Published in the Financial Post, June 25, 2002

The Ultimate Enron
by
Pierre Lemieux

 

When Enron declared bankruptcy, it had about $160-billion (all amounts in Canadian dollars) in annual revenues obtained from voluntary customers, $21-billion in debt on its balance sheet and a couple of problematic billions in off-balance sheet liabilities which were buried in the footnotes to its financial statements. At about the same time, the government of Canada was raising $170-billion a year in revenues from willy-nilly taxpayers, and its books showed a net debt (also called public debt) of $564-billion (as of March 31, 2000), plus off-balance sheet liabilities difficult to pin down but reaching at least half a trillion dollars.

The government's official balance sheet shows only financial assets and liabilities. On March 31, 2000, the liabilities of $639-billion were mainly composed of bonds and treasury bills (72%) and what is owed to cover the civil servants' future pensions (21%). The federal government's assets amounted to $74-billion --mainly foreign exchange (52%), cash (20%), and loans, investments and advances to enterprise (i.e., arms-length) crown corporations (14%). Hence, the net debt of $564-billion.

Now, let's look at the government's off-balance sheet liabilities, which are incurred by organizations somewhat similar to the "special purpose entities" set up by Enron. The federal government's "entities" are of three sorts: agent crown corporations, enterprise corporations and the Canada Pension Plan.

The liabilities of agent Crown corporations (whose debt is guaranteed by the government) make up nearly half of a broad category of off-balance liabilities called "Contingent liabilities," which as of March 31, 2000, amount to $82-billion. This amount also includes loan guarantees to small businesses, Indians, farmers, the Hibernia project and a host of other goodies -- for example, insurance guarantees to nuclear power plants.

The liabilities of enterprise Crown corporations form another category of off-balance sheet items. They amount to $100-billion as of March 31, 2000. The main corporations in terms of liabilities are the Export Development Corporation ($18-billion), the Canada Mortgage and Housing Corporation ($17-billion), the Canadian Wheat Board ($8-billion), the Farm Credit Corporation ($6-billion) and the Business Development Bank of Canada ($5-billion).

Finally, some liabilities arise from political commitments and don't even appear in the public accounts. The largest special purpose entity ever may well be the Canada Pension Plan. Its unfounded liabilities at Dec. 31, 2000, are estimated to reach $443-billion by the Chief Actuary of Canada.

In other words, the federal government's off-balance sheet liabilities add at least half a trillion dollars to its formal net liabilities. Even if there are assets corresponding to some (small part of) of these liabilities, Enron is dwarfed.

The problem is not that the information does not exist. Tons of it does. The Receiver General publishes the Public Accounts of Canada in three volumes, making up for 1,029 pages, plus 364 pages of supplementary data available on the Web -- a total of seven diskettes if you download everything. The Department of Finance publishes the 28-page Annual Financial Report of the Government of Canada. The Auditor-General audits these reports, and puts out his Supplementary Information Observations, plus his Annual Report. Statistics Canada's Financial Management System, designed to compare the different levels of government, produces a large number of statistical series, explained in a 178-page methodology handbook. And don't forget the government sector data in the National Accounts, based on a still different methodological basis. And so forth.

To interpret all this data is difficult and time consuming. And, strangely, we may have less independent analysts in this field than in financial markets. Most serious analysts of government data are probably academics, whose salaries depend on government subsidies. Notwithstanding the useful work of the Canadian Tax Foundation, think-tanks that are both independent and critical of government are rare in Canada. One reason is that statist or "neutral" organizations are the most likely to obtain a charitable status.

We haven't even considered the possibility that some political information is misleading, that public sector's accounting conventions are self-serving and that governments are not submitted to the minute disclosure rules that govern private companies. Imagine if no politician could use inside information to further his political interests! And we haven't touched the whole field of provincial and local finances.

Anyway, why would you try to learn the value of, say, the federal government's debt? You can't sell your share in the government if you are not happy. If your political influence is limited to your equal citizen's vote, one vote out of 20 million, the probability of your deciding an election (by breaking a tie between two winning parties) is equal to one over a number larger that the total number of elementary particles in the observable universe. This is why most taxpayers remain "rationally ignorant" of politics, and either abstain or vote blind.

Enron's debt was raised from voluntary lenders, and its equity financing from voluntary shareholders. While the company's management may have misled investors, nobody (except perhaps the securities commissions) could have led investors to believe that their voluntary investments carried no risk. On the other hand, the citizens are the formal shareholders of the government of Canada, but no one can sell his shares and bailout -- except at the high cost of emigrating. In brief, the state is the ultimate Enron.