An Overview of the Historical Use of Public Enterprise

1
An Overview of the Historical Use of Public
Enterprise

• The Development of
• Public Enterprise
• January 14th

2
Crown Corporations

• They existed prior to Confederation
• The first was the public works board of 1841, to
  build the canal system in Upper Canada
• Also used for the administration of harbors
• The first major Crown was the CNR in 1918
• Formed after the collapse of three railways

3
Crown Corps

• 1930s saw more
• 1932 CBC
• 1934 Bank of Canada, Canada Wheat Board
• 1937 TransCanada Airlines (Air Canada)
• Provinces were also involved early
• Ontario Hydro 1906
• Telephones in the 1910s in most provinces

4
WW II and Post War Era

• 28 wartime Crown Corporations established
  employing some 230,000 people or more than one
  sixth of the entire manufacturing workforce.
• At the end of the war some were sold to private
  investors, some were dismantled and the
  government retained ownership of some.
• By the beginning of the 1950s there were only
  around 30 federal crown corporations
• In 1952 the government passed the FAA which was
  to regulate the financial affairs of the Crown
  corporations and there relations with the federal
  government.

5
Crowns

• Canadian Nationalism saw another wave in the
  1960s
• Canada Council, National Arts Center, Canadian
  Film Development Corporation National Film Board
• There was another wave in the 1970s
• 50 Crowns created in the Trudeau era for job
  creation , economic stabilization and nationalism
• Petro Canada, Export Development Corporation,
  Cape Bretton Development Corporation etc.

6
Crowns

• Provinces got heavily involved in the 1970s
• Province building was facilitated by Crowns
• Sask and Quebec were the most active but others
  were also involved
• Quebec was aimed a building a nation
• Sask had two eras in 1940 and 1970s, one was
  utility based the other was resource based. A
  reasonable return for resource ownership
• All provinces use them for a variety of policy
  purposes

7
Federalism was a factor

• Federalism changing from the old centralized
  version of the war years and immediate war years
  to one in which the provinces began to challenge
  Ottawa.
• Provinces were not happy with Ottawa imposing its
  priorities on them
•  PE appeared attractive to governments with
  concerns about jobs, regional economic
  diversification, and export promotion.

8
Federalism

• Job creation and economic stabilization were the
  reason the federal government created the Cape
  Breton Development Crorporation
• Provincial governments were equally aggressive
• Province-building was the response to uneven
  development due to the nature of the market.
• Provincial government wanted to ensure that the
  province realized an appropriate return form its
  ownership of natural resources
•  All provincial government established
  development corporations to attract industry to
  their jurisdiction.

9
Public enterprise

• First and Second Generation Public Enterprise
  created since 1945
• First Generation created passively and actively
• Passive industries in decline, prevent the
  collapse of economy after the war
• Active Nationalization of the commanding
  heights some of it was punative dealing with
  wartime collaborators

10
Public Enterprise

• Five Basic Reason for the First Generation of
  Public Enterprise
• 1) socialist economic policy
• 2) social and consumer interest
• 3) salvage uncompetitive businesses
• 4) punitive nationalizations of wartime
  collaborators
• 5) promotion of advanced technology
• Only two and five give guidelines

11
Public enterprise

• With strong Keynsian policy, public enterprise
  declined because of
• New emphasis on direct expenditure
• Direct stimulus through monetary and fiscal
  policy
• But by late 1960s and early 1970s, a second
  generation emerged with participation in viable
  rather than failing businesses

12
Public Enterprise

• Why? Two reasons
• Contradiction in the pattern of national economic
  growth
• Structural unemployment, regional unemployment,
  and sectoral under investment
• Changing International Political Economy
• EU, multinational corporations, need for equity
  finance to deal with external competition
• Reassert control of the economy.

