This morning the province released a damning audit of the Cumberland Regional Development Authority. The audit, performed by accounting firm PricewaterhouseCoopers, runs 700 pages. Necessarily, reporters will today skim the audit for the choicest details, and the resulting articles will sensationalize the abuses. There’s nothing wrong with that, and I’m going to do a bit of it myself here. I fear, however, that a larger issue will be mostly overlooked: graft, corruption, abuse of power, ignoring the rules, and a sense of entitlement are endemic to anything labeled “economic development.” It’s not the exception; it’s the rule.
The Cumberland Regional Development Authority was one of 12 such agencies that operated across the province. Their purpose, nominally, was to stimulate local economic development by using tax dollars to fund various projects that would produce more “economic activity,” “create jobs,” and all the other feel-good phrases we’ve come to associate with these endeavours.
Another of the 12 agencies was called the South West Shore Development Agency, run by a fellow named Frank Anderson. Thanks largely to the work of Timothy Gillespie, the publisher of South Shore Today, all sorts of financial irregularities were uncovered, an audit was conducted, the RCMP was called in, and now Anderson is being prosecuted on 11 fraud-related charges.
The same process is unfolding with relation to the Cumberland Regional Development Authority. But this time it wasn’t a prying reporter who revealed the problems; it was two former CRDA employees who reported financial irregularities directly to provincial ombudsman Dwight Bishop. Bishop issued a report in August 2012 that found false documentation and questionable expenditures at CRDA, and a lack of oversight from the provincial Department of Economic and Rural Development and Tourism (ERDT), which funded the agency.
The province, realizing that two out of 12 regional development agencies having major issues might indicate systematic problems, shut all 12 of them down, and is in the process of replacing them with six new “enterprise networks.” It also hired PricewaterhouseCoopers (PWC) to conduct a forensic audit of CRDA.
What the audit found
PWC found so much wrong at CRDA that it’s impossible to list it all. But some highlights:
• The board of directors of CRDA was given no financial information at all; financial statements were kept with CRDA Executive Director Rhonda Kelly.
• “CRDA management and employees routinely participated in the submission of false invoices and cheque copies to ERDT and the recording of accounting entries to conceal the impact of the fictitious documentation.”
• Project and administrative funds were co-mingled, and funds designated for particular projects were used on other projects with no authority to do so.
• Kelly was both the Executive Director of CRDA and the recognized agent for the Downtown Amherst Revitalization Society (DARS); DARS billed CRDA for over $100,000 via what PWC calls “false or questionable” invoices.
• Acquisition of goods and services from several vendors, including Carter’s Sports, Jost Vineyards, and MT&L Public Relations, violated provincial procurement policy.
• Kelly had excessive and “unreasonable” car rentals paid for by CRDA. PWC notes that in 2010, a car was rented for Kelly on over half the working days, including an eight-day stretch for a single rental. The full cost of car rental for Kelly alone (other employees also rented cars) in 2010 and 2011 came to $28,030, and that didn’t include fuel costs.
• Violating provincial rules around alcohol, CRDA regularly purchased special label wine from Jost, amounting to over $14,000 in the four years covered by the audit. The was given to people associated with various CRDA projects and to employees and board members, both of which were inappropriate, says PWC.
CRDA’s use of MT&L Public Relations
That’s just a very cursory list, on my first past through the audit. But I’d like to examine the MT&L expenditures in a bit of detail, because it’s illustrative of the larger problem with all “economic development” agencies generally.
PWC includes the following chart in the audit:
PWC “could find no evidence that the purchasing of marketing and communications services was tendered.” Provincial rules for this are very clear, and CRDA’s own rules reflected those policies: Any purchase over $25,000 has to be tendered. But the MT&L services were never tendered. “It was evident that CRDA was aware that it was subject to the procurement guidelines,” reports PWC, “because we observed instances where employees of CRDA referred to proactive steps that had to be taken to avoid following the guidelines. For example, CRDA commonly followed a practice of ‘splitting orders’ to stay below the threshold levels that would have triggered the control measures in the procurement guidelines.”
