Public Enterprise and Privatization An Introduction and Overview

Public Enterprise and Privatization: An Introduction and Overview ADMN /826 Public Enterprise, Privatization and Public Private Partnerships January 7 th 2004

What is Public Enterprise?

Legal Definition: n n n The most common definition (legal) is to suggest that the Crown Corporation is an organization that the government owns. Current legislation defining the relationship between government and Crowns, deals with only 100 % wholly owned

Functional Definition: n The criteria used by statistics Canada is the following n n a majority of its ownership must be vested in government management of its affairs must be relatively independent from government its primary role must be to provide goods or services to the private sector, not government the prices set for these good and services mus. T reflect the cost of producing them.

Public Ownership/ Nationalization? n n The most common form of public ownership or nationalization within Canada is the creation of Crown Corporations. Public Ownership is essentially where government either creates a commercial enterprise/business or takes a business out of private hands and runs it as a state agency.

The Crown Sector? n n Crown Corporations, as a form of public ownership, account for a significant proportion of contemporary economic activity – their use, however, is easier to chronicle than to explain. As well, choosing the Crown corporation form involves answering two questions: n n Is government involvement in the sphere of activity justified? What is the rationale for choosing the Crown corporation form instead of some other alternative.

Categories of Nationalization 6 Categories of Nationalization: n n n Departmental crown corps: administrative or research oriented, do not produce goods/services for commercial profit (AECL, NRC – important for biotech) Agency corps: more autonomous than above with external clients, yet not profit centres either (Export Development Corporation) Special operating agencies (SOA): deliver goods/services to external clients but now set up as stand-alone, arms-length, cost-recovery (CGSB; CGC; CFIA) Proprietary corps: produce goods/services for external clients, armslength, commercial focus (was Petro-Can, Sask. Tel, Sask. Energy, Sask. Power, SGI) Mixed enterprise: joint ventures with private business (AC) Investment management corps: manage public pension & insurance funds; channel returns into gov’t programs

Characteristics of Crown Corporations n n n n Engage in business transactions. Has a legal identity. Limited liability. Can initiate or be the object of legal action. Semi-independent board of directors. One shareholder (the government). Management structure similar to private sector.

Different from other Policy Tools? n n n Degree of control exercised by government. Type of good produced. Budgeting technique. Proportion of revenue coming from taxation. Higher degree of autonomy.

Rationale for Crown Corporations n The most common rationales for the existence and use of Crown corporations include the following: n n n n Market failure/provision of essential good or service. Nation building/nationalism. Efficient & effective delivery method. Economic development. Public ownership as regulatory tool. Commercial investment. Providing a window on the private sector Attracting business people to management

Rationale? n n Keep in mind that the rationale for any particular Crown corporation may change, the result of which is sometimes an equally valid but different rationale from what was originally intended. There may be a need to reform all or some part of the Crown corporation to meet the new rationale.

Rationale – market failure n n Market Failure occurs when competitive markets fail to provide the socially optimal quantity of a good or service. This failure can be a complete absence of the good or service, or it may be provided by the private sector, but at quantities that are lower or greater than considered desirable.

Rationale – market failure n n In such cases of Market Failure, the only way to achieve optimal quantities is through government intervention. The case for intervention becomes even stronger when the failure occurs in an area that is considered essential.

Rationale – nationalism n n This rationale is usually phrased in terms of national identity, controlling resources, preserving cultural uniqueness or brining the country together. Some argue that there is a need to find a way by which Canada’s geographically divided communities may be linked by transportation and communication networks, or even to establish a degree of autonomy from the U. S.

Rationale – commercial investment n n The primary goal of Crown corporations that are created as a commercial enterprise is to generate a return on investment. It is argued that these types of Crown corporations can generate significant profits for the government.

Rationale – economic development n n n In economics, development in an economy usually refers to a change in the composition of output or GDP. Diversification of economic activity is central in this process. Two means to economic development that Crown corporations have used in the past are R&D and job creation.

Rationale – regulatory tool n n Providing some form of regulation is often cited as a rationale for public ownership of a firm(s) in an industry. Regulation can occur in three principal areas: i. Managing natural monopolies: • • iii. restriction to a fair rate of return. rate regulation. The regulation of sensitive industries; and The enforcement of government objectives.

Rationale – autonomy n n There are certain activities that should be performed by government but require freedom from direct political influence or other controls. It is believed that some healthy degree of autonomy allows the Crown corporation to pursue its mandate more effectively.

Rationale – efficient & effective method of delivery n n Delivering a public service can be accomplished by most of the policy tools available to government, but there are some that lend themselves better to the corporate form. For example, services that involve large quantities of commercial transactions may be delivered more efficiently through a corporation than a department or central agency.

Rationale – “other” i. ii. iii. Visibility/Transparency. Revenue Generation/Low Visibility Taxation. Ideology.

Problems? n Goals may be vague (or unstated) and multiple – hence conflicting. Vehicle for (hidden) cross-subsidization. n Reduced incentive to be efficient. n n Board of Directors may become patronage tool. Creation of new crowns or subsidiaries without the approval of legislature (too much autonomy).