13
State Intervention in Canada

• Government always plays a role in the economy
• Transportation infrastructure
• Intervention came in the form of outright
  construction and the bailout of bankrupt firms
• Canadas role as a producer of staples, distorted
  economic structures
• Created rigidity and over-investment in
  transportation infrastructure
• Canadian economy subject to violent shifts in
  international economy

14
State Intervention in Canada

• Canada has lots of resources, but great distances
  thus transportation is crucial
• As a colony, Canada also lacked a strong free
  enterprise spirit and accepted state intervention
• As a late industrializing nation Capital
  accumulates too slowly thus state involvement was
  necessary

15
State Intervention in Canada

• Canada also has a problem with dependent
  industrialization
• We lag behind the US due to staples economy
• American aggressiveness lead to defensive
  expansionism
• The role of the state was a challenge to the US
• Need for state interaction based on economic
  stimulus and territorial integration.
• Provinces joined in with cheap power and
  telephones and rural electrification

16
State Intervention in Canada

• Some have argued that Canada was a public
  enterprise nation
• This is how we built the nation
• Canadian business have been quick to press for
  government intervention and assistance in
  economic ventures
• All explanations rely on some geopolitical
  explanation for the large role of the state
• Geography, climate, small populations,
  insulation against American interests all point
  to defensive expansionism.

17
Economic Development and State Intervention

• What explains public enterprise in areas of
  production
• Petro-Canada, Aircraft Manufacturing, etc
• Three Factors
• 1) trade dependent with weak manufacturing
• Relied on import substitution
• 2) reliance on imported production processes
• 3) federal system of government with uneven
  regional development

18
Public enterprise

• Not all market failure have resulted in public
  enterprise
• Each country and province has a calculus of
  instrument choice but some regularities exist
• Found in similar sectors
• postal service railway telecommunications gas
  electricity airlines

19
Public enterprises

• Ownership of the residual interest in state
  enterprises is compulsory for taxpayers and is
  non-transferable
• Ownership by government means interest is
  typically very heterogeneous.
• Governments represent different groups with very
  different and often conflicting interests in the
  enterprises.
• By contrast, owners of private enterprises
  typically have a single homogeneous interest, the
  value of the firms and hence their equity.
• Government is no ordinary owner. Governments can
  and typically do use their regulatory and
  taxing powers to extend special privileges to
  their own enterprises.
• This is a common feature of SOEs they are given
  special privileges and have non-commercial
  obligations placed upon them.

20
Public Enterprises

• Mixed objectives Multiple principles
• They are typically asked to meet non-commercial
  as well as commercial objectives.
• The list of non-commercial objectives is very
  divers
• redistributing income
• subsidising particular regions and sectors
• earning foreign exchange
• generating employment
• increasing the probability that the government in
  power will be re-elected.  

21
Multiple Objectives

• Some have only commercial objectives, but most
  face conflicting or multiple objectives.
• A focus on commercial objectives are either not
  implemented or do not persist.
•  Statutory objectives
• Few PEs are given only commercial objectives when
  they are established.
• Most PEs are established with vague or
  conflicting objectives.
• Mixed objectives and weak taxpayer interest in
  commercial performance give management, and their
  political masters, considerable scope to be
  responsive to groups with a politically active
  interest in the operation of the enterprise.

22
Public Enterprise

• Ongoing intervention in SOE management
• More than objectives is the influence of
  legislative intervention
• Ministers have powerful format powers such as to
  appoint and remove board members, to give
  direction of a general character to management
  and to approve significant financial commitments.
• There are also significant informal powers?

23
Evidence on Public Enterprise Behaviour

• Evidence suggest that PEs place considerable
  weight on non-commercial objectives.
• Studies of production, pricing, employment and
  investment decisions of PEs suggest that they are
  responsive to groups with a politically active
  interest in the operation of the enterprise.
• Consumers, suppliers, employees have more power
  than taxpayers.

