A new policy backgrounder from the Frontier Centre for Public Policy, authored by Sheldon Schwartz, identifies fundamental limitations on the operating and investment opportunities available to commercial Crown corporations.
Schwartz, a former assistant Deputy Minister of Finance and former Chief Financial Officer and Vice President of Finance and Administration for the Crown Investments Corporation points out that, compared to a comparable private company, Saskatchewan’s commercial Crowns find themselves with a number of significant constraints:
- Investment constraints, for example, the “Saskatchewan First” investment policy which restricts out-of-province investment and discourages competing with the local private sector.
- Remuneration constraints may make it harder to attract and retain top talent. For example, they cannot use stock options, widely used in the private sector to help to help to align management and board compensation with shareholder value creation;
- A poor outcome for even a relatively small investment can become a high profile political issue, which may increase risk aversion.
“To the extent public policy constraints on a commercial Crown corporation result in foregoing attractive investment opportunities and thus conflict with shareholder value maximization,” says Schwartz, “a commercial Crown corporation should be expected to be worth less over time than an otherwise identical publicly traded corporation that is not subject to such constraints.”
In some ways these characteristics are nothing new, commercial Crowns have always been different from private companies in that they are not only expected to be commercially successful, but also to fulfill certain public policy priorities. However with the differences properly articulated, it becomes clear that there is a tradeoff between maximizing the value of taxpayers’ investment and fulfilling public policy priorities.
Schwartz goes on to recommend that federal and provincial commercial Crowns be subjected to periodic public review to identify the public policy tradeoffs and to hold the government accountable. Such reviews should answer the following questions:
- What is the current market value of taxpayers’ equity investment in the commercial Crown corporation?
- Has the investment maintained or enhanced its equity value relative to private sector counterparts, If not, why not?
- What public policy activities does the commercial Crown carry out that a private sector counterpart would not do without compensation? What would be the amount of the required annual subsidy to a private sector counterpart?
- Has the investment fulfilled its original public policy mandate? For those that have, does government ownership serve a continuing public policy purpose? If so, what is it? For those that have not, why not?
"Rather than ideology, the pragmatic public policy rationale that was the original impetus for establishing a commercial Crown corporation is the logical starting point for a rational evaluation of the desirability and necessity of continuing public ownership of what, after all, is a commercial investment, "writes Schwartz. "And as for emotion, as my mother has observed, you should never love something that can’t love you back."
The backgrounder, More Government Constraints = Less Value, can be found here
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About the Author:
Sheldon Schwartz worked for the Province of Saskatchewan during a career spanning 25 years, including as Assistant Deputy Minister of Finance, responsible for Saskatchewan’s treasury and debt management functions and as the Chief Financial Officer and Vice President of Finance and Administration for Crown Investments Corporation, the Province’s holding company for its commercial Crown corporations. Born in Regina, he has a Masters degree in Economics from Carleton University, and holds the Chartered Financial Analyst (CFA) designation. As a semi-retired consultant living in Victoria, British Columbia, Sheldon continues his lifelong interest in public policy in Canada. His recent article, “Saskatchewan’s Crown Corporations— Time for a New Crown Review”, appeared in The Saskatchewan Institute of Public Policy’s Spring 2008 Policy Dialogue.