Here’s an email from CRDA employee Paul Hopper to Kelly, his boss, explaining exactly how to split the MT&L contract:
This is a clear violation of the rules. But does MT&L have any responsibility here? The ad agency (since bought up by National Public Relations) gets a lot of government work—about $70,000 from provincial government departments in 2010, $80,000 in 2011, and $250,000 in 2012. Surely, the company and its employees are familiar with government procurement rules—didn’t they have the ethical responsibility to report CRDA’s work-around? Maybe not, as Darrell Dexter exempted the $303,000 “Ships Start Here” ad campaign, which went to MT&L, from the rules. Maybe MT&L had good reason to think they were exempt.
Economic Development agencies are like HAL 9000
There is, in fact, a common, everyday ethical murkiness surrounding all economic development ventures. Here’s how PWC describes it in regards to CRDA:
Our examination revealed an absence of controls at the most fundamental levels: the Executive Director, the Board of Directors and the financial reporting function. Lack of controls in these areas meant that controls at transactional levels throughout the organization could not operate effectively.
The tone set by the Executive Director was that it was acceptable (and expected) that certain rules be circumvented if such conduct accomplished the objective of obtain funding. The Executive Director’s statements: “the important thing is, the project gets done” and “it’s a question of does the work get done or doesn’t it get done” illustrate a mindset that pervaded the organization. The result was an organizational philosophy that preserving committed government funding was an imperative, even if it meant participating in schemes to create fictitious documents and concealing the schemes with false accounting entries.
Where have we seen this before? Why, yes, with Halifax’s concert scandal. As the city’s auditor general, Larry Munroe, explained in his usual understated tone:
Of particular interest is the mechanism by which the Acting CAO was able to encumber HRM (through the Halifax Metro Centre), by requesting transfers of funds outside of the normal HRM financial system and its controls, and how this practice could go undetected for so long. All transactions occurred via the use of a Halifax Metro Centre bank account which falls under HRM’s consolidated banking agreement with its banker. Given what became known and observed at the time, it was apparent a number of matters as they relate to overall HRM governance, roles and responsibilities, culture and accountability had surfaced and their impact needed to be fully understood.
As my own investigation into the concert scandal made clear, the promise of “successful concerts” (even when there weren’t any) and “economic development” (even when the concerts were a loss), not to mention their own egos, tempted the various players to ignore the various financial rules and governance controls that have evolved to prevent exactly those sorts of abuses.
We see this time and again: Anything labeled “economic development” gets a pass from the rules everyone else has to follow. It happened in the Commonwealth Games fiasco. It happened when Trade Centre Limited produced completely bogus delegate projections (and therefore economic impact projections) for the new convention centre.
This is what “economic development” schemes do. There are a number of reasons for it. First, and fundamentally, the contradictory purpose of these things is almost guaranteed to lead to corruption, just as HAL 9000’s contradictory programming led to that whole “lock Frank out of the spaceship” thing: the primary purpose of the economic development agency is to break the rules. We have an established tax structure: Nova Scotia Business, Inc works around it to give “payroll rebates” so those tax rates don’t apply to favoured companies. Concert promoters are many things, but at heart they’re business people who have to live by the rules of the market; bring a government partner in, however, and market discipline no longer applies. The job of regional development agencies is, in essence, to be a deal-maker, to work the room, slap a lot of backs, grease a lot of palms, hand out the government bennies, like a coke dealer working a night club. It’s no wonder these things go off the rails.
Second, the “economic development” agencies attract grifters and players. They see where the money is, and want to place themselves as the conduit, with all the social benefit that comes with it. They’re not exactly sticklers for rules.
Third, and I think in the end most important, is we’ve so capitulated to the rhetoric of “economic development” that we no longer can control it. Anyone who questions “economic development” is a “naysayer,” or a misanthrope bent on destroying his or her community. Since we’ve muzzled all the watchdogs, the crooks have the run of the place.