24
Special Privileges The Problem of Commitment

• There are may special privileges extended to
  public enterprise
• Protection from competition
• Under priced natural resources
• Tax exemptions
• Lower financing costs and or sales preferences
  from government

25
Special Privileges

• Special advantages may not give public enterprise
  a competitive advantage
• Because of the special burden imposed by
  non-commercial objectives.
• The fact that PEs have to meet costly
  non-commercial objectives is likely to be the
  reason that they are extended special privileges
  in the first place.
• Governments may also choose to extend privileges
  or benefits to private firms faced with collapse 
• a government can extend privileges to private
  enterprises and regulated private enterprise is
  often the practical alternative to public
  ownership.

26
Why Choose Public Enterprise

• Four reasons why legislators might prefer SOEs
  over subsidised or regulated private providers.
• It may in some cases be difficult to define or
  reach any agreement on the exact nature of
  non-commercial objectives.
• Non-commercial objectives may become clearer over
  time, of they may evolve over time, and
  legislators know that it will be easier to
  interfere in the affairs of public enterprise
  than private enterprise.
•  

27
Why Choose Public Enterprise

• 2) The redistribution achieved by a PE through
  pricing, purchasing, production, employment and
  investment decisions is typically less
  transparent than it would be with either subsidy
  or regulation
• SOEs transfer is less transparent
• 3)  Private enterprise will weaken the position
  of the residual claimant relative to other groups
  with an interest in the enterprise.
• private firms will want to return to shareholders
  as much of the benefits generated by the special
  privileges as then can and do as little to meet
  non-commercial objectives as they can get away
  with. SOEs can reduce agency costs?

28
Why Choose Public enterprise

• 4) The commitment problem
• Private enterprise is much more adversely
  affected by the political uncertainty
  surrounding the durability of special privileges
  for at least two reasons.
• A state-owned enterprise is likely to be seen as
  a more legitimate recipient of special
  privileges, as least in part because of the
  perception that the benefits will not simply be
  captured by private shareholders .
• This in turn will reduce the risk that special
  privileges will be short-lived.

29
The State as Investor

• Ken Rasmussen
• Part 2
• January 14th, 2004

30
The State as Investor

• When and why does the state become an investor
• Public private partnerships is not new
• Federal government has equity in 400 companies
• Governments are often involved in firms, through
  the provision of loans, grants for r and d
• But equity is something altogether different
• Ownership shares confer rights
• Equity allows more participation in the share
  sales
• Equity confers the right to benefit from the
  distribution of assets in the event of
  liquidation
• equity confers the right to share in profits
  distributed through dividend payments upon the
  decision of the Board of Directors

31
The State as Investor

• Equity can be a highly discretionary instrument
  of policy if government capital is directed
  towards specific sectors, categories of firms and
  or individual companies.
• European governments have sought to use
  investment to re-deploy factors of production,
  to enhance competitiveness, and promote winners
• Ottawa, has used equity investment in a reactive
  manner -- a problem solving devices
• Que. and Alberta, have had a positive investment
  strategy
• used portfolio investment both to generate
  revenues and to serve the goal of regional
  economic development

32
Purposes served by investment

• Return on Investment
• Sometimes the government is purely interested in
  making money
•   Security
•  Government acts as an investment banker
• Minority equity is used to provide insurance to
  creditors
• This is particularly so in the small business
  sector
• FBDB,SOC- -- lender of last resort 
• Acquire good or Service
• The subsidiary investment of a wholly owned crown
  corporation

33
Purpose served by investment

• Incentives
• New capital can serve as a spur to the enterprise
• Government can use equity to induce a private
  investor by sharing the risk
• Strategy
• Sometimes, the government has an overt strategy
  of economic development.
• Defensive expansion of Telsat is a case in point
• Problem solving
• Frequently government is drawn into share
  ownership by default  
• Sometimes plans go screwy and government must
  take up the slack.

