The Auditor General's report addressed the issue of government loan guarantees to companies in the diamond manufacturing industry. Specifically, the report dealt with the default on the loan guarantee for Deton'Cho Diamonds Incorporated.
The GNWT originally provided loan guarantees to three companies in the diamond industry: Deton'Cho Diamonds Incorporated, Sirius Diamonds Ltd. and Arslanian Cutting Works (NWT) Ltd., to allow businesses to obtain private financing that might not otherwise be available at a total of $24.2 million dollars. The intent of the loan guarantees was to encourage economic development by supporting business ventures that banks would consider too risky without government backing.
At the time the auditor's report was written, only Deton'Cho Diamonds had defaulted on their loan. The report notes that although a deal was ultimately reached to sell Deton'Cho Diamonds to Deton'Cho Corporation, and the $2.6 million principal will be paid to the government in twenty equal, interest-free, yearly instalments, the foregone interest using a modest discount rate of four percent would amount to $800,000 over 10 years. The committee notes, however, that it remains to be seen exactly what the total cost to taxpayers will be for the Deton'Cho loan guarantee.
Subsequent to the auditor's report, the remaining two loan guarantees went into receivership. The net loss for Sirius Diamonds Ltd. is estimated at over $6.5 million.
Members had an opportunity to question the comptroller general about the events leading up to the default on the Deton'Cho Diamonds. The comptroller general's position was unequivocally that the global diamond industry is inherently risky and no amount of due diligence can change that.
The committee understands that loan guarantees are inherently risky. The inherent risk is not what was at issue. Of concern to Members is if the Diamond Review Committee and the Financial Management Board did everything within their power to minimize the loss of public funds. In other words, was due diligence adequate? Ultimately, the committee did not find the witnesses' testimony to be persuasive. Members remain uneasy that the due diligence process and the monitoring was not as rigorous as necessary.
In light of what has been learned from the loan guarantees for the diamond manufacturing industry in the NWT, some Members are hesitant to endorse the use of public funds to back high-risk experimental industries. Some Members feel government investment would be better put towards ventures with demonstrated markets and viability; for example, strategic infrastructure projects. They are of proven benefit to NWT residents, are less vulnerable to volatile global markets and, therefore, risks can be more accurately assessed.
Consolidated Budgets
A consolidated financial statement is one in which all the revenues and spending for a government department or agency is recorded together in the same document. A consolidated financial statement includes all like items of assets, liabilities, revenues and expenses from a government department, including any revolving funds and corporations that fall under its mandate.
The auditor noted a number of reasons consolidated budgets can be helpful to managers and Members of the Assembly. For one, it's easier to compare budgets to year-end financial statements when both are consolidated. It also focuses attention on the broader activities of
government; for example, consolidated accounts would more easily reveal how much is spent on salaries and administration. Consolidated budgets would also provide more detailed information on housing and post-secondary education spending.
The GNWT bases its accounting standards on recommendations of the Public Sector Accounting Board, PSAB. So far, these rules require consolidated financial statements but not consolidated budgets. However, the trend appears to be increasingly towards consolidated financial documents. The committee notes that PSAB has changed their guidelines so that, as of April 1, 2005, a government's 'reporting entity' includes all entities that are controlled by the government. This change means that, for the first time, the 2005-2006 public accounts will be consolidated, including government boards and agencies. The committee is of the opinion that this change makes it all the more pressing for the GNWT to move towards consolidated budgeting.
The standing committee understands that the government is opposed to providing consolidated budgets, including the concern that it could potentially render budgets so complicated they would no longer be of use to anyone outside of the accounting profession, notably decisions-makers and the public at large. The committee points out that there are ways of ensuring this concern is addressed. For instance, in addition to consolidated budgets, more detailed information could also be needed, such as a breakdown of component parts, in order to facilitate understanding.
Recommendation
The Standing Committee on Accountability and Oversight recommends that the GNWT prepare consolidated budgets for the 2008-2009 budget cycle.
Conclusion
Recommendation
The Standing Committee on Accountability and Oversight requests the Executive Council table a comprehensive response to this report within 120 days in accordance with Rule 93(5) of the Rules of the Legislative Assembly.