Selling 49% of SaskTel is Not Enough

Commentary, Crown Corporations, Ian Madsen

In recent weeks, the Brad Wall government in Saskatchewan has advanced Bill 40, which would allow for the sale of up to 49% of any Crown corporation presently owned by Regina.  While there has been predictable criticism and opposition from those who believe that governments should own or dominate key sectors or even most of the economy, and those who do not want change or reform of any such ownership or involvement, a key argument can be made that the bill does not go nearly far enough.

One odd factoid is used against Bill 40:  any dilution of government ownership of a Crown beyond 10% makes the firm subject to federal income tax (provincial income tax being just paying the owner what it was entitled to anyway).  However, becoming obligated to pay income tax is a major reason in favour of selling much or all of a Crown corporation.  Income tax is the price of being a viable, profitable, contributing commercial citizen.  Crowns evade this responsibility, with the tax exemption effectively a subsidy paid for by higher taxes on the rest of the economy.

Compared to private rivals or potential rivals this subsidy allows the Crowns wide room to inflate their costs or profit margins over private sector rivals who must pay anywhere from 26% (BC) to well over 30% (east of Ontario) of pre-tax income to Ottawa and their home-base provincial government.  This is effectively a subsidy which lets Crowns undercut existing or potential competitors with goods or services at lower prices, inflate staff numbers and pay more for salaries (which is why organized labour generally loves them).

This tax exemption subsidy has the unintended effect of reducing the pressure on Crowns to innovate and control or cut costs.  It is informative to look at the examples of Cameco Corp. and Potash Corp., which performed far better in recognized financial metrics after privatization starting in the late 1980s than in the prior roughly fifteen years under government ownership (forthcoming study by the Frontier Centre for Public Policy).

A sell-off of 49% of the provincially owned telephone crown corporation SaskTel is unlikely to bring the fully-valued price that any such Crown would get should it be entirely sold off in an initial public offering in the stock market or to a strategic private investor or institution.  The government would still be in control, and could potentially change the firm’s mission or operational orientation, harming the outside, minority partner.  Hence, a discount would be effectively demanded on the sale of such a stake of less than 50% to outsiders.

One of the most successful Saskatchewan government-facilitated investments of the 1980’s was SaskFerco according to a newly published report by the Frontier Centre for Public Policy.  However, the government took a 49% stake, not the private sector investor, Cargill.  It turned out tremendously profitable, with a return to the government of several times the initial cash investment, and, crucially, it was taxable the whole time.

Several billion dollars are tied up in Saskatchewan Crown corporations whose counterparts operate as commercial companies in the private market throughout most of Europe and the USA:  telecomm and power companies.  Meeting this global standard would free up money that could be used to pay down debt, forestall tax increases, or pay for needed infrastructure and other purposes.  According to valuations by the Frontier Centre, SaskEnergy had a market value of between $800 million and $1.2 billion in 2014.  In 2012, SaskTel was valued at $2.06 – 2.15 billion but with lower interest rates its value will have risen substantially, raising its likely value to almost $3.0 billion.  SaskPower is valued at $1.75 to 2.62 billion

All together, that could be close to $6 billion for the people of Saskatchewan to put to work in ways that increase competition and improve services while reducing taxes and debt service costs.

Ian Madsen is Senior Policy Analyst at the Frontier Centre for Public Policy