An Overview of the Historical
Use of Public Enterprise
The Development of
Public Enterprise
January 14th
Crown Corporations
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They existed prior to Confederation
The first was the public works board of 1841,
to build the canal system in Upper Canada
Also used for the administration of harbors
The first major Crown was the CNR in 1918
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Formed after the collapse of three railways
Crown Corps
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1930s saw more
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1932 CBC
1934 Bank of Canada, Canada Wheat
Board
1937 TransCanada Airlines (Air Canada)
Provinces were also involved early
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Ontario Hydro 1906
Telephones in the 1910s in most provinces
WW II and Post War Era
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28 wartime Crown Corporations established
employing some 230,000 people or more than one
sixth of the entire manufacturing workforce.
At the end of the war some were sold to private
investors, some were dismantled and the government
retained ownership of some.
By the beginning of the 1950s there were only
around 30 federal crown corporations
In 1952 the government passed the FAA which was
to regulate the financial affairs of the Crown
corporations and there relations with the federal
government.
Crowns
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Canadian Nationalism saw another wave in
the 1960s
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Canada Council, National Arts Center, Canadian
Film Development Corporation National Film Board
There was another wave in the 1970s
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50 Crowns created in the Trudeau era for job
creation , economic stabilization and nationalism
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Petro Canada, Export Development Corporation, Cape
Bretton Development Corporation etc.
Crowns
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Provinces got heavily involved in the 1970s
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Province building was facilitated by Crowns
Sask and Quebec were the most active but others
were also involved
Quebec was aimed a building a nation
Sask had two eras in 1940 and 1970s, one was
utility based the other was resource based. A
reasonable return for resource ownership
All provinces use them for a variety of policy
purposes
Federalism was a factor
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Federalism changing from the old centralized
version of the war years and immediate war
years to one in which the provinces began to
challenge Ottawa.
Provinces were not happy with Ottawa
imposing its priorities on them
PE appeared attractive to governments with
concerns about jobs, regional economic
diversification, and export promotion.
Federalism
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Job creation and economic stabilization were the
reason the federal government created the Cape
Breton Development Crorporation
Provincial governments were equally aggressive
“Province-building” was the response to uneven
development due to the nature of the market.
Provincial government wanted to ensure that the
province realized an appropriate return form its
ownership of natural resources
All provincial government established development
corporations to attract industry to their jurisdiction.
Public enterprise
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First and Second Generation Public
Enterprise created since 1945
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First Generation: created passively and
actively
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Passive: industries in decline, prevent the
collapse of economy after the war
Active : Nationalization of the “commanding
heights” some of it was punative dealing with
wartime collaborators
Public Enterprise
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Five Basic Reason for the First
Generation of Public Enterprise
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1) socialist economic policy
2) social and consumer interest
3) salvage uncompetitive businesses
4) punitive nationalizations of wartime
collaborators
5) promotion of advanced technology
Only two and five give guidelines
Public enterprise
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With strong Keynsian policy, public
enterprise declined because of:
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New emphasis on direct expenditure
Direct stimulus through monetary and
fiscal policy
But by late 1960s and early 1970s, a
second generation emerged with
participation in viable rather than failing
businesses
Public Enterprise
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Why? Two reasons
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Contradiction in the pattern of national
economic growth
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Structural unemployment, regional
unemployment, and sectoral under investment
Changing International Political Economy
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EU, multinational corporations, need for equity
finance to deal with external competition
Reassert control of the economy.
State Intervention in Canada
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Government always plays a role in the
economy
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Transportation infrastructure
Intervention came in the form of outright
construction and the bailout of bankrupt firms
Canada’s role as a producer of staples,
distorted economic structures
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Created rigidity and over-investment in
transportation infrastructure
Canadian economy subject to violent shifts in
international economy
State Intervention in Canada
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Canada has lots of resources, but great
distances thus transportation is crucial
As a colony, Canada also lacked a
strong free enterprise spirit and
accepted state intervention
As a late industrializing nation Capital
accumulates too slowly thus state
involvement was necessary
State Intervention in Canada
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Canada also has a problem with dependent
industrialization
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We lag behind the US due to staples economy
American aggressiveness lead to “defensive
expansionism”
The role of the state was a challenge to the US
Need for state interaction based on economic
stimulus and territorial integration.
Provinces joined in with cheap power and
telephones and rural electrification
State Intervention in Canada
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Some have argued that Canada was a public
enterprise nation
This is how we built the nation
Canadian business have been quick to press
for government intervention and assistance in
economic ventures
All explanations rely on some geopolitical
explanation for the large role of the state
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Geography, climate, small populations, insulation
against American interests all point to “defensive
expansionism.