History of Crown Corporations

Crown Corporations Today… SASKATCHEWAN CROWN CORPORATIONS ECONOMIC DRIVER $4. 7 Billion or 14. 3 % that the Crown Sector contributes to provincial GDP SIGNIFICANT EMPLOYMENT 13, 160 Direct Jobs / 8, 304 Indirect Jobs or 4. 4 % of Total Saskatchewan Employment CROWN CORPORATION & INVESTMENT REVENUES Annual Revenue of $3. 2 Billion (Consolidated to Holding Company) RETURN TO SHAREHOLDER Target $150 Million Dividend (2000 dividend declaration deferred by shareholder) CROWN CORPORATION HOLDINGS $7. 6 Billion in Assets INVESTMENT FOR SASKATCHEWAN Capital expenditures in excess of $415 Million SUPPORT OF SASKATCHEWAN ENTERPRISES $637 million of goods and services from local suppliers Based on Year 2000 Data

Sask types of Crowns or public enterprises n n Treasury Board Crown--public good activities; goal is to recycle revenues and sharpen management CIC type operating Crowns--utilities CIC III type enterprises--joint ventures; equity investments Regulated monopolies--involve public good aspects

CIC Quick Facts Chair of the Board: Pat Atkinson President: Frank Hart Employees: 81 Total assets: $8. 08 billion Holdings as % of Sask. GDP: 15% % of Sask. employment: 9% Consolidated earnings: 284. 1 million (2002) Consolidated revenues: 3, 489. 9 million (2002) Consolidated debt: $3, 514. 9 million (2002 Debt ratio: 55% in 2002 Return on equity: 10% in 2002 Dividend to GRF: $300 million for 2002

CIC Crown Corporations Information Services Corporation of Saskatchewan SGGF Management Corporation Saskatchewan Government Insurance Saskatchewan Opportunities Corporation Saskatchewan Power Corporation Saskatchewan Telecommunications Saskatchewan Transportation Company Saskatchewan Water Corporation Sask. Energy Incorporated

Major Investments Big Sky Farms Inc. Centennial Foods Partnership New. Grade Energy Inc. Meadow Lake Pulp Limited Partnership Saskferco Products Inc.

Treasury Board ? Departments TB Crowns

Problems of Public Enterprise n n n Proliferation of new corporations and subsidiaries Inefficiency of crown corporations Unfair competition with the private sector n n n Increasing financial power of crown corporations Problems of accountability n n n CTV vs. CBC Accountability to whom Problems of mandate and reporting Proposal for reform: privatization

Privatization

What is Privatization? “The transfer of public assets, operations or activities to private enterprise”. Margaret Thatcher once remarked: “The public controls the private sector, but nobody controls the public sector”. n n Private firms need their customers in order to survive – state industries do not. Financed through taxation, state operations are largely independent of consumer choices.

What is Privatization? n Undoing of public enterprise Why Privatize? What are the economic & social market failures? n To reduce government involvement in commercially viable activities n Increase efficiency in the delivery of programs and services

Privatization “Our view is straightforward. If government doesn’t need to run something, it shouldn’t. And in the future, it won’t. ” Canadian Budget 1995

Privatization Consider University education: n Nationalization implies public good n Assumes a constituent policy: n n n Equity before efficiency Everyone pays the cost, because everyone is better off Privatization implies private good n Assumes a distributive policy: n n n Everyone pays the cost, benefits flow to only a few Admin students moving to Alberta? Therefore, efficiency-based, user-pays model n n Includes higher-tuition Academic-based/merit funding only

Main Methods of Privatization n Sell the whole operation by public share issue First sell part (51%) of the operation by public share issue and the balance later Sell all or parts of the operation to private sector buyers n Sell the operation to the workforce n Give the operation to the workforce n Contract out the service to the private sector

Types of Privatization n Liquidation: gov’t sale of a state-owned firm to the private sector (AC, CDC) n n n Part Liquidation: AC, CDC Whole Liquidation: Canada Communications Group (CCG) Subsidization: gov’t provision of grants to non-profit orgs for public service n Consumer groups, Environmental groups

Types of Privatization n Franchising: to a private company exclusively to provide a region with a certain service n n Monopoly rights Contracting out: gov’t retention of responsibility but hiring a private contractor

What’s Driving Privatization? Ideology ü Accountability ü Efficiency ü Financing ü

Privatization Benefits of Privatization: Economic Benefits: n n n One-time cash injection to gov’t revenues Competitive imperative Market capitalization Social Benefits: n n Commercial control over enterprise (more disclosure) ‘Private – dividend’ more public money for programs and services

Advantages of Privatization To Government: n Reduces the operating costs of government n Raises proceeds to reduce the debt n Reduces future calls on government expenditure n Turns losses into tax revenues n Reduces lobbying pressures on politicians

Advantages of Privatization To the Private Sector: n Stimulates development of private enterprises n Helps create a competitive environment which in turn increases efficiencies and reduces costs n Could provide a basis for an export industry

Privatization Costs of Privatization: Economic Costs: n Loss of annual government revenue Social Costs: n n n Loss of ‘guaranteed’ jobs Loss of government influence in market outcomes (Public Interest) Loss of government control over provision of public goods and services

Privatization Conclusions: n A policy conundrum… n n n In ‘good’ crowns, benefits exceed costs In ‘bad’ crowns, costs exceed benefits Yet, n Only ‘good’ public enterprise is easy to privatize … but these public enterprises are successful and thus providing substantial economic and social benefits n ‘Bad’ public enterprise is hard to sell … yet incurring significant economic and social costs