Privatization a Good Thing?

Worth A Look, Crown Corporations, Frontier Centre

The Swedish government wants to get out of the business of telecommunications, banking and making Absolut Vodka.

Yes, one of the world’s top-selling spirits belongs to a state enterprise, but not for long: Last Friday, the government proposed selling its shares in six firms, including its 100% stake in Absolut owner Vin & Sprit. More holdings will go on the block soon.

It is curious to think that until the election of the centre-right government last fall, part of the normal business of the Swedish Cabinet involved discussing such weighty matters as Absolut advertising campaigns.

But you do not have to go far to find silly examples of governmentowned businesses: Canada is full of them. Saskatchewan in particular is still stuck in the Tommy Douglas era: The province owns telephone and insurance companies, a natural gas distributor and money-losing intercity bus service, not to mention stakes in a pork producer, board plant and fertilizer mill. It has lost millions in film production, tens of millions in potato processing, hundreds of millions in pulp.

Unfortunately, the will to get governments out of the boardrooms of the nation has gone cold, despite successful privatizations in the 1980s and 1990s, such as CN Railway and Petro-Canada. “No matter the stripe of government, nobody is talking about it,” says Jason Clemens of the Fraser Institute.

That is a shame, because the discussion needs to happen. Every few months, some group calls to privatize one of Canada’s Crown jewels — Liquor Control Board of Ontario, Canada Post, Canada Mortgage and Housing, and Atomic Energy of Canada are recent examples — and politicians just slough it off. But privatizing some of these state enterprises makes sense. There is no reason for Ottawa to be in the business of insuring mortgages when private firms are clamouring to get in, following General Electric’s lead. Surely there are groups other than the feds willing to finance small business, exporters, and farmers.

It is bizarre that nine provinces consider booze retailing an essential public service, and stubbornly resist calls to privatize their monopolies. Even after Ontario Finance Minister Greg Sorbara commissioned a report in 2005 that said Ontario could up its $1.5 billion annual liquor revenues by 13%, he dismissed its findings.

Meanwhile, it is fair to ask why provinces should own electric utilities, insurers and lottery and gaming firms — and not just regulate them — or act as private equity and venture capital investors, as is the case in Saskatchewan and Quebec.

Part of the difficulty in getting governments to listen is that many Crown enterprises do make money — just not enough. SaskTel, for example, earned a 6.6% profit on sales in 2005, far below its private-sector telecom peers. Canada Post CEO Moya Greene has said profits could be twice as high as they are, even under Ottawa’s ownership.

The reason state-owned enterprises have sub-par earnings is that they often make decisions motivated by politics rather than business reasons. They are inefficient, don’t use capital or labour optimally (many are bloated job creation havens) and lack the incentive to offer good service or quality. Governments perennially starve their firms for capital and limit their ability to raise funds through private debt or equity. And they underestimate the time and effort spent on management and policy issues related to their enterprises, says C.D. Howe Institute president William Robson: “There are more important things for governments to be doing, and it’s a bad misuse of public-sector resources.”

Once freed, they flourish: A World Bank study found privatized firms increase profit by 45%, output by 27%, efficiency by 11%, capital spending by 44%, and jobs by 6%.

Meanwhile, back in booming, resource-rich Saskatchewan, Finance Minister Andrew Thomson has said he will have to dip into a rainy day fund to the tune of hundreds of millions of dollars to balance the budget. He should instead sell many of the province’s businesses, which account for about 12% of GDP, twice the national rate.

Sadly, the subject is verboten: The opposition Saskatchewan Party lost the 2003 election over fears of a hidden privatization agenda. Nowadays, nobody seems to bat an eye over the fact the NDP government gave a $614,000 grant to its 30%-owned film company, Minds Eye, to make a series about Saint Tommy Douglas, the father of medicare and former premier that was pulled from CBC due to factual errors.

Meanwhile, in Sweden, another jurisdiction renowned for generous social spending, the government is kicking the habit of owning enterprises fittingly, by giving up the bottle. Perhaps there is a public service message for Canadian politicians: Governing and running businesses don’t mix.