BUSINESS

A costly wrong number

Alberta adds up the bill for a phone fiasco

JOHN HOWSE July 20 1992
BUSINESS

A costly wrong number

Alberta adds up the bill for a phone fiasco

JOHN HOWSE July 20 1992

A costly wrong number

BUSINESS

Alberta adds up the bill for a phone fiasco

When the Alberta government launched NovAtel Communications Ltd. in 1983, it was intended to free the province from its dependence on resources and catapult it into a brave new world of hightechnology industry. Instead, the nine-year adventure in the manufacturing of cellular telephone equipment has turned into a financial nightmare that has cost the province’s taxpayers at least half a billion dollars. Much of the money vanished in a flurry of largely uncontrolled lending to dozens of small rural telephone systems in the United States. Last week, as a team of government-appointed examiners gathered on the 12 th floor of a suburban Calgary office tower to begin the task of determining how much of that money is likely to be repaid, Albertans were absorbing another consequence of the costly venture: in its June 29 Creditweek report, the debt-rating agency Standard & Poor’s Corp. of New York City sharply downgraded the province’s financial outlook—an action likely to cost Alberta heavily in interest charges on its future borrowing.

Meanwhile, opposition politicians attacked Premier Donald Getty’s Conservative government for allowing the financial drain to continue after Getty replaced Peter Lougheed as premier in 1985. “The controls at NovAtel were so lax,” said NDP MLA Pamela Barrett,

“things could not have been worse if they took out advertisements offering free money.” Liberal Leader Laurence Decore noted that two of the six loan examiners were former NovAtel employees who had approved at least some of the questionable loans. Declared Decore: “These are the same wizards who made these sweetheart deals in the first place.”

The mounting controversy over NovAtel is only the latest in a series of financial embarrassments to land on the doorstep of the Alberta Tories. The most spectacular of those was the 1987 collapse of the Edmonton-based Principal Group Ltd., which cost 67,000 investors $150 million. Then, last year, the government was forced to make good on a $ 103-million loan guarantee when a controversial magnesium plant at High River ceased operations. Other losses include a $6-million loan.to Edmontonbased Gainers Inc., a meatpacking company owned by Peter Pocklington.

NovAtel’s troubled history

began when provincially owned Alberta Government Telephone and privately held Nova Corp. formed the new company as a joint venture directed at developing high-technology communication products. In 1989, Nova left the venture, selling its half share in NovAtel to AGT for $42.5 million. Late the following year, the provincial government decided to privatize AGT and rename it Telus Corp. But that decision proved fateful. Although a prospectus issued to potential investors in AGT estimated NovAtel’s profits for the second half of 1990 at $16.9 million, in fact, the company expected to lose $4 million in that period. The discrepancy became evident when a German electronics company, Robert Bosch GmbH, began examining NovAtel’s books with a view to purchasing a 50-per-cent interest in the firm. The shortfall in earnings not only persuaded Bosch to drop its bid for NovAtel, it also put an end to the Tories’ attempts to privatize its corporate parent.

Meanwhile, documents that a NovAtel subsidiary, NovAtel Finance Co., had filed with the U.S. Securities and Exchange Commission in Washington provided equally damaging disclosures. Those documents furnished details of how the Alberta firm had lent money to fledgling cellular phone systems in several states, including Nevada, California, Wyoming and New York. According to the documents, NovAtel Finance Co. had offered to guarantee start-up loans to more than 70 companies seeking to introduce cellular phone service to rural areas.

The money was to be used to buy switching systems, construct compact base stations and integrate cellular circuits with existing services. In return, NovAtel officials have said since, the companies receiving the loan guarantees were expected to purchase expensive hardware from the Alberta firm. The U.S. companies were supposed to repay the loans from subscriber fees over a period of seven years, and together, those expectations reflected an optimism that prevailed among cellular telephone suppliers at the time. “This was a no-lose industry in 1988,” said one Edmonton-based financial analyst familiar with NovAtel’s history. “It was set to explode. It was the future.”

Last week, the Alberta government minister responsible for NovAtel’s activities defended the company’s strategy. “All manufacturers used systems financing,” Technology Minister Frederick Stewart told Maclean’s. In fact, earlier this year NovAtel claimed that its approach

had succeeded in securing orders for its equipment from 91 of 249 cellular phone systems in the United States. But NovAtel’s loans were made on what critics say were unusually generous terms. In one case, the company offered a North Carolina firm $2.4 million to fund the construction of a cellular system and its operation for one year.

The U.S company, GMD Partnership, was required to put up just one dollar. In a July, 1988, letter to the GMD partners, whose address was a golf club,

NovAtel wrote: “We commit to lend the maximum amount based upon your estimation of the funds that will be required.” At the same time, loans were approved with little scrutiny. Once approved by NovAtel Finance Co.’s local representatives in the United States, one borrower said, loans were merely “rubberstamped” in Edmonton.

