Paul Martin’s spending freeze puts chills into IT vendors

The federal government’s winter freeze on spending has left some high-tech executives wondering whether their companies will be left out in the cold.

Industry insiders say the government has not yet provided enough information about the freeze and the subsequent review of capital projects.

Compounding such concerns is the timing of the freeze. The December announcement by Prime Minister Paul Martin’s new administration coincided with cautiously-optimistic predictions by analysts who said 2004 would be a year of gradual growth for high-tech.

But those IT companies that rely on government contracts as a major source of revenue say things are a little harder to predict when some operations are on ice.

The review, overseen by the government’s expenditure review committee, promises to subject new capital contracts that exceed $5 million to “”rigourous”” evaluation. The committee is slated to announce its decisions on what to cut and what to keep by this fall. Those contracts that have already been signed will not be affected. The helicopter program and projects under the infrastructure program are exempt from the review.

One executive who did not want to be identified said the government has yet to provide sufficient information on the review to contractors, prompting major concerns among high-tech leaders.

“”In speaking with government customers, I don’t think (Ottawa) has straightened all this out yet,”” the source said, urging improved communications with stakeholders on the review process.

Also keeping a close eye on Ottawa is Oracle. Roughly 10 per cent of the company’s contracts fall above the $5-million cut-off, placing the company in a position of possible review.

“”Certainly, for the larger projects, there is no real guidelines given to industry yet to say what it all means,”” said Henk Dykhuizen, vice-president of the government sector for Oracle Canada.

Meanwhile, Cognos is monitoring the spending freeze “”very closely,”” said Sean Reid, a spokesman for the Ottawa-based leader in business intelligence software and provider of analytic applications to the Royal Canadian Mint. So far, however, business with the government has not been affected, he added.

Similarly, Don McClure, general manager of business development for Xwave, is concerned about the freeze but hasn’t detected any affects – yet. McClure hasn’t received any communication from government on the freeze, and generally “”lives from what we see in the press.”” The company delivers complete IT services and has a client list that includes Public Works and Government Services, Department of National Defence and the Canadian Customs and Revenue Agency.

McClure added that previous spending freezes have affected Xwave but they “”haven’t been overly onerous.

“”Usually, it results in a delay or cancellation of some programs,”” he said. “”But if you’re experienced in doing business with the government, you’re sort of used to delay and cancellation. That’s the risk (you have to take).””

It’s a whole different story, however, for startups that might be relying on that one large project to maintain staffing levels and get them off the ground.

Project cancellation also means a company must incur significant costs for the initial groundwork required to put a proposal together, said Oracle’s Dykhuizen, who believes the government can only afford to review the selected contracts for a maximum of six months.

“”(The committee) has programs that they need to make some quick decisions on because they do have some spending schedules for March and the new fiscal year,”” he said. “”They need to plan for those expenditures.””

Realistically, the government will not want to prolong its review by much more than three to four months because an election is fast approaching, Dykhuizen added. “”They want to know right now what’s going ahead and what’s not. If they’re going to have to prepare the public for any cancellations, or even to make sure they’re justified in going through with high-visibility projects, they’re going to have to know that fairly quickly.””

A spokesman for the Treasury Board of Canada Secretariat referred reporters who had questions on the freeze to the secretariat’s Web site. More in-depth questions from were forwarded to the press secretary of TBS president Reg Alcock, but answers were not forthcoming on Tuesday.

The TBS site’s FAQ section emphasized that while the review would wrap up next fall, some programs and expenditures “”will require more in-depth scrutiny than is possible, given the time available to prepare the report.””

Given this possibility, the committee will make recommendations for further study in areas “”deemed most appropriate,”” said the site.

The site made no specific mention of how the committee might consult with industry stakeholders. Rather, it said the committee would actively seek input from parliamentarians over the course of its work.

Last month, Alcock emphasized to Canadian Press that “”just because a project is on the list (to be frozen) doesn’t mean it’s dead.””

Alcock also admitted at the time that details of the review were sketchy, but he argued that cabinet was less than a week old and barely had time to meet.

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Jim Love, Chief Content Officer, IT World Canada

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