In-equity stakes

When it comes to investment by the government, some Nova Scotian companies are more equal than others.

The Nova Scotian government is so dependent on VLT revenue that it has recently adopted a gaming strategy that papers over VLT addiction. The new rules will require that a machine called Gameplan be attached to VLTs, and this will supposedly cause gamblers to realize how much money they’re losing, and therefore slow down. Critics, however, say Gameplan is easily worked around, and won’t lower addiction rates or spending by addicts.

But there’s a bureaucratic brilliance in how the new rules play out. See, the company that makes Gameplan, Tech Link International Entertainment, is partly owned by the government; in 2005, Nova Scotia Business, Inc. invested $5.5 million in the company and received an equity stake in it, and after the gaming strategy was announced, NSBI extended the company $1.5 million in loans to make the machine. In effect, the province puts forward a bogus addiction-reduction mechanism that doesn’t reduce income from VLTs and at the same time gets to announce job creation in the Tech Link factory, which is also partially owned by the government. It’s a PR hat trick, all on the backs of VLT addicts, who no one cares about anyway. This isn’t the first time the province’s economic development strategies have looked like a loaded deck.

In February, the Department of Transportation awarded the first of many contracts to install LED lights on the province’s highways. The specs for lights in the tender for the contract were so narrowly written that the only company that could realistically supply the lights was LED Roadway Lighting Ltd, a company in which NSBI has a $10 million equity stake.

Earlier this year, a competing company, Rhyno LED Lighting Solutions, asked the federal economic development agency, ACOA, for financial assistance in opening a LED factory in Clare County. “I’m afraid that an application would not be viewed very favourably, basically for competitive impact reasons,” replied ACOA’s Mike Comeau. “We already have a domestic company producing [LEDs]... to compete against a domestic company, it would not be viewed very favourably.” In May, ACOA loaned Roadway $500,000, so the company could meet the demand for the province’s new lights.

In all, Nova Scotia has an equity stake of about $88 million in 19 companies, ranging from a GPS navigation company to a plastics company to a fashion design company; see the complete list here. In theory, this is a step up from the old way of doing things---we’re getting something for the money we give to companies, and we’re making public policy that benefits publicly owned firms. But in practical terms, Nova Scotia’s equity stake is meaningless: the province gets no dividend payments, has not realized a penny in capital gains and, for the most part (there are a couple of exceptions), does not have even one voting member on the board of directors. The companies’ risk has been socialized, but their profits remain privatized.

And while we taxpayers theoretically are stockholders in the companies, NSBI won’t reveal what percentage of the companies we own; nor are we we allowed to know CEO salaries and we can’t require the companies we own to meet enhanced wage or environmental standards.

There are many ways government can stimulate the economy, starting with “a well-educated, skilled, healthy work-force and infrastructure,” says economist Mike Bradfield, who is skeptical of the province giving financial assistance to particular firms. Still, if we do buy into companies, “I’d prefer we do it indirectly, through credit unions, improving their capacity to assess and assist firms and increasing their funding capacity by placing government accounts in the credit unions.”

If the government does buy into companies, Bradfield wants “a fully-participating---dividends and voting shares---equity position, with the understanding that the government can sell its shares to the workers or their union. Taking equity without full participation is not venture capital---it is a pig with lipstick.”

Then there’s the issue of making public policy to align with the private fortunes of the favoured companies. Already people are claiming the policies are biased against competing firms, and looking down the road, it’s easy to see how this equity stake business can corrupt policy making, and opens the door wide for graft and kickbacks.

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