Fraser Institute Digital Publication July 2005 Accounting for Gomery: The Money Links Between the Federal Government, Political Parties, and Private Interests Mark Mullins, PhD Contents Executive summary / 2 Context / 3 Introduction / 4 Financial flows context / 5 Methodology / 7 The Liberal party reports / 7 The Kroll Lindquist Avey report / 11 Gomery inquiry testimony / 14 Conclusions and recommendations / 14 Appendix A: Identified Organizations and Individuals / 18 References / 34 Acknowledgements / 35 About the author / 35 About this publication / 36 About The Fraser Institute / 37 Accounting for Gomery 2 Executive summary • The numbers of people and amounts of money involved in the Gomery inquiry are larger than previously known. Problems with federal government sponsorship and advertising programs can be understood using an economic theory of incen- tives and institutional structure. • This study finds that at least 565 organizations and individuals are identified in reports and testimony related to the Gomery inquiry. The original 2003 Auditor General sponsorship and advertising report cited only 71 organizations. The activ- ities under investigation are therefore quite widespread. • The people identified in these reports and testimony are politicians and bureau- crats (government insiders), and political party members and business people (government outsiders). This paper finds that almost all of them have an exclu- sive financial link to the Liberal Party of Canada (hereafter referred to as the Lib- eral party). They donated at least 40 times more to the Liberal party than to all of the other main political parties combined from 1993 to 2003. • This paper finds that these individuals privately donated at least $3.9 million to the Liberal party and received at least $7.4 million in private payments from the Liberal party from 1993 to 2003. The Gomery inquiry forensic report found only $2.5 million in Liberal party donations. • The same people also received public (tax funded) payments from the federal gov- ernment, and this was the underlying incentive that encouraged inappropriate behaviour and relationships. These incentives can be specifically identified: • Government insiders benefited through salaries, staffing, budgets, and political influence accruing to senior ministers and bureaucrats from access to $120 million in public funding of the federal cabinet, and • Nearly $1.2 billion in directed sponsorship and advertising contracts were awarded to government outsiders, generating at least $190 million in pri- vate benefits through outsider salaries, bonuses, and profits • The economic rent (or unearned financial benefits) captured by the government outsiders was almost 50 times larger than their political donations to the govern- ing Liberal party. This cash incentive may have been the driving force that resulted in misdirected and wasted taxpayer funds. Fraser Institute Digital Publication July 2005 Accounting for Gomery 3 • There were also specific conflicts of interest involved in the financial relationships between the Liberal party and a number of organizations, including the RCMP, the Privy Council Office and the federal government’s two largest advertising firms, that have not yet been adequately reported on by the media. • The money links outlined here are significant underestimates of the underlying relationships. Context The Auditor General and the Gomery Commission have investigated allegations that taxpayer funds were misused in federal government sponsorship and advertising activi- ties. This paper provides the first comprehensive assessment of the private money links between federal political parties and people associated with the sponsorship and adver- tising investigations. The purpose is to provide a fuller understanding of both the public and private financial links between the federal government, political parties, and private individuals than has yet been established. The analysis of this paper continues the work in a series of value-for-money studies began last year with an assessment of Auditor General reports from 1997 to 2003 (Clem- ens et al., 2004). The current paper lays out the tripartite financial links between govern- ment, political parties and the private sector using publicly available Elections Canada data and several audit sources, including two reports commissioned by the Liberal party. Applying a Public Choice theoretical analysis1 to this case study reveals that there exist significant incentives for insider and outsider rent seeking2 of the kind that was identi- fied in the preceding Fraser Institute report. A further finding is that these numbers are significant underestimates of the true underlying financial links. 1 Public Choice uses economic tools and methods to model the behaviour of voters, politicians, bureau- crats, and special interest groups to explain political outcomes. A key assumption is that all of these peo- ple act in their own self-interest. 2 Rent seeking is defined as money and effort expended by individuals or groups to obtain public benefits (or rents) from government. This results in a misallocation of public spending that is paid by everyone else in society. Fraser Institute Digital Publication July 2005 Accounting for Gomery 4 Introduction The Gomery Commission of Inquiry into the Sponsorship Program and Advertising Activities began hearings on September 7, 2004 and completed final arguments on June 17, 2005. Justice John Gomery heard testimony from 183 witnesses over those nine months. This produced more than 180,000 pages of transcripts and evidence and 28 million estimated pages of related documents (Globe and Mail, June 4, 2005, p. A8; Kroll Lindquist Avey Report, May 18, 2005). Inside this sea of information, there was little apparent media interest in analyzing two reports commissioned by the Liberal party, one for the Quebec wing of the party and the other for its national organization (Federal Liberal Agency of Canada, 2004; Federal Lib- eral Agency of Canada (Quebec), 2004). The Quebec report was commissioned on March 22, 2004 and the other was likely commissioned after July 15, 2004.3 Both were delivered to the Liberal party in the period between the June 28, 2004 election and the September start of the Gomery inquiry. The reports were written by two chartered accounting firms (Samson Belair/Deloitte & Touche, 2004; PricewaterhouseCoopers LLP, 2004). They are accounting reviews of the organizations and individuals identified by Auditor General Sheila Fraser in her Novem- ber 2003 report on federal government sponsorships and advertising (Fraser, 2003). Together, the reports track donations from these people to the Liberal party and pay- ments by the Liberal party to these same people. The work was later extended in the May 18, 2005 Kroll Lindquist Avey forensic accounting report, commissioned by Judge Gomery at a reported cost of $7.5 million in taxpayer funds (MacDonald, 2005: A22). This paper documents the two Liberal party reports, highlighting their significant find- ings and limitations. Additional information is examined from the Kroll Lindquist Avey report and from the Elections Canada party financing database. Donations from spon- sorship and advertising organizations and individuals are tracked for all of the main fed- eral political parties. These money flows are placed within the context of the tripartite relationship between the government, political parties, and the private sector. 3 The national report was likely commissioned after the July 15, 2004 reporting date of the Quebec report, as it uses an almost identical list of named parties (organizations and individuals) as the Quebec report and some identical text passages. Fraser Institute Digital Publication July 2005 Accounting for Gomery 5 Financial flows context Figure 1 lays out the channels of all possible financial flows between Figure 1: General Financial Flows government, political parties, and the private sector. For example, money can flow from the govern- ment to private contractors in exchange for services rendered. Individuals (and organizations prior to the 2004 election financ- ing reforms) can donate funds to political parties. Politicians can receive funds from government in the form of salaries and other monetary benefits. There are specific payment channels for the Canadian federal government. The main political parties examined in this paper are the Liberal Party of Canada, the Conservative Party of Canada (and its predecessors, the Reform Party of Canada, the Progressive Con- servative Party of Canada, and the Canadian Reform Conservative Alliance), the Bloc Quebecois and the New Democratic Party. Canada’s parliamentary system gives a unique status to the governing party, at present the Liberal party. The merging of executive and legislative functions results in a com- mingling of individuals from the governing party with the government itself. The most obvious example of the money flows involved is the funding of cabinet salaries and bud- gets to ministers who are at the same time members of the governing party. Figure 2 looks specifically at the potential money flows associated with the sponsorship and advertising activities highlighted by the Auditor General’s 2003 report and investi- gated by various bodies, including the Public Works and Government Services depart- ment, the Standing Committee on Public Accounts, and the Gomery inquiry.4 The organizations and individuals identified in those reports are the basis for the calculation of financial