at least in part, over the relative contributions of public spending and tax reductions – or more particularly, different kinds of public spending and changes in the mix of taxes collected by government – to citizens’ living standards and economic opportunities. In the shortterm, the majority of taxpayers – and almost two-thirds of people who file tax returns – receive substantially more in benefits from increased public spending than they do from tax reductions, unless a sluggish economy squeezes their incomes or puts them out of work.16 The main exception to this rule reflected in the all-party consensus that Employment Insurance taxes should be set at “break-even” levels to fund anticipated program spending – although there is far less consensus on the levels and kinds of benefits that should be funded under the program.17 Table 2.4 notes the distribution of personal income and federal income taxes payable by income group. However, many economic analysts suggest that certain kinds of spending – particularly on education, skills acquisition and infrastructure – contribute more to increases in earning capacity, productivity, and overall standards of living than do more generalized transfer payments. Similarly, links between increased levels of business investment, the spread of new or improved technologies, and productivity growth increase the importance of internationally competitive tax rates on business and investment income – particularly given the growing international mobility of investment capital.18 Lower corporate tax rates and fewer distortions in links between personal and corporate taxes – such as the double taxation of investment income – are easier to sustain politically if combined with the phasing-in of more broadly-based tax reductions that enhance the disposable income of the lower and middle income majority of taxpayers.19 These realities were reflected in the packaging of the government’s preelection tax measures – and in Finance’s technical analysis of the measures required for Canada to make its tax system more supportive of increased

37

Federal Fiscal and Budgetary Policies

productivity and competitiveness, including renewed commitments to reduce corporate income tax rates between 2008 and 2010, to phase out the corporate income surtax, and to accelerate the elimination of the federal capital tax on corporations for 2006. Indeed, except for the timing, large elements of this package could have been lifted from Jack Mintz’ Tax Competitiveness Report published in September by the C.D. Howe Institute.20 We now turn to three areas in which the federal government has struggled – not always successfully – to balance short-term political pressures with the management of broader structural policy challenges: federal-provincial fiscal arrangements, energy policy and the challenge of rising energy prices, and the proliferation of income trusts in response to distortions and perverse incentives in the taxation of corporate and investment income.

b a l a n c i n g s h o rt- t e r m a n d s t ru c t u r a l c h a n g e s : the problems of fiscal federalism As noted earlier, a central objective of federal fiscal restructuring during the 1990s was to restore fiscal flexibility and reallocate funds to enable the government to respond to the challenges of a changing economic and social environment. Setting and enforcing fiscal priorities become increasingly difficult when one level of government raises revenue, only to transfer it to another level of government that gets the political benefits of spending it. As part of this process of balancing federal budgets and regaining some degree of fiscal discretion, the Chretien government had reduced its transfers to the provinces by almost a quarter between 1995 and 1998. Provincial governments, especially in Ontario and Quebec, seized on these cuts first to demand greater consistency and predictability in federal transfers, and subsequently to claim the existence of a “vertical fiscal imbalance” in which federal surpluses were seen to have been created primarily at the expense of provincial governments.21 The federal government responded to these complaints with a series of one-time and phased five year increases in transfers, particularly through the Canada Health and Social Transfers. Although increased transfers provided a means of asserting a stronger federal presence in policy fields strongly valued by public opinion, Ottawa also hoped to “buy changes” needed to make Canada’s health care system more fiscally sustainable and meet pressing concerns over increased waiting times and other concerns. In fiscal terms, these shifts had three major effects. First, overall levels of federal transfers to provinces largely recovered their 1993 levels, adjusted for inflation and population change. In the most recent three years alone (2001–02 – 2004–05), major federal cash transfers to provinces increased by 57 percent in nominal dollar terms.22 Second, the balance of federal transfers shifted heavily

38

Macro Choices and Challenges

Table 2.5 Major Federal Transfers to Other Levels of Government ($ billions)

1994–95

Canada Health and .

7.7

Social Transfer*

9.8

Fiscal Transfers

8.9

1997–98

2001–02

2004–05

12.6

17.3

23.8

10.0

12.0

12.9

−2.1

−2.7

5.3

20.5

26.6

42.0

(e.g. Equalization) Other** total (percent of total)

26.3 1994–95

Canada Health and

29.2

Social Transfer*

37.0

Fiscal Transfers

1997–98

2001–02

2004–05

61.5

65.0

56.7

33.7

48.8

45.0

30.7

–

−10.3

−10.0

12.7

26.3

20.5

26.6

42.0

(e.g. Equalization) Other** total

Source: Canada, Department of Finance (2005a), Fiscal Reference Tables (Ottawa: September), Table 11. * Established program financing before 1995–96. ** Mainly “Alternative Payments for Standing Programs.”

from an emphasis on regional redistribution through equalization payments to per-capita transfers to provinces through the Canada Health and Social Transfers. (See Table 2.5.) Paul Martin’s commitment in October 2004 to increase payments under the cht and cst by at least $3 billion annually over each of the subsequent five years was largely consistent with these trends.23 However, although the cumulative increase in federal transfers was sufficient to finance substantial increases in health spending in most provinces, it was not sufficient to “buy” any significant degree of change, as provinces resisted federal efforts to mandate new services or practices in the absence of what they considered “new” money, and the federal government strongly resisted any extension of private provision that might undermine its ability to protect the existing single payer system under the Canada Health Act. Martin also sought to preempt the complaints of “have-not” provinces over declining equalization payments by announcing federal plans to increase transfers under the equalization and Territorial Formula Financing programs by 3.5 percent annually over five years from an expanded base of $10.9 billion and $2.0 billion respectively in 2005–06. However, any expectation that this display of federal largesse would satisfy provincial

39

Federal Fiscal and Budgetary Policies

demands rapidly evaporated in 2005 as Martin retreated from one position after another under pressure from the provinces. In January 2005, the government concluded a “special deal” that excluded resource royalties from equalization payments to Newfoundland and provided parallel treatment to Nova Scotia after Newfoundland Premier Danny Williams stormed out of a first minister’s meeting and hauled down Canadian flags from provincial government buildings. Williams even received the equivalent of a signing bonus in the form of federal prepayment, which was applied to the provincial debt, proportionally the largest in Canada.24 These ad hoc revisions to equalization triggered an outraged call for renegotiation of the federal tax and transfer system from Ontario’s Liberal premier, Dalton McGuinty. In May 2005, Martin conceded a $5.75 billion supplementary transfer to Ontario, over five years, to compensate it for “paying more than its fair share” to the federation – although most of the details for implementing this agreement had not yet been negotiated six months later.25 Following the February 2005 budget, Finance Minister Ralph Goodale appointed an Expert Panel on Equalization, chaired by former Alberta Deputy Finance Minister Al O’Brien, to recommend reforms to the equalization system consistent with existing budget commitments. This process rapidly became enveloped in public controversy over how to address the effects of rising provincial energy revenues, especially in Alberta, in any revised system of equalization.26 The cumulative effect of these policies has been to stimulate competing – and ultimately incompatible – notions of entitlement: Ottawa’s periodic pretensions to micro-manage provincial health spending as the “guardian of Medicare,” provincial claims of entitlement to ever-increasing levels of federal transfers, preferably with a minimum of strings attached, and competing notions of fairness which richer and poorer provinces have generated to justify their claims to a larger share of federal transfers. The question of energy revenues on both vertical and horizontal fiscal imbalance is central to the redesign of equalization. As discussed by André Plourde in chapter 3, the federal government introduced the current fiveprovince standard to define equalization entitlements in 1982, when the inclusion of Alberta’s oil revenues combined with a deep national recession threatened to turn Ontario into a “have-not” recipient of equalization. However, the representative tax system (rts) used under the five-province standard had anomalies of its own, particularly for provinces contributing a heavily disproportionate share of a major revenue source. As noted by Courchene, the short-lived oil price spike of 2000 resulted in an equalization clawback on resource revenues of more than 100 percent for Saskatchewan under the rts formula – although this figure has subsequently declined.27 Newfoundland and Nova Scotia argued that their resource revenues provide

40

Macro Choices and Challenges

them with a time-limited opportunity for their economic development to catch up with the rest of Canada before the exhaustion of offshore oil and gas resources closes this window, possibly forever. The effects of equalization reform on individual provinces will ultimately depend not only on the formula chosen for determining provincial entitlements, but also on the overall size of the equalization budget and the degree to which it fluctuates with economic activity. At time of writing, it is unclear how the O’Brien Task Force will address these trade-offs and concerns. Its mandate clearly calls for its proposals to fit within the fiscal envelope already announced by the federal government, but its report will be delayed until after the 2006 federal election. Federal cabinet ministers appear to be taking the long view of these issues – carefully avoiding any suggestion of a direct assault on the revenues of Alberta or other energy-producing provinces that would resurrect memories of the National Energy Program of the early 1980s or trigger a potential constitutional crisis.28 The Unanticipated Surplus Act, discussed earlier in this chapter, provides a prospective check on pressures for ad hoc adjustments to provincial transfers in response to pressures from provincial premiers driven by a mixture of surplus envy and reluctance to raise their own tax rates to pay for steadily rising health care costs. However, it is still far from clear whether a new minority Liberal government or a Harper Conservative one will succeed in regaining the political initiative in this perennial game of fiscal chicken with the provinces over the disposition of prospective federal surpluses. Unlike the short-term politics of fiscal federalism, the Martin government’s overall approach to energy development suggests a greater focus on longer-term structural issues of supply and sustainability capable of balancing regional interests within a longer-term vision of the national interest.

e n e r g y a n d f i s c a l p o l i c y: s t i c k h a n d l i n g pa s t s t i c k e r s h o c k The politics of energy resurfaced at another level during the late summer of 2005. Tight global markets and supply shocks induced by the impact of Hurricanes Katrina and Rita on the energy infrastructure of the U.S. Gulf Coast triggered sharp spikes in retail gasoline prices across Canada. Parallel increases in natural gas prices, combined with tight electricity markets in Canada and growing dependence on natural gas for electricity generation across North America led to concerns that home heating prices could double during the winter of 2005–06, causing hardships for many Canadians. At the same time, representatives of energy consumers, such as Perrin Beatty of the Canadian Manufacturers and Exporters, warned of the potential impact of supply shortages on Ontario’s manufacturing sector.29

41

Federal Fiscal and Budgetary Policies

Canada has a fairly stable surplus of oil and natural gas. However, the ways chosen to develop and market these resources during the era of low prices that followed the collapse of the National Energy Program (1985–99) resulted in trade-offs between the introduction of international market pricing and the progressive opening of export markets, especially to the United States. Financing long-term investments in new resource developments, along with improvements in pipelines and other energy infrastructure, required the broadening of energy markets and the capacity to negotiate long-term contracts. As a result, during the 1990s, Canada became the largest single foreign supplier of oil and natural gas to the United States. However, the tightening of international oil and gas supplies after 2003 has prompted sharp price increases, and increased concerns over supply constraints in the medium-term until sizeable new investments in “non-traditional” energy sources, including Alberta’s oil sands, coal-bed methane (cbm), wind-generation, and other forms of alternative energy reach markets in significant quantities. The federal government is in an unenviable position on these issues. Provincial ownership, and with limited exceptions, regulatory control of natural resources means that Ottawa has a secondary role in energy policies. Canada’s commitments under nafta and international energy agreements preclude the unilateral interruption of export contracts unless on the same basis as supplies to domestic markets. The federal government has a limited capacity to influence energy prices, at least in the short-term, when crossborder energy trade often results in a series of regionally-integrated markets. As demonstrated by Ontario’s bungled efforts at electricity market deregulation, price subsidies are often both inefficient and an obstacle to conservation and more efficient energy usage – as well as working at cross-purposes to federal policies to promote more efficient energy use. Ottawa’s principal roles in energy policies arise form its jurisdiction over international trade, the regulation of interprovincial pipeline and electricity transmission, coordination of resource development in the northern territories (with territorial and aboriginal governments), and the effects of its environmental policies in shaping or constraining energy development. Changing conditions in energy markets and environmental policies have affected federal finances several ways. Federal revenues derive from the flat-rate excise tax per litre on gasoline and other motive fuels, gst revenues from energy consumption and related economic activity, and personal and corporate income taxes. Direct federal revenues from energy taxes in were $5.1 billion, compared with budgeted transportation sector expenditures of $2.8 billion in 2004–05. Sharp increases in the profits of energy firms in 2004 and 2005 also accounted for much of the growth of federal corporate income tax revenues.30 The 2004 and 2005 federal budgets unveiled a series of initiatives to increase and diversify energy supplies by rationalizing energy taxes and

42

Macro Choices and Challenges

subsidizing the development and commercialization of new technologies and energy sources, particularly wind generation, while expanding funds available for energy conservation by homeowners, businesses, and governments. Rising oil and gas prices actually reinforce these strategies – but run the risk of a populist backlash if governments are seen to profit from high energy prices while economically vulnerable groups such as seniors, low-income earners, and transportation sector workers face visible hardships. Faced with the prospect of record natural gas prices in the winter of 2005–06, Finance Minister Ralph Goodale announced several mediumterm initiatives, valued at a total of $2.4 billion over 5 years, as a form of political insulation for the government’s energy strategy. Goodale promised an annual $125 per person energy rebate in each of the next five years for low-income earners in receipt of various forms of federal assistance, including the Guaranteed Income Supplement (gis) and the National Child Benefit supplement. He also announced an expansion of subsidies for energy retrofits for low-income earners and low-income housing, and legislative changes to expand the investigative powers of the Competition Bureau and create a new Office of Petroleum Pricing Information to monitor and report on gasoline prices.31 While these initiatives accommodate short-term political concerns over the costs of high energy prices, they suggest a long-term term commitment to structural adjustments in ways that depend more on providing incentives for the workings of market forces rather than heavy-handed intervention in a sector whose regional and provincial variations offer endless complexities, and the prospect of much greater political pain than gain. As such, federal energy policies reflect a few short-term tactical gestures towards the politics of distributive Liberalism within a relatively coherent, while evolving policy framework consistent with the long-term perspectives of strategic liberalism.

ta c k i n g b e f o r e t h e w i n d – m u d d l i n g t h ro u g h o n i n c o m e t ru s ts The Martin government’s preference for risk avoidance, incremental change and interest group accommodation is most visible in its handling of the taxation of income trusts and related issues of investment income. The rapid growth of the income trust sector has been the most intensely reported story in Canada’s financial press during the past year – even more than the political and economic effects of rising energy prices. Income trusts exploit variations in the treatment of income earned by corporations and investors to allow operating companies to finance their operations by selling “trusts” full or partial ownership of operating assets in return for commitments to pay a steady stream of income to investors – some of which may involve a “return of capital.”32

43

Federal Fiscal and Budgetary Policies

Table 2.6 Market Capitalization: Income Trusts and Other “Flow Through Entities”

Business

Income Trusts Energy

Real Estate

Limited Partnerships

Total

Dec. 2004

51.4

41.9

17.4

8.0

118.7

Dec. 2000

3.7

5.8

4.6

3.9

18.0

Dec. 1995

–

1.3

–

–

1.3

Source: Canada. Department of Finance (2005d), “Tax and Other Issues Related to Publicly Listed FlowThrough Entities” (Ottawa: 8 September), 12.

The relative attractiveness of trusts both to investors and to certain kinds of businesses results from a combination of distortions in the tax system and growing demand from aging investors for relatively high-yield investment products. The tax distortions stem from the relatively unfavourable tax treatment of dividends paid by larger corporations, and the effect of income trusts in reducing the costs of capital to many businesses. Rather than paying corporate income taxes at rates ranging from 30 to 35 percent, depending on provincial tax rates, income trusts “flow through” income directly to shareholders who then pay taxes at their current marginal income tax rates, where applicable.33 Record low interest rates and the collapse of conventional equity markets after 2000 created growing public demand for these investments – particularly when investment analysts believe that a company’s cash flow can be used more productively through the distribution of a larger share of profits to investors than by reinvestment in the business. The market value of income trusts grew from $18 billion to $118 billion between December 2000 and December 2004, and by an additional 43.7 percent during the first eight months of 2005 to more than $170 billion – reflecting a large number of new public offerings and the conversation of numerous corporations into income trusts.34 (See Table 2.6.) The 2004 federal budget attempted to curb the growth of the income trust market by restricting their acquisition by pension funds and other retirement savings vehicles. However, a sharp backlash from the financial sector, pension funds, and issuing companies caused Goodale to withdraw the proposed restrictions – and the government gave every appearance, until recently, of treading water amid the rising tide of trust conversions. A federal discussion paper released in early September 2005 projected revenue losses for 2004–05 in the range of $300 million – compared with about $30 billion in corporate income tax revenues. However, the sector’s rapid growth led some observers to suggest that this figure could double in 2005–06. Within a few days of the discussion paper’s release, four major companies announced plans for conversions of all or part of their assets totaling more than $17 billion.35

44

Macro Choices and Challenges

Finance Minister Goodale responded by freezing advance tax rulings on new income trust conversions, significantly increasing the risks for prospective investors, and contributing to a drop of about $15 billion in the collective market value of income trusts – although this trend was reinforced by a broader stock market correction. The Department of Finance initiated consultations with tax experts and the financial sector to explore the effects of various options to reduce the effects of existing tax distortions without creating serious difficulties in financial markets. Income trusts pose a huge challenge to the government’s struggling productivity agenda. On one hand, they provide Canadian firms with a costeffective vehicle of tapping domestic savings and reducing dependence on foreign capital. On the other, the commitment required by the income trust structure to apply much of a company’s cash flow in payouts to investors is less suitable for growing, profitable companies attempting to finance growth from their own earnings. Goodale carefully avoided a confrontational or demagogic approach to the issue, preferring to weigh various options and alternatives. Although the consultation process elicited several proposals for the wholesale restructuring of tax rules on both corporations and investment income that would be required to restore a level playing-field not only between corporations and income trusts, but between tax-sheltered investments in pensions and rrsps and other kinds of investment income, the government demonstrated little appetite for such a wide ranging debate in an election year. Finance officials appear to have weighed a number of options, including restrictions on interest deductibility by income trusts, who often borrow funds to finance distributions to unitholders as part of their convoluted corporate and financial structures, direct taxes on income trusts, and a 5 percent tax on trust distributions received by pension plans and other tax sheltered savings vehicles. Indeed, Goodale’s Parliamentary Secretary, John McKay, referred to the likelihood of such a tax in a television interview shortly before his Minister’s formal announcement – prompting a full-scale denial from departmental officials.36 The prospect of turning income trust policies into a highly charged election issue capable of arousing the wrath of many middle-class voters, whether from suspicion of the government’s intentions or from the effects of its indecision on savings and investment choices during the peak of the rrsp contribution season, led Goodale to cut short his consultation process and announce significant changes to the tax treatment of corporate dividends the day before the introduction of the non-confidence motion that triggered the January 2006 election. Goodale’s proposal, which is intended to take effect in 2006, will equalize the federal taxation on corporate dividends and income trust distributions when proposed corporate tax reductions are phased in between 2008 and 2010.37 (See Table 2.7.) Full integration would require parallel

45

Federal Fiscal and Budgetary Policies

Table 2.7 Equalizing Taxation of Corporate Dividends, Income Trust Distributions Large Corporations Current

Proposed

Income Trusts

$100)

$100

$100

B Corporate Income Tax

32)

32)

0

C Amount transferred to investor

68)

68)

100

D Amount included in personal incomea

85)

99)

100

39)

46)

46

(17)

(32)

–

A Income

E Personal Income Tax (at average top federal-provincial rate of 46%) F Dividend Tax Creditb G Net personal income tax

22)

14)

46

H Total tax paid (B+G)

54)

46)

46

Source: Canada. Department of Finance (2005h). a Dividend income is “grossed up” by 25 percent before application of average combined federal and provincial tax credits of 20 percent. Proposed reforms would increase the “gross-up” to 45 percent and the credit to 32 percent, assuming a 19 percent federal tax credit and an average provincial credit of 13 percent. Actual provincial rates vary. b Assumes provincial governments will parallel federal actions.

measures by provincial governments, whose taxes account for about onethird of total revenues on investment income. The government’s handling of the income trust issue reflects both the technical difficulty of framing effective policy responses to the complex interaction of tax systems, financial markets, and shifting approaches to business organization, and the political risks of challenging a broad, well-organized network of business and financial interests whose interests overlap with a large constituency of middle class voters that could be mobilized quite easily in defence of its retirement savings. Goodale’s retreat on income trusts, while consistent with the government’s longer-term strategic objectives of reducing taxation on corporate and investment income to foster economic growth and the fiscal challenges of an aging society, is also a concession to the realities of distributive politics that takes the road of least resistance in an election year.

c o n c lu s i o n s The traditional pattern of Liberal governments, particularly when in political trouble, is to loosen the fiscal spigots when approaching an election, and then reimpose fiscal discipline once safely re-elected. Ralph Goodale’s efforts to

46

Macro Choices and Challenges

distract public attention from the government’s ethical and political troubles with promised election-eve tax reductions may help the government to secure re-election. However, it is far from clear that another minority government will succeed in regaining control of its agenda or in managing public expectations within realistic limits. Its capacity to fulfill these commitments – trading up to a more activist agenda – depends on several factors. The Canadian economy must continue to adapt to macro-economic trends largely beyond the government’s control, at least in the short-term: rising energy prices, inflation, and interest rates, a strong Canadian dollar, the uncertain prospects facing the American economy, and their combined effects on economic growth and employment levels in Canada. Given the regional and sectoral diversity of Canada’s economy and the realities of North American integration, governments can attempt to manage structural economic change – as in the case of energy policies – or they can react to it, as in the case of income trusts. However, in both cases, these approaches involve considerable accommodation of business interests or a willingness to “buy” change by using a mixture of fiscal “carrots” while adopting relatively flexible approaches to regulatory change. The government will continue to look for opportunities to reallocate spending – or mobilize additional resources to meet its commitments. It remains to be seen whether its approach to the distribution of “unanticipated” surpluses will enable Goodale to discipline the spending proclivities of his cabinet colleagues, or to fend off the apparently endless appetite of the provincial governments for “free money.” The election of a new parliament based on roughly the same distribution of votes and seats as its predecessor would renew internal conflicts between the two Liberal Parties competing for Paul Martin’s political attention. The government’s pre-election Fiscal and Economic Update offers a possible framework for policy discipline – although its multiple promises – combined with those of the subsequent election campaign – may raise the expectations of enough interest groups (and ordinary Canadians) to the point that the next government will be severely challenged in meeting these commitments.

notes 1 Canada, Department of Finance, Fiscal Reference Tables (Department of Finance, 2005), Tables 1, 3, 7, author’s calculations. 2 Finance officials suggest that up to half of spending increases in 2004–05 resulted from “one-time” spending – in some cases reflecting both changes to federal accounting rules and efforts to apply a portion of “unanticipated” surpluses to medium-term spending commitments. Canada, Department of Finance, The Fiscal and Economic Update: Background Material to the Presentation (Ottawa: Department of Finance, 2005), 59.

47

Federal Fiscal and Budgetary Policies

3 Eric Beauchesne , “Ottawa has ‘lost its balance,’” Financial Post, 10 November, 2005, FP4. 4 Paul Martin, “Address” (Prime Minister’s Office, 20 September, 2005). 5 Canada, Department of Finance, The Fiscal and Economic Update: Background Material to the Presentation (Ottawa: Department of Finance, 2005), 7. 6 The retroactive measures announced in November 2005, when extended for another five years, account for 77.5 percent of the $30.3 billion in cumulative tax cuts promised through 2010–11, net of promised increases in basic personal and spousal credits contained in the February 2005 budget. The reinstatement of previously promised corporate income tax cuts account for an additional $8.9 billion, mainly beyond 2008. Canada. Department of Finance, Ibid, 139. 7 Geoffrey Hale, The Politics of Taxation in Canada (Peterborough, on: Broadview Press, 2001), 237–38. 8 Geoffrey Hale, “Innovation and Inclusion: Budgetary Policy, the Skills Agenda, and the Politics of the New Economy,” in G. Bruce Doern, ed., How Ottawa Spends: 2002–2003 (Toronto: Oxford University Press, 2002), 20–47. 9 Tim O’Neill, “Review of Canadian Federal Fiscal Forecasting: Processes and Systems” (Ottawa: Department of Canada, 21 June, 2005); online at www.fin.gc.ca/activty/ pubs/Oneil/PDF/Oneil_e.pdf. 10 Ibid., 26–9, 42; see also Canada, Department of Finance, Fiscal and Economic Update, 178–88. 11 Predictably, the criticisms came both from academic economists, and others, who argued that governments should run deficits on certain occasions as instruments of stabilization in response to economic downturns, and from fiscal conservatives who suggested that, based on past performance, eliminating the no-deficit rule was the equivalent of handing an alcoholic the keys to the proverbial fiscal liquor cabinet. Alternately, it was suggested that the difficulties of playing “catch-up” should governments run significantly higher than anticipated deficits during an economic downturn would undermine such a rule’s effectiveness or enforceability. 12 Canada, Department of Finance, “Minister of Finance Introduces Legislation for a ‘Balanced Approach’ to Unanticipated Surpluses,” Release # 2005–067 (Ottawa: Department of Finance, 2005, 7 October). 13 Technically, personal and spousal (non-refundable) credits. Ibid. 14 Paul Vieira, “Tax cuts of $4B to $5B affordable, Ottawa told,” Financial Post, 25 October 2005, FP4. 15 Canada, Department of Finance, Fiscal and Economic Update, 131–3, 139. 16 Patrice Martineau, “Federal Personal Income Tax: Slicing the Pie,” Analytical Paper # 24, Catalogue # 11-621-mie-2005-024 (Ottawa: Statistics Canada, April 2005); Canada Revenue Agency, Income Statistics: Sample Data – 2004 Edition: 2002 Tax Year (Ottawa: Canada Revenue Agency, 2004). 17 The Employment Insurance Commission announced a modest reduction in ei taxes for 2006 from $1.95 to $1.87 per $100 in insured earnings in November 2005, except in Quebec, which will finance and manage its own parental leave program. The

48

18

19

20 21

22

23

24 25

26

Macro Choices and Challenges

government has directed $400 million in 2006 to pilot projects extending ei benefits. Canada, Department of Finance, “Government Welcomes Employment Insurance Premium Reduction for 2006,” Release 2005–075 (Ottawa: 9 November 2005); Human Resources and Social Development Canada, Report of the Chief Actuary to the Employment Insurance Commission on the Employment Insurance Premium Rate for 2006 (Ottawa: Human Resources and Social Development Canada, October, 2005), 8. For example, see Jack M. Mintz, Tax Competitiveness Report 2005, Commentary # 216 (Toronto: C.D. Howe Institute, September, 2005); Jacqueline Thorpe, “Goodale Policy Criticized,” Financial Post, 14 October 2005, B1,3; Finn Poschmann, “Background Issues: Marginal and Effective Tax Rates in Ontario,” (Toronto: Institute for Competitiveness and Prosperity, July 2004), online at: www.competeprosper.ca/research/ FinnPoschmann_290305.pdf. Poschmann (ibid.) notes that measures to reduce the cumulative effects of marginal income tax rates with multiple payroll taxes and clawbacks on refundable tax credits can serve both sets of purposes for lower- and middle-income families. This analysis is reflected in proposals to “make work pay for lower-income Canadians” by the introduction of a “Working Income Tax Benefit,” comparable to Earned Income Tax Benefits in the United States, by 2008 in cooperation with provinces. Canada, Department of Finance, A Plan for Growth and Prosperity (Ottawa: Department of Finance, 2005), 128–30. Mintz, Tax Competitiveness Report 2005; and Canada, Department of Finance, Fiscal and Economic Update, 128–37. Quebec, “A New Division of Canada’s Fiscal Resources,” Report of the Commission on Fiscal Imbalance (Seguin Commission, 2002); Dahlby, Bev, “Dealing with the Fiscal Imbalances: Vertical, Horizontal, and Structural,” Working Paper (Toronto: C.D. Howe Institute, 2005). Geoffrey Hale, “Federalism and Canada’s Economic Union: The Past 20 Years,” in David Laidler and William Robson, eds., Prospects for Canada: Progress and Challenges Twenty Years after the Macdonald Commission (Toronto: C.D. Howe Institute, 2005), 156. Canada, Department of Finance, “Ten Year Plan to Strengthen Health Care and new Framework for Equalization Territorial Financing Formula: Impact on Federal Transfers to Provinces and Territories,” (Ottawa: Department of Finance, 2005); online at www.fin.gc.ca/FEDPROV/typhc_e.html Canada, “Government of Canada Reaches Offshore Agreement with Newfoundland and Labrador,” Release # 2005–007, 28 January 2005. Ian Urquhart, “That 23 Billion Gap as Big as It Ever Was – Ontario Side Deal waits for Ottawa Cash,” The Toronto Star, 12 November 2005; two agreements valued at $2.2 billion were signed just before the government’s defeat in November 2005. Les Greenberg , “Bad Blood Between Martin and McGuinty Spells Big Trouble for Liberals in Ontario,” Ottawa Citizen, 1 December 2005, A1. Kenneth J. McKenzie, “Reflections on the Political Economy of Fiscal Federalism in Canada,” Working Paper (Toronto: C.D. Howe Institute, 2005); Thomas J. Courchene,

49

27

28 29 30

31

32

33

34

35 36

37

Federal Fiscal and Budgetary Policies

“Resource Revenues and Equalization: Five-Province vs. National-Average Standards, Alternatives to the Representative Tax System, and Revenue-Sharing Pools,” irpp Working Paper 2005–04 (revised) (Montreal: Institute for Research in Public Policy, September 2005). Thomas J. Courchene, “Confiscatory Equalization: The Intriguing Case of Saskatchewan’s Vanishing Energy Revenues,” Choices 10:2 (Montreal: Institute for Research in Public Policy, March 2004). Confidential Interviews, Government of Canada; Peter Morton (2005), “Peterson Rules Out Oil Retaliation,” Financial Post, 21 October, FP1. Perrin Beatty, “Recharging Canada’s Industrial Heartland,” speech to Ontario Energy Association (Ottawa: Canadian Manufacturers and Exporters, 13 September, 2005). Corporate income tax revenues “largely related to the energy sector” accounted for much of the $5.7 billion in unanticipated cit revenues for 2005–06 reported in the November 2005 fiscal statement. Canada, Department of Finance, Fiscal and Economic Update, 80–1. Canada, Department of Finance and Natural Resources Canada, “Energy Relief: Helping Canadians Deal with High Energy Costs,” Release # 2005–066 (Ottawa, 6 October, 2005). For three perspectives of the income trust debate, see Vijay Jog and Liping Wang, “The Growth of Income Trusts in Canada and the Economic Consequences,” Canadian Tax Journal 52:3, 2004, 853–80; Tim Edgar, “The Trouble with Trusts,” Canadian Tax Journal 52:3, 2004, 819–52; Lalit Aggarwal and Jack Mintz, “Income Trusts and Shareholder Taxation: Getting It Right,” Canadian Tax Journal 52:3, 2004, 792–818. Compared with a conventional combined personal and corporate tax rate on dividends averaging 43 percent, federal estimates suggests the effective tax rate on income trust distributions would be about 18 percent. Canada, Department of Finance, Tax and Other Issues Related to Publicly Listed Flow-Through Entities (Ottawa, 8 September, 2005), 18. Amin Mawani, “Research on Income Trusts,” presentation to Tax Policy Research Symposium, sponsored by Deloitte Centre for Tax Education and Research, University of Waterloo, Toronto, on, 25–26 August 2005; Keith Kalawsky, “Goodale Can’t Slay This Beast,” Financial Post, 9 September 2005, B1,3; Derek deCloet, Steven Chase, and Peter Kennedy, “Ottawa Flags Lost Tax Revenue as Income Trust Party Grows,” The Globe and Mail, 9 September 2005, B1. DeCloet, Chase and Kennedy, ibid. Jon Kesselman “Income trust fix?” Financial Post, 19 October 2005, FP23; Paul Vieira “Fingerprints of Panic All over Trust File,” Financial Post, 25 November 2005, FP7; Sinclair Stewart, Steven Chase, and Elizabeth Church, “How the Pensions Win Again,” The Globe and Mail, 25 November 2005, B1. To avoid the over-integration of small business dividends and the resulting incentives for massive tax avoidance, Goodale’s proposal applies only to dividends paid from income subject to the general corporate tax rate.

3 Offshore Energy Revenues and Equalization: Having your Cake and Eating It Too? andré plourde

Over the years, the treatment of offshore energy revenues within Canada’s evolving fiscal equalization system has been the source of much controversy. The most manifest indicator of the intense feelings that have fueled this debate arguably occurred in December 2004 when Premier Danny Williams of Newfoundland and Labrador ordered Canadian flags removed from all provincial buildings. This was in reaction to the impasse reached in discussions with Ottawa over a federal promise to ensure that the province would lose none of its offshore energy revenues through induced reductions in equalization payments. Shortly thereafter, Premier Williams’ gambit paid off: an agreement satisfactory to the province was concluded with the federal government. The same arrangements were also extended to Nova Scotia, the only other province in Canada off whose shores energy production of any significance is currently happening. But these deals were not the first bilateral agreements between Ottawa and these two provinces that concerned offshore energy revenues. Indeed, in the 1980s, issues relating to the sharing of such revenues and their implications for fiscal equalization were hotly debated, and eventually led to formal agreements. Given the design of the equalization system in effect at the time, the provinces then faced the very real possibility of losing through equalization whatever additional revenues they would have gained as a result of energyrelated activities occurring off their shores. Key policy questions that arose then – and ones that remain with us today – concerned the design and implementation of the means to ensure that Newfoundland and Labrador and Nova Scotia actually benefited from these new sources of provincial revenues – to allow them to have at least

51 Offshore Energy Revenues and Equalization

some of their cake and eat it too. This would necessarily involve some modification to the treatment of offshore energy revenues under equalization. However, it should also be clear that such arrangements would affect the system as a whole, not to mention have consequences for other equalizationreceiving provinces. It is against such a background that this chapter traces the treatment of provincial offshore energy revenues through various arrangements with the provinces and links these to developments on the fiscal equalization front. A key area of focus concerns the interaction between a province’s equalizationreceiving status and its collection of offshore energy revenues. In doing so, the chapter tries to address several questions. How have policy-makers reacted to this issue, and what types of special provisions have been made to deal with it? And – the motivation for the title of the chapter – how successful have these provisions actually been in sheltering the provinces’ offshore energy revenues from inducing reductions in their equalization payments? What are the implications of these kinds of arrangements on the equalization system as a whole? The remainder of the chapter proceeds as follows. The first section tracks key developments in Canada’s approach to fiscal equalization. The second section then looks more carefully at the treatment of provincial offshore energy revenues within equalization and at the various attempts that have been made to allow provinces with this type of revenues to contain the induced offsetting reductions in equalization payments. In addition, the consequences of these developments are assessed for both Newfoundland and Labrador and Nova Scotia. The agreements reached between Ottawa and the governments of these two provinces are described and their possible implications are explored in the third section. Conclusions then follow.

histori cal ov erview Parliament and the government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation. Section 36.2, The Constitution Act, 1982

When these constitutional provisions were introduced in 1982, fiscal equalization had already existed in Canada for 25 years. Rather than ushering in new directions, these provisions simply re-iterated a long-standing principle, namely that equalization would seek to ensure that all provincial governments could afford to provide comparable levels of services without having to resort to unduly high levels of taxation. In practice, this principle has been implemented through assessments of provincial governments’

52

Macro Choices and Challenges

fiscal capacities, or measures of their potential ability to raise revenues. For most of its history, it is the equalization of per capita fiscal capacities – however measured – that has been at the heart of the program. Within this context, it is important to note that fiscal equalization in Canada has never been defined as a system of inter-provincial transfers, where provincial governments with relatively high per capita fiscal capacities transfer a portion of their revenues to their counterparts with lower capacities. Instead, the federal government has used its general revenues to finance the requisite transfer payments to those provincial governments with lower fiscal capacities – the so-called “have not” provinces for purposes of equalization.1 So the consequences for the federal treasury of all aspects of fiscal equalization have always been important factors influencing the design of the program. And since about one-third of Canadians live in Ontario and roughly 40% of the country’s economic activity takes place in that province, federal taxpayers in Ontario have effectively paid a large share of the equalization payments that have flowed to the “have not” provinces since the program’s inception. Answers to four questions will shed some light on the transition from the above discussion of principles to a focus on the determination of equalization payments (also called entitlements). First, how do provincial revenues enter equalization? Since 1957, specific categories of provincial government revenues have been included in the calculation of what “have not” provinces are entitled to receive in the form of equalization payments. In the early years, for example, only three revenue categories were included (corporate and personal income taxes, and succession duties). Over the years, the coverage of provincial revenues has increased (energy-related revenues were introduced in 1962, for example), such that by fiscal year 2004–05, some 33 revenue categories were included (ranging from corporate and personal income taxes, to lottery revenues, to 14 different categories of revenues from natural resources). For the first decade of its existence, Canada’s fiscal equalization system was anchored in the actual revenues collected by the provinces. In 1967, however, an important innovation was introduced. No longer would actual provincial revenues enter into the determination of fiscal capacities and, by extension, of equalization payments. Instead, measures of the revenues that provinces would have collected had they imposed national average tax rates for each individual category would enter the calculations. The “representative tax system” approach to equalization was born: for every category, the national average tax rate would be applied to the actual provincial tax base in the calculation of each province’s fiscal capacity. A second question asks: up to what level or standard are fiscal capacities equalized? Beginning in 1967, the underlying objective of the equalization program was essentially to raise the (per capita) fiscal capacities of “have

53 Offshore Energy Revenues and Equalization

not” provinces to the national average. Indeed, the “Representative National Average Standard” (rnas) was in effect until 1982, at which time it was replaced by the “Representative Five-Province Standard” (rfps). Under the rfps, equalization would seek to raise the (per capita) fiscal capacities of “have not” provinces to that measured by a weighted average of the fiscal capacities of British Columbia, Saskatchewan, Manitoba, Ontario, and Québec. Energy-rich Alberta and the chronically equalization-receiving provinces of Atlantic Canada were excluded from the calculation of the standard, thus ensuring that the effective role of provincial energy revenues was rather low in setting the standard and that the fiscal situation of the government of Ontario played an even more important role in the determination of equalization payments. Overall, the switch to the rfps was effected by the federal government to reduce total equalization payments. Under the rnas, higher energy-related revenues accruing to Alberta, in particular, were giving rise to sharp increases in the entitlements of “have not” provinces. Since none of the government of Alberta’s energy revenues could be used to finance these higher payments, Ottawa acted to limit federal taxpayers’ liability by adopting an equalization system in which the overall importance of provincial energy revenues was sharply curtailed. How, then, are equalization payments determined in the presence of a standard? The following equation provides a characterization of how equalization payments would be determined in any given fiscal year (the subscript indicating the time period is suppressed to simplify the exposition) under “pure” versions of the types of standard-driven equalization systems implemented in Canada: n nat j × Bi j º ª nat j × BS j EPi = popi × ¦ « − ». pop S popi ¼ j =1 ¬

EPi represents equalization payments to province i; popi and popS are respectively the population of province i and of the provinces included in the standard; n is the number of provincial revenue categories included (for example, as noted earlier, n = 33 in the current system); natj is the national average tax rate applicable to revenue category j; BS j and Bi j are the tax bases for category j from which provincial revenues are raised for all provinces in the standard and for province i, respectively. The first term in the square bracket is thus a measure of the per capita standard to which all eligible provinces are raised, while the second term is the fiscal capacity of province i, for purposes of equalization. Under the rnas, popS and all the BS j’s incorporate information about all 10 provinces. However, under the rfps, only information about the five provinces included in the standard is reflected in these measures. Note that national

54

Macro Choices and Challenges

average tax rates were used under both rnas and rfps, as the above equation indicates.2 Finally, as discussed earlier, positive values for EPi would generate equalization payments of that magnitude flowing from the federal government to its counterpart in province i. Governments of provinces with fiscal capacities in excess of the standard (and thus with negative EPi’s), on the other hand, would not contribute that amount to the funding of equalization: for these provinces, EPi would be set equal to zero. To what extent were departures from these pure systems incorporated in the approaches that have actually governed equalization in Canada? Over the years, such departures have been frequent, significant, and varied in nature. These have included, among others, limitations on the proportion of provincial energy revenues that could enter the calculations,3 the imposition of arbitrary constraints on how the size of payments could vary from one year to the next (both floors and ceilings were imposed at different times), and provisions explicitly designed to prevent Ontario from becoming eligible to receive equalization. For the purposes of this chapter, a few types of modifications warrant further explanation. As activities related to the production of energy resources located offshore from Nova Scotia got under way, a special category of revenues was added to equalization and it would bring together all revenues accruing to the government of Nova Scotia (whether as royalties, corporate income taxes, sales taxes, bonus payments, or in other forms) from offshore operations. The same approach would later be adopted when the government of Newfoundland and Labrador began to receive revenues from offshore energy-related activities, and another special category of revenues was added to equalization. It became clear, however, that under the rfps revenues included in these special categories could (and, for a time, did) give rise to dollar-for-dollar reductions in the equalization entitlements of these two provinces. Basically, the equation described earlier confirms that since neither of them were included in the five provinces that determined the standard, the corresponding BS j would be equal to zero, and thus every dollar of provincial revenues included in these categories would generate an offsetting one dollar reduction (or “clawback”) in equalization payments to Nova Scotia or Newfoundland and Labrador. Indeed, a similar – though less extreme – type of situation would arise whenever an equalization-receiving province’s tax base for one category of provincial revenues was large relative to that of the five provinces in the standard. In response, the federal government chose to extend some protection against the clawback of these provincial revenues through equalization by introducing the so-called “generic solution.” Effective with the 1993–94 fiscal year, provinces with at least 70% of the national tax base for any category of

55 Offshore Energy Revenues and Equalization

revenue would only see 70% of their revenues for that category included in the equalization calculation, thus allowing them to prevent 30% of these revenues from having deleterious consequences on their entitlements. All of the revenue categories eventually eligible for this kind of treatment related to natural resources, and included – as one might expect – the two offshore revenue categories described above. And then came October 2004, and a major change in Canada’s fiscal equalization program. The “new framework” agreed to by first ministers effectively fixes the size of total equalization payments at $10.9 billion in 2005–06, and provides for 3.5% annual growth in this aggregated sum for the next 10 years. These arrangements signal a departure from the long-standing principle of using differences in per capita fiscal capacities as key drivers of the determination of payments. These differences in fiscal capacities could continue to play a role in determining how the available pool of equalization funding is shared amongst “have not” provinces, but additional restrictions (such as constraints on how much each province’s equalization payments can drop in any given year) would also influence the evolution of payments. The federal budget of 2005 then guaranteed the level of payments to be received by each “have not” province for 2004–05, and specified a schedule of payments for 2005–06. As Michael Smart and others have argued, this “new framework” is potentially a watershed in the evolution of fiscal equalization in Canada: as currently conceived, it is difficult to make the case that the program is designed to “equalize” anything. In addition, these arrangements transform the equalization system into a zero-sum game: since the size of the overall “pot” is fixed externally, higher equalization entitlements for any one province must lead to lower entitlements available for any other equalization-receiving province.4 The federal government has also explicitly signaled that aspects of these new arrangements are temporary in nature and commissioned an expert panel to provide advice on the future of fiscal equalization in Canada, including on the approach to be used allocate payments to receiving provinces. This expert panel is due to report in 2006. Figure 1 provides some indication of the implications for Newfoundland and Labrador of applying the pure versions of the rnas and the rfps compared with the equalization payments actually received by the province between 1982–83 and 2004–05. Figure 2 does the same for Nova Scotia.5 As one would expect, the rnas would generate larger equalization payments for both provinces in every year of our sample period.6 Results for the pure rfps generally track actual payments quite closely, with a few exceptions. For three years starting in 1988–89, departures from the pure rfps reduced the equalization payments flowing to both provinces, but payments thereafter returned to tracking the rfps estimates quite closely until 2001–02.7

56

Macro Choices and Challenges

Figure 1 Actual and Estimated Equalization Payments, Newfoundland and Labrador

Figure 1. Actual and Estimated Equalization Payments, Newfoundland and Labrador

millionsof of current current $$ millions

1400 1400 1200 1200

1000 1000 actual actual rfps RFPS rnas RNAS

800 800 600 600

002 004

998 000

994 996

990 992

886 888

882 884

400 400

Figure 2 Actual and Estimated Equalization Payments, Nova Scotia

Figure 2. Actual and Estimated Equalization Payments, Nova Scotia

1400 1800

1400 1400 1200 1200

actual actual rfps RFPS rnas RNAS

1000 1000 800 800

600 600

02 04

98 00

92 94 96

88 90

400 400 82 844 86

millions of of current current $ millions

1600 1600

57 Offshore Energy Revenues and Equalization

From 2001–02 to the end of the sample period in 2004–05, actual payments received by the two provinces exceeded those estimated using a pure rfps approach. Basically, this reflects the fact that the federal government chose to invest some of its budget surpluses in changes to the equalization system that generated higher payments to receiving provinces. The operations of Canada’s fiscal equalization system had thus started to diverge from that associated with its underlying approach – the rfps – at least a few years before the emergence of the “new framework” in October 2004. In some sense, the system was already wobbling when it was overtaken by developments.

t h e roa d to t h e 2 0 0 5 ac c o r d s As Kenneth J. Boessenkool and Thomas J. Courchene, among others, have pointed out, the treatment within equalization of provincial natural resource – and especially, energy – revenues has been a source of controversy since these were first included as eligible revenue categories.8 The recent bilateral offshore accords between the federal government and that of Newfoundland and Labrador and of Nova Scotia – and the absence of similar arrangements with Saskatchewan, another energy-rich, equalization-receiving province – represent but the latest chapter in this ongoing saga. An additional twist to this story has involved linkages between jurisdictional issues and the sharing of government revenues from activities related to energy (and, more generally, natural resource) production. In the case of Saskatchewan, for example, issues of this kind have never really arisen since the situation is clear: the Constitution vests provinces with ownership rights to natural resources within their boundaries. However, the situation of resources located offshore was not as clear, at least initially: Newfoundland and Labrador and Nova Scotia maintained that these resources belonged to the coastal provinces, as if located on land. Ottawa, on the other hand, argued that offshore areas and the resources located therein were outside the boundaries of all provinces and thus fell under federal jurisdiction. Eventually, both the Court of Appeal of Newfoundland (in 1983) and the Supreme Court of Canada (in 1984) offered unanimous opinions supporting the application of federal jurisdiction to offshore areas. A political solution now needed to be found for the sharing of government revenues derived from energy-related activities in offshore areas, and the additional linkages with equalization would be an integral part of the resulting bilateral agreements between the federal government and that of these two Atlantic provinces. Ottawa and the government of Nova Scotia had already agreed to an approach to sharing government revenues when the legal opinions were released. By the end of 1984, however, this agreement had been revisited by the two governments, and it is at that time that an explicit departure from established equalization practices was introduced: Nova Scotia’s entitlements

58

Macro Choices and Challenges

would be protected from fully reflecting the consequences of offshore energy revenues accruing to the provincial government. The then Liberal federal government agreed to provide Nova Scotia with so-called “offset payments” that would result in the province being partially compensated for any fall in equalization due to provincial offshore revenues. This protection would be triggered once a specified cumulative level of offshore oil and gas production had been reached, and the degree of compensation would begin at 90%, falling by 10 percentage points in every subsequent year, thus reaching zero in its ninth year of operation. Significantly, these offsets payments were treated as occurring entirely outside the equalization system, as if completely unrelated to the equalization payments from which they were calculated. In the end, offshore energy revenues would first be recorded for equalization purposes in 1991–92, and the protection provisions would be triggered in fiscal year 1993–94 by production from the Panuke-Cohasset oil field. The jurisdictional dispute between Ottawa and St. John’s had been much more acrimonious than that involving Nova Scotia, and it was not until the election of a Progressive Conservative federal government in September 1984 that discussions could proceed in earnest. A bilateral agreement was reached in early 1985, and the Canada-Newfoundland Atlantic Accord was born. In a manner consistent with the earlier judicial opinions, the Atlantic Accord effectively recognized federal jurisdiction in offshore areas. However, a joint federal-provincial management scheme was instituted and the province was given the right to tax offshore energy-related activities “as if ” these were located on land, within the boundaries of Newfoundland and Labrador, thus extending to the province 100% of the provincial-type revenues generated by offshore oil and gas operations. (Similar provisions would be granted to Nova Scotia in 1986.) In the same vein as the 1984 agreement between the federal government and Nova Scotia, the 1985 Atlantic Accord also included provisions aimed at protecting Newfoundland and Labrador’s equalization payments from the effects of increases in provincial offshore energy revenues. Once again, offset payments would be made to the province, but this time there were two components to the protection proffered:9 • the “offset floor” component ensured that equalization payments in a given year were no less than a certain percentage (95, 90, or 85%) of payments in the preceding year, depending on the province’s fiscal capacity relative to that of other provinces; • the “phase out” component provided protection against any further decreases in equalization payments – for the first four years, these payments plus the offset floor component could not fall by more than 90% annually, with the degree of protection thereafter falling by 10 percentage points per year, until it reached zero eight years later.

59 Offshore Energy Revenues and Equalization

A threshold volume of cumulative production was again specified and protection against reductions in equalization payments, once triggered, would be in effect for 12 years (but offering a decreasing degree of protection over time). As it turns out, the first offshore energy revenues were recorded for equalization purposes in 1995–96, and Hibernia production led to the protection provisions coming into effect in fiscal year 1999–2000. As with Nova Scotia, the resulting offset payments were treated as occurring outside the equalization system, and so would not be included as part of Newfoundland and Labrador’s equalization payments. The agreement with Nova Scotia and the 1985 Atlantic Accord also included provisions for additional payments by Ottawa to the governments of the two provinces: $200 million in the case of Nova Scotia, and $225 million for Newfoundland and Labrador. As was the case with the offset payments discussed above, these additional federal transfers would be considered to occur outside of the equalization system. At the time the generic solution was introduced, both Newfoundland and Labrador and Nova Scotia were given the right to opt every year for either the specific protection provisions of the agreements negotiated with the federal government, or the generic solution. In 1999–2000 and 2000–01, for example, the government of Newfoundland and Labrador chose to take advantage of this option, and opted to invoke the provisions of the generic solution for its offshore revenues instead of the relevant provisions of the 1985 Atlantic Accord.10 Finally, in recognition of the fact that the development of the energy resources located offshore from Nova Scotia had not proceeded as rapidly as had been expected in the early 1980s, the federal government allowed that province to “re-set” the first year of its period of equalization protection to 2000–01, as if triggered by natural gas production from Sable Island. In consequence, the federal budget of 2004 thus included provisions for a lump sum payment of about $33.6 million to Nova Scotia as compensation resulting from this change in the initial year of the protection period. In the remainder of this section, information available to policy-makers at the time the discussions that eventually led to the 2005 offshore accords were taking place is used to draw a picture of the situation as it would then have appeared. A series of counterfactual simulation exercises is undertaken, based on the information used by the federal Department of Finance in the calculation of equalization payments (including the October 2004 estimates). The key question addressed is thus the following: as negotiations were proceeding throughout the Fall of 2004, how did it appear that the provisions described above had been effective in allowing these two provinces to shelter their offshore energy revenues from the equalization clawback? The obvious starting point is to use this information to obtain estimates of provincial revenues since the inception of energy-related activities in the

60

Macro Choices and Challenges

Figure 3 Offshore Energy Revenues, Newfoundland and Labrador & Nova Scotia (estimates as of October 2004)

(

)

millions of current $

300 250 200 n&l N&L ns NS

150 100 50

04

02 03

01

98 99 00

95 96 97

91 92 93 94

0

relevant offshore areas. These are reported in Figure 3 and Table 1. Offshore energy revenues were quite small for both provinces until significant production volumes were achieved: from the Hibernia oil field in Newfoundland and Labrador, and the Sable island natural gas field in Nova Scotia. The high energy prices that have prevailed for most of this decade have also clearly contributed to the higher levels of provincial revenues realized. Based on the information available at the time the October 2004 equalization estimates were released, Figure 3 and Table 1 suggest that total offshore energy revenues accruing to the government of Newfoundland and Labrador were expected to reach some $750 million (or $781 million in dollars of 2004) by the end of fiscal year 2004–05. In the case of Nova Scotia, however, these revenues were more modest, reaching a total of about $211 million ($225 million in dollars of 2004) between 1991–92 and 2004–05. Figure 4 shows estimates of the consequences of the various provisions available to Newfoundland and Labrador to reduce the clawback through equalization of its increased offshore oil revenues since the provisions of the 1985 Atlantic Accord were triggered, as these would have appeared in the Fall of 2004.11 As noted earlier, in 1999–2000 and 2000–01, the government of Newfoundland and Labrador opted to invoke the provisions of the generic solution, but has chosen in every subsequent year to rely on the protection provisions of the 1985 Atlantic Accord. The “no provisions” series provides estimates of the equalization payments that the province would have received had none of the protection mechanism described in the previous section ever

61 Offshore Energy Revenues and Equalization Table 1 Offshore Energy Revenues and Estimated Value of Protection from Reductions in Equalization Payments (millions of dollars) Newfoundland and Labrador Offshore Energy Revenues Fiscal Year Current $

Estimated Value of Protection

Nova Scotia Offshore Energy Revenues

Estimated Value of Protection

2004 $

Current $

2004 $

Current $

2004 $

Current $

2004 $

1991–92 1992–93 1993–94 1994–95 1995–96 1996–97 1997–98 1998–99 1999–00 2000–01 2001–02 2002–03 Oct. ’05 2003–04 Oct. ’05 2004–05 Oct. ’05

0 0 0 0 24.0 0.1 0.9 3.6 20.4 46.1 51.7 115.3 115.3 204.1 204.1 284.0 318.5

0 0 0 0 28.4 0.2 1.0 4.2 23.1 50.2 56.1 123.0 123.0 211.0 211.0 284.0 318.5

0 0 0 0 6.3 −0.5 −1.0 −0.2 5.1 13.3 51.4 177.0 177.0 218.0 218.0 188.6 318.5

0 0 0 0 7.4 −0.6 −1.2 −0.2 5.8 14.5 55.7 188.8 188.8 225.4 225.4 188.6 318.5

0.8 4.6 18.7 4.9 4.7 4.4 3.0 2.4 1.4 9.4 18.4 23.3 21.6 44.9 24.1 69.7 71.3

1.0 5.7 22.9 5.9 5.6 5.1 3.5 2.8 1.6 10.3 20.0 24.8 23.0 46.4 25.0 69.7 71.3

0 0 16.8 3.9 3.3 2.6 1.5 1.0 0.4 1.7 4.8 5.3 4.1 12.3 5.5 50.7 92.3

0 0 20.6 4.7 3.9 3.0 1.7 1.2 0.5 1.8 5.2 5.7 4.4 12.7 5.7 50.7 92.3

total Accords

750.2 784.7

781.1 815.6

658.0 787.9

684.3 814.2

210.6 189.8

225.3 203.6

104.3 137.9

111.7 145.0

Notes: • Values of offshore energy revenues taken from the data used by the federal Department of Finance to calculate equalization payments, including the October 2004 estimates. Values in italics reflect the October 2005 equalization estimates and the effects of the 2005 offshore accords, when appropriate. • The conversion to dollars at 2004 prices (2004 $) is done with the implicit price index for GDP. • Values of protection in current dollars estimated by the author using the equalization data described above. Exceptions are for Newfoundland and Labrador (2001–02 to 2004–05), where the values were obtained from Canada, Department of Finance, Newfoundland Offshore Accord (1985), (www.fin.qc.ca/FEDPROV/ nae.html), based on the October 2004 equalization estimates. For an explanation of the negative values in some years, see footnote 11 in the text.