Economic Development and State
Intervention
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What explains public enterprise in areas of
production
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Petro-Canada, Aircraft Manufacturing, etc
Three Factors
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1) trade dependent with weak manufacturing
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Relied on import substitution
2) reliance on imported production processes
3) federal system of government with uneven
regional development
Public enterprise
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Not all market failure have resulted in public
enterprise
Each country and province has a calculus of
instrument choice but some regularities exist
Found in similar sectors:
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postal service; railway; telecommunications; gas;
electricity; airlines
Public enterprises
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Ownership of the residual interest in state enterprises is
compulsory for taxpayers and is non-transferable
Ownership by government means interest is typically very
heterogeneous.
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Governments represent different groups with very different and
often conflicting interests in the enterprises.
By contrast, owners of private enterprises typically have a single
homogeneous interest, the value of the firms and hence their
equity.
Government is no ordinary owner. Governments can and
typically do – use their regulatory and taxing powers to extend
special privileges to their own enterprises.
This is a common feature of SOE’s they are given special
privileges and have non-commercial obligations placed upon
them.
Public Enterprises
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Mixed objectives: Multiple principles
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They are typically asked to meet non-commercial as well
as commercial objectives.
The list of non-commercial objectives is very divers
1.
2.
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5.
redistributing income
subsidising particular regions and sectors
earning foreign exchange
generating employment
increasing the probability that the government in power will
be re-elected.
Multiple Objectives
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Some have only commercial objectives, but most face
conflicting or multiple objectives.
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A focus on commercial objectives are either not
implemented or do not persist.
Statutory objectives:
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Few PEs are given only commercial objectives when they are
established.
Most PEs are established with vague or conflicting
objectives.
Mixed objectives and weak taxpayer interest in commercial
performance give management, and their political masters,
considerable scope to be responsive to groups with a
politically active interest in the operation of the enterprise.
Public Enterprise
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Ongoing intervention in SOE management
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More than objectives is the influence of legislative
intervention
Ministers have powerful format powers such as to
appoint and remove board members, to give
direction of a general character to management
and to approve significant financial commitments.
There are also significant informal powers?
Evidence on Public
Enterprise Behaviour
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Evidence suggest that PEs place considerable
weight on non-commercial objectives.
Studies of production, pricing, employment
and investment decisions of PEs suggest that
they are responsive to groups with a
politically active interest in the operation of
the enterprise.
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Consumers, suppliers, employees have more
power than taxpayers.
Special Privileges: The Problem
of Commitment
There are may special privileges
extended to public enterprise
Protection from competition
Under priced natural resources
Tax exemptions
Lower financing costs and or sales
preferences from government
Special Privileges
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Special advantages may not give public enterprise a
competitive advantage
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Because of the special burden imposed by non-commercial
objectives.
The fact that PEs have to meet costly non-commercial
objectives is likely to be the reason that they are extended
special privileges in the first place.
Governments may also choose to extend privileges or
benefits to private firms faced with collapse
a government can extend privileges to private enterprises
and regulated private enterprise is often the practical
alternative to public ownership.
Why Choose Public Enterprise
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Four reasons why legislators might prefer
SOEs over subsidised or regulated private
providers.
It may in some cases be difficult to define or
reach any agreement on the exact nature of
non-commercial objectives.
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Non-commercial objectives may become clearer
over time, of they may evolve over time, and
legislators know that it will be easier to interfere
in the affairs of public enterprise than private
enterprise.
Why Choose Public Enterprise
2) The redistribution achieved by a PE through pricing,
purchasing, production, employment and
investment decisions is typically less transparent
than it would be with either subsidy or regulation
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SOEs transfer is less transparent
3) Private enterprise will weaken the position of the
residual claimant relative to other groups with an
interest in the enterprise.
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private firms will want to return to shareholders as much
of the benefits generated by the special privileges as then
can and do as little to meet non-commercial objectives as
they can get away with. SOEs can reduce agency costs?
Why Choose Public enterprise
4) The commitment problem:
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Private enterprise is much more adversely
affected by the political uncertainty surrounding
the durability of special privileges for at least two
reasons.
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A state-owned enterprise is likely to be seen as a more
legitimate recipient of special privileges, as least in part
because of the perception that the benefits will not
simply be captured by private shareholders .
This in turn will reduce the risk that special privileges
will be short-lived.