34
Towards and Investment Strategy

• The Canadian Development Investment Corporation
  (CDIC)
• instrument created to hold the governments
  equity investments
• It was also created out of the governments
  disillusionment with CDC
• CDIC would hold the governments investment in
  CDC until it was a favourable time to sell.
• CDIC quickly moved from a numbered holding
  company holding CDC shares to a Crown Corporation
  following cabinet investments instructions to a
  holding company with 12 billion in investments
•  

35
CDIC

• First President was Maurice Strong, who wanted to
  move away from reactive investment
• CDIC was incorporated under the Canadian Business
  Corporations ACTS in May of 1982.
• Its broad objective was to assist in the
  creation of development of business, resources,
  properties and industries of Canada.
• Would invest in any business likely to benefit
  Canada.
• No private body could hold shares in CDIC.
•  Yet CDIC was neither an instrument of policy nor
  for targeting new investments nor for privatising
  government investments.
• CDIC was used principally to rationalise
  state-owned enterprise in crises so as to avert
  their financial collapse and to divert political
  pressure by showing a new business like
  management.

36
Provincial State as Investor

• Provincial investment strategies
• 3 factories favour a more active role for
  government as an investor
• economic opportunity ie windfall profits from
  resource industries.
• intergovernmental conflict of interest ie federal
  taxation, pricing or regulation policy that harm
  a provincial treasury
• strong political leadership

37
Alberta

• Windfall profits brought two concerns
• an investment strategy that would optimise the
  use of these funds.
• overcome the vulnerability of a regional economy
  that would be tied to the fortunes of a volatile
  commodity
• Created the Alberta Heritage Savings and Trust
  Fund
• The strategy was based on the govt commitment to
  free enterprise
• It was designed to reduce dependence on oil and
  gas
• The government could have simply used the revenue
  to reduce the level of taxation, but chose to
  become an investor

38
Alberta

• Could invest in
• (1) capital projects that would provide
  long-term economic or social benefits, but not
  profits
• (2) loans to other governments
• (3) those that strengthen and diversity the
  economy, while giving a reasonable return on
  profit
• (4) investment in debt instruments such as bonds
  and blue chip corporations
• No equity investment at the start, but this would
  alter  
• The decision-making body was the Heritage Savings
  Trust Fund Investment Committee which consisted
  of cabinet ministers
• Fund did make make equity investments, which
  angered the extreme right in the province and the
  party
• Cabinet set guidelines that restricted the
  shareholdings to 5 percent of any company, they
  would not seek membership on the boards of
  companies.

39
Joint Ventures

• Joint Ventures
• Joint Ventures are a particular type of state
  enterprise
• Governments- public enterprise and businesses
  pool their resources
• Each of the partners has an equity participation
  in the venture that is not readily transferable,
  and thus a voice in policy
• The use of joint ventures implies that
• there is a project or activity that government
  wants to see carried out
• private-sector resources, capital, technical, or
  marketing expertise, which means 100 state
  control is not feasible
• factors exist which preclude the private
  enterprise from going it alone.

40
Joint Ventures

• The joint venture has a strong appeal
• It looks like a good way to promote economic
  growth
• Because they only put up part of the money,
  governments can stretch out their money and thus
  have a greater overall impact on the economy
• Governments also get access to technical
  information and get a better ideal about the
  running of a particular industry.
• Joint ventures became the most prominent form of
  state capitalism in the 1980s.

41
Joint Ventures

• Many provinces remain reliant on the revenues
  generated by resource development
• most joint ventures cluster around the resource
  sector and involve provincial governments
• weak manufacturing base, that continue to have a
  high reliance on resource exports
• federal system means provincial governments focus
  there growth strategies on regionally specific
  comparative advantage
• Joint ventures in the resource sector are largely
  used for province-building
• To stimulate exploration and development of
  mineral deposits which will, in turn create jobs
  and general revenues.

