Sask Water blundered into its ill-fated potato venture with big goals but no clear idea of how to achieve them, without knowing whether it was succeeding, and without thinking out the risks involved.
Those are the conclusions of Saskatchewan’s provincial auditor, who investigated Sask Water’s mid-1990s decision to create a major potato production and processing industry that ended in disaster.
The provincial government lost $5.2 million when the Lake Diefenbaker Potato Corporation went bankrupt last spring. It also ended up with more than $23 million worth of government-built storage facilities that had few potatoes to hold, raising 1999 potato investment losses to $8.9 million.
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Auditor Fred Wendel said Sask Water’s potato industry misadventure demonstrates a basic lesson about the dangers of a poorly thought-out plan.
“If you haven’t set out what you’re trying to do in a very clear way to the board (of directors), and you haven’t agreed ahead of time how you’re going to know if you get there – like the measures or indicators to know whether you’ve been successful or not – then you obviously have a problem,” said Wendel in an interview.
“They didn’t do a comprehensive risk analysis. That’s pretty serious.”
The report said Sask Water inadequately managed its potato industry investments, including a network of expensive potato storage buildings, between 1996 and most of 1998.
The auditor’s investigation found that Sask Water management did not provide the board of directors with adequate information and the board didn’t request it.
Sask Water began aggressively pushing into the potato industry in 1996 when it contracted two farmers to produce processing potatoes to prove they could be economically grown in Saskatchewan.
That year it sketched out a vision for the industry’s future: Production would grow exponentially, creating thousands of acres of new potato production; a fresh pack plant would be built and operated by 1997; by the end of 1999 a world-class french fry plant would be built in Saskatchewan and would begin processing potatoes.
On a mission
Sask Water’s self-assigned role was to propel production by building major storage facilities and by crop-sharing with farmers.
The strategy appeared to work well in 1997 and into 1998, with provincial acreage quickly tripling to about 6,000 acres. Most of the increase was grown by a private group called the Lake Diefenbaker Potato Corporation, which Sask Water had encouraged.
But by mid-1998, LDPC was in serious financial trouble. Costs were higher than expected due to inexperienced management and unexpectedly low prices – which it had helped create by flooding the market with cheap potatoes.
Sask Water suffered a devastating blow in June 1998 when Lamb Weston, the company it had counted on to build a french fry plant in Saskatchewan, chose Alberta instead. That knocked the linchpin out of the potato expansion strategy.
Sask Water’s president left the agency, and the board of directors and new president moved to minimize impending heavy losses.
Sask Water and the two other main creditors of the LDPC agreed to a financial restructuring package for the company, and the agency abandoned plans for any other major potato investments after 1998.
The LDPC collapsed anyway, under a debt of $35 million, leaving Sask Water with millions of dollars in unpaid bills and owing the Royal Bank $1.25 million for guaranteeing LDPC’s debt.
The auditor found no problem with Sask Water’s participation in the LDPC bailout, noting by that point, the agency’s objective was to minimize losses to the potato network.
“Sask Water’s rules and procedures for managing its investment in the potato industry since late 1998 were adequate,” reads the report.
The auditor made three suggestions to minimize the chance of a policy like the potato industry strategy running amok.
Sask Water should not commit money to significant investments until it has:
- Approved clear and measurable objectives for the investments.
- Analyzed the risks, costs and benefits of the investments.
- Set performance indicators against which it can measure the extent of the investment’s objectives.
While most of the report of the investigation focused on what went wrong in the potato venture, Wendel found that Sask Water now follows good management practices and protects public investment in the potato storage facilities.
He found that the network of storage facilities is worth $21.7 million as Sask Water claims, and he does not believe that value needs to be written down.
“We’ve looked at (Sask Water’s) plan, what they’ve got looking into the future, looked at the costs and said it looks like they have a reasonable plan now, they have clear objectives and strategies,” said Wendel.
He suggested that crown corporations take any new major investment suggestions to the legislature’s crown corporations committee before spending money.