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Macro Choices and Challenges

Figure 4 Equalization Protection before the 2005 Offshore Accord, Newfoundland & Labrador (based on information available in October 2004)

millions of current $

1400 1200 1000 ns

800 600 99 99

00 00 no provisions no

01 01

02 02 with provisions with provisions

03 03

04 04 rnas RNAS

been in effect, including the generic solution. The estimated effects of all of the protection provisions actually used by Newfoundland and Labrador, whether the generic solution or offset payments, are reflected in the “with provisions” series. Finally, estimated equalization payments under the pure rnas are also presented, for purposes of comparison. The information available in the Fall of 2004 would have led one to conclude that since 2001–02, the protection provisions had been sufficiently important to allow Newfoundland and Labrador to receive more in federal transfers than would have been the case under the pure rnas – that is, if its own and Alberta’s energy revenues had both been fully included in the calculation on equalization payments. For those years, the protection provisions were thus estimated to have allowed Newfoundland and Labrador to do better financially than it would have done under an equalization system even more generous to receiving provinces than the version of the rnas from which the federal government moved away on the basis that it was too expensive to implement, as noted earlier. Although not reported, the same types of estimates were also obtained for Nova Scotia. These also show that the protection provisions were valuable to the province, but the effects here were much smaller, driven in some part by the fact that Nova Scotia’s offshore energy revenues had been smaller than those accruing to Newfoundland and Labrador. In this case, the province is

63 Offshore Energy Revenues and Equalization

estimated to do better financially under the pure rnas than under the “with provisions” case. In essence, this means that Nova Scotia’s offshore energy revenues were smaller than the equalization payments that would be triggered by the broadening of the standard to include, for example, Alberta’s energy revenues. The type of simulation exercise described above can be extended to cover the entire period since the onset of energy-related activities in the areas off the shores of these two provinces in an effort to assess the overall effectiveness of the protection provisions, as it would have appeared in the Fall of 2004. The resulting estimates are presented in Table 1. These suggest that for the period extending from 1995–96 to 2004–05, the protection provisions described above could be seen, at the time of the negotiations, to have resulted in Newfoundland and Labrador being able to shelter about 88% ($684 million out of a possible $781 million)12 of its offshore energy revenues either through smaller-than-expected decreases in equalization, or through offset payments received from Ottawa. This proportion rises to about 98% ($659 million of a possible $674 million) if we limit ourselves to the period during which the provisions of the 1985 Atlantic Accord were invoked by the government of the province (that is, from 2001–02 to 2004–05). Indeed, on the basis of the information available in the Fall of 2004, the offset payments flowing to Newfoundland and Labrador in 2002–03 and 2003–04 are estimated to be greater than the offshore energy revenues collected by the province.13 This is made possible by the fact that the provisions of the 1985 Atlantic Accord protect the province against reductions in equalization payments, whatever the cause of such reductions. As it turns out, in 2002–03 Ontario’s per capita fiscal capacity fell sufficiently to bring about a reduction in the corresponding measure for the five-province standard. All else equal, this development would act to bring about reduced equalization payments for all receiving provinces (subject to the limits imposed by the general floor provisions in effect, at the time, in the equalization system as a whole). But, in the case of Newfoundland and Labrador, the provisions of the 1985 Atlantic Accord would act to counter this reduction. As a result, the offset payments are estimated to exceed the province’s offshore energy revenues for these two years: the resulting effective rate of protection against the equalization clawback was thus greater than 100%. It was also clear, however, that this degree of protection would not be available in the future: the passage of time would bring about further erosion in the effectiveness of the phase out component of offset payments, and the province’s rising (per capita) fiscal capacity relative to that of other provinces would do the same to the offset floor component. In the case of Nova Scotia, the estimates reported in Table 1 indicate that not only were the province’s offshore energy revenues smaller than those collected by Newfoundland and Labrador, but also that the applicable

64

Macro Choices and Challenges

protection provisions were seen as less effective in preventing the clawback through equalization. Using information available at the time of the negotiations, the province appeared to have been successful in sheltering about 50% ($112 million of $225 million) of the offshore energy revenues that it was estimated to have collected between 1991–92 and 2004–05. However, if the $33.6 million lump-sum payment incorporated in the 2004 federal budget were to be excluded, then the protection provisions available to Nova Scotia were perceived to be such as to allow the province to shelter about 35% of its offshore energy revenues: slightly more than 65% of these revenues would have been clawed back through equalization. As noted earlier, the federal budget of 2004 re-set the trigger date for the special protection provisions available to Nova Scotia, so that by the end of the period under consideration, there were some indications that the province would be able to shelter – for a few years anyway – a greater proportion of its offshore energy revenues from the equalization clawback. Production flows from the Sable Island natural gas field were falling, and there were no additional projects firmly on the drawing board – the anticipated development of Deep Panuke, another natural gas deposit off the shores of Nova Scotia, remained shelved by the project proponent. The promise of the offshore thus remained somewhat elusive, and protection from the equalization clawback would likely be more valuable some years down the road, when and if additional development projects led to higher offshore energy production. The situation was different in Newfoundland and Labrador. By the beginning of fiscal year 2004–05, production from the Terra Nova offshore oil field had recently come on stream; the White Rose project was well under way and would soon add to the oil production flows from areas off the shores of the province. As we saw earlier, the protection provisions incorporated in the 1985 Atlantic Accord were such that the province had thus far been quite successful in sheltering its offshore revenues from the equalization clawback. It was clear that this situation would most likely change within a short time period. The passage of time and the improvement in Newfoundland and Labrador’s relative fiscal capacity meant that the effective rate of protection extended to its offshore energy revenues would fall in the very near future – even more so as each year went by and production volumes rose.

the 2005 offshor e ac cor ds As one might expect in light of the above discussion, Premier Danny Williams of Newfoundland and Labrador made it a priority to bring up the issue of the equalization treatment of offshore energy revenues in the course of the 2004 federal election campaign. Eventually, Prime Minister Paul Martin committed his administration to identify and enact modifications to current practices that

65 Offshore Energy Revenues and Equalization

would guarantee Newfoundland and Labrador 100% of the provincial-type energy revenues generated by offshore activities, including compensation for any clawback through equalization. Once the election results were in and Paul Martin’s Liberals were returned in a minority position, the two governments set out on the task of negotiating arrangements to deliver on the Prime Minister’s commitment. After a few public disagreements – including the now famous “lowered flags” incident described earlier – Ottawa and St. John’s came to terms in late January, and the Arrangement between the Government of Canada and the Government of Newfoundland and Labrador on Offshore Revenues was signed on February 14, 2005. The federal government had also been involved in parallel discussions with the government of Nova Scotia, and the same basic deal was extended to that province and signed on the same day. Basically, these two bilateral agreements (the “2005 offshore accords”) explicitly signal the federal government’s intention to provide the two provinces whatever additional payments are necessary to ensure that reductions in equalization induced by offshore energy revenues are fully offset. Both would be guaranteed to suffer no equalization clawback and thus to keep 100% of the revenues collected from offshore-related activities for the eightyear period extending from 2004–05 to 2011–12, as long as the provinces continue to qualify to receive equalization payments. Beginning in 2006–07, these additional offset payments are to be calculated on the basis of the equalization formula then in existence, and the terms of the 1985 Atlantic Accord or other provisions protecting against reductions in equalization (such as the generic solution, one might presume), as appropriate. In 2004–05 and 2005–06, however, values of the additional offset payments are identified in the accords. Basically, this is linked to the fact that the “new framework” specifies each province’s equalization entitlements for both of these years. Any differences between a province’s actual offshore revenues and those implicitly used to calculate its pre-determined equalization payments will simply be ignored. For example, if a province’s actual offshore revenues were to exceed these values, the additional revenues accruing to the province would affect neither its equalization entitlements nor its two types of offset payments, thus still ensuring that all offshore revenues are sheltered from the equalization clawback. The fact that a full offset of any reduction in equalization payments induced by offshore energy revenues is guaranteed for a fixed period of time and is thus not linked to economic performance indicators (such as the evolution of provincial per capita fiscal capacities, as was the case in the 1985 Atlantic Accord, for example) reduces the risk facing the two provinces along a few dimensions. For example, significantly higher energy prices and rapid expansions of offshore oil and gas production would likely lead to sharp increases in provincial offshore energy revenues. Yet, all of

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Macro Choices and Challenges

these revenues would be sheltered from equalization until 2011–12, as long as the provinces continue to qualify to receive equalization. The 2005 offshore accords also envisage the possibility of extending continued full protection against the clawback of offshore revenues through equalization for another eight-year period, ending in 2019–20. For this to occur, specific conditions about the overall financial/fiscal situation of each province must be met: equalization-receiving status in 2010–11 or 2011–12, and per capita net debt (for Nova Scotia) or per capita debt servicing changes (for Newfoundland and Labrador) not lower than those of at least four other provinces. There are also provisions for special offset payments in the event that either province ceases to qualify to receive equalization payments between 2012–13 and 2019–20. Non-refundable, lump-sum payments of $2 billion and $830 million were also extended to Newfoundland and Labrador and Nova Scotia, respectively, under the provisions of these two accords. These are effectively advances on the additional offset payments identified earlier: until 2011–12, such payments would only be made once their cumulated value from 2004–05 onward exceeded each province’s advance. Documents released by the Office of the Prime Minister14 indicate that these advances are estimated to equal approximately three-quarters of the cumulated value of the anticipated additional offset payments to 2011–12. In the case of Newfoundland and Labrador, this statement seems broadly consistent with the available information: the October 2005 equalization estimates provided by the federal Department of Finance indicate that the province’s offshore energy revenues amounted to about $318 million in 2004–05. Key additional assumptions underlying this assessment would likely involve a period of sustained high oil prices and the addition of the White Rose field offsetting any decline in production from Hibernia and Terra Nova – not unreasonable in the current context. The situation of Nova Scotia, however, is less clear. Provincial offshore revenues are currently estimated to be running at about $70 million per year, according to the October 2005 equalization estimates. With no new production project under development or formally announced, it seems more difficult to reconcile the existing and likely future context of energy production off the shores of Nova Scotia with the claim that $830 million represents three-quarters of the cumulated value of anticipated additional offset payments.15 Once again, the fact that these advances are also non-refundable clearly acts to reduce fiscal risks facing the two provinces. A significant and sustained fall in energy prices, for example, or lower-than-anticipated offshore production would yield lower provincial offshore energy revenues and, in turn, smaller calculated additional offset payments. Until 2011–12, the worse that this could mean is that the cumulated value of calculated

67 Offshore Energy Revenues and Equalization

additional offset payments would be less than the advance payment received by the province, and so that no additional offset payment would be made by the federal government. Finally, as with the terms of the 1985 Atlantic Accord, all offset payments made under the 2005 offshore accords will be considered to be outside (or separate from) the overall equalization framework. This provision is of importance not only to Newfoundland and Labrador and Nova Scotia, but also potentially to the governments of all equalization-receiving provinces. Recall that under the “new framework” adopted in October 2004, total equalization payments were fixed for 2004–05 and 2005–06, and set to grow at an annual rate of 3.5% thereafter – higher equalization payments to one province thus necessarily resulting in less equalization-related funds available to all others. However, the fact that these additional offsets payments under the 2005 offshore accords (and indeed the payments of a similar nature under the 1985 Atlantic Accord) are considered separate from the equalization framework means that they will not reduce the sums available to other provinces for equalization purposes; the zero-sum aspect described earlier would not apply in this case. Therefore, to the extent that the “new framework” remains in effect, the federal government cannot pay for the additional offset payments by reducing the equalization entitlements of other provinces, but must instead find the needed additional funds from its own treasury. How does this additional protection against reductions in equalization payments extended under the 2005 offshore accords affect the results obtained in the previous section? We will address this question using the most recent equalization estimates available at the time of writing, namely those produced by the federal Department of Finance in October 2005, wherein updated information is provided for the last three fiscal years. If we use these estimates to look at the implications until the end of 2004–05 only, then the additional offset payments for that year alone are sufficient to ensure that the estimated effective rate of protection extended to Newfoundland and Labrador’s offshore energy revenues since first recorded in 1995– 96 would reach almost 100%. The value of the protection provided through the generic solution and especially the two sources of offset payments is estimated to reach about $814 million while energy revenues accruing to the province during that time period are now estimated to amount to some $816 million. If we limit our attention to the situation prevailing since 2001–02, when the provisions of the 1985 Atlantic Accord were invoked by the province, then the additional offset payment (and the treatment proffered through the “new framework”) for 2004–05 raises our estimate of the total payments (from equalization and the protection provisions) accruing to Newfoundland and Labrador to $788 million, or about 111% of the offshore energy revenues collected by the province during that period.

68

Macro Choices and Challenges

Overall, these results indicate that as long as Newfoundland and Labrador remains an equalization-receiving province (or the cumulated value of its calculated additional offset payments between 2004–05 and 2011–12 is less than $2 billion), then it will have been successful in sheltering all (and a bit more) of the offshore energy revenues collected between 1995–96 and 2011– 12 from being clawed back through equalization. As far as Nova Scotia is concerned, the additional offset payment of $30.5 million in 2004–05 means that the province is estimated to have been successful in sheltering approximately $145 million, or about 71%, of the offshore energy revenues collected since 1991–92. How does the $830 million advance payment provided under the terms of 2005 offshore accord factor into this? As argued above – and despite the assurances to the contrary in official documents highlighted earlier – there are good reasons to expect that this amount will prove larger than the cumulated value of the calculated additional offset payments owed Nova Scotia between 2004–05 and 2011–12. To the extent that the advance payment exceeds this cumulated value by about 10%, then the same type of situation will emerge for Nova Scotia as did for Newfoundland and Labrador: as long as it qualifies to receive equalization payments, Nova Scotia will have been successful in sheltering all of the offshore energy revenues that it collected between 1991–92 and 2011–12 from the equalization clawback.

c o n c lu s i o n s For most of its existence, fiscal equalization has been pan-Canadian in its operation. Under this system, the federal treasury would act to attenuate differences in the ability of provincial governments to provide public services by effecting transfer payments sufficient to bring all (per capita) fiscal capacities up to some set standard. The rules were clear (though often complicated!) and applied equally to all equalization-receiving provinces. This did not prevent differences in treatment across revenue categories (think, for example, of the different approaches to resource revenues adopted over time) from emerging. However, given a standard, the equalization framework then treated all such revenue categories identically across provinces. Within this context, the elimination of measured per capita fiscal capacity deficiencies relative to a standard was considered equally important whether these occurred in Nova Scotia, Saskatchewan, or any other province qualifying for equalization. But even early on, there was a proclivity to treat offshore energy revenues “differently” – viz., the special revenue categories created for them within the equalization system. Later, the bilateral agreements between Ottawa and the governments of Newfoundland and Labrador and of Nova Scotia – those reached in the 1980s as well as the 2005 offshore accords – marked even more

69 Offshore Energy Revenues and Equalization

clearly a departure from the principles outlined above as far as offshore energy revenues are concerned. Through side-deals aimed at un-doing outside the system some of the effects of equalization on these two provinces, a situation was created where all relative deficiencies in per capita fiscal capacities are no longer treated equally. Together, equalization and the offset payments created by the various bilateral arrangements specific to offshore energy revenues effectively give preferential treatment to the elimination of per capita fiscal capacity deficiencies in Newfoundland and Labrador and Nova Scotia over those existing in other equalization-receiving provinces. The fact that the offset payments are considered as occurring outside equalization ensures that even under the “new framework,” with its externally determined total expenditure envelope, offset payments do not affect the entitlements of other equalization-receiving provinces. But it does mean that federal taxpayers (and especially those in provinces that do not qualify for equalization) will be asked to finance higher levels of expenditures in the form of transfers from Ottawa to the governments of equalization-receiving provinces. The results obtained in this chapter indicate that, overall, the 2005 offshore accords – and the earlier agreements on which they build – have been successful in putting in place arrangements that will almost certainly ensure that, at least until 2011–12, both Newfoundland and Labrador and Nova Scotia will get the full benefit of all the provincial-type offshore energy revenues collected since the onset of activities in areas off their shores. Over that period and for both provinces, it seems highly likely that cumulated offset payments will be at least as large as the sum of reductions in equalization payments induced by the offshore energy revenues collected. The bilateral agreements have effectively excluded, at least until 2011–12, the two offshore revenue categories from the determination of equalization payments. However, since it is difficult to develop a compelling rationale for excluding only those revenue categories, proceeding in this manner will naturally result in calls from other provinces for bilateral agreements aimed at excluding other revenue categories from equalization.16 As Allan Gregg has noted in the case of the health care accords, it is rather difficult to have national policy driven by a series of bilateral deals.17

notes In the course of writing this chapter, I have benefited from participation at two meetings hosted by the Expert Panel on Equalization and Territorial Formula Financing. My thanks to the editor of this volume, G. Bruce Doern, for his patience and his comments on an earlier draft of this chapter. I am also grateful to Wade Locke (Department of Economics, Memorial University of Newfoundland) and to officials of the federal Department of Finance for providing some of the data and

70

1

2

3

4 5

6

7

8

Macro Choices and Challenges

information used herein, and to my colleague Paul Boothe for his comments. Please allow me to thank them without implicating them in any way in the quality of the final product: all remaining errors are my own. Manitoba, Quebec, and the four Atlantic provinces have been recipients of equalization payments in every year since the program’s inception. Saskatchewan has been a recipient in almost all years, while Alberta benefited from equalization payments until fiscal year 1964–65. British Columbia received payments until the beginning of the 1960s and has recently returned to an equalization-receiving status. Ontario is the only province that has never received equalization payments. This makes even the “pure” version of the rfp s described above something of a hybrid: it relies on revenue/tax base information from the five provinces in the standard and on national average tax rates. This is consistent with the version of the rfp s actually implemented. For a detailed discussion of the changing treatment in equalization of provincial revenues from energy and other natural resources, see Canada, Department of Finance, Natural Resource Revenues – A Review of Their Treatment in Equalization, FederalProvincial Relations Division, Ottawa, June 4, 2005. See Michael Smart, “Some Notes on Equalization Reform,” Department of Economics, University of Toronto, July 26, 2005. Data on actual equalization payments were taken from Roland T. Martin, “Equalization: Milestone or Millstone?,” aims Equalization Papers, Atlantic Institute for Market Studies, Halifax, June 2001, 23; and Canada, Department of Finance, Equalization Program, http://www.fin.gc.ca/FEDPROV/eqpe.html, last accessed by the author on January 2, 2006. Estimated payments under pure versions of the rna s and rfp s were calculated by the author using data provided by the federal Department of Finance. Note that in these and all subsequent figures “82,” for example, indicates the fiscal year 1982–83. For a discussion of the rna s and rfp s as actually implemented and estimates of the consequences of switching from one approach to the other, see Wade Locke and Paul Hobson, An Examination of the Interaction between Natural Resource Revenues and Equalization Payments: Lessons for Atlantic Canada, Working Paper no. 2004–10, Institute for Research on Public Policy, Montreal, October 2004. The relatively high payment to Nova Scotia estimated for 2001–02 under the rnas is linked, among other things, to a spike in natural gas royalties in Alberta. That year’s peak is less pronounced in Newfoundland and Labrador because of the dampening effects on the province’s equalization payment of a sharp rise in oil production – and thus offshore revenues – from the Hibernia development. In contrast, Nova Scotia benefited from a more favourable treatment in the early 1980s: actual equalization payments exceeded estimates under the pure rfps from 1982–83 to 1984–85. Kenneth J. Boessenkool, “Taking Off the Shackles: Equalization and the Development of Nonrenewable Resources in Atlantic Canada,” aims Equalization Paper no. 2 and AIMS Oil and Gas Paper no.1, Atlantic Institute for Market Studies, Halifax, May 2001; Thomas J. Courchene, “Renegotiating Equalization: National Polity, Federal

71 Offshore Energy Revenues and Equalization

9

10

11

12

13 14

15

State, International Economy”, C.D. Howe Institute Commentary 113, C.D. Howe Institute, Toronto, September 1998; Thomas J. Courchene, Resource Revenues and Equalization: Five-Province vs. National-Average Standards, Alternative to the Representative Tax System, and Revenue-Sharing Pools, paper prepared for the Expert Panel on Equalization and Territorial Formula Financing, September 2005. The presentation is based on Canada, Department of Finance, Newfoundland Offshore Accord (1985), http://www.fin.gc.ca/FEDPROV/nae.html, last accessed by the author on January 1, 2006; and follows Thomas J. Courchene, “Confiscatory Equalization – The Intriguing Case of Saskatchewan’s Vanishing Energy Revenues,” Choices 10(2), Institute for Research on Public Policy, Montreal, March 2004. The argument that this decision proved financially detrimental for the province, at least in 2000–01, is made in Wade Locke, “Untangling the Accord – The Atlantic Accord, Equalization, and Offsets,” Department of Economics, Memorial University of Newfoundland, St. John’s, February 2, 2005. The estimates presented in Figure 4 were calculated by the author using the same data source as for Figure 3. Information on the size of Newfoundland and Labrador’s offset payments was taken from Canada, Department of Finance, Newfoundland Offshore Accord (1985). Note that the removal of the generic solution generates two opposing effects in these counterfactual simulation exercises. First, an additional 30% of the province’s offshore revenues enter the equalization calculation, which on its own puts downward pressure on that province’s equalization entitlements. Second, the generic solution’s protection of some of Saskatchewan’s revenues (first from potash and then from heavy third-tier oil production) is also lifted, which acts to push up equalization payments for all receiving provinces by raising the five-province standard. The estimates reported in this paper incorporate both of these effects. All dollar values reported in the rest of this section and the next are measured at 2004 prices to correct for the effects of general price inflation. See the notes to Table 1 for additional information. This point is also made in Wade Locke, “Untangling the Accord.” Canada, Office of the Prime Minister, Government of Canada Reaches Offshore Agreement With Newfoundland and Labrador, http://www.pm.gc.ca/eng/ news.asp?id=403, and Government of Canada Reaches Offshore Agreement With Nova Scotia, http://www.pm.gc.ca/eng/news.asp?id=402, both were last accessed by the author on January 3, 2006. At about $70 million, offshore revenues for Nova Scotia were also unusually high in 2004–05, after having been between $20 million and $25 million in each of the two preceding years. The value for 2004–05 seems to be driven by one-time revenues in the form of forfeitures of exploration obligations: companies forego some up-front payments to the province in return for abandoning previously agreed-upon offshore energy exploration programs. If anything, both of these developments strengthen the argument made in the text: the forfeitures do not augur well for additional energy production projects off the shores of Nova Scotia and the results for 2004–05 would seem to provide an over-estimate of the province’s annual offshore energy revenue

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Macro Choices and Challenges

potential, thus making the $830 million advance appear even more likely to exceed the cumulated value of additional offset payments expected to occur over the eightyear period provided in the 2005 offshore accord. 16 Indeed, the government of Saskatchewan has already called for a “Saskatchewan Energy Accord” through which the province’s energy revenues would be extended the same treatment as that available to offshore energy revenues. See Government of Saskatchewan, Equalization Reform – A Fair Deal for Saskatchewan, paper presented to the Expert Panel on Equalization and Territorial Formula Financing, June 2005, 2–3. 17 See Allan Gregg, “Quebec’s Final Victory,” The Walrus, February 2005, 50–61.

4 Canadian Energy Policy: Supply, Sustainability, and a Policy Vacuum keith brow nsey

From wind-generated electricity to the oil sands, billion of dollars are set for investment in the Canadian energy sector during 2005–2015. Canadian technologies such as a new generation of candu nuclear reactors, directional drilling for oil and natural gas, and the hydrogen fuel cell are leading the energy industry into new and important markets. With Alberta’s Ralph Klein vowing to protect his province’s fiscal surpluses from imaginary demons in central Canada, the reformulation of the offshore revenue-sharing agreements between the federal government and Nova Scotia and New Brunswick as well as the Kyoto Protocol, Ottawa is dealing with a series of difficult political and policy issues. This would be a full agenda for any government, but it is especially difficult for the minority Liberal government of Paul Martin. Barely able to scrape enough votes together to produce a majority in the House of Commons, the government appears unfocused and unsure of its direction. But through this fog – unknown to federal ministers and bureaucrats – the outline of a policy for the exploitation of Canada’s massive energy resources can be detected. In the first decade of the 21st century Canadian energy policy is defined by three actors – the producing provinces, the energy industry through its lobby groups, and the Canada-United States relationship. These three groups or stakeholders in the energy debate have filled the vacuum left by Ottawa. While the national government has a role in energy policy, it has been marginalised by a preoccupation with surviving in a minority parliament, a sustainable development agenda, and the Kyoto protocol. The federal Liberals have not been able to formulate a coherent strategy for the exploitation of the country’s energy potential. Into this situation has come the energy industry

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Macro Choices and Challenges

in the form of business associations such as the Canadian Association of Petroleum Producers and the Canadian Electricity Producers, the United States with its insatiable demand for energy, and the producing provinces. They advocate a regional North American energy policy, fully integrated into U.S. markets while denying the efficacy of the federal government’s multilateral commitments through agreements such as the Kyoto Protocol on Climate Change or its policy of sustainability. The federal government’s role in energy policy is framed by the constitutional division of powers. While the provinces own their natural resources, Ottawa has constitutional jurisdiction over interprovincial and international trade. This gives the federal government authority to regulate the transportation of energy – electricity, hydrocarbons and anything else. They have, moreover, power to affect the energy sector through environmental and competition legislation. As well, the federal government has control over the offshore and territorial energy resources. Within this constitutional framework there are a number of pieces of legislation and regulations that govern federal energy policy.

g l o b a l p o l i c y a n d r e g i o n a l i n t e g r at i o n Canadian politicians and bureaucrats continually frame their programs and policies with reference to the concept of globalization. Provincial governments describe the importance of global markets to their future economic vitality, while the federal government in its Liberal incarnation under Paul Martin focuses on an agenda designed to meet the challenges of increasing international competition. While both levels of government see the necessity of adapting to what they believe is a globalized world economy, they understand the phenomenon in very different ways. The energy producing provinces define globalization as an integrated North American market for their electricity, coal and petroleum exports. The federal government understands globalization as something else. Its focus is on international rules and agreements such as the World Trade Organization, the Kyoto Protocol, North American Free Trade Agreement, and the Free Trade Agreement of the Americas. These multilateral agreements are vehicles through which Ottawa seeks to reduce tariffs and other impediments to trade as well as address other international concerns. In terms of trade the Liberal government – as was its Progressive Conservative predecessor – is committed to the national treatment of foreign capital, the end of rules on foreign investment, protection of intellectual property rights, the establishment of anti-dumping rules, lower agricultural subsidies and other forms of economic integration. But unlike the Mulroney government and its emphasis on bilateral relations with the United States, the Liberals have pursued trade liberalization goals through a multilateral approach. It believes that the capacity to shape the international

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Federal Energy Policy

economic agenda lies not with one state but is “shared by a group of the world’s leading capitalist powers.” There must be a coincidence of interest among a number of states and they work together out of shared interest. This enables smaller nations such as Canada to achieve goals that it could not otherwise accomplish. For example, international environmental regulations such as efforts to reduce greenhouse gases could not be imposed independently. Canada and other states acted together in the negotiations of the Kyoto Protocol. The issue of halting or even reversing global warming was viewed by much of the world community – including Canada – as a shared interest. Economic great powers, middle powers such as Canada and smaller states – worked together to advance the cause of reduction of greenhouse gases through an international agreement negotiated in Kyoto, Japan. This image of globalization requires common policy approaches such as a convergence on a neo-liberal model of international economic and other relations.1 The provinces, energy producing corporations, and the United States are committed to a different image of globalization. Their shared view of the new global order is regional in its perspective. Globalization, they believe, has diminished the role of the nation state. Instead, transnational corporations have become the primary generators of wealth in the world economy. This neo-liberal, regional agenda emphasizes technology and the corporate managers who know how to use it. The energy producing provinces – especially Alberta and Quebec – promote regional connections with the principle customer for their product, the United States, not so much from a commitment to market economy but in order to protect their constitutional jurisdiction over energy resources from an encroaching federal government and to maintain and increase their revenues. With the encouragement of the United States, the provinces and energy companies have promoted regional organizations and integration as a counterweight to the federal government. One manifestation of this phenomenon are the regular meetings of premiers with various American governors’ organizations, bi-national meetings of provincial and state political leaders from Canada and the United States, and the formation of regional rather than national associations for energy management – especially in electricity. While the provinces and corporations promote the hollowing out of the federal government, they have adapted their global outlook to local conditions by promoting the rise of regional states or natural economic zones. Because it denies the necessity of the nation state for market activity, the market image of globalization appeals to neo-liberal ideologues in Canada and the United States.

c a n a d i a n e n e r g y s u p p ly The vast majority of Canada’s energy supply comes from hydroelectricity, nuclear power, fossil fuel generated electricity, oil, natural gas and coal. This

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list does not include several less efficient sources of energy such as wood, animal parts and crop residues which are still in use but account for an increasingly small portion of total energy production. As well, new, environmentally friendly, sources such as wind and solar power are a small portion of the overall energy picture. In 2004 Canada produced approximately 559.3 terawatt of electricity from various sources – 59 per cent from hydroelectricity or 329.5 terawatt hours. Thermal electricity production – burning coal, natural gas and oil – was at 145.7 or 26.05 per cent of total production. Nuclear power generated 84.2 terawatt hours or 15.05 per cent.2 In 2004 Canadian crude oil production was estimated at 2.4 million barrels per day (b/d). This total includes both conventional and non-conventional crude. Coal production reached 62,129,000 in 20033 while marketable natural gas production was 478 m3/d in 2004.4 Alberta produced 79 per cent of Canada’s total natural gas production in 2004. While British Columbia was at 14 per cent, Saskatchewan four per cent, Nova Scotia two and Ontario, the Northwest Territories and the Yukon were at one half percent. The National Energy Board (neb) estimates marketable gas reserves at 1,530 billion cubic metres. But gas reserves in Canada appear to have peaked. Reserve replacements amounted to only 46 per cent of production. This is an indicator of diminishing gas supples from producing areas. In 2004 gross natural gas exports from Canada reached 101.4 billion cubic metres while imports were 12.5 billion cubic metres. Crude oil production reached 404, 000 cubic metres per day or 2.57 (mb/d).5 Atlantic offshore production of conventional crude was 313,000 barrels per day while the western sedimentary basin reached 4.22 million barrels per day in 2004. Additions to established reserves of conventional light and heavy crude replaced 94 per cent of production in 2004. At 38 per cent of Canada’s total crude production, the oilsands in the western sedimentary basin reached 155,000 m3/d in 2004 The neb estimates remaining Canadian conventional crude oil and bitumen reserves at the beginning of 2003 at 28.4 billion cubic metres. While conventional crude reserves estimates have declined by 5.1 per cent in 2003, this was offset by an increase by non-conventional or bitumen production. Oil sands reserves of crude bitumen are pegged at 27.73 billion cubic metres at the end of 2003. Canada’s bitumen reserves are now recognized by the United States Department of Energy and the Oil and Gas Journal in their annual summary of world oil reserves. Coal production in Canada in 2004 was 70.47 million tonnes in 2004. Domestic consumption was 60.47 million tonnes. While Canada imported 23.62 million tonnes, it exported 30.14 million tonnes. The largest coal producing and consuming province is Alberta at 30.91 million tonnes per year closely followed by British Columbia at 27 million tonnes. Most of the coal produced in Canada is used for the domestic generation of electricity.

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Alberta, for example, is the largest consumer of coal. Almost all of its consumption of 25.64 million tonnes is used to generate electricity – 25.43 million tonnes out of a total of 25.64. Canada has eight billion tonnes of proven coal reserves. The largest deposits are found in British Columbia, Alberta, and Saskatchewan.6 The Canadian electricity generation and transmission industry has undergone a fundamental restructuring over the last five years. The industry is almost fully integrated into a North American grid7 and Hydroelectricity accounts for 329.5 terawatt hours or 58.91 per cent of total generation. Nuclear generation jumped dramatically between 2003–2004 from 70.7 to 84.2 terawatt hours or 15 per cent. Thermal generation from coal, natural gas and oil declined from 2003 from 159.5 to 145.7 terawatts or 28.33 to 26,05 per cent. At the beginning of 2004 Canada became a net importer of electricity. This was due to declining water levels due to drought. As a result, hydro generating provinces were forced to import electricity. But as water levels increased imports decreased and in 2004 Canadian exports of electricity reached 27.6 terawatt hours. Beginning in the mid 1990s electricity markets throughout North America began a process of restructuring and deregulation. Because electricity generation, transmission and distribution fall mainly under provincial jurisdiction, there has been a diversity of policies across the Canada. The National Energy Board – which has authority over interprovincial and international transmission – believes that deregulation will enhance competition, improve market efficiency and offer greater choice of services and suppliers. The goal of deregulation is, therefore, to unbundle the functions of provincially owned or controlled electric utilities – generation, transmission and distribution – to lower price and increase supply. Alberta and Ontario have gone the farthest in deregulation while British Columbia, Saskatchewan, New Brunswick, Nova Scotia, and Quebec have established wholesale markets and limited retail access.8 The incentive for the restructuring came from the United States. Under the authority of the Energy Policy Act 1992, the U.S. Federal Energy Regulatory Commission (ferc) issued orders 888 , 889, and 2,000 which established a series of regional competitive wholesale electricity markets. These new regulations also mandated that any utility selling into the U.S. market had to provide open access transmission services as a condition of receiving transmission access from transmission owning pubic utilities in the United States.9 With large publicly-owned electric utilities with excess capacity, British Columbia and Quebec opened their transmission lines. Alberta, with no spare capacity and private ownership of electrical utilities, engaged in a deregulation process in the hopes of increasing electric generation and the eventual sale of excess supply to the United States. The result in Alberta has

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been dramatically increased consumer prices and marginal increases in supply. Overall, the electrical deregulation has not met expectations. In those provinces where it has occurred consumer prices have risen while supply has not noticeably increased.10

c o n s t i t u t i o n s , l aw s , r e g u l at i o n s , a n d t r e at i e s Federal energy policy focuses on five areas. They are: resource management on frontier lands, uranium and nuclear power, interprovincial and international trade and commerce, trans-boundary environmental impacts, and policies of national interest including economic development, energy security, and science and technology. These areas deal mainly with interprovincial and international movements of energy and with projects that extend beyond provincial boundaries. As a result, the federal government has enacted policies to regulate international and interprovincial trade, pipelines and electricity transmission. As well, the federal government has broad taxing and spending powers. The central department concerned with energy policy is Natural Resources Canada (nrc an). Under sections 92 and 109 of the Constitution Act 1867 provincial governments are given control over natural resources. As a result, they have authority over most sources of energy from oil and gas to hydroelectricity with the exception of nuclear energy. The Constitution, however, also assigns the federal government jurisdiction over interprovincial and international trade as well as other economic powers. Ottawa has used its authority to play a significant role in the oilpatch. The best known example of federal involvement in the oil and gas sector was the 1980 National Energy Program (nep). Federal acts which directly affect the energy sector are the National Energy Board Act, Canada Labour Code, Canada Oil and Gas Operations Act, Canada Petroleum Resources Act, Canadian Environmental Assessment Act, energy Administration Act, Mackenzie Valley resource management Act, the Northern Pipeline Act, and the Species at Risk Act. Within each of these pieces of legislation there are various regulations and procedures for environmental protection, worker safety, and public consultation. For example, under the Canada Oil and Gas Operations Act, there are eight sets of regulations dealing with such issues as drilling and spills and debris. As well, several of the acts affecting energy production have guidelines and guidance notes to explain the regulations.11 Federal energy policy is also framed by domestic and international treaty arrangements. International treaties include the North American Free Trade Agreement (nafta) between Canada, the United States, and Mexico, and the Canada-U.S. Clean Air Agreement which limits emissions of sulphur dioxide and nitrous oxide – the components of acid rain. Federal-provincial

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agreements such as the Newfoundland-Canada and Nova Scotia-Canada Offshore revenue agreements are key pieces of Canadian energy policy. Finally, foreign domestic policies have had an impact on Canadian energy. The most important are the United States’ May 2001 National Energy Policy, the rules and regulations of the United States Securities and Exchange Commission and the Federal Energy Regulatory Commission.

n at i o n a l i s m t o r e g i o n a l i s m t o g l o b a l i z at i o n : c a na d i a n e n e rg y p o l i c y h i s to ry There is no simple characterization of federal energy policy in Canada. Ottawa has, at times, neglected the energy sector while at others the federal government has made it the centre of its economic strategy. After Confederation Ottawa had little interest in energy except for assuring that railways had sufficient supplies of coal. Nevertheless, the federal government played an important role in the evolution of the Canadian energy sector. The federal Department of Mines licensed interprovincial hydroelectric projects and transmission lines as well as international projects with the United States. After 1909 the cross-border electricity trade with the U.S. was regulated by the international Joint Commission. Between 1869 – when Canada assumed control of the Hudson Bay lands in the prairie west and 1930 – the federal government retained control over natural resources on the prairie provinces. The introduction of the Dominion Lands Act in 1872 provided the legal framework for federal control of natural resources in the Northwest Territories and in the provinces of Alberta, Saskatchewan and Manitoba after 1905.12 After years of lobbying and protest over this semi-colonial status, the prairie provinces were given control over their natural resources in 1930. Ottawa did, however, play a role in the regulation of interprovincial electric transmission lines and hydroelectric damn construction. The only other major event concerning energy policy was the Beauharnois scandal in 1930. The issue erupted when the Beauharnois Power Company of Quebec donated $700,000 to the Liberal party of W. L. Mackenzie King. Although this enormous sum was viewed by many as a bribe for a power contract, it was typical of party finance in the period.13 During World War II the federal government used its declaratory power under the peace, order and good government provisions under Section 91 of the Constitution Act 1867 to take control of almost all energy production in Canada. After the war, energy returned to provincial jurisdiction although Ottawa retained control over uranium production and nuclear power. The key federal department at this time was Energy, Mines and Resources. Its focus was on the development of Canada’s vast energy reserves in the north and the regulation of electric transmission and oil and gas pipelines. In the 1950s

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energy debate centred on the construction of interprovincial oil and gas pipelines and electric transmission lines. The famous 1956 pipeline debate concerned federal subsidies and the route of a transcontinental line to bring western natural gas to central Canada. The National Oil Policy of 1960 was a federal response to demands by the western petroleum producing provinces to open markets in central Canada for crude oil and natural gas. It was not until the 1973 oil shock that the federal government took an active role in the area of energy policy. A response to Western, especially United States, support for Israel in the Yom Kippur War, the Organization of Petroleum Exporting Countries cut-off shipments of crude oil to the West. Suddenly the price of a barrel of crude oil shot up from approximately $3U.S. per barrel wti to over $12 per barrel wti. The federal government, confident that Canada had abundant and secure supplies of petroleum resources, was mystified at the sudden shortages and price spike.14 In 1974 the federal government, feeling it needed a better window on the oil and gas sector, and inspired by Canadian nationalists, created a state-owned oil company, Petro-Canada. Petro-Can was resented by both oilpatch veterans and the provincial government. The Western Canadian oilpatch had a self-image of rugged individualism and any state incursion was resented as an unnecessary impediment on their God-given right to drill, produce and market oil and natural gas.15 Federal incursions into the oil and gas sector were resented by the western producing provinces. The governments of Alberta and Saskatchewan were committed to economic diversification through increased oil and gas revenues. Any attempt to decrease these revenues or interfere in any way with their efforts to diversify their provincial economies was strongly resented. The resulting federal-provincial conflict created a lack of coherence in energy policy. Instead, of working toward maximization of revenues and recovery, the two levels of government were in a continuous conflict over the direction and control of the oil and gas industry.16 A second oil shock came with the 1979 Iranian Revolution. Although the overthrow of the Shah of Iran was widely welcomed by the Iranian people, the revolution was soon overtaken by Islamist fundamentalist whose hatred of the West was profound. The Iranian revolutionaries simply stopped oil exports to the west. After the seizure of the United States Embassy and the taking of American hostages by state-sponsored protestors in Tehran in 1979, the U.S. imposed economic sanctions, froze Iranian assets in the United States, and prohibited the import of Iranian oil into the U.S. Oil and gas prices increased dramatically rising from just under $20us a barrel to $40us. There was the expectation that petroleum prices would go much higher. The federal government responded to these events with the national Energy Program (nep). The nep offered incentives for drilling in the Canada lands, increased export taxes on oil and gas, and a variety of “off-oil” measures in an effort to conserve domestic oil and gas reserves while decreasing

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dependence on foreign energy supplies. The federal government wanted to alleviate the shock of 1979–80 increase in the cost of oil and natural gas by keeping prices below world levels, increase its share of revenues from the petroleum industry, continue to promote the Canadianization of the industry, and to have a national voice in energy affairs. Although a number of domestic companies benefitted from the federal initiatives, the nep was strongly resented in the oilpatch and the Alberta and Saskatchewan governments. After a series of negotiations between the producing provinces and the federal government, an agreement was reached concerning pricing and taxation. As well, the provinces were able to secure an amendment to the existing constitutional division of powers which strengthened provincial control over natural resources. But the constitutional amendments and negotiations with the federal government maintained the basic structure of the nep. The Mulroney Conservatives were elected in September 1984 partly on the promise of ending the nep. With the signing of the Western and Atlantic Accords in spring 1985, direct federal involvement in the energy sector – except for nuclear power – came to an end. The Canada-U.S. Free Trade Agreement of 1989 guaranteed American companies national treatment and proportional access to Canadian energy sources. The effort to Canadianize the industry was replaced by a policy of regional integration. Market forces would dictate the price and supply of energy while the federal government would concern itself with environmental and competition regulation. The election of a Liberal government in 1993 did little to change the market orientation of Canadian energy policy. The Liberals committed their government to a policy of sustainability at the same time as they signed the North American Free Trade Agreement (nafta) with the United States and Mexico in late 1993. Although Mexico was given an exemption for its stateowned oil and gas industry, nafta extended the energy provisions of the 1989 Free Trade Agreement between Canada and the U.S. The Liberals continued the Conservative policy of free- market regional integration, but there was a shift in focus. The regional integration policy was overlaid with broader environmental and competition goals. The most important of the international agreements is the Kyoto Protocol to the United Nations Framework Convention on Climate Change. When Canada signed the Kyoto Protocol on 11 December 1997, it committed to reduce greenhouse gas emissions (ghg s) to six percent below 1990 levels by 2008–12. The Kyoto Protocol was a key piece of the federal government’s energy policy framework. The Kyoto Protocol fit with the federal framework of innovation and sustainable development. As part of its sustainable development strategy Kyoto seeks to reduce ghg s – primarily carbon dioxide emissions (CO2), methane and nitrous oxide. These gases are generally agreed to natural gas be a major contributor to global warming. Greenhouse gases are caused by the burning of carbon based fuels such as oil, natural gas, and coal.

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The Protocol stipulates that progress in achieving this reduction commitment will be measured through the use of a set of internationally agreed-to emissions and removals inventory methodologies and reporting guidelines. Kyoto came into force, when 55 signatories to the Convention accounting for accounting for a total of 55 per cent of ghg s agreed to ratification. This goal was met in February 2005 when the Russian Federation ratified the agreement. Through the Alberta government and several industry organizations such as the Coal Association of Canada and the Canadian Association of Petroleum Producers, the energy sector has expressed its dislike of the Kyoto Protocol.17 In September 2002, Alberta launched a $1.5 million advertising campaign designed to weaken public support for the Kyoto Protocol. On 17 October 2002, the Alberta government announced its own “madein-Alberta” climate change plan. The fifty year initiative was designed as a partnership between the province, the federal government and the private sector. Instead of the absolute reductions as defined in the Kyoto Protocol, the made-in-Alberta plan called for cuts to greenhouse gas emissions intensity (emissions divided by gross domestic product) by 50 per cent below 1990 levels by the years 2020.18 The ratification and implementation of the Kyoto Protocol was not a surprise to the energy sector. From its perspective, the federal government has no policy and no clear strategy on how to implement the requirement for ghg reductions mandated by the Kyoto agreement. The election of George W. Bush in November 2000 and his administration’s rejection of the Kyoto Protocol, the producing provinces, industry groups, and the federal government had all agreed that Kyoto could not be implemented in its present form. Kyoto opponents argued that any effort to require Canadian industry to reduce greenhouse gas emissions without the active participation of the United States would put Canada at a comparative economic disadvantage with its largest trading partner. The Alberta oilpatch, moreover, believed it would suffer a disproportionate burden of the Kyoto effort to reduce greenhouse gases. While province’s conventional production of oil and natural gas would be affected by the implementation of the Kyoto Protocol, the non-conventional oil reserves found in the tar sands and in heavy oil would suffer the greatest blow. Industry representatives claim that he costs of Kyoto would price Alberta non-conventional reserves out of the North American and world markets. Billions of dollars in planned investment could be lost and Alberta’s future economic prosperity threatened. In western producing provinces comparisons with the widely unpopular National Energy Program abounded. Another international agreement which sets the rules for energy commodity trading is the North American Free Trade Agreement. Chapter Six of nafta commits the united States, Mexico and Canada free trade in energy and basic petrochemicals. This goal is to be achieved through sustained

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liberalization. Any form of quantitative restriction is prohibited, as are minimum and maximum export requirements and prices requirements. Although there are exemptions for Mexico’s state-owned oil and gas industry, no party to nafta “may adopt or maintain any duty, tax or other charge on the export of any energy or basic petrochemical good” to the other signatories. Moreover, if restrictions on energy exports are enacted, it will not reduce the proportion of total export shipments. In other words, proportional access to Canada’s energy supplies are guaranteed under nafta.19 In May 2001, the Bush administration had released its National Energy Policy. The Policy – written by the National Energy Policy Advisory Group and chaired by the American Vice-President and former Chief Executive Officer of Haliburton Corp. one of the largest oil and gas field serve firms in the world, Dick Cheney – called for secure supplies of oil and gas for the United States through such mechanisms as enhanced recovery, increasing domestic supplies and global alliances.20 Canada’s deregulated energy sector has become the United States largest energy trading partner and leading supplier of natural gas, oil and electricity. In 2000 Canada supplied 14 percent of U.S. energy needs through an integrated network of pipelines and electricity lines. Canadian energy supplies – especially natural gas and oil – were not described as a foreign source of energy but as part of the U.S. domestic supply. American recognition of Canada’s importance as a source of energy was seen as part of the evolution of an integrated North American energy sector.

energy policy i n t h e m u lt i l at e r a l wo r l d Since 1993 Canadian energy policy has been framed by a commitment to sustainable development. All relevant government departments have incorporated sustainable development into their policies. The Sustainable Development Strategy was tabled in Parliament in 1997, but it was not until the release of Natural Resources Canada’s Energy in Canada in 2000 that the concept was incorporated into energy policy. The Strategy states that economic “growth provides the conditions in which protection of the environment can best be achieved and environmental protection … is necessary to achieve growth that is sustainable.” The sustainability framework has three main objectives. The first is to develop a competitive and innovative energy sector. This is to be achieved through the promotion of the long-term development of Canadian energy resources, the wise use of energy resources and maximization of economic opportunities. The second feature of the sustainability framework is to encourage environmental stewardship by mitigating the environmental impact of energy development and transportation through the integration of environmental objectives into all policies and programs. Finally, the sustainability framework was to establish secure access to energy

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resources by ensuring that current and future generations of Canadians have sufficient competitively prices energy. This is to be achieved by making efficient use of existing resources. Within this framework four domains were the focus of energy policy – rapidly developing energy markets, the environmental impact of energy development and use, nuclear power and frontier lands oil and gas exploration and development. The federal government recognizes that the conventional energy supply of hydrocarbons and electricity is evolving to meet the demands of a the North American market. Natural Resources Canada has begun to question the need for economic regulation as well as the appropriate roles for federal and provincial governments. Open access to the United States market necessitates new regulatory approaches. Canadian natural gas production, for example, has now been integrated into a North American market which nrc an believes, will lead to lessening of the regulatory role for the federal government. While the federal government’s 2004 study, Smart Regulation. A Regulatory Strategy for Canada, has formed the basis for redefining of the federal role through its principle regulatory agency,21 the National Energy Board, regionalization and restructuring has pressured Ottawa to rethink its role in the energy sector. But the process appears to lack a coherent strategy. In the words of one participant, “they sit around the table and tell each other what a good job they are doing.” If Ottawa is withdrawing from economic regulation and policy in the energy sector, it has strengthened its commitment to a sustainable economy and the reduction of greenhouse gases. This multilateral or global approach to energy contrasts with the regionalization of the electricity, oil and natural gas markets. In the 2005 Budget the federal government committed $3 billion in new investments to address climate change and protect the natural environment. Combined with the $2.2 billion of existing funding, Ottawa has allocated over $5 billion to meet its Kyoto pledge. As part of its sustainable development policy, the federal government has committed more than $10 billion in funding for environmental measures since 1997.The framework for these investments is contained in the government’s plan to achieve a green economy. The five principles around which investments are to be made include the notions of balance, competitiveness, partnership, innovation, and cost effectiveness. According to the February 2005 Budget, environmental investments in the economy must balance the need for short-term action to protect the environment with long term incentives to alter individual and collective practices. The creation of a sustainable economy must also weigh the impact on short term competitiveness and to the extent possible investments in the environment should encourage, individual, business and other government investment. New technologies are central to the creation of a green economy and any initiative must be cost effective.22

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With the ratification of the Kyoto Protocol on 16 February 2005, the federal government formalized its commitment to a multilateral approach to the environment and energy. Ottawa has specified six policy instruments to meet its Kyoto goals. The first instrument is the introduction of a $1 billion Clean Fund to encourage the most cost-effective projects to reduce greenhouse gases while promoting the development of a market for emissions trading. Second, the federal government has committed to increase wind-power production and quadrupled the number of homes eligible for grants to reduce heating and cooling costs. Several tax measures have also been introduced. These include incentives for investment in efficient and renewable energy generation equipment. Fourth, the government has allocated $300 million in a Green Municipal Fund and $5 billion over five years from the federal gasoline tax to support sustainable infrastructure. The fifth measure announced by the Liberal government is the creation of a Sustainable Energy Science and Technology Strategy. Spending for this initiative is $200 million. Finally, in keeping with efforts to refocus federal regulatory policy from a command-andcontrol framework, the federal government is pursuing agreements with large final emitters and vehicle manufacturers to establish ghg reductions. It is hoped that these policies will create a clean energy future and increase the efficiency, sustainability and competitiveness of the Canadian economy.23

f i l l i n g t h e va c u u m : i n d u s t r y, t h e p r o v i n c e s a n d t h e u . s . While the federal government has reoriented its energy policies toward market deregulation and multilateral environmental agreements other actors have moved to fill an energy policy vacuum. These actors include the producing provinces, the electrical generation industry, the fossil fuel sector, and the United States. While there appears to be little coordination between these different actors their goals are remarkable similar. Working through their industry organizations, international consultations and federal-provincial initiatives, a continental energy strategy has emerged. This regionalization policy does not fit easily with the federal government’s multilateral energy and environmental initiatives. With a few minor variations, the provinces have very similar energy policies. The petroleum producing provinces have set in place royalty holidays and various tax expenditures to encourage further exploration and production in the offshore, frontier lands, and the tar sands. The royalty structure in the Atlantic Offshore, for example, was very generous to the various petroleum companies. Both the Newfoundland-Canada and Nova Scotia-Canada Offshore Boards have created a policy environment which include substantial tax incentives and royalty holidays for exploration and development.24 Along

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with the federal government, the provinces had removed almost any impediment to the full integration of Canada’s oil and gas industry into the North American and world markets. In terms of electricity production, provincial governments have abandoned the tradition strategy of using provincial crown corporations to produce inexpensive electricity as a catalyst for economic development. The current trend is regional integration and export of electricity.25 In May 2001, the Bush administration had released its National Energy Policy. The policy – written by the National Energy Policy Advisory Group and chaired by the American vice-president and former chief executive officer of Haliburton Corp. one of the largest oil and gas field serve firms in the world, Dick Cheney – called for secure supplies of oil and gas for the United States through such mechanisms as enhanced recovery, increasing domestic supplies and global alliances.26 Canada’s deregulated energy sector has become the United States largest energy trading partner and leading supplier of natural gas, oil and electricity. In 2000 Canada supplied 14 percent of U.S. energy needs through an integrated network of pipelines and electricity lines. With access assured through nafta, Canadian energy supplies – especially natural gas and oil – were categorized as part of the U.S. domestic supply. American recognition of Canada’s importance as a source of energy was seen as part of the evolution of an integrated North American energy sector. The federal Liberal government supported the provinces’ efforts to sell their oil and gas, coal and electricity to American consumers. After years of distrust and some recent controversy, Ottawa had made an effort to reassure the energy producers – especially the western-based oil and gas sector – that they welcomed the Bush National Energy Policy and that the federal government would do all it could to sell Canada’s energy resources in the United States.27 With no energy strategy of their own, the federal government had little choice but to support the American initiatives. Through several of its industry associations, the Canadian energy sector acts as a policy entrepreneur. It has supplanted the federal state which abandoned its interventionist policies in the mid-1980s and the provincial governments which have – with a few exceptions – reduced their institutional capacity. In this policy vacuum the energy industry in its different forms has successfully managed to promote its interests in the face of increasing environmental and other community concerns. It has faced these challenges with a set of policy ideas that reflected with emerging problems. This was not a straightforward process. The withdrawal of the federal government from economic regulation, a minister who was absent from Ottawa because of ill health, and the retirement of the deputy minister and the failure to find a replacement, have allowed the energy industry with the support of the producing provinces, to promote its political and economic agenda. And the industry jumped at the opportunity. The oilpatch, for example, has organized a

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coherent sub-government where its ideas and program dominated the political agenda. The federal state has focused on the Kyoto Protocol while other actors in the energy network lack resources to present a coherent alternative to market model, necessary to influence policy makers, the industry has increased its capacity in terms of both knowledge and ability. There are several industry organizations which have a significant, if not dominant impact, on the Canadian oil and gas industry. The most important of these is the Canadian Association of Petroleum Producers (capp). capp has the resources – financial, organizational, knowledge and political – to play a significant role in the oil and gas policy network both at the national and provincial levels. capp represents approximately 150 producers accounting for 98% of Canada’s oil and gas production. Associate members include banks, oil accounting firms, and investment analysts. The Canadian Association of Petroleum Producers is a self-described and registered lobby group located in Calgary within a ten block radius of 95 per cent of its members. Its mission is to advocate the interests of the Canadian oil and gas industry to both the provincial and federal governments as well as the public. With a budget of $10.5m (Canadian), capp has forty-five employees. Its funds come from its membership – each member company pays an annual fee based on its production – the larger companies pay more than the smaller producers. The budget is divided in three ways: on third goes to lobbying for market access, regulatory reform, climate change policy and other issues important to the industry; one third of the capp budget goes to operations; and one third to public affairs. It lobbies in three ways. First, it acts as an industry advocacy organization presenting an industry position to both the federal and provincial government. Second, capp commits one third of its resources to regulatory reform. With in-house council, economist and other research staff as well as government-relations experts, capp has a legal and technical capacity which rivals the federal National Energy Board and the Alberta Energy and Utilities Commission. Third, capp acts in a public affairs capacity. It has direct contact with aboriginal groups, the forestry industry, trappers, landowners and community and environmental groups in an effort to foster understanding of the industry. It is a sophisticated, multi-level organization with a recognized technical expertise. capp has three stated goals. First, it aims to ensure governments respond to global business realities and increasing costs of exploration and production in Canada and that the oil and gas industry is treated equally with other sectors of the Canadian economy. Second, it lobbies for reduced approval times for exploration and production and that environmental and land-use policies recognize the benefits provided to society by the oil and gas industry. Third, it wants to ensure that gains made through free trade and deregulation during the 1990s are protected. These goals are pursued by regular and frequent meetings with provincial and federal political and administrative

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officials. Senior staff at capp have direct access to officials in Ottawa and in Edmonton. There are scheduled meetings between capp representatives and politicians in Ottawa and provincial capitals but much business is conducted informally. These meetings are referred to as educational or information sessions. The purpose is to educate governments in the provinces on the importance of the petroleum industry to the provinces’ economies. capp officials make annual pilgrimages to the provincial capitals of the oil and gas producing provinces and territories. capp also cultivates relationships with midlevel bureaucrats and backbench members of provincial legislatures with the expectation they will one day be elevated to the senior civil service or cabinet. As well, there are joint meetings between capp and other industry groups such as the Small Explorers and Producers Association of Canada, Canadian Association of Oil Well Drilling Contractors and the Canadian Energy Pipeline Association with provincial ministers and key officials. capp is also a member of the Joint Dialogue Group. This is a loose confederation of energy companies ranging from the electric power association, the nuclear power association, the Coals Association of Canada and the Canadian Energy Pipeline Association. This is a recognition of common interest and the need for mutual support in dealing with the federal government.

c o n c lu s i o n s There is a vacuum in Canadian energy policy. The federal Liberal government has not been able to formulate a coherent energy strategy. This is due in part to a preoccupation with surviving a minority parliament, a minister of natural resources who has been absent because of illness, and an emphasis on the issues of sustainability and the reduction of greenhouse gases through the Kyoto Protocol. The vacuum in energy policy has been filled by industry associations, the energy producing provinces and the United States. From hydro electricity to oil and gas production these three sides of the energy sector have articulated a series of policies for the exploitation of Canada’s energy resources. Ottawa has been left on the sidelines, unable or unwilling to formulate much beyond contradictory commitments to sustainability and the Kyoto accord while promising to sell Canada’s energy to the United States and other potential customers in emerging Asian economies. The Ottawa vacuum is the result – at least, in part – of contradictory objectives. On the one hand, the federal government has committed to a policy of sustainable development and the reduction of greenhouse gases through the Kyoto Protocol. This is a multilateral image of globalization – “in which there are many participants with an effective voice” – is a preferred option for the Martin Liberals. On the other hand, Ottawa has committed to a regional energy integration through the North American Free Trade Agreement and promises to sell Canadian energy to the United States. While the

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federal government has addressed a number of areas of concern to the energy industry including market access, skills training programs, financial reporting reforms, and native land claims, the contradictions in its approach – sustainability and greenhouse gas reduction and increased energy exports – have create confusion within the energy policy community. The unwillingness or inability to put in place a comprehensive program to secure a stable supply of energy to meet Canada’s present and future needs is the result of these contradictions. Provincial governments, the energy industry and the United States have filled the gap left by the federal state. They are committed to the regional integration of North American oil and gas, electricity and coal supplies. The industry groups and the provinces believe that the viability of the energy sector is in the regional market, while the United States views Canadian energy as vital to its national interest. Faced with the demands from three of the major interests in the energy policy community for expanded markets and increased supply, the Liberal government has pursued a policy of trade liberalization while at the same time promoting several environmental initiatives. But the efforts to increase sales of Canadian energy conflict with international commitments to decrease greenhouse gas emissions and the policy to establish energy sustainability. While Ottawa has established an agenda that it hopes will meet the challenges of increasing international competition through innovation, skills development, and multilateral trade, it has neglected to construct, a coherent energy strategy. While their motives vary, the provinces, energy corporations, and the United States share an image of the global order is regional in perspective and which encourages regional energy integration. The United States wants a secure supply of energy, the companies want to maintain and increase profits, and the provinces want greater revenues and to protect their constitutional jurisdiction from what several of them view as an encroaching federal government. Together these different interests present a formidable and coherent energy policy framework. On its side, the federal government has few allies in its multilateral approach. The various environmental organizations which support Ottawa’s sustainability and Kyoto initiatives are divided and lack the financial resources of the provinces and industry. Moreover, Ottawa’s policy of promoting energy sales to the United States has created a tension with its support of Kyoto and other environmental initiatives. The recent announcement of a Canada-China Energy Working Group is an attempt to diversify markets for Canadian oil and gas, nuclear energy, and coal but has yet to produce any substantive results.28 Canada and other industrial and industrializing states are dependent on secure and sustainable supplies of fuels and electricity. A national response to this reality is necessary if Canada is to avoid economic and social dislocation while, at the same time, reconciling the need for environmental protection

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and the reduction of greenhouse gases.29 The federal government, however, has failed to do this. Instead, it has promoted contradictory policies which have permitted the energy industry and its allies to articulate a regional, supplydriven vision for Canada’s energy supply. This situation has created an uncertain energy future for Canada. Unless, the federal government can articulate a coherent set of policies, Canada will leave its energy security to the provincial governments, the industry, and consumers in the United States.

notes 1 Peter Leslie, “Regionalization Multi-Level Governance, and Globalization,” paper presented at the Fourth Annual Conference of the European Consortium for Political Research, University of Canterbury, 8–9 September 2002. Available at http:// www.iigr.ca/conferences/archives/pdfs1/leslie.pdf. 2 National Energy Board, Annual Report to Parliament 2004 (Calgary: National Energy Board, 2005), 13. 3 Coal Association of Canada, Canadian Coal Production Statistics (Calgary: Coal Association of Canada, n.d.). 4 National Energy Board, Annual Report to Parliament 2004, 22. 5 These numbers are provided by the Canadian Association of Petroleum Producers. 6 Coal Association of Canada, Coal Economics (Calgary: Coal Association of Canada, n.d.). 7 Monica Gattinger, “Canada-United States Electricity Relations: Policy Coordination and Multi-Level Associative Governance,” In How Ottawa Spends 2005–2005: Managing the Minority (Montreal: McGill-Queen’s University Press, 2005) 143–62. 8 National Energy Board, Annual Report to Parliament 2004, 23–7. 9 G. Bruce Doern and Monica Gattinger, Power Switch: Energy Regulatory Governance in the Twenty-First Century (Toronto: University of Toronto Press, 2003), 71–91. 10 Donald Dewees, “Electricity Restructuring in Canada,” in G. Bruce Doern, ed. Canadian Energy Policy and the Struggle for Sustainable Development (Toronto: University of Toronto Press, 2005), 28–150. 11 National Energy Board, Annual Report to Parliament 2004. 12 David H. Breen, Alberta’s Petroleum Industry and the Conservation Board (Edmonton: University of Alberta Press and the Energy Resources Conservation Board, 1993), ch.1. 13 Reginald Whitaker, The Government Party: Organizing and Financing the Liberal Party of Canada, 1930–58 (Toronto: University of Toronto Press, 1977), 12–13. 14 Peter Foster, The Blue-Eyed Sheiks. The Canadian Oil Establishment (Toronto: Collins, 1979), 51. 15 J.D. House, The Last of the Free Enterprisers: The Oilmen of Calgary (Toronto: Macmillan of Canada, 1980). 16 John Erik Fossum, Oil, the State, and Federalism: The Rise and Demise of Petro-Canada as a Statist Impulse (Toronto: University of Toronto Press, 1997), 10.

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17 Stephen Rodrigues, interview with author, Calgary, Alberta, 12 September 2002 and Allen Wright, conversation with author, 31 November 2005. 18 Alberta Environment, “Finalized Made-in-Alberta Climate Change Plan Released,” 17 October 2002. 19 Canada, North American Free Trade Agreement (Ottawa: Supply and Services Canada, 1993), chapter 6. 20 National Energy Policy Development Group, National Energy Policy, Reliable, Affordable, and Environmentally Sound Energy for America’s Future (Washington, dc: U.S. Government Printing Office, 2001). 21 Canada, External Advisory Committee on Smart Regulation, Smart Regulation. A Regulatory Strategy for Canada (Ottawa: External Advisory Committee on Smart Regulation, 2004). 22 Ralph Goodale, The Budget Plan 2005 (Ottawa: Department of Finance, 2005), 170–5. 23 Ibid., 174–5. 24 Peter Clancy, “Offshore Petroleum Politics: A Changing Frontier in a Global System,” in Michael Howlett and Keith Brownsey, eds, Post-Staples Resource Policy in Canada, (forthcoming). 25 Alexander Netherton, “Between ‘Provincial Hydros’ and Neoliberal Energy Regimes: Electricity Energy Policy Studies in Canada,” in Michael Howlett and Keith Brownsey eds, Post-Staples Resource Policy in Canada. 26 National Energy Policy Development Group, National Energy Policy. 27 Rt. Hon Jean Chretien, Remarks at the Prime Minister’s Dinner, Calgary, Alberta, 12 June 2001. 28 The Canada-China Energy working group was announced by Prime Minister Paul Martin in Beijing on 20 January 2005. “Canada-China Statement on Energy Cooperation in the 21st Century,” Press Release, Office of the Prime Minister, 20 January 2005. 29 Vaclav Smil, Energy at the Crossroads: Global Perspectives and Uncertainties (mit Press, 2003), ix.

