Child of the Canadian Federation of Labour, Working Ventures is the second- largest of 14 union-sponsored venture capital funds in the country, behind the granddaddy of them all, the Quebec Federation of Labour's Fonds de Solidarite des Travailleurs du Quebec. Only five years old, Working Ventures now boasts of having $506-million in assets under management, and why not: investors in these funds receive a 20-per-cent tax credit from participating provincial governments plus a matching 20-per-cent tax credit from the federal government plus the regular deduction that applies to any investment in an RRSP, should they choose to place their holding there.

Yet with all of this help from the taxpayer, Working Ventures has only got around to investing about a quarter of the money it has raised, about $133- million, for the purposes that Parliament had in mind when it set up the program: small and medium-sized "venture" enterprises. The rest of the money has been socked away in government bonds and paper. Under the terms of the legislation, funds are supposed to put 60 per cent of their assets into venture capital. While the regulatory benchmark is, properly speaking, not the current level of assets but where it was as of the previous fiscal year-end, the fact remains that the fund did not meet the 60-per-cent requirement last year, and according to Working Ventures president Ron Begg, won't do so this year either.

Whether Working Ventures meets the terms of the legislation isn't really the issue here. The real question is: Why did we set up this program in the first place? And why, in these times of constraint, has this egregiously misguided tax subsidy survived the Finance Department's allegedly searching scrutiny? There's nothing wrong with unions starting up their own mutual funds if they choose, of course. Nor should fund managers be made to feel guilty for stuffing their clients' money in safe - relatively speaking - investments like government bonds. But there seems little reason to single out union-sponsored funds for such extraordinarily generous tax treatment, still less if the tax credit is lent straight back to the government.

The absurdity of this arrangement is compounded when you realize that in many cases the union connection is nominal at best. Not every investor in these funds, or even most, are union members. Several of the funds in fact originated as bright ideas in the minds of the very Bay Street "casino capitalists" that union leaders like to rail against, who saw the tax goodies available, cooked up a fund, and looked for a union label to attach to it.

To close the circle, at least one of the funds is sponsored by employees of the federal government: Capital Alliance Ventures Inc., affiliated with the Professional Association of Foreign Service Officers. Let's assume some of these diplomats, half of whom work overseas, actually invest in the fund. So: the government pays its employees, who lend part of their pay cheques back to the government through the fund, much of which is then returned to them as a tax credit. What exactly is accomplished by all this money spinning?

Increasing the national debt, for starters. By one calculation, the Solidarite fund alone has cost the federal and Quebec treasuries almost $800-million - up to the end of 1993. And what does the public get for this "investment"? More distortions to efficient investment decisions. When union-sponsored funds brag that they now manage one-third of all venture capital funds in Canada, they are not saying much: with a tax break like that, what did they expect? It isn't that there's been a sudden surge in venture capital investment; rather, they have simply drawn funds away from funds that didn't get the same tax help.

Should we then make the same credit available to every fund, in the name of spurring risk-taking? No, and not only for the horrendous cost involved. There's such a thing as too much risk. The incentive for making risky investments is supposed to be the real economic returns they might - or might not - offer to the investor, not the tax privileges it might enjoy, which are necessarily at the cost of other investments that might be more deserving of his support.

One last point. When provinces agree to offer these credits, they typically insist that only investments within the province qualify. When the federal government adds its own credit on top, it is in effect subsidizing the balkanization of the national capital market. Naturally, the provinces are keen to keep the federal tap flowing, especially Quebec, where the Solidarite fund has become an icon of economic nationalism. Why, then, does the federal government hesitate to rein in this subsidy? Do we really need to ask?