Public Enterprise and Privatization:
An Introduction and Overview
ADMN /826
Public Enterprise, Privatization and
Public Private Partnerships
January 7th 2004
What is
Public Enterprise?
Legal Definition:


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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:

The criteria used by statistics Canada is the
following


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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 musT
reflect the cost of producing them.
Public Ownership/
Nationalization?


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?


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:


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:

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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, SaskTel, SaskEnergy, SaskPower,
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




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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?



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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

The most common rationales for the existence and
use of Crown corporations include the following:




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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?


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

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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


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


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

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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

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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


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:
•
•
ii.
iii.
restriction to a fair rate of return.
rate regulation.
The regulation of sensitive
industries; and
The enforcement of government
objectives.
Rationale – autonomy

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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


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?

Goals may be vague (or unstated) and
multiple – hence conflicting.
Vehicle for (hidden) cross-subsidization.

Reduced incentive to be efficient.

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Board of Directors may become patronage
tool.
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Creation of new crowns or subsidiaries
without the approval of legislature (too
much autonomy).
History of Crown Corporations
100 years of Crown Corporations
 1900-70 -- Establishing Crowns
 1970’s
-- Expanding Crowns
 1980’s -- Privatizing Crowns
 1990’s -- Managing Crowns
SGI &
SaskEnergy
Privatization
Attempts Failed
1929
Sask Power
Commission
Established
(1901)
Territorial
Gov’t sells
Hail Insurance
SEDCO
Established
Rural
Electrification
1900
1950
1908
Forerunner
Of SaskTel
Formed
1946
SGI
Established
Crowns
CrownsDeveloped
Developed
Crown Sector
Expanded into
Resources:
PCS, SMDC, SaskOil
PAPCO
SaskComp
Established
1970
Individual Line
Service and rural
Natural gas programs
Crowns
Crowns
Expanded
Expanded
1980
Crown’s
Financial
Health
Restored
1990
PCS, PAPCO Saskoil,
SaskComp Sold,
Cameco, SaskFerco,
NuGrade BiProvincial
SaskTel Int’l formed
Crowns
Crowns
Sold
Sold
2000
SOCO,
ISC
Established
Crowns
Crowns
Revitalized
Revitalized
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
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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
SaskEnergy Incorporated
Major Investments
Big Sky Farms Inc.
Centennial Foods Partnership
NewGrade Energy Inc.
Meadow Lake Pulp Limited Partnership
Saskferco Products Inc.
Treasury
Board
?
Departments
TB Crowns
Problems of Public Enterprise
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Proliferation of new corporations and
subsidiaries
Inefficiency of crown corporations
Unfair competition with the private sector
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Increasing financial power of crown
corporations
Problems of accountability
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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”.

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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?
What is Privatization?

Undoing of public enterprise
Why Privatize?
What are the economic & social market failures?
 To reduce government involvement in
commercially viable activities
 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:

Nationalization implies public good

Assumes a constituent policy:
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Equity before efficiency
Everyone pays the cost, because everyone is better off
Privatization implies private good
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Assumes a distributive policy:
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Everyone pays the cost, benefits flow to only a few

Admin students moving to Alberta?
Therefore, efficiency-based, user-pays model
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Includes higher-tuition
Academic-based/merit funding only
Main Methods of Privatization
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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

Sell the operation to the workforce

Give the operation to the workforce
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Contract out the service to the private sector
Types of Privatization
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Liquidation: gov’t sale of a state-owned firm
to the private sector (AC, CDC)
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Part Liquidation: AC, CDC
Whole Liquidation: Canada Communications Group (CCG)
Subsidization: gov’t provision of grants to
non-profit orgs for public service

Consumer groups, Environmental groups
Types of Privatization
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Franchising: to a private company
exclusively to provide a region with a
certain service

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Monopoly rights
Contracting out: gov’t retention of
responsibility but hiring a private
contractor
What’s Driving
Privatization?
Ideology
 Accountability
 Efficiency
 Financing

Privatization
Benefits of Privatization:
Economic Benefits:
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One-time cash injection to gov’t revenues
Competitive imperative
Market capitalization
Social Benefits:

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Commercial control over enterprise (more
disclosure)
‘Private – dividend’ more public money for
programs and services
Advantages of Privatization
To Government:
 Reduces the operating costs of government
 Raises proceeds to reduce the debt
 Reduces future calls on government
expenditure
 Turns losses into tax revenues
 Reduces lobbying pressures on politicians
Advantages of Privatization
To the Private Sector:
 Stimulates development of private
enterprises
 Helps create a competitive environment
which in turn increases efficiencies and
reduces costs
 Could provide a basis for an export
industry
Privatization
Costs of Privatization:
Economic Costs:

Loss of annual government revenue
Social Costs:
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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:

A policy conundrum…

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In ‘good’ crowns, benefits exceed costs
In ‘bad’ crowns, costs exceed benefits
Yet,
 Only ‘good’ public enterprise is easy to privatize … but
these public enterprises are successful and thus
providing substantial economic and social benefits
 ‘Bad’ public enterprise is hard to sell … yet incurring
significant economic and social costs