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pa r t i i How Ottawa Buys

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5 How Ottawa Buys: Procurement Policy and Politics Beyond Gomery ba r ba r a a l l e n

Kickbacks. Graft. Conflict of interest. Corrupt party financing. The story unfolds as a prime-time television drama. With the publication of Justice Gomery’s report on November 1, 2005, individuals and the Liberal party itself are officially implicated in the biggest political scandal in modern Canadian history. It is possible, that this time, the big red machine may crumble. The Paul Martin government is challenged on all fronts by the implications of Gomery1 and the Sponsorship scandal. Potentially criminal acts associated with Liberal Party fundraising have been uncovered. The non-confidence vote on November 28, 2005, struck the final blow. The Liberals face the electorate in a winter election that will determine whether the Liberals self-destructed through scandal and the policy and management blindness that results from being in power too long. In this chapter I develop two key arguments about procurement policy and politics beyond Gonery. First, there is a lack of coherent procurement policy in Canada and this has contributed to the most recent problems involving corruption and public mismanagement associated with the Sponsorship affair. This argument will be developed by looking at procurement policy, how it is articulated in Canadian public policy writ large, its varied elements and approaches, its core literature, and its interrelationships with other fields of policy. Second, I argue that the Gomery Inquiry has presented both a threat and an opportunity to the Martin government. On the one hand, the Liberal government reign itself is threatened by the series of scandals and issues of the past couple of years underpinned largely by problems with procurement policy. The issues implicate the entire Liberal machine and the only true solution may be to throw out them out and elect another party

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new post-2006 election government to thoroughly assess procurement policy and make changes that may get an opportunity to follow through on their “fixes” or whether to Harper Conservatives will.

pro c urem en t an d po l it ic s Aside from the much-hyped media coverage of the Sponsorship Scandal, there is an important underlying story of problems in Canadian political institutions and the relationships within them. Procurement policy – the set of values and objectives regarding purchasing made explicit and asserted through legislation, guidelines, rules and norms – is part of the key storyline. Procurement is often associated with corruption and patronage politics. Political corruption, or the gain of personal advantage at the expense of the public interest, is now linked directly to procurement as a result of the Sponsorship Scandal. Procurement often gets conflated with patronage politics – the ongoing small “p” politics associated with federal largesse and regional distribution. The events surrounding the Sponsorship affair has brought procurement policy and its operational manifestation, contracting, into the politicalspotlight. The Auditor General’s report released in February of 2004 began a series of events involving the scrutiny of procurement processes (e.g. contracting), and politicians and bureaucrats rarely seen before in Canada. When the immediacy of spectacle subsided in spring 2004, the work began in earnest to figure out why the Sponsorship debacle had happened. The Gomery Inquiry directed its attention at least initially at individuals and at the uncovering of any potential wrong-doing. Meanwhile, there were parallel studies looking at the details of Treasury Board-Public Works and Government Services relationships, monitoring systems, and accountability systems. On November 1, 2005, Gomery reported and focussed the blame on the Chrétien government and particular individuals associated with the Liberal party under Chrétien. But what is really going on here? Is something new and different happening or is the Inquiry re-visiting old issues and tinkering with institutional mechanisms that will not have any truly reformative impact? Corruption in politics is not a new issue. What may be new is that for the first time, dirty government business is being aired in public, not long after it occurred. It is too early to tell whether the Gomery Inquiry, the fall of the Liberal government, and the administrative changes being made by the government will have lasting effects. What is clear is that the government is continuously in the business of shopping for goods and services, using its funds raised by taxes, in order to deliver

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and make the right choices. Essentially this activity is embodied in procurement policy, the effective and efficient purchase of goods and services in the interest of Canadians. The problem is, there is no

t h e pa r a m e t e r s o f p r o c u r e m e n t

2

In Canada procurement is worth $13B, one third of the total federal discretionary budget.3 The volume of government contracting amounts to almost 540,000 contracts per year valued at approximately $12.3 billion, in addition to the 1.5 million acquisition card transactions.4 Procurement has been defined by the Parliamentary Secretary’s Task Force, Government-Wide Review of Procurement (January 2005) in a broad sense. The study states that, “procurement is the strategic, proactive process of acquiring goods, services and construction from third parties in the best possible manner.”5 The language that describes the process in more detail in the report is focused on “contracts.” What is missing is the notion of a higher level element that would connect the procurement process to government strategy and higher objectives. The procedural underpinnings of procurement form the framework for the activity of purchasing – the determination of what to buy, and the establishment of procurement strategies, spending control systems, and performance measurement systems. Various aspects of procurement have been reviewed in major studies dating back to 1962. These include: The Royal Commission on Government Organization (Glassco Commission), The Lambert Commission, The Neilson Task Force on Program Review, Increased Ministerial Authority and Accountability, the Renewal of the Public Service in Canada, dnd/pwgsc

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surprisingly, these studies have never effectively been linked or grounded in a theory or framework for procurement policy that captures its complexity. The academic literature that deals with various aspects of procurement comes from many different fields, including economics, management and law. The economic literature is concerned with issues of efficiency in contracting, with a recent focus on the efficiency aspects of electronic procurement, notably auctions and reverse auctions.6 Aside from the efficiencyrelated aspects of procurement most of the writing and research associated with procurement falls in the management literature category.7 Purchasing and procurement are seen as elements of Supply Chain Management (scm) from the perspective of the scm literature. “Sourcing” is a related, integrative concept that is considers all activities necessary for linking external resources to a company.8 The literature has been criticized for lacking clear theoretical and conceptual schema to delimit its boundaries.9 In terms of procurement per se, and the concern here with public procurement, there is no defined field from which to draw. In the literature it is one of the areas in which articles appear from time to time, but the public nature of purchasing is seen as a niche area from the business perspective. This is one of the reasons why the strategic nature of public purchasing was not recognized for a long time. Most writing on public sector procurement has been focused on defence procurement. The harmonization of public procurement rules has been a focus of the European Union and consequently there has been a fair amount of research emerging in this area. There is very little analysis of the contextual and policy issues associated with public procurement. The odd article involves public sector issues and how they interrelate with private sector supply management problems.10 Thus procurement policy lacks a coherent grounding and this partially explains why what is written in government documents is generally lacking a systematic approach, and why each time procurement is studied, very little improvement is made. The next section will examine Canadian procurement policy in more depth with a view to addressing this lack of coherent grounding.

u n pa c k i n g p r o c u r e m e n t p o l i c y

Government procurement policy expresses the fundamental values and legislative and regulatory frameworks underpinning the activity of purchasing. Values are the beliefs and positions of the government formed over time as a result of government interpretation and the shaping of what it believes democratically to be the needs and wants of citizens.

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Table 5.1 The basis of Canadian Procurement Policy 1 Policy objective The objective of government procurement contracting is to acquire goods and services and to carry out construction in a manner that enhances access, competition and fairness and results in best value or, if appropriate, the optimal balance of overall benefits to the Crown and the Canadian people. 2 Policy statement Government contracting shall be conducted in a manner that will: a. stand the test of public scrutiny in matters of prudence and probity, facilitate access, encourage competition, and reflect fairness in the spending of public funds; b. ensure the pre-eminence of operational requirements; c. support long-term industrial and regional development and other appropriate national objectives, including aboriginal economic development; d. comply with the government’s obligations under the North American Free Trade Agreement, the World Trade Organization – Agreement on Government Procurement and the Agreement on Internal Trade. Source: Treasury Board of Canada Secretariat, Contracting Policy. http://www.tbssct.gc.ca/pubs_pol/dcgpubs/ Contracting/contractingpol_/_e.asp# obj, 24/10/05.

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fact the pre-eminent elements to the policy statement as there are repercussions to the Canadian government if the transparency and competitiveness elements are mishandled. The objectives of government have been pursued through purchasing since Confederation and rose in importance as the state grew in the wake of World War II. In one early assessment of Canada’s purchasing policy, Stegeman and Acheson noted that the following objectives had been pursued explicitly or implicitly through procurement of goods and services: lowering the tax burden by economical purchasing; amelioration of regional employment by purchasing from industries in those areas, stabilization of effective demand, technological advancement, and protection of specified domestic industries.12 The avoidance of corruption is also a goal embodied in procurement policy statements, although it is somewhat couched in the broader notions of prudence and probity. Elements of what could be deemed to be procurement policy appear in many other pieces of legislation and regulation – there are twenty-three Acts of Parliament & Regulations and sixty-nine government policies related to procurement.13 Because economy in purchasing must be sacrificed to make a contribution to achieving any of the others, the government’s decisions in terms of this sacrifice result in a variable and complex policy as it relates to procurement. Where and how the government articulates its procurement policy, and how it has come to be a vehicle for multiple objectives is an essential element of Canadian public policy per se. What has been missing, at least until recently, is a strategic approach to procurement policy and procurement processes. Procurement is not just about the buying process itself but it is about a cycle of activities that takes place at three inter-related levels: the strategic, the managerial, and the operational levels. Most attention has been paid to procurement processes at the operational level, and to a lesser extent to the managerial level. But the way in which the socio-economic objectives that are “demanded” of the procurement policy are connected to these three levels has not been well elucidated. The following diagram depicts this relationship. Procurement is used as an instrument to implement policy, and thus is the means through which political goals are achieved. Instruments are techniques and mechanisms but they also become ends in themselves.14 Instruments are fundamental objects of political dispute and inherently suggest values and ideas that are always in contention. It is this normative aspect that complicates the decision-making process. Socio-economic objectives such as supporting the aerospace industry, developing aboriginal business and communities, enhancing environmentally friendly purchasing, regional development and employment, (to name just a few) fundamentally require decisions about which objectives are more important than

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Figure 5.1 Procurement – Strategic, Managerial, and Operational levels Strategic

Managerial Procurement activities: processes operationalized in various forms of contracts

explicit and asserted through guidelines, norms, laws, regulations Socio-economic objectives

Operational

others in the face of the always-limited resources. Policy implementers are asked to consider them all and then make choices, in turn shaped by the political landscape of the day. Procurement in the public sector thus has two connected overall objectives which often conflict with one another – to obtain goods and services for government getting the best value for the least money and secondly, and to use the purchasing power to achieve wider policy objectives. Both objectives leave wide room for interpretation. While it is generally known that government uses its purchasing power to support various objectives, the policies themselves are not very well understood. There seems to be genuine surprise from Canadian taxpayers and even from politicians and officials within the system (feigned or not), when a questionable contract (at least in terms of value-for-money) is made public. Contracting with the private sector is one of the most important, if conflict-ridden foundations of procurement policy throughout Canada’s history. Choices made for political reasons seem to override choices that would be made in line with good purchasing practices. In the next section I examine this political context of choices in the Canadian environment, illustrating a particularly complex background of socio-economic objectives.

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Much of the justification of the Sponsorship program arose from the belief that there was a political need, in the wake of the near-defeat in the 1995 Quebec Referendum, to enhance federal visibility in Quebec through increased federal spending in Quebec. This took the form of advertising campaigns and communication of the federal role in Quebec, and the use of Quebec companies, businessmen, and indeed politicians to do it. This “political need” was either a genuine belief that the political and economic union of Canada was threatened by the Quebec sovereignty movement, or basic greed and manipulation of the system for private gain, that happened to coincide with historical events. It is likely that there is truth in both aspects of this. In procurement policy terms, the federalist cause was a “socio-economic objective,” which Chrétien and other politicians felt was a legitimate purpose on which to use the procurement instrument. Thus procurement policy and associated processes became implicated in a most messy and controversial “objective” for which there appeared to be a perceived need and a reason to go outside the normal spending and allocation procedures. In 1997 and 1998 the documents show that there were substantial increases in funding levels granted through the Supplementary Estimates, the Annual Reference Level Update (arlu

per se

lumbia agreed to become a part of the Dominion of Canada based on the agreement that the Government would build and extend the Canadian Pacific Railway to its borders. The only way the Government could secure an agreement was to promise that private business would build the railway, in conjunction with the use of Government land grants and subsidies.17

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The disparity between political union and the economic development necessary for fulfilment of its essential terms was immediately reflected in the controversial character of the debates, leading to acceptance of the terms by the Canadian Parliament, which insisted upon safeguards against excessive taxation. In Canada transportation has been used as a direct instrument of national economic policy. Transportation incentives to reduce economic disparities between regions and to provide a framework for communication were part of the basic agreements under which the British North America colonies agreed to Confederation. There was little concern for efficiency and valuefor-money. There were few suppliers and few to no rules about how to buy for government. Those given the responsibility for procuring were given the leeway to get what they needed. With multiple policy tools including engaging private business to build some systems while government built others directly, government was undertaking to build transportation links across vast expanses of territory in the name of the broader policy of nation building. With an explosion in the level of government activity from the 1950s onwards, battles over expenditure dollars became increasingly political and, when combined with persistent deficit financing, there was a massive increase in the political temptation to spend vast sums of public money.18 Of course this temptation had always been central to the Canadian political experience. Jeffrey Simpson points out that all that changed in the modern era was the scale and scope of government spending, but the change represented a quantum leap form what had gone on before. Although programs carried the prerequisite regulations and bureaucratic norms, by either adjusting these norms or simply overriding them with an act of political discretion, politicians could try to turn these programs to their political advantage. Parties in power differed little in this aspect.19 Politically advantageous state intervention became the rule, not the exception. Purchasing policy, industrial subsidies and grants, and government financial services were referred to as a “contemporary policy arsenal” and as “discretionary policy weapons.” Governments were increasing relying on these instruments, reflecting various political and economic trends. Socio-economic objectives realized through the growing use of “regional policy” started to further complicate the procurement landscape. The fiscal equalization program was intended to reduce disparities between regions, to achieve a national standard in public services, and at the same time to equalize provincial-government revenues.20 Increasingly the goal seemed less to grow the national pie, but to divide it through a decentralized framework oriented to the circumstances of the regions. The regionalization of federal procurement policies was analogous to the notion of equalization; there was a growing dedication by the provinces to see federal procurement of goods and services evenly distributed among the regions.21

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The confusion over the role of purchasing policy is evident in Tupper’s findings as he described the procurement environment and the growing importance of purchasing with regional or other industrial objectives: It remains unclear to most observers, and perhaps even to policy makers, precisely which economic and political objectives are being pursued. dss says for example, that purchasing policy is used to promote a “healthy economic climate” in Canada, while analysts conclude that purchasing policy is indeed multi-purpose, being employed for such diverse ends as the sustenance of a defence production industry, the protection of Canadian firms from import competition, and the encouragement of Canadianbased, high technology industries. Finally the administration of federal purchasing policy features considerable government discretion. While elaborate administrative procedures do exist, most commentators point to their flexibility and the resulting scope for tailoring procurement policy to the needs of particular firms and industries. Such extensive discretion perhaps accounts for the problem of discerning clear policy patterns and the high degree of political conflict involved.22

The growing emphasis on regional policy throughout the 1980s coupled with the discretion available in the procurement instrument resulted in an increasingly unclear and incoherent procurement policy with a huge potential for manipulation for particular interests. In the next section I develop a taxonomy for mapping what government buys against its procurement policy objectives along with some associated strategic, managerial and operational issues.

Figure 5.2 maps what government buys against the related socio-economic objectives and the strategic, managerial and operational issues. By linking what government buys, the basic procurement socio-economic objectives and their strategic, managerial and operational elements, the issues become clearer. What remains problematic, is that socio-economic objectives such as “national unity” could essentially be linked to every kind of buying government does if there is discretion in how contracts are designed, to whom and where they are awarded. In the past couple of years, some of these issues have been examined in the attempt to rectify problems being uncovered with the management of funds and associated procurement. Three key areas have been examined: contracting procedures, scrutiny and oversight, and accountability. As a result of the Auditor General’s report and the then impending Gomery Inquiry the Liberals began a series of institutional and managerial changes to these areas. Important in terms of procurement, Public Works and Government Services ( ) is being over-hauled. pwgsc will become the government’s only purchasing agent with a strategy of fewer

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Figure 5.2 Purchasing – Objectives, Methods and Issues What government buys

Related socioeconomic objective

How government buys

Strategic issues

Managerial issues

Operational issues

Major crown projects – helicopters, ships, major systems

Canadian security and diplomacy, industrial policy, regional policy, innovation, sovereignty

Large dollar contracts, usually over a long period of time, may be development or maintenance, involving numerous instruments

Question of use of procurement for furthering industrial development, innovation, Canadian content and setasides problematic

Managing large contracts, capacity and skills of public service, length of time to let contracts increases cost over time

Needs of the military not always filled due to furtherance of other objectives, equipment outdated by the time contracts fulfilled

Services delivery, it

Outsourcing for consultants and operating companies (e.g. aboriginal); combination public and private

Deliverance of the public goods by private sector; up and down funding to provinces for health

Capacity of sme s, capacity of public sector, lack of evaluation

scale [waste, social care, health, environment, science]

Good value services for Canadians, environmentally friendly, support of small business and aboriginal communities/small and medium sized business. Also a regional element, even sovereignty

Procurement process difficult, variable, and not smallcompany friendly

Human resources – hiring staff

Employment, fairness, regional equity

Public Service Commission, or private sector by contract

Federal employment in all regions, Unions, economic health of provinces, country

Any change challenges people fundamentally

Too many private sector individuals delivering public goods, government loses capacity

Information technology – physical infrastructure and all research (beyond )

Innovation, technological development, international competitiveness

Government develops, attempts to shape economic environment by regulation

Lack of resources, lack of incentives for innovation to take root, brain drain

Getting the right Skills and equipment to capacity the right people, contracting can be complex due to technology life.

Paper, paper clips, pens, books, coffee

None. Unless contracts are grouped and directed to particular firms or regions

Standing offers. Credit cards. Single purchases sometimes.

Not strategic until centralized into large contracts or politically directed.

Contract man- Authority levels agement. A large need to be number of correct. transactions expensive.

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cbc

culties, but rather the absence of a stable set of objectives, whether of a ‘value for money’ or of a political kind, and the oscillation between contradictory objectives … Contracts are often used as auxiliary weapons for all kinds of government policies, but this tactic is rarely consistent or carried to its logical conclusion.”24 The contradictory objectives increase the likelihood that they can be manipulated to serve individual purposes.

t h r e at s a n d o p p o r t u n i t i e s : c o r r u p t i o n , pat r o n a g e a n d n e w a c c o u n ta b i l i t y n e e d s “Principles aren’t of much account anyway, except at election time. After that you hang them up to let them season.” Mark Twain, Speech January 4, 1901, “Municipal corruption”

The auditor general’s 2004 report presented a first de-layering of the issues associated with the Sponsorship program and suggested that there had been

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not only questionable activities but criminal acts committed. The Gomery Inquiry has used the term “kickbacks” and as much as said that the whole system was riddled with corruption – and yet Justice Gomery did not use the word. Does the Sponsorship Scandal constitute wide-scale corruption or not? Many observers would say yes. How then have we allowed the procurement of contracts for government services to stray so far into the realm of corruption and mismanagement? It is undoubtedly a problem of longevity in power by the Liberals. A party in power for a significant period of time builds up tight relationships with the private sector and the links between ex-politicians and businesses grow. Socio-economic objectives such as the development of regions moves from being small “p” politics – the regular business of government, to big “P” politics where the line between what is for the greater good and what is for individual good becomes grey. When enough private sector individuals become imbued with the capacity to shape and influence government decisions (such as the relationships between Quebec advertising companies and the elected politicians) due to long relationships over time, the potential for corruption increases. This is a critical theme that arises in the domestic political framework of procurement; the management of corruption. Arguably, very public political scandals connected to federal procurement such as the awarding of the cf-18 maintenance contract, the eh

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Figure 5.3 Analyzing the Sponsorship affair in terms of Gibbons’ elements of corruption

Patronage Sponsorship affair Importance/influence of factor high(H), medium(M), low(l)

Role of Quebec politicians enhanced due to sovereignty issue

Vote-buying Government contracts were vote buying mechanisms in some respects

Pork-barrelling

Bribery

Quebec companies May have been implicit

Graft

Conflict of interest

Corrupt campaign financing Influence peddling

Money received in Ties of politicians Liberal party questionable ways possibly conflict coffers recipient of interest of corrupt approaches

Influential ex-politicians and bureaucrats certainly in question

Number and type of actors involved

L

L

M

L

H

M

H

M

The role of the political actor in any corrupt activity

M

L

H

M

L

M

H

M

His or her status as an official or combatant in the electoral process

M

M

H

M

L

M

H

L

The kind of reward involved

M

M

M

M

M

M

M

L

The degree to which rewards can be meted to individuals selectively or only as invisible rewards

H

M

L

M

M

M

M

M

H

H

L

M

M

M

H

H

The location of the act in either the electoral or administrative spheres of government

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public service must be on guard against these hazards without exacting an unnecessarily high price in terms of cumbersome procedures, costly delays or undue rigidity.”34 Procurement is inherently a political process because the use of taxpayer money directed towards government objectives is a question of choices – choices made by politicians and implemented by officials. Politically motivated corruption is distinguished from the normal politics of procurement by the attempt to make personal gains at the expense of the public interest. The potential for political controversy increases as both the sheer size and dollar value of a contract increases and the bureaucratic complexity increases. There is a large amount of activity that is not overtly “political” on a day-to-day basis. The supply of goods and services to government and the associated buying process is governed by a series of on-going standing contracts that provides for the necessities of continuous government activity. One can think of simple goods in this case; paper, pens, computers, uniforms, food; goods and some services. When these activities are aggregated or combined into contracts of a changing nature, the opportunity for conflict emerges. The procurement process is arranged to handle the daily operation of continuing supplierbuyer relationships, and also to manage the complexity of the relationships between the marketplace and government in the purchase of goods and services. Large procurements may not garner much political focus. They may be of an ongoing nature such as the large-scale replacement of desktop computers, expensive but relatively straightforward in terms of process. Certainly as the size of the procurement increases, the potential for problems increases stemming from the increasing visibility of the process, the increased requirement for bureaucratic approvals, the level of interest from the private sector and the ensuing private-public sector relationship that must be managed. Procurement policy has been driven in part by the need to control political corruption and there is certainly room for differences of opinion in terms of how well the Canadian polity has done.35 Whether the norms and procedures that have developed over time are adequate is debatable. Statutory provisions contained in The Conflict of Interest and Post Employment Code for Public Office Holders, The Lobbyist Registration Act, and The Conflict of Interest Code for Members of the House of Commons have evolved to increasingly enhance public confidence in the integrity of public office holders and the decision-making process in government.36 For over ten years the question of how to institutionalize the role of an “ethics watchdog” was debated and now takes the form of the Ethics Commissioner as an officer of Parliament. Concern with accountability in government and most recently the Sponsorship Scandal moved procurement policy and associated procurement activities into the spotlight. Where there are decisions made by individuals with

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respect to contracting, there will always be the potential for corruption despite legislation, regulation and ethics review. At the same time, effective implementation of the procurement process is a means by which government can demonstrate its probity, efficiency and fairness. Transparent and competitive procedures provide an important deterrent to corruption. The more objective the selection criteria, the more difficult it will be for improper motives to be concealed.37 Availability of information about government and increased access to the activities and available contracting opportunities of government through information technology has resulted in a more transparent and open procurement environment. The strategic use of Information Technology (it) involves both administrative centralizing and decentralizing pressures that impact on accountability and political and managerial responsibility. New Public Management (npm

npm oecd during the 1990s. Private sector management principles for evaluating the public sector included: a move away from bureaucratic styles to more flexibility; competition and rivalry as the key to lower costs and better standards; disaggregated units and use of the franchise arrangement in or outside of the public sector; hands-on professional management; explicit standards and measures of performance; output controls and performance linked to results rather than process; and a constant focus on cost cutting.38 In Canada, this was partly reflected in Public Service 2000, a policy prescription for how principles were to work across the whole of the bureaucracy. It had two main components. The first was an institutional change in arrangements within the public service aimed at “deregulating” and “empowering” line managers, and the second was an attempt to articulate a new set of core values for the public service.39 Roberts suggests that the fear of the impacts of decentralized processes and decision-making on the part of “the control lobby” (a loosely organized community that included the federal Office of the Auditor General, many legislators, public-service unions, the media, some industry associations, and perhaps auditors and financial administrators within the public service) constrained the path of reform. The reform was to involve Bill C-26 (deregulation of personnel management practice). Bill C-52 (designed to provide new legislative foundation for pwgsc

npm

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the wake of the auditor general’s report and Justice Gomery’s first report is another attempt to manage how private sector techniques are used within a public sector sphere.

c o n c lu s i o n s

used the opportunity in every way they can. Underlying a rare winter election campaign, are the issues of how the government uses its buying power and the mechanisms in place to do this. The complexity and incoherence of procurement policy can result in corruption if individuals use discretion in improper ways. The attempts to overhaul administration associated with government buying are one way in which to address the problem but it does not resolve the policy conflict. The government reaction has been typical for the most part with respect to how to solve problems with the mismanagement of government spending: tighten the rules, create more rules, tinker with institutional mechanisms that shape how the rules are followed, and increase the monitoring of the spending. The opportunity, now post-election, rests in choosing what changes are to be made wisely. Is it possible to ensure corruption never happens again in the Canadian political system? Where there is politics, there is power. Where there is power, there is corruption. Where there is “big shopping” and money, there is temptation. The answers may lie in how long we allow and elect our politicians to run the country for us, and how well we can balance the need for managing the objectives of a government with the administrative procedures in place to do it. The current Liberal government has an opportunity to improve the administrative and political system, but it may be too overwrought by the problems associated with staying in power to make effective changes. A greater understanding of procurement policy at all levels is critical to further evolution of the institutional and public administration systems that can effectively manage the problem of power in the Canadian political system.

notes Now popularly referred to as “Gomery,” the proper title is “The Commission of Inquiry into the Sponsorship Program and Advertising Activities.”

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3

4

5

6

Procurement Policy and Politics Beyond Gomery

See B.M. Hoekman, “Introduction and Overview,” in B. Hoekman and P. Mauroides, eds., Law and Policy in Public Purchasing (Ann Arbour: University of Michigan Press, 1997), 1. See Government of Canada, Public Works and Government Services Canada, Parliamentary Secretary’s Task Force, Government-Wide Review of Procurement, Concepts for Discussion, 2004, 5. See Document Prepared by the Treasury Board of Canada Secretariat for the Commission of Inquiry into the Sponsorship Program and Advertising Activities, http://www.tbs-sct.gc.ca/gr-rg/gomery/cisp-cepc_e.asp, 30/10/2005. See Government of Canada, Public Works and Government Services Canada, Parliamentary Secretary’s Task Force, Government-Wide Review of Procurement, Final Report, January 2005, 5. See B.A.C. Allen, Procurement Policy in Canada, Evolution and Impacts – Domestic Policy, Trade and Information Technology

8 See U. Arnold and E.E. Scheuing, “Supply Chain Management – Integrating E-Purchasing and Retailing Concepts,” at www.ism.ws/ResourceArticles/Proceedings/ 2002/ArnoldFD.pdf, accessed 18/11/03. 9 M. Giannakis and S.Croom, “The Intellectual Structure of Supply Chain Management: An Application of the Social Network Analysis and Citation Analysis to scm The 10th International Annual International Purchasing and Supply Education and Research Association Conference See P.F. Johnson, M.R. Leenders, and C. McCue, “A Comparison of Purchasing’s Organizational Roles and Responsibilities in the Public and Private Sector,” Journal of Public Procurement A good example is described in the article by M. Blanchfield, “Liberals’ Rush to Equip Forces a Bad Idea: Tory – Plans for Quick Purchase of Aircraft Is Proof Troops Are Ill-Equipped: Critic,” The Ottawa Citizen See K. Stegeman and K.Acheson, “Canadian Government Purchasing Policy,” of World Trade Law

Canadian Public Policy – Ideas, Structure, Process

Procurement Policy in Canada,

Spoils of Power – The Politics of Patronage (New York: Harper Collins, 1988), 374. 19 Ibid. 20 See B. Higgins and D. J. Savoie, (Somerset, nj Regional Economic Development: Canada’s Search for Solutions Public Money in the Private Sector – Industrial Assistance Policy and Canadian Federalism

25 26

27

28 29 30

31 32 33

The Ottawa Citize The Limits of Administration (New York: John Wiley & Sons, 1976), 47. See Allen, Procurement Policy in Canada, and Simpson, Spoils of Power. Attempts to discredit the government-of-the-day have more often than not alluded to the existence of political corruption. For an early example, see Government of Canada, (Ottawa: Kings Printer, 1906) “A Session’s Disclosures – Some Transactions of the Laurier Administration Exposed in the Session of 1906,” twenty-five detailed descriptions of land deals, construction contracts, and problematic elections, accusing both individuals and groups of various forms of corruption. There are still few academic sources available on political corruption in the Canadian context. The most comprehensive book outside of the journalist tradition remains K.M. Gibbons and D.C. Rowat, eds., (Toronto: McGlelland and Stewart, 1976). K.M. Gibbons, “The Study of Political Corruption,” in Gibbons and Rowat, eds., , 6. Ibid., 5. Some important international organizations are dedicated to reducing corruption. Transparency International is the leading global non-governmental organization devoted to combating corruption (http://transparency.org, accessed 21/02/05). The companion site, Corruption Online Research and Information System defines corruption as “the abuse of entrusted power for private gain.” http://www.corisweb.org, accessed 21/02/05. Gibbons, “The Study of Political Corruption,” 6. Ibid., 13. See S. Arrowsmith, Government Procurement and Judicial Review

Report (1962–63), Vol.2, Report 10, 80–1, as quoted in Arrowsmith, , 31. 35 A deterrent to corruption is provided in some cases by criminal sanctions. With Crown contracts the relevant provision outlining criminal sanctions is section 110 of the Criminal Code. In Arrowsmith, , 101.

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36 Conflict of Interest Code and Post-Employment Code for Public Office holders, http://strategis.ic.gc.ca/epic/internet/inoec-bce.nsf/en/oe01422e.html, accessed 12/01/05. It was most recently revised in October of 2004 to reflect changes since the first independent ethics commissioner assumed office in May of 2004. 37 Arrowsmith, , 102. 38 See R. Roste, “Studies of Innovation in the Public Sector, a literature review,” PUBLiN – Innovation in the Public Sector, March 2004. http://www.step.no/publin/reports/ d8-litterature-survey-march2004.pdf, accessed 12/05/05. 39 Alasdair Roberts, “Worrying about misconduct: The Control Lobby and the PS 2000 Reforms,” 39, 4, (1996): 490.

6 How Ottawa Does Business: Ethics as a Government Program john langford a n d a l l a n tu p pe r

In late 2005, Canadian politics are consumed by controversies about the ethical conduct of politicians, civil servants and those they routinely interact with including businesses, interest groups, lobbyists and (in the case of politicians) their party organizations. Canadian media devote considerable resources to commentary about the revelations of the Gomery inquiry, the travel expenses of public office holders and political party financing. Pollsters routinely probe Canadian views about ethical conduct in government with the same discouraging results. Polls reveal widespread cynicism toward public office holders and the view that politicians are primarily motivated by narrow self-interest. Justice Gomery’s term, “culture of entitlement,” has immediately become part of Canadian political discourse. Opposition parties, particularly the Conservatives, feast on revelations of government ineptitude, extravagance and maladministration. The opposition’s message is that a change of government will yield demonstrably superior government ethics. Such public discussion yields several themes and lines of inquiry. Media and editorialists report and judge controversial government behaviours on a case-by-case basis. The merits of particular policy responses – codes of ethics, registration of lobbyists and whistleblower legislation to cite a few contemporary examples – are intermittently assessed. Moral philosophers and students of public policy provide “big picture” grist for the mill. This chapter provides a decidedly different perspective on Canadian government ethics. It argues that Ottawa’s many ethics initiatives now constitute an “ethics program” or “business line” – a collection of interrelated activities directed towards a common goal. In 2005, the federal ethics program is a sprawling collection of laws, general statements of government intent, administrative

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regulations and processes. It engages numerous government agencies, tens of thousands of appointed and elected officials, lobbyists, political parties and, by implication, considerable time, effort and public expenditure. Ottawa’s ethics program has a seemingly singular focus – a desire to improve the integrity of government and the most important political processes connected to it. This chapter has two main objectives. First, it outlines the remarkable scope of activities, institutions and public policy processes that comprise the ethics program. As it expands into new areas and involves more government and political actors, the ethics program acquires momentum. It now boasts its own “policy community,” a collection of organizations and individuals, both within and outside of government, with substantial interests in the policy area. The ethics program concerns pollsters, pressure groups like Democracy Watch and Transparency International, public service unions, the Auditor General and media. A noteworthy development in 2004 was the establishment of the Standing Committee on Access to Information, Privacy and Ethics in the House of Commons. Ottawa’s ethics industry, maintained by such forces and by the pressures of partisan politics, will expand, not fade away. Second, the chapter raises a hard question – does Ottawa’s ethics business line have the potential to increase the integrity of government, electoral politics and lobbying and meet Canadians’ expectations in the millennium? While it is not possible at this early date to measure outcomes, could it be judged to be a successfully designed program with clear objectives, a coherent strategy, and a suitable management framework?

the ethics program: major elements The Government of Canada’s ethics program has five prominent elements. • Major framework statements that commit governments, as a matter of fundamental policy, to measures that improve the integrity of government and politics. Such framework statements, beginning with the commitments in the Liberal Party of Canada’s 1993 Red Book, are now staples of Canadian government. They have had the effect of engaging the most senior members of the Government of Canada including the prime minister and the clerk of the Privy Council in the ethics program. • Legislation and proposals to amend existing legislation that respond to major areas of ethical concern including lobbying, political party financing, access to information, privacy protection and whistle-blower protection. • Codes of conduct that are increasingly detailed, that seek to control many activities, and that apply to more parliamentarians and their staffs. Independent officers of Parliament whose roles and influence, like the content of the codes, are controversial now administer these codes.

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• A large number of activities that apply to the overall management of the Public Service of Canada. These activities make the promotion of ethical conduct an obligation of senior officials and establish new or upgraded bureaucratic agencies such as the Public Service Integrity Office and the Office of Values and Ethics to administer complex internal procedures for dealing with ethics. • Efforts to extend the spirit and/or letter of the ethics program beyond the activities of politicians, their staffs and public servants to Crown Corporations and non-governmental organizations engaged in the delivery of public services as well as political parties and the lobbying industry. Our account of Ottawa’s ethics program is deliberately suggestive not exhaustive. It reviews the major elements of the program and observes its key features. Second, our account does not provide detailed commentary about either particular ethical controversies or the effectiveness of specific government responses. For example, the complex debate about the advisability of adopting whistle-blowing legislation, while important, is not reviewed. Readers in search of further information are referred to the standard references on the subject.1 Our purpose is to ask questions about the objectives, strategy, organization and coherence of the multiple activities – not to argue fine ethical points on any of the substantive topics covered. Macro Policy Statements and Frameworks For more than a decade, Canadian federal governments have stressed the need for higher ethical standards. In response to concerns about misconduct under the Mulroney Conservatives, the Liberals 1993 campaign made major commitments about improving government ethics and the quality of democracy. Prime Minister Martin’s current emphasis on government ethics is the offspring of earlier commitments. The first report of the Gomery inquiry adds momentum. Through the 1990s to 2005, federal governments have frequently made major policy statements about government ethics. Under Prime Minister Chrétien, the promotion of more ethical government assumed high public profile especially after 2000. The language of ethical improvement became a staple in Throne Speeches. Under Chrétien, it reached its zenith in May 2002 when a commitment to more ethical government was enshrined in the “Eight Point Plan for Ethics in Government.”2 In a single major statement, the government addressed many controversial issues including lobbying, ministerial dealings with Crown Corporations, political party financing and a code of conduct for members of Parliament and senators. New urgency was added to the ethics program when Prime Minister Martin, on his first day in office, declared that he would “change the way

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things work in Ottawa.”3 He immediately released a package of ethical reforms including a commitment to reinstate legislation to create independent ethics officers in the House of Commons and Senate, the issuance as a government priority of a revised Conflict of Interest and Post Employment Code for Public Office Holders and a promise of an “early response” to calls for whistle blowing legislation. Major policy commitments were supplemented by immediate policy changes with regard to the use of airplanes for ministerial travel and gifts associated with the performance of public duties. Mr Martin took dead aim at his personal circumstances in outlining a recusal process for himself. The prime minister justified these measures in the following words. “We must restore Canadians’ trust that their government will conduct itself in an ethical manner.”4 In February 2004, the ethics program assumed more importance when it was centerpiece in a major government announcement entitled “Ethics, Responsibility, Accountability: An Action Plan for Democratic Reform”.5 Previously announced measures were supplemented by calls for major changes to Parliamentary procedures, strengthened committees and new procedures for government appointments including justices of the Supreme Court of Canada. The ethics program has moved from the sidelines to the centre of political power with important consequences. First, prime ministerial endorsement makes ethics a government priority and by implication, a focal point for media attention and partisan debate. Second, government ethics are increasingly framed in terms of general principles not specific measures and as the preserve of the highest levels of power. Finally, the previous two points guarantee the engagement of public opinion and thus elevate the ethics program to even greater public prominence. The Legislative Agenda of the Ethics Program Ottawa’s ethics program features legislation aimed at major areas of public concern. This section focuses on federal laws in four areas of chronic ethical controversy – the financing of Canadian political parties, registration of lobbyists, access to information and whistle-blowing. Prime Minister Martin’s government has inherited substantially revised legislation on political party financing and lobbyist registration, released a major discussion paper on changes to access to information and passed long anticipated legislation that protects whistleblowers. Each of these laws raises complex democratic questions. New rules for political party financing establish new policy principles in an area of perennial public concern. Lobbyist registration responds to worries about undue influence. Access to information with its focus on transparency and openness is deemed at the heart of ethical government but in need of a major overhaul in light of technological change, new approaches to governance and changing

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public expectations. Legal protection of whistle-blowers, on the other hand, adds a significant new dimension to the ethics program. Each law claims to advance the integrity of government, promote transparent government and contribute to stronger democracy. Political Party Financing In early 2003, Ottawa’s ethics program broke new ground when Jean Chretien announced meaningful changes to the Canada Elections Act. The government’s revisions advanced several new principles. Individual Canadians now face a total annual limit of just over $10,000 in their contributions to a political party, its riding associations and nomination and leadership races. More significantly, “corporations, unions and associations” are prohibited from contributing to registered political parties and leadership candidates. As a substitute for revenues foregone, political parties will forthwith receive public subsidies based on their performance in the previous general election. These changes sparked intense debate about their impact on the party system and electoral politics. Interestingly, the government justified the changes as substantial improvements to democracy and government ethics. As Ian Stewart observes, public subsidies for political parties and the ban on corporate donations are primarily justified on ethical grounds. The ban on corporate contributions is explicitly designed to remove public perception of “undue influence.” Moreover, the removal of the burden of fundraising should allow parties to alter their behaviour in major, positive ways. In Stewart’s words, “a guaranteed quarterly allowance would free parties from the yoke of perpetual fundraising and permit them to engage in other, more socially beneficial, activities.”6 Major changes to political party financing highlight important characteristics of Ottawa’s ethics program. First, Mr Chrétien, as prime minister, spoke frequently and directly in support of the changes. He made them centerpieces of the government’s agenda. Second, the changes were said to have potential for grand improvements in the quality of government. In the prime minister’s words: “I rise in the House today to move second reading of a bill that will change the way politics is done in this country, a bill that will address the perception that money talks, that big companies and big unions have too much influence on politic, a bill that will reduce cynicism about politics and politicians, a bill that is tough but fair.”7 Third, changes to the Canada Election Act extend the law to previously unregulated activities including leadership contests and party nominations. Finally, the changes marked the debut of a significant new actor in the ethics program. The chief electoral officer of Canada, the individual charged with the Act’s administration, spoke frequently, positively, and vigorously about the new law’s democratic and ethical ambitions. He also noted the need for greater co ordination between various elements of the ethics program if the impact of money on politics was to be addressed fully.8

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Lobbyist Registration The Lobbyist Registration Act (lra) is now a mature element in Ottawa’s ethics program. The Act was originally passed in 1989 and substantially amended in 1996. In 2002, it was again amended as part of a “macro” ethics package introduced by Mr Chrétien. The perennial ethical debate about lobbying was given new impetus by the Martin government’s emphasis on integrity in government and by the fact that the 2002 amendments came into force in 2005. The lra rests on several principles including: “free and open access to government is an important matter of public interest” and the view “that public office holders and the public are able to know who is attempting to influence government is desirable.”9 It has a complex definition of lobbying and identifies three categories of lobbyists. The lra requires lobbyists to register and to make public their dealings with government. Among other things, the 2002 amendments require former public office holders to identify their past federal employment, attempt to clarify the definition of lobbying and alter the registration obligations of corporations. Recent amendments to the lra highlight several characteristics of the ethics program. First, they give insight into the range of stakeholders in the program. Within government, Industry Canada, a major department, administers the lobbyist registration system and thus has a major interest. The rcmp has enforcement obligations that engage it. Industry organizations and lobbyists are concerned about the Act’s impact on their public profile and behaviours. Moreover, the term “lobbying” has such notoriety in public opinion that the Act attracts the interest of diverse political reformers, all of whom believe it to be seriously deficient.10 The legislative obligation to review the Act every five years institutionalizes a debate about lobbying. A cycle of critique, clarification and debate is established. Access to Information The Department of Justice’s 2005 discussion paper entitled “A Comprehensive Framework for Access to Information Reform” reveals many dimensions of the ethics program.11 The minister’s introduction sets the tone by acknowledging the Supreme Court’s comment that the Access to Information Act is “quasi constitutional in significance.”12 The discussion paper defines the Act as a key part of the ethics program. It justifies reform as enhancing integrity, accountability and transparency in government. A major impetus for reform is the intersection of the Act with other elements of the ethics business line. Whistle-blowing legislation, reforms to the governance of Crown corporations and new federal policy on “proactive disclosure” demand change in the Access to Information Act. Two aspects of the discussion paper are particularly important. First, it is explicitly concerned with defining the boundaries of the modern federal public sector. The issue of whether all Crown Corporations should be covered by the Access to Information Act is probed. The paper goes far beyond Crown corporations and asks about their subsidiaries, mixed ownership enterprises

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and even non-governmental organizations engaged in the delivery of public services. How far should the ethics program be extended? Second, the discussion paper suggests that major reforms in the public service are required if a “culture of openness” and compliance with the “spirit of transparency” are to be achieved. It suggests more education in information management for government executives and further proactive disclosure obligations. Whistle-Blowing Legislation In the last moments before the 2005 election call, the passage of the Public Servants Disclosure Protection Act, commonly referred to as “whistle-blowing” legislation, added a major element to Ottawa’s ethics business line. The legislation deals with the circumstances under which public servants should reporting wrongdoings that they are made aware of in the course of doing their official duties. The Act’s preamble notes: “Confidence in public institutions can be enhanced by establishing effective procedures for the disclosure of wrongdoings and for protecting public servants who disclose wrongdoings.”13 The Act specifies wrongdoings for which the “whistle” can be blown, provides procedures for reporting and investigating “wrongdoing” within a government department, establishes a public sector integrity commissioner as the individual to whom public employees would disclose a wrongdoing in certain circumstances, and makes the commissioner responsible for protecting whistle blowers against reprisals. Specified “wrongdoings” include contravention of laws, misuse of public funds, gross mismanagement and counseling others to commit wrongdoings. The long awaited legislation highlights the ethics program in all its dimensions. First, it passes responsibility for the operation of the legislation to a commissioner who is appointed with the approval of the House and the Senate and reports to Parliament. For many participants in the ethics policy community, statutory recognition and independence from government are essential characteristics of good policy. They are thought to elevate debate to a higher level and promise greater objectivity by removing final decisionmaking powers from the government. Second, the Act reflects an enormous amount of work, debate and controversy over many years. In its wake is an impressive chronology of reports, working groups, consultations, discarded bills and thousands of hours of work. Third, the obligation to disclose is extended to officials in Crown corporations. Fourth, the Act is simply the start of much more work. It obliges the Treasury Board to establish a new Charter of Values as well as a new code of conduct for all public sector employees. Such charters and codes will demand considerable, study, consultation and compromise. Moreover, many aspects of the Act, the exclusion of the Armed Forces and the Canadian Security Intelligence Service (csis) for example, are controversial and will remain so. Fifth, the causes of whistle-blower legislation and the protection of whistle-blowers have already spawned pressure groups. For example, the Federal Accountability Initiative for Reform (fair),

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an organization led by former whistle-blowers, has developed a formidable critique of the Act. Finally, the whistle-blowing legislation, like many other elements of the ethics program, is complex. Its definitions of “wrongdoing” are controversial in scope and subjective in interpretation. Its provisions for disclosure of wrongdoings and for the protection of whistle-blowers against reprisal are detailed, administratively onerous and likely to be contentious in application. Writing before the passage of the Act, Paul Thomas makes an important point that would apply to most elements of the ethics program. “Adoption of a whistleblower law and related procedures would add to the complexity of the legal environment of the federal public service – a continuation of a trend under way since the 1960s … Laws, regulation, codes and enforcement procedures have very real limits in terms of promoting ethical conduct and they have a cost.”14 Codes, Commissioners and the Ethics Business Line At the heart of Ottawa’s ethics program are conflicts of interest codes and important administrative machinery to administer them. The codes and their supporting apparatuses are surrounded by controversy. Seen together, they reveal Ottawa’s ethics program in action. For example, even basic questions about who is covered by which code and for what purposes are not easily answered in many cases. The codes are diverse. Some are detailed in certain areas and subject to complaints about burdens of compliance. Others are general and subject to criticisms of vagueness, subjectivity in application and ineffectiveness. In 2004, a breakthrough occurred when legislation was passed establishing two new officers of Parliament – the ethics commissioner and Senate ethics officer.15 The ethics commissioner has three major roles: to administer codes and rules established by the prime minister, to provide confidential advice to the prime minister about ethics and to provide advice to “public office holders.” The establishment of the Commissioner as an officer of Parliament responds to the widespread media view that the former position, the ethics counsellor, was subject to prime ministerial direction and hence ineffective. The commissioner is responsible for members of the House of Commons who have their own code of conduct and for administration of the “Prime Minister’s Conflict of Interest and Post Employment Code for Public Officers.” The Prime Minister’s Code applies to elected and appointed public officials, a situation that gives rise to confusion. Elected officials covered include ministers, ministers of state and parliamentary secretaries. Appointed officials include most governor in council appointments including deputy ministers, full time political staff, and various ministerial assistants designated as under the Code. In his first report, the Ethics Commissioner, Bernard Shapiro, noted that he was responsible for 1,250 full time public

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office holders and 2, 200 part timers.16 Moreover, ministers, ministers of state and parliamentary secretaries are covered by the Prime Minister’s Code and the House of Commons Code. When dealing with such persons, the ethics commissioner must decide which code of conduct applies.17 On the other hand, the work of the Senate ethics officer is subject to direction by a committee of five senators, a situation that leads to worries about the officer’s independence. In a classic understatement, the first Senate ethics officer, Jean Fournier, remarked: “Thomas Jefferson was not around to draft this code and it’s too bad and it shows. But perfect is the enemy of the good.”18 The Prime Minister’s Code, as revised by Prime Minister Martin, covers several controversial political and governmental activities. Its purposes and underlying principles are ambitious. Among other things, the Code asserts: “Public office holders shall act with honesty and uphold the highest ethical standards so that public confidence and trust in the integrity, objectivity and impartiality of government are conserved and maintained.”19 Public officer holders are warned that their obligations to the public interest are “not fully discharged by simply acting within the law.”20 They are admonished to avoid “real, potential or apparent” conflicts of interest. The Code covers such ethically charged matters as conflicts of interest and their avoidance, preferential treatment, outside activities, acceptance of gifts and post employment policy. It obliges public office holders to disclose their assets, liabilities, income and outside activities to the ethics commissioner. Decisions are then made about how best to deal with activities or financial interests that may cause conflicts of interest. Various options can be pursued including sale of assets, recusal or a “blind trust.” Post employment provisions include a two-year “cooling off ” period whereby ministers and ministers of state are prohibited from engaging in certain activities with government officials. Other public office holders face a one-year cooling off period. In concept and ambition, the Prime Minister’s Code is straightforward. Its purpose is to promote ethical government by identifying influential persons, establishing expectations for their conduct and obliging them to provide information about their financial affairs. In practice, the Code is remarkably complex. Here are a few examples. The Code’s definition of “public office holder,” an area where clarity is likely a virtue, is two pages long. Further, the assets of a public office holder are defined by three broad categories – exempt, declarable, and controlled. Exempt assets fall into fifteen further categories. On the other hand, controlled assets, those deemed to hold potential for conflict of interest, are vaguely defined and subject to complex administrative procedures. The post-employment rules, while clear in intent, are subjective in application; witness the commissioner’s capacity to alter the cooling off period. Remember too, members of Parliament are subject to another code altogether as are senators whose activities are governed by a Senate committee, a Senate Code, and a designated Senate ethics officer.

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Federal public servants, other than those covered by the Prime Minister’s Code, are subject to the “Values and Ethics Code for the Public Service.”21 The Values and Ethics Code differs from the Prime Minister’s Code in a major way. It stresses “core values” as guides to good conduct. It identifies four “families” of public service values – democratic, professional, people, and, oddly, ethical.22 Each value is associated with a set of commitments, obligations and good behaviours. The Code informs public servants that their professional obligations, important statutes, and government policy statements should also guide their activities. The public service code requires public servants to report their assets, outside employment, and activities that might give rise to conflicts of interest. Brief statements are made about gifts, the solicitation of gifts, and the avoidance of preferential treatment. Certain post-employment activities are prohibited for a year, although the period can be reduced or waived by the deputy minister. The Code is administered within departments and agencies. To date, no independent officer has been established. Deputy ministers are obliged to exemplify, by action and behaviour, the values outlined in the Code. Their supervisory roles can be delegated to a senior official within the department. The enthusiasm for codes of conduct has spread beyond the immediate sphere of public officials. Lobbyists, while outside of government, must respect the Lobbyists Code of Conduct.23 Political parties are also getting in on the act. In reaction to the first Gomery Commission report, the Liberal Party announced its intention to return over $1 million to the federal treasury and to establish a newly minted code of conduct for party employees and volunteers.24 Codes of conduct reveal important characteristics of the ethics program. First, the Prime Minister’s Code of Conduct, the House of Commons Code, and the Senate Code were endorsed by Prime Minister Chrétien and Martin as major matters of public policy. Second, the codes, especially the prime minister’s, establish remarkably high standards of conduct for public office holders. Third, the codes’ purposes and underpinning principles are clear. However, those purposes and principles require complex administrative machinery, detailed procedures, and, often, a series of negotiations and judgements before they are brought to life. A gap is thus created between public expectations and the government’s capacity to deliver more ethical government. Fourth, debates about the substance of the Codes are intermingled with controversy about administration, interpretation, and adjudication. The ethics commissioner and the Senate ethics officer are structured as officers of Parliament to give evidence of objectivity and independence of judgement. New centres of power are thus created in the ethics program. Finally, the codes and relevant administrative offices are works in progress. Their roles, mandates and powers can be considerably extended. The

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offences they designate, the penalties they can levy, and the range of offices that they cover are all in play given the momentum of the ethics program. The agenda is even broader. The whistleblowing legislation obliges the government to develop a further code and a charter of values. These documents must somehow relate to those presently established. Moreover, further officers can be envisioned. At the very least, the current division of labour is likely to be reexamined quickly. Other forces call for the expansion of codes and the power and independence of commissioners. No voices call for retreat, the rollback of powers, or the weakening, let alone elimination, of codes or the officers and offices that administer them. Ethics and Public Service Management The ethics program now permeates the management of the Public Service of Canada. Several important policy documents establish ethics as a major management responsibility. Senior officials have particularly important duties. The ethics program involves many government agencies, all senior managers and important administrative processes. It is institutionalized in new government units whose mandate is ethics management, by the designation of senior officers in departments and agencies with responsibilities for ethics, by the creation of “values and ethics support networks” and by an emphasis on ethics training. Such management activities are in addition to extensive public service activity around the Code of Values, the office of the public service integrity officer, and policies on workplace harassment and proactive disclosure of travel expenditures and contracts over $10,000. A revealing document entitled “Who does what? A framework of responsibilities for values and ethics and ethics in the federal government” notes major responsibilities for ethics management in the Privy Council Office, the Treasury Board Secretariat, the Public Service Human Resource Management Agency, the Leadership Network, the Canada School for Public Service, the Public Service Commission of Canada, all departments and the offices of the various commissioners.25 To these, one might add the ombudsmen found in agencies such as the Department of National Defence and the Correctional Service as well as the review and public complaints functions found in agencies such as csis and the rcmp. Many of the issues dealt with by these offices relate to the ethics of workplace behaviour. The importance of ethics management is highlighted in the Privy Council Office’s document “Guidance for Deputy Ministers.”26 The deputy minister is deemed to play pivotal roles in policy-making, department management, and overall guidance of the public service of Canada. Deputy ministers, in their roles as senior managers in departments, must establish high ethical standards. They are to be role models who “walk the talk.” “The leadership

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role of a Deputy Minister is never more important than in this context.”27 Another central agency, the Treasury Board Secretariat, has established an ambitious Management Accountability Framework for the federal public service. According to the Treasury Board, the Management Accountability Framework will provide managers “with a comprehensive and integrated model for management” and “clear indicators and measures” of performance management. The framework establishes the promotion of “Public Service Values” as a major management responsibility. Even more recent proposals for the reform of public sector management promise enhanced transparency and accountability and, more ominously, stronger internal audit and control of the actions of public servants.28 The Leadership Network, another federal agency, has defined “key leadership competencies” for deputy ministers and other public servants. Values and ethics are centerpiece in such competencies. The fully competent deputy will demonstrate values and ethics in personal behaviour, make transparent decisions without favouritism or bias and build a culture of respect for people and Public Service principles.29 The ethics program in the federal public service now has an institutional presence in the Office of Public Service Values and Ethics, a branch of the newly minted Public Service Human Resources Management Agency that, in turn, is a “portfolio partner” of the Treasury Board Secretariat.30 The Office gives ongoing “voice” to ethics, provides a repository of information, and builds ethics management into central agency thinking. One of its major activities is to transform the language of ethical debate into modern public management terminology. The Office sees itself as having three major “Responsibilities and Accountabilities” – the dissemination of information and education about ethics, the review, with Treasury Board, of departments’ performance, and advisory support for the Values and Ethics Code of the Public Service of Canada. The Office undertakes many activities including support of the “values and ethics support networks” and the preparation of educational materials, including a “Manager’s Kit: Dialogue and Ethical Decision-Making.” Such activities are overshadowed by larger ambitions. The Office is working on a “measurement framework and roadmap for departments” that assesses and improves ethical performance. It advocates a “three-pillar” regime – Leadership, Organizational Culture and People Management – to achieve “high levels of positive values and ethical performance for an organization.” This overview has frequently noted the imperial tendencies of the ethics program. The ethics business line is constantly extending its reach, sometimes incrementally, sometimes in major steps, to previously untouched organizations, persons and governmental processes. A further important example is the Treasury Board’s 2005 report on the governance of Crown Corporations.31 The report’s title, “Meeting the Expectations of Canadians,” highlights the invasion of the ethics program into debates about the management of Crown Corporations. The report stresses that Crown Corporations

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must meet “Canadians’ standards for ethical conduct and operations of all public institutions.” Specific recommendations included the need for more reporting by Crown Corporations on “governance structure, codes of conduct and compliance with policy on ethics and values,” the extension of the Access to Information Act to as many Crown Corporations as possible, and instructions on ethical obligations to new directors. Future appointments are to be “competency based, professional and transparent.” The report also recommends that the Canada School for Public Service should become engaged in training and educational activities for Crown corporation directors and executives. The implementation of such proposals would have the effect of connecting Crown Corporations more closely with the ethics program. They would link Crown Corporations, nominally independent government organizations, more frequently and in new ways, with Treasury Board, the Canada School for Public Service, and other influential ethics actors.

is the emerging ethics program l i k e ly t o b e s u c c e s s f u l ? This paper has two objectives: to provide an overview of the ethics program in late 2005 and to pass a preliminary judgment on whether or not it is a successfully designed program with reasonable objectives, a coherent strategy, and a suitable management framework. An evaluation of the ethics program is necessary given its prominence in Canadian government and public debate. The ethics business line has expanded relentlessly since the 1993 Liberal Red Book, through Prime Chretien’s Eight Point Plan to Prime Minister’s Martin’s major emphasis on higher ethical standards. As we have noted repeatedly, considerable political and administrative momentum propels the ethics program. Is it the way to go for the future? Objectives The primary requirements of a good government program is that it have clear, compatible and attainable objectives for an agreed upon target group for which the collection of activities are intended. Other requirements, that most auditors and program evaluators accept, include an expected direction of change, an expected magnitude of change, a time frame over which this change is expected, and measurable indicators of progress. In essence a welldesigned program goes beyond the statement of clear, compatible and attainable objectives (a significant challenge in itself) to establish some measures that indicate what the state of play is before the program is implemented. This baseline then becomes a way to assess progress. Clearly, these criteria are more readily applied to a simple program started at one point in time and administered within one agency for a cohesive target group with an

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easily identifiable problem. Nevertheless, it is reasonable to at least open up the ethics program to scrutiny on the issue of objectives. In late 2005, during the election campaign, many realists would argue that the primary objective of the ethics program is to diffuse the impact of the Justice Gomery’s first report and to thereby rob the opposition parties of a key plank in their electoral platforms. Setting this view aside, the most regularly stated purpose of the federal ethics program is to restore public trust in government and politics by enhancing the ethical standards of public officials and related political actors such as party officials, contributors and lobbyists. In the context of this rather grand objective, the ethics program pursues more specific outcomes. The government has indicated that the new ethics regime is designed to discourage such obvious corruptions as the theft of public funds or their diversion to the financing of political party activities. Most of the reforms put in place to date focus on the eradication of conflict of interest and the establishment of a level playing field in government decision-making. To this end, the various detailed codes of conduct are largely designed to assure the public that individual politicians and public servants will not subvert the performance of their public duties by catering to their personal interests. In the same vein, lobbyist registration and limitations on political donations aim to ensure that special interests do not unfairly dominate public decision making. At least in the case of lobbying, the focus is more on transparency than the eradication of the practice. Transparency and accountability are also the desired outcomes of reforms of the Access to Information regime, the whistle blower legislation, public service initiatives to enhance public sector management and performance reporting to Parliament and more desultory efforts to make the activities of security agencies more visible to the public. Another focus is on the independence of ethics administration with the government responding to this concern by begrudgingly moving more (but not all) of the enforcement outside the hands of direct employees of the government. There is also some concern, arising from the sponsorship scandal, about the capacity of politicians to influence administrative decision making directly or through the placement of their aides in senior public service positions. But this has not resulted in any clear, high level commitment to the objective of ensuring a politically neutral public service. Overall, then, it could be argued that the government sees the diminishment of corrupt practices and the strengthening of procedural fairness, transparency, accountability, and independent enforcement as the primary elements of ethical rectitude and the keys to the re-establishment of public trust. But government pronouncements do not help us clarify what success would actually look like, when we should anticipate it occurring or what indicators we might actually observe, beyond, one presumes, the trend in the numbers in the regular surveys of public trust.32 Moreover, this analysis

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opens up the question of whether, in focusing on the above objectives and downplaying or ignoring others such as the neutrality of the public service, protection of personal privacy, and the exposure of citizens to risk (e.g. re prescription drugs, biotechnology, unsafe drinking water, flu pandemics), the government has missed important elements of public integrity that the public will be focusing on next year or the year after. As noted, another important component of an effective program is a clear understanding of its coverage and main targets. If the ethics program is ultimately intended to enhance the integrity of government, electoral politics, and lobbying, a fair question is: does it cover the proper universe of participants, including ministers, other parliamentarians, their political staffs, public servants, and officials in more arms-length agencies, lobbyists, political party officers, and contributors? This question poses interesting challenges for an ethics program because until relatively recently the presumption has been that different standards would be established for different players and that some players would not be subjected to centrally imposed ethics regimes. As a result, parliamentarians were treated differently from ministers, political staffs and party operatives were often ignored, public servants had their own standards, Crown corporations were left to set their own standards, and the employees of contracted profit and non-profit service delivery agencies were beyond the pale. More recent reform initiatives are changing this presumption. They reflect the government’s increasing willingness to see the public sector and the concept of a public official more broadly and to extend the ethics program to important political participants. Senators now have standards of conduct. Political staffers are covered with their ministers. As noted above, ministers and senior public servants may be covered by two codes of conduct! The access to information reform proposals raise the issue of extending the act’s transparency regime to cover Crown corporations and all their subsidiary operations. The new whistle blowing legislation exempts the Canadian Forces and employees of csis and the Communications Security Establishment, but otherwise makes the disclosure regime applicable to all individuals who work in the wider public sector – including Crown corporations and, assumedly, any other agency which reports to a minister. Further, proposed governance reforms for Crown corporations would also bring their employees under the broader umbrella of the values and ethics regime for public servants. On the political side, the notion of lobbyist is made more comprehensive and the electoral financing rules are extended to cover a wider range of activities and participants. In 2005, the ethics program is a long way from applying the same standards to all elected and appointed officials. But steadily it is moving to applying at least some elements of the ethics program to all public officials and influential participants in the political process.

131 Ethics as a Government Program

Strategy A fundamental issue in the development of an ethics program is the government’s basic strategy. Consider a continuum of strategic possibilities. At one end is a regime of detailed and specific rules and control mechanisms that dictate the precise nature of good behaviour in virtually all situations in which public officials or political participants might conceivably confront and provide adequate oversight and enforcement mechanisms. This approach – characteristic of the modern government of the United States – turns ethics into litigation and legal wrangling in which accused individuals and their lawyers struggle to demonstrate that an imputed offence is not covered by the law or its detailed regulations. When loopholes are discovered and exploited successfully, legislators and administrators rush to fill them with more specific rules and penalties so that the next miscreant cannot slip through. In late 2005, a prominent example of this legalistic dance in the United States is the attempt to prosecute the (now resigned) Republican house leader, Tom DeLay, for his efforts to use loopholes in campaign financing laws to funnel cash to the campaign war chests of federal and state level candidates in Texas. The advantage of a rules-based approach is that if comprehensive rule sets are developed for all public officials, if there is an apparent appetite and capacity to update the rules and controls to deal with revealed shortcoming, and if enforcement is diligently pursued, then the public can at least feel confident that the advertised standards of conduct are being observed. The problems are equally obvious. Constant media coverage of the pursuit of public officials, party officials, and lobbyists who test the rules creates the impression that politicians, political staffers, public servants, and party officials are a venal, self-interested, and dishonest mob often in league with special interests and always sailing close to the wind. In addition, as the rules grow in size and complexity as new problems are met, the public loses touch with their purpose and the meaning. Public trust disintegrates in the face of complex, legal arguments about the meaning of rules and whether they apply in the particular circumstances of current “scandal.” The alternative strategy – at the other end of the continuum – is the “values approach” that replaces detailed rules and legal wrangling about them with a set of core values or principles which – when successfully imbued in the psyche of public officials and other political participants – will make them into principled, self-policing servants of the public interest. Political and administrative leaders under this model can eschew detailed rules and enforcement in favour of managing the creation of an ethical political and administrative culture. This is, in effect, a pro-active and preventative approach.

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The most potent advantage of the values “high road” is the clarity of ethical vision and public recognition that a well crafted and supported set of core values can create. The difficulties associated with this approach, however, are many. Achieving consensus on core values (and what they mean) and limiting their number are formidable challenges within any large organization – but especially so in contemporary public sector organizations caught in the confusing crossfire of statist, business, and diversity values.33 Moreover, a consensus on core values does not help solve the problem of which core value is the more or most important in the event that more than one seem relevant to the solution of an ethical dilemma. Finally, the level of continuing leadership, training, and reinforcement required to inculcate core values in the large numbers of elected and appointed officials in the federal government – never mind lobbyists, party officials, and contributors – may be beyond the resources of any government regardless of the rewards that might result in terms of public trust. Most modern governments employ an amalgam of the two approaches and Canada is no exception. In its earlier manifestations in the 1970s and 1980s, the ethics program for politicians and public servants was focused on conflict of interest. The regime was a combination of laws (e.g. the Criminal Code, the Parliament of Canada Act), the rules and standing orders of the two houses of Parliament, and the Conflict of Interest and Post-Employment Code for Public Office Holders. Except for the Criminal Code provisions, the “guidelines” were “designed to promote integrity rather than enforce compliance.”34 Since the early 1990s, the regimes for politicians and public sector employees appear to be moving in different directions. On the political side, the movement is towards a more integrated codification of the rules and stronger regimes of compliance for ministers, parliamentarians, and their political aides led by increasingly more independent and powerful ethics officers. In other words, more rules and stronger enforcement are apparent. For public servants, on the other hand, the movement has been towards a valuebased approach with an emphasis on the creation of a statement of public service values and the commitment of substantial resources to enhancing the importance of these core values through training and role modeling by executives and senior managers. Rules and policies were not discarded but the focus was on using a values approach to guide public servants toward the right choice in difficult situations. However, recent management controls likely put in place in anticipation of the Gomery report35 and the revised whistle blower protection legislation (which sets up detailed bureaucratic processes and demands the creation of both a new Charter of Values and what could be a more comprehensive and detailed new Code of Conduct for public employees) imply a shift to a stronger rules and control based regime. Until the shape of these further developments becomes clearer, judgments about the direction and coherence of the government’s ethics strategy will be difficult.

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Management Framework As outlined above, the federal ethics program is a complex collection of activities spread across a large number of government and parliamentary offices. A comprehensive overview of the management of the ethics program might start with an analysis of the authorities and resources provided to each unit and officer involved in this multi-faceted undertaking. The purpose of such an overview would be to assess whether units have the power, staff and the money to do their part of the jobs properly. For instance, does the registrar of Lobbyists have the authority and resources required to administer the information disclosure and complaints investigation provisions of the Lobbyist Registration Act in a timely manner? Does the Canada School of Public Service have sufficient resources to provide training on the Values and Ethics Code for the Public Service to a satisfactory number of officials across all departments and Crown Corporations? Does the access to information commissioner have the power required to force departments to meet the disclosure timetables laid down in the act? Suggestions of problems in areas like these appear in the annual reports of specific officers (where such reports are required by law) and in the media but we have neither the research results at this point nor the space to do analysis at this level of detail. A related question is: how is the ethics program being structured to ensure that all its disparate parts pull in the same direction? This question points to the likely Achilles heel of the federal ethics program in 2005. Potentially, the ethics program is the poster child for the hot new concept of horizontal management. This concept has emerged in recent years to refer to related activities undertaken by more than one government unit in support of an objective that cannot be attained by any one unit in isolation. A key feature of a horizontal activity is that the sharing of authority and resources among a number of units means that a traditional hierarchical approach to management will not work. You cannot command units you do not control. The antidote to the problem of aligning these activities is coordination or collaboration among the units using devices that vary from “informal networks to jointly managed secretariats.”36 Such coordination or collaboration appears to be inadequate in the federal ethics program. Excluding the occasional policy statement or announcement of a new activity by the prime minister, the government is not making a sustained effort to provide overall thematic guidance to or share information and intelligence among the various ethics officers and officials responsible for enhancing integrity. The chief electoral officer, charged with overseeing the regulation of electoral financing, has noted that “money may enter the political system in many ways.”37 Therefore, the different efforts being made to limit the impact of money on governmental and political activities need to

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be aligned to ensure that gaps are plugged and emerging problems are addressed on as many fronts as possible. Similarly, within the public service and across the wider public sector, the key ethics players need some organized forum for trading information and aligning their various efforts to enhance the ethical behaviour of appointed public officials. To be effective, the ethics program requires an information sharing process that provides each unit with the data required to align its activities with those of related units. Better still would be some form of overarching board or steering committee which would involve the participant units in an ongoing collaborative process of aligning objectives and strategies. This sort of arrangement would also facilitate a broader form of shared accountability for the results of the program. Instead of members of Parliament and the public depending on the separate reports of each unit that reports annually, a steering committee would be responsible for providing an overview of how the government’s overall ethics program was progressing.38

c o n c lu s i o n s In 2005, a comprehensive ethics program has emerged in Canadian government and politics. The ethics program involves many disparate processes, institutions and policy objectives. Three characteristics of the ethics program stand out. First, the program is remarkably wide-ranging in its concerns and ambitious in its efforts to improve the quality of Canadian government. Second, the ethics program lacks elementary characteristics of an effective government program. It pursues a range of different objectives, applies unevenly to different officials and public institutions, and embodies elements of conflicting strategic possibilities. In 2005 the many dimensions of the ethics program lack effective co-ordination and there are few signs of collaboration to achieve common objectives. These features will make the future evaluation of the ethics program extremely challenging. Finally, the ethics program will become more prominent in the future. In response to the first Gomery report, the Conservatives unveiled a major ethics statement that demands a considerable extension of the status quo.39 It calls for greater powers for the auditor general and the ethics commissioner. In the Conservative’s view, political party financing needs even more stringent controls, Access to Information needs work, whistle-blowing legislation requires fangs, and a permanent independent prosecutor should be appointed to ensure that miscreants are brought to justice. The ndp promises even tougher measures in some areas. For its part, the Liberal Government responds quickly to every crisis. Just prior to the election call and in reaction to the David Dingwall “success fee” incident, it promised to make the Lobbyists Registrar a direct cabinet appointee and empower the registrar to impose fines up to $50,000 on lobbyists who violate their code of conduct. As The Globe and Mail observes: “It’s an

135 Ethics as a Government Program

ethics auction!”40 The relentless drives of partisan politics, interest groups and public opinion combine to push up the ante and make the ethics program a continuing national preoccupation.

notes

1

2 3

4 5 6

7 8

9 10

The authors want to thank the editor, Bruce Doerrn, and Greg Levine, Evert Lindquist, Jim McDavid, and David Zussman for providing extremely helpful comments on earlier drafts. All errors and judgments are the responsibility of the authors. For example, see Kenneth Kernaghan and John Langford, The Responsible Public Servant, (Toronto: Institute of Public Administration of Canada, and Halifax, Institute for Research on Public Policy), 1990. An excellent overview of the federal scene up to 1992 is Sharon Sutherland, “The Canadian Federal Government: Patronage, Unity, Security and Purity” in John W. Langford and Allan Tupper, eds., Corruption, Character and Conduct: Essays on Canadian Government Ethics (Toronto: Oxford University Press, 1993), 113–50. For a helpful commentary on ethical controversies under Prime Minister Chrétien, see Ian Greene, “The Chrétien Ethics Legacy,” Review of Constitutional Studies, 9, 1 and 2 (2004): 241–61. Finally, on the early ethics initiatives of the Martin Government see Luc Juillet, “The Office of Ethics Commissioner, Accountability, and Public Trust,” in G. Bruce Doern, ed., How Ottawa Spends, 2004–2005: Mandate Change in the Paul Martin Era (Montreal and Kingston: McGill-Queen’s University Press, 2004), 296–316. Canada, House of Commons, Debates, May 23, 2002. For details see Canada, Office of the Prime Minister, “A New Approach,” 12 December 2003, 1. Access via http://www1.pm.gc.ca/eng/news.asp?id=3. See also, Office of the Prime Minister, “Attaining the Highest Ethical Standards,” 12 December, 2003. Access via http:www.pm.gc.ca/eng/news.asp?id=4. Canada, Office of the Prime Minister, “Higher Ethical Conduct,” 13 December, 2003, 1. Canada, Privy Council Office, “Ethics, Responsibility, Accountability: An Action Plan for Democratic Reform,” 4 February 2004. Access via http: www.pco-bcp.gc.ca. Ian Stewart, “Bill C-24: Replacing the Market with the State?” Electoral Insight (January 2005): 33. See also Andrew Stark, “Canada’s Upside-Down World of Public Sector Ethics,” International Public Management Journal 8, 2 (2005): 198–204. Canada, House of Commons, Debates, 11 February 2002, 1535. See J.P. Kingsley, “Democracy and Political Party Financing,” an address to the International Political Science Association Symposium, Montreal, 8 May 2003. Available at http://www.elections.ca/content.asp?section=med&document=may0803&dir= spe&lang=e&textonly=false. Canada, Industry Canada, “Government of Canada Proposes Improvements to Lobbyist Registration System,” Ottawa, 23 October, 2002, 2. Access via http: www.ic.gc.ca/cmb. See, for example, the scathing criticisms of the revised bill by Duff Conacher, Coordinator of Democracy Watch. “Democracy Watch Has Something to Celebrate: Conacher,” The Hill Times, 4 July, 2005, 8.

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11 Canada, Department of Justice, “A Comprehensive Framework for Access to Information Reform,” Ottawa, 2005. Access via http://www.justice.gc.ca/en/dept/pub/ati/ index.html. 12 Ibid. 13 Canada, House of Commons, Bill C-11, An Act to Establish a Procedure for the Disclosure of Wrongdoings in the Public Sector, including the Protection of Persons Who Disclose the Wrongdoings, 1st Session, 38th Parliament, 2004–5. Access via http:www.parl.gc.ca/38/1/parlbus/chambers/house/bills/government/c-11/c-11_3/ c-11/cover-E.html. 14 P.G. Thomas, “Debating a whistle-blower protection act for employees of the Government of Canada,” Canadian Public Administration 45, 2 (Summer, 2005): 181. 15 For an overview see Canada, Office of the Leader of the Government in the House of Commons, “Minister Saada Reinstates Bill to Create Positions of an Independent Ethics Commissioner and a Senate Ethics Officer,” Ottawa, 11 February, 2004. Access via http://www.pco-bcp.gc.ca/lgc. 16 Office of the Ethics Commissioner, Annual Report on Activities in Relation to Public Office Holders for the Fiscal Year Ending March 31, 2005 (Ottawa: Office of the Ethics Commissioner, 2005), 4. Access via http://www.parl.gc.ca/oec-bce. 17 This issue is effectively discussed in Andrew Stark, “Canada’s Upside-Down World of Public Sector Ethics,” 192–3. 18 Paco Francoli, “Senators Pass a Code of Conduct, ‘Warts’ and All,” The Hill Times, May 23, 2005, 13. 19 Canada, Office of the Prime Minister, Conflict of Interest and Post Employment Code for Public Office Holders, (Ottawa: Office of the Prime Minister, 2004), 2. 20 Ibid. 21 Canada, Treasury Board Secretariat, Values and Ethics Code for the Public Service, (Ottawa, 2003). Access via http://www.tbs-sct.gc.ca/pubs-pol/hrpubs/TB-851/ vec-cve1-e.asp. 22 For a critical overview of the “values” approach to government ethics see John W. Langford, “Acting on values: An Ethical Dead End for Public Servants,” Canadian Public Administration 47, 4 (Winter 2004): 429–50. 23 Canada, Industry Canada, “Lobbyists Code of Conduct,” Ottawa, 13 April 2005. Access via http://strategis.ic.gc.ca/epic/internet/inlobbyist-lobbyiste.nsf. 24 See: http://www.liberal.ca/images/dir/coce.pdf. 25 Canada, Public Service Human Resource Management Agency, Office of Public Service Values and Ethics, Who Does What? A Framework of Responsibilities for Values and Ethics in the Federal Government (Ottawa: 2000). Access via http://www.hrma-agrh.gc.ca/ veo-be/who_e.asp. 26 Canada, Privy Council Office, Guidance for Deputy Ministers, (Ottawa: 2003). Access via http://www.pco-bcp.gc.ca/default.asp?Page=Publications&Language=E&doc= gdm-gsm/gdm-gsm_doc_e.htm. 27 Ibid, 7.

137 Ethics as a Government Program 28 See Canada, Treasury Board, Management in the Government of Canada: a Commitment to Continuous Improvement (Ottawa: 2005). Access via http://www.tbs-sct.gc.ca/ spsm-rgsp/cci-acg/cci-acg01_e.asp. 29 For details see Canada The Leadership Network, “Deputy Minister – Key Leadership Competencies (Ottawa: Public Works and Government Services, Canada, 2004). Access via http://www,hrma-agrh.gc.ca/leadership/klc-ccl/dm_e.asp. 30 For an overview see Treasury, Board, Office of Public Sector Values and Ethics. Access via http://www.hrma-agrh.gc.ca/veo-bve/index_e.asp. 31 Canada, Treasury Board, Meeting the Expectations of Canadians: Review of the Governance Framework for Canada’s Crown Corporations (Ottawa: President of the Treasury Board, 2005). Access via http://www.tbs-sct.gc.ca. 32 The only ray of light with respect to measurement is the expressed intention of the Values and Ethics Branch of the Public Service Human Resources Management Agency to develop a measurement framework for government departments to assess their ethical progress. 33 These issues are discussed in more detail in Langford, “Acting on Values.” 34 N. Averill and J. Szekula, “The Federal Conflict of Interest and Post Employment Systems,” in Ethical Conduct and Public Office: Practices and Prescriptions (Ottawa: Public Policy Forum, 2002), 7. 35 See for instance: Treasury Board, “Government Reinforces Integrity of Audit and Oversight,” Oct.21, 2005. Access via http://www.tbs-sct.gc.ca/media/nr-cp/2005/ 1021_e.asp. 36 Quote and definitions drawn from H. Bakvis and L. Juillet, The Horizontal Challenge: Line Departments, Central Agencies and Leadership (Ottawa: Canada School of Public Service, 2004), 8–9. Access via http://www.myschool-monecole.gc.ca/Research/ publications/pdfs/hc_e.pdf. 37 J.P. Kingsley, Democracy and Political Party Financing. 38 The issue of effectively managing complex horizontal initiatives without creating organizational “clutter” at the centre of government is nicely set out in E. Lindquist, “Strategy, Capacity and Horizontal Governance: Perspectives From Australia and Canada,” Optimum Online 35, 3 (Fall, 2005). Access via http://www.optimumonline.ca/ frontpage.phtml. 39 Conservative Party of Canada, “The Federal Accountability Act: Stephen Harper’s Commitment to Canadians to Clean Up Government” (Ottawa, 4 November 2005). Access via http://www.conservative.ca/EN/accountability/harper_makes_ commitment_to_clean_up_government/. 40 “On the Ethics Watch,” The Globe and Mail, November 5, 2005.

7 Ottawa’s Spending on Public Opinion Research: Implications for Democratic Governance a n d r e a d. r o u n c e

Public opinion research is an important Government of Canada activity that has become even more important in the recent years of the Liberal Government under Prime Ministers Chrétien and Martin. The purpose of this chapter is to explore how Ottawa spends on public opinion research, who undertakes this research, how this research is managed, and what public opinion research in a minority government situation all mean for spending in this area. Public opinion research has become an integral part of government activity. It has been integrated into the performance measures used by departments and agencies, consultation around proposed policies, services, and programs, and it is a vital part of shaping and evaluating communications between government and citizens. In addition, changes to the coordination and procurement of public opinion research undertaken by Prime Ministers Chrétien and Martin over the past twelve years have contributed to the growth and expansion of a public opinion research industry in Canada. Spending on public opinion research has risen five-fold over the past decade, with expenditures reaching over $29 million per year and supporting 621 projects conducted by 74 research firms in 2004–05 (see Figure 7.1). Although public opinion research was located within the same agency as the Sponsorship Program, the auditor general found in 2003 that public opinion research was well-managed, unlike the Sponsorship Program. As will be discussed later on in this chapter, the separation of the coordination and procurement functions for public opinion research has been vital to its ability to remain separate from any scandal around the Sponsorship Program. However, despite the auditor general’s acknowledgement that public

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Figure 7.1 Annual Total Investment in Public Opinion Research: 1993–94 to 2004–05

Dollars Spent (Millions)

35 29

30

26.2

25

25.4

19.3 19.9

20 13.2

15

15

14.7

9.2

10 5

23.7

4

7.1

0 1993– 1994– 1995– 1996– 1997– 1998– 1999– 2000– 2001– 2002– 2003– 2004– 94 95 96 97 98 99 00 01 02 03 04 05

Year Sources: Canada, Public Opinion Research, Government of Canada Annual Report 2001–02, 2002–03, 2003–04, and 2004–05.

opinion research was well-managed, the most recent auditor general’s Report (released in November 2005) points to concerns around the reporting and quality of public opinion research. These concerns around the quality of research point to the need for the Public Opinion Research Directorate to ensure that departments commissioning public opinion work know how to be sure that they have a quality research product to inform their decision-making and reporting. It is not enough to have well-managed processes in place: instead, it is necessary to ensure that the information departments use in their reporting and decision-making is reliable and reflects citizens’ opinions accurately. It has been argued that public opinion research can be understood as an important component of democracy. Governments use this research to engage citizens, assess practices and programs, and to help shape advertising and messaging. How citizens are engaged through this research is likely to change in nature over the next few years, in part due to the growing importance of web-based consultation and citizen engagement, although the traditional approaches to telephone surveys and focus groups will almost certainly remain important to government. It seems likely that spending on public opinion research will remain at least at current levels or increase in the near future, in both the number of public opinion projects commissioned and the number of dollars spent. The question will be whether or not public opinion research provides citizens with a legitimate mechanism to provide input to government decision-making, thus contributing to a stronger

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democracy; or whether it is used (in part) to ensure that government decisions are made more palatable to citizens, potentially weakening democracy.

defining public opinion research i n c a na da According to the Federal Government’s Contracting Policy, public opinion research is defined as “the planned gathering, by or for a government institution, of opinions, attitudes, perceptions, judgements, feelings, ideas, reactions, or views that are intended to be used for any government purpose, whether that information is collected from persons (including employees of government institutions), businesses, institutions or other entities, through quantitative or qualitative methods, irrespective of size or cost.”1 Public opinion research includes a wide range of activities undertaken for a wide range of purposes. Policy research, market research, communications and advertising research, program evaluation, client/customer satisfaction studies, omnibus or syndicated studies, and product development research are all activities that fall under Ottawa’s classification of public opinion research.2 Literature reviews, reviews of already conducted public opinion research, secondary analysis of already collected data, and the evaluation of services and/or the delivery of goods in contract situations are not considered to be public opinion research. Public opinion research falls into two main categories: syndicated studies and custom public opinion research. Syndicated studies, also known as multi-level or multi-client studies, are “studies dealing with a variety of questions, including issues relevant to the Government of Canada and, at times, related to the image of political parties or electoral behavior.”3 Syndicated studies fall into such thematic categories as national public opinion overviews, regional reports, technology and innovation, international issues, security, youth, health, and business/economic issues, and various other topics. In the past few years, public focus on these types of surveys has centered on the likelihood that questions asked as part of the research would be “political” in nature. As a result, governments accessing this type of research may have been using public funds to gain access to information about the public’s perceptions of political parties and electoral behavior. Custom public opinion research is commissioned by the government “from a private firm and tailored to fit specific research needs of the client department or agency.”4 This makes up the majority of the research commissioned by government, as it can be designed to address specific questions and to provide some of the evidence base needed to support policies, programs, and services. Research commissioned by the government can be quantitative, qualitative, a combination of the two, or can fall into another category. The Government of Canada describes quantitative research as “information obtained

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Figure 7.2 Public Opinion Research: Quantitative, Qualitative, and Combined Methodologies 2001–02 to 2004–05

100% 80% Combination

60%

Qualitative

40%

Quantitative

20% 0% 2001–02

2002–03

2003–04

2004–05

Year Sources: Canada, Public Opinion Research, Government of Canada Annual Report 2001–02, 2002–03, 2003–04, and 2004–05.

about some or all members of a target population through structured procedures, such as a survey, allowing conclusions to be drawn for the total target population.”5 This type of research includes opinion polling – probably the most well known of the quantitative approaches, but by no means the only one used by the government. Qualitative research involves information gathered from citizens through unstructured/semi-structured procedures, such as focus groups or interviews. Increasingly, these types of approaches are being used in combination to assess policies, programs, and services. As noted in Figure 7.2, about half of the spending on public opinion research has been on quantitative work, while another third has been on qualitative work.

why d o public opinion research? Public opinion research has become more important to governments in the last decade, in part due to technological advances that have allowed government to move past interest groups as the “voice of the people” in order to hear from the people themselves more directly.6 The availability of public opinion research encourages governments to become better informed on the priorities and concerns of citizens; to better engage citizens through opiniongathering initiatives and to better respond to their concerns; and to evaluate the impact of programs, services, and communications (including advertising). It also allows governments to better test the palatability of particular policy options and to design communications activities that help to support chosen policy directions (see Figure 7.3 for detailed breakdown of uses for public opinion research). As recently as 2002, the Treasury Board Secretariat

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Percentage of Total Investment

Figure 7.3 Type of Research as a Percentage of Total Investment in Public Opinion Research: 2001–02 to 2004–05

40

Advertising Initiatives

30

Policy Development/ Program Evaluation

20

Market Research

10

Quality of Service

0

Other

2001–02

2002–03

2003–04

2004–05

Year Sources: Canada, Public Opinion Research, Government of Canada Annual Report 2001–02, 2002–03, 2003–04, and 2004–05.

concluded that public opinion research had even more uses than were in practice, and emphasized the importance of using public opinion research in evaluation and for establishing priorities, policies, and programs.7 Government’s Responsibility to be Informed Public opinion research is an important resource for governments seeking to better understand citizens’ needs and expectations of government. The Treasury Board Secretariat has noted that the government has a responsibility to be informed on the concerns and views of Canadians when developing priorities and policies and implementing and monitoring programs serving citizens. Public opinion and attitudinal research provides a way to assess those views, attitudes, and concerns.8 Citizen Engagement and Democratic Responsiveness The government of Canada’s focus on citizens’ views, attitudes, and concerns also includes an interest in increasing citizen engagement. By assessing attitudes and concerns and then actively working to respond to those concerns, it seems that government hopes to be able to better engage citizens in the future. In addition, public opinion gathered through public and on-line consultations help shape government responses to a variety of policy issues and problems. Government has emphasized that “the increase in public opinion research activities by the Government of Canada departments reflects the government’s commitment to engage Canadians and consult with them on its priorities, its policies, and its programs.”9

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Ottawa has undertaken a series of ongoing public opinion projects, including the nationally-conducted Listening to Canadians survey. This survey is conducted three times per year, measuring Canadians’ views on public policy priorities and on how well the government has responded to these priorities.10 Part of democratic responsiveness is ensuring that the government is held accountable, by citizens, for its decisions. In the October 5, 2004 Speech from the Throne, the government made seven commitments to Canadian citizens. One of those commitments was “to aim for tangible, practical results for Canadians and report to them so that they can hold their governments to account.”11 The importance of being transparent around successes and failures relates to the importance of public opinion. Performance/Service Assessment and Evaluation The public’s perception of service and program delivery is a key element of most performance measurement frameworks in government. Both citizens who take advantage of particular services and programs and those who do not have important perspectives to share that can help shape both changes in programs/services and/or inform new ones. The Treasury Board Secretariat has done extensive public opinion research around service and program delivery. Over the past three years, a key project has been the Government On-Line Internet Research Panel, which involves a group of Canadian Internet users who provide feedback to the government on such topics as the governments’ websites, privacy and security concerns on-line, marketing and communications of information services, and accountability and transparency.12 Public opinion as shaping policy options The relationship between public opinion and policy outcomes is one in flux, and depends on a number of factors, including the electoral cycle and the way that an issue resonates with the public.13 Some have described public opinion as a “… limiting or enabling factor,” making it either less or more difficult for governments to implement a chosen policy option.14 In his research on the politics of taxation and the increase in public opinion research done around the budget since the 1990s, Geoffrey Hale notes that “The federal government’s efforts to introduce a greater appearance of openness to the budget process in recent years has masked a systematic effort by both federal and provincial governments to shape the terms of public debate and to focus that debate on the evaluation of a limited range of options consistent with their broad policy objectives.”15 By providing citizens with a narrow range of options to consider, public debate and public opinion is being constrained. Government action

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based on that opinion research may not reflect true public opinion, but rather, opinion within limited parameters. However, it has also been noted that public opinion, even when obtained within these limited parameters, can impact the themes and priorities emphasized by elected officials. It should be noted that public opinion research is not limited to public opinion polling. Media scans, the number of interest groups with an engaged membership, citizens contacting their members of Parliament, as well as polls and focus groups commissioned by the government and others can all have an impact both on policy options and on policy implementation. Communication Strategies Public opinion research plays an important part in the development, implementation, and evaluation of communication strategies. Governments use public opinion research to understand how to better communicate their policy agendas and both to respond and to be seen to be responding to citizens’ concerns and priorities. Throughout the 1990s, policy development became integrated with the marketing of those policies.16 No longer was public opinion research designed only to assess citizens priorities and issues, but to understand how best to “sell” government’s proposed policies. All memoranda to Cabinet which form the basis for Cabinet decisionmaking include a section dealing with public opinion, which provides a vital look into both the current state of the public’s opinion around a particular issue and the potential impact of that opinion on Cabinet’s decision on that issue. In addition, public opinion is used to help shape the communications strategy accompanying the decision, in order to ensure its general acceptance (or at least indifferent response) by the public. Social advertising and marketing Public opinion research has served to inform the development and presentation of Government advertising and marketing campaigns. Health Canada is an example of a department that uses public opinion research extensively in the development and implementation of social marketing campaigns. For departments such as Health Canada, public opinion research is used at three stages to inform campaigns: • Prior to a campaign to help set realistic objectives and learn more about target audiences; • During campaign development, where focus testing of campaign elements ensures that campaign materials will be relevant to the target audience; and • After campaigns are launched to measure the effectiveness of social marketing campaigns.17

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Ottawa’s Spending on Public Opinion Research

Analysis undertaken by Health Canada of print advertisements related to various advertising and social marketing campaigns from 2001 to 2004 shows how important public assessment of the strengths and weaknesses of this kind of government communication is for future communications. Observations made by citizens around every aspect of this type of communication from font size and contact information to the clarity of communication and then to the use of inclusive language and inclusion of diverse groups of people in print ads are designed to increase the effectiveness of future advertising and marketing campaigns. Of particular interest, given current political circumstances, is that Canadians tend to become cynical when they perceive information to be missing from a government ad and that messages about government accountability tend to go over well.18 Health Canada has also done similar assessments about the strengths and weaknesses of campaigns using web sites and other print media designed to communicate with Canadians.

how is pub li c opin io n re se arc h n ot u se d As important as understanding how public opinion research is used in Ottawa is understanding what is not used – or at least what is not supposed to be used. According to the 1995 guidelines to the Policy on the Management of Government Information Holdings, “public funds should not be expended on Public Opinion Research concerned with monitoring voting behaviour or party image.”19 However, syndicated research – multi-client, multi-topic research such as the omnibus surveys done by Ekos and Pollara – often contain questions around citizens’ voting choices and political evaluations. Separating the potentially partisan from the outright partisan is not difficult for most. However, there have been questions that could be seen as “onthe-line.” A poll of business leaders done by Compas Research for the Financial Post in March/April 2005 concluded that surveys assessing citizens’ awareness of a politician’s track record on an issue, perception of the governing party’s degree of fiscal responsibility, and the governing party’s performance on aspects of its policy platform were partisan questions and should not be funded by public money.20 The problem arises when these questions are included in a syndicated omnibus poll, to which various government departments and agencies have subscribed. A further complication arises when one considers the difference between asking how the “governing party” is doing and how “government” is doing on an issue. This has been tied into discussion around public service ethics. Ultimately, the goal for government in this respect has been to maintain a professional, ethical, and non-political public service. In order to ensure that this goal would be met and that public money for research would not be used to support partisan purposes, all public opinion research contracts issued through

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Public Works and Government Services Canada (pwgsc) as of fall 2004 now include the following clause: “No Reporting on Electoral or Political Party Voting Intentions of the Electorate The Contractor shall ensure that no written, verbal, or electronic reporting to Government of Canada clients will contain information on electoral voting intentions, political party preferences, or party standings with the electorate in any jurisdiction in Canada.”21

who spends on public opinion research As previously noted, since the Liberal Party became the government in 1993, spending on public opinion research and the number of projects undertaken have increased dramatically. In 1993–94, approximately $4 million was spent on 90 projects. As seen in Figure 7.1, by 2005–06, $29 million was being spent on 621 projects. Spending on public opinion research includes both subscriptions to the syndicated studies and original commissioned research. The commissioning of public opinion research waxes and wanes, in part due to the relevance of issues to particular departments. For example, the increase in spending at Agriculture and Agri-Food Canada in 2003–04 came (in part) as a result of concerns around mad cow disease. For the 2004–05 fiscal year, ten departments and agencies are responsible for the most spending on public opinion research: Health Canada, Human Resources Development Canada hrdc (now Human Resources and Skills Development Canada, hrsdc), National Resources Canada (nrCan), Industry Canada, Canadian Heritage, the Department of Foreign Affairs and International Trade, Customs and Revenue Agency, Public Works and Government Services, Finance Canada, and Social Development Canada (see Table 7.1).22 Of these, Health Canada has consistently spent the most on public opinion research over the past five years: “In order to address [Canada’s top priority], Health Canada uses public opinion research extensively in support of its mission to maintain and improve the health of Canadians – monitoring trends and exploring values, perceptions, awareness, knowledge and behaviours related to a broad range of health issues.”23 In 2004–05, Health Canada’s public opinion research expenditures included research done to support the anti-tobacco campaign, the health living/sport participation campaign, knowledge and perceptions around influenza, and attitudes of First Nations and Inuit on issues such as immunization, oral health, and healthy pregnancies.

who conducts public opinion research f o r o t tawa ? Prior to the election of the Liberal Party in 1993, there was an established practice of having the main pollster of the party/leader coming into office also doing a great deal of the work commissioned by the public service. In the last years of the Mulroney government, over four polls per week (at a

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Table 7.1 Overall Investment in Public Opinion Research by Government Departments and Agencies, 2001–02 to 2004–05 (Top Ten Spenders) 2001–02

2002–03

2003–04

2004–05

Dollars # of Dollars # of Dollars # of Dollars # of (000) Projects (000) Projects (000) Projects (000) Projects Health Canada

4,036

88

4,270

81

4,866

105

6,248

106

Human Resources Development Canada

2,614

62

2,120

60

3,720

63

2,033

36

Canadian Heritage

1,288

36

1,124

30

1,758

42

1,392

37

Communication Canada

2,117

70

3,176

75

1,459

22 1,195

24

Public Works & Government Services Canada Foreign Affairs and International Trade Canada

867

18

870

16

1,337

23

1,415

21

Canada Customs and Revenue Agency/ cra

687

23

868

17

1,304

21

1,261

26

1,834

54

1,584

42

1,174

38

1,216

34

Agriculture and Agri-Food Canada

430

9

624

15

962

20

Natural Resources Canada

847

32

1,586

28

912

31

1,701

39

Environment Canada

1,343

36

710

20

717

27

Treasury Board of Canada Secretariat

1,228

16

704

15

615

13

Finance Canada

1,051

17

Social Development Canada

1,047

24

Industry Canada

Sources: Canada, “Public Opinion Research,” Government of Canada Annual Report, 2001–02, 2002–03, 2003–04, and 2004–05.

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total annual cost of $64 million) were being commissioned, with the most important work being conducted by Decima Research.24 Determined to address what was seen as a major problem of the previous administration, Prime Minister Chrétien’s early administration was marked by a comparatively small amount of spending on public opinion research and a revamp of the rules for government polling. During the first term of the Chrétien government, only $28 million in total was spent on public opinion research conducted by numerous researchers. In 1994, the Privy Council Office revamped the rules for government polling. The key clause in the revamp was known informally as the “Decima Clause,” and prevented any one company from getting more than 25% of the government’s public opinion research work.25 Preventing a monopoly on public opinion research ensured not only the growth of an industry, but also the sense that this type of research had legitimate public policy and communications purposes – it was not used only for political purposes. However, although the power of the party pollster diminished under Chrétien, the influence of particular firms was still noted in some departments. Soon after Paul Martin was appointed finance minister in 1993, Earnscliffe Strategic Group signed a retainer contract with the Department of Finance “which gave it all the department’s communications work, without having to go through the laborious competitive-bidding process. The company was charged with selling both Martin’s agenda of spending cuts, deficit reduction, and productivity growth, as well as his credibility to voters and to the financial markets.”26 In spite of the close relationship between Martin and Earnscliffe, the government of Canada under Chrétien and now under Martin has seen public opinion research divided up among many of the country’s research firms. As of 2004–05, the Government of Canada was using over seventy research firms to fulfill its public opinion research needs. Although the biggest firms had multiple contracts to supply research, no one firm had a clear monopoly in the field (see Table 7.2). Many of the largest public opinion research firms account for spending on both custom and syndicated research. As of 2004–05, ekos Research Associates accounted for the highest dollar value contracted and was tied with Ipsos-Reid for the largest number of custom research projects contracted (see Table 7.3). Environics Research Group had the second highest dollar value contracted, and Ipsos-Reid came in third. These three companies have consistently been the three largest suppliers of custom public opinion research in the past five years. Over the past four years, ekos Research, Environics Research Group, and Ipsos-Reid have consistently performed as top syndicated research providers, as well as custom research providers (see Table 7.4). Departments and agencies are commissioning these firms to design and implement public opinion research projects and also purchasing subscriptions to such research publications as ekos Research Associates’ Rethinking Government, Environics Research Group’s Focus Canada, and Ipsos-Reid’s The Ipsos Trend Report Canada.

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Ottawa’s Spending on Public Opinion Research

Table 7.2 Top Ten Research Firms for All Public Opinion Research by Business Volume, 2001–02 to 2004–05 2001–02

2002–03

2003–04

2004–05

Dollars Projects Dollars Projects Dollars Projects Dollars Projects (000) (#) (000) (#) (000) (#) (000) (#) ekos Research Associates

4,567

112

4,095

100

4,539

80

5,315

113

Environics Research Group

3,615

72

3,048

64

3,232

55

4,755

83

Ipsos-Reid

3,537

106

3,581

91

2,639

79

3,960

94

Phase 5 Consulting Group

1,213

28

1,125

22

1,858

31

2,275

40

Les Études de Marché Créatec +

1,528

31

2,086

29

1,599

24

1,231

15

862

19

929

20

1,416

29

1,181

28

924

24

1,310

38

1,600

37

1,231

25 689

10

1,313

30

Corporate Research Associates

967

25

The Strategic Counsel

779

11

Millward Brown Goldfarb* Decima Research Sage Research gpc International

790

12

1,184

19

1,075

11

Pollara

1,446

23

690

14

885

15

Compas

2,031

50

1,552

41

Phoenix Strategic Perspectives

Sources: Canada, “Public Opinion Research,” Government of Canada Annual Report 2001–02, 2002–03, 2003–04, and 2004–05. * Previously known as Goldfarb Consultants. ** Previously known as gpc Factor Research Group. *** Previously known as Créatec +.

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Table 7.3 Top Ten Research Firms for Custom Research by Business Volume, 2001–02 to 2004–05 2001–02

2002–03

2003–04

2004–05

Dollars Projects Dollars Projects Dollars Projects Dollars Projects (000) (#) (000) (#) (000) (#) (000) (#) ekos Research Associates

2,917

56

2,892

63

3,678

51

3,890

62

Environics Research Group

3,333

60

2,782

51

2,808

38

3,940

52

Ipsos-Reid

2,628

60

2,993

59

2,124

51

3,350

59

Phase 5 Consulting Group

1,226

27

1,125

22

1,858

31

2,275

40

Les Études de Marché Créatec + ***

1,378

30

1,927

26

1,599

24

1,231

15

792

16

869

18

1,350

27

1,170

27

924

24

1,297

36

1,572

34

664

16

1,231

25

1,184

19

1,075

11

665

9

869

14

1,181

24

Corporate Research Associates

923

21

The Strategic Counsel

779

11

Millward Brown Goldfarb* Decima Research Sage Research GPC International

790

11

Pollara

1,346

23

Compas

1,898

43

Phoenix Strategic Perspectives

1,485

35

Sources: Canada, “Public Opinion Research,” Government of Canada Annual Report 2001–02, 2002–03, 2003–04, and 2004–05. * Previously known as Goldfarb Consultants. ** Previously known as gpc Factor Research Group. *** Previously known as Créatec +.

Table 7.4 Top Ten Departmental/Agency Investments in Syndicated Studies: 2001–02 to 2004–05 (Ordered by Firm Providing the Research, Based on Top Ten Expenditures Each Year)27 2001–02

2002–03

2003–04

2004–05*

Dollars (000)

# of Subscriptions

Dollars (000)

# of Subscriptions

Dollars (000)

# of Subscriptions

Rethinking Government

423

14

360

12

216

7*

Rethinking North American Integration

254

9

209

5

134

6*

Rethinking the Information Highway

471

11

321

7

257

4*

Rethinking Citizen Engagement

170

5 220

9

129

4*

48

3*

305

13*

155

3*

ekos Associates

Public Security Monitor

64

Dual Digital Divide Perceptions Regarding Family Violence

107

2

226

10

Environics Research Group Focus Canada North of 60 Monitor National Pulse on Health

24 139

2

222

5

189

9

77

3

121

3

crop with Environics Research Group 3sc Environics International/GlobeScan Corporate Social Responsibility Monitor

23

26

5

27

5*

International Environmental Monitor

92

32

4

41

4*

Dollars (000)

# of Subscriptions

1,425

–

815

–

100

–

66

–

Table 7.4 (Continued) 2001–02

2002–03

2003–04

2004–05*

Dollars (000)

# of Subscriptions

Dollars (000)

# of Subscriptions

Dollars (000)

# of Subscriptions

169

7

114

5

111

4*

158

3 124

12*

Dollars (000)

# of Subscriptions

Perspectives Canada (Formerly Pollara) Perspectives Canada Les Études de Marché Créatec + Québec 360

150

Ipsos-Reid

610

–

Phoenix Strategic Perspectives

132

–

Solutions Research Group

119

–

d-code

107

–

Institute of Public Administration of Canada

64

–

War Child Canada

48

–

The Ipsos Trend Report Canada

124

12

122

13

Public Safety and Security in the New Millennium

150

6

70

3

Reconnecting Government with Youth

246

6

288

8

56

3

Compas The Business Agenda (Compas)

137

Sources: Canada, “Public Opinion Research,” Government of Canada Annual Report 2001–02, 2002–03, 2003–04, and 2004–05. *Note: The way spending on Syndicated Studies was reported changed with the 2004–05 Annual Report, from itemized reporting of the top expenditures to the top research firms by contract value. This change is reflected in the reduction in detail of the 2004–05 column.

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Ottawa’s Spending on Public Opinion Research

managing public opinion research: c o o r d i n at i o n a n d p r o c u r e m e n t Processes and policies governing the coordination and procurement of public opinion research in the Government of Canada have taken many different forms over the past decade. The most recently implemented coordination and procurement policies have been designed to ensure that public opinion research conducted by the Government of Canada supports the following principles: • the government has a responsibility to make every effort to inform itself on the concerns and views of Canadians in order to establish priorities, develop policies, and implement and monitor programs that serve Canadians; • public opinion research and attitudinal research is a legitimate method of obtaining information about public views, attitudes, and concerns; • Canadians have a right of access to the findings of government public opinion research within the scope of the Access to Information Act and Privacy Act; • public opinion research reports are shared among departments and deposited with the Library of Parliament and with the Library and Archives Canada; • the government should obtain the best value for money spent; • public funds should not be expended on public opinion research concerned with monitoring electoral voting behaviour or the image of political parties.28 Unlike advertising and sponsorship activities where there was no differentiation between the bodies charged with coordinating and contracting, the program co-ordination and contracting activities for public opinion research were managed as two separate functions. This has helped to ensure that public opinion research has remained relatively free from concerns around mismanagement and lack of accountability that has affected sponsorship and advertising activities. Coordination When Public Works and Government Services Canada created its Communications Coordination Services Branch in 1997, both program coordination and contracting for public opinion research were part of its operations. In June of 2000, program coordination was transferred to the Canada Information Office, but contracting for public opinion research remained with the Communications Coordination Services Branch. In the next year (September 2001), Communication Canada took over program co-ordination

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from the Canada Information Office and a procurement branch of the pwgsc took over contracting for public opinion research from the Communications Coordination Services Branch.29 Until its dissolution, Communication Canada provided advisory services and coordinated public opinion research for the Government. In May of 2002, Prime Minister Chrétien asked Treasury Board President Lucienne Robillard to make recommendations on how sponsorship, advertising, and public opinion research could be better managed by the Government of Canada. After months of investigation, the Treasury Board Secretariat’s Review of Public Opinion Research concluded that public opinion research was being managed adequately, although some changes could be made to existing coordination and contractual procedures. The changes announced later that year were guided by four key principles: value for money, stewardship, flexibility, and transparency.30 In November 2003, the auditor general’s Report included an investigation into government’s sponsorship, advertising, and public opinion research (por) activities. Unlike with sponsorship and advertising, the auditor general found that public opinion research activities were being managed adequately. However, there were some issues identified with the way that the government coordinated public opinion research, as it was clear that not all por reports were released to the public, that the government did not have a strategic plan for public opinion research, and that many departments purchased the same syndicated surveys. In response to the report, the government noted that because por was tailored to the needs of particular departments and agencies, it was not always possible to have a strategic plan involving all of government and that departments were not allowed to share syndicated research among themselves, necessitating multiple subscriptions.31 As a direct result of the auditor general’s 2003 report and the resulting “Sponsorship Scandal,” Communication Canada was dissolved and the Public Opinion Research Directorate created within pwgsc. This new research directorate took over program coordination and the provision of research assistance and expertise, while the newly created Communications Procurement Directorate looked after the contracting associated with public opinion research. All public opinion research commissioned by the government is available to the public, subject to the Freedom of Information Act and the Privacy Act. The Public Opinion Research Directorate acts as a “gate-keeper” for this research, receiving research reports from departments and agencies and passing them on to the public, the Library of Parliament, and Library and Archives Canada. In cases where the complete research report is not provided, executive summaries of final reports must be provided to the directorate in both French and English, with full reports available on request. According to the communications policy of the Government of Canada, reports must be made available to the public within three months of completed fieldwork/data collection.32

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Ottawa’s Spending on Public Opinion Research

How departments and agencies manage the day-to-day operations associated with public opinion research varies. Most have a designated public opinion research coordinator placed either in communications or in strategic policy groups, who provides advice on methodology and contracting and helps coordinate projects. The location of the coordinators in these groups is an important indicator of the uses and value of public opinion research in most departments and agencies: this kind of research is used to support both communications work and policy development and assessment. In some cases, departments and agencies that undertake a great deal of public opinion research will have a unit devoted to coordinating, supporting, and disseminating this kind of research. Health Canada’s Public Opinion Research and Evaluation Division is one such body. A recent memo from the Treasury Board Secretariat to departments and agencies reiterated the importance of coordinating public opinion research, noting that “the purchase or contracting of public opinion research is a centrally coordinated activity in the Government of Canada, as determined by Treasury Board policies on communications, common services, and contracting.”33 However, in November 2005 the auditor general reported on the quality and reporting of surveys, including recommendations around the vital importance of the Public Opinion Research Directorate’s central coordination function. The report concluded that it was unclear whether much of the public opinion research undertaken in 2003–04 was of sufficient quality to be used for reporting and decision-making purposes, noting that: “Information generated by surveys must be of good quality if it is to be credible and useful to parliamentarians, government managers, and Canadians, especially when it concerns the performance of government programs. Deputy ministers and agency heads need to be confident about the quality of any survey data included in their departmental performance reports.”34 The Report found that departmental performance reports and other documentation referring to research results did not include information on the quality and limitation of survey results. In addition, it was determined that the Public Opinion Research Directorate was not providing the level of support needed to ensure that departments commissioned research of sufficient quality.35 In response, Public Works and Government Services has committed to create an expert technical advisory panel, comprised of government, academia, and market research representatives, to develop benchmarks of survey quality for the Government of Canada.36 It is anticipated that these benchmarks and the reinterpretation of the Public Opinion Research Directorate’s mandate will help to ensure that government commissioned public opinion research will be of consistent (and demonstrable) quality. Procurement The procurement processes used for public opinion research have their basis in a system introduced in 1995. Prior to this point, public opinion research

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was purchased using the Open Bidding System (a precursor to merx – the Government of Canada’s electronic tendering service), which tended to favour the lowest bidder and not the most innovative and suitable proposal. In addition, this system was time-consuming and impacted departments’ abilities to access research in a timely manner. A 1995 evaluation of this process concluded that pwgsc should begin using a standing offer process to obtain public opinion research services.37 Few issues have been raised through internal government reviews of the procurement of public opinion research. The Treasury Board Secretariat’s Review of public opinion research in 2002 concluded that por was being managed adequately, although it recommended some changes to contractual procedures. At that point, there were four standing offers, designed to reflect the required methodology, target region, and purpose of commissioned public opinion research. Two were for national research (one for quantitative and one for qualitative methodologies and analysis, depending on the type of issue to be assessed), one for regional research in Atlantic Canada, and one for client satisfaction research supporting the Treasury Board. In 2003 the government began revising the contracting process with input from industry and other interested stakeholders.38 As a result of this process, there was a move later that year from two to three national standing offers, supplemented by those developed by individual departments (who would undertake a larger volume of por) and those developed to acknowledge the importance of research with specialized sub-populations, including regions, Aboriginal people, seniors, and youth. Standing offers were also to be developed for those with targeted expertise in online and international research. In addition, departments with specific needs and significant business volume can establish their own tailored standing offers.39 This was an important step in expanding access to government contracts in this area, and an acknowledgement that different social and political realities required firms with different kinds of expertise to fully address research problems. Standing offers were developed for use with straight-forward or timesensitive work, up to $200,000 in value. Firms would be selected for the standing offer list in a competitive process based on their capacity, experienced personnel, and a test-case project. In order to ensure that the bestqualified firms were available to the government, technical expertise was considered to be more important than the costing they proposed. Firms would also have to ensure that 80% of their content was Canadian in order to qualify to be included on the standing offer list. As projects were proposed, approved firms could be “called-up” to take on projects, based on their expertise, availability, proprietary techniques to be applied, and an assessment of the supplier’s past performance and client satisfaction. When this change was proposed, it was expected that the majority of public opinion research would be addressed under the standing offer system.40

157

Ottawa’s Spending on Public Opinion Research

Complementary supply arrangements were used for more complex work requiring alternate research designs, up to a value of $400,000. In order to be given a por contract under a supply arrangement, approved firms would undergo a “mini-competition” – competing among at least three firms for the particular work. por contracts in excess of $400,000 would be awarded through a full competition on merx. In order to ensure that new companies were not prevented from being considered for supply arrangements, supplementary competitions were advertised on merx every year, to add to the list of approved firms. Concerns around the transparency of public opinion research were also considered as part of this set of revisions to the contracting process. Supplier selection criteria and procedures were clarified, all surveys being conducted by the government would be registered through the Canada Survey Research Council, and a toll-free number was established so that citizens could check the validity of a survey and/or lodge a complaint.41 The auditor general’s 2003 report highlighted a number of relatively minor issues around the government’s procurement of public opinion research. Overall, the auditor general concluded that the process of selecting suppliers followed the rules. However, there was a suggestion that the management of standing offers and call-ups was not always in line with the rules. In addition, some project files did not clearly explain project objectives or rationale, making it difficult to justify procurement in the first place.42 Overall however, the management of public opinion research has remained sound under the Liberal Government, with a clear separation between procurement and coordination.

c o n c lu s i o n s : w h at n e x t f o r p u b l i c o p i n i o n r e s e a r c h i n o t tawa ? Public opinion research is clearly an important undertaking for Ottawa, both for elected officials and for the day-to-day workings of government. It has become embedded in federal government structures, including performance measures and policy proposals, and the evaluation of social marketing and government products. The most recent Liberal governments, under Prime Ministers Chrétien and Martin, have spent an increasing amount of money on an increasing number of projects over the past twelve years. At just under $30 million, expenditures for 2004–05 were the largest under these two Liberal governments to date. Changes made by these governments, including reforms to allow an increasing number of research firms to have access to government contracts, have contributed to the growth in the country’s public opinion research industry. However, there are several issues that will need to be identified and assessed by the government in the near future. Links have been made between citizen

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engagement and public opinion, but it is unclear whether or not public opinion research counts as citizen engagement. In its response to the 2003 auditor general’s report, the Government noted that “Public opinion research is an integral part of interactive and two-way communication.”43 However, if citizens are being asked for their opinions and attitudes without receiving information and responsiveness back from Government, are they really engaged? There is growing discussion around on-line citizen engagement as well. The Treasury Board Secretariat has developed an extensive Government OnLine Research Panel, and there have been discussions around the possibility of government involvement in on-line citizens’ forums.44 The major political parties use web-based polling on their websites to engage their supporters, and encourage participation. Rather than as tools of research per se, these web-based polls are seen by parties as “a tool for participation. People are using them, not for statistical validity and getting a sense of the electorate, but to establish relationships.”45 If these kinds of tools are working for parties, perhaps they may work for the broader citizenry as well. In addition to the current emphasis on citizen engagement, public opinion research has a particular importance to a government in a minority government situation. While prime minister, Martin’s approach to leadership – one of the ways he has set out to distinguish himself from his predecessor – has involved responsiveness to Canada’s citizens. He consistently made use of public opinion research during his tenure as finance minister, both to assess potential policy options and to shape messaging around the chosen directions. As well, it could be concluded that although government-commissioned research is not supposed to be political, it is reasonable to conclude that favourable policies should equal favourable attitudes toward the existing government (and the party in power). Whether or not government chooses to respond to the public opinion research it commissions, it is vital to ensure that that research is of the highest quality. As the auditor general has noted, when research is used to support accountability structures and to impact decision-making in some way, it must be conducted according to consistent standards. Government has taken steps to ensure that such standards will be created, and it is anticipated that departments will work toward implementing better research and reporting practices, benefiting both government and citizens. There are clearly limitations to public opinion research. Debate over informed versus uninformed opinion and over what types of opinion impact both public servants and elected officials means that the role of public opinion in government may change with a different party arrangement. Elected officials watch public opinion research (including polls) closely, although they may not admit to being influenced by it. In 2002, Stephen Harper was quoted as saying: “This party will not take its position based on public opinion polls. We will not take a stand based on focus groups. We will not

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take a stand based on phone-in shows or householder surveys or any other vagaries of public opinion.”46 However, despite the views of the elected officials, it is clear that public opinion and public opinion research is important to the Government of Canada. Public opinion research, in its varied forms, will continue to impact the next government – whatever form it takes.

notes 1 Treasury Board of Canada Secretariat, Contracting Policy, Section 16.13.6 (). 2 Ibid., Section 16.13.8. 3 Canada, Report of the Auditor General of Canada (Ottawa: November 2003), 4. 4 Ibid. 5 Ibid. 6 Geoffrey Hale notes this in The Politics of Taxation in Canada (Peterborough, on: Broadview Press, 2002), as do others. 7 Canada, Building on a Strong Foundation: Enhancing the Contracting Process for Government of Canada Public Opinion Research (www.communication.gc.ca/por_rop/ porop05_03_01_e.html). 8 Treasury Board of Canada Secretariat, Policy Guidance Memo on Public Opinion Research (www.tbs-sct.gc.ca/pubs_pol/sipubs/comm/pg-op_e.asp?printable=True), April 28, 2005. 9 Public Works and Government Services Canada Government Information Services Branch, Public Opinion Research in the Government of Canada Annual Report 2003–04 (Ottawa: Author, 2004), 1. 10 Canada, Public Works and Government Services Canada, Services offered by the Public Opinion Research Directorate (www.communication.gc.ca/services/por_services.html). 11 Office of the Prime Minister, Speech from the Throne, October 5, 2004 (http://pm.gc.ca/eng/sft-ddt.asp). 12 Public Works and Government Services Canada (pwgsc), Public Opinion Research: Annual Report 2003–04, 27. 13 For an in-depth discussion of the relationship between public opinion and public policy in Canada, see Petry, François and Matthew Mendelsohn “Public Opinion and Policy Making in Canada 1994–2001,” Canadian Journal of Political Science 37 (2003): 1–25. 14 Hale, Politics, 118. 15 Ibid., 128. 16 Ibid. 17 Public Opinion Research and Evaluation Division, Communications, Marketing and Consultation Directorate, Health Canada, Public Opinion Research Issue Paper: Print Ads (Ottawa, on: Author, 2005).

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18 Health Canada, Public Opinion Research and Evaluation. Web page. (www.hcsc.gc.ca/ahc-asc/branch-dirgen/cmcd-dgcmc/pore-reop/index_e.html). Accessed September 2005. 19 Canada, Report of the Auditor General. 20 Compas Research Inc., Federal Government Polling Done for the Financial Post, (Toronto: April 4, 2005), 3–4. 21 Treasury Board of Canada Secretariat, Policy Guidance Memo. 22 pwgsc, Public Opinion Research: Annual Report 2003–04. 23 Ibid., 21. 24 Jenefer Curtis, “Captain Crunch (Michael Marzolini, Canadian government’s pollster),” Saturday Night, 113, 7 (September 1998); 17–21.Curtis emphasizes the importance of Allan Gregg, of Decima Research, during the Mulroney years in Ottawa. 25 Ibid. For analysis of the issues around polling and public opinion research that the newly elected Liberal Government was dealing with in 1994, see Claude Emery’s excellent paper produced for the Library of Parliament in 1994, entitled Public Opinion Polling in Canada. Available on-line, at http://www.parl.gc.ca/information/library/ PRBpubs/bp371-e.htm. 26 In her article “Captain Crunch,” in the September 1998 issue of Saturday Night, Jenefer Curtis noted that Martin’s support of Earnscliffe Research Group was not shared by the prime minister. At the time, she argued that “It’s fair to say that esg is to Martin what Gregg was to Mulroney. Moreover, the pmo and the Privy Council Office – the centre of the government – are cool to esg, calling it “the Martin Group,” symptomatic of the ever-present Martin-Chrétien divide within the party.” 27 Note that these are listed because they have been in the top ten expenditures for syndicated research. Many of these firms also have other syndicated publications that are purchased by the Government of Canada. In addition, other firms not on this list produce syndicated publications purchased by select departments and agencies of the Government of Canada. In 2004–05, reporting changed, and contracts for syndicated publications were aggregated and released by research firm, rather than by publication. 28 Treasury Board of Canada Secretariat, Policy Guidance Memo. 29 Canada, Report of the Auditor General, 2003. 30 Canada, Report on the Review of Public Opinion Research Program Files: Consulting and Audit Canada CAC File: 344 4330 7-2, October 2002. Available at http:// www.communication.gc.ca/reports_rapports/cac_cvc/report_344433072.html. This review was undertaken by a team of experts put together by Consulting and Audit Canada (cac) to examine all the public opinion research files for contracts signed between April 1, 2001 and May 31, 2002. The review was completed between June 6 and 26, 2002. 31 Canada, Government Response to the Auditor General’s Report: Q and A’s (Ottawa: Author, 2003–04). 32 Treasury Board of Canada Secretariat, Communications Policy of the Government of Canada: Procedures (Ottawa: Author, 2005).

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33 Treasury Board of Canada Secretariat, Policy Guidance Memo. 34 Canada, Report of the Auditor General of Canada (Ottawa: November 2005), 2. 35 Canada, Report of the Auditor General of Canada, 2005: 8. The auditor general’s report identified eight main areas of information that should be included in a research report or accountability document (such as performance reports). The areas that were particularly problematic included the response rate (an indicator of data quality), sample size, confidence interval, and description of the sampling frame and final report. In its response to this concern, the Treasury Board Secretariat emphasized the difficulty in balancing the provision of detailed technical information with the need to ensure that public documentation is easy to understand and balanced. 36 Public Works and Government Services Canada Government Information Services Branch, Public Opinion Research in the Government of Canada Annual Report 2004–05 (Ottawa: Author, 2005), 1. 37 The March 1995 evaluation by Thomas Creary and Associates recommended that pwgsc begin using a standing offer process to obtain public opinion research services. This new system came into effect in 1995 and is still in use today. 38 Representatives of the Public Opinion Research Industry included the Professional Marketing Research Society (pmrs), the Canadian Association of Market Research Organizations (camro), the Canadian Survey Research Council (csrc), and l’Association de l’Industrie de la recherché marketing et sociale (airms). 39 Canada, Building on a Strong Foundation. 40 Government of Canada news release, “Government of Canada Enhances Public Opinion Research Contracting Process”, 12 June, 2003. Available at http://www.news.gc.ca/ cfmx/CCP.view/en/index.cfm?articleid=5179. 41 Ibid. 42 Canada, Report of the Auditor General, 2003. The auditor general’s investigation into public opinion research spending was designed to determine whether the government had adequate controls over its public opinion research activities between 1999–200 and 2002–03, whether the government had obtained the best value and followed a transparent process in contracting for public opinion research, while also determining whether particular departments designed their research activities to achieve specific results. 43 Canada, Government Response to the Auditor General’s Report: Q and A’s. 44 Such as the one being held by dfait currently. 45 Bosley, Aneurin, “Pollsters Don’t Trust Internet Elite” Capital News Online, Carleton University School of Journalism and Communication, 2000 (http://temagami. carleton.ca/jmc/cnews/29092000/n4.htm). 46 Stephen Harper, quoted regarding Canada’s participation in a potential war in Iraq. Reported in Report Newsmagazine, 25 March 2002. See also Hugh Winsor, “Pollsters: The Unaccountable Gurus Who Have Kidnapped Journalism and the Policy Process,” Westcoast Lecture Series, School of Policy Studies Policy Forum, Queen’s University, 2003. Available at http://www.queensu.ca/sps/the_policy_forum/speakers_series/.

