Towards a Rational Evaluation of Crown Corporations

Commentary, Crown Corporations, Frontier Centre, Saskatchewan, Uncategorized

Governments sometimes establish commercial enterprises to achieve public policy objectives. Both the provinces and the federal government have used commercial Crown corporations to provide certain essential infrastructure services at a reasonable cost which either the private sector did not provide in certain areas, or would only provide at a socially unacceptable cost. For example, Saskatchewan established and still owns commercial Crown corporations to provide telecommunications, natural gas transmission and distribution, electricity generation, transmission and distribution; and, property and casualty insurance.

But history is not destiny: some former provincial and federal commercial Crown corporations were subsequently privatized and have become both larger and more valuable, such as Telus and Canadian National Railway.

What may be lost in debate over privatization is a practical question that should interest all taxpayers. Does government ownership of a commercial Crown hinder the value of taxpayers’ investment over time?

If there is value in having flexibility and choice then its' absence reduces value.

Compared to an otherwise identical publicly traded private sector corporation, a commercial Crown corporation has less flexibility and choice in its operating and investment decisions. It may face operating and investment constraints that its private sector counterparts do not including restrictions on out-of-province investments, entering new lines of business or discontinuing existing business lines or services, the amount and form of board and management compensation, or on competing with the local private sector.

The value of any investment is the present value of its expected future net cash flows to its owners. Therefore, to the extent that a commercial Crown corporation is unable to take advantage of certain attractive investment opportunities because it is constrained by having fewer investment and operating options, a commercial Crown corporation should be expected to be worth less over time than an otherwise identical publicly traded company not subject to such constraints.

For example, in October 2008, the Saskatchewan government announced a new “Saskatchewan First” investment policy for its commercial Crown corporations. The Saskatchewan First policy restricts its commercial Crown corporations from investing outside Saskatchewan except in limited circumstances. Where feasible, they are to divest existing out of province investments. New investments will preferably not compete with the private sector.

SaskTel is a Saskatchewan commercial Crown corporation offering similar products in full competition with private carriers. It is federally regulated by the CRTC. By further limiting SaskTel’s business options, the Saskatchewan First Policy can be expected to have negative impacts over time on the value of Saskatchewan taxpayers’ equity investment compared to SaskTel’s private sector counterparts, which are not subject to such constraints.

At least that’s the theory. But how would one really know if that’s the fact? Unlike shareholders in publicly traded corporations, taxpayers can’t observe the share price of a commercial Crown corporation to assess board and management performance, or the effects of general economic conditions or government policies such as “Saskatchewan First” on the equity value of their investment compared to its private sector counterparts. Saskatchewan citizens can look up the value of shares in Telus that they can choose to hold or not as investors, but have no information on the equity value of their investment in SaskTel that they are compelled to hold as taxpayers.

Whether owned by the federal government or a province, taxpayers are entitled to the information to periodically assess the situation, outlook and performance of each commercial Crown in a public and transparent process with full public input and debate. Taxpayers are also entitled to make an informed choice whether government ownership continues to be a pragmatic means to an end, or whether it has become an end in itself, or whether has served its purpose and is no longer necessary or desirable to hold as a public investment. After all, it’s their money.

Public debate about the retention or privatization of commercial Crown corporations often has been ideologically-charged and emotional. It need not be. Rather than ideology, the pragmatic public policy rationale for establishing a commercial Crown corporation is the logical starting point for a rational re-evaluation of the desirability and necessity of continuing public ownership. And as for emotion, as my mother has observed, you should never love something that can’t love you back.

Sheldon Schwartz, a former Vice President of Finance and Administration for Crown Investments Corporation of Saskatchewan is author of the Frontier Centre study on Crown corporations, More Government Constraints = Less Value, available at www.fcpp.org.