The State as Investor
Ken Rasmussen
Part 2
January 14th, 2004
The State as Investor
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When and why does the state become an investor
Public private partnerships is not new
 Federal government has equity in 400 companies
 Governments are often involved in firms, through the provision
of loans, grants for r and d
 But equity is something altogether different
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Ownership shares confer rights
Equity allows more participation in the share sales
Equity confers the right to benefit from the distribution of assets in
the event of liquidation
equity confers the right to share in profits distributed through
dividend payments upon the decision of the Board of Directors
The State as Investor
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Equity can be a highly discretionary instrument of policy if
government capital is directed towards specific sectors,
categories of firms and or individual companies.
European governments have sought to use investment to redeploy factor’s of production, to enhance competitiveness, and
promote winners
Ottawa, has used equity investment in a reactive manner -- a
problem solving devices
Que. and Alberta, have had a positive investment strategy
 used portfolio investment both to generate revenues and to
serve the goal of regional economic development
Purposes served by
investment
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Return on Investment
Sometimes the government is purely interested in
making money
Security
Government acts as an investment banker
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Minority equity is used to provide insurance to creditors
This is particularly so in the small business sector
FBDB,SOC- -- lender of last resort
Acquire good or Service
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The subsidiary investment of a wholly owned crown
corporation
Purpose served by investment
Incentives
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Strategy
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New capital can serve as a spur to the enterprise
Government can use equity to induce a private investor by
sharing the risk
Sometimes, the government has an overt strategy of
economic development.
Defensive expansion of Telsat is a case in point
Problem solving
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Frequently government is drawn into share ownership by
default
Sometimes plans go screwy and government must take up
the slack.
Towards and Investment
Strategy
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The Canadian Development Investment Corporation
(CDIC)
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instrument created to hold the government’s equity
investments
It was also created out of the governments disillusionment
with CDC
CDIC would hold the government’s investment in CDC until
it was a favourable time to sell.
CDIC quickly moved from a numbered holding company
holding CDC shares to a Crown Corporation following cabinet
investments instructions to a holding company with $12
billion in investments
CDIC
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First President was Maurice Strong, who wanted to move away from
reactive investment
CDIC was incorporated under the Canadian Business Corporations
ACTS in May of 1982.
Its broad objective was to “assist in the creation of development of
business, resources, properties and industries of Canada.
Would invest in any business likely to benefit Canada.
No private body could hold shares in CDIC.
Yet CDIC was neither an instrument of policy nor for targeting new
investments nor for privatising government investments.
CDIC was used principally to rationalise state-owned enterprise in
crises so as to avert their financial collapse and to divert political
pressure by showing a new “business like” management.
Provincial State as
Investor
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Provincial investment strategies
3 factories favour a more active role for
government as an investor
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economic opportunity ie windfall profits
from resource industries.
intergovernmental conflict of interest ie
federal taxation, pricing or regulation policy
that harm a provincial treasury
strong political leadership
Alberta
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Windfall profits brought two concerns
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an investment strategy that would optimise the use of these
funds.
overcome the vulnerability of a regional economy that would
be tied to the fortunes of a volatile commodity
Created the Alberta Heritage Savings and Trust Fund
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The strategy was based on the gov’t commitment to free
enterprise
It was designed to reduce dependence on oil and gas
The government could have simply used the revenue to
reduce the level of taxation, but chose to become an
investor
Alberta
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Could invest in:
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(1) capital projects that would provide long-term economic or
social benefits, but not profits
(2) loans to other governments
(3) those that strengthen and diversity the economy, while giving
a reasonable return on profit
(4) investment in debt instruments such as bonds and blue chip
corporations
No equity investment at the start, but this would alter
The decision-making body was the Heritage Savings Trust Fund
Investment Committee which consisted of cabinet ministers
Fund did make make equity investments, which angered the
extreme right in the province and the party
Cabinet set guidelines that restricted the shareholdings to 5
percent of any company, they would not seek membership on
the boards of companies.
Joint Ventures
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Joint Ventures
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Joint Ventures are a particular type of state enterprise
Governments- public enterprise and businesses pool their
resources
Each of the partners has an equity participation in the
venture that is not readily transferable, and thus a voice in
policy
The use of joint ventures implies that
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there is a project or activity that government wants to see
carried out
private-sector resources, capital, technical, or marketing
expertise, which means 100% state control is not feasible
factors exist which preclude the private enterprise from
going it alone.
Joint Ventures
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The joint venture has a strong appeal
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It looks like a good way to promote economic
growth
Because they only put up part of the money,
governments can stretch out their money and thus
have a greater overall impact on the economy
Governments also get access to technical
information and get a better ideal about the
running of a particular industry.
