Wednesday, December 5, 2001
The Chronicle Herald

HERE WE GO again.

By Brian Lee Crowley

With the best of intentions, our politicians are yet again headed for a bitter controversy about government financing of business. The controversy would be quite unnecessary if politicians could get it into their heads that government is hopelessly ill-equipped to finance individual businesses, and stick instead to their knitting.

Five years ago, governments in the region discovered “venture capital.” In those days of high-tech feeding frenzies and a sky-high NASDAQ, Ottawa and the four Atlantic provinces figured we weren’t getting our fair share of the excitement. Their diagnosis: We didn’t get enough venture capital, a piece of business finance that helps to nurture a good technical idea until it is sufficiently developed to go public.

All the exciting technology plays had venture capital investment in their early stages, as savvy investors spotted good opportunities. They invested in equity in those start-ups, supplied them with management and other expertise, and then cashed in at the IPO stage. That’s when things went well. But it’s worth it to invest in a few high-tech disasters if, in the process, you also get a chunk of the next Microsoft or Intel or Sun Microsystems.

If lack of venture capital was a key reason this region didn’t participate in the New Economy, our politicians saw an opportunity for themselves to plug this obvious failure of the market to service the region’s needs. The four provincial governments, plus Ottawa and some private-sector outfits such as the chartered banks, clubbed together and put $30 million into their new creation: ACF Equity Atlantic Inc.

Now, at the five-year mark in its planned 10-year lifespan, questions are being asked about its performance. Predictable questions. Questions that the fund’s critics foretold even as it was being created.

The most obvious question, for a fund that got backing from every provincial government in the region, is: Why do some provinces get a lot more of the money than others? To a private investor, that’s a nonsense question. You don’t build a portfolio based on geography, but on opportunities that present themselves to earn a good return on
investment, wherever those opportunities may be. But it’s not a silly question to a politician. In fact, it’s the question that newspapers, and opposition MPs such as Acadie-Bathurst’s Yvon Godin, have been asking this past week. And they’re right to do so.

After all, people in New Brunswick or Newfoundland or P.E.I. don’t pay their provincial taxes to subsidize business in Nova Scotia, the province that has snaffled the lion’s share of ACF investments. Each province kicked in the same amount, and the critics want to know why each province isn’t getting substantially similar levels of investment.
While the ACF has been pretty good at resisting this kind of politics in its decision-making, that’s in part because the fund has been quite inconspicuous since its inception. Now that the public and the opposition are starting to focus on it, though, the distribution of its investments will increasingly become fodder for election campaigns and newspaper editorials. The pressure will build on local politicians to “bring home the bacon.” Politics will begin to insinuate itself into the fund’s decisions. And we will be right back to the bad old politicization of business decisions that has done so much damage to the region’s economy.

A much more interesting question, however, than whether Tilley or Tignish or Trinity got its share of the ACF is why the politicians thought that it was a good idea in the first place.

The idea was that there was a raging thirst for venture capital in this region, and that there was a host of potential high-tech successes wanting only venture capital to succeed. But even the most cursory study of business financing in the region would have quickly revealed that the problem wasn’t lack of supply, but rather of demand. Private venture capitalists have tried to set up shop here, and even advertised for applications, with little or nothing to show for their efforts. Even the ACF, devoted wholly to the region, has only managed to invest in about 10 companies, two of which have failed. They say they’ll invest in one or two more, and then what’s left of their $30 million in the companies they have already backed. This doesn’t sound like a region crying out for venture capital, but rather a region where the opportunities, while good, are not numerous. Publicly subsidizing venture capital in competition with private-sector investors only makes a thin market thinner, making it less likely that real venture capitalists, with deep pockets and even deeper pools of expertise, will ever establish themselves here.

Governments can help businesses get established and grow, by cutting debt and taxes. But they don’t belong, even as partners, in financing individual businesses.

Brian Lee Crowley is president of the Atlantic Institute for Market Studies, a public policy think-tank in Halifax. E-mail: