The Fraser Institute

The Fraser Institute

October 24, 2007 06:00 ET

The Fraser Institute: $99 Billion to $125 Billion in Federal Tax Dollars Wasted Due to Government Failure Since 1992

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Oct. 24, 2007) - Canada's federal government wasted $99 billion to $125 billion or more between 1992 and 2006 on failed or poorly managed programs, cost overruns, overpayments, and other examples of government failure, concludes a new study released today by independent research organization The Fraser Institute.

The study, Government Failure in Canada: 2007 Edition, is based on published reports from Canada's Auditor General and examines 305 distinct instances of government failure. The study is the third in a series of reports documenting government waste and inefficiency.

"There is a tendency for the public to blame the sitting government for mismanagement and failure without recognizing that these failures occur as a result of the incentives present in the public sector," said Niels Veldhuis, the study's co-author and Director of The Fraser Institute's Fiscal Studies Department.

"The examples of government failure in this study cover 15 years, two different governing parties, and five prime ministers, illustrating that failures are inherent in the way government operates."

The study determined the estimated cost of government failure using three different methods: specific costs actually provided by the Auditor General ($28.3 billion to $28.7 billion); the costs calculated using information provided by the Auditor General and other statistical sources ($66.9 billion to $69.1 billion), and the costs of failure related to observed problems in programs based on Canada's Social Insurance Numbers ($4.3 billion to $26.8 billion).

Additionally, the study looks at a number of instances where the Auditor General did not include any cost estimates due to a lack of information.

"In 119 of the cases we examined, the Auditor General was unable to provide an estimate of the loss incurred. That's 39 per cent of the total number of cases, meaning there's a strong chance the amount of waste and overspending far exceeds our $125 billion estimate," Veldhuis said.

Some of the 305 examples of waste, mismanagement, and incompetence summarized in the report are:

Department of National Defence (1994): The Auditor General found that trades-people within DND were approximately 33% less productive than commercial trades-people. This resulted in extra costs of $50 million a year. For example, at CFB Portage La Prairie in 1990/1991, DND employed 105 person-years, requiring a budget of $5.25 million, for construction engineering services. After the base closed, the same services were contracted out to a private firm employing 32 staff and operating on a budget of $3.7 million.

Agriculture Canada (1998): The Cash Advance Program provides loans up to 50% of the value of crops with the federal government paying interest on the first $50,000 advance. The Auditor General found no evidence that the program contributed to orderly marketing. The incremental effect of the program was likely minimal and may have displaced private credit financing. The audit reported $5.5 billion in cash advances paid between crop years 1992 and 1998.

Foreign Affairs (1997): The cost of embassy properties was overestimated by $2.4 billion, resulting in a 30% overcharge on passport fees since the cost of embassies is capitalized and passed on to users through passport fees. The Auditor General noted that Foreign Affairs experienced internal resistance in its attempt to downsize ambassadorial residences. For example, one ambassadorial residence was sold for $12 million and a new residence leased for $350,000, on top of additional renovations of $300,000. However, the ambassador refused to leave the previous residence and the project was cancelled, even though costs had already been incurred.

Satellite Communications (2002): The Department of National Defence took eight years to develop a $174 million satellite communications system. When the system was completed, DND determined the commercial system it had been using was sufficient to meeting existing needs and required fewer staff to operate. In addition, the new military satellite communications system would require an extra $15 million to meet current operational standards. The system remains in storage.

The Canadian International Development Agency (2005): CIDA was unable to spend its initial tsunami relief funds before the end of 2004/2005. As a result, to free up funding for the new fiscal year, CIDA spent $69 million intended for tsunami relief on non-tsunami-related activities in 2004/2005.

National Security (2005): A comprehensive audit of the federal government's emergency preparedness in the wake of the 2001 Anti-Terrorism Initiative found:

- DND was allocated $43.1 million to implement a High Frequency Surface Wave Radar System but an internal study indicated that the full cost of the system would be $220 million and it would only perform to expectations during daylight and calm weather.

- $10 million for equipping provincial and local authorities to deal with possible terrorist threats was not distributed according to the capabilities and needs of recipients. 40% of funding went to areas considered a low risk for a terrorist attack (cities with populations less than 30,000).

- No threat or risk assessment was carried out before $190 million was allocated for the protection of critical infrastructure.

The 305 examples of government failure the study examines clearly show that the public system itself is flawed and more limits must be placed on the operations of the federal government to eliminate waste and avoid continuing scandals, said Jason Clemens, co-author and Resident Scholar with The Fraser Institute's Fiscal Studies department.

"The government does not need to undertake an activity in order to ensure that it is done. Public purposes can be accomplished as well, or better, by contracting, privatizing, or allowing the private sector to undertake the activity."

In the study, Veldhuis and Clemens spell out several ways in which government waste could be reduced and institutional limits could be overcome. These include requiring government to define its role clearly and eliminate or restructure any of the activities not supportive of its core functions; selling state-owned assets to the private sector for private operation; utilization of Public-Private Partnerships to allow a complementary role for government and maximize the comparative strengths of each partner in developing infrastructure; outsourcing to use competitive bidding to provide publicly financed goods or services; and improve internal control and monitoring mechanisms, such as providing more resources for the Auditor General to increase the scope of available audits to include Crown Corporations and government foundations, and mandatory audit compliance.

"The sooner Canadians realize that government is best at performing a narrow set of tasks like tax collection, the better off citizens will be. At that point, we can reform government in order to make better use of the resources we have by harnessing the strengths of both the public and private sectors," Clemens said.

The Fraser Institute is an independent research and educational organization based in Canada. Its mission is to measure, study, and communicate the impact of competitive markets and government intervention on the welfare of individuals. To protect the Institute's independence, it does not accept grants from governments or contracts for research. Visit www.fraserinstitute.org.

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