42
Joint Ventures

• Private companies also get benefits
• they can benefit from governments experience
• reduce financial exposure
• reduce political risk
• joint ventures in resource sector popular with
  all parties.
• wise to collaborate with the provincial
  government since they own the resources.
• becoming involved in a joint venture has
  attractions for a foreign investor who can
  overcome regulatory barriers to foreign ownership

43
Saskatchewan Mining Development Corporation

• SMDC a classic joint venture vehicle
• Started by the NDP in 1974 to engage in all
  phases of mineral production and the sale of
  minerals found in Saskatchewan 
• SMDC was a wholly owned corporation created by
  the NDP
• SMDC invited private corporations to approach it
  to participate in joint ventures
• Voluntary participation became mandatory
• Within a five years SMDC became a major player in
  the Saskatchewan mining industry, spending one of
  every three dollars fore exploration in the
  provinces

44
SMDC

• Two biggest mines Key Lake and Cuff Lake
• Key Lake Mine a joint venture between SMDC (50 )
  a German company and the federal governments
  Eduardo nuclear.
• SMDC has had a wide variety of partners and has
  learned a great deal.
•  It gave SMDC experience in marketing uranium.
•  The reasons for the easy relations between SMDC
  and its foreign partners includes
• 1)   the relatively underdeveloped state of the
  uranium industry
• 2)   the availability of capital for SMDC
  reducing costs of exploration
• 3)   the involvement of foreign owned companies
  that were themselves state owned and were used to
  dealing with other state owned enterprises

45
SMDC

• SMDC owned rich, low cost uranium and made a
  profit of over 60 million in 1987.
•  Government wanted to privatise SMDC, but was
  forced by the federal government to merge with
  Eldorodo Nuclear, and sell both of them at the
  same time as CAMACO
• The plan to merge was much more beneficial to
  Elderodo, than SMDC, given the very difficult
  histories of the two companies.
• SMDC was a strong company with excellent
  prospects. It had assets in 1987 valued at 914
  million, with revenues of 194 million.

46
SMDC

•  The company was not hampered by excessive debt
  load, and the debt to equity ration was 1.41
• SMDC had very desirable properties
• Eldorodo was less than a winner for a variety of
  reasons.
•  Despite being mismatched, the government ordered
  them merged into a new company called CAMECO
  which was created in Oct 1988.

47
SMDC

• 1.6 billion in assents and 61.5 owned by the
  government of Sask, and 38.5 by the government
  of Canada
• The plan was to privatise CAMECO in stages - 30
  within 2 years, 60 within 4 years and 100
  within 7 years.
• Individual Canadian investors were limited to 25
  of the shares and non-Canadian to 5.
• In addition non-Canadians were to be allowed a
  maximise of 20 of voting stock and Sask was gong
  to press the head office to stay in Sask.
• There were quick howls from the financial
  community that the restrictions were too
  limiting.
• The late 1980s was a bad time to sell as uranium
  was a the bottom of the cycle.

48
SMDC

• 130 reactors under construction around the world,
  but were coming on stream in the 1990s
• Mining companies were planning new mines, but the
  government was disposing of its mines at a time
  when the industry was in a down turn.
• The timing of the privatisation was bad, but it
  would also do nothing to improve the efficiency
  of CAMECO  
• The Selling of SMDC also would deny the
  government a window which would allow it to set
  taxes.
•  Crown ownership and effective taxation and
  regulation were two parts of the same coin.
•  Another factor was the unique situation of
  uranium production itself.

49
SMDC

• Issues of health and safety better handled
  through PE?
• Social policy objectives in ensuring that the
  native population received benefits.
• This of course costs money and contradicts the
  shareholders desire for profit.
•  SMDC had begun to diversify and vary its base
• SMDC had 30 joint ventures with other companies
  the promising being in the area of gold.

50
Conclusions

• Collaboration is the norm in joint ventures as
  both parties expect something in return.
• Crowns are an attractive way to invest with
  private capital because
• project specific investments can be made
• incentives can be proffered to a large number of
  private companies
• divestment can be undertaken or monies written
  off with the same political visibility and
  without recourse to the bureaucratically centred
  procedures that constrain a wholly owned crown
  corporations
• It is logical to focus on vehicles other than
  traditional state enterprises which ties up
  capital and has statutory limits on activities
  and investments.