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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:.

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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 7th 2004

legal definition
Legal Definition:
  • 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
Functional Definition:
  • The criteria used by statistics Canada is the following
    • 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
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
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
Categories of Nationalization

6 Categories of Nationalization:

  • 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, arms-length, 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
Characteristics of Crown Corporations
  • 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
Different from other Policy Tools?
  • 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
Rationalefor Crown Corporations
  • The most common rationales for the existence and use of Crown corporations include the following:
    • 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
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
Rationale – market failure
  • 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 failure13
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
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
Rationale – commercial investment
  • 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
Rationale – economic development
  • 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
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:
      • Managing natural monopolies:
          • restriction to a fair rate of return.
          • rate regulation.
      • The regulation of sensitive industries; and
      • The enforcement of government objectives.
rationale autonomy
Rationale – autonomy
  • 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
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
Rationale –“other”
  • Visibility/Transparency.
  • Revenue Generation/Low Visibility Taxation.
  • Ideology.
problems
Problems?
  • Goals may be vague (or unstated) and multiple – hence conflicting.
  • Vehicle for (hidden) cross-subsidization.
  • Reduced incentive to be efficient.
  • Board of Directors may become patronage tool.
  • Creation of new crowns or subsidiaries without the approval of legislature (too much autonomy).
slide23

Crown Corporations Today…

SASKATCHEWAN

CROWN CORPORATIONS

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

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)

Based on Year 2000 Data

  • Account for greater than 15% of provincial GDP.
  • Employ 8% of the provincial workforce
  • Invest over $500 million in capital expenditures annually in the province
  • Purchase over $1.5 billion in goods, services and payroll annually from Saskatchewan.
  • Provide leadership in achieving representative workforces, environmental stewardship, and community leadership.
  • Offer high quality infrastructure and services at reasonable prices.
  • Operate at TSE commercial standards
  • Are significant players in fostering venture capital and expertise to support business development.
sask types of crowns or public enterprises
Sask types of Crowns or public enterprises
  • 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
slide25

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

slide26

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

slide27

Major Investments

Big Sky Farms Inc.

Centennial Foods Partnership

NewGrade Energy Inc.

Meadow Lake Pulp Limited Partnership

Saskferco Products Inc.

slide28

Treasury

Board

?

Departments

TB Crowns

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

  • 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 privatization32
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
privatization33
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

privatization34
Privatization

Consider University education:

  • Nationalization implies public good
    • Assumes a constituent policy:
      • Equity before efficiency
      • Everyone pays the cost, because everyone is better off
  • Privatization implies private good
    • Assumes a distributive policy:
      • Everyone pays the cost, benefits flow to only a few
      • Admin students moving to Alberta?
    • Therefore, efficiency-based, user-pays model
      • Includes higher-tuition
      • Academic-based/merit funding only
main methods of privatization
Main Methods of Privatization
  • 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
  • Contract out the service to the private sector
types of privatization
Types of Privatization
  • Liquidation: gov’t sale of a state-owned firm to the private sector (AC, CDC)
      • 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 privatization37
Types of Privatization
  • Franchising: to a private company exclusively to provide a region with a certain service
      • Monopoly rights
  • Contracting out: gov’t retention of responsibility but hiring a private contractor
what s driving privatization
What’s Driving Privatization?
  • Ideology
  • Accountability
  • Efficiency
  • Financing
privatization39
Privatization

Benefits of Privatization:

Economic Benefits:

  • One-time cash injection to gov’t revenues
  • Competitive imperative
  • Market capitalization

Social Benefits:

  • Commercial control over enterprise (more disclosure)
  • ‘Private – dividend’ more public money for programs and services
advantages of privatization
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 privatization41
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
privatization42
Privatization

Costs of Privatization:

Economic Costs:

  • Loss of annual government revenue

Social Costs:

  • Loss of ‘guaranteed’ jobs
  • Loss of government influence in market outcomes (Public Interest)
  • Loss of government control over provision of public goods and services
privatization43
Privatization

Conclusions:

  • A policy conundrum…
    • 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