A Window on Two Policy Models

Commentary, Public Sector, David Seymour

Mad scientists could not have designed it if they tried. Over the past decade, telecommunications privatization has played out in a continent-sized laboratory. In the middle of North America, two almost identical companies in the almost identical markets of Manitoba and Saskatchewan went divergent ways. While Saskatchewan politicians chose to hang on to the crown corporation SaskTel, Manitoba politicians cashed out and let go of Manitoba Telephone Services through a 1996 public share offering.

Ten years after the Manitoba government devolved MTS, the results for company size and profitability are dramatic. Despite slight advantages to SaskTel early on, MTS today earns twice the revenue, has three times the assets and employs 20 per cent more people.

Since the telecommunications market is highly competitive and federally regulated, MTS could not have achieved such growth by gouging customers or providing a more inferior product. In fact, service levels in both provinces remain essentially similar according to a Frontier Centre analysis of prices, geographical coverage and numbers of customers served (see study). Nonetheless, the differences between MTS and SaskTel are vast, and the only noticeable cause is their ownership model.

Not only have these changes occurred since MTS became a private company, but also a strong case can be made that MTS is able to streak ahead of SaskTel because politicians do not control it. Quite simply, survival in telecommunications requires investment. As a recent SaskTel Annual Report notes, “Saskatchewan is now available to competitors … that outstrip anything [SaskTel] can achieve within the province. Our traditional revenue sources have long ago fallen away … for SaskTel to continue as a profitable enterprise … throughout a serving area as sparsely populated as Saskatchewan … it must expand beyond its borders.”

While SaskTel recognizes the challenge, its hands are tied because whatever it spends or borrows becomes a liability for Saskatchewan’s residents. While MTS acquired the nationally based company Allstream, out-invested SaskTel by almost two to one for the past five years, and runs a fibre optic network from New York to Victoria, SaskTel’s out of province operations, such as its phone directory business, are valued in the tens of millions. The Allstream acquisition cost $1.6 billion, a figure comparable to about 25 years’ worth of the dividends SaskTel pays to the province, or the province’s entire education budget. Not only is such an expense too large for the taxpayers in Saskatchewan (or Manitoba for that matter), it is also too risky.

Telecommunications is one of the fastest growing industries. In the ten years since MTS became private, cell phones have gone from a privileged business tool to a must-have for school kids. Most telcos are getting into pay per view television, and high speed internet has become ubiquitous. In the next few years, Internet-based calling services such as Skype threaten to send conventional telephones the way of the horse and buggy. Telcos are in a dogfight and holding onto SaskTel is like pulling your dog out of a fight by its leash. Instinctively comforting, maybe, but the best option is to let go so it can fight for itself.

Crown Corporations were established a long time ago to provide sufficient capital for the large-scale investments that only governments could assemble and to protect consumers from price gouging by outsiders. These arguments no longer work for modern telecoms. As we have seen, the capital supply argument now works in reverse. Gouging is no longer an issue because, as the SaskTel Annual report maintains, there are many competitors, and the Canadian Radio-television and Telecommunications Commission regulates their prices.

If people in remote locations face a genuine access problem and the government wants to subsidize them, it could be transparent and give financial support. Owning an entire company, with all the difficulties above, is a much clumsier strategy.

In 2006, MTS racked up an income tax liability of $126.7 million to the governments of Canada and Manitoba, funds which can be used to pay for services or lower taxes in the broader economy. Meanwhile SaskTel, as a crown corporation, is exempt from income tax. This tax exemption is one of several hidden subsidies within the crown corporation model. This subsidy represents a hidden financial loss for governments and taxpayers that is paid for with higher taxes or fewer services elsewhere.

The differences in ownership also make a difference to the staff in each company. For a young person starting a career, SaskTel is a well run company with the latest technology and good practices. A young person starting with MTS joins a company that has a substantial national network and has doubled in size in the past decade. Which company would you rather start with? The SaskTel-MTS comparison is the best evidence we have of what telecommunications privatization means. No theory or speculation is necessary; just observe what has actually happened. None of the traditional fears relating to privatized businesses has materialized. After slightly over a decade, MTS has twice the assets, three times the revenue, and a fifth more jobs compared to SaskTel. Prices are the same and Manitoba’s local telco pays more taxes.

In the tumultuous world of telecommunications competition, Saskatchewan residents, including SaskTel employees, would do better to let their dog into the fight.