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An Overview of the Historical Use of Public Enterprise


An Overview of the Historical Use of Public Enterprise The Development of Public Enterprise January 14th Crown Corporations They existed prior to Confederation The ... – PowerPoint PPT presentation

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Title: An Overview of the Historical Use of Public Enterprise

An Overview of the Historical Use of Public
  • The Development of
  • Public Enterprise
  • January 14th

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

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

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

  • Canadian Nationalism saw another wave in the
  • 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.

  • 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

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
  • 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.

  • 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.

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

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
  • 5) promotion of advanced technology
  • Only two and five give guidelines

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

Public Enterprise
  • Why? Two reasons
  • Contradiction in the pattern of national economic
  • 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.

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

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

State Intervention in Canada
  • Canada also has a problem with dependent
  • We lag behind the US due to staples economy
  • American aggressiveness lead to defensive
  • 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

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.

Economic Development and State Intervention
  • What explains public enterprise in areas of
  • 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

Public enterprise
  • Not all market failure have resulted in public
  • 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

Public enterprises
  • Ownership of the residual interest in state
    enterprises is compulsory for taxpayers and is
  • Ownership by government means interest is
    typically very heterogeneous.
  • Governments represent different groups with very
    different and often conflicting interests in the
  • 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.

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
  • redistributing income
  • subsidising particular regions and sectors
  • earning foreign exchange
  • generating employment
  • increasing the probability that the government in
    power will be re-elected.  

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.

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?

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.

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

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

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.

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?

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.

The State as Investor
  • Ken Rasmussen
  • Part 2
  • January 14th, 2004

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
  • Equity confers the right to benefit from the
    distribution of assets in the event of
  • equity confers the right to share in profits
    distributed through dividