Twilight of the Crowns

Commentary, Crown Corporations, Frontier Centre, Saskatchewan, Uncategorized

The people of Saskatchewan received a special Valentine’s Day gift this year. Their government sold its remaining stake in Cameco, a uranium-mining company, which had been formed originally from 2 crown corporations. Not too many years ago, the sale would have evoked horrified cries about “selling the family silver.” Now it’s viewed as smart public policy.

The sale came at a propitious time. Saskatchewan’s finance minister had predicted a $150 million budget shortfall, so the $228 million realized from unloading the rest of Cameco will come in handy. Share sales since 1991, notably the $477 million netted in 1996, have helped pay down provincial debt.

Crown-corporation folklore is deeply implanted in the Prairie psyche. The Crowns have always been odd birds, hybrids of commerce and government. In simpler times there was a rationale for their existence: the government invested in capital-intensive industries like power and telephones in sparsely populated areas because the private sector wouldn’t. The Prairies offered fertile ground for the philosophy of public ownership.

After Tommy Douglas took the helm in 1944, he And his colleagues established a government-owned box factory, brickyard, boot factory, fish-processing plant and airline. They drafted legislation allowing municipalities to own and operate bowling alleys, gas stations and bakeries. Eventually, these ambitions concluded with the takeover and domination of whole industries, effectively chasing away private investors who simply avoided unnecessary political risks by investing elsewhere.

For example, laws were passed to prohibit private inter-city bus service within Saskatchewan, forcing passengers into money-losing government buses. The government-owned Potash Corporation lost hundreds of millions and was finally sold back to the private sector. The box and boot factories went broke; ditto the fish plant and brickyard.

In these fiscally difficult times Saskatchewan’s selling for a good price was the smart thing to do. Direct ownership is, in the final analysis, unimportant and economically redundant. Cameco remains a major economic player in a uranium industry responsible for almost 5,000 workers. The head office, with 317 high-paying jobs, remains in Saskatoon and the company pays millions in income taxes that are used to support public services, instead of enjoying a “free” tax-exempt ride as a Crown.

Still, the Cameco sale was the result of a momentary pang of pragmatism rather than the signal for broader modernization. As in Manitoba, the Saskatchewan government still clings stubbornly to its oldest Crowns: SaskPower; SaskTel, North America’s last remaining state-owned telephone company; and STC and SGI, its bus and auto-insurance monopolies.

The days of the state-owned-enterprise have ended thanks to changing technology, open borders and global capital markets. With larger markets and freedom from parochial politics it seems that many of these privatized firms expand, thrive and generate copious tax revenues. A comprehensive study by economists William Megginson and Jeffry Netter, in the June 2001 Journal of Economic Literature, reviewed the relative performance of state-owned and privately owned firms, finding strong evidence in favour of denationalization. In Manitoba, a private, politically unhampered Hydro is the most likely way to create a mid-continental economic colossus headquartered in Winnipeg.

Not coincidentally, the Crowns that survive today exist in markets where the government has granted them a legal monopoly, notably auto insurance. Both provinces own power companies that have been partly exposed to competition, but new entrants will find it expensive to challenge established players, and no one will invest where there is a clear conflict of interest, with government as owner, competitor and regulator.

How does one explain the inertia that keeps crown corporation flame flickering? The Crowns look better than they should because they get hidden subsidies from taxpayers. The illusion that they can provide services more cheaply than the marketplace persists because their prices don’t include normal overheads like commercial rates for credit or a fair share of taxes. They do offer superficial optics, allowing the appearance of growth and prosperity, symbolic office towers and risky megaprojects that create temporary jobs but expose taxpayers to huge potential liability.

What is better policy? Maintaining subsidized Crown Corporations, a larger public debt, a smaller tax base that forces higher taxes onto everyone else, and less growth? Will the sky fall down if sectors like power and auto insurance were exposed to normal economic forces? Would consumers and the broader economy benefit from customer focussed competition and lower taxes? An intelligent discussion based on facts, not politics and nostalgia, has yet to begin.

In the end, fiscal pressures will doom the Crown Corporation. The Opposition, i.e. government-in-waiting, in Saskatchewan, is upfront about putting the Crowns on the block in a quest for higher growth. The City of Winnipeg recently demonstrated the budget logic underlying its sale of Winnipeg Hydro. Six percent of Manitoba’s population pays 33% of total taxes, and only a relative handful of them have to move to lower-tax provinces to create a fiscal crisis here. The pattern elsewhere, when governments hit the wall, is to divest state-owned enterprises.

It would not be the end of the world. Like Cameco in Saskatchewan, these assets will not disappear. Megginson and Netter’s study hints strongly that they will prosper. You may even end up paying less for car insurance as seeking competitive quotes on the Internet. Your power may be a little more expensive because subsidies will end, but your taxes will be lower and you will have a real pocket book incentive to save energy and help the environment.

Not just powersmart, policy smart.