The Price of Reality

Commentary, Crown Corporations, Frontier Centre, Manitoba, Uncategorized

Manitoba Telecom Services, formerly a crown-owned telephone company, recently caused much hullabaloo when it applied to raise the rates for local service by 40% over five years. The reason? Rapidly falling long distance prices have curtailed revenues which allowed the company to subsidize local hook-ups. It charges $17.80 for a service that costs it $36 per household to provide.

Skeptics attacked the company, which spends $700 million a year battling a swarm of deep-pocketed competitors. They tootled that MTS needed the money to pay income taxes and generate a healthy return for its new shareholders.

A lot of partisans eagerly harrumphed, "We told you so." Some suggested that, had MTS remained a crown corporation, rates would have remained lower.

The tempest over local price increases needs some rational discussion. The "romance" with the philosophy of crown corporations remains strong in some quarters. But crowns are a dying breed, here at home and all over the world. The decision to move MTS from Manitoba's dwindling playpen of crown corporations in 1997 by means of a successful share offering was the right move.

Life is easy in the world of crown corporations. Because Crowns don't pay income taxes, they look more profitable than they are. Money is cheap to borrow since Crowns coast on the government's credit rating, backed up by the power to tax.

But returns on capital lose their importance because governments are easily seduced by the argument that profits are "wasteful." Low profits, goes the line, mean that lower prices are possible, so the public benefits. Finally, most crowns don't have to bother with the unpleasantries of competing for customers. Many benefit from special laws that give them monopolies. It's no miracle that organizations like Autopac, the Liquor Board, the Lotteries Corporation or Manitoba Hydro can wow the mixed economy crowd with wonderful "profits".

Let's see. Get a monopoly. Get cheap capital from the taxpayers. Arrange the law so that your "enterprise" pays no income tax. Don't get fussed about profits. Voila, we have created low cost public services courtesy of the "magic" of government ownership. But it's all smoke and mirrors.

Of course, the same logic that puffs up the performance of crown corporations could be extended towards the rest of the economy. We could have cheaper goods and services, say haircuts, cars, groceries or shoes by having the government set up crown corporations to monopolize these sectors. This theory predicts cheap goods for the masses, but the reality is different.

This model insulates industries from market pressures that bring productivity and efficiency. The devastation of such thinking continues to wreak havoc on the shattered remnants of the Russian economy. It's also why Manitoba has a less vibrant economy than it should.

The privatization of MTS has been the Filmon Government's greatest recent achievement. As a slow-moving government organization it could never had survived the rapid technological changes now destroying its capacity to offer cheap local service through artificially high long distance rates.

Today the bundled cost of local and long distance – face it, most people spend more on long distance – is lower than ever and falling fast. With the growth in newer businesses like cellular phones, job losses have been negligible. Privatization provided the government with $400 million for other uses while transferring $800 million in risky debt to shareholders.

The solution to high rates for local service is to shake out costs to by allowing other companies to provide it. That worked for long distance, and would do the same for the price of basic hook-ups.

Why go back now? Let's stick with success, and extend it.