Joint ventures became the most prominent form
of state capitalism in the 1980s.
Joint Ventures
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Many provinces remain reliant on the revenues generated by
resource development
most joint ventures cluster around the resource sector and
involve provincial governments
weak manufacturing base, that continue to have a high reliance
on resource exports
federal system means provincial governments focus there
growth strategies on regionally specific comparative advantage
Joint ventures in the resource sector are largely used for
province-building
To stimulate exploration and development of mineral deposits
which will, in turn create jobs and general revenues.
Joint Ventures
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Private companies also get benefits
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they can benefit from governments experience
reduce financial exposure
reduce political risk
joint ventures in resource sector popular with all
parties.
wise to collaborate with the provincial government
since they own the resources.
becoming involved in a joint venture has
attractions for a foreign investor who can
overcome regulatory barriers to foreign ownership
Saskatchewan Mining
Development Corporation
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SMDC a classic joint venture vehicle
Started by the NDP in 1974 to engage in all phases of
mineral production and the sale of minerals found in
Saskatchewan
SMDC was a wholly owned corporation created by
the NDP
SMDC invited private corporations to approach it to
participate in joint ventures
Voluntary participation became mandatory
Within a five years SMDC became a major player in
the Saskatchewan mining industry, spending one of
every three dollars fore exploration in the provinces
SMDC
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Two biggest mines Key Lake and Cuff Lake
Key Lake Mine a joint venture between SMDC (50% ) a German
company and the federal governments Eduardo nuclear.
SMDC has had a wide variety of partners and has learned a
great deal.
It gave SMDC experience in marketing uranium.
The reasons for the easy relations between SMDC and its
foreign partners includes
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1) the relatively underdeveloped state of the uranium industry
2) the availability of capital for SMDC reducing costs of
exploration
3) the involvement of foreign owned companies that were
themselves state owned and were used to dealing with other state
owned enterprises
SMDC
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SMDC owned rich, low cost uranium and made a
profit of over $60 million in 1987.
Government wanted to privatise SMDC, but was
forced by the federal government to merge with
Eldorodo Nuclear, and sell both of them at the same
time as CAMACO
The plan to merge was much more beneficial to
Elderodo, than SMDC, given the very difficult histories
of the two companies.
SMDC was a strong company with excellent
prospects. It had assets in 1987 valued at $914
million, with revenues of $194 million.
SMDC
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The company was not hampered by
excessive debt load, and the debt to equity
ration was 1.4:1
SMDC had very desirable properties
Eldorodo was less than a winner for a variety
of reasons.
Despite being mismatched, the government
ordered them merged into a new company
called CAMECO which was created in Oct
1988.
SMDC
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$1.6 billion in assents and 61.5% owned by the government of
Sask, and 38.5% by the government of Canada
The plan was to privatise CAMECO in stages - 30% within 2
years, 60% within 4 years and 100% within 7 years.
Individual Canadian investors were limited to 25% of the shares
and non-Canadian to 5%.
In addition non-Canadians were to be allowed a maximise of
20% of voting stock and Sask was gong to press the head office
to stay in Sask.
There were quick howls from the financial community that the
restrictions were too limiting.
The late 1980s was a bad time to sell as uranium was a the
bottom of the cycle.
SMDC
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130 reactors under construction around the world, but were
coming on stream in the 1990s
Mining companies were planning new mines, but the
government was disposing of its mines at a time when the
industry was in a down turn.
The timing of the privatisation was bad, but it would also do
nothing to improve the efficiency of CAMECO
The Selling of SMDC also would deny the government a window
which would allow it to set taxes.
Crown ownership and effective taxation and regulation were
two parts of the same coin.
Another factor was the unique situation of uranium production
itself.
SMDC
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Issues of health and safety better handled through
PE?
Social policy objectives in ensuring that the native
population received benefits.
This of course costs money and contradicts the
shareholders desire for profit.
SMDC had begun to diversify and vary its base
SMDC had 30 joint ventures with other companies
the promising being in the area of gold.
Conclusions
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Collaboration is the norm in joint ventures as both
parties expect something in return.
Crowns are an attractive way to invest with private
capital because
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project specific investments can be made
incentives can be proffered to a large number of private
companies
divestment can be undertaken or monies written off with the
same political visibility and without recourse to the
bureaucratically centred procedures that constrain a wholly
owned crown corporations
It is logical to focus on vehicles other than traditional state
enterprises which ties up capital and has statutory limits on
activities and investments.