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An Overview of the Historical Use of Public Enterprise
The Development of Public Enterprise
January 14th
Crown Corporations 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 Formed after the collapse of three railways
Crown Corps 1930s saw more
1932 CBC 1934 Bank of Canada, Canada Wheat
Board 1937 TransCanada Airlines (Air Canada)
Provinces were also involved early Ontario Hydro 1906 Telephones in the 1910s in most
provinces
WW II and Post War Era 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 Canadian Nationalism saw another wave in
the 1960s Canada Council, National Arts Center, Canadian
Film Development Corporation National Film Board
There was another wave in the 1970s 50 Crowns created in the Trudeau era for job
creation , economic stabilization and nationalism
Petro Canada, Export Development Corporation, Cape Bretton Development Corporation etc.
Crowns Provinces got heavily involved in the
1970s 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 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 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 First and Second Generation Public
Enterprise created since 1945 First Generation: created passively and
actively 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
Five Basic Reason for the First Generation of Public Enterprise 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
With strong Keynsian policy, public enterprise declined because of: 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 Why? Two reasons
Contradiction in the pattern of national economic growth
Structural unemployment, regional unemployment, and sectoral under investment
Changing International Political Economy EU, multinational corporations, need for equity
finance to deal with external competition Reassert control of the economy.
State Intervention in Canada Government always plays a role in the
economy 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 Created rigidity and over-investment in
transportation infrastructure Canadian economy subject to violent shifts in
international economy
State Intervention in Canada 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 Canada also has a problem with
dependent industrialization 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
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 Geography, climate, small populations,
insulation against American interests all point to “defensive expansionism.
Economic Development and State Intervention
What explains public enterprise in areas of production Petro-Canada, Aircraft Manufacturing, etc
Three Factors 1) trade dependent with weak
manufacturing Relied on import substitution
2) reliance on imported production processes
3) federal system of government with uneven regional development
Public enterprise 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: postal service; railway; telecommunications;
gas; electricity; airlines
Public enterprises 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. 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 Mixed objectives: Multiple principles
They are typically asked to meet non-commercial as well as commercial objectives.
The list of non-commercial objectives is very divers
1. redistributing income
2. subsidising particular regions and sectors3. earning foreign exchange4. generating employment5. increasing the probability that the government in
power will be re-elected.
Multiple Objectives
Some have only commercial objectives, but most face conflicting or multiple objectives.
A focus on commercial objectives are either not implemented or do not persist.
Statutory objectives: 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 Ongoing intervention in SOE
management 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 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. 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 resourcesTax exemptionsLower financing costs and or sales preferences from government
Special Privileges Special advantages may not give public
enterprise a competitive advantage 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
Four reasons why legislators might prefer SOEs over subsidised or regulated private providers.
1. It may in some cases be difficult to define or reach any agreement on the exact nature of non-commercial objectives.
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
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.
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: Private enterprise is much more adversely
affected by the political uncertainty surrounding the durability of special privileges for at least two reasons. 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 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
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 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 re-deploy 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
Return on Investment Sometimes the government is purely interested
in making money Security Government acts as an investment banker
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 The subsidiary investment of a wholly owned crown
corporation
Purpose served by investment
Incentives New capital can serve as a spur to the enterprise Government can use equity to induce a private
investor by sharing the risk Strategy
Sometimes, the government has an overt strategy of economic development.
Defensive expansion of Telsat is a case in point Problem solving
Frequently government is drawn into share ownership by default
Sometimes plans go screwy and government must take up the slack.
Towards and Investment Strategy The Canadian Development Investment
Corporation (CDIC) 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 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 Provincial investment strategies 3 factories favour a more active role
for government as an investor 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
Windfall profits brought two concerns 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
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 Could invest in:
(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 Joint Ventures
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 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 The joint venture has a strong appeal
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 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 Private companies also get benefits
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 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 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 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 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 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 $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 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 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 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 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.