Government Investment in Private Enterprises

Commentary, Crown Corporations, Manitoba, Sheldon Schwartz, Winnipeg

Sometimes governments invest in or provide investment subsidies to private enterprises for reasons of national security or in times of national emergency. While the specifics of such intervention may be contentious, few would question the necessity.

However, sometimes governments in Canada have established ongoing programs to invest in private enterprises and/or sponsor or participate in venture capital pools with private sector investors. The rationale is a perceived private sector market failure. Private investors are perceived as either unwilling to supply “enough” risk capital in general, or to specific companies or sectors that the government wishes to support.

Often the arguments for and against such government intervention are based on whether or not, as a matter of principle, governments should be involved in “picking winners and losers” and, as a practical matter, on how good or bad the results have been. A different perspective is to consider whether individuals would willingly pay taxes and/or forgo services to finance government investment in private enterprises.

The most direct beneficiaries of such government intervention are the investors in and employees of the particular companies, not the public at large. Yet it is the public at large that ultimately finances the government’s participation and that bears the ultimate risk. Indeed, such programs or assistance can be thought of as forcing taxpayers to invest in enterprises that are unable to obtain sufficient financing from willing private investors without government involvement.

At the margin, the resources devoted or diverted to government-sponsored venture capital pools or to investment in specific businesses are financed through some combination of higher taxes, higher government debt or lower spending on other programs (e.g., health, education, social services) than would otherwise be the case. If given the choice, would citizens, particularly lower income ones, willingly pay higher taxes and/or forgo services for the government to finance these activities? If not, then why is it appropriate public policy?

Investment Saskatchewan, a provincial Crown corporation, is an example of a government program that provides financing to private enterprises. Other provinces and the federal government also have or have had variants of such programs. In its 2007 Annual Report, Investment Saskatchewan states that its public policy purpose and mandate is “to enhance Saskatchewan’s long-term economic growth and diversification through the provision of investment capital and financing, and to ensure prudent management of commercially viable investments.” In 2008 its target is to provide $35.7 million in investment capital: $25.0 million in new investments and $10.7 million in 2007 commitments.

The population of Saskatchewan is approximately one million. Therefore, for 2008, the level of resources being diverted from other potential uses into planned government-sponsored investment in private sector companies via Investment Saskatchewan is over $35 per capita or more than $140 for a family of four.

Citizens expect their governments to show leadership, to act in their best interests and to treat them fairly.

Since the benefits from government investment in private enterprises are concentrated among the few but the costs and risk are diffused among the many, governments may find it politically difficult to discontinue such intervention in the face of focused opposition from the beneficiaries. However, political expediency is an excuse, not a reason, to maintain the status quo. It is no substitute for leadership.

How can it be fair to force citizens as taxpayers into investments that they have rejected as individuals? How can it be in their best interests? If asked, perhaps taxpayers would prefer some combination of lower taxes, lower government debt or higher spending on other programs such as health, education and social services.

A fairer public policy would be for governments to promote a healthy investment climate by ensuring the removal of undesirable impediments to private investment. They can ensure that private investors who are considering investments in their jurisdictions find good public infrastructure, fair and reasonable tax levels, an efficient and effective regulatory regime and a healthy, highly educated and skilled labour force.

A healthy investment climate is one where governments support, rather than attempt to substitute for private investors. Not only is that a fairer public policy, it is a better one.