Critics contend that much of the money was misdirected. In one case, General Cellular Corp. of Fairfield, Calif., used $19.5 million of the $78 million that it had borrowed from NovAtel Finance Co. for day-to-day expenses, instead of for equipment.

One GMD official described NovAtel’s loans to that partnership as having “no strings attached.”

Meanwhile, many of the recipient companies are struggling financially, and the anticipated rush of orders for NovAtel equipment never materialized. Instead, three of the 78 U.S. firms that received loans from NovAtel have since defaulted on payments—threatening to cost the Alberta company as much as $84 million. “The government was the sugar daddy for a bunch of dubious companies in the United States,” charged NDP Opposition Leader Ray Martin in the Alberta legislature. “What was Alberta doing lending money to neophyte U.S. companies in a very high-risk business?”

Losing money, for one thing. Throughout its nine-year history, NovAtel never showed a profit. Instead, losses mounted to the point that by the end of its 1990-1991 financial year, the company reported that it had lost $204 million over the previous 12 months alone. At the same time, the company’s claim of diversifying the Alberta economy was also losing credibility. In early 1991, NovAtel slashed 222 jobs at its Lethbridge plant, reducing its total workforce to about 1,500. In May, 1991, another 387 NovAtel workers in Calgary lost their jobs.

With NovAtel’s losses weighing down Telus Corp., the Alberta government, still intent on privatizing the telephone utility, bought the struggling cellular phone maker in December, 1990, for $185 million. The decision left Alber-

ta taxpayers liable for hundreds of millions of dollars in NovAtel’s accumulated losses.

Finally, last May, Alberta’s Tories decided it was time to stem the ongoing financial hemorrhage. In a complex three-way deal, the province sold NovAtel’s cellular switching technology to Toronto-based communications giant Northern Telecom Ltd. for $38 million and transferred its cellular hand-phone manufacturing component to Telexel Holding Ltd. of Calgary, a subsidiary of Hong Kong-based power-tool maker TechTronic International Co. Ltd., for $28.8 million. In the third leg of the transaction, NovAtel Finance Co.’s $300 million in outstanding loans was transferred to provincially owned North West Trust Co. for review and administration (ironically, the province had come into possession of North West in 1987, when the government was forced to take over it and another crumbling financial institution, Heritage Savings and Trust Co.).

The sale of what remained of NovAtel has left the Alberta government and its taxpayers with little to show for their original investment. Northern Telecom and Telexel, meanwhile,

have said that they plan to continue producing the former company’s cellular switches and handsets in Alberta. But apart from the title to NovAtel’s real estate holdings in Calgary and Lethbridge, the province retains the company’s portfolio of loans as its only asset remaining from the venture. According to provincial officials, North West Trust expects eventually to recover $216 million of the $300 million that NovAtel Finance originally lent.

At the same time, the tally of losses that provincial taxpayers underwrote continues to rise. For his part, Stewart acknowledged that the final amount will be at least $566 million. That toll prompted the credit-rating agency to downgrade its assessment of Alberta from “stable” to “negative” last month. Declared the Standard & Poor’s report: “Provincial finances deteriorated sharply in the fiscal year ended March 31, 1992. This resulted primarily from a $ 1.2-billion shortfall in resource revenues and an extraordinary cost associated with disposition of NovAtel Communications Ltd.”

Whatever the eventual financial impact of NovAtel’s collapse, its political cost is already becoming apparent in campaigning for a provincial byelection scheduled for July 21 in the riding of Calgary/Buffalo. Although Tory candidate Rod Love denies that voters are overly concerned about the NovAtel issue, his main rival, Liberal Gary Dickson, contends that it is the No. 1 issue among voters in the downtown constituency. “I have knocked on 4,000 doors,” Dickson said, “and NovAtel is a focal point of anger throughout the riding.” Added Liberal Leader Decore: “The government failed to monitor how these monies were handed out.”

A full accounting of the NovAtel fiasco may not emerge for several weeks. As details of the company’s troubles mounted last month, Getty instructed provincial auditor general Donald Salmon to conduct a review of its activities. His report is expected early this fall. For his part, Stewart told Maclean’s: “I am absolutely confident that the loss figure will not change. I remain angry and frustrated at the staggering amount. And I will resign if the auditor general finds that any of that loss was due to my negligence.” That may be cold comfort to Alberta’s taxpayers. For them, their provincial government’s entry into the wireless world of cellular communications has already proven to be a painfully wrong number.

JOHN HOWSE in Calgary