8 The Maritime Helicopter Project: The Costly Politics of Military Procurement ta n ya n e i m a and chr istopher stoney

On 23 July 2004, the federal government announced its long awaited decision to purchase Sikorsky helicopters to replace the ageing Sea King fleet. On the surface this would appear to be a standard procurement decision about how to achieve the optimal level of military preparedness for Canada. However, in a process dating back over 30 years, this has developed into one of the most protracted and controversial procurement exercises in Canadian history. According to the Globe and Mail the “long and tortuous path of helicopter politics” constitutes a “national disgrace” and a painful example of Liberal mis-management of defence.1 Even the eventual decision to purchase 28 Sikorsky H-Cyclones remains controversial and the subject of ongoing legal wrangling and charges of unfair competition rigging by the government. Our interest in the Maritime Helicopter Project (mhp), as it became known in the early 1990s, reflects a number of factors and characteristics that make it an interesting and revealing case study in government policy-making. One important factor is that defence procurement is in many ways unique. For example, projects such as the maritime helicopter project are “big ticket” and require relatively large amounts of government expenditure. The decisions are also long-term and purportedly strategic in nature and, as such, can commit future governments to expenditure and priorities they may have opposed or preferred not to fund. Defence is always a controversial area of expenditure with many people and stakeholder groups opposed to it on ethical and moral grounds or simply because they consider the opportunity costs too high. In theory, defence constitutes an indivisible public good with few people able to recognize individual benefits. In reality, defence procurement is highly

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political with investment inextricably linked to international relations abroad and regional patronage, employment and redistributive policies at home. Together these factors make defence procurement decisions notoriously complex, long winded and controversial. Consequently, the traditional criteria used to establish basic measures of performance such as “value for money,” efficiency and effectiveness are equally complex and political. We apply these criteria to the mhp and consider the implications of recent announcements by the government that it is moving away from a “best value” approach to a “least-cost compliant” approach. In order to analyse the decision-making process, the chapter is informed by a number of decision-making frameworks and insights. In particular it uses the mhp to demonstrate the limitations of conceptualizing defence policy and procurement decisions as rational exercises in strategic decisionmaking. To this end, we draw on public choice theory and also a tradition of early writers, including March and Simon,2 Cyert and March,3 Cohen March and Olsen,4 and Mintzberg et. al.5 who conceptualise decision-making as a more complex and less deliberate exercise than public choice theory implies. In our view incrementalism, “muddling through,” and even the “garbage can” metaphor provide a more accurate description of the political process and apparently irrational outcomes that have characterized what Simpson describes as “Canada’s helicopter fiasco.”6 By conceptualising the policy process and decisions that have produced the helicopter “fiasco,” the chapter is able to provide a clearer analysis of the key procurement issues that need to be addressed if the Canadian military is to be supplied with effective equipment in a timely and strategic manner. At a time when the military faces rapidly changing threats and demands, it is unacceptable that procurement cycles should be taking in excess of 10 years to deliver much needed equipment. However, we are opposed to the growing military and political demands that competitive procurement processes be circumvented altogether in an effort to speed up the process. Because defence procurement is an expensive, confidential and high risk area of government spending, we argue that due process, accountability and “value for money” are vital criteria and should not, as a matter of course, be sacrificed for political or logistical expediency. In any case, our analysis of the mhp decisionmaking process suggests that the real reason for delays in procurement cycles are political in nature rather than administrative or bureaucratic. To this end we advocate a number of suggested reforms that, if adopted, could strengthen and improve the existing procurement process. In order to contribute to these broader debates, the aims and structure of the chapter are first to chart the key episodes in the helicopter procurement process over nearly four decades of political indecision and vacillation. Second, we locate the mhp decision-making process within the wider context of Canada’s defence procurement policies and defence spending. Third, we

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analyse the political decisions that led to the eventual purchase of the American produced Sikorsky H-Cyclones and the rejection of the Anglo-Italian “Team Cormorant» eh-101s. Fourth, the chapter illustrates the limits of traditional performance criteria when used to evaluate a political procurement process and consider the implications of this for future defence procurement.

c o n t e x t ua l i s i n g the maritime helicopter project A brief history The Maritime Helicopter Project (mhp) has been the focus of public concern for many years in Canada with the saga of the selection process and purchase of replacement helicopters playing out through the nation’s media. To better understand the issues raised by the mhp, it is important to contextualise the project within the history of Canada’s helicopter procurement program, a process that has spanned decades. Between 1963 and 1969 Canada procured 41 Sea King shipboard helicopters as part of a “singular focus on building and maintaining an anti-submarine warfare capability,” due to the cold war threat of Soviet nuclear submarines in Canadian waters.7 The Sea Kings have since been used for many other purposes, ranging from search-and rescue on land and in Canadian coastal waters, to supporting peacekeeping efforts, to disaster relief missions. As early as 1977 however, the Canadian forces were already discussing the feasibility of replacing the anti-submarine Sea King helicopters as part of a frigate replacement project.8 The Sea King Replacement (skr) Project, as it was known at the time, was passed on to the Air Force however, as the Navy wished to reduce the overall cost of the frigate replacement project. The Air Force saw the replacement of the then only ten-year-old helicopters as a low priority, and therefore the skr was shelved. In 1983, the skr resurfaced in the form of contracts awarded for the design of avionics for the new anti-submarine helicopter, although replacing the airframe was still not a high priority. The project went through a name change in 1985, to the New Shipboard Aircraft Project. The Air Force, now considering replacement airframes, was insistent on using a larger helicopter than what both the American and British navies were switching to for their shipboard duties. Reasons given for the size requirements of a modern Sea King replacement include range, endurance, space for people and equipment, and flexibility for multipurpose missions.9 By 1991, the priorities had shifted again, and the New Shipboard Aircraft Project was merged with the New Search-And-Rescue Helicopter Project.10 The Canadian forces had decided to replace the Labrador search-and-rescue helicopters after several fatal crashes. Using a single helicopter design for

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both anti-submarine warfare and search-and-rescue, although seemingly efficient, put further constraints on the type of helicopter that could be used and further increased the price. Nevertheless, in 1992 the Conservative government announced that the eh-101 European Helicopter Industries Limited was chosen to fill both requirements, and orders were placed for 50 helicopters.11 Immediately following the federal election in 1993 however, Prime Minister Jean Chrétien cancelled the eh-101 project to fulfil a campaign promise. Part of his reasoning appeared sound: the Sea Kings were used for antisubmarine warfare but “Whose submarines, exactly, were dnd planners expecting to ferret out?”12 The Cold War was over, and it made sense for the Canadian forces to revisit their choice in helicopter for shipboard duties, a task they executed through the Maritime Helicopter Project (mhp). This decision came with a price however – approximately $500 million in cancellation fees, years of preparation time on the part of the public and private sectors, the costs of additional required maintenance time, and reduced performance in naval exercises. Procuring new helicopters did not fall off the agenda entirely however and by 1998 new search and rescue aircraft were purchased. The 15 new helicopters, named the Cormorants are actually the same airframes as the helicopters that were cancelled five years earlier, the eh-101, albeit with altered electronic systems to suit the requirements of search and rescue operations. It should be noted that these helicopters have not operated flawlessly over the last few years. They have been grounded in 2003 for fuel leaks and in 2004 for tail rotor cracks and require more maintenance time than originally anticipated.13 The decision to replace the Sea Kings was finally announced in July 2004 and the contract signed in November 2004. The 28 Sikorsky H-Cyclones come at a price tag of approximately $5 billion ($1.8 billion for the helicopters and $3.2 billion for servicing over the next 20 years) with the first delivery expected in 2008.14 Augusta-Westland, the company who was bidding with its eh-101 design, has challenged this contract in the Federal Court of Canada, alleging flaws in the procurement process.15 Canadian defence spending A brief description of the context of Canadian defence procurement helps to illustrate the difficulty Canadian forces had in purchasing replacement helicopters. For example, in terms of the declining funds available for the project, in 2004 Canada’s defence spending was 1.2% of the nation’s gross domestic product (gdp),16 compared to almost 8% of gdp at its 50 year peak in the early 1950s. From this period, funding has fallen continuously until a slight rise the mid 1980s and has since remained at levels between 1% and 2% of gdp.17

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5.0 4.0

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Percentage of gdp

Figure 8.1 nato Defence Expenditures as a percentage of gdp 2004

Selected nato Countries Source: dnd 2005.

To put these amounts into some perspective, Figure 8.1 shows how Canada’s spending ranks at the lower end of the nato community in terms of expenditure as a percentage of gdp. Cuts in defence spending have led to a significant drop in the size of Canada’s regular force, which has declined in recent years from 100,000 in 1989 to approximately 61,500 in 2005.18 This decrease in funding has forced the military to prioritize amongst its operational requirements and put further pressure on major procurements such as the mhp. In spite of Canada’s relatively low spending on defence, attempts to increase it have proved difficult and unpopular. The end of the Cold War threat, the public’s thirst for a peace dividend, and the ideological drive for lower taxes have made increases in defence spending harder to justify and politically unpopular. For example, a report from the Polaris Institute recommended that there be no increases to Canadian defence spending, instead the Canadian forces should focus on proper management and allocation of resources.19 However, the events of September 11, 2001, and the continuing threat from terrorism, appear to have renewed public concern on matters of security and the role of defence. The fatal accident onboard hms Chicoutimi, a second hand submarine purchased from the uk, and numerous media stories of the Canadian military being ill equipped to carry out its overseas duties, have helped to reinforce these concerns and put defence spending back on the political agenda.20 To what extent this translates into increased expenditure remains to be seen, although it may have been a factor in funds becoming available for the purchase of the replacement helicopter fleet.

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Figure 8.2 Procurement Cycle Cabinet to ioc (Initial op Capability)

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mhp

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There is also increasing pressure on governments and the military to open up the decision-making process in order to improve transparency and incorporate wider public involvement. On this matter, the Polaris Institute concluded that “for too long Canadians have been denied opportunities to participate in a discussion about Canadian military spending that has only included decision-makers and the defence lobby.”21 However popular and desirable such reforms would be, defence is not like other aspects of government spending. The strategic, confidential and technical nature of defence spending necessarily limits the public’s understanding of military requirements and prevents their involvement in procurement decisions. As Doern et al have noted, “Voters … have still less knowledge of which new tanks or jet aircraft are best for the armed forces.”22 If one of the conditions for greater spending on defence is increased openness and public accessibility then this may further complicate and extend the procurement process. A recent study shows that defence procurement cycle times in Canada are already complicated by political interference, demands for the “Canadianization” of the project (i.e., on-board systems specially designed to meet Canadian specifications), and the nature of the administrative process.23 Furthermore, in a study of eleven major defence procurement projects since the 1960’s, the mhp was found to be in a category of its own as the longest procurement cycle of all.24 To help explain why the mhp procurement process is taking so long, it is useful to take a closer look at the decision-making process and issues in defence procurement

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a n a ly s i n g t h e d e c i s i o n - m a k i n g p r o c e s s “All politics all of the time” Given that the concepts of strategy and strategic decision-making are synonymous with the military and defence, it is ironic that defence procurement is one of the most politically driven policy areas of all. In a process described by Simpson as “all politics all of the time,” any notion of strategic, rational decision-making appears entirely misplaced. When politicians are considering major procurement decisions Simpson suggests a number of overtly political criteria are central to their deliberations: “Cabinet ministers, with rare exceptions, don’t think about defence requirements when purchases must be made. Their first instinct is to delay, figuring that defence spending isn’t popular. Their second instinct, if the purchase absolutely must be made, is to focus on where the assembly must be done, the parts made, the jobs created, the press releases issued.”26 Simpson also argues that ministers, both Liberal and Conservative, are “militantly uninformed” about the military so that when defence procurement arises at the cabinet table “the discussion isn’t about what’s best for defence but where the political pork will be distributed.”27 On the specifics of the mhp, Simpson is particularly critical of the use of “offsets” (i.e. Industrial Regional Benefits Requirements – irbs) by contractors, describing them as “a fancy word for jobs scattered in sensitive political locations across Canada.”28 As evidence of this practice he points out that Sikorsky’s partner, General Dynamics, has a plant in the riding of former defence minister David Pratt. Although no longer defence minister when the announcement to award Sikorsky the contract was made, Simpson maintains that the decision would have been made some time ago, when Mr Pratt was in office. Commenting on the regional offsets resulting from the Sikorsky deal, Fisheries and Oceans Minister Geoff Regan outlined Sikorsky’s promise that the contract will bring “$1 billion of work to aerospace companies in Atlantic Canada, with Ontario gaining $2-billion worth of industrial activity, Quebec $995 million, and Western Canada $390 million.”29 Although offsets benefit the selected regions, the goal of securing regional development benefits through defence spending is controversial and politicises and extends the procurement process considerably. On this issue, the Senate Committee on National Security and Defence asserts that elected politicians should make the final decision on major military purchases, but “Regional development money should come from a regional development budget, not a military budget.”30 In addition to the regional dimension, procurement decisions have also to take into consideration the international context and, in particular, Canada’s

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defence and economic relationship with the US, particularly in the aftermath of the 2001 terrorist attacks on New York. Immediately following September 11, 2001, it became apparent that Canadian border security would have to be strengthened in order to satisfy US concerns of cross-border terrorist activities.31 Indeed, in a remarkable admission on September 4, 2002, the US ambassador to Canada, Paul Cellucci, revealed that when he was appointed “his only order from the Bush administration was to work on increasing this country’s military spending.”32 This prefaced further statements that were openly critical of Canada’s military spending and called for a larger and better-equipped military. Assuming that the American ambassador’s comments reflect US strategy with respect to Canadian policy making, it can be inferred that not increasing defence spending, and not maintaining a modern military force, could lead to economic difficulties for Canada’s export industries. In fact, the nation’s ability to partake in US-led wars may also be important in sustaining our status as a major trading nation. America’s lack of confidence in Canada’s post-September 11 security measures highlighted Canadian industry’s vulnerability to the subsequent crossborder traffic delays. A significant portion of Canadian industry depends on the ability to move freely between the US and Canada, and the severity and scope of the impact potential border disputes could have on the Canadian economy was considered a very serious threat by the federal government. Consequently, $1.6 billion was allocated to security and defence initiatives, and significant security negotiations took place that would work to see the restoration of Canadian border confidence.33 It is also apparent that the US and other nato partners are keenly interested in Canada’s defence spending and the resulting political and economic pressures may have influenced the Martin government’s decision finally to fund the new helicopter deal. As Allen observes, both Martin and Harper are both “willing to trade more US friendly policies and military spending for better relations with the Bush administration. The achievement of “interoperability’ and [the ability to] work with US forces on [the] war with terrorism will continue to drive National Defence decisions. It is no longer about only defence per se. Economics is obviously intricately paired with defence and foreign relationships with the U.S.”34 Though by no means the only factor in deciding the winning bid, it is interesting to note in the context of Allen’s comments that Sikorsky helicopters is a US based firm, whereas Team Cormorant’s eh-101 is an Anglo-Italian joint venture. In his analysis of domestic politics, Simpson reflects on the pivotal role of Chrétien in the mhp and concludes this was driven by political opportunism and his personal dislike of the Canadian military: “He (Chrétien) simply never liked the Canadian military, believing them to be a bunch of bleaters. He came from Quebec, where interest in things military is low to non-existent. He

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didn’t believe the Canadian people were interested in defence spending, compared to just about anything else. So his abiding purpose was not to buy a replacement for the Sea Kings. And he didn’t.”35 The decision to tear up the existing eh-101 contract, negotiated by the Mulroney government, may have been politically expedient, but an alternative strategy was not formulated and the Navy was left to face another decade of drift and to muddle through with an increasingly inefficient and ineffective helicopter fleet. Turning to the Liberal party, Simpson highlights the role of party and internecine politics in choosing the Sikorsky helicopters: “The eh-101 was the chopper the military wanted. But the optics of choosing it 11 years after Mr. Chrétien rejected it were too awful even for the Martinites, who as we know, cannot find anything good to say about their predecessors.”36 For advocates of public choice theory the suggestion that party interests play a role in defence procurement will come as no surprise, but in the mhp they appear to have been particularly influential. In reflecting on the Martin government’s record on defence procurement, Allen states “As with any ruling party, the overarching goal is to stay in power – and Martin’s choices are certainly in line with this thinking.”37 However, in the context of defence she concludes that this approach is not good enough. Rather than adopt a strategic approach, Allen believes that Martin has preferred to delay most major decisions on defence in favour of small incremental decisions. “Although headlines after the Budget announcements focused on major spending decisions on the military, more careful reading of the announcements actually shows that incremental decisions are the reality of the hype and Martin made sure to leave room in the Budget to change his mind in the future. Thus he is very much in line with the traditional ‘wait-and-see’ approach of past governments.”38 Although the Martin government has finally signed a contract to purchase replacement helicopters for the Sea King fleet, international and domestic pressures appear to have left it with little room for manoeuvre. The perception is still one of a government responding to events in haste and out of political necessity and self interest rather than planning a long-term and coherent defence strategy. Even after three decades of indecision and delay, the first Sikorsky helicopters will still not be operational for another 3–4 years, by which time the deal could again be cancelled given the history and political vagaries of helicopter procurement. The likelihood of this scenario would be significantly increased should we see a change in political leadership in the near future: as Allen notes, “Defence policy is also a reflection of the Prime Minister’s preferences rather than the needs of the military.”39 It is the combination of these factors that have made the mhp a political rather than a rational exercise in strategic decision-making. The following section examines the significance of this for the procurement process and for the criteria used to assess performance and outcomes.

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e va l uat i n g t h e mhp p r o c u r m e n t process and outcomes Traditionally, performance measurement has been seen as a management tool used to inform decision-making and improve policies and services. However, the recent exposure of maladministration in the Canadian political system and public service by the auditor general, Justice Gomery, and others highlights the importance of performance measurement for accountability. According to Flynn, for example, accountability is more than a process of showing how money is spent, “it also involves demonstrating that money has been used efficiently, effectively and for the purposes for which it has been allocated.”40 In addition to efficiency and effectiveness we can also add economy and equity as two more relevant and common measures of public sector performance. In this context, economy attempts to measure the costs of the inputs used, efficiency focuses on the costs of producing outputs, while effectiveness measures are concerned with outcomes and results in relation to the intended objectives. Equity, the so-called fourth “E,” is intended to capture the “fairness” of policies, processes, and services in terms of accessibility and distribution in the absence of market forces. By using these measures to analyse the mhp it is possible to bring some of the key issues into sharper focus and demonstrates the extent to which performance and politics are inseparable. Economy focuses our attention on the cost of inputs and “the acquisition of the appropriate goods and services at the best possible price.”41 In terms of the mhp the inputs would include the financial resources required to buy the replacement helicopters, the associated administrative costs of developing the procurement plan and securing contracts for the purchase. In terms of the costs of the process, these are inestimable, but if we consider that the Canadian forces began feasibility studies into replacing the Sea Kings as early as 1977 (a process that won’t be completed until 2014) we can only imagine the financial and human resources that will have been expended in over three decades of research, drafting procurement specifications, designing competitions, lobbying, preparing bids and defending legal challenges. However, one amount we do know is the $500-million in penalties paid by the government to Augusta-Westland in 1993, as a result of Jean Chrétien’s promise to cancel the Mulroney government’s contract for 50 eh 101 helicopters. Because the specifications for the new helicopters are actually very similar to the cancelled helicopters, it could be argued that this was an unnecessary loss and demonstrates a lack of concern for economy by the federal government. Furthermore, questions of economy also arise if we consider that 11 years after ripping up a contract for 50 eh 101 helicopters at a cost to the taxpayer of $5.8-billion, the federal government has a new contract to pay $5-billion,

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for only 28 helicopters. Even allowing for inflation, the new contract appears to be much more expensive in respect of the average price per helicopter. On the other hand, it could be argued that in 1993, the first Chrétien government’s main strategy was to bring down Canada’s rising national debt and that Canada is now in a much stronger financial position to invest in big ticket defence items such as helicopters. In this respect it is the context and timing of the procurement process that must be considered and not just the absolute or relative costs of the helicopters. That said, it is more difficult to make a case that the mhp has been an efficient exercise in procurement. Again if we calculate the inputs in terms of time, resources and rising costs since the replacement proposal was first considered in 1977 and compare these to the outputs, then the process would have to be described as inefficient. Assuming the current contract is executed, it will have taken over three decades to produce a replacement helicopter. During this time the Sea King has become increasingly expensive to operate and maintain, requiring 25–30 hours of maintenance for every hour spent in the air, and so inefficient that they have been effectively grounded save for emergencies. According to Manson, much of the growth in procurement cycles can be blamed on the formal procurement process which has often been cited as having become overly bureaucratic and time-consuming. “Much of this growth has occurred within the department of national defence, which has worked very hard at ensuring that taxpayer money spent on new equipment produces results that are operationally effective and financially efficient. Over the past forty years or so increasingly detailed procedures have evolved, each of which might be justified in its own right, but which in their totality have evolved into a cumbersome and time-consuming process.”42 However, although it is tempting and in part justified to blame the procurement system for these delays and inefficiencies, our analysis suggests that in this case the problems are more political than technical or administrative. In particular, critics point to successive Liberal governments dragging their feet in order to avoid the embarrassment of choosing to buy the helicopter that Chrétien had paid so much to reject. One means of avoiding a damaging U-turn has been simply to put-off and delay decision-making through a variety of political and technical means: “With Sea Kings falling from the sky, he (Chretien) had to authorize an ‘upgrade’ program to make them marginally safer. He split the helicopter bidding into two parts – for the helicopter platform and the interior electronic package – to cause further delay and confusion. He instructed hapless ministers to keep making announcements about something that would happen in the future but never did.”43 A related strategy has seen significant alterations made to the specifications of the mhp and the criteria for selection: “A series of Liberal defence ministers had promised that the controversial helicopter contract would go

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to the highest bidder, a stipulation that critics said skewed the process in favour of Sikorsky Aircraft Corp.’s H-92.”44 The effect of this has been to ensure that helicopters other than the one originally contracted (i.e. the eh-101) stand a better chance of successfully meeting the criteria. This leads Epps45 to argue that the changes were designed to accommodate other competitors and to ensure the price excluded the eh-101 from winning the contract. If this were the intention behind the changed rule, it has been effective. Although the federal government did its best to conceal the fact, it was ultimately forced to buy Sikorsky helicopters after Team Cormorant, the only other competitor, was disqualified on technical grounds. It is not clear what the reasons for this were but Team Cormorant has long alleged that the process to replace the Sea Kings was “rigged” in favour of their other competitors.46 Whether or not politically motivated by the mhp, recent changes to the defence procurement process indicate that the government is focusing more on the cost of bids; a fact demonstrated by the decision to choose the lowest cost helicopter bid. This approach is different from the way defence decisions were made in the past, “Traditionally, big defence contracts are awarded based on best-value, by which contracts can go to more expensive bids if the product is markedly better.”47 Although this shift in approach may deliver short-term cost savings and be seen to improve both economy and efficiency, there are potential downsides to consider in the longer term. For example, by choosing the lowest compliant bidder, the likelihood that companies will strive to offer innovative products may be reduced.48 The focus on cost for bid preparation by suppliers and vendors does not provide incentives for companies to achieve better specifications than what have been laid out. In this instance a narrow view of economy may result in a product with lower quality that may ultimately prove to be “false economy.” This is why Kernaghan’s definition of economy emphasizes the balance between price and acquiring “appropriate” goods and services. In Simpson’s judgement, politics and the subsequent emphasis on costs have led to the “wrong” helicopter being chosen. He argues that the military really wanted the eh-101 as it is a sturdier, more durable helicopter, carries more people and, from a safety perspective has three engines; one more than the Sikorky.49 In spite of its higher price, a strong case could have been made under the old system that that the eh-101 represents better value for money than its rival. Notwithstanding these concerns, Defence Minister Bill Graham maintains that the Sikorsky helicopter “represents the right helicopter for the Canadian Forces at the best price for Canadians.”50 It is difficult to know if this is the case since the full costs and differences between the bids are not public knowledge. However, some reports suggest that there was only a

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1-per-cent difference (about $50-million) between the winning Sikorsky bid and the disqualified bid of Team Cormorant, whereas the government argues that the Cormorant bid was about 15-per-cent higher (approximately $750-million).51 Consequently, according to assistant deputy minister for defence, Alan Williams, the lowest-cost compliant approach used to purchase the Sikorsky helicopters “is perhaps the case that will come closest to providing best value for the taxpayer in the sense that we don’t spend a nickel more on anything that we don’t have to and we’re minimizing the whole life-cycle of costs … Because someone says this is more capable or this can fly faster or higher … if I don’t need that, why should I pay taxpayers’ money for that?”52 In spite of such claims, a spokesperson for the auditor general’s office was more cautious about endorsing the approach used by Defence: “It is impossible to say whether the lowest-cost compliant approach is bad or good. Under some conditions this approach is fair and it’s good and it leads to good value. In this case did it?”53 Clearly, the economy and efficiency criteria used in procurement decisions are complex and judgments about “best value,” even those based on low-cost compliant bids, depend on longer-term performance measurement and ultimately their effectiveness. However, in order to assess effectiveness, the procurement process must have a clearly articulated purpose and set of objectives by which to measure outcomes. In the case of the mhp the aims have never been clearly defined and appear to vacillate between traditional performance criteria and political expediency. For example, if the purpose of the mhp was to deliver to the Navy the most suitable replacement for the Sea King helicopters in a timely and costeffective manner, then this has clearly not been the case. If, on the other hand, as critics suggest, the objective has been to delay the procurement process, place technical and financial barriers in the way of one of the leading competitors and reduce the political embarrassment of a major U-turn, then it can be considered highly effective. Although equity may not appear to be an obvious criterion to consider in relation to defence procurement, it provides a broader context within which to conceptualise the mhp. For policy-making that involves the allocation of resources, the distributive aspect of equity requires us to consider opportunity costs and the notion of fairness. For example, the resources allocated to defence could make a significant contribution to social programs, health care initiatives and so on. In respect of the trade-offs between these areas of spending, it was widely known, as we have seen, that Prime Minister Chrétien was not a strong supporter of military spending and, like many in his party, saw more returns and votes in social spending. It is little surprise then, that political will was in short supply during the 1990s when it came to spending heavily

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on replacement Sea King helicopters. This is a decision that could plausibly have been justified on the grounds of other spending priorities providing more equitable outcomes. On the other hand, how equitable was it to allow military personnel to continue risking their lives in antiquated equipment, which the press had dubbed “flying coffins,” or for Canada to continue “free riding” on the back of the US for a credible defence policy?54 Whatever peoples thoughts there were on these matters, they were changed dramatically by the events of September 11, 2001. Suddenly national security and Canada’s relationship with the United States were thrown into sharp focus and the pressure for defence spending was reprioritized relative to other priorities. As we discussed earlier, questions of equity and fairness have also been raised in relation to claims that the mhp procurement process appeared to be skewed in favour of one bidder over another and that technical requirements were used to exclude the bid that was, in political terms, the least desirable. Currently, in an attempt to expedite the procurement of Chinook helicopters and Hercules planes for the Canadian forces, it is suggested that these same tactics are being deployed again: “Industry sources said the requirements will be so specific that only the makers of the Chinook and the Hercules aircraft will be able to comply, and that the government is simply delaying the inevitable.”55 Moreover, in their understandable haste to secure much needed equipment, General Hillier, Canada’s chief of defence staff, and deputy minister of Defence Ward Elcock have even been recommending the government forgo the competitive process altogether and simply purchase the Chinook helicopters and Hercules planes.56 For the time being this is being resisted by ministers, but speed is now clearly a key factor competing with due process in defence procurement: “We are going to go fast. That’s the direction from the Prime Minister … You have to at least allow companies to demonstrate whether or not they can meet the requirements. And from my perspective that’s competition.”57 However, because accountability is also a key measure of the procurement process, it could be seen as inappropriate and high risk for the government to circumvent the competitive process altogether. In the wake of the Gomery Commission findings, accountability and transparency have assumed more importance relative to other criteria such as speed and efficiency. As one defence official put it: “What there needs to be is a fair open and transparent process rather than a directed contract. In that sense, it is significantly different, even though you may get the same result.”58 While removing fair and open competition may speed up procurement, the process of awarding contracts will be reduced to an internal exercise insulated from public scrutiny As such, the process will inevitably be subjected to greater political pressures that may not be consistent with traditional performance measures such as

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economy, effectiveness and equity. In such circumstance the likelihood of the procurement process delivering optimal equipment for the military in a timely manner is significantly reduced while the chances of more protracted and “tortuous” sagas in defence procurement, such as the mhp, are significantly increased.

c o n c lu s i o n s Defence procurement, like any other policy area, does not exist in a vacuum, nor is it written on a clean slate. Rather, as Allen concluded, defence spending in Canada is underscored by “the unique nature of Canadian beliefs and political contexts. The state of military procurement is both a reflection of past military spending and the confusion that exists over the role of the Forces and the lack of a realistic doctrine to guide planning.”59 A combination of historical, cultural, and economic factors have produced a decision-making context in which short-term political considerations have overwhelmed seemingly rational and strategic plans for replacing the Sea King helicopter fleet. However, at a conceptual level, although public choice theory accommodates and predicts high levels of party political and self interested behaviour, it too appears overly instrumental and simplistic in this context. Incrementalism, “muddling through” ad hoc, and contradictory decision-making have all at times characterised the mhp to such an extent that Cohen et al’s concept of the “garbage can model” seems an apt metaphor for a decision-making process “characterized by a continuous ebb and flow of leadership, ongoing change in the policy environment, and shifting sets of coalitions among stakeholder groups.”60 In spite of our criticism of the overtly political and messy nature of defence procurement we remain convinced that ultimately it is politicians who have to be responsible for the final decision on large military purchases. However, this responsibility also requires that politicians be held accountable for the unacceptably long procurement cycle that has plagued the mhp and helped to undermine the credibility of Canadian defence procurement. As former Defence Chief of Staff Paul Manson stated recently, the consequence of such delays have serious strategic and operational consequences: “With the Canadian military attempting to transform itself to meet the demands of a rapidly changing world, it is simply untenable to take ten or fifteen years to introduce new systems into the inventory. Surely the turgid pace of capability acquisition is a barrier that stands between the status quo and a transformed military. It goes without saying that the Canadian forces must have the right equipment at the right time if they are to meet the operational demands of the new strategic and tactical environments.”61 If repeats of the mhp saga are to be avoided in the future then lessons need to be learned that will improve decision-making and accountability, reduce procurement cycles and lead to more effective outcomes. First, the goal of securing regional development

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benefits through defence spending is controversial and politicises and extends the procurement process considerably. Consequently, we strongly agree with the Senate Committee on National Security and Defence that “Regional development money should come from a regional development budget, not a military budget.”62 Second, manipulating procurement criteria and specifications in order to achieve a winning bid that is politically acceptable shows the government to be operating in bad faith and undermines the credibility of the competitive process. The absence of genuine competition increases the risk of suboptimal equipment being purchased at inflated prices. Furthermore, introducing new specifications, for political gain or to “Canadianize” standard equipment, adds years to the procurement cycle and incurs enormous extra costs for competing firms and ultimately taxpayers.63 For these reasons, procurement guidelines, specifications and timeframes need to be carefully drafted and clearly set out at the beginning of the competition and not altered during or near the end of the process. Third, ill defined performance measures obfuscate accountability and contribute to the extension and increased costs of the procurement cycle. As the mhp illustrates, in the public glare of political and media scrutiny, the often conflicting demands for economy, efficiency, effectiveness and equity can induce overly cautious decision-making and programme paralysis. In this context, well defined goals can speed-up and improve the decision-making process by facilitating the difficult task of making trade-offs between competing performance criteria. Using performance measures to assess a policy as complex as defence procurement is not without major challenges. Any assessment of performance is highly subjective, but in defence procurement the political and often confidential nature of the process presents added difficulties. However, these obstacles are not intractable and should not exclude defence procurement from independent audit and review. By analysing the mhp the most uneconomic, inefficient, ineffective and potentially unfair aspects of the procurement process can be identified and the findings used to inform future programmes. Finally, recent pressure to circumvent the procurement process completely in order to expedite the purchase of military equipment should be resisted as this reduces transparency and accountability and increases the likelihood that decisions will reflect political interests rather than the military’s strategic needs. This is significant because in our view, analysis of the mhp suggests that delays in the procurement cycle are largely attributable to the political factors we have identified in this chapter. The administrative and technical delays we have outlined are really reflections of deeper political vacillation and inertia; had the political will to replace the Sea King helicopters been sustained through changes in government and leadership, then the procurement process would not have taken over 30 years to complete.

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We share Manson’s64 wish to see a more streamlined system of defence procurement. However, given the large sums of money involved, the strategic needs of the military and the public’s demands for better accountability, it is important that the procurement process be strengthened and not circumvented or manipulated for political ends. If, as Flynn suggests, accountability involves “demonstrating that money has been used efficiently, effectively and for the purposes for which it has been allocated,”65 then the mhp should serve as a salutary warning.

notes 1 “The long, tortuous path of helicopter politics,” Globe and Mail (Toronto) 24 July 2004, A14. 2 March, James G., and Herbert Simon, Organizations (New York: John Wiley 1958). 3 Cyert, Richard M., and James, G. March, A Behavioural Theory of the Firm (Englewood Cliffs, nj: Prentice Hall, 1963). 4 Cohen, Michael D., James G. March, and Johan P. Olsen “A Garbage Can Model of Organizational Choice,” Administrative Science Quality 17 (1972): 1–25. 5 Mintzberg, Henry, Duru Raisinghani, and André Theoret, “The Structure of Unstructured Decision Processes,” Administrative Science Quarterly 21 (1976): 246–75. 6 “Damn It’s Still the Wrong Helicopter,” Simpson, Jeffrey, Globe and Mail, 24th July 2004, A13. 7 Gordon Davis, “The Maritime Helicopter Project, Why and How – Part 1,” Maritime Affairs, The Naval Officers’ Association of Canada (1999), Available online at http://www.noac-national.ca/article/davis/themaritimehelicopterproject_p1_ gordondavis.html. 8 Priestley, Stephen. “Politics, Procurement Practices, and Procrastination: The Quarter-Century Sea King Helicopter Replacement Saga.” Canadian American Strategic Review (June 2003). Available online: http://www.sfu.ca/casr/id-mhp.htm, accessed October 2003. 9 Curleigh, Colin. “Welcome News – A New Maritime Helicopter,” Maritime Affairs The Naval Officers’ Association of Canada (12 December 1996). Available online at http://www.noac-national.ca/article/curleigh/anewmaritimehelicopter_ bycolincurleight.html. 10 Priestley, “Politics, Procurement Practices, and Procrastination.” 11 Epps, Ken. “Maritime Helicopter Project,” Ploughshares Monitor 24, 2 (Summer 2003). Available online: http://www.ploughshares.ca/libraries/monitor/ monj03i.htm. 12 Priestley, Politics, Procurement Practices, and Procrastination. 13 cbc News Online, “Indepth: Search and Rescue – Finding a new helicopter,” 20 July 2005, Available on line: http://www.cbc.ca/news/background/search_rescue/ labrador.html.

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14 Scott Taylor, “Cyclones on the Way: A Healthy Forecast for Canada’s Maritime Aviation,” Esprit de Corps 11, 12 (2004): 6. 15 Augustawestland International Ltd. v. Canada (Minister of Public Works and Government Services), (2004) F.C. 1545. 16 nato International Staff, NATO-Russia Compendium of Financial and Economic Data Relating to Defense – Information for the Press, (9 June 2005), 7. Available online: http://www.Nato.Int/docu/pr/2005/p050609e.htm. 17 National Defence, “Historical and Comparative Overview of Canadian Defence Spending,” Accessed 24 November 2003 http://www.dnd.ca/site/reports/cds_report/ english/anxc_e.htm. 18 Department of Foreign Affairs and International Trade News Release, “International Policy Statement – A Role of Pride and Influence in the World – Highlights” (19 April 2005). Available online: http://w01.international.gc.ca/minpub/Publication.asp? Language=E&publication_id=382440. 19 Staples, Steven, “Breaking Rank: A Citizens’ Review of Canada’s Military Spending” (Ottawa: The Polaris Institute, 2002, 40. 20 Allen, Barbara A. “Like a Sub Adrift: Defence Policy as Litmus Test for the Martin Government,” in How Ottawa Spends, ed. Doern, G. Bruce. (Montreal: McGill Queens University Press, 2005) 59–76. 21 Staples “Breaking Rank,” note 19 at 40. 22 G. Bruce Doern, Allan Maslove, and Michael Prince, Public Budgeting in Canada (Ottawa: Carleton University Press, 1988), 79. 23 Manson, Paul, “Procurement Cycle Growth: The Race between Obsolescence and Acquisition of Military Equipment in Canada, 1960 to the Present,” Presentation to the Canadian Institute of Strategic Studies (ciss) Seminar, 22 July 2005, Available on line: www.cda-cdai.ca/presentations/procurementcyclegrowth.htm. 24 Ibid. 25 Ibid. 26 Simpson, “Damn.” 27 Ibid. 28 Ibid. 29 Gloria Galloway and Kevin Cox, “Winning Helicopters Assailed as Inferior,” Globe and Mail (Toronto), 24 July 2004, A1. 30 Senate Committee on National Security and Defence , Wounded – Canada’s Military and the Legacy of Neglect, September 2005, Available online: http://www.parl.gc.ca/38/1/parlbus/commbus/senate/com-e/defe-e/rep-e/ repintsep05-e.htm#_ftn96, pages 93–95. 31 Goldfarb, Danielle and William B.P. Robson. “Risky Business: U.S. Border Security and the Threat to Canadian Exports.” C.D. Howe Institute Commentary 177 (March 2003): 2. 32 Staples, Steven. “Uncle Sam’s Canada Plan: Remarks by Steven Staples of the Polaris Institute to the Canadian Conference on Unity, Sovereignty and Prosperity,”

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34 35 36 37 38 39 40 41 42 43 44 45 46

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December 5, 2002. Available online: http://www.creativeresistance.ca/canada/ 2002-dec27-uncle-sam’s-canada-plan-for-defence-spending-steven-staplespolaris-institute.htm. Whitaker, Reg. “More or Less Than Meets the Eye? The New National Security Agenda” in How Ottawa Spends, ed. Doern, G. Bruce. (Oxford: Oxford University Press, 2003), 48–54. Allen, “Like a Sub Adrift,” 71. Simpson, “Damn.” Ibid. Allen, “Like a Sub Adrift,” 74. Ibid., 71. Ibid., 60. Flynn, Norman. Public Sector Management. 4th Edition (London: Prentice Hall, 2002), 206. Kernaghan, Kenneth, and David Siegel, Public Administration in Canada (Toronto: Nelson, 1999), 326. Manson, “Procurement Cycle Growth.” Simpson, “Damn.” Galloway and Cox, “Winning Helicopters.” Epps, “Maritime Helicopter Project.” LeBlanc, Daniel. “Copter Plans ‘Plain Stupid,’ Expert Says: Lowest Bid Not Always the Smartest Deal, Former Public Works Deputy Minister Says.” Globe and Mail, May 13, 2003, A4. LeBlanc, Daniel. “Military Short $100-million, dnd Says: Opposition Lashes Out Over Military’s Aging Helicopters,” Globe and Mail, November 8, 2002, A4. LeBlanc, “Copter Plans.” Simpson, “Damn.” Minister W. Graham, cited in Graham Leblanc, “Ottawa Forced to Buy Sikorsky, Sources Say,” Globe and Mail, February 10, 2004 A4. Ibid. Gloria Galloway, Globe and Mail, July 28th 2004, A6. Cited in ibid. Allen, “Like a Sub Adrift,” 60. Daniel Leblanc, “Ottawa Seeks Bids on Military Aircraft,” Globe and Mail, 8 October 2005, A4. Ibid. Defence official quoted in Ibid. Defence official reported in Ibid. Allen, “Like a Sub Adrift,” 60. Robert Denhardt and Janet Denhardt, Public Administration: An Action Orientation, Fifth Edition (Fortworth, tx: Harcourt Brace, 2006), 180. Manson, “Procurement Growth Cycle.”

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62 Senate Committee on National Security and Defence, Wounded – Canada’s Military and the Legacy of Neglect, September 2005, Available online http://www.parl.gc.ca/38/ 1/parlbus/commbus/senate/com-e/defe-e/rep-e/repintsep05-e.htm#_ftn96, 93–95. 63 Manson, “Procurement Growth Cycle.” 64 Ibid. 65 Flynn “Public Sector Management,” 206.

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9 How Ottawa Reviews Spending: Moving Beyond Adhocracy? evert lindquist

On December 12, 2003, Prime Minister Paul Martin announced a significant reorganization of cabinet structure and the public service,1 including central agencies. The latter changes included removing several responsibilities from the Treasury Board Secretariat (tbs), which was “re-mandated to focus on more rigorous oversight of government expenditures,” and re-creating the Office of the Comptroller General in tbs. A new Cabinet Committee on Expenditure Review, led by Reg Alcock as president of the Treasury Board of Canada, would “conduct a fundamental review of all programs and expenditures.” Together, these changes were touted as “a first step in creating a culture of continuous reallocation and realignment.”2 Indeed, “stronger financial management and accountability” was one of seven overarching themes of the new government.3 For those inside and outside tbs who have long called for a stronger budget office and challenge function, these changes constituted a welcome opportunity.4 There was a prospect of matching renewed tbs bureaucratic capacities with a clear mandate from the Prime Minister, a new minister with considerable energy and a strong interest in public management and oversight, and a powerful client in the Expenditure Review Committee (erc). Eight months later, though, in a significant setback for the Treasury Board, the prime minister announced that Minister John MacCallum would chair the erc, appointed a new deputy secretary to Cabinet (Expenditure Review), and located its secretariat in the Privy Council Office (pco). A secretariat was quickly assembled and, working with erc ministers, identified $11 billion worth of savings over five years that were announced in the February 2005

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Budget.5 However, the erc and its secretariat were dissolved later in the Spring. When the election was called, the government had neither announced a successor to the erc nor the contours of a broader expenditure management system to guide priority-setting and re-allocation. This chapter provides an account and analysis of the erc exercise.6 It begins by considering the challenges confronting key actors in the drama – the Treasury Board seeking to rebuild capabilities and a prime minister attempting to set a new tone in the post-Chrétien environment – each aspired to similar goals, but their trajectories did not intersect productively at a crucial time. The next two parts describes the re-launching of the erc and how it delivered on its mandate. The fourth part compares the erc with previous review exercises and practice in other jurisdictions. Ottawa’s style of reviewing programs, and the capabilities for coordinating them, are characterized as “ad hoc.” The chapter concludes by exploring the possibilities for institutionalizing the review and re-allocation function. This should be a top transition priority for the next government following the January 2006 federal election, no matter its composition. Fostering a culture of re-allocation involves regularizing the process, more aggressive action from the Treasury Board, a dedicated erc-type secretariat or “adhocracy” in tbs that can more fully draw on relevant expertise, and selective reviews each budget cycle. Most importantly, the next prime minister needs to allocate sufficient time of senior ministers to drive the erc process and to strengthen the bureaucratic leadership for the budget office and review functions.

b u r e au c r at i c a n d p o l i t i c a l m o m e n t u m f o r r ev i ew: c o n v e r g i n g pat h s ? Comprehending the re-launch of the erc in August 2004 requires understanding the trajectories of tbs and the fledgling Martin government. Both were building to similar goals in different ways. tbs was given an opportunity to reclaim its relevance and prestige as a central agency, but was inadvertently overloaded by a government that did not comprehend how its demands squared with tbs capabilities. tbs did not have the reflexes to quickly build alternative capacities or insist on sufficient resources to meet these short-term political demands, while handling an internal restructuring and building essential long-term capabilities.7 Bureaucratic Groundwork: Laying Foundations for Review The ambit of the Treasury Board of Canada has always been enormous. In addition to it roles as budget office and employer for the government, it has long

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been understood to be the public service’s “general manager” well before its designation as the “management board” for the government in 1997. In the tight fiscal environment of the 1990s, both Conservative and Liberal governments moved forward with initiatives associated with managerialism, alternative service delivery, and the New Public Management. The Treasury Board steadily sought to move away from transactions to more strategic initiatives, and to streamline and more fully integrate its diverse “suites” of policies across its span of control. The Program Branch – which embraced the “budget office” or the program and expenditure management sectors – lost its top leadership position (deputy secretary) when Secretary Peter Harder sought to encourage more collaboration with other tbs branches concerned with financial management, human resource management, information management, labour-management relations, official languages, employment equity, results, service quality, reporting to Parliament, etc.). Program Branch had previously been de-layered and modestly downsized in cost-reduction initiatives. Harder also established a task force on “modern comptrollership” that called on the Treasury Board to strengthen integrated performance information, risk management, stewardship, control, and shared values and ethics across the public service.8 After the 1994–95 program review cuts, Treasury Board assessed whether programs were at risk and required re-investment.9 These disparate changes were captured in an overdue vision for tbs, Results for Canadians, simultaneously retrospective and prospective.10 It emphasized a strategic focus on results, service, values, and responsible spending. But, for many, the Treasury Board continued to be opaque and uncoordinated, moving from one initiative to another, without fully and convincingly completing the previous ones, steadily losing clout in comparison to other central agencies such as pco and Finance. However, tbs was involved in several significant initiatives in the early 2000s.11 First, it supported the Advisory Commission on Labour-Management Relations and the Task Force on Modernization of Human Resource Management that led to the sweeping Public Service Modernization Act in late November 2003 and realigning responsibilities across central agencies and departments, including tbs.12 Second, tbs had lead roles in Government Online and Service Canada, two major government-wide initiatives.13 Third, tbs continued working with departments and agencies to implement modern comptrollership initiatives.14 Fourth, although tbs had long assessed departments on an annual basis (not to be confused with the 2002 Departmental Assessments linked to re-allocation below), the Management Accountability Framework was used as a more detailed guide in 2003.15 Finally, tbs revised the estimates to emphasize results,16 and began annual reporting on Canada’s Performance on the overall impact of federal and other programs in strategic areas using a variety of internal and external measures.17

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Several important themes coalesced around the aspirations and capabilities for a modern “budget” office informed by the principles of comptrollership. They included: • Horizontal is strategic. Ministers and staff came to believe that tbs’ comparative advantage rested in its ability to provide horizontal or government-wide perspectives on programs, whether for performance reporting or informing horizontal assessments and initiatives. There were pilot efforts to build comprehensive and detailed picture of federal government expenditures in areas such as biotechnology, climate change, Aboriginal issues, and public safety and anti-terrorism initiatives. • Ongoing re-allocation. The 2002 Speech from the Throne and the 2003 Budget announced a goal of re-allocating $1 billion per year from low-priority program to higher-priority initiatives, and the government claimed that several urgent issues were addressed with the liberated funds.18 • Better expenditure information. This required access to finer-grained financial information on programs linked to outputs and outcomes (nonfinancial information) at different levels of aggregation in departments and across government, to support comparability of data across programs, and better year-over-year comparisons of planned and actual information. Developing a robust Expenditure Management Information System (emis) was not a new idea, but after an early 2003 review, the effort began in earnest. The Program, Reporting and Accountability Structure (pras) for the Estimates was overhauled, becoming the Management, Resources and Results Structure (mrrs). Replete with programming challenges, tbs worked with departments and agencies to secure data on about 5000 program activity areas.19 • Promoting stewardship and comptrollership. tbs continued to implement the modern comptrollership initiative through pilot projects and then government-wide.20 Creating the “stewardship” strategic outcome by combining expenditure management and modern comptrollership. tbs sought to build centres of excellence in the areas of risk management, internal audit, and evaluation. In short, a vision of a strong budget office was taking shape, rooted in comptrollership principles and requiring a robust information system to better track expenditures, link inputs to results, and provide a basis for evaluating the value-for-money and efficiency of government programs within and across departments. Such systems, it was believed, could ultimately improve the quality of reporting to Parliament. So, well before December 2003, tbs was strengthening capacity in expenditure management and comptrollership. The controversies over the sponsorship, gun registry, and other programs provided powerful arguments for a

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strengthened and more forceful tbs in these areas. But, they still competed for the attention of the Treasury Board with other priorities. The Treasury Board’s ambit thus seemed a second-best approach. But while many observers had speculated about where to re-locate the expenditure budget office functions, few would have predicted Martin’s machinery changes in December 2003. They gave tbs a clear focus and mandate, and the prospect of ministerial clout through the erc and Treasury Board President Reg Alcock, previously chair of the Standing Committee on Government Operations and Estimates. The advocates for a stronger budget office could not have asked for more. Political Imperatives: New Expectations for the Treasury Board There are several reasons why Prime Minister Paul Martin and his government took an interest in expenditure review. First, one goal was to build credibility for his government in public management after the internecine struggles of the Liberal Party over leadership and the Sponsorship scandal. Second, despite prudence factors and surplus budgets, the government sought financial room to deal with in-year unforeseen pressures (such as “mad cow” disease, sars, softwood lumber, avian flu, security etc.), impending bi-lateral and multi-lateral negotiations with the provinces and territories, and possible tax relief and direct spending on citizens. Third, Martin galvanized his political reputation as minister of Finance with the Program Review in 1994–95; taking another firm stand could generate credibility for the government. Fourth, intra-party transitions are often as dramatic and more difficult than transitions between parties.21 As prime minister, Martin could take stock of federal programs outside his sphere of knowledge at Finance.22 Finally, the Liberals had to demonstrate fiscal prudence to deal with the Conservatives and generate room to spend to work with or outflank the New Democratic Party. Expenditure review was not simply a glimmer in the eye of the prime minister. Before he left politics, John Manley as minister of Finance, and Lucienne Robillard, the president of the Treasury Board, identified a $1 billion target for review and re-allocation in the February 2003 Budget. This was to become a regular feature of future budget cycles, and requests to extend or increase funding for programs would not be approved without evaluations or reviews.23 Others, such as Ralph Goodale, who succeeded Manley as minister of finance, shared this disposition. Many Liberal ministers recalled the painful program review decisions, and despite recent surpluses, understood the virtues of ongoing, pre-emptive review. The erc, therefore, built on growing ministerial and bureaucratic interest, and promised to galvanize this function, sending strong political and bureaucratic signals. But it was one of many initiatives. First, the prime minister

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froze spending on December 16, 2003; partly a strategy to liberate resources for other purposes and to deal with year-end spending by departments. Second, anticipating the fall-out from the impending auditor general February 2004 report on the sponsorship program, the government announced a commission of inquiry and pointed to several initiatives about strengthening the internal audit function, more transparency for contracts and miscellaneous expenditures of executives, a new governance regime for Crown Corporations, and stronger requirements for certified comptrollers in departments and agencies, which also required more training. Finally, the March 23, 2004 budget reiterated the commitment to find $1 billion per year and signaled the government’s intent to re-allocate at least $3 billion annually for new “investments in the priorities of Canadians” within four years.24 The December 2003 announcements had huge consequences for tbs. First, the expenditure management and comptrollership functions required disentangling from the other functions going to new departmental homes. tbs oversaw negotiations over its own budget and human resources and for the other machinery changes (see endnote 1). Second, a bewildering array of reviews were to be completed by fall 2004: reviews of the spending and programs of the thirty largest departments and agencies; selected horizontal policy and program reviews; reviews of government-wide operational functions like capital asset management, public sector compensation, procurement and contracting, corporate and administrative services, professional services, information technology, infrastructure for service delivery, institutional governance, and legal services; and sponsorship-related reviews on the Financial Administration Act, the governance of Crown corporations, and the accountabilities of ministers and senior public servants.25 Third, the Budget increased tbs’s resources for emis and the reviews, among other things. Six teams were staff up out of the associate secretary’s office in Spring 2004. Finally, when the government mandated a stand-alone and more substantial Office of the Comptroller General in tbs, along with initiatives to beef up standards and staff across the public service, it meant the functions that remained had to be re-structured. Shifting the Expenditure Review File to New Hands Following a flurry of announcements, Prime Minister Martin dissolved Parliament on May 23, 2004. The June 28 election led to a Liberal minority government. In such a precarious context, it is not surprising the prime minister took seriously his December 2003 expenditure review commitments. Martin and his advisors either determined there was insufficient progress with the reviews or required a higher political profile. Several factors could explain this. First, tbs was also dealing with implementing the complex Public Service Modernization Act (psma) and its

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own internal restructuring flowing from the psma and December 2003 announcements. Second, tbs was carrying out a multitude of reviews on top of its normal “transactional” work, but this was not a normal time: a minority government meant a regular stream of deals and initiatives to keep allies onside and, all of these, implied Treasury Board involvement. Fourth, tbs was a point of contact for records and support for the Gomery Commission, and several staff were expected to testify at its hearings in September. Finally, perhaps due to the election and shortened summer break, neither the President of the Treasury Board nor the Prime Minister had started driving the review process. Most interactions between tbs and departments in late spring and over the summer concerned the emis/mrrs project, which had less about the erc and more about building a new expenditure information architecture. Finally, despite the arrival of new resources and myriad reviews in motion, a high profile, dedicated coordinating secretariat was not established. On August 18, 2004, the prime minister announced that John McCallum, minister of National Revenue, would lead the erc. While erc retained its status as a “subcommittee” of the Treasury Board, its new secretariat would be located in pco. It was not clear whether these changes emerged from discussions with the president of the Treasury Board or were unilaterally announced. McCallum, an economist by training and profession, was chosen partly because, as minister of Defence, he had been involved in significant reallocation decisions. Munir Sheikh, recently associate deputy minister in Health Canada and previously in the Department of Finance, was appointed as deputy secretary to Cabinet (Expenditure Review). Minister Alcock was no longer erc chair and, most importantly for tbs, it no longer served as its secretariat.

the 2004–05 expenditure review process With ministers and deputy ministers returning from summer vacations, the erc chair and deputy secretary had to move from a standing start and achieve in four months a target of $12 billion in savings over five years to inform the February 2005 Budget. The deputy secretary had to quickly gain access to information and talent. To assemble his secretariat, Sheikh turned to Bob Emond, former adm Corporate Services for the Department of National Defence (and previously in a similar position for tbs and Finance). Overtures were made to tbs to work collaboratively; tbs staff did brief erc staff over a three-day period. Seconding staff to the erc was broached but did not happen, largely because of perceptions about the emphasis of the erc reviews. Sheikh contacted several deputy ministers for suggestions of promising talent, and hired about twelve staff. Minister McCallum would later say that the erc was “small and

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fresh … things that the Treasury Board Secretariat were not,”26 but few of its staff had experience in expenditure management and program assessment. Perhaps tbs was less co-operative than it could have been, but the secretary had a broad span of control and was wrestling with health issues. More generally, there were undoubtedly tensions since a key responsibility been taken out of tbs hands and the new erc process promised to complicate the reviews tbs had underway. And, given the challenges and availability of leaders in both organizations, there was no time to repair relations. Unfortunately, this left erc with little concrete information. Later, erc staff wondered about “silly” tbs templates, which were not developed for a reallocation exercise, but rather, building the new architecture for emis/mmrs. McCallum and Sheikh’s top priority was to elicit co-operation from ministers and deputy ministers for an exercise that had languished thus far. In early September the prime minister and the clerk of the Privy Council, Alex Himelfarb, reiterated the importance of the erc to ministers and deputy ministers and requested they submit information in six weeks. These messages were reinforced at Cabinet meetings, and the clerk established a steering committee of deputy ministers to review proposals. Ministers and departments initially presumed that the erc would rely on centrally set targets similar to the 1994 Program Review. But erc staff asked that they self-identify savings in programs constituting 5% of base budgets so ministers could explore the possibilities. Deputy ministers submitted short notes itemizing proposals and their effects, endorsed by their ministers. This eventually led to about two hundred one-pagers and roughly $17 billion of cuts for ministers to consider. Many proposals were withdrawn due to political considerations such as federal presence, impacts on jobs, and so on, but it became apparent that $6 billion could be secured from initiatives in the areas of service transformation, procurement, and property management. Given the minority government situation, it is not surprising the focus was more on efficiencies as opposed to outright program eliminations and cutbacks. During Fall 2004, erc ministers met once a week and sometimes twice a week, for a total of fifteen meetings. Ministers were fully engaged and serious about their charge. Rather than rely on officials to develop a package for consideration and possible endorsement by the erc, the ministers strongly indicated that they wanted to identify the possibilities. Not only was the erc comprised of powerful ministers, the deputy prime minister regularly attended, and so did the minister of Finance from time to time. As erc Chair, McCallum had bilateral sessions with ministers on their files, but on major files with horizontal dimensions – such as Service Canada, procurement, and real property management – ministers and deputy ministers from the implicated departments were encouraged to form committees and work collaboratively in developing proposals.

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The vast majority of ministers and deputy ministers were, in varying degrees, considered active contributors to the process. After re-launching the process, the prime minister received regular progress reports. The prime minister, minister of Finance, and the clerk knew which ministers and departments were contributing, a potential factor in assessing the performance of ministers and deputy ministers. After vetting the proposals, erc communicated its recommendations to ministers in November and December, 2004. Final decisions about the package, which identified approximately $11 billion in savings over five years, were made on December 14 and presented to the Cabinet on January 10 just weeks before the February 23, 2005 Budget. The erc was soon dissolved and staff quickly moved on to other opportunities.27

did the 2004 expenditure review deliver? One of the centerpieces of the February 23, 2005 Budget was the erc savings package. A separate budget document – Expenditure Review for Sound Financial Management – explained the process, itemized the savings, indicated what new initiatives were funded (without mentioning the larger stream of federal surpluses), and assured readers of an even impact on federal government jobs and communities across regions (see Tables 9.1 and 9.2).28 Details on initiatives were posted on the Expenditure Review web site,29 with links to department web sites that summarized the savings.30 The list of savings reflect the breadth and diversity of the operational, horizontal, and departmental reviews that produced them: an interesting mix of typical “efficiencies” every department and government seeks from time to time, withdrawal of funding for certain programs, initiatives that reverse more than a decade’s worth of effort to give departments and agencies flexibility in the purchase of services (e.g. procurement and property management), consolidations of corporate and other services, and the delivery of services. In many cases, short-term “investments” were needed to secure savings to build new information systems, consolidate, and so on. Half of the savings were secured from three initiatives in motion well before the erc started: property management, procurement, and Service Canada. The latter was incubated at tbs as a horizontal initiative and then transferred to Human Resources Development Canada when tbs was realigned.31 Of course, any large initiative in government necessarily sweeps up and takes credit for many initiatives in process, but perhaps erc’s accomplishment was to showcase, on a government-wide basis, the many smaller re-allocations that occur in departments and agencies in any year.32 The erc process would have been a truly painful exercise like the Program Review if another $6 billion in efficiencies had to have been found.

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Selected Policy, Political, and Budgetary Realms

Table 9.1 Expenditure Review – Total Savings ($ millions) 2005–06 2006–07 2007–08 2008–09 2009–10

Total

Government-wide Efficiencies Property Management

150

150

170

255

300

1,025

59

204

598

841

888

2,590

265

420

805

780

780

3,050

474

774

1,573

1,876

1,968

6,665

Program Efficiencies

128

196

320

342

360

1,346

Administrative Efficiencies

106

230

353

371

385

1,445

Program Elimination-Reduction

104

205

274

274

275

1,132

Sub total

337

631

947

987

1,021

3,923

26

60

67

81

91

325

837

1,465

2,587

2,944

3,079

10,913

Procurement Service Delivery Sub total Departmental Initiatives

Employee benefit savings grand total % from efficiencies

89%

Source: “Government of Canada – Expenditure Review” web site at http://www.expenditurereviewexamendesdepenses.gc.ca/tab/tr-re_e.asp (February 23, 2005). Note: Shaded areas denote efficiencies. Calculation of percentage efficiencies excludes Employee Benefits in both the numerator and the denominator.

A sensitive topic concerns how credible and firm the announced savings were. Neither the tbs program sectors or Office of the Comptroller General were involved in detailed costing. The erc relied heavily on the commitments and word of department representatives about the authenticity and feasibility of their figures. As one official observed: “if it seemed reasonable, we took it out of their base budgets over the five-year planning horizon.” Some observers have questioned the credibility of the figures.33 For the Department of Finance, whether the figures were solid or not did not really matter; if the specific commitments were not feasible or yielded lower savings, departments were still on the hook for the savings. For tbs, responsible for reflecting the savings in the Estimates, the quality of the undertakings mattered with respect to program integrity in the longer term – they might later deal with departments attempting to access its reserve for workload and other pressures.

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Table 9.2 Departmental Savings Initiatives ($ millions) Department Agriculture agr – Canadian Food Inspection Agency

2005–06 2006–07 2007–08 2008–09 2009–10 Total 25.0

30.0

35.0

45.0

45.0

180.0

3.6

5.1

20.1

20.1

20.1

69.0

agr – Canadian Grain Commission

0.6

0.7

0.9

0.9

0.9

3.9

Atlantic Canada Opportunities Agency

7.1

14.0

21.0

21.0

21.0

84.1

35.1

73.8

110.0

110.0

110.0

438.9

2.0

6.0

10.0

10.0

10.0

38.0

40.9

74.0

114.4

114.4

114.4

458.1

Citizenship and Immigration

1.2

8.0

17.5

18.8

20.0

65.5

Econ. Dev. Agency of Canada – Quebec

4.4

8.4

11.3

11.3

11.3

46.9

4.3

10.2

17.1

17.1

17.1

65.6

0.05

0.1

0.15

0.15

0.15

0.6

Canada Revenue Agency Canadian Heritage Canadian International Development Agency

Environment ec – Canadian Environmental Assessment Agency Department of Finance Canada

1.8

3.5

5.3

5.3

5.3

21.2

18.7

20.8

34.7

39.2

40.7

154.0

dfait (Foreign Affairs)

4.0

13.0

32.0

32.0

32.0

113.0

Governor General

0.3

0.6

0.8

0.8

0.8

3.3

Health Canada

20.0

43.9

68.4

68.4

68.4

269.1

Human Resources ans Skills Development

12.0

20.0

20.0

20.0

20.0

92.0

Fisheries and Oceans

Indian and Northern Affairs

20.0

45.0

65.0

65.0

65.0

260.0

Industry Canada

14.2

32.3

51.2

51.2

51.2

200.1 17.8

dfait (International Trade)

1.6

2.8

4.5

4.5

4.5

Justice Canada

12.2

14.2

16.2

16.2

16.2

75.2

National Defence

34.0

88.0

143.0

172.0

203.0

640.0

Natural Resources Canada

26.5

28.9

30.6

25.3

25.3

136.6

Privy Council Office

2.1

4.2

6.3

6.3

6.3

25.2

pco – Indian Residential Schools

1.6

3.1

4.7

4.7

4.7

18.8

psep – Royal Canadian Mounted Police

1.0

3.4

5.1

5.1

5.1

19.9

psep – Canada Border Services Agency

1.7

3.0

3.4

3.4

3.4

14.9

pwgsc

8.0

16.0

23.0

23.0

23.0

93.0

11.2

13.9

17.5

17.5

17.5

77.6

Transport Canada

5.4

11.4

17.2

17.2

17.2

68.5

Treasury Board

1.4

2.3

4.2

4.2

4.2

16.3

Social Development Canada

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Selected Policy, Political, and Budgetary Realms

Table 9.2 (Continued) ($ millions) Department

2005–06 2006–07 2007–08 2008–09 2009–10 Total

tb – Canada School of Public Service

0.5

0.9

1.4

1.4

1.4

5.6

tb – Public Service Human Resources Management Agency

8.5

16.9

17.2

17.2

17.2

77.0

Veterans Affairs

3.2

6.4

9.3

9.3

9.3

37.5

Western Economic Diversification

3.1

6.0

8.8

8.8

8.8

35.5

totals

337

631

947

987

1,021

3,923

Source: “Government of Canada – Expenditure Review” web site at http://www.expenditurereviewexamendesdepenses.gc.ca/tab/tr-re_e.asp (February 23, 2005).

A final erc deliverable was to “develop an ongoing permanent system of expenditure review that would become an integral part of annual budget process.”34 While advice was undoubtedly forthcoming from the deputy secretary, Expenditure Review, there has been no indication that the Martin government insinuated it into the next budget planning cycle. During fall 2005 there was no further expenditure review and no articulation of a new expenditure management system, perhaps because the prime minister was focused on the strong possibility of an election and tbs was completing three major reports flowing from commitments made by the primer minister early in his mandate,35 among many other responsibilities. Moreover, designing a new expenditure management and review system might have been deferred as a “transition” issue for the new prime minister as part of articulating a new cabinet decision-making system.

t h e erc i n h i s t o r i c a l a n d c o m pa r at i v e p e r s p s e c t i v e There is a natural tendency to compare the erc to the 1994–95 Program Review, but broader historical and cross-jurisdictional comparisons can show what is truly distinctive about how Ottawa reviews. They also point suggest elements for building a credible, workable and sustainable review process. The Program Review was announced by the newly elected Chrétien government in the February 1994 Budget. It informed the decisive February 27, 1995 Budget that announced significant cuts, elimination and rethinking of federal programs. Much has been written on this,36 and here we focus on key features. Like the erc, the Program Review got off to a slow start and had to be re-energized in late Spring by appointing a new assistant secretary for Machinery of Government and Program Review in pco, having the minister of Finance announce significant expenditure reduction targets, and creating

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How Ottawa Review Spending

a secretariat in pco. A worsening fiscal situation and increasing public concern drove a reluctant government towards a comprehensive expenditurereduction strategy, which became its signature accomplishment. Once the Program Review process began in earnest, departments prepared submissions for the next three fiscal years during summer 1994, and analysts in the Department of Finance and tbs developed “perspectives” to inform decisions. During fall 1994 the submissions were vetted by a committee of deputy ministers chaired by the clerk, and then by a ministerial committee comprised of several senior ministers (but not the minister of Finance, Paul Martin). Ideas not taken up for the February 1995 Budget, were considered in the next budget cycle, often referred to as Program Review II. The program review was a closed process focused on cuts – ranging from 17% to 50% in most programs – and less about reshaping the federation and improving the management of government.37 Few observers now invoke the early Nielsen Task Force on Program Review, announced in September 1984 by a newly elected Prime Minister, Brian Mulroney. The government sought to review roughly a thousand government programs, including tax expenditures,38 to secure savings and reduce the size of government. The task force consisted of senior ministers who were advised by a Private Sector Advisory Committee. The committee reviewed recommendations from 22 study teams that involved, in total, 225 individuals, equally split between government and the private sector, including provincial and municipal representatives. The reviews were completed by December 1985, and the 21 volume final report was submitted in March 1986 to Cabinet and the House of Commons. Slipping timelines, politics, and poor communications strategies meant the work did not inform the November 1984 mini-Budget and the May 1985 Budget.39 A Cabinet Committee on Expenditure Review was formed and chaired by the prime minister, but never gained any momentum in his sprawling cabinet structure.40 The Treasury Board undertook other, less significant, reviews between the Program Review and Expenditure Review cycles. The Program Integrity (1998–1999) involved reviewing programs less for expenditure savings and more to ensure proper funding and management. tbs analysts worked with departments to identify needs and risks, but the Department of Finance saw this less as a review process designed to secure expenditure savings and more as a potential draw on the public purse. The Departmental Assessment initiatives (2000–03) was geared to facilitating re-allocations within departments to higher priorities. Joanne Kelly noted that “the Chrétien government has throughout its time in office established mechanisms [that] seemed quite sensible at their inception … Yet the initiatives themselves were often shortlived: some were dropped, and often they were replaced by other initiatives with apparently similar objectives.”41 As if to confirm this observation, while her chapter was in press, the new minister of Finance, John Manley, started

198

Selected Policy, Political, and Budgetary Realms

another review and re-allocation exercise announced the February 2003 Budget. A $1 billion in savings was booked by the minister of Finance, and implemented by the Treasury Board. The savings were generally “reinvested” back into department priorities; little was re-allocated across departments and portfolios. Since the late 1970s, Australia governments have relied on a powerful Expenditure Review Committee (erc) that spends several weeks each year reviewing the expenditures and programs of departments and agencies as part of the normal budget cycle.42 This practice has been maintained regardless of the political orientation of governments. The erc is comprised of the most senior ministers in a government, and sometimes the prime minister. The erc reviews department and agency submissions, and briefings from officials in the Department of Finance and Administration (similar scope to Ottawa’s current tbs). The Australian model engages senior ministers as part of the budget cycle, but concentrates a challenge function, expenditure management, and secretariat support for its erc in one entity. The uk has developed a more selective process. In 1998, the Blair government instituted Comprehensive Spending Reviews (csr s) to bring a medium-term perspective to budgeting, rather than the usual focus on proposed expenditures for the next fiscal year, by examining performance targets and strategic challenges over three years.43 csr s are overseen by the Cabinet Committee on Public Services and Public Expenditure (psx), chaired by the chancellor of the Exchequer and supported by the Treasury and, at times, the Cabinet Office. psx selects the reviews, which focus on improving value for money and management as opposed to securing savings. They involve a “self-study” phase by departments, their reports vetted first by teams of Treasury officials and then ministers.44 Eventually this leads to negotiations on the budget allocation and targets contained in departmental Public Service Agreements. The Netherlands has a similar, but more transparent and inclusive, process.45 Each year the minister of Finance proposes programs as candidates for policy reviews. About ten reviews are approved by Cabinet, undertaken by teams that include officials from the one or more departments associated with the program, the Ministry of Finance, and the Ministry of General Affairs (equivalent to pco). External experts were invited to sit on the teams and, increasingly, began chairing them (similar to Ottawa’s Nielsen Task Force study teams). Teams are supported by a senior officials committee anchored by the director-general of budget, and coordinated by a committee of ministers. The reviews must produce an alternative with a 20% reduction The reports feed into detailed budget preparation, the ministers responsible for the programs submit responses to the reviews to Cabinet, and the government provides summaries of the reviews to Parliament.

Table 9.3 Some Comparisons of Review Processes Canadian Program Review Processes

Selected International Examples

Nielson Task Force 1984–86

Program Review 1994–95

Program Integrity 1999–2000

Department Assessments 1999–2003

Manley $1B Reallocation 2003

Expenditure Review 2004–05

Australia’s erc Process

UK Comp. Spending Reviews

The Netherlands Review Process

Regular

8

8

8

8

8

8

9

9

9

Targets

8

9

8

8

9

9

–

–

9

Differentiated

9

9

9

9

9

9

9

9

9

Engages Top Ministers

9

9

8

8

8

9

9

9

9

PM, C

C

PM

R

R

R

PM

PM

PM

Horizontal Perspectives

8

8

8

9

-

9

–

–

9

Part of budget cycle

8

9

9

9

9

9

9

9

9

Outside Experts

9

8

8

8

8

8

8

9

9

Dimensions

Focus

R = Re-allocation

C = Expenditure cuts

PM = Program management improvement

200

Selected Policy, Political, and Budgetary Realms

Table 9.3 compares the 2004–05 erc process with predecessors in Canada and selected examples from other jurisdictions. Although the erc was more horizontal than the Program Review, it continued Ottawa’s style of a closed process, rarely sustained for more than one year. This “on again, off again” style – when the government feels so moved – requires creating new capabilities from scratch in the form of idiosyncratic “adhocracies” or a temporary administrative coordinating secretariats.46 Despite Martin’s ambition of creating a “culture of re-allocation and realignment” with the erc, Ottawa’s approach remains decidedly ad hoc in nature.

c o n c lu s i o n : l e s s o n s a n d r e c o m m e n d at i o n s This chapter provided an account of the 2004–05 erc process, which flowed from the commitments of Prime Minister Martin in December 2003. Much has been made of the putative expenditure savings and significant “announcements” – such as centralized purchasing and Service Canada – initiatives emphasizing control, value-for-money, and innovation in a Gomery environment. However, the process started slowly, did not foster a government-wide culture of re-allocation, continues an “ad hoc” style, and revealed important weaknesses in Ottawa’s larger expenditure management system. One can argue that departments will have sufficient incentives to reallocate resources internally, that external reviews reduce incentives to make such decisions if the funds get scooped for government priorities, and that massive surpluses dilute incentives for ministers to scrutinize existing programs. But there are significant pressures on the federal budget flowing from provincial demands, improved services for citizens, and different cost pressures associated with government operations, to name only a few, and the strong possibility of contracting “economic flu” from the US and international economy. Ottawa needs to develop the reflexes and routines to, at the very least, review and possibly reallocate public resources. However, when the election was called no successor to the erc had emerged nor a new expenditure management system. Building review into the cabinet decisionmaking and expenditure management system should be a top priority for the new government after the January 2006 election. The delay in institutionalizing expenditure review is surprising because aspects of erc’s process were sound: senior ministers were engaged; dedicated, off-line staff were attracted and deployed expressly for review; short timelines were identified; a broad target was identified but differentiated contributions were allowed from departments; and strong support came later from the prime minister, clerk and erc chair. A heartening lesson was that senior ministers were not only engaged by expenditure review, but also asserted leadership and allocated considerable time despite a minority government.

201

How Ottawa Review Spending

Another lesson, reinforced by historical and comparative examples, is that reviews should proceed as part of the regular budget cycle, but their focus and breadth may change over the course of a government mandate. Finally, while leaders of the erc secretariat were proud of their accomplishments, they acknowledge it would have been preferable to tap into and rely on tbs expertise. However, the Treasury Board and tbs must show they are prepared to reach for the brass ring! Despite initiatives to build a strong budget office and expenditure review function in 2003 and early 2004, tbs failed to create a dedicated capacity – a temporary administrative adhocracy separate from the program, expenditure management, and policy sectors – to support the erc exercise and its reviews.47 While diverse capacities are required to monitor, challenge, and assist departments and programs – ranging from expenditure monitoring, improved information systems, horizontal analysis of issues across departments, performance reporting, evaluation, and comptrollership – providing strong, unencumbered support for an erc is a different challenge. Related to this is a broader concern about bureaucratic leadership in tbs for the budget office and expenditure management/review functions. The potency and status of the program and expenditure management sectors waned ever since the deputy secretary position – really a junior deputy minister position that actively led the budget office and challenge function – was eliminated in late 1990s. Appointing associate secretaries has not filled this gap; even if assigned responsibility for expenditure-related initiatives, they are extensions of the secretary’s office, easily pulled onto other files. Moreover, the December 2003 restructuring eventually led to a new portfolio for the president of the Treasury Board that includes tbs, the Public Service Human Resource Management Agency, and the Canada School of Public Service. Despite tbs’ narrower focus, the secretary now serves as portfolio deputy minister. It is not clear why pco’s machinery-of-government and senior personnel secretariats have ignored these gaps and pressures, but this oversight should be remedied. The irony is that the prime minister appointed a deputy secretary in pco to lead a time-bound erc exercise and a small secretariat. Other lessons concern the scope of review. It was naïve for the government to assign tbs responsibility for so many overlapping reviews in such a short time-period. The erc experience – and historical and comparative examples – indicate that focus and selectivity is required to meet schedules and not overwhelm ministers and officials. tbs officials have long wrestled with the matter of breadth of reviews. One solution was to review all programs over a five-year period, but some programs demand attention more often, and others receive little or no scrutiny. To fully engage ministers requires first choosing review topics consistent with government priorities and developing a quick-response capability in tbs similar to the erc secretariat for top-down demands. This

202

Selected Policy, Political, and Budgetary Realms

does not mean that other reviews and horizontal assessments should not be undertaken; a good budget office responds to government priorities and undertakes medium-term and other reviews that do not require the immediate attention of ministers. The single-most important issue is whether the prime minister is prepared to allocate senior ministerial time for review and re-allocation activities, and whether pco and Finance support such initiatives in the context of the larger cabinet decision-making and expenditure management system.48 Until these interests are aligned, the Treasury Board and tbs – no matter how aggressive and capable – will flail around without political clout. Developing a re-allocation culture requires that prime ministers engage strong ministers, ensconce review in the expenditure management cycle at the cabinet level, and utilize motivational and monitoring strategies as Martin did in fall 2004. Finally, relying on a ministerial review committee outside the Treasury Board (as with the Program Review and the erc) is second-best. The most elegant solution would put Treasury Board and tbs at the centre of review, combining technical expertise with political clout on a regular basis. There are two options for the prime minister here: appoint more senior ministers to the Treasury Board which would convene as the erc for a few weeks each fall; or maintain the current mix of Treasury Board ministers, but, each fall, appoint an Expenditure Review subcommittee of the Treasury Board with senior ministers as full or ex officio members. This would invert the tactic used in August 2004 of using a subcommittee to move the erc outside the ambit of the Treasury Board. If a new government chooses instead to rely on a ministerial committee outside the Treasury Board – particularly if the prime minister seeks a leadership role – tbs expertise and information should be fully levered to support its work, through temporary assignments and horizontal coordination. There remains, of course, the prospect of engaging outsiders in selectively reviewing programs, but the top priority should be to institutionalize an annual review process that engages influential ministers.

notes 1 Other changes included splitting Human Resources Development Canada (hrdc) into Human Resources and Skills Development Canada (hrsdc) and Social Development Canada (sdc), merging the Canadian Centre for Management Development with Training and Development Canada and the Official Languages Training into the Canada School of Public Service (csps), and creating a new portfolio under the Minister of Public Safety and Emergency Preparedness as well as the Canada Border Services Agency and Canada Public Health Agency.

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2 See Office of the Prime Minister, News Releases on “Changing Government: Prime Minister Announces Appointment of Cabinet” and “Stronger Financial Management and Accountability,” December 12, 2003. 3 The others were democratic reform, ethics, strengthening social foundations, building a modern economy, ensuring Canada’s place in international affairs, and public health and safety. 4 See Evert A. Lindquist, “On the Cutting Edge: Program Review, Government Restructuring, and the Treasury Board of Canada” in Gene Swimmer, ed., How Ottawa Spends 1996–97: Life Under the Knife (Ottawa: Carleton University Press, 1996), 205–52; Joanne Kelly, “Pursuit of an elusive ideal: Review and reallocation under the Chrétien government” in Bruce Doern, ed., How Ottawa Spends 2003–2004: Regime Change and Policy Drift (Toronto: Oxford University Press, 2003), 118–33; Joanne Kelly and Evert Lindquist, “Metamorphisis in Kafka’s Castle: the Changing Balance of Power among the Central Budget Agencies of Canada” in John Wanna, Lotte Jensen, and Jouke de Vries, eds., Controlling Public Expenditure: The Changing Roles of Central Budget Agencies – Better Guardians? (Northhampton ma: Edward Elgar, 2003), 85– 105; and Evert Lindquist, Ian Clark, and Jim Mitchell, “Reshaping Ottawa’s Centre of Government: Martin’s Reforms in Historical Perspective” in G. Bruce Doern, ed., How Ottawa Spends 2004–2005: Mandate Change in the Martin Era (Montreal: McGill-Queen’s University Press, 2004), 317–47. 5 Canada, Budget 2005: Expenditure Review for Sound Financial Management (Ottawa: Department of Finance Canada, February 23, 2005). 6 This chapter benefited from the insights of several officials involved with the expenditure review process and budget office functions who, despite busy schedules, agreed to be interviewed and/or commented on drafts of the chapter on a confidential basis. Bruce Doern, John Langford, Jim Mitchell, David Good, and Harry Swain provided useful and challenging comments. The interpretations and recommendations are my own, along with responsibility for any errors or omissions. 7 On a department with such reflexes, albeit for a very different initiative, see Evert A. Lindquist, “Organizing for mega-consultation: hrdc and the Social Security Review,” Canadian Public Administration (Fall 2005): 348–85. 8 The Report of the Independent Review Panel on Modernization of Comptrollership in the Government of Canada (1997), commissioned by the Treasury Board of Canada can be found at web site http://www.tbs-sct.gc.ca/cmo_mfc/resources2/review_panel/ rirp_e.asp. 9 Kelly, “Pursuit of an elusive ideal.” 10 On the stream of initiatives, see Ian D. Clark, “Restraint, Renewal, and the Treasury Board Secretariat,” Canadian Public Administration 37, 2 (1994): 112–31; Lindquist, “On the Cutting Edge”; Evan H. Potter, “Treasury Board as a Management Board: The Re-invention of a Central Agency,” in Leslie A. Pal, ed., How Ottawa Spends 2000–01: Past Imperfect, Future Tense (Toronto: Oxford University Press, 2000): 95–129; Donald J. Savoie, Governing From the Centre: The Concentration of Power in Canadian Politics (Toronto: University of Toronto Press, 1999) and Breaking the Bargain: Public Servants,

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15 16

17

18 19

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Ministers, and Parliament (Toronto: University of Toronto Press, 2003); Kelly and Lindquist, “Metamorphisis”; David Good, The Politics of Public Management: The hrdc Audit of Grants and Contributions (Toronto: University of Toronto Press, 2003); and Lindquist, Clark, and Mitchell, “Reshaping Ottawa’s Centre of Government.” See Canada, Treasury Board of Canada Secretariat, Performance Report (Minister of Public Works and Government Services Canada, 2000, 2001, 2002, 2003, 2004, 20005) at web sites http://www.tbs-sct.gc.ca/rma/dpr/dpr-rmr_e.asp and http://www.tbssct.gc.ca/rma/dpr/03-04/TBS-SCT/TBS-SCTd34_e.asp. The psma involved a massive overhaul of hr systems, including shifting the Public Service Commission’s focus, and moving the responsibility for language training, management development, and training more generally in a new Canada School of Public Service. For details see “Public Service Modernization Portal” at http:// www.psmod-modfp.gc.ca/index_e.asp. See Treasury Board of Canada, Connecting with Canadians: Pursuing Service Transformation, Final Report of the Government On-Line Advisory Panel (December 2003) at web site http://www.gol-ged.gc.ca/pnl-grp/reports/final/final00_e.asp. For information on Service Canada, see http://www.servicecanada.gc.ca/en/about/about.html. See Treasury Board of Canada, “Modern Comptrollership Initiative: A Progress Report on Government-wide Implementation” (2003) at web site http://www.tbssct.gc.ca/cmo_mfc/resources2/mci_imc/00_e.asp. For detail on the Management Accountability Framework, see web site http:// www.tbs-sct.gc.ca/maf-crg/index_e.asp. See Evert A. Lindquist, “Getting Results Right: Reforming Ottawa’s Estimates” in Leslie A. Pal, ed., How Ottawa Spends 1998–99: Balancing Act: The Post-Deficit Mandate (Toronto: Oxford University Press, 1998): 153–90; and John A. Chenier, Michael Dewing, and Jack Stillborn, “Does Parliament Care? Parliamentary Committees and the Estimates,” in G. Bruce Doern, ed., How Ottawa Spends 2005–2006: Managing the Minority (Montreal: McGill-Queen’s University Press, 2005): 200–21. The Canada’s Performance reports can be found at http://www.tbs-sct.gc.ca/report/reports-rapports_e.asp#govrev under “Results-based Management, Accountability and Review.” Treasury Board of Canada, Performance Report, period ending March 31, 2003, 18–19. See Treasury Board of Canada, Performance Report, year ending March 31, 2003, 19 at http://www.tbs-sct.gc.ca/rma/dpr1/04-05/kickoff/ppt02_e.asp. See also Task Team – pras Policy Review, Planning Reporting and Accountability Structure (PRAS) Policy Review, A Discussion Paper for Results-Based Management, Comptrollership Branch (July 2002) at web site http://www.tbs-sct.gc.ca/rma/dpr/ team-equip_e.asp#s1. On the Expenditure Management Information System, see http://www.tbs-sct.gc.ca/ emis-sigd/index_e.asp; and the Management, Resources and Results Structure, see http://www.tbs-sct.gc.ca/rma/mrrs-sgrr_e.asp. See Donald J. Savoie, ed., Taking Power: Managing Government Transitions (Institute of Public Administration of Canada, 1993).

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22 As minister of Finance, Martin and his advisors would not have developed a finegrained understanding of federal programs except in fiscal policy, tax policy, equalization and other transfers to the provinces and territories, and in selected areas, such as research and development, where he had a personal interest. 23 Kathryn May, “Treasury Board Plan Offers Clues to Budget: Robillard Wants to Review, Weed Out Unused Programs in Effort to Save Cash,” Canada.Com News (February 15, 2003). A regular cycle of reviews (every program over a five-year period) was announced in Treasury Board of Canada, Performance Report, year ending March 31, 2003, 4. 24 Canada, Strengthening Public Sector Management: An Overview of the Government Action Plan and Key Initiatives (Ottawa: Treasury Board of Canada Secretariat, 2004). 25 Ibid. 19–23. 26 Remarks at a public presentation, University of Victoria, September 13, 2005. 27 In September 2005, the prime minister appointed Sheikh as deputy minister of Labour. 28 The booklet can be found at web site http://www.fin.gc.ca/budget05/booklets/ bkexpe.htm. 29 See http://www.expenditurereview-examendesdepenses.gc.ca/index_e.asp. 30 See, for example, Canadian Food Inspection Agency, “Expenditure Review Committee (erc) Initiatives” accessed at web site http://www.inspection.gc.ca/english/corpaffr/ budget/2005/expende.shtml accessed in December 2005, and, in some cases, displayed on the banner of the department web site: see Agriculture and Agri-Food Canada, “Contributions to Expenditure Review Committee by Agriculture and Agri-Food Canada” at web site http://www.agr.gc.ca/erc_ced_e.php accessed in December 2005. 31 Treasury Board of Canada Secretariat, 2001–02 Performance Report, p. 16. 32 On balancing departmental and government-wide re-allocation efforts, see David Good and Evert Lindquist, “Strengthening Resource Re-allocation in Government: Culture, Incentives and the Chief Financial Office,” a paper prepared for the Conference Board of Canada Roundtable on Financial Management in the Public Sector, held in Ottawa on November 16, 2005. 33 See Harry Swain, “Turning the Tide,” remarks for a speech delivered to the adm Update in Ottawa, November 9, 2005, where he challenged the savings from leasing of federal properties and from standing offers for purchasing. More recent speeches from the minister of Public Works and Government Services, Scott Brison, indicated some reflection and softening of the positions with respect to procurement and leasing. See his speaking notes for the for Toronto Board of Trade and the osme Consultation Workshop (September 21 and 23, respectively) accessed at web site http:// www.pwgsc.gc.ca/comm/min/text/speeches-e.html. 34 See The World Bank Group, “Expenditure Reviews and Government Efficiency Highlights from Canadian Expenditure Review,” 3 March 2005, accessed at web site http:// www1.worldbank.org/publicsector/pe/bbagsdetails.cfm?ID=190 in December 2005. 35 See Treasury Board of Canada Secretariat, Review of the Responsibilities and Accountabilities of Ministers and Senior Officials: Report to Parliament (Ottawa: President of

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41 42

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the Treasury Board of Canada, 2005) and The Financial Administration Act: Responding to Non-compliance: Report to Parliament (Ottawa: President of the Treasury Board of Canada, 2005), and Government of Canada, Management in the Government of Canada: A Commitment to Continuous Improvement (Ottawa: President of the Treasury Board of Canada, October 2005). Edward Greenspon and Anthony Wilson-Smith, Double Vision: The Inside Story of the Liberals in Power (New York: Doubleday, 1996); Gilles Paquet and Robert Shepherd, “The Program Review Process: A Deconstruction” in Swimmer, ed., How Ottawa Spends 1996–97; and Amelita Armit and Jacques Bourgault, eds., Hard Choices or No Choices? Assessing Program Review (Institute of Public Administration of Canada, 1995). Paquet and Shepherd, “The Program Review Process.” Against this backdrop one can better understand the curious remark in Strengthening Public Sector Management, 17, that the 2004 erc was not Program Review III. Targets for each department were not set unilaterally by the minister of Finance, the process was more iterative and collaborative, there was no direct challenge function from Finance and tbs, and more attention was paid to the horizontal implications of proposals. I am indebted to Harry Swain for recalling that tax expenditures were included in the Nielsen reviews. For a survey of the challenges of calculating and reviewing tax expenditures, see Evert A. Lindquist, “Improving the Scrutiny of Tax Expenditures in Ontario: Comparative Perspectives and Recommendations” in Allan M. Maslove, ed., Taxing and Spending: Issues of Process (Toronto: University of Toronto Press, 1994), 32–128. See V. Seymour Wilson, “What Legacy? The Nielsen Task Force Program Review” in Katherine A. Graham, ed., How Ottawa Spends 1988/89: The Conservatives Heading into the Stretch (Ottawa: Carleton University Press, 1988), 23–47. Evert Lindquist, “Has Federal Cabinet Decision-Making Come Full Circle?” in Paul W. Fox and Graham White, eds., Politics: Canada, 8th Edition (Toronto: McGraw-Hill Ryerson, 1995). Kelly, “Pursuit of an elusive ideal,” 126. John Wanna, Joanne Kelly, and John Forster, Managing Public Expenditure in Australia (Sydney: Allen and Unwin, 2000); John Wanna and Stephen Bartos, “’Good Practice: Does It Work in Theory: Australia’s Quest for Better Outcomes” in Wanna, Jensen, deVries, eds., Controlling Public Expenditure, 30–56; and Joanne Kelly and John Wanna, “Crashing Through with Accrual-Output Price Budgeting in Australia: Technical Adjustment or a New Way of Doing Business?” American Review of Public Administration 34, 1 (March 2004): 94–111. The Fundamental Expenditure Review of Treasury recommended de-layering the expenditure management bureaus and making them more proactive, strategic and able to deal with horizontal issues. oecd, Reallocation, 17, 41–2. The uk tends to rely on “teams” for central initiatives comprised of Treasury or Cabinet Office staff working with department staff. The csr seems a variation on this approach.

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45 This emerged out of the 1981 “Reconsideration Procedure,” part of a new expenditure management and fiscal policy regime to tackle huge deficits . See Jouke de Vries and Kutsal Yesilkagit, “A ‘Super-Ministry’ or a Void of Politics? The Transformation of the Dutch Central Budget Agency: the Ministry of Finance” in Wanna, et al, eds., Controlling Public Expenditure, 144–65; and oecd, Reallocation, 43–44. 46 On central adhocracies, see Evert A. Lindquist, “Strategy, Capacity, and Horizontal Governance: Lessons from Australia and Canada,” Optimum Online (December 2004). 47 tbs had plenty of staff resources in aggregate; the question was whether its leaders saw the need and was prepared to create new capabilities. Even if resources were inadequate, tbs could have secured new resources as pco did for the erc. Indeed, the erc can be seen as a “second-start” similar to previous cases of initial failures to coordinate existing capabilities in support of horizontal initiatives. See James A. Desveaux, Evert A. Lindquist, and Glen Toner, “Organizing for Policy Innovation in Public Bureaucracy: aids, Energy, and Environmental Policy in Canada,” Canadian Journal of Political Science 27, 3 (September 1994): 493–538. 48 On the latter point, see Kelly, “Pursuit of an elusive ideal,” 129.

10 Chasing a National Priority: Health Canada, the Public Health Agency, and a Canadian Strategy for Cancer Control mich a el j. pr ince In 2005, 149,000 Canadians will be told they have cancer. Almost 70,000 of us will die from it. And it’s only going to get worse. Over the next 30 years, six million Canadians will develop cancer. And half will die of it. That’s a fact. But so is this: we have enough knowledge to start to reverse all of this. To save more than one million Canadians from getting cancer, and a half million from dying from it. And to save a nation of families and friends from watching their loved ones suffer needlessly.1 The Campaign to Control Cancer. The gap between the aspirations and needs of ordinary Canadians – and Ottawa’s apparent priorities – has mystified and distressed proponents of the cancer strategy.2

How Canada’s governments deal with cancer control, as part of the health system is not an especially inspiring feature of our country. That it should and could be is the contention of this essay. Canada is still chasing cancer control as a national priority despite several years of consulting with health organizations and conceptualizing the elements of such a strategy and after other countries successfully adopted such policies. Not only do we trail other nation states in identifying cancer as a national health priority, federal funding for a cancer control program lags behind investments for other health initiatives such as diabetes and hiv/aids. Moreover, within the field of cancer services, prevention and palliation – vastly overshadowed by medical research and clinical services for treatment – pursue better recognition and enhanced funding.

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Why has the Canadian cancer control strategy not received more strategic attention and investments by policy makers? That is the core question which stimulates this inquiry. The chapter first profiles cancer as a public issue and presents leading international practices for cancer control as a benchmark for understanding and evaluating Canada’s actions in this area. Second, the chapter then describes and assesses Health Canada’s policy approach to cancer control and programming. Third, the chapter discusses the Public Health Agency of Canada and the recently announced Integrated Strategy of Healthy Living and Chronic Disease and then considers the intergovernmental context, addressing how and where cancer control figures in recent federalprovincial/territorial health accords. Finally, brief conclusions follow. The main lines of argument are these: As a public issue, cancer is highly prominent with far-reaching ramifications for Canadians, and with longstanding roles played by non-governmental organizations, health professionals and both levels of government. A cancer control strategy is an idea promoted by international health agencies that many countries have adopted, and through their experiences a pattern of promising practices and health outcomes are evident. Canada’s approach to cancer control, as exemplified at the federal level by Health Canada, is multifaceted with open-ended priorities, generally informed by a population health perspective and significant investments in research; yet, lacking in a comprehensive national framework that addresses and funds adequately all aspects of cancer control – that is, prevention, early detection and screening, treatment, rehabilitation and support, and palliative and end-of-life care. The creation in 2004 of the Public Health Agency of Canada alongside though separate from Health Canada, among other things, unleashed a form of bureaucratic and ministerial politics that has undoubtedly shaped and most likely slowed implementation of the Canadian Strategy for Cancer Control (cscc). Underlying this politics is a policy debate between government officials and the cancer community over the desirability of a generic strategy on chronic diseases, under the direct control of federal authorities, as compared to disease-based strategies like the cscc that would operate at arms length from government. The Integrated Strategy on Healthy Living and Chronic Disease unveiled by the Martin Liberals in October 2005 tries to bridge this policy debate, yet compounds the problem with a very modest investment for the cscc. The end result is that Canadians continue to lack an adequate national cancer control policy.

n at i o n a l c a n c e r c o n t r o l s t r at e g i e s : p r a c t i c e s i n i n t e r n at i o n a l a p p r o a c h e s , pa s s i n g u s b y For most people in Canada, cancer “hits home” one-way or another, making it an issue that is easy to personalize with profoundly emotional dimensions.

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The proximity of cancer is extensive and obvious given its growing incidence and rising prevalence. One in four Canadians will die from cancer and, based on current rates, 38 per cent of women and 43 per cent of men will develop cancer during their lifetime.3 Reports in Canada and internationally portray cancer as an epidemic or “leading killer” and as a “looming crisis” that will overwhelm the health care system in the next decade or so unless comprehensive national action is taken. In part, with the rapid rise in the cost of certain therapies and drugs, cancer is a major cost-driver in health budgets. A large piece of the health care system in provinces is devoted to efforts at treating and managing cancer.4 Experiences of cancer patients and their families draw attention to the high fragmentation of cancer services and faulty or antiquated equipment, resulting in confusion, unnecessary delay and anxiety; increases over the last decade in waiting times for radiation therapy, chemotherapy, and other systemic therapies, with some patients sent out of the country for care; and the continued lack of availability of supportive and palliative care for patients and their families.5 Experience of cancer no doubt varies across provinces – for example, excellent and sensitive care versus insensitive care and long waiting lines – within provinces, and even within Canada’s large cities. Cancer agencies and health professions suggest half of cancers are preventable or detectable earlier through reducing tobacco consumption (see chapter 11), increasing active living, and improving healthy eating.6 Through the efforts of leading national organizations in the cancer sector, the idea of a Canadian strategy for cancer control, with national priorities, goals and targets, and the full continuum of cancer control activities, is on the public agenda and entered governmental policy circles. The concept of cancer control refers to a series of integrated activities “aimed at preventing cancer, curing cancer, and increasing survival rates and quality of life for those who develop cancer by converting the cumulative knowledge gained through research, surveillance and outcome evaluation into strategies and actions. This encompasses all aspects of cancer related interventions, not just cancer care.” In turn, the idea of a cancer control strategy is “an organized approach to the reduction of cancer incidence, morbidity and mortality. It provides a framework for an integrated set of activities covering: primary prevention, screening and early diagnosis; treatment and symptom control; rehabilitation and support, and palliative care.”7 Collectively, these various stages of activities constitute the cancer care continuum. For cancer interest groups and associations, health professionals, researchers, and family organizations in Canada, the demand is for a comprehensive approach to cancer control that would subsume, if not replace, the piecemeal measures introduced by the federal government over the last few decades aimed at selective aspects of cancer control or specific diseases. Indeed, one aspect of the chasing after this national issue is the persistent advocacy and

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agenda building by these policy entrepreneurs. Despite these efforts, Canada lags behind other nations in implementing a comprehensive and planned approach to cancer control. The World Health Organization (who), building on work over the last 15 years or so, recommends the development of national cancer control programs as the best means of reducing the impact and incidence of cancer as well as improving the quality of life of those with cancer. The most recent resolution on cancer prevention and control passed by the World Health Assembly, in May 2005, urged member states to develop and reinforce, in consultation with all key stakeholders, comprehensive national cancer control programs that establish outcome-oriented and measurable goals over the long term.8 A review of national cancer control plans in several countries reveals a pattern of practices comprising the following key elements:9 1 Embedded in national health priorities: cancer control is one of about four to six explicit priority areas of action within an overall national health policy agenda based typically on a population health perspective. 2 Statement of purpose and aim linked to national health outcomes: established within that larger health agenda, the strategy itself contains a highlevel statement of the country’s overarching purposes, aims, desired health outcomes, and principles to guide existing and future actions to control cancer. 3 Objectives linked to national action: a set number of specific objectives and disease priorities are identified for national attention and action that address the full continuum of care. 4 Investments linked across sectors/levels of government: public investments are committed to fund the strategy and action plans, including activities by non-governmental organizations (ngo s). In other words, the strategy is a channel for bringing resources (funds, workforce, and knowledge) to bear on achieving identified health outcomes through arrangements between the federal and provincial/territorial governments and between governments and ngo s. 5 Federal policy resources committed: the strategy is achieved in federations like Australia through a mandated federally coordinated effort, typically led by the federal ministry responsible for health, supported by a mix of policy instruments and interventions. 6 Intergovernmental agreement: there is intergovernmental agreement of the strategy, by all or most jurisdictions involved, with a range of program options to be implemented in partnership between governments as well as with non-governmental sector organizations. 7 Expert advisory council supports evidence-based analysis and policy advice: a national council or advisory committee is established and given

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responsibility for achieving consensus among the stakeholders on the overall strategy and advising the federal government on its implementation. The council would include representatives from federal and provincial/territorial Health Departments, the Canadian Institutes for Health Research, screening organizations, national cancer NGOs, and health informatics and research scientists. 8 Implementation vehicles established to undertake specific functions: under the oversight of the national council, a series of steering committees, institutes or project teams implement more specific aspects of the strategy, for example, on prevention, screening, diagnosis, palliative care, or research. 9 Data collection linked to data measurement, research and monitoring desired outcomes: a national surveillance system exists to collect, analyze and disseminate health data. The system is managed by an agency established at arms length from governments, yet readily accessible to ngo s and the research community. 10 Accepted political responsibility and public accountability: Federal and provincial/territorial health ministers prepare a national report providing an overview of the impact of target cancers on Canadians, with subsequent reports, perhaps every two or three years, evaluating the success of both specific aspects and the overall strategy. A key purpose of this monitoring and evaluation would be to identify and promote “best practices” in cancer care and control. These elements constitute the overall architecture of a comprehensive strategy to cancer control that exists in several countries and is under serious consideration by others. Notably, whereas once Canada was ahead of many other industrialized countries in its thinking on developing a national strategy for cancer control, we now sadly trail behind others. An example of this is New Zealand.10 Work on developing a national plan for cancer control first began in Canada in 1999, spearheaded by a network of cancer experts and cancer survivors, with assistance from Health Canada. In 2002, the Canadian Cancer Society shared with representatives of the New Zealand cancer control community, Cancer 2000 and the Canadian Strategy for Cancer Control Action Plan. At that time, the New Zealanders were just completing a process of identifying key elements for their own national strategy. Since then, however, the New Zealanders finished that basic step, developed and, by 2004, launched a national strategy. Lest this example be dismissed because New Zealand is a relatively small country with a unitary system of governance, another example is Australia. With a federal system of parliamentary cabinet government comparable to Canada, Australia too has a results-driven federal and intergovernmental strategic framework on health policy and cancer control.11

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t h e g o v e r n m e n t o f c a n a d a’ s a p p r o a c h to cancer control To examine the federal government’s approach to cancer control, we can relate existing cancer-related activities to the core roles Health Canada sees itself performing, which are as follows: • National leader and partner in health protection and promotion, and in administering the Canada Health Act; • Funder of health care through transfer payments to the provinces and territories, as well as to First Nations and Inuit organizations, and to various non-governmental community organizations; • Guardian and regulator of consumer safety and environmental health and protection “by managing product related risks and providing information to enable Canadians to make informed decisions about health products available to them;” • Service provider of health benefits to First Nations people and Inuit as well as occupational health and safety services to federal employees (including the rcmp and military personnel) and inmates in federal facilities; and, • Information provider of health information, and supporter of medical, scientific and technical research within the Department and by external research organizations, and of disease surveillance.12 Relating these core roles to cancer control generates Table 10.1. It shows that cancer-related activities take place through other federal organizations, such as taxation measures on tobacco products through Finance Canada. Identifying levels of strategic ideas and actions in the health policy field is another way to examine Ottawa’s current approach to cancer control. As Table 10.2 shows, four levels of public action can be identified conceptually. Varying in scope and comprehensiveness, the levels include: mandate philosophy or paradigm; comprehensive national framework; particular strategies; and specialized measures. From specific initiatives through to the mandate paradigm, increasing scales of decision making and interdependencies need to be accommodated, stretching out across the federal government, other governments and other sectors in Canada and internationally. The usefulness of this simple classification is that it identifies the absence of a comprehensive strategy on cancer control; indicates where one would fit in relation to existing ideas and activities; and, draws attention to the points of articulation with other levels that a comprehensive strategy would address. The population health model provides Health Canada with its underlying philosophy, a paradigm adopted also by all provincial and territorial governments, along with many other governments around the world. In principle, the population health approach supports measures that “promote health by

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Table 10.1 Core Roles of Health Canada and Cancer Control Activities Core Roles

Cancer Control-Related Activities

Leader and Partner

Canadian Coalition on Cancer Surveillance Centre for Chronic Disease Prevention and Control Healthy Living Agenda National Healthy Workplace policy agenda

Funder

Health Reform Fund Research Hospitals Diagnostic/Medical Equipment Fund Grants and contributions to cancer organizations and other national voluntary health agencies

Guardian and Regulator

Federal Tobacco Control Strategy Clinical Trial Regulations Medical Devices Regulations, e.g. for mammography equipment Food safety, quality and nutrition Radiation Emitting Devices Act and regulations

Service Provider

First Nations and Inuit Home and Community Care Services

Information Provider

Canadian Institute of Health Research: Institute of Cancer Research Canadian Breast Cancer and Prostate Cancer Research initiatives Projection of cancer incidence, prevalence and economic burden of selected cancers Public awareness campaigns about risk behaviours

Table 10.2 Levels of Policy Ideas and Actions on Cancer Control Policy Level

Cancer Control

Mandate Philosophy/Paradigm

Population Health Model

Comprehensive National Policy Framework

No cancer control policy framework currently exists

Particular Strategies

Canadian Breast Cancer Initiative Federal Tobacco Control Strategy Women’s Health Strategy

Specific Measures

Cervical Cancer Screening Prostate Cancer Research cihr – Institute of Cancer Research

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addressing determinants that fall both within and outside of the health sector throughout the human life cycle.” Also, the approach “promotes healthy and safe living, working and recreational environments by anticipating, preventing and responding to health risks.”13 Indeed, “Canada has been a leader in population health research and theory, and this perspective has become part of the language of policy development and accountability.”14 This level of policy thinking provides the basic meaning, legitimacy and high-level direction to health policy. For cancer control, the population health paradigm’s significance is its focus on the healthy population and population groups at risk along with addressing social determinants of health and wellness. Canada lacks a high-level national framework on cancer control with cooperative action between governments and among sectors; that is a comprehensive set of actions across the spectrum of cancer control, funded with significant and sustainable investments. In a positive development, statements by the federal health ministers and the chief public health officer, and the recently announced Integrated Strategy on Healthy Living and Chronic Disease (discussed later in this chapter) convey a desire to contribute to the formulation of a Canadian strategy on cancer control, within a “balanced health agenda” that targets chronic diseases, conditions that influence health, and risk factors.15 While lacking an explicit comprehensive national strategy, a canceroriented agenda is evident in Canada. For the federal government, current actions on cancer control are most apparent at the third and fourth levels of particular strategies and individual measures; mechanisms seemingly favoured by health ministers and officials. Among provinces, the Nova Scotia government and the Legislative Assembly of New Brunswick have formally expressed support for the cscc with other governments indicating interest, and some provinces implementing provincial strategies. In 2003, the Cancer Quality Council of Ontario began operations, the first agency of its kind in the country, with a mandate “to monitor and assess cancer system performance and drive needed improvements … towards a cancer system that is coordinated [and] patientfocused.”16 In October 2004, the pei government announced a cancer control strategy for their province; in March 2005, the Northern Health Authority and the bc Cancer Agency adopted a northern cancer control strategy for that vast region of the province; and, work is currently underway by the Newfoundland and Labrador government in developing a province-wide cancer control strategy.17 On health research creation and knowledge transfer, one of the Canadian Institutes of Health Research (cihr), introduced by Ottawa in 2003 is specifically on cancer research.18 Areas of cancer research supported cover a range: health promotion policies, health determinants, disease and disability prevention, incidence and prevalence of different types of cancer, cell function

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Table 10.3 Federal Government Cancer-Related Strategies and Measures Initiative (Original Date)

Health Canada Spending Commitment

Canadian Breast Cancer Initiative (1993) Three Phases: 1993–98, 1998–2003, 2003–08

Phase 1: $10 million over five years Phase 2: $15 million over five years Phase 3: $15 million over five years20

Federal Tobacco Control Strategy (1996)

Phase 1: $50 million over five years Phase 1: $22.2 million in 2004–05

Cervical Cancer Screening Initiatives (1997)

$670,000 over three years

Canadian Prostate Research Initiative (1999)

$15 million over five years

and regulation, tobacco use, diet and exercise, and evaluation of interventions in palliative care. In the words of the Institute’s scientific director, the potential is there “to create an exciting and world-class environment for cancer research” by enhancing existing research, creating new cancer research programs and coordinating national research efforts.19 Like other industrialized countries, Canada targets a short list of cancers, including breast, cervix, lung and prostate cancer, introduced through specific initiatives. A review of spending on cancer measures shows that federal investments are often for time-limited periods, despite requests from the community for sustainable support. These strategies and measures typically are presented as complementing a recent Throne Speech and/or budget of the federal government; supporting the government’s commitment to health care, research and the concerns of Canadians; and responding to the recommendations of a national forum, comprised of stakeholders, held on the issue or disease. With the exception of key parts the Federal Tobacco Control Strategy and the cihr, such strategies and measures do not have a specific statutory foundation afforded by legislation. Continuum of Cancer Control and Investments A further way to understand Canada’s policy approach to cancer is by comparing government activities and investments, provincial as well as federal, in relation to the continuum of cancer control – the intervention areas of prevention, early detection and screening, treatment, rehabilitation and support, and palliative care. This assessment of resource investments (financial, personnel, information, and technical) in Table 10.4 admittedly is highly generalized, though it is drawn from analyses by the cancer community in Canada.

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Table 10.4 The Continuum of Cancer Control: Interventions and Investments Intervention Areas

Public Investments in Canada on Cancer Control

Prevention

Relatively small share of resources allocated to prevention

Examples: anti-smoking, community nutrition, public health education.

Screening Examples: cervical smears, mammograms, rectal examinations

Diagnosis and Treatment Services Examples: radiation, chemotherapy, surgery

Rehabilitation and Support Examples: Psychological, sexual, spiritual and practical counseling and information

Palliative Care Examples: Prevention, treatment and relief of physical, psycho-social and spiritual pain and suffering

Other than breast cancer, population screening varies widely across Canada

The largest part of resources focus on institutional provision of care and drug therapies Comparatively few resources for patients and families

Greatly under-funded and thus undeveloped part of the system with low access

Source: Based on information in Canadian Strategy for Cancer Control, 2001 and Cancer Quality Council of Ontario, 2003.

Most resources directed at cancer are to cancer treatment centres, hospitals, and community-based facilities to therapy treatments and symptom control, involving radiation, chemotherapy and surgery.21 In contrast, the front and back-ends of the cancer control spectrum – prevention and palliation – get the smaller shares of public resources. As the Cancer Quality Council of Ontario points out, “Approximately 80 per cent of patients who develop cancer will require surgery.” With respect to providing supportive and palliative care for patients and their families in community settings, “less than 3 per cent of cancer program budgets are clearly allocated to support care and fewer than 5 per cent of Canadian cancer patients have access to palliative care services when they need them.”22 The existing uneven distribution of investments on the various areas of cancer control no doubt reflects the interplay of several factors: the influence of important professional communities; the knowledge legitimated through scientific and medical research and practice; the bio-medical focus on disease, curing patients and prolonging their lives; public expectations of what should be done, reinforced by media coverage and politicians’ reactions; the relatively recent creation of hospice palliative care programs across Canada in the past 30 years; and the gradual development of more of a population

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health approach to cancer control by provincial cancer agencies.23 In the absence of appropriate palliative support, those who are dying and their families may experience uneven access to services, professionals who lack adequate multidisciplinary knowledge, unnecessary suffering and pain from crises and uncontrolled symptoms, and indignities in personal care.24

still ch asing, but get ting closer? As their health care paradigm, Canadian governments have adopted the population health perspective. Health Canada addresses cancer, and other diseases for that matter, through efforts at making Canadians more aware of dangers to their health, encouraging them to take a more active role in their health through positive lifestyle choices, and protecting them from avoidable environmental, public health, and consumer and occupational safety risks. Even with the overarching population health paradigm, Health Canada’s plans and priorities remain in the form of a large multiplicity of strategies. Less clear is the inclusion on those departmental plans of statements identifying a handful of priority action areas consistently followed and appropriately resourced. With the absence of a high-level statement of strategic intent on cancer control, what exists is a de facto set of objectives and disease priorities; what might be called an emergent strategy, shaped by demands and events, rather than an expressed strategy, guided by a societal vision, national targets and desired health outcomes. The open-ended nature of Health Canada’s priorities and strategic outcomes statements has undesirable consequences. One result is that it is difficult to set firm direction and targets against which to measure health progress. It also makes it difficult to coordinate resources across the federal government effectively and efficiently, thus limiting the transparency and accountability to the public on cancer control expenditures and programming. Still another result is that such open-ended priority plans do not facilitate the formation of meaningful and strategic long-term partnerships with provinces/territories and ngo organizations on cancer control. For cervical cancer and prostate cancer, as Table 10.3 shows, funding has been for time-limited periods, raising concerns of the ongoing role of federal investments and the ability of organizations receiving the funds actually to build capacity. In the realm of fiscal federalism, where much of Canadian social policy takes root, no major intergovernmental agreement on cancer control exists. The Public Health Agency of Canada and the Integrated Strategy on Healthy Living and Chronic Disease In the wake of sars and other health emergencies, the federal government announced in 2004 the formation of the Public Health Agency of Canada (phac)

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“to ensure that effective surveillance and crisis response systems are in place to better deal with major public health problems.” Reporting to the minister of Health, the phac is headed by the country’s first chief public health officer, who advises the federal government on public health matters; provides leadership in links with international agencies such as the who; and helps coordinate Canada’s national public health responses during public health disasters and emergencies. To establish the phac, approximately $400 million transferred from Health Canada with an additional $665 million over the subsequent three years. Besides emergency preparedness and response to public health risks, the Agency’s mandate includes developing national strategies for the management of infectious disease and chronic diseases. In the February 2005 federal budget, the Martin Liberals announced $300 million over five years in new direct federal funding for an integrated strategy to encourage healthy living as well as to prevent and control chronic diseases. The government provided also a one-time grant of $10 million for cancer research to the Terry Fox Foundation. The integrated strategy contains two elements: a set of general activities promoting healthy eating and encouraging physical activity and healthy weight that help to prevent and control chronic diseases, and second, a series of disease-specific activities for diabetes, cardiovascular disease and cancer. Specific details on the actual investments for the general health promotion activities and chronic diseasespecific measures were eventually unveiled in late October 2005. Perhaps the extended time since the February budget was used to hone the hyperbole. The press release on the Integrated Strategy on Healthy Living and Chronic Disease describes the $300 million over five years expenditure, and $74.4 million per year ongoing, as “an historically important investment in health promotion and disease prevention,” with which “Canada now joins countries from around the world in an innovative and integrated approach to combat major preventable chronic diseases.” The release quotes health minister, Ujjal Dosanjh, saying the Integrated Strategy “will address the needs of Canadians across the health continuum – from healthy to high-risk people to those living with chronic disease” and that the Strategy “builds on existing multi-year federal investments to control chronic diseases, including a billion dollars that is currently being invested to combat cancer.”25 Nowhere is a full and transparent accounting given on what activities or which federal programs agencies this apparent $1 billion on cancer is disbursed. What is itemized on cancer-specific activities is that of the $300 million in new federal investment, $59.5 million over five years and $17.5 million each year ongoing thereafter is for the Canadian Strategy on Cancer Control. Compared to other national health strategies in Canada, federal investments on cancer control services are relatively modest, and leveraged with investments raised through charitable efforts by ngo s in the sector. Cancer control expenditures by the federal government, as allocated through Health Canada, remain the poor cousin of hiv/aids and diabetes funding.26

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In the 2006 federal election campaign, the Martin Liberals announced some further elements of a national cancer strategy which brings its spending commitments up to $160 million. The Liberal promises included a new Terry Fox Research Institute in Vancouver, Terry Fox research chairs at Canadian universities, and funds for cancer research/knowledge transfer and application in clinical practice.27 The now $160 million for the cscc falls well short of the $260 million over five years that cancer community estimates is required to adequately resource a sustainable national approach that truly addresses prevention through research and treatment to palliative care. In response to the announcement, the chief executive officer of the Canadian Cancer Society said: “This funding is a down payment towards a pan-Canadian plan to fight cancer, but it’s only the beginning. More funding is needed to have a real impact on this disease.”28 In a full-page newspaper advertisement, the Campaign to Control Cancer, a national coalition of organizations, states that the cscc has not been implemented, while dozens of other countries have similar plans and are using them with great results. The coalition’s ad optimistically notes that, “Things are starting to happen. On October 20, 2005, the federal government announced a first: the Integrated Strategy on Healthy Living and Chronic Disease, which includes some funding for the cscc. It’s a good start. It signals a new partnership to action against cancer. Action that can’t wait any longer. We have much to do. We have to implement the plan.”29 Why has cancer control not received greater attention and support by public policy makers? Why in Canada are we still chasing after the adoption of a cancer control strategy? Health Canada, Cancer Control and Hunting-Down Priorities At face value, specific spending commitments on specific cancer-related measures by Health Canada seem modest. Alternatively, the size and composition of cancer-related spending, when linked to population health policies and programs, could lead to the view that overall spending by Health Canada is more substantial than originally thought. “Many health promotion and sickness prevention initiatives,” as Lewis and Fooks point out, “cut across disease categories.”30 A related point is that cancer control occurs through a range of policy instruments: regulations, taxation, social marketing or public information, and private spending; in data not readily reported in public accounts. In practice, cancer control may be a higher policy priority than officially seems because of the interconnections among health issues and multiple interventions by government. However, this does not account for the absence of a comprehensive national cancer control strategy in Canada. To govern is to make choices, goes the old saying, and public spending is choosing, par excellence. Financial constraints are not the reason for the

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limited investment by the Martin Liberals in the cancer control strategy. In the weeks following the Integrated Strategy and the $59.5 million investment on cancer control, the Martin Liberals embarked on a pre-election spending extravaganza of $20 billion in new promises. Health policy making, priority setting and budgeting all take place within a context of the programs and plans of other federal ministers and officials, interest groups, other governments, research and policy institutes, and the media. If there is a lack of political will or leadership on cancer control, that leadership operates within this wider context.31 Cancer as a health issue and cancer control as a strategic response must constantly compete for attention, support, and resources against myriad problems and proposed solutions. Frequent turnover among health ministers and senior health officials (deputy and assistant deputy ministers), further constrains an ability to create sustained consideration and direction to forging a national strategy on cancer control. In the last 10 years, for example, in the federal government there have been six ministers of Health.32 The stalled status of the cscc on the federal policy agenda is due also to petty bureaucratic politics and principled policy differences in health approaches. There are public stories, and confidential sources, that attest to struggles over mandate and turf between Health Canada and the recently formed Public Health Agency; to competition over public credit between the minister of State and the Health minister on public health initiatives; to unease among federal health officials over the strong disease-specific approach of the strategy, rather than an integrated approach that tackles common risk factors, and the strategy’s innovative approach to knowledge exchange and intergovernmental relations; and to the prime minister’s interest in the cancer strategy overlaid by his preoccupation with medical wait times.33 Unquestionably, the health agenda confronts regularly a host of profound challenges and opportunities: the health of Aboriginal peoples, genomics and innovation, Hepatitis C and the integrity of Canada’s blood system, reproductive technologies, perceived shortages of nurses and other professionals, and public health threats.34 Cutbacks in health care spending and reorganizations of health care systems across jurisdictions are further factors contributing to the turbulence and tensions in health policy and service delivery. Virtually all provinces and territories struggle with health care budgets, and attempted reorganizations of primary care and the regionalization of health services. Relations between the federal government and the provinces and territories on health care funding and reform remain strained and, at times, hotly disputed over cost-sharing, national standards and the enforcement of the Canada Health Act. The politics of health of late centres on implementing some reforms, preserving the insured health care system, and ensuring accessibility to it in the face of wait lists, staff shortages, and equipment deficiencies.35 Heightened

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concern with acute care makes it even more challenging for health promotion activities and other services not in the core of the medical system, such as palliative care, to garner new resources and be included as an integral part of a comprehensive strategy. The Intergovernmental Context of Health Reform Through the First Ministers’ 2000 Communiqué on Health, the 2003 Accord on Health Care Renewal, and the 2004 10-Year Action Plan on Health, the federal government and provinces/territories are making significant reinvestments plus new investments in health care services, and making some progress on reforms to the health care system. Multilateral support for a Canadian strategy on cancer control is largely implicit in the 2000 and 20003 health agreements; implicit in that cancer is unspoken but understood to be a central health issue in several of the specific priorities of action, namely, health promotion and wellness, improved management of chronic diseases, improved access to preventive, diagnostic and treatment services, and end-of-life care.36 Cancer is identified explicitly in the agreements in relation to performance indicators for measuring progress on reforms, though there is no mention of a cancer control strategy. Governments have established four sets of performance categories: timely access, quality of health care, sustainability, and health and wellness. Timely access refers to access to essential services across the country as well as waiting times. Quality of health care addresses patient safety, patient satisfaction, and health outcomes. Sustainability includes measures to do with efficiency and effectiveness, the state of health human resources, equipment, information systems, and value for money from the system. The final category is health status and wellness. In the 2003 Accord, there are specific measures on cancer in three of the performance areas, and indirectly in the fourth area.37 The 2004 accord, the 10-Year Action Plan on Health, includes $41 billion in additional federal spending on health over the next decade.38 The Martin government outlined a “five in five” proposal for health reform agreement with the provinces and territories; that is, lowering waiting times over five years in five priority areas – cancer, heart, diagnostic imaging, joint replacement, and sight restoration. On addressing wait times and improving timely access to essential health services, the Action Plan sets out a number of commitments and timelines. Each jurisdiction agrees to establish comparable indicators of access to health care professionals, diagnostic and treatment procedures with a report to their citizens by December 31, 2005. Ministers of Health are to establish evidence-based benchmarks for medically acceptable wait times starting with cancer, heart, diagnostic imaging procedures, joint replacements, and sight restoration. First ministers commit to achieve

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meaningful reductions in wait times in priority areas such as cancer, heart, and so forth by March 31, 2007, recognizing the different starting points, priorities, and strategies across jurisdictions. Multi-year targets to achieve priority benchmarks are to be in place by each jurisdiction by the end of 2007, with provinces and territories to report annually to their citizens on their progress in meeting their multi-year wait time targets. To improve access to medically necessary insured services, the Martin government committed $4.5 billion over six years, from 2004–05 to 2009–10, in a Wait Times Reduction Fund.

c o n c lu s i o n s The chase continues. This chapter examined Canada’s approach to cancer control and found it is very much an incomplete project. The analysis suggests that bureaucratic and ministerial politics have shaped and slowed implementation of the Canadian Strategy for Cancer Control (cscc). Underlying this politics is a policy debate between government officials and the cancer community over the desirability of a generic strategy on chronic diseases, under the direct control of federal authorities, as compared to diseasebased strategies like the cscc that would operate at arms length from government. A general approach promises to address risk factors common to multiple chronic diseases, encouraging collaboration and enhancing impacts on health promotion and disease prevention. A disease-specific approach makes considerable political sense to Canadians as voters and politicians, empirical sense to researchers familiar with disease-based knowledge, and practical sense to Canadians as potential or actual patients, given the general problems everyone has with assessing the health care system as a whole. A comparable case is with environmental policy in which along with a general approach to sustainable development, government actions focus on named pollutants such as acid rain, which resonate with people and reflect the state of knowledge and interventions. The Integrated Strategy on Healthy Living and Chronic Disease unveiled by the Martin Liberals tries to bridge this policy debate, yet complicated the issue with a modest investment for the cscc. Consequently, Canadians continue to lack an adequate national cancer control policy. Effective provision of cancer care and cancer control must have appropriate public investments that span the breadth of health promotion and prevention, to screening and early detection, to treatment and rehabilitation services, and palliative care, and do so in a coordinated, evidence-based and patient-centred manner.39 What might propel adoption of the cscc? Several factors suggest increased action on a comprehensive approach to cancer control. Certainly continued budgetary surpluses in Ottawa coupled with another minority government

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and perhaps joined by strong action by parliamentary committees. Community and parliamentary support is growing in Canada for a strategic approach to public health and cancer control.40 Further developments at the provincial level and inter-provincial levels in adopting cancer control strategies are likely; complemented by work in the non-governmental sector, such as by the Canadian Hospice Palliative Care Association. The health field seems to be in a state of renewed investment and innovation, although it is too early to give a definitive assessment of the speed and eventual scope of reforms.41 Even so, these developments are emphasizing the necessity of a broader, population-based approach to health and health care and more systematic attention to social determinants of health, health promotion and prevention, and, to a degree, issues of inequalities among groups. This is arguably the most important trend in health care policy over the last decade. To be a true strategic approach, cancer control must operate in the context of a higher-level policy paradigm such as the population health perspective with health goals and priorities, measurable targets, and expected health outcomes informed by available research evidence. A strategic vision embraces prevention, provision, and palliation. Lowering the burden of cancer requires reducing the actual environmental and lifestyle causes at the root of cancer incidence. It also means providing better and more standardized care for patients, and alleviating the psychosocial and physical burden of cancer on patients and on their families. A partially funded cancer strategy means the available knowledge on cancer care and control is not being fully applied. It means prevention is incomplete; that not enough screening of enough Canadians is being done. It means many cancer patients wait too long for treatment and that most do not receive supportive care services. It also means pressures continue for the expansion of private medical care and for out-of-the country diagnoses and treatments at American hospitals and cancer clinics.42 It is time that Canada’s governments move from chasing a national cancer control strategy to reaching adoption of this vital and unrelenting priority for Canadians.

notes 1 “Cancer Is Out of Control in Canada,” The Globe and Mail, November 24, 2005, A14. The Campaign to Control Cancer is a national coalition of leading organizations committed to cancer control. See www.controlcancer.ca. 2 Mary Janigan, “Fighting over the War on Cancer,” The Globe and Mail, September 24, 2005, F2. 3 National Cancer Institute of Canada, Canadian Cancer Statistics, 2005. Toronto: ncri, April 2005. Available at website: http://www.cancer.ca/css/internet. Incidence refers to the number of individuals in the population newly diagnosed with cancer each year, and prevalence refers to the total number of persons in the population at any one time who have cancer.

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4 Cancer Quality Council of Ontario, Strengthening the Quality of Cancer Services in Ontario: Synopsis, Toronto: October 2003, p. 1; Lisa Priest, “Paying the Price for New Cancer Treatments,” The Globe and Mail, August 1, 2005, A5. 5 Cancer Strategy for Cancer Control, Synthesis Report, Toronto, January 18, 2001, at 16, 29, and 40; see also N. Seeman, “Low-Tech, Low-Brow,” in D. Gratzer, ed., Better Medicine: Reforming Canadian Health Care (Toronto: ecw Press, 2002): 92–3; Cancer Quality Council of Ontario, Strengthening the Quality of Cancer Services in Ontario (Ottawa: Canadian Cancer Society/National Cancer Institute of Canada, 2003), 5, 11, 27–8. 6 Cancer Strategy for Cancer Control, Synthesis Report, 28; and Cancer Quality Council of Ontario, Strengthening the Quality of Cancer Services in Ontario, 17. 7 Canadian Strategy for Cancer Control, Business Plan for cscc, Version 3–5. November 24, 2003, 20. Available at website: http://www.cancercontrol.org. 8 See the 58th World Health Assembly, resolution 22, May 25, 2005. At http://who.int/ gb/ebwha/pdf_files/WHA58/WHA58_22-en.pdf 9 Australia, Guidelines for Improving National Public Health Strategies Development and Coordination (Melbourne: National Public Health Partnership Secretariat, 1999). Available at website: http://www.nphp.gov.au; Australia, Preventing Chronic Disease: A Strategic Framework, Background Paper (Melbourne: National Public Health Partnership Secretariat, 2001). Available at website http://www.nphp.gov.au; J. A. Bennett, C. Brewer, S. Beyko and S.A.L. Bennett, Cancer Control Strategies in Eleven OECD Countries (Ottawa: Department of Biochemistry, Microbiology, and Immunology, University of Ottawa, 1999); Ireland, Cancer Services in Ireland: A National Strategy (Dublin: Department of Health and Children, 1996); National Cancer Research Institute, “About ncri,” London: 2003. Available at website: http://www.ncri.org.uk; and New Zealand, The New Zealand Cancer Control Strategy (Wellington: Ministry of Health and the New Zealand Cancer Control Trust, 2003). Available at website: http://www.moh.gov.nz/cancercontrol. 10 I wish to thank Dr Jo Kennelly of the National Cancer Institute of Canada for this example and other assistance with the research for this paper. 11 Australia, Guidelines for Improving National Public Health Strategies Development and Coordination; and Preventing Chronic Disease: A Strategic Framework, Background Paper. 12 Health Canada, 2005–2006 Estimates, Part III, Report on Plans and Priorities (Ottawa: Treasury Board Secretariat, 2005), 5 Available at website: http://www.tbs-sct.gov.gc.ca. 13 Health Canada, 2003–2004 Estimates (Ottawa: Public Works and Government Services Canada, 2004), 31. 14 S. Lewis and C. Fooks, “A Primer on Reforming the Canadian Health Care System,” A Discussion paper prepared for the Canadian Cancer Society and the National Cancer Institute of Canada, June 2002, 1. See also C. J. Frankish, G. Veenstra, and G. Moulton, Population Health in Canada: A Working Paper (Ottawa: Health Canada, 2001). Available at website: http://www.hc-sc.gc.ca/hppb/phdd/docs/social/ e_contents.html; C. J. Redden, Health Care, Entitlement, and Citizenship (Toronto: University of Toronto Press, 2002).

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15 See “Health Minister Releases Two Cancer Reports: More Canadians with Cancer Living Longer,” News Release, Public Health Agency of Canada, October 19, 2004; and “Canadian Strategy for Cancer Control: Statement from the Chief Public Health Officer,” News Release, Public Health Agency of Canada, January 27, 2005. Available at website: http://www.phac-aspc.gc.ca. 16 Cancer Quality Council of Ontario, Strengthening the Quality of Cancer Services in Ontario, 1. See also, Cancer Care Ontario, Targeting Cancer: An Action Plan for Cancer Prevention and Detection, Cancer 2020 Background Report (Toronto: Cancer Care Ontario, 2003). 17 See Partners Taking Action: A Cancer Control Strategy for Prince Edward Island, 2004– 2015 (Charlottetown: Department of Health and Social Services, October 2004); and, Northern Cancer Control Strategy, Final Report, Northern Health and BC Cancer Agency, March 2005, available at http://northernhealth.ca. In Quebec, the Coalition Priorité Cancer au Québec formed in 200 is calling on the Quebec government to provide the resources needed to implement the Programme québécois de lutte contre le cancer, first adopted in April 1998. 18 The Institute of Cancer Research advisory board consists of 16 members: two from federal agencies, three from provincial cancer agencies, seven academics from various universities, and four from non-governmental organizations. 19 Canadian Institutes of Health Research, “The Institute of Cancer Research.” Available at website: http://www.cihr-irsc.gc.ca. 20 In addition to this amount, the Canadian Institutes of Health Research has pledged $14 million to the Canadian Breast Cancer Research component of this Initiative over the 2003 to 2008 period. 21 “Canadian Hospice Palliative Care Association.” Available at website: http:// www.chpca.net; and Cancer Strategy for Cancer Control, Business Plan for CSCC, 20. 22 Cancer Quality Council of Ontario, Strengthening the Quality of Cancer Services in Ontario, 5, 23; as well, see Cancer Strategy for Cancer Control, Synthesis Report, 40. 23 Canadian Association of Provincial Cancer Agencies, “About the capca,” available at website: http://www.capca.ca. “Canadian Hospice Palliative Care Association;” and M. R. McKenzie, “Oncology and Palliative Care: Bringing Together Two Solitudes,” Canadian Medical Association Journal 158, 13 (1998): 1702–04. 24 N. MacDonald, “Palliative Care: An Essential Component of Cancer Control,” Canadian Medical Association Journal 158, 13 (1998): 1709–16. 25 Public Health Agency of Canada, “Federal Government Announces $300 million for Health Promotion and Disease Prevention,” News Release, October 20, 2005, 1. 26 For 2004–05, funding for tobacco control doubled, yet the grant for prostate cancer research initiative ended. See Canada, 2004–2005 Estimates, Parts I and II and Health Canada, 2003–2004 Estimates. In 2004–05, the Canadian Diabetes Strategy received $30 million. 27 Liberal Party of Canada, Supporting Canadian Families: The Canada Health Guarantee (Liberal Party of Canada, January 4, 2006).

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28 Dr. Barb Whyllie, “Federal Funding for Cancer-Fighting Efforts a Start But More Needed, Says Canadian Cancer Society,” Media Release, October 20, 2005. 29 “Cancer Is Out of Control in Canada,” available online at http://www.conservative.ca. 30 Lewis and Fooks, A Primer on Reforming the Canadian Health Care System, 28. 31 Pauline Comeau, “Cancer Strategy Needed But Political Will Lacking,” Canadian Medical Association Journal 170, 13 (2004): 1904. 32 From 1996 to 2005, federal Health Ministers were Diane Marleau, David Dingwall, Allan Rock, Anne McLellan, Pierre Pettigrew, and Ujjal Dosanjh. Ministerial turnover has implications, no doubt, for the status of the Health portfolio within cabinet, in relation to central agencies, as well as for a minister’s relation to her or his deputy and to the portfolio’s constituencies, and thus for relations among political leadership, bureaucratic influence, and public input. Alas, these fascinating issues are beyond the scope of this paper. 33 See Janigan, “Fighting over the War on Cancer” and Mark Kennedy, “The Great Debate: The Future of Cancer Care Will Mean the Difference between Living and Dying,” CanWest News Service, October 30, 2005. This analysis echoes confidential communications with participants associated with the Council of the Canadian Strategy for Cancer Control. 34 D. Naylor, Learning from sars: Renewal of Public Health in Canada. Report by the National Advisory Committee on sars and Public Health. Ottawa: Health Canada, 2003. Available at website: http://www.hc-sc.gc.ca/english/protection/warnings/sars/ learning.html. 35 See D. Adams, ed. Federalism, Democracy and Health Policy in Canada. (Montreal and Kingston: McGill-Queen’s University Press, 2001); Cancer Quality Council of Ontario, Strengthening the Quality of Cancer Services in Ontario. 36 First Ministers’ Meeting, Communiqué on Health, Ottawa: September 2000. Available at Canadian Intergovernmental Conferences Secretariat website: http:// www.scis.gc.ca/info00/800038004_e.html and First Ministers’ Meeting, Accord on Health Care Renewal. Ottawa: February 2003. Available at Health Canada’s website: http://www.hc-sc.gc.ca/english/hca2003/accord.html. 37 On an update on this work following the first ministers’ 2004 health plan, see Tom McIntosh, The Taming of the Queue II: Colloquium Report, March 31, April 1, 2005 (Ottawa: Canadian Policy Research Networks, 2005). Available at web site: http:// www.cprn.org. 38 For details on the 2004 plan, related speeches by first ministers and backgrounders see the Office of the Prime Minister’s web site, http://www.pm.gc.ca. 39 Health Canada, Progress Report on Cancer Control in Canada (Ottawa: Centre for Chronic Disease, Prevention and Control, Population and Public Health Branch, Health Canada, 2004). Available at web site http://www.hc-sc.gc.ca. 40 In February 2005, a private member’s bill in the Senate, The National Cancer Strategy Act, called for such a strategy and on June 7, 2005, the House of Commons passed unanimously a motion tabled by Conservative health critic Steven Fletcher

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committing the federal government to fully fund and implement the Canadian Strategy for Cancer Control in collaboration with the provinces and stakeholders. 41 See Allan Maslove, Health and Federal-Provincial Fiscal Agreements: Lost Opportunity,” in Bruce Doern, ed., How Ottawa Spends 2005–2006: Managing the Minority (Montreal: McGill-Queen’s University Press, 42 2005) 23–40. 43 Lisa Priest, “US Clinic Lures Canadians,” Globe and Mail, November 25, 2005, A1 and A10.

11 Access to Emergency Medicines: How Ottawa Amends the Patent Act l i s a m i l l s a n d a s h l e y we b e r

Canada is the first country to amend its patent law to permit the export of generic medicines for public health emergencies such as hiv/aids in the developing world. Before 2003, the Agreement on Trade-Related Aspects of Intellectual Property Rights (trips) did not permit the export of generic medicines that infringed patent protection, even in cases of national emergency. Countries, particularly in Africa, experiencing the hiv/aids pandemic and lacking any domestic drug manufacturing capacity were unable to import necessary drugs without infringing patent rights. Following the appeal by Stephen Lewis, the Director of the un Special Envoy on hiv/aids in Africa, that Canada take action on this issue, the government introduced a bill to implement international decisions permitting the export of generic medicines under these circumstances. Although development and public health Non Government Organizations (ngo s) were instrumental in getting the issue on the legislative agenda, and in removing clauses that would undermine the law’s impact, this chapter will show that ultimately measures to protect patent holders have limited its potential. We argue that the legislation may have an important symbolic impact but it is unlikely to result in increased access to emergency medicines in the developing world. The policy outcome has been shaped by the structural position of the brand name pharmaceutical industry in Canada, its effective lobbying on the issue, and its perceived importance to the government of Canada. In this sense the current case builds on the historical politics of patent policy in Canada and globally through which the pharmaceutical industry and other interests had secured strong

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international protection for patent and other intellectual property rights against then quite weak user interests, including the health lobby.1

d r u g pat e n t s a n d t h e i n t e r n at i o n a l c o n t e x t Patent protection is a monopoly right granted by the state to an innovator in exchange for making the invention – and knowledge about how to reproduce it – available.2 Knowledge about new drugs and medicines can be considered a public good, in that once it is established it is both non-excludable and non-rival. As with any public good, it is subject to the problem of free ridership. Free riders will simply take the knowledge that has already been developed and use it without having to pay the initial costs associated with its development. In industries such as pharmaceuticals, the costs of drug innovation are very high, while the costs of imitation are relatively low. Grabowski argues that the social returns to pharmaceutical innovation exceed the private returns.3 According to this argument, patents and patent regimes protect innovation and promote the creation of public goods. The awarding of monopoly privileges, however, provides innovators with the opportunity to charge rents and distort the value of a good on the market, by raising the price and reducing the output.4 The trips Agreement, concluded by Members of the newly established wto in 1994, created a regime of minimum standards for the protection of intellectual property rights on a global scale. It provides protection for trademarks, copyrights, and patents – items produced primarily in the developed world. It is particularly in relation to patents on pharmaceutical drug innovations that trips has faced high-profile criticism, as it has created damaging barriers to the provision of public health. Infectious and communicable diseases have reached epidemic proportions in the many countries in the developing world, with over 3.1 million hiv/aids deaths in 2004. Of those deaths, 640, 000 were of children under the age of fifteen.5 Patent-protected anti-retroviral drugs, which have saved the lives of thousands of aids patients in the developed world, cost around US $10,000, putting them out of reach of the millions in the developing world. The global inequality of drug access has become a major issue, both in regards to the interpretation of the trips agreement and the enforcement of public health priorities. Despite criticism that these rules and regulations have become barriers to the provision of public health, there is in fact a certain degree of flexibility built into the agreement, which affirms the right and ability for countries to override aspects of trips when the rules conflict with the provision of public health. In particular, Article 7 and 8 of the trips agreement allows members to adopt measures that are necessary to protect public health and nutrition,

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and recognizes that there is a need for appropriate measures to prevent the abuse of intellectual property rights. Article 20 allows for limited exceptions to exclusive rights. Most importantly, article 31 sets out conditions for use of goods without the authorization of the patent holder, which includes situations of national emergency or extreme urgency.6 Nevertheless, the U.S. in particular has threatened trade sanctions against developing countries who override patents in order to produce or import cheaper generic drugs for domestic distribution. In 1998, the Pharmaceutical Manufacturers Association of South Africa, representing 41 multinational drug companies, filed a private lawsuit against the government of South Africa which had introduced legislation to increase the availability of affordable hiv/aids drugs by legitimizing generic substitution of off-patent medicines, transparent pricing for all medicines, and parallel importation of patented medicines.7 In South Africa, 13 of the possible 15 anti-retroviral drugs (arv s ) used to treat hiv/aids are under patent. arv s , most commonly used in first-line treatment of hiv/aids, are the drugs most heavily patented in Africa.8 In a country that has seen the prevalence of hiv/aids among 15– 49 year olds rise from less than 1% in 1990 to 20.1% in 2001, and with deaths in 2003 calculated as high as 520, 000, the problem of hiv/aids in South Africa has certainly reached epidemic proportions, clearly meeting criteria of a national health emergency.9 Although presented as a private suit, the pharmaceutical companies had strong support from home governments. The European Directorate General for Trade in the European Commission stated that: “No priority should be given to health over intellectual property considerations”.10 Both the EU and US placed tremendous pressure on South Africa by withholding trade benefits and threatening further sanctions. This stimulated a strong and public response by civil society led by global and national ngo s. With increasing public pressure, the US government backed down in 1999. Facing a public relations nightmare, the pharmaceutical companies dropped the suit in April 2001. Despite the failure of the suit in South Africa, the US continued to pursue a similar case against Brazil through the wto dispute-settlement proceedings a few months later. Brazil, with initial support from a vibrant and vocal homosexual community, was the first developing country to prove that poor countries can treat hiv/aids. With strong government support, an effective campaign was initiated to combat the disease, focusing both on building infrastructure, such as clinics and training personnel, as well as reducing the price of essential arv drugs.11 By actively encouraging the development of a domestic generics industry, and by facilitating generic reproduction of essential drugs, the price of drugs has plummeted in Brazil, making them affordable for the government to purchase and distribute to the population for free. aids mortalities have been halved.12

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The US took the issue to the wto dispute settlement body for arbitration in February 2001. By June, under intense scrutiny from the media and ngo s, the US withdrew its complaint. By this time, the hiv/aids pandemic had reached record proportions, with aids deaths verging on 22 million and with more than half of these cases plaguing Sub-Saharan Africa.13 The UN Secretary-General, Kofi Annan convened the UN General Assembly Special Session on hiv/aids in New York in June 2001. The matter was also placed on the G8 agenda for the July 2001 meeting in Genoa, Italy, which resulted in the establishment of the Global Health Fund, later renamed the Global Fund against hiv/aids, Tuberculosis and Malaria.14 The Fund became a worldwide fundraising campaign that targeted both the public and private sector. Members that signed on in 2001 ranged from countries like Canada to private contributors such as the Gates Foundation, both of which, ironically, pledged equal contributions.15 The Anthrax Scare The developing countries’ objections to trips were reinforced when developed countries threatened to violate patent protection during the anthrax scare. In mid-October 2001, a perceived threat of anthrax attacks in North America forced Western policy-makers to rethink their position in relation to compulsory licenses and trips. Mail carrying a powder form of anthrax was delivered to a number of politicians and influential Americans, causing the death of five and sickness in an additional 13 persons. The threat, the severity of which was relatively unknown, sparked a controversial – and hypocritical – response from the Canadian and US governments. In order to tackle the emerging threat to national security, Canada issued a compulsory license for a million tablets of a patented treatment drug from a generic producer. Although the threat of a compulsory license was ultimately avoided,16 the credibility of the industrialized countries’ position had been severely damaged. This, in turn, helped invigorate the developing countries’ proposal to amend the trips agreement in Doha, Qatar. The Doha Declaration on trips and public health ultimately affirmed the sovereign right of governments to take measures to protect public health. In August 2003, the wto’s General Council came to a decision on some of the issues that had been left ambiguous in the Doha Declaration. After two years of meetings and negotiations, the Council unanimously adopted a decision to waive, on an interim basis, article 31(f) of trips, which restricted the use of compulsory licences to situations that dominantly supply domestic markets. The decision on the “Implementation of Paragraph 6 of the Doha Declaration on the trips Agreement and Public Health” gives countries without domestic production capacity the ability to issue compulsory

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licences, and engage in contracts with foreign manufacturers to import generic copies of essential medicines still under patent at reduced costs.

e s ta b l i s h i n g b i l l c - 9 In response to the wto Decision, in September 2003 Stephen Lewis and several ngo s urged the Canadian government to take action. The issue complemented Prime Minister Chrétien’s foreign policy focus on Africa. Initially Bill C-56 was quickly introduced (later to become Bill C-9) making Canada the first country to implement domestic legislation that addressed the wto’s amendments. It passed second reading in the House of Commons on November 7, 2003. After a number of revisions and modifications, it was re-introduced as Bill C-9 (An Act to amend the Patent Act and the Food and Drugs Act) and passed in May 2004.17 The legislation prompted a large amount of debate both at home and abroad. In November 2003, the un made public statements commending Canada on its efforts to improve the right to health for developing countries. The special rapporteur of the un Commission on Human Rights encouraged other wto members to follow Canada’s example.18 In July 2004 at the annual nafta Commission meeting, shortly after its approval in the House of Commons, the United States Trade Representative (ustr) announced a Memorandum of Understanding with Canada, agreeing to suspend article 1709(10)(f) of the nafta to ensure consistency with the wto Decision regarding compulsory licenses.19 The US affirmed a commitment not to impede Canada’s efforts to assist poor countries in accessing cheaper generic versions of patented drugs.20 While the Bill was intended to implement the Doha Declaration and wto Council decision on access to emergency medicines, it contains a number of clauses that differ from the wto requirements and that were highly controversial in Canada. Bill C-56 included a “first opportunity” clause for patentees, which subsequently became known in the media as the “right of first refusal.” Under this clause, generic companies would have to disclose the details of any contract being negotiated that pertained to patented drugs. This clause would have given brand name companies the right to fill contracts negotiated by generic companies, as well as an incentive to underbid prices offered by the generic companies in order to prevent them from entering the market. With no guarantees or consistent market access, there would have been little incentive for generic companies to engage in negotiations and increase competition in drug prices. The clause was ultimately removed from the legislation after intensive lobbying by ngo s. Unlike the wto decision, the Canadian legislation adopted a limited list of drugs. The idea of a designated list of drugs was a contentious issue in the

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wto negotiation, which ended in favour of developing countries by not including any provisions on particular drugs: Seen as an imposition on a country’s sovereign right to define its own public health needs and emergencies, the criteria for determining need for a compulsory licence was left to the discretion of the issuing countries and their contracting partners. The Canadian legislation, however, designates a list of 56 products. Canadian government officials chose the who list of essential medicines, and then added additional drugs when they were proposed as amendments in the Standing Committee hearings. Contrary to ngo criticism, officials argue that it is more efficient to have a list of drugs that is already approved rather than to have each application awaiting individual approval from the commissioner of Patents. Furthermore, the government felt that having a pre-authorized list of drugs was less litigious and would remove the threat of litigation by the brand name industry on a case-by-case basis. Government officials saw a list as the only way to make the legislation functional in the Canadian context.21 The wto Decision and the C-9 legislation also differ in their list of eligible countries. The wto Decision applies solely to Members of the wto. The Canadian legislation, however, extends its scope beyond wto membership. Under Bill C-9, countries on the oecd’s official development assistance (oda) list may utilize the legislation to legally initiate a compulsory licence and negotiate contracts with Canadian generic firms. However, these countries must illustrate a need based on a national public health emergency. While this requirement is also applicable in the wto Decision and the trips agreement, the 2003 wto Decision was carefully designed to avoid the inclusion of any specific wording that could limit a country’s ability to invoke and apply the agreement.22 Bill C-9 limits generic companies’ contracts to two years, with a possibility for one renewal. This limit was not included in the wto decision. The government included this limitation into the C-9 legislation as leverage to guarantee the participation of the brand name companies in the policy process.23 Bill C-9 also created a mechanism for determining appropriate remuneration rates to be paid to the patent holders. Whereas the wto Decision did not establish a mechanism for determining equitable remunerations, a royalty rate was adopted into the C-9 legislation with input from industry representatives. Initially, the government sought to introduce a fixed rate mechanism; however, it would not have been trips compliant. The government then created a formula that centred on a definition of commerciality above 25% of the patentees sale price in the Canadian market. Article 21.17 of the Bill states that if the average price of a product to be manufactured under a licence is greater than 25 percent of the average price in Canada of the equivalent product sold by or with the consent of the patentee, the brand name company can apply to the Federal Court for remunerations on the

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grounds that the agreement is commercial in nature. Generic companies argue that this criterion leaves them open to civil litigation and contentious legal conflicts.

the policy process The ngo s One of the features of the C-9 policy process was the important role ngo s played in getting the issue on the policy agenda and removing the most restrictive clauses from the bill. Having been involved in the debate over access for a number of years in the international context through the trips and Doha negotiations, ngo s acted as significant catalysts for the movement of the issue from the international to the domestic domain. The ngo network was able to maintain critical and important pressure on the other stakeholders to stay on track in pursuit of the overall goal of improving access to essential medicines. The process began for ngo s in mid-2001, prior to the commencement of the wto Doha Round of negotiations, when a coalition of civil society groups began to discuss Canadian organizations working together to address the issue of access. For some, such as Médicins Sans Frontières (msf), these discussions had already been going on for some time, dating back even further to 1999 with the launch of its international access campaign. Working under the umbrella of the Global Treatment Access Group (gtag), ngo s such as msf, oxfam and the Canadian hiv/aids Legal Network lobbied the Canadian government and trade officials to change their position regarding trips and essential medicines, which ngo s felt favoured pharmaceutical interests over humanitarian endeavours. The advocacy campaign continued in the international context until the wto Council Decision. Throughout the international negotiations, gtag lobbied the Canadian government to utilize the flexibilities built into the trips agreement to allow Canadian generics to entertain contracts issued through compulsory licenses. The response they received from the government was to wait until a decision had been reached multilaterally through the wto negotiations. When the Decision was reached in August 2003, gtag and its members began pressuring the government to implement the decision domestically. After the Canadian Generic Pharmaceutical Association (cgpa) issued a public letter to the acting minister of International Trade, Pierre Pettigrew, asking the government to act on the 2003 wto Decision, and the Globe and Mail published an article discussing the implications of the wto Decision, gtag felt that a large policy window had opened domestically, creating an opportunity to push the issue onto the Canadian political agenda. ngo s worked with Steven Lewis, un special envoy for hiv/aids, to have him speak to the issue in his address to the un in the early fall 2003, and

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again at a later conference on hiv/aids and sexually transmitted infections in Africa. With growing media attention, gtag published a commentary in the Globe and Mail. Shortly thereafter, the minister of Industry, Allan Rock, announced that the government planned to move ahead with the legislation. When the ngo s became concerned that the government was limiting the scope of the legislation, gtag held a press conference on November 1, 2003, with Steven Lewis and other officials in attendance. The objective in this advocacy battle was to make the government aware that civil society groups were going to be active in the discussions and critical of any changes or restrictions on the Bill the government attempted to introduce which differed from the wto Decision.24 Once a first draft of the legislation was ready, ngo s were invited to meetings with government officials to discuss it. At these meetings, every participant was required to sign confidentiality agreements. Over a number of weeks, all of the interested stakeholders met separately with government officials. When the legislation was tabled on November 6, 2003 ngo s were taken aback with the insertion of the new clause regarding the right of first refusal. As one representative commented: “It would be hard to convey to you how incensed we were to see a poison pill in the legislation.”25 Fearing that the government had sided with the brand name companies, ngo s went into overdrive, contacting MPs, issuing press releases, and engaging in conversations with the opposition parties and the pmo’s office. Despite two years of intense lobbying to get to that stage, ngo s agreed that the faults were so significant that it would be better to have no legislation at all than to have it flawed. Thus they were willing to take the risk of delaying the Bill until the next session, knowing the potential existed for it to be delayed or even completely derailed. The gamble ngo s took ultimately succeeded, and Bill C-9 was re-introduced when Parliament reconvened in the New Year 2004. The final advocacy round for ngo s focused on getting some of the other elements of the Bill fixed to make it more workable for both developing countries and generic producers. ngo s campaigned against the list of medicines, list of countries, ngo contracting and the two-year limit concerns in the end received partial success. The list of medicines was maintained; however, it was slightly extended to include some hiv/aids drugs that are patented and approved in Canada, but are not on the who List of Essential Medicines. Identified by ngo s as the single most dissuading factor in the legislation for generic companies, there are remaining concerns with the legislative process that complicate the addition of any drugs to the list.26 ngo s were pleased with the expansion of eligible countries, despite additional restrictions on non-wto members, and they were also successful in their lobby to allow for ngo contracting under the Bill. Arguing that ngo s

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should also be allowed to order and purchase drugs under the legislation, the government eventually put forward an amendment to the Standing Committee regarding this issue, which borrowed the language the ngo s had used in their proposal. Despite the hard fought battle, ngo s remain sceptical of the effectiveness of the legislation. Recognizing that any legislation of this nature is only, at best, a partial solution, they fear that the onerous and unnecessary complications of the Bill will inhibit its use by developing countries and generic producers. At the moment, they are optimistic that a test case will go through that may actually result in drugs being produced in Canada and exported to developing countries. Whether there will be a second case however, is still highly speculative. At the end of the process, ngo s acknowledge that the merits of Bill C-9 will be more symbolic in terms of its political contributions than practical in terms of actually improving access. Whereas at the beginning, they viewed it as a 60/40 split between the political and practical contributions, now those numbers have shifted to 80/20. While still committing time and effort towards the Canadian advocacy campaign, ngo s have begun to shift their focus towards advocacy in other countries that seek to use the Canadian legislation as a model for future endeavours. The Brand Name Companies The brandname pharmaceutical companies became one of the strongest voices to lobby for input and involvement in the drafting of the Bill. As the owners of the patent rights being infringed upon by the legislation, the brandname companies were guaranteed an active role in the policy process by the government.27 Under the auspices of the industry organization, rx&d, brand name companies were able to organize themselves and effectively engaged in the policy discussions. The brandname companies have long been active in the conflict between intellectual property rights and access to medicine, which started in the international domain of the wto and was then brought into the Canadian context with Bill C-9. The brand names argued that they were already providing drugs to the developing countries at not-for-profit prices, and thus saw the legislation as redundant. Furthermore, with strong and highly competitive generic suppliers already operating in the developing world in places like Brazil and India, most of which would not complete their transition into the wto until 2005, they argued that there was little need or market for Canadian generics. Despite their initially strong and hostile opposition, the high media profile and strong political incentives led the Canadian government to move forward with the Bill, and the brandname companies were forced to reframe their arguments and choose new tactics.28

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rx&d represented the multiple companies operating in Canada, acting as one voice in both government discussions and in the Standing Committee meetings. Most of the companies, however, are subsidiaries of multinational corporations with their head offices located in Europe and the US. Dialogues took place back and forth informally between the Canadian subsidiaries and their head offices abroad, mostly with linkages to the global ip departments and global government affairs departments. rx&d worked with the pharmaceutical organization in the US as well as the International Pharmaceutical Manufacturers Association (ipma). International interest was focused on getting the right amount of input in the right places in order to protect patent rights, as all parties recognized that the Canadian experiment with Bill C-9 would ultimately serve as a template for other countries to follow. In October 2003, shortly after the government announced its commitment to follow up domestically on the wto Decision, rx&d and the Canadian Generic Pharmaceuticals Association (cgpa) were invited to Ottawa for confidential meetings with government officials to discuss possible drafts. Throughout the process, rx&d and its members played a significant role in providing the government with technical assistance and insight into the inner workings of the industry. Most importantly, the brandname companies were given the opportunity to comment on the draft Bill, and recommend changes that would best protect their interests. Concerned with both the domestic and international implications the legislation would have on international drug prices and production, brandname companies presented their concerns to the Standing Committee on Industry, Science and Technology. In general, amendment requests fell under five categories: workability, transparency, preventing re-importation, anti-diversion, and notification or due process.29 To ensure the system remained non-commercial, requests were made to enhance contract transparency as well as make information regarding delivery tracking and shipments open and accessible. To achieve this, additional requirements regarding product differentiation, such as size and colour, were added into the legislation at the request of the brand name companies as a means of protecting against counterfeiting. This point alone faced criticism from generic manufacturers and ngo s, who claim that product differentiation may lead to confusion for patients taking multiple drugs.30 The issue of prices and profitability were contentious issues for all parties. Whereas the ngo s recognized that profit-making incentives had to exist in order to encourage generic drug manufacturers to engage in contracts, the brandname companies argued that profits on humanitarian endeavours were counter-intuitive, and that ngo s were applying a double-standard to brand names and generics.

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The issues of anti-diversion and notification requirements were the most pressing concerns on the industry’s agenda. Anti-diversion concerns have always been a key argument used by pharmaceutical companies to justify existing pricing systems and the need for stricter intellectual property laws. Drug prices have generally been standardized across markets in order to curb any incentive for parallel imports and diversion of cheaper medicines to higher priced markets. The industry was particularly concerned that Bill C-9 would create the opportunity for companies and countries to purchase cheaper goods under a compulsory license, and then divert the shipments to higher priced markets for a profit. To avoid diversion, the brandname companies opposed the inclusion of ngo s and international organizations, such as the who, as potential contractors for orders of essential medicines, arguing that these organizations, not being sovereign states, are not subject to international trade rules. The lists of eligible countries and drugs were also identified by the brandname companies as necessary restrictions on the scope of the Bill, in order to protect against corrupt and unreasonable behaviour. Likened to the restrictions placed on access in Canada through private and public drug plans, the brandname companies felt a list of drugs and list of eligible countries were appropriate restrictions that took into account the practical realities and magnitude of the issue of global access.31 Arguing that the lack of such restrictions in the wto amendment was due to the complications associated with consensus building in the wto, the difficulties of negotiations, and a practical necessity for solutions to revolve around the lowest common denominator, brandname companies were pleased that these restrictions were included in the final draft of the C-9 legislation.32 Despite the movement back and forth on a number of the issues, the brandname companies have viewed the final draft of Bill C-9 as an overall success. While some issues, such as the right of first refusal, were removed from the legislation, overall most of rx&d’s concerns were addressed. Considering the nature of the legislation, the brand name companies’ enthusiasm for Bill C-9 is both counter-intuitive and somewhat alarming. While brandname companies are pleased with the final draft and format of the Bill, they are also adamant that Bill C-9 will be ineffective, and will not make a significant difference in improving global access to essential medicines. When asked about the effectiveness of Bill C-9, one industry representative stated the position clearly: Interviewer – Did you achieve your objectives? Representative – If you look at it, we probably could have done other things. By and large it is pretty reasonable. Interviewer – In your opinion, is the Bill going to achieve anything? Representative – No.33

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The Generics Industry Like the ngo s, the Canadian generics industry became active in the debate over improving global access to medicines long before the drafting of Bill C-9. In 2000, Apotex, the largest Canadian-based generics producers, offered to produce the hiv/aids drug azt at cost to South Africa. Its efforts were thwarted by the Canadian government, however, as the product was under patent in Canada, prohibiting the export of generic copies. In 2001, simultaneous with the Doha Declaration, the Canadian Generic Pharmaceuticals Association (cgpa) went before a Foreign Affairs sub-committee to request the removal of these export restrictions. Despite its lobbying, the Canadian government chose to wait for a resolution in the wto before addressing the domestic patent legislation. When the issue was again put on the wto agenda in August 2003, the cgpa published a number of opinion pieces. Having sent a letter to the minister of International Trade, Pierre Pettigrew, highlighting the opportunity that existed for Prime Minister Jean Chrétien to build his legacy, cgpa again requested that the government revise its domestic legislation to make it compliant with the new wto decision. Getting the attention of the Canadian media, it became an important news story, prompting responses from the government and the brandname companies as they sprung into action. Under the organization and leadership of the cgpa, the generics industry has actively engaged the non-profit sector, the public sector and their competitors regarding the C-9 legislation. Representing more than twenty generic manufacturing companies, cgpa spearheaded the campaign by engaging in early discussions with government officials before the legislation was tabled, and in their presentations to the Standing Committee on Industry, Science and Technology. The opinions and comments it puts forth on behalf of its members represents the general interests and perspectives held by the largest generic manufacturers in Canada. In its report to the Standing Committee, the cgpa argued that the legislation created onerous burdens on generic companies, which would ultimately inhibit their ability to make use of the Bill. In particular, the organization highlighted the complex regulatory requirements and the lack of long-term viability as significant barriers for generic manufacturers. Requirements demanding the generic company to provide detailed information about the importing countries beyond those required under trips obligations, as well as requirements for lengthy and multi-staged approval from the different governmental departments create unnecessary barriers that delay or even dissuade companies from engaging in these types of contracts. Fearing intense scrutiny and unnecessary time lags, cgpa argues that the final draft of Bill C-9 makes its members vulnerable to complicated and excessive litigation proceedings with patent-holders.

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Exposure to litigation from the brandname companies is also a contentious issue for the generics industry in Canada. There are two areas of the legislation that are particularly susceptible to legal conflict. The first is the issue of remunerations, and the criteria for determining if a contract is commercial in nature. The cgpa argues that the best price should win the contract regardless of its brand pricing in Canada; remuneration criteria limit the ability of Canadian generics to compete with foreign generic manufacturers in places like India. The second issue is the ability of a patent-holder to make an application to the Federal Court regarding the termination of a license for circumstances that are beyond the control of the generic manufacturer in Canada. A contract may be terminated if the importer country allows the drug to be used for commercial purposes, if it re-exports the drug, if it provides inaccurate information in its application, if it fails to establish a website, if it fails to provide notice, if it fails to pay, if the quantity is greater than has been authorized, or if the product has been exported via an abnormal transit route. Though consequences and penalties need to be established in the Bill that deter misconduct, generic manufacturers see this aspect of the Bill as another opportunity for brandname companies to engage in legal conflicts. In addition, with the potential for a contract to be terminated without any compensation for the producer, another disincentive is created for generics to negotiate these types of contracts in the first place.34 The two-year limit on generic companies’ contracts is another concern for the industry. Bill C-9 stipulates that a contract can be retained for two years, with only one renewal. After investing resources and efforts into developing and supplying drugs for a contract, which generics claim will still take up to two years even with Health Canada expediting the process, there is little incentive to sell a product for as long as or less time as it took to develop it, especially with strict restrictions on profits. In addition, the final draft of the legislation is unclear regarding the parameters for obtaining additional compulsory licenses in respect to the same product, and what process will be required regarding new applications to the commissioner of Patents.35 cgpa argues that the non-negotiable time limitation imposed by the legislation provides little incentive for profit-geared generic manufacturers to engage in the market. The list of drugs is another setback the generics identify regarding the Bill. Acknowledging that generic manufacturers would be more inclined to produce drugs for export that are set to come off patent in Canada in order to gain expedited approval from Health Canada, limiting the list of drugs reduces the generics’ interests in participating and engaging in contracts. Another problem with having a list of drugs is that it becomes open to lobbying for specific products. At the committee hearings, intense lobbying from brandname companies kept additional drugs from being added to the list, such as Chlarithromycin, which is set to come off patent in Canada, and

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generic producers are already in a position to produce and export the drug. In the eyes of the generics producers, the government showed direct favourtism towards the interests of rx&d and its members, allowing the brand name companies to weaken and complicate the legislation to make it untenable and uneconomic for generics to participate. The right of first refusal was unsurprisingly a clear-cut issue for the generic producers – they would not produce any drugs under Bill C-9 without the removal of the clause. “We are not sales agents for brandname companies,” remarked a cgpa representative.36 cgpa explained to the committee that there was no way that a generic company was going to spend the time and resources negotiating contracts, deciding and sourcing materials, doing studies, negotiating a price and then having the brand name company move in and take the contract. The generics made it very clear that the legislation would not be used if a right of first refusal remained, and eventually the government heeded their concerns and removed the clause. Despite their constant and vocal participation in the policy process, generic manufacturers are very sceptical about the final draft of Bill C-9. With the exception of the removal of the right of first refusal, they argue that rx&d and its members succeeded in lobbying the government to create an ineffective and flawed piece of legislation. In the end, Canadian generics prefer the original wto Decision to that of the Canadian C-9 version, due to its more global removal of export restrictions without restrictive lists of drugs and countries. Now that the legislation has been passed, cgpa and its members are under direct pressure to utilize the Bill, knowing that they will face harsh criticism from all of the other parties if they do not make it work. So far only one company, Apotex, is attempting to work with msf within the parameters of Bill C-9 to bring some drugs to market. If any generic producers are going to use the Bill, it will likely be Canadian-based companies, such as Apotex, which do not have to defer Canadian production decisions to a foreign head office. Even with a pilot case underway, cgpa is unconvinced that Bill C-9 will ever lead to the production of Canadian generic drugs for export to the developing world.

c o n c lu s i o n s Bill C-9 will have a minimal impact on improving developing countries’ access to essential medicines. Each of the stakeholders is sceptical that the new Canadian legislation will increase the number of cheap drugs on the global market. While the brandname companies question whether any type of legislation could achieve this goal, the generics companies and the ngo s believe that the government missed an important opportunity to stand up to the members of rx&d and implement strong and effective legislation. Determined to find a balance between competing industry and humanitarian

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interests, the government chose to consult and make concessions rather than implement a radical policy that could make a practical difference. Canada had already struck a balance between intellectual property rights and public health at the international level through the negotiations that took place in the drafting of the various wto agreements. By again opening up these discussions with the domestic legislation, more concessions have been made in favour of intellectual property rights by creating rather than removing barriers to access. The future, however, is not altogether bleak, as msf and Apotex are currently engaging in discussions to push a test case through under the new legislation. msf met with government officials, cgpa and seven of its member companies in August 2004, as the government made presentations to better inform the different participants how the regulations would look, how they would work, and how to apply for contracts. The government assured generic producers that all applications would be fast-tracked through Health Canada’s regulatory process, patent application fees would be waived, and the government committed $15 million to ensure that the machinery will be put into place to effectively implement the legislation.37 msf had various discussions with the generic companies in attendance, and made them aware that the ngo planned to purchase drugs under the legislation. Asked to create a shortlist of medicines, msf, in conjunction with its European counterparts, came up with a list of five medicines, two of which are not currently on the list of drugs. Despite the interest that had been shown by different companies in August, msf received no response from September to November of 2004. After making harsh remarks about their lack of action in a Globe and Mail interview, msf received responses from both Industry Canada and Apotex that they wanted to test the legislation. The test case is currently underway, with the two groups having met in February 2005. Apotex has identified it as a priority project, and has informed msf that drugs will be available as early as January or February 2006. One of the most challenging aspects of this test case will be to get the fixed-dose combination drugs added to the list and approved for production. In the short-term, msf believes that success in this case alone will make a significant different to millions of people. In the long-term, however, everyone – including the government – is highly sceptical that this first case will stimulate a second. While the limitations of Bill C-9’s practical contributions are clear, there is more optimism regarding its political contributions. From the beginning, the policy process was highly publicized and popular amongst politicians and the public. ngo s and industry representatives from both the generic and brands were very aware of the political opportunity this legislation embodied for the Canada government internationally. Thus, their lobbying efforts catered to the government’s desire to chalk up political points with a humanitarian initiative on the world stage. Both the outgoing and incoming Prime Ministers

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wanted to claim the initiative as his own, with Jean Chrétien lending his name to the Bill, which is also known as the “Jean Chrétien Pledge to Africa,” and Prime Minister Martin inviting Bono to speak at the Leadership Forum to comment on Canada’s efforts to improve global access to essential medicines. Ministers in six different departments issued press releases and statements on behalf of their departments, and the pmo placed representatives in all the meetings in order to maintain a supervisory role. The issue of access was politically charged, creating an opportunity for Canada to assert itself as an international player as well as set an important precedent for other countries. Despite its shortcomings, Bill C-9 is the first of its kind. It is even more significant that it is a G7 country that is the first to implement this type of legislation, which in itself sends a strong statement to the international community and the brandname pharmaceutical industry. As one ngo explains “Its major contribution is going to be political, in the sense of creating momentum globally for questioning the sanctity of patents and creating a tool for countries to shape their intellectual property policies.”38 Even the government and its officials, recognizing the shortfalls in its practical application, take comfort and pride in the fact that this Canadian initiative will encourage other countries to follow suit. As Bill C-9 is still new and untested, its effectiveness on both practical and political levels has yet to be evaluated. With a parliamentary review scheduled in two years time, the opportunity still exists to challenge its efficacy and even make changes to its functionality. As more countries interpret and adopt similar legislation in their own domestic environments, its significance as a political instrument will be greatly enhanced. Thus, despite its limitations, Bill C-9 remains a worthy endeavour both as a learning experience for public policy-making in Canada, and as a politically symbolic step towards finding a sustainable solution for improving access to essential medicines.

notes 1 See Bruce Doern and Markus Sharaput, Canadian Intellectual Property: The Politics of Innovating Institutions and Interests (Toronto: University of Toronto Press, 2000) and Graham Dutfield, Intellectual Property Rights and the Life Science Industries (Burlington, vt: Ashgate, 2003). 2 Arthur R. Miller and Michael H. Davis. Intellectual Property: Patents, Trademarks and Copyrights in a Nutshell, Second Edition (Pittsburgh: West Publishing Company, 1990) 10. 35 usca § 111 requires that the patent application specific how the invention works and how to reproduce it. 3 Henry Grabowski. “Pharmaceuticals, Politics, Policy and Availability: Patents and New Produce Development in the Pharmaceutical and Biotechnology Industries,” Georgetown Public Policy Review 8, 2 (Spring 2003).

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4 Susan K. Sell, Private Power, Public law: The Globalization of Intellectual Property Rights. (New York: Cambridge University Press, 2003), 13. 5 unaids. Epidemiological Fact Sheet: South Africa, www.unaids.org, accessed 13/10/04. 6 Mark Heywood, “Drug Access, Patents and Global Health: ‘chaffed and waxed Sufficient,’” Third World Quarterly 23, 2 (2002): 217–31 at 225. 7 Ellen’t Hoen, “trips, Pharmaceutical Patents, and Access to Essential Medicines: A Long Way from Seattle to Doha,” Chicago Journal of International Law 3, 1 (Spring 2002): 27–46 at 30. Ironically, these actions are not contrary to rights established in the TRIPS agreement. Even article 31, cited as under violation in the lawsuit, sets out conditions for use of goods without the authorization of the patent holder, which includes situations of national emergency or extreme urgency. 8 Ibid., 227. 9 unaids, Fact Sheet. 10 European Commission dgi Note on the who’s Revised Drug Strategy in Ellen t’Hoen. “Economics of aids and access to hiv/aids care,” Médicins sans Frontières Publication (2003): 48, at www.msf.org, accessed 25/06/04. 11 Tina Rosenberg, “Look at Brazil,” New York Times, January 28, 2001. 12 Ford, Nathan, “Patents, Access to Medicines and the Role of Non-governmental Organizations,” Journal of Generic Medicines 1, 2 (January 2004): 137–45 at 139. 13 John Foster, “Canada and International Health,” in D. Carment, F. Osler Hampson and Norman Hillmer, eds. Canada Among Nations (Ottawa: Carleton University Press, 2002), 192. 14 Ibid., 192. 15 Ibid., 197. 16 The patent was for Ciprofloxacin (Cipro) and was held by the German multinational pharmaceutical company Bayer. Cipro was an expensive antibiotic, effective in its treatment of exposure to a variety of deadly chemicals. Cipro’s retail price was $2.50 US; Apotex, a Canadian generic firm offered to supply it to the Canadian government at $0.99 US a tablet. Although other off-patent drugs could also have been used as therapeutic substitutes, Cipro was deemed the most effective, and the two countries acted accordingly, without hesitation. In order to avoid setting precedents, Bayer ceded and agreed to meet the pressing demand, dropping the price per tablet to $0.95 US. See William Dempster, Negotiating trips and Public Health, Masters Thesis, Norman Patterson School of International Affairs, Carleton University. 17 The forthcoming sections of the chapter are based on data from confidential interviews with representatives from the government, ngo s, the brand name and generic pharmaceutical industry, and media representatives. Interviews were conducted in February 2005. 18 United Nations. Press Release: un Rights Experts Welcome Canadian Initiative on Access to Low-Cost Drugs in Developing Countries, 7 November, 2003. 19 Robert Zoellick, Letter to Minister of International Trade, 16 July 2004. 20 United States Trade Representative (ustr). “US and Canada Agree to Assist Poor Countries Access to Medicine,” Office of the ustr, 16 July 2004.

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21 Interview with government representatives, 15 February 2005. 22 James Orbinski, “Access to Medicines and Global Health: Will Canada Lead or Flounder?” Canadian Medical Association Journal (20 January 2004): 224–226 at 225. 23 Interview with government representatives, 15 February, 2005. 24 Interviews with ngo representatives, February 21 and February 23, 2005. 25 Interview with ngo representative, February 23, 2005. 26 Already concerns have been raised regarding the procurement of fixed-dose drugs, which are a combination drugs with individual components that already meet approval on the list, but have not been approved as a combined dosage drug. The individual molecules have been tested, gone through clinical trials, and have been found safe in the Canadian market. The fixed-dose combination, however, is not in high demand in Canada, and thus has not been a priority for drug companies to seek regulatory approval. Throughout the C-9 process, ngo s asked the government how they were going to address the issue of these fixed-dose drugs, and received the response that it would not be a problem. Despite lobbying to have that commitment written into the text of the Bill, the government ultimately preferred to leave it out to remain flexible. However, they agreed that there was a common understanding between parties that this would not become a barrier to utilizing the legislation. Recent interactions with the government, msf and a generic company currently attempting to test the Bill, however, have called this commitment into question. 27 In interviews with government representatives on February 15, 2005, the government defended the right of brand name companies to be involved in the policy discussions due to the fact that it is these companies that own the patent rights being infringed. Logically, no discussion could take place that would remove their rights without their involvement and consultation. 28 Interview with Canadian media representative, February 9, 2005. 29 Interviews with industry representatives, February 25, 2005. 30 Interviews with industry representatives, February 25, 2005. 31 Interviews with industry representatives, February 25, 2005. 32 Interviews with industry representatives, February 25, 2005. 33 Interview with industry representative February 21, 2005. 34 Interview with industry representative, February 23, 2005. 35 Interview with industry representative, February 23, 2005. 36 Interview with industry representatives, February 23, 2005. 37 Interview with ngo representative, February 21, 2005. 38 Interview with ngo representative, February 21, 2005.

12 Government Approaches to the Regulation of “Sin” malcolm bird and chr istopher stoney

Our society’s relationship with “sin” activities – tobacco use, alcohol consumption, and gambling – is by no means a constant one. Think back seventy-five years to a time when gambling was illegal in Canada, alcohol, after a period of prohibition, was a highly regulated product, and tobacco consumption, in stark contrast, was a common and highly socially acceptable activity. Although regulation in these areas is much different today, it appears equally inconsistent and perplexing. Tobacco consumption is in decline and is considered a socially repugnant activity by many; however, government-owned and operated gambling and alcohol businesses are booming. While changes in the laws and regulation governing the sins have tended to reflect shifts in public attitudes towards tobacco use, alcohol consumption and gambling, this does not fully explain the variation and changes to public regulation in these areas. For one thing, how governments choose to regulate (or not regulate) the “sins” may itself be a strong factor in shaping social attitudes and legitimizing “sinful” products and activities. Furthermore, how governments choose to regulate will depend upon a range of contingent and fluctuating variables such as tax revenues, healthcare and social costs, commercial and employment opportunities, international trade, and the degree to which the costs can be privatized and dispersed among politically disempowered groups. The interaction of these variables is complex and when combined with the difficult moral questions and dilemmas posed by the “sins,” it makes this one of the most difficult and controversial areas of regulation that governments and societies confront. In this context, we should not be surprised to find that the approaches governments adopt to regulate these activities at times appear inconsistent and even hypocritical.

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Our intention in this chapter is to outline the development and current state of the different regimes used to regulate each of the three “sinful” activities selected as case studies, tobacco, alcohol, and gambling. By doing so we aim to illustrate the degree to which the rules governing their use have changed and the extent to which they now reflect pragmatic choices rather than moral absolutes. Our main contention, linking change in each of the case studies, is that governments, particularly provincial governments, are under intense pressure to provide more comprehensive levels of public services, especially in healthcare and education, but are unable, or find it impolitic, to increase revenues through direct income taxes on citizens and businesses. Consequently, they have become more dependent on profits from Crown-owned alcohol and gambling enterprises and non-direct taxes on all of these state sanctioned “sinful” activities. Augmenting the states’ coffers in order to fund general public services is, however, only half of the story: governments must also bear many of the costs that arise from consumer indulgence. The economic losses and health and social costs associated with each vice not only affect individuals, but also their families, communities, and society at large. Governments and taxpayers are often left footing many of the bills. The benefits of revenue earned from these “sinful” activities must accordingly be balanced with the costs that are borne by taxpayers. The quantity and form of the problems arising from such activities, as well as the particular groups that indulge in them, significantly influence the rules governing each vice. We believe this politically charged “cost-benefit analyses” of the revenues versus the costs of citizen indulgence are at the very heart of any discussion of how governments choose to regulate “sin.” In order to begin our analysis, a few key points need clarifying. First, we use the phrase “regulatory regime” broadly, referring to how government policy influences an individual’s choice to indulge in one of our three “sin” activities. Accordingly, “regulatory regime,” for the purposes of this chapter, includes prices and taxes for purchase; the general availability of the product and the rules regarding its purchase such as hours of operation and sale; age restrictions; and rules on where one can indulge, to name a few examples. The phrase “regulatory regime” also refers to public education campaigns designed either to encourage people to use the product or, alternatively, to educate people as to the potential dangers inherent in using it, as well as to more focused health programs in our public schools, for example. Any government action, in short, that either facilitates or hinders one’s ability to indulge in his or her particular vice is considered part of the “regulatory regime.” While slightly parenthetical to our analysis, we are also interested in public attitudes towards each vice, insomuch as they reflect the formal set of rules that govern people’s behaviour.

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Second, we are not suggesting that regulation of these products is unfair or that it should stop (we are not promoting a libertarian argument).1 Rather, in illustrating the wide degree of variation in terms of how these activities are regulated, we argue that this does not make good policy sense. We support tobacco regulation, but think that many of the reasons for controlling it, such as its high healthcare costs associated with long-term use, as well as its highly addictive nature, should be considered when deciding how to regulate the two other vices examined. Alcohol and gambling can both have devastating effects on individuals and their families and we question the state’s role in actively promoting them and, thereby, its increasing dependence on them as politically expedient sources of revenue.

three case studies Tobacco Canadian governments’ tobacco policies provide the best example of an increasingly restrictive regulatory regime. Most readers will recall a time when smoking was permitted in restaurants, bars and even classrooms, activities that today seem unimaginable. The increasingly stringent smoking restrictions in our contemporary era started with the surgeon general’s report on the dangers of tobacco usage in 1964. However, most tangible restrictions on use started in the early 1980s, with increasingly stringent restrictions being imposed over the last ten years.2 The mid-1960s, when the report was issued, approximately 50% of Canadians were regular, daily smokers.3 Since then, the rules and regulations governing all aspects of tobacco consumption and sales have steadily grown more severe. Partially due to the restrictive regulatory environment, smoking rates have fallen steadily to the point where today, only about a quarter of Canadian adults are regular, daily smokers. 4 This should be seen as a great public policy achievement, as smoking kills over 45,000 Canadians annually and costs our economy and healthcare system untold billions in lost productivity.5 Governments have no direct stake in either the production or distribution of tobacco. This is in stark contrast to gambling and alcohol where all provincial governments (except Alberta for alcohol) have large government-owned and operated Crown corporations involved, to varying degrees, in facilitating the activity in question. Tobacco consumption is also the only policy arena where the federal government takes the lead role (although provincial and municipal governments both play key roles in what can be described as a state-led battle against tobacco and its consumption in Canada). To illustrate how restrictive the regulatory regime is, imagine you are a smoker, wishing to indulge in your habit. You face many more obstacles

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today than would have been the case twenty or even ten years ago. To begin with, tobacco is prohibitively expensive. Both the federal and provincial governments have drastically increased excise taxes on cigarettes such that a pack of 25 costs approximately $9.6 You are not permitted to touch the package, all must be kept behind the counter, until the point of purchase and in Saskatchewan all tobacco products must be out of eyesight of children.7 Once purchased, a graphic picture and warning covers fifty percent of the pack. These warnings and pictures are designed to target a wide range of smokers’ and ramp up the fears and concerns they might already have about engaging in tobacco consumption. In addition, you must be 19 years of age to purchase tobacco products (up from 16 years of age), an age restriction which is increasingly enforced. In-store promotions are not permitted, and no form of in-store advertising is allowed, over and above simply displaying the cost. In addition, all forms of public advertising for tobacco products are also prohibited.8 The above restrictions arise from federal legislation and so are relatively uniform across the country. By contrast, provincial and municipal rules respecting tobacco consumption vary to a certain extent from province to province and town to town. When provinces and municipalities do decide to get involved in regulating tobacco control, however, the impact of their involvement is one of increasing restriction with respect to tobacco use. For example, in many provinces and municipalities, it has become increasingly difficult to legally consume a tobacco product indoors.9 With the notable exception of Quebec, most provinces have very stringent indoor smoking policies. In Manitoba, Saskatchewan, and New Brunswick, all indoor smoking is forbidden, except in people’s own homes.10 As mentioned, there is some variation with respect to indoor smoking rules across Canada, as some provinces still allow smoking in bars and restaurants, but these are the last bastions. Such indoor smoking restrictions are to protect non-smokers from the harmful effects of second-hand smoke, but increasingly, municipalities and provinces are beginning to restrict where smoking can occur outdoors. The Toronto Transit Commission and Dalhousie University, for example, ban all smoking on their property. Such a web of provincial and municipal regulation would have been unimaginable twenty years ago when outdoor smoking was almost completely unregulated (unless you were working alongside a flammable substance) and when smokers could light-up indoors in public venues such as grocery stores, schools and hospitals. In conjunction with these restrictions, governments have also embarked on a myriad of public health advertising campaigns and school programs aimed at educating children, in particular, about the dangers involved in using tobacco. Through all of these efforts, governments continue to make smoking a more inconvenient and unattractive pastime.

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Of course, these are only examples of formal, government-imposed regulatory restrictions. To experience peer-pressure and changed social norms, next time you are at a dinner party, try lighting up after the dinner course and see how people respond. Typically, your actions will be met with shocked and critical looks from other guests and a direct request from the host to smoke outside. This informal regulatory regime reflects the general view of most Canadians that smoking, especially indoors, is a socially repugnant and harmful activity, thus justifying governments’ critical stance towards the use of this product. Canadian governments, while not making smoking illegal, have altered the regulatory environment around it significantly. They also profit handsomely from the regulatory environment by virtue of the high excise taxes imposed. Total government revenue from tobacco sales in 2003–04 was over $7.6 billion.11 Conveniently, the government is able to justify the high taxes it imposes on the grounds that higher prices will deter people from smoking (and from smoking more) and by reference to the high health care costs that tobacco use imposes on publicly funded health care and the other economic losses associated with smoking related ill health (e.g. absenteeism and low productivity). Alcohol In contrast to the regulatory regime governing tobacco and its use, Canadian governments’ regulatory regime for alcohol has become increasingly unrestrictive. Over the 20th century, Canadians have steadily adopted more liberal attitudes toward alcohol consumption. As they have done so, the strict controloriented regime, which formerly governed alcohol purchasing and use, has been steadily relaxed. Interestingly, average per capita alcohol consumption rates since 1980 have also fallen,12 despite the fact that alcohol is easier to consume. Other factors, including demographic shifts and social and cultural variables, such as a more “health oriented society,” have had a sustained and decisive influence on per capita consumption rates. Thus, an increasingly liberal regulatory regime, does not necessarily lead to more indulgence. However the concerns of the temperance movement of the early 20th century were not unfounded; while it may be easier and socially more acceptable today to consume alcohol, it is still a potentially dangerous and addictive drug that, when used improperly, causes untold damage to our society. Historically in Canada, concern about the effects of alcohol has produced some draconian measures restricting the consumption of alcohol. For example, during the early quarter of the last century, many Canadian provinces (except Quebec) had, for various periods of time, banned alcohol outright (i.e. imposed prohibition). Starting in the 1920s, however, each province repealed prohibition, choosing instead to strictly regulate alcohol

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consumption through state owned liquor control boards13 and very restrictive rules on bar and restaurant alcohol service. In Ontario, where rules were particularly restrictive, purchasing alcohol was made extremely difficult. To purchase, citizens had to be 21 and obtain a valid purchasing permit. In addition, they could only purchase alcohol (except domestic beer) at the government-owned Liquor Control Board of Ontario store, which were generally dingy, cold and uninviting places. All purchases had to be written down, and customers were not able to view the products until purchase. Taxes on alcohol were also high. In bars, licenses were also heavily restricted; men and women, for example, couldn’t indulge together in the same room and they even had separate entrances. Like liquor stores, bars, were often seedy establishments and hardly the sorts of places frequented by “respectable” citizens. Indeed, those who did frequent them were generally stigmatized and viewed with a degree of suspicion. As with smoking rules of today, these formal restrictions were enforced by informal social agreement and corresponding social pressure. Whereas today, smoking at a dinner party would be socially unacceptable, drinking alcohol with friends on ones’ back porch in Ontario, for example, would likely have been treated with similar disdain from neighbors. Over the last forty years, Canadians have seen the gradual loosening of the strict controls on the availability and consumption of alcohol. The minimum drinking age has been lowered to 19 (18 in Quebec, Alberta, and Manitoba) and by the mid-1960s, permits were no longer required in order to purchase alcohol from government-owned stores in Ontario. However, the drastic improvement in the “retail environment” of the many government-owned liquor stores is perhaps the most visible sign of an altered regulatory regime for alcohol. Today, for example, the stores of the Societe des alcools du Quebec (saq) and the Liquor Control Board of Ontario (lcbo), are well designed and visually appealing. Employees staffing these stores are helpful, well trained, and professional. Other provinces, too, have transformed their liquor retailing regimes. The province that has “liberalized” liquor sales the most is Alberta, which privatized its Alberta Liquor Control Board (alcb) in 1993 such that all alcohol in that province is now distributed at the retail level by private businesses. The ability to purchase alcohol on credit cards and the ability to purchase alcohol on Sundays are other examples of a general relaxing of the rules. The taxes (and thus cost) of alcohol have steadily declined over time14 and it is now readily available from restaurants and bars and is served liberally at sporting and cultural events. More liberal rules for consumption have been accompanied by concerted efforts to encourage responsible drinking. Anti-drinking and driving campaigns throughout the country have dramatically reduced alcohol-related road injuries and deaths.15 Such campaigns, buttressed by increased sentences for

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driving while impaired, have served to make drinking and driving socially unacceptable. Similarly, drinking while pregnant is also actively discouraged. While consumption has dropped and people are more responsible while drinking, alcohol still causes significant social, economic and health problems.16 These costs, not surprisingly, are borne by individuals themselves, their families and ultimately by the government, the economy and society at large. Gambling Despite the drastic changes in the regulatory regime governing tobacco consumption and alcohol use, the change in the regulatory regime for gambling is perhaps even more dramatic. It is hard to believe today that until the 1960s, gambling was for the most part illegal throughout the country. When gambling did occur, it was fairly informal and usually conducted in the form of raffles or charity casinos or perhaps engaged in at the horse track.17 Since then, however, and particularly in the last fifteen years, legal opportunities to spend money for a chance to win have exploded: gambling is now a highly organized activity promoted by various corporate entities, many of them Crown corporations. Not surprisingly, the proliferation of legal opportunities to gamble, and the relaxation in the rules governing most forms of gambling, has been accompanied by an increasing public acceptance of gambling as a legitimate pastime and fun activity. Walk into any neighborhood convenience store across Canada, for example, and you will be confronted with an array of gambling opportunities. Prominently displayed at the cash register are a myriad of scratch-and-win tickets and a lotto 6/49 machine to process national lottery tickets. If lotto tickets are not your chosen form of gambling, there are plenty of other forms to choose from. Punters can travel to a destination casino to play “games of skill” such as blackjack, roulette or poker or indulge in slipping coins into a slot machine. Off track betting is now permitted, as are repetitive rounds of bingo that can be played in bars and restaurants. Many provinces even allow gambling in bars and restaurants through the use of Video Lottery Terminals (vlts). Finally, the recent rise in availability of the internet and in the popularity of both on-line and televised poker tournaments means that individuals need no longer leave the house to indulge in almost any game imaginable. These regulatory changes have come about through deliberate decisions by provincial governments to increase the availability and acceptability of gambling and to empower provincially owned Crown corporations, who have been eager to expand gambling venues in an effort to increase revenues. Unlike alcohol, the expansion in opportunities to gamble has had a strong correlative effect on the number of people gambling and amount of money

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wagered across the country. Controversially, it also appears to have had a significant impact on the increasing number of problem gamblers. For example, in 1992 the average Canadian spent $130 annually on gambling activities; in 2000, the average Canadian spent $424, an increase of over 300 percent.18 Unlike alcohol, where other factors at play limit increased consumption, an expansion in gambling venues and opportunities to gamble is positively correlated with an increase in gambling and, thus, with an increase in the negative costs associated with this “sin” activity. If increasing the opportunities to gamble and relaxing the regulatory context for gambling appears to lead to more people gambling, the development of glamorous surroundings encourages them to spend more. In addition, a range of subtle techniques have been deployed by government-owned gambling outlets to maximize the amount that punters spend. For example, the bank machine at Lotto Quebec’s Lac Lemey Casino in Hull, Quebec, only dispenses $50 bills and the absence of windows creates a timeless environment in which perceptions of night and day are absent and in effect meaningless.

co nt e xt: g ov e r n m e n t in c o m e from “sin ” ac ti vit ies Before discussing the specific reasons why provincial and federal governments create and maintain the regulatory environments that they do, it is essential to outline the current political and economic context. The federal government, as its concurrent budgetary surpluses illustrate, is in a good financial position. Canada’s annual deficit has been eliminated and the national debt is slowly shrinking in proportion to the economy’s output. This remarkable turnaround is credited to the drastic action of the Chrétien’s Liberal government in the mid-1990s.19 The finance minister, Paul Martin, embarked on an ambitious cost cutting program and successfully reduced government expenditures while reorganizing the federal civil service.20 While Chrétien’s Liberals cut their own departments by an average of 9%, the most significant cost cuts were a result of the decision to reduce transfer payments (principally for healthcare and education) to the provinces. These transfer payments were reduced by an average of 40% during these years.21 The responsibility for providing health care and education, however, fall under provincial jurisdiction and these costs continue to grow substantially (especially health care as our population ages). This is all occurring in a political climate hostile to increasing direct taxes (i.e. income taxes) on citizens and businesses. The net result, with the exception of oil-rich Alberta, is that provincial governments have seen many costs and responsibilities “downloaded” onto their shoulders through the refusal of the federal government to assist with program costs as much as they once did and they have little means to raise the necessary tax revenue to cover their added financial responsibilities.

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Provincial governments, thus, are more dependent on revenue from non-direct taxation in order to adequately provide public services to their citizens. The revenue earned from tobacco, alcohol and gambling taxes, and profits earned from alcohol and gambling enterprises is substantial, comprising a small but significant portion of provincial resources. Alcohol taxes and the profit earned from provincially owned and operated liquor distributors makes up a sizable and growing proportion of provincial budgets.22 Ontario’s lcbo, for example, handed over $1.04 billion in profit to the province in 2004,23 a 20% increase over 2000 profits, and total income from alcohol excise taxes in Ontario was over $1.5 billion.24 To provide some scale, the total budget in Ontario for 2004 is approximately $78 billion.25 Accordingly, alcohol taxes and income represented approximately 2% of the provincial budget. While this may sound like an insignificant portion, remember that foregoing this income would mean either cuts to government services or an increase in taxes to make up the shortfall, neither or which would be a politically popular option. Government revenue, in this sense, is a zero sum game; if reduced, service cuts or tax increases are the only available option.26 The saq in 2004 turned over $570 million to the Quebec’s government coffers27 and New Brunswick’s liquor corporation handed over $120 million to its political masters.28 While these numbers include operating profits and excise taxes collected by Crown liquor retailers, they nevertheless represent a significant (and growing) source of government revenue for provincial governments. Similarly, federal and provincial revenue from tobacco taxes has increased significantly over the last ten years. In Ontario, for example, total revenue from tobacco taxes was $1.35 billion in 2003–04 which is almost double the $703 million collected in 2001–02.29 Quebec, too, has greatly increased tobacco taxes, seeing its provincial revenue from this source increase from $483 million in 2000–01 to $923 million in 2003–04.30 Perhaps the biggest beneficiary, however, has been the federal government who in 2003–04 earned over $3.3 billion dollars from tobacco excise taxes, as compared to $2.5 billion ten years earlier.31 Because of the addictive and highly inelastic nature of tobacco, increasing tobacco taxes serves to increase revenues and helps to recover some of the financial costs that its sustained consumption imposes on the public health care system. Interestingly, provincial governments are not just content with increasing taxes on tobacco products, but are now suing tobacco companies directly in an effort to seek compensation for health costs that are borne by the public health system as a result of tobacco use. In September of 2005, the Supreme Court of Canada unanimously agreed that British Columbia’s Tobacco Damages and Health Care Costs Recovery Act is constitutionally valid.32 The B.C. government can accordingly use this statute to sue tobacco companies to extract money for costs incurred directly from the manufactures of tobacco products. It is likely that other provinces will follow B.C.’s example, now that

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its legislation has been constitutionally upheld, and enact similar legislation. Part of the motivation for passing such legislation and initiating such lawsuits is to allow the government to recover money spent on healthcare. However, such lawsuits (B.C. has already commenced lawsuits against some tobacco companies) also illustrate that governments are willing to use smoking related losses to bolster general revenues. Assuming the British Columbia government wins its lawsuits, an outcome that is far from certain, there is no guarantee that the awarded money will have to be dedicated specifically to smoking related health care costs or tobacco use prevention and, even if it were, forgone income could be dedicated to other government spending or a reduction in taxes. As with the vast majority of income from alcohol and gambling, tobacco revenues are directed into the general funds of the provinces or the federal government. The point being that the difficult financial position which provincial governments find themselves in makes them more willing to use either lawsuits against tobacco manufacturers or excise taxes on tobacco products as viable means of increasing their revenue. If B.C.’s lawsuits are successful this will, no doubt, only increase cigarette prices, and assist in making smoking an even more expensive activity in which to indulge. It is gambling, however, that provides the most significant and growing source of revenue for provincial governments. The net revenue from government run lotteries, vlts and casinos has exploded: Net governmental revenue between 1992 and 2000 increased from $2.7 billion to slightly over $10 billion, respectively.33 Individual governments’ takes from gambling are equally significant. The Ontario government’s net income from Ontario Lottery and Gaming Corporation was $1.83 billion in 2000; Quebec’s government earned $1.37 billion; and, most surprisingly, Alberta’s (a province which has just over three million inhabitants) was $954.7 million.34 It is therefore apparent that both federal and provincial governments earn substantial revenue when Canadians indulge in drinking, smoking or gambling.

t h e c o s t s o f “ s i n f u l” i n d u l g e n c e The income earned form “sin” activities is evident, but this, as suggested, is only part of the reason why governments are pushing these “sinful” activities, especially alcohol and gambling, and imposing exorbitant taxes on tobacco; the other key factor is the form and composition of the groups bearing the costs associated with such indulgences. Our argument, in short, is that the costs associated with smoking, mainly medical costs, are much more tangible and thus easier to calculate than those associated with alcohol and gambling. This is principally because health costs are easier to measure and can be causatively linked to smoking. In contrast, the social costs that are linked with alcohol consumption and gambling are more ephemeral in nature and thus

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more difficult to quantify. This does not mean that they do not exist; only that accounting for them is more difficult. Additionally, the groups that most affected by the changes in regulatory regime of each vice have varying degrees of political power. As a result, some are more or less able to raise political awareness of their plight and the political will to help them fight the physical and social ills arising from these activities. Indulging in tobacco is seriously detrimental to one’s physical health and can cause serious (and fatal) diseases that, in Canada, are borne by our publicly funded health care system. It is estimated that tobacco use imposes a $3 billion burden per year on our public healthcare system.35 Scientific-based evidence has established a causative relationship between tobacco usage and the increased prevalence of numerous debilitating diseases. If you smoke tobacco, you are far more likely to develop lung cancer, emphysema, asthma, heart and lung problems, to name a few possible ailments, and are more likely, in general, to be in a state of ill health. We are not debating the legitimacy of this science-based research, but only raising the point that it is easier to establish a direct link or causative relationship between tobacco use and health problems that accrue from its use. Having said this, the social costs associated with tobacco usage are, in relation to the social costs arising from our other two vices, very low. Few people commit crimes or acts of violence as a result of tobacco use, nor are people likely to spend their own or their family’s non-discretionary income on tobacco products, leaving limited resources for necessities. The quantifiable nature of the tobacco-related health care costs and the fact that they are borne by our publicly funded health care system force governments (especially ones strapped for revenue) to be more attuned to them, thus making governments more likely to address the negative externalities caused by tobacco consumption. Alcohol consumption, too, causes significant damage to our society in the form of health costs. Like tobacco, there are specific physical ailments that are strongly correlated with drinking; liver disease, heart and stomach problems, for example, are often the direct result of alcohol consumption. However, while the over-consumption of alcohol causes or acts as a contributing factor to numerous medical problems; it is still difficult to link medical problems directly to alcohol consumption.36 Think of the number of accidents people have after a few drinks, sprained joints or broken bones, or the high number of errors committed by people who are suffering from the aftereffects of drinking. To provide some perspective, total alcohol related costs for Ontario are estimated at $2.9 billion per year.37 Nevertheless, medical and productivity related costs are only a fraction of the total costs incurred by society when people drink to excess. The most significant costs associated with alcohol consumption are social costs. For example, consider the countless crimes committed while under the influence of alcohol (everything from petty vandalism to property crimes to much more

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serious violent assaults and even murders). How many bar fights are directly related to people (mostly young men) drinking to excess? There is even some significant evidence that alcohol consumption and homicide rates are positively correlated.38 Other costs include the increased policing and criminal system costs associated with crimes committed by people while intoxicated, the economic losses generated by overindulging (missing work the next day, for example), or the emotional costs that family and friends pay when a loved one is battling alcoholism. The mixed nature of the negative costs associated with alcohol – both social and health related costs – and increased difficulty in quantifying the costs or associating them with drinking means that payment for these costs is more diffused, both for governments and society at large. Not surprisingly, this means that governments are less likely to address the negative effects of alcohol consumption and/or charge rates for alcohol that are equivalent to the real cost of consumption for individuals and society. Moreover, the dependence of governments on the revenue streams earned through taxes and from Crown-owned retailers means that government are even less likely to address these problems through restrictive policies. It is simply too politically expedient, in the short-term, for provincial governments to rely on income from alcohol’s sale and tax revenue and to discount the real, long-term social and medical costs associated with its use. In contrast to the costs associated by tobacco use and alcohol consumption, the costs associated with gambling are almost entirely social in nature. That is to say that there are few direct health related negative costs associated with gambling; for the most part, excessive gambling creates financial hardship which manifests itself in a wide variety of social problems. If you are spending too much time and money gambling, be it on lotteries, scratchand-win tickets, at a casino or on a vlt, chances are that you are spending non-discretionary income (that is income needed to cover life necessities) on the habit. Problem gamblers may borrow money from family, friends or maximize their credit; all of which adds to the stress, and perhaps thrill, experienced through gambling. The income spent on gambling may leave no money to pay the rent or their mortgage or other costs needed to live. The financial hardship caused by their gambling, coupled with their obsession with the activity, may also seriously affect their relationships with loved ones. Gambling may lead to family and relationship breakdown and people may spend their retirement or educational savings.39 Although problem gamblers may lose their jobs and rely on the government for financial assistance, it is very difficult to make a causal link between gambling and increased dependence on government aid. Most of the social costs are limited either to individuals or their family units. An individual spending the family rent money at a casino is, for the most part,

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Government Approaches to the Regulation of “Sin”

hurting his or her loved ones. In addition to the problems of quantifying the social costs of gambling and establishing causal links, it is the relatively private nature of the costs associated with gambling that enables governments to discount the sometimes devastating impact on individual and family lives. A relatively small group of people, governments are not directly responsible for problem gamblers in the same way as they are for smokers incurring tobacco related health costs and their lack of political influence is exacerbated by the fact that provincial governments earn such large amounts of revenue from gambling ventures.

r e g u l at i o n a n d c l a s s Our central argument in this section is that at least some of the changes in the regulatory regimes governing each of these “sin” activities are related to the social class and influence of those who indulge in each activity and, more generally, how attractive these activities are made to appear to sections of the Canadian public. The social costs of gambling are not evenly distributed among the population. Estimates on the number of problem gamblers vary, but in Ontario, for example, one study places the number at 4.8% of the population. These numbers include both moderate (3.8%) and severe (1.0%) gamblers.40 While these are staggering numbers (almost half a million individuals), what is most disturbing is the relatively high percentage of government revenue that is derived from this small group. Again, estimates vary, but one study concluded that 35% of the revenue earned from gambling in this province comes from this limited pool of problems gamblers.41 Part of the reason that this situation is allowed to persist is that these problem gamblers have a limited amount of political power. Problem gamblers, by and large, tend to live in the margins. They are, for example, more likely to be male, of Aboriginal descent, single or divorced, have lower family incomes and education levels and suffer substance abuse problems.42 The ability of this group to draw attention to its plight is lower than it would be if these individuals comprising this group came from more privileged backgrounds or were able to exercise cohesive political pressure. The marginal characteristics of this group and the diffuse nature of the social costs, when combined with the large source of revenue gambling represents to governments, means that there is little political pressure or will to regulate the activity too rigidly, or to curb gambling generally. The heavy regulation of tobacco also has an uneven effect on different social groups in our society. Regular smokers, like gamblers, tend to come from the lower socio-economic strata of society. They are more likely to come from lower-income groups and thus have lower education attainments and income levels.43 It is interesting to note that the doubling of tobacco taxes in

260

Selected Policy, Political, and Budgetary Realms

the last five years did not meet with any real significant political challenges. This is partly related to who was affected by the tax hike. It is also related to the general ethos in our society that smoking is an unhealthy habit leading to serious disease, and that high tobacco taxes are justified in order to reduce smoking and recover the costs associated with it. This dramatic shift is partly due to the governments’ ardent efforts to de-normalize tobacco consumption. It also has to do with an increased emphasis on physical health, and shifts in perception as to what it means to be healthy. Government efforts to de-normalize tobacco consumption, and an emphasis on healthy lifestyle, are campaigns which have targeted middle class Canadians, who have responded to the cultural attitudinal shifts towards anti-smoking. Not surprisingly, demonizing smoking, and smokers, has met with general widespread public support. The consumption of alcohol has followed very different path. Every province (except Alberta) has large government-owned and operated alcohol retailers that dominate the industry. These retailers can and do have a dramatic effect on the public’s perception of alcohol consumption. The lcbo and saq, in particular, have focused on improving their stores and customer service to provide high value to their customers. Many of these changes have focused on altering how people view the consumption of alcohol. Gone are the dingy, uninviting and surly staffed stores of the past, when there was a conscious effort to promote temperance by associating alcohol consumption with outright shame. The lcbo, which is regarded in the liquor distribution industry as the market leader, has made incredible efforts to upscale its image, products, stores and staff. Linking alcohol consumption with fine eating and a healthy lifestyle, the lcbo has focused its efforts on increasing its sales of higher value products, particularly wines. This has allowed the lcbo to increase sales without increasing total alcohol consumption, which, in turn, means that this Crown agency can balance between its two guiding principles: social responsibility (not to be seen “pushing” more alcohol sales) and improving its bottom line (generating revenue generation for its political masters). In trying to run its business in a socially responsible manner, the lcbo makes special efforts to educate people about irresponsible alcohol use. For example, it is an ardent supporter of the anti-drinking and driving campaigns and campaigns to combat underage drinking. The lcbo’s ability to appeal to the middle-class not only means decoupling alcohol consumption from sin and irresponsibility, but also normalizing it as a civilized, bourgeois, middle class activity. The lcbo’s seasonal, free and very popular magazine Food and Drink is over two hundred pages long, containing a plethora of recipes, articles and advertisements that portray alcohol consumption in a positive and normal part of everyday (bourgeois) life. In addition to influencing the public’s perception of alcohol consumption, this dramatic institutional shift is a critical reason why the lcbo

261

Government Approaches to the Regulation of “Sin”

has been able to maintain widespread public and thus political support for its continued public ownership.44 Gambling, like alcohol, is portrayed as an entertainment activity. Government casinos are beautifully designed and inviting places, staffed with welltrained and professional workers. Whether it is in Quebec, Ontario or British Columbia, government-owned and operated casinos (or those sanctioned by the provincial government) do their utmost to provide their customers with plush surroundings and as many amenities as possible. Most have minimum dress codes and, like those in Quebec, offer free parking and coat check and even valet service. They, like the government-owned liquor retailers, are consciously trying to distance themselves from their “seedy” pasts. Governmentowned casinos are even careful not to use pejorative descriptions such as “gambling,” to describe what goes on behind their doors, choosing, instead, to call it “entertainment” or, at worst “gaming.” They have made a conscious effort to re-brand their product and make it more attractive to middle class consumers (or at least appear to target middle class consumers). This, no doubt, is an effort to change how government-owned casinos are viewed by the public and thus comprises a part of governments’ strategy to insulate themselves from popular and political criticism.

c o n c lu s i o n s The economic, social and, perhaps even moral problems that are raised by governmental involvement in “sinful” activities are not new and are a part of a much larger, indeed fundamental, problem that all governments face. Governments, for the most part, provide public goods to all citizens. Common examples of such goods are parks, transportation systems, fire protection, public radio, national defense and, of course, the most critical function of any government, security of person. Similarly, other goods that governments’ provide such as education, healthcare and social welfare are goods that markets can provide, but it is more efficient and equitable for the governments to provide them. What all the goods that governments provide have in common is that they are goods that are collectively enjoyed and collectively paid for through tax revenue, and because of this, unlike privately consumed goods, it is very difficult to attach a set price to them. Few people, if any, are thankful to the government that they returned safely from their morning walk without getting assaulted or robbed. The net result is that citizens constantly underestimate the costs and value of the public services they use and, now more than ever, are reluctant to pay taxes to support under appreciated public goods.45 It is this fundamental pressure that forces governments to raise revenue where ever and whenever possible and to do so in ways that are the least politically costly. Revenue from alcohol, tobacco and gambling is viewed as a voluntary tax on those who wish to indulge in such activities. If you don’t

262

Selected Policy, Political, and Budgetary Realms

want to pay; don’t indulge, is often a common and simplistic reply to governmental income derived from “sin” activities. Additionally, these revenues tend to be inelastic and relatively stable and can be “adjusted” upwards to make up for sudden budgetary shortfalls without much public outcry. In some respects the federal and provincial government’s focus on increasing income from excise taxes is a return to the past. Traditionally, governments relied on excise taxes and tariffs for the majority of their budgets. Income tax are a modern invention gaining popularity (and acceptance) in the post World War I period.46 In 1967–68 profits from the lcbo was 7% of Ontario’s revenue,47 today total profits from the lcbo constitute approximately 1.3% of overall revenue,48 and there was no profit from provincial gambling enterprises as most were only established in the 1970s. Governments have appreciated that profiting from our indulgences is an under exploited source of income that, unlike corporate and personal income taxes, is more politically palatable to the voting public. The regulatory regime of alcohol, tobacco and gambling is not static, but rather, as our analysis has shown, is influenced by a myriad of factors that change over time. The wide range of policy tools available to governments such as increasing price and dictating where and when one can indulge can significantly alter when (and how much) one drinks, smokes or gambles. This is most evident in the case of tobacco and gambling. The regulatory approaches have had a causative positive effect on how much citizens indulge. This illustrates that consumer “choices’ are malleable and as such are shaped by an environment that is largely created by our various levels of government. Perhaps what is most interesting about the shifting regulatory regime of each indulgence is how our collective sense of morality has changed. Our secular ethos almost forbids opposition to indulging in drinking, smoking or gambling based on religious or moral grounds, but it does not forbid it if it is coated in public health or, more accurately, pure financial terms. It is this preeminent concern with revenue that is currently the driving force with how governments structure the regulatory regimes for whenever consumers wish to smoke, drink or gamble. Consequently, instead of conceiving of regulation as preventative or restrictive frameworks, the examples of gambling and alcohol consumption illustrate how the state is now actively involved in promoting “sin” activity and consumption. This shift towards pro-active regulation is consistent with the concept of entrepreneurial government and is likely to continue as governments become increasingly dependent on our continued and increasing indulgence. Thus, it is not without considerable irony that governments are becoming increasingly “hooked” on our addictive and “sinful” behaviour.

263

Government Approaches to the Regulation of “Sin”

notes 1 Sullum, Jacob, For Your Own Good: The Anti-Smoking Crusade and the Tyranny of Public Health (New York: Free Press, 1998). 2 Studlar, Donley T., The Demographic Sources of Ontario Gaming Revenue: Comparative Politics in the United States and Canada (Peterborough, on: Broadview Press, 2002), 19. 3 Studlar, Tobacco Control, 122 and Physicians for a Smoke-Free Canada, “Percentage of Canadians who Smoke 1965–2004,” Fact sheets, (March, 2005); http://www.smokefree.ca/factsheets/. 4 Roughly a quarter of adult Canadians are daily smokers and the percentage varies slightly according to the age group with younger Canadians generally smoking more than older Canadians. The notable exception, however, are aboriginal populations where over 65 percent are daily tobacco users. Health Canada, The Federal Tobacco Control Strategy (ftcs): A Framework for Action (Ottawa: Health Canada, 2002), 4, and Studlar, Tobacco Control, 122. 5 Health costs and lost economic productivity associated with tobacco usage are estimated at $3 billion and $15 billion per year, respectively. Health Canada, The Federal Tobacco Strategy, 3. 6 Prices range from $10.93 per pack in the Northwest Territories (highest) to $8.07 in Quebec (lowest). Physicians for a Smoke-Free Canada, “Tobacco Taxes in Canada,” Factsheet, (May, 2004.) http://www.smoke-free.ca/factsheets/. 7 Picard, André, “Top Court Upholds Province’s Tobacco Display Law,” Globe and Mail, January 20, 2005, A11. 8 Tobacco Act, 1997, s the basis for the federal government’s anti-tobacco strategy and imposes very tight restrictions on sales, consumption, and usage of tobacco products. Displaying of tobacco products where minors can view the products is prohibited in Saskatchewan. The Tobacco Control Act, Saskatchewan, 2002, section 6. 9 Asbridge, Mark, “Public Place Restrictions on Smoking in Canada: Assessing the Role of the State, Media, Science and Public Health Advocacy,” Social Science and Medicine 58 (2004): 13–24, and Physicians for a Smoke-Free Canada, “Background on Protection from Second-Hand Smoke in Canada,” Fact-sheet, (March, 2005); http:// www.smoke-free.ca/factsheets/. 10 Physicians for a Smoke-Free Canada, ibid. p. 1–5. 11 Physicians for a Smoke-Free Canada, “Tax Revenues from Tobacco Sales,” Fact-sheet, (November, 2004); http://www.smoke-free.ca/factsheets/. 12 Babor, Thomas, et al. Alcohol: No Ordinary Commodity (Oxford: Oxford University Press, 2003), 40. 13 Heron, Craig, Booze: A Distilled History (Toronto: Between the Lines Press, 2003), 278. 14 Babor et al., Alcohol, 106, 112. 15 Solomon, Robert Analysis of Lives Saved due to Reduction in Alcohol Related Fatal Crashes for the Years 1982–2002 (Oakville: madd Canada, 2004); http://www.madd.ca/ english/research/analysis2002.pdf.

264

Selected Policy, Political, and Budgetary Realms

16 Babor et al., Alcohol, 57–92. 17 Wiebe, Jamie et al. Measuring Gambling and Problem Gambling in Ontario (Ottawa: Canadian Centre on Substance Abuse and Reponsible Gambling Council), 6. 18 Statistics Canada, “Fact-sheet on Gambling” Perspectives on Labour and Income, (Ottawa: Statistics Canada, 2002); http://www.statcan.ca/english/studies/75-001/ 00702/fs-fi_200207_01_a.pdf. 19 “A Survey of Canada,” The Economist, Dec. 3, 2005, 4. 20 Gene Swimmer, ed, How Ottawa Spends 1996–97: Life Under the Knife, (Ottawa: Carleton University Press, 1996), 2. 21 Janice McKinnon, Minding the Public Purse: The Fiscal Crisis, Political Trade-offs and Canada’s Future (Montreal & Kingston: McGill-Queens University Press, 2003), 221. 22 It is difficult to delineate between operating profits (income over and above operational costs) of liquor distribution Crown corporations and the liquor excise taxes that they collect on behalf of provincial governments. The lcbo, for example, does not separate the two different streams of income in its financial statements, thus making the assessment of “profitability” per se difficult. Nonetheless, liquor Crown corporations turn over significant amount of revenue to their political masters. 23 lcbo, Annual Report, 2003–2004, 45. 24 lcbo, Annual Report, 2003–2004, 45 Excise tax revenue from alcohol sales in Ontario which include sales from lcbo, bri and wine stores (does not include other taxes remitted by liquor retailers). Calculation by author. Annual Report and Consolidated Financial Statements, (Ontario) 2004–2005. 25 Ministry of Finance, Ontario, Annual Report and Consolidated Financial Statements, 2004–2005 http://www.fin.gov.on.ca/english/economy/paccts/2005/ 05_ar.html. 26 There is a third possible option: deficit financing. But this option, in today’s political climate, is even more politically unpopular than the other two. 27 saq, Annual Report, 2004–2005, Management Report 3; http://www.saq.com/img/ ent/rapport05/en_pdf/Financial_statements.pdf. 28 New Brunswick Liquor Corporation, Annual Report, 2004–2005, 9. 29 Ministry of Finance, Ontario, 2003–2004 budget, 77. 30 Ministry of Finance, Quebec, 2003–2004 Budget, 56. 31 Physicians for a Smoke-Free Canada, “Tax Revenues from Tobacco Sales,” Factsheet (November, 2004); http://www.smoke-free.ca/factsheets/. 32 Blackwell, Richard, and Petti Fong, “Tobacco Firms Can be Sued for Health Costs, Court Rules,” Globe and Mail, September 30, 2005, A1. 33 Statistics Canada Fact-Sheet on Gambling, Perspectives on Labour and Income (Ottawa: Statistics Canada, 2002), 2. 34 Statistics Canada Fact-Sheet on Gambling, Perspectives on Labour and Income (Ottawa: Statistics Canada, 2002), 2.

265

Government Approaches to the Regulation of “Sin”

35 Health Canada The Federal Tobacco Control Strategy: A Framework for Action, 3. 36 Centre for Addiction and Mental Health, “Addressing the Burden from Alcohol with a Harm Reduction Perspective on Retailing,” presentation to the Expert Panel to Review the Sale and Distribution of Beverage Alcohol in Ontario (February 25, 2005), 4 citing Room, R. et al, “Alcohol and Public Health,” Lancet, 365 (Feb. 5, 2005): 519–30. 37 Addictions Ontario et al, “Alcohol and Public Health: The Implications of Changes to Ontario’s Beverage Alcohol System,” Report submitted to the Beverage Alcohol System Review Panel (February 25, 2005), 3 citing Addiction Research Foundation, The Economic Costs of Alcohol, Tobacco and Illicit Drugs in Ontario: 1992 and E. Singly et al, “The Economic Costs of Alcohol, Tobacco and Illicit Drugs in Canada,” Addiction, 93, 7 (1992): 991–1006. 38 Robert Nash Parker and Linda-Anne Rebhun, Alcohol and Homicide: A Deadly Combination of Two American Traditions (Albany: State University of New York Press, 1995). 39 A thorough examination of the effects of problem gambling see J. Wiebe, et al, Psychological and Social Factors Associated with Problem Gambling in Ontario: A One Year Follow Up Study (Guelph: Ontario Problem Gambling Research Centre, 2003). 40 Williams, Robert, and Robert Wood, The Demographic Sources of Ontario Gaming Revenue (Guelph: Ontario Problem Gambling Research Centre, 2004), 41. 41 Ibid., 42. 42 Wiebe, J. et al. Measuring Gambling and Problem Gambling in Ontario, 4, and Williams and Wood, The Demographic Sources of Ontario Gaming Revenue, 41. A slight inconsistency in the research as the former authors argue that education levels are positively related to problem gambling which is in direct contrast to the latter authors who argue that lower educated are more likely to be problem gamblers. 43 Studlar, Tobacco Control, 46. 44 The evolution of the lcbo is a fascinating case of revolutionary institutional change see: Malcolm G. Bird, The Liquor Control Board of Ontario and the Demise of the Alberta Liquor Control Board: Why Such Divergent Outcomes? PhD Dissertation, Department of Public Policy and Administration, Carleton University, Forthcoming, 2007. 45 Anthony Downs, “Why Government in a Democratic State Is Too Small,” in Edmund S. Phelps, ed., Private Wants and Public Needs: An Introduction to a Current Issue of Public Policy (New York: W.W. Norton, 1965). 46 Babor et al., Alcohol, 102. 47 Canadian Tax Foundation Provincial Finances 1967 (Toronto: Canadian Tax Foundation, 1967), 17. 48 lcbo revenue was $1.04 billion and the budget was approximately $78 billion, calculations by author. See notes 24 and 25 for source information.

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appendices

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appendix a Canadian Political Facts and Trends

2005 4 may: Chuck Guité alleges Paul Martin intervened in the awarding of government contracts to Liberal Party friendly firms at the Gomery Inquiry. 4 may: An inquiry into the Chicoutimi tragedy concludes the submarine’s commanders was not responsible for the fire about the submarine killing one soldier.

may: Ed Broadbent announces will not seek re-election in order to care for his ailing wife.

5

5 may: Tony

Blair wins the British election but with a reduced majority.

5 may: Prime Minister Paul Martin signs a child care agreement with Ontario similar to the agreements signed between the federal government and the provinces of Manitoba and Saskatchewan last week.

may: Prime Minister Paul Martin promises the Province of Ontario $5.7 billion in order to close the gap between what Ontario pays to Ottawa and the amount of money Ontario receives in return.

9

10 may: mp s vote 153–150 in favour of a Conservative motion calling on the Liberal government to resign. 10 may: The refugee claimant who alleged that former Minister of Immigration Judy Sgro promised him entry into Canada if he supplied free food and campaign support has retracted this allegation.

270

Appendix A

12 may: The federal government announces a $99.7 million childcare funding agreement for Newfoundland. 16 may: Nova Scotia is the next province to sign a deal with the federal government for child care arrangements.

may: Conservative mp Belinda Stronach joins the Liberal Party as the new Human Resources Development Minister.

17

17 may: The

Liberal Party wins a majority in British Columbia.

24 may: Liberal candidate Todd Russell wins the federal by-election in Labrador. 26 may: Canada’s premiers establish a five-member panel charged with the responsibility of producing a report in the fall on the funding gaps between Ottawa and the provinces. 29 may: France rejects a European constitution in a referendum. This was the first country to hold a referendum on the issue. 31 may: Official Languages Commissioner Dyane Adam releases her report on the Action Plan for Official Languages noting that the government’s approach is “slow and timid.” 31 may: Advertising executive Paul Coffin pleads guilty to 15 fraud charges in connection with the federal sponsorship program. This marks the first plea in the scandal. 5 jun: Bernard Landry resigns as leader of the Parti Québécois.

jun: Ontario mp Pat O’Brien announces he will leave the Liberal party and sit as an Independent because of the Liberal position on same-sex marriage legislation.

6

jun: The Supreme Court of Canada strikes down a Quebec law banning private medical insurance which some suggest might usher a two-tier healthcare system in Canada.

9

27 jun: Minister of National Defence Bill Graham announces the creation of a new agency titled “Canada Command” which will centralize domestic operations to allow for quicker responses to security threats. 28 jun: The Supreme Court holds that police search warrants can only be hidden from the media where authorities can show genuine harm would arise from the publicity. 28 jun: Same sex

marriage legislation passes in the House of Commons.

jun: Democracy Watch launches legal action against the federal Ethics Commissioner Bernard Shapiro because of Shapiro’s protective stance of public officials.

29

271 Canadian Political Facts and Trends 6 jul: Terrorists attack London’s public transportation system.

jul: G8 Leaders meet in Scotland to discuss world poverty, the climate and terrorism.

9

14 jul: The Department of Public Safety announces the hiring of 270 additional border guards over the next five years. 18 jul: Canadian cattle is allowed across the border into the United States since a cow was diagnosed with mad cow disease in Alberta in 2003. 2 aug: An Air France flight crashes at Toronto’s Pearson International Airport after running off the runway. No injuries were reported. 10 aug: Michaelle Jean is announced by the Prime Minister as the next Gove-

nor General. 12 aug: Gas prices at the pumps break the $1.00 (cdn) mark. 15 aug: News reports suggest the next Governor General, Michaelle Jean, favoured sovereignty for Quebec.

aug: Conservative Leader Stephen Harper loses his senior aide, Phil Murphy, his chief of staff after recently losing several other senior aides.

16

1 sep: Saskatchewan and Alberta celebrate their centennials 19 sep: Canada

as provinces.

and Denmark agree to Hans Island process.

27 sep: Michaë lle

Jean succeeds Adrienne Clarkson as Governor General.

10–24 oct: Education strike in British Columbia has closed down 40,000 schools and turned down 600,000 students within the two week period.

oct: An evacuation of over 800 members of the Kashechewan First Nation by the Government of Ontario to Ottawa, Sudbury, and other communities in Ontario begins after E. coli is found in their water supply network. 26

nov: Justice Gomery and his commission released his first phase report on the sponsorship scandal. Gomery criticized Chrétien and his chief of staff Jean Pelletier but cleared them of direct involvement in kickback schemes.

1

nov: Amid global anxiety over avian flu pandemic, China confirms first human case of bird flue and it’s first death

16

nov: Prime Minister Paul Martin meets the premiers, territorial leaders and first nation groups at the Aboriginal Conference in Kelowna, bc, to cover issues of poverty, housing, education and economic development. The summit has secured a $1.3 billion health blueprint and brought the total value of the new programs to $5 billion.

24 & 25

272

Appendix A

nov: gm announces plan to shut down 12 factories, including one in Oshawa, on and slash 3,900 jobs in Canada and 30,000 overall.

22

22 nov: After a duck was found to be carrying avian flu in a bc

farm, the U.S. and several Asian governments have banned the import of poultry from British Columbia.

24 nov: Former Ontario premier Bob Rae is to head a limited public inquiry into the Air-India bombing that killed 331 people on Jun 23, 1985. 24 nov: Opposition leader Stephen Harper moves a

motion of no confidence

in the government of Paul Martin. 28 nov: The House of Commons passes a motion of no confidence in the government of Paul Martin. 28 nov

till 9 dec: The United Nation’s Climate Change Conference gathers over 190 nations on greenhouse gas emission cuts after the Kyoto Protocol expires in 2012. Environment Minister Stephane Dion is the president of the Conference. nov: The governor general, on the advice of the prime minister, dissolves Parliament and calls a general election for Jan 23, 2006.

29

30 nov: First day

of the election campaign.

2 dec: Conservative leader Stephen Harper pledges gst

cut to 5% within five

years if his party is elected. dec: Paul Martin Liberals announce that they will more than double their $5 billion commitment to daycare, one day following Stephen Harper’s Conservatives pledged to give families $1,200 a year for every preschool child.

6

6 dec:

Bank of Canada raises the key lending rate to 3.25 per cent from 3 per

cent. dec: Liberal leader Paul Martin pledges an outright ban on handguns as a way of combating increasing gun violence in Canadian Cities.

8

dec: Provincial Health Ministers release the National Standards for the maximum length of time patients should wait for treatment in five areas, including cancer, heart disease and joint ailments.

10

dec: The United States launched a rebuke of the Liberal Government’s constant criticism of the Bush Administration, bringing the high level of tensions between the world’s two biggest trading partners to the forefront of the Canadian election.

13

dec: First set of televised national campaign debate was held in Vancouver.

15 & 16

273 Canadian Political Facts and Trends 28 dec: The rcmp launches a criminal investigation into the possibility of a leak of Ottawa’s plans for income trusts.

2006 jan: Canada’s benchmark Stock index soars to an all-time high in the first session of 2006

3

3 jan: Election campaign is resumed after the holiday, Paul Martin pledges to

repeal $975 immigrant “head tax”, which was introduced by him in 1995 when he was Finance Minister, as a deficit-fighting measure. 4 jan: Israeli Prime Minister Ariel Sharon’s massive stroke sends him to the emergency room, shaking Israel’s unstable politics. 7 jan: Statistics Canada reports that the economy has created 233,000 jobs in 2005, similar to 2004. Full-time jobs growth rose 2 per cent, while part-time employment declined 1 per cent. 9 & 10 jan: Second set of leaders debate

is held in Montreal.

9 jan: Liberal leader Paul Martin says he’d ban federal use of notwithstanding clause in the second English debate.

jan: Conservative Leader Stephen Harper has for the first time displaced Paul Martin as the politician Canadians favour to lead the country according to a new poll done by ctv and the Globe and Mail.

12

12 jan: ndp

leader Jack Layton releases a $71.5 billion spending he is proposing for the next Parliament: a platform heavy on health and social spending.

jan: At the 29th general election, Stephen Harper and the Conservatives won 124 seats across Canada to win the 39th Federal Election. The Liberals win103 seats in Monday’s election. The Bloc Québécois won in 51 ridings and the ndp in 29.

23

jan: Bank of Canada raises the key lending rate to 3.5 per cent from 3.25 per cent.

24

appendix b Fiscal Facts and Trends

Table B.1 Federal Revenue By Source 1994–5 to 2004–5 As a Percentage of Total Fiscal Year

Personal Taxa

Corporate Tax

Indirect Taxesb

Other Revenuec

Total Revenue

Annual Change

1994–5

61.0

9.4

22.0

7.6

100.0

−6.0

1995–6

60.4

12.2

20.4

7.0

100.0

−5.4

1996–7

59.0

12.1

20.7

8.3

100.0

−7.5

1997–8

58.6

14.7

20.1

6.7

100.0

−8.2

1998–9

59.1

13.8

20.1

7.0

100.0

−1.2

1999–00

59.2

13.9

19.8

7.1

100.0

−6.2

2000–1

56.8

15.7

20.1

7.4

100.0

−7.5

2001–2

58.7

13.9

21.1

6.3

100.0

−3.6

2002–3

57.9

12.5

23.3

6.3

100.0

−3.4

2003–4

56.7

14.7

22.2

6.4

100.0

−4.7

2004–5

55.8

15.1

21.6

7.5

100.0

−6.6

Source: Department of Finance, Fiscal Reference Tables 2005, Table 3 and 5. (a) Employment Insurance and other income taxes are included in the total. (b) Consists of total excise taxes and duties. (c) Consits of non-tax and other tax revenue.

275 Fiscal Facts and Trends Table B.2 Federal Deficit/Surplus 1995–6 to 2006–7 Billions of Dollars (current) Fiscal Year

Budgetary Revenue

Total Expenditures

Budgetary Deficit/Surplus

As % of gdp

1995–6

130.3

158.9

−28.6

3.5

1996–7

140.9

149.8

−8.9

1.1

1997–8

153.2

149.7

− 3.5

0.3

1998–9

155.7

152.8

−2.9

0.3

1999–00

165.7

153.4

−12.3

1.3

2000–1

178.6

161.4

−17.2

1.6

2001–2

173.3

164.4

−8.9

0.8

2002–3

171.6

164.6

−7.0

0.6

2003–4

186.2

177.1

−9.1

0.7

198.4

196.8

−1.6

0.1

2005–6

a

200.4

196.4

−4.0

0.3

2996–7

a

210.1

205.1

−5.0

0.3

2004–5

Source: Department of Finance, Fiscal Reference Tables 2005, Tables 1 and 2; Department of Finance, Budget Plan 2005, Table 1.2. Note: While revenue, expenditures, and deficit categories refer to fiscal years, nominal gdp is based upon a calendar year. Total expenditures include program spending and public debt charges. (a) Figures for these years are estimates.

276

Appendix B

Table B.3 International Comparisons 1995–2006 Percentage Change from Previous Year Growth in Real gdp 1995

1996

1997 1998

1999

2000

2001

2002

2003

2004

2005

2006

Canada

2.8

1.6

4.2

−4.1

−5.5

5.2

1.8

−3.1

−2.0

2.9

3.0

3.2

U.S.

2.5

Japan

2.0

3.7

4.5

−4.2

−4.4

3.7

0.8

−1.6

−2.7

4.2

3.6

3.5

3.4

1.8

−1.0

−0.1

2.4

0.2

−0.3

−1.4

2.7

2.4

2.0

Germany

2.0

1.0

1.9

−1.8

−1.9

3.5

1.4

−0.1

−0.2

1.1

1.1

1.8

U.K.

2.9

2.7

3.2

−3.2

−3.0

4.0

2.2

−2.0

−2.5

3.2

1.7

2.4

Unemployment Rates 1995

1996

1997 1998

1999

2000

2001

2002

2003

2004

2005

2006

Canada

9.5

9.7

9.2

−8.4

−7.6

6.8

7.2

−7.7

−7.6

7.2

6.8

6.6

U.S.

5.6

Japan

3.2

5.4

4.9

−4.5

−4.2

4.0

4.8

−5.8

−6.0

5.5

5.1

4.8

3.4

3.4

−4.1

−4.7

4.7

5.0

−5.4

−5.3

4.7

4.4

3.9

Germany

7.1

7.7

8.6

−8.1

−7.5

6.9

6.9

−7.6

−8.7

9.2

9.3

9.1

U.K.

8.6

8.1

7.0

−6.2

−6.0

5.5

5.1

−5.2

−5.0

4.7

4.8

5.1

Labour Productivity 1995

1996

1997 1998

1999

2000

2001

2002

2003

2004

2005

2006

Canada

1.0

0.5

2.0

−1.6

−3.2

3.2

0.7

−0.9

−0.3

1.3

1.8

2.0

U.S.

0.3

2.0

2.3

−2.1

−2.8

2.3

1.0

−3.3

−2.9

3.4

2.1

2.2

Japan

1.8

3.0

9.8

−0.7

−0.3

2.7

0.6

−0.9

−1.8

3.0

2.1

1.8

Germany

1.8

1.4

2.1

−0.5

−0.4

1.6

0.9

−0.7

−0.8

0.7

1.0

1.1

U.K.

1.3

1.5

1.1

−2.2

−1.7

3.1

1.5

−1.3

−1.9

2.7

1.1

1.4

Source: Organization for Economic Cooperation and Development (oecd), Economic Outlook, no. 78, Dec. 2005, Annex Tables 1, 12, 13.

277 Fiscal Facts and Trends sFigure of Federal Revenue as a Percentage of Total, 2004 5 B.1 Sources of Federal Revenue as a Percentage of Total, 2004–5

Other Revenue 7.5%

Indirect Taxes 21.6%

Personal Tax 55.8%

Corporate Tax 15.1% Source: Department of Finance, Fiscal Reference Tables 2005, Table 3.

278

Appendix B

B.2 Figure B.2 Expenditures by Ministry 2005-06 Estimates Federal Expenditures by Ministry 2005–06 Estimates Foreign Affairs and International Trade 2.5%

National Revenue 0.5%

Regional Agencies (f) 0.5%

Social and Citizenship Programs (a) 27.2%

National Defence 7.2%

Industry and Transport 3.6%

Justice and Corrections (b) 3.7%

Resources and Environment (c) 3.6%

Finance (e) 37.7%

Government Operations and Administration (d) 3.2%

Source: Department of Finance, Main Estimates, Budgetary Main Estimates by Standard Object of Expenditure, Part II, 2005–2006. (a) Social Citizenship programs include departmental spending from Canadian Heritage, Citizenship and Immigration, Human Resources and Skills Development, Social Development, Veterans Affairs, Health, and Indian Affairs and Northern Affairs. (b)Citizenship Justice and Corrections includesdepartmental spending fromspending the Department of Justice and the Solicitor General. and al programs include from Canadian Heritage, Citizenship (c) Resources and Environment includes spending Agriculture and AgriFood, igration, Human Resources and Skillsdepartmental Development, Socialfrom Development, Veterans Affairs, Healt Environment, FisheriesAffairs and Oceans, and Natural Resources. an Affairs and Northern (d)and Government Operations and Administration Spending includesofthat from and Public and Government ce Corrections includes spending from the Department Justice theWorks Solicitor General Services, the Governor includes General, Parliament, the Privy Council, and the Treasuryand Board. ources and Environment departmental spending from Agriculture AgriFood, Environm (e) Finance expenditures include Resources but are not limited to, spending on public interest charges and major and Oceans, and Natural eries transfers to the provinces. ernment Operations and Administration Spending includes that from Public Works and Governme (f) Regional AgenciesGeneral, includes Parliament, the Western Economic Canada Opportunities ices, the Governor the PrivyDiversification Council, andand theAtlantic Treasury Board nce Agency. expenditures include but are not limited to, spending on public interest charges and major tran

inces. onal Agencies includes the Western Economic Diversification and Atlantic Canada Opportunities Department of Finance, Main Estimates, Budgetary Main Estimates by Standard Object of Expend 2006.

279 Fiscal Facts and Trends Figure B.3 Federal Expenditures by Type of Payment 1998–99 to 2006–07 Billions of Dollars (current)

90

Direct Program Spending (d)

80 70 60 Social Transfers to Persons (a)

50 Public Debt Charges

40 30 20

Social Transfers to Governments (b) Defence

10 0 98-99

Other Transfers to Governments (c)

99-00

00-01

01-02

02-03

03-04

04-05(e)

06-07(e)

Source: Department of Finance, Budget Plan 2005, Tables 7.6 and 7.8; Public Accounts of Canada, Vol. 1, External Expenditures by Type, various years. (a) Includes elderly benefits and Employment Insurance benefits. ncludes elderly benefits andHealth Employment Insurance benefits (b) Consists of the Canada and Social Transfert (chst). Prior to the chst, two separate social transfers existed: Established Program Financing for health and post-secondary education expenditures; Consists of the Canada Health and Social Transfer (CHST). Prior to the CHST, two separate social transfers and the Canada Assistance Plan for welfare and welfare services. The chst figures include cash transfers to xisted: Established Program Financing for health and post-secondary education expenditures; and the Canad the provinces and so not include the value of the tax point transfer. Assistance Plan for welfare and welfare services. The CHST figures include cash transfers to the provinces a equalization and transfers to Territories, statutory subsidies and recoveries under the Youth notIncludes includefiscal the value of the tax point transfer. o(c) Allowance Program. and transfers to Territories, statutory subsidies and recoveries under the Youth ncludes fiscal equalization (d) Includes all operating and capital expenditure costs, including defence. Allowance Program ncludes all operating and capital expenditure costs, including defence (e) Estimates. Estimates

280

Appendix B

Figure B.4 Federal Revenue, Program Spending, and Deficit as Percentages of gdp 1996–7 to 2006–7 Percentage of GDP 25 20

Budgetary Revenue

15 Program Spending

10 5

Budgetary Balance

0

(a ) 67 20 0

20 0

56

(a )

45 20 0

34 20 0

23 20 0

12 20 0

01 20 0

900 19 9

89 19 9

78 19 9

19 9

67

-5

Fiscal Year

Source: Department of Finance, Fiscal Reference Tables 2005, Table 2; Department of Finance, Budget Plan estimates 2005, Table 7.6. Note: Budgetary revenue and program spending are based upon fiscal years, while gdp is based on the e: Budgetary andprogram programspending, spendingand are the based uponare fiscal while GDP isspending based ondoes the calendar calendar year.revenue Revenues, deficit on ayears, net basis. Program not Revenues, program and is thenominal deficit are a net basis. spending nottrend include r.include public interestspending, charges. gdp gdp.onBeginning in Program 1997–8, the budgetdoes deficit linepublic rest charges. GDP is nominal GDP. Beginning in 1997-8, the budget deficit trend line changes to indicate a changes to indicate a budgetary surplus as a percentage of gdp. getary surplus as a percentage of GDP (a) Estimates.

rce: Department of Finance, Fiscal Reference Tables 2005, Table 2; Department of Finance, Budget Plan 5 Table 7 6

281 Fiscal Facts and Trends ral Revenue, Figure B.5 Expenditures and the Deficit 1997-8 to 2006-7

Federal Revenue, Expenditures and the Deficit 1997–8 to 2006–7 Billions of Dollars (current)

250

Budgetary Revenue

200

150 Total Expenditures

100

50 Budgetary Surplus

0

Budgetary Deficit

a) 20

06 -

07 (

a) 20

05 -

06 (

05 20

04 -

04 03 20

20

02 -

03

02 20

01 -

01 00 20

19

99 -

00

99 98 19

19

97 -

98

-50

Fiscal Year

Source: Department of Finance, Fiscal Reference Tables 2005, Table 3; Department of Finance, Budget Plan timates 2005, Table 7.6; Public Accounts of Canada, Statement of Revenues and Expenditures, various years. Note: Expenditures include program spending public interest charges debt. Expenditures include program spending and and public interest charges on on thethe debt. (a) Estimates.

e: Department of Finance, Fiscal Reference Tables 2005, Table 3; Department of Finance, Budget Plan , Table 7.6; Public Accounts of Canada, Statement of Revenues and Expenditures, various years.

282

Appendix B

Figure B.6 Growth in Real gdp 1995–2005 Annual Change (per cent) 6.0

4.0

2.0

0.0

-2.0

-4.0 1995

1996

1997

1998

1999

2000

2001

Year Source: Statistics Canada, The Daily, cat. # 13-1001, various years.

Statistics Canada, The Daily , cat. #13-001, various years

2002

2003

2004

2005

283 Fiscal Facts and Trends Figure B.7 Rate of Unemployment and Employment Growth 1995–2005 Per cent 12 10 Unemployment Rate

8 6 4

Employment Growth Rate 2 0 -2 -4 1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Year Source: Statistics Canada, The Daily, cat. # 11-001XIE; Historical Labour Force Statistics (71–201), various years. Note: Employment growth rate and the unemployment rate apply to both sexes, 15 years and older, and are ployment growth rate and the unemployment rate apply to both sexes, 15 years and older, and are seasonally adjusted.

y adjusted

284

Appendix B

terest Rates and the Consumer Price Index (CPI) 1995 2005

Figure B.8 Interest Rates and the Consumer Price Index (cpi) 1995–2005 Average Annual Rate (per cent) 15

10

Prime Rate

5

Bank Rate CPI

0 1

2

3

4

5

6

7

8

9

10

11

Fiscal Year Source: Bank of Canada Review, Table F1; Statistics Canada, The Consumer Price Index, cat. # 62-001, various : The years. CPI is not seasonally adjusted. The Prime Rage refers to the prime business interest rate charged te Note: The cpiand is not adjusted. Prime refersbytothe theBank primeofbusiness charged by artered bank, theseasonally Bank Rate referedThe to the rateRage charged Canadainterest on anyrate loans to comme chartered bank, and the Bank Rate refered to the rate charged by the Bank of Canada on any loans to nks. commercial banks. urce : Bank of Canada Review, Table F1; Statistics Canada, The Consumer Price Index, cat.# 62-001, va

285 Fiscal Facts and Trends Figure B.9 Productivity and Costs 1995–2004 Annual Change (per cent) 6 5 4

Output (per person) (a)

3 2 1 0 -1 Unit Labour Costs (b)

-2 -3 -4 1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Fiscal Year Source: Statistics Canada, cat. # 13-010, various years. Output per person is the real GDP per person hour worked in the business sector, and is a measure of (a) Output per person is the real gdp per person hour worked in the business sector, and is a measure of productivity. This trend shows the annual percentage change of this indicator. Real GDP is based on con productivity. 1986 prices. This trend shows the annual percentage change of this indicator. Real gdp is based on constant 1986 prices. (b) Unit labour costs in the business sector basedononthe thereal realGDP, gdp, in constant trend shows Unit labour cost in the business sector is isbased constant 1986 1986prices. prices.This This trend show annual percentage change in thisinindicator. the annual percentage change this indicator.

286

Appendix B

Figure B.10 Balance of Payments 1994–2004 Billions of Dollars (Current) 80 70 60 50 40 30

Bilateral (Canada/US)

20 10 0

Total

-10 -20 -30 1994

1995

1996

1997

1998

1999

2000

Fiscal Year Source: Statistics Canada, cat. # 67-001, various years.

urce : Statistics Canada, cat.# 67-001, Table 1, 6 and 58, various years.

2001

2002

2003

2004

287 Fiscal Facts and Trends Figure B.11

Figure B.11 GrowthininReal RealGDP gdpCanada Canadaand and Selected Countries Growth Selected Countries 19951995–2005 - 2005 Annual Change (per cent)

United States Japan Germany U.K. Canada

8.0

6.0

4.0

2.0

0.0

20 05

20 04

20 03

20 02

20 01

20 00

19 99

19 98

19 97

19 96

19 95

-2.0

Year Source: Organization for Economic Cooperation and Development (oecd), Economic Outlook, no. 78, Dec. 2005, Annex Table 1. Source: Organization for Economic Cooperation and Development (OECD), Economic Outlook, no.78, Dec. 2 Annex Table 1

288

Appendix B

Figure FigureB.12 B.12 Standardized Unemployment Rates Canada and Selected Countries 1995 - 2005

Standardized Unemployment Rates Canada and Selected Countries 1995–2005 Standardized Unemployment Rate (per cent)

United States Japan Germany U.K. Canada

14.0 12.0 10.0 8.0 6.0 4.0 2.0

20 05

20 04

20 03

20 02

20 01

20 00

19 99

19 98

19 97

19 96

19 95

0.0

Year Source: Organization for Economic Cooperation and Development (oecd), Economic Outlook, no. 78, Dec. 2005, Annex Table Source : Organization for 13. Economic Cooperation and Development (OECD), Economic Outlook, no.78, Dec. 2 Annex Table 13.

289 Fiscal Facts and Trends Annual Rates Canada and Selected Countries 1995 - 2005 Figure Inflation B.13

Annual Inflation Rates Canada and Selected Countries 1995–2005 Inflation Rate (per cent)

United States Japan Germany U.K. Canada

6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Year Source: Organization for Economic Cooperation and Development (oecd), Economic Outlook, no. 78, Source: Organization for18. Economic Cooperation and Development (OECD), Economic Outlook, no.78, Dec. 2 Dec. 2005, Annex Table Annex Table 18.

290

Appendix B

Labour Productivity Canada and Selected Countries 1995 - 2005

Figure B.14 Labour Productivity Canada and Selected Countries 1995–2005 United States Japan Germany U.K. Canada

Annual Change (per cent)

5.0 4.0 3.0 2.0 1.0 0.0 -1.0 1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Year

Source: Organization for Economic Cooperation and of Development Economic Outlook, no. 78, grow Note: Labour productivity is defined as output per unit labour input.(oecd), The data is for labour productivity Dec. 2005, Annex 12. on total economy unit labour cost was dropped because inclusion of the public s business sector. Table The series he Note: Labour defined as output per unit of labour input. The data is for labour productivity was thought to productivity be a distortingis influence. growth in the business sector. The series on total economy unit labour cost was dropped because inclusion ource: Organization for Economic andinfluence. Development (OECD), Economic Outlook, no.78, Dec. 2 of the public sector was thought toCooperation be a distorting Annex Table 12.

Contributors

b a r b a r a a l l e n is a research fellow and lecturer at the School of Public Policy, University of Birmingham and a research associate in the Carleton Research Unit on Innovation, Science and Environment (c r u i s e ) at the School of Public Policy and Administration at Carleton University. m a l c o l m b i r d is a doctoral student in the School of Public Policy and Administration, Carleton University. keith brownsey teaches Political Science at Mount Royal College in Calgary. g. bruce doern is Chancellor’s Professor in the School of Public Policy and Administration at Carleton University and holds a joint Research Chair in Public Policy in the Politics Department at the University of Exeter. He is also the director of the Carleton Research Unit on Innovation, Science and Environment (c r u i s e ). geoffrey hale is associate professor of Political Science at the University of Lethbridge. john langford is professor in the School of Public Administration, University of Victoria. evert lindquist is professor in the School of Public Administration, University of Victoria. lisa mills is assistant professor in the School of Public Policy and Administration, Carleton University.

292

Contributors

tanya neima is a graduate student in the School of Public Policy and Administration, Carleton University andré plourde is associate professor and chair, Department of Economics, University of Alberta. michael prince is the Landsdowne Professor of Social Policy and an associate dean in Social Development at the University of Victoria. andrea rounce is a Phd candidate in the Department of Political Science at Carleton University. christopher stoney is associate professor in the School of Public Policy and Administration at Carleton University. allan tupper is professor in the Department of Political Science at the University of British Columbia ashley weber is a graduate student in the School of Public Policy and Administration, Carleton University

The How Ottawa Spends Series How Ottawa Spends 2005–2006: Managing the Minority Edited by G. Bruce Doern How Ottawa Spends 2004–2005: Mandate Change in the Paul Martin Era Edited by G. Bruce Doern How Ottawa Spends 2003–2004: Regime Change and Policy Shift Edited by G. Bruce Doern How Ottawa Spends 2002–2003: The Security Aftermath and National Priorities Edited by G. Bruce Doern How Ottawa Spends 2001–2002: Power in Transition Edited by Leslie A. Pal How Ottawa Spends 2000–2001: Past Imperfect, Future Tense Edited by Leslie A. Pal How Ottawa Spends 1999–2000: Shape Shifting: Canadian Governance Toward the 21 Century Edited by Leslie A. Pal How Ottawa Spends 1998–99: Balancing Act: The Post-Deficit Mandate Edited by Leslie A. Pal How Ottawa Spends 1997–98: Seeing Red: A Liberal Report Card Edited by Gene Swimmer How Ottawa Spends 1996–97: Life Under the Knife Edited by Gene Swimmer Ottawa Spends 1995–96: Mid-Life Crises Edited by Susan D. Phillips How Ottawa Spends 1994–95: Making Change Edited by Susan D. Phillips How Ottawa Spends 1993–94: A More Democratic Canada …? Edited by Susan D. Phillips How Ottawa Spends 1992–93: The Politics of Competitiveness Edited by Frances Abele Ottawa Spends 1991–92: The Politics of Fragmentation Edited by Frances Abele How Ottawa Spends 1990–91:Tracking the Second Agenda Edited by Katherine A. Graham How Ottawa Spends 1989–90: The Buck Stops Where? Edited by Katherine A. Graham How Ottawa Spends 1988–89: The Conservatives Heading into the Stretch Edited by Katherine A. Graham

How Ottawa Spends 1987–88: Restraining The State Edited by Michael J. Prince How Ottawa Spends 1986–87: Tracking The Tories Edited by Michael J. Prince How Ottawa Spends 1985: Sharing the Pie Edited by Allan M. Maslove How Ottawa Spends 1984: The New Agenda Edited by Allan M. Maslove How Ottawa Spends 1983: The Liberals, The Opposition & Federal Priorities Edited by Bruce Doern How Ottawa Spends Your Tax Dollars: National Policy and Economic Development 1982 Edited by Bruce Doern How Ottawa Spends Your Tax Dollars: Federal Priorities 1981 Edited by Bruce Doern Spending Tax Dollars: Federal Expenditures, 1980–81 Edited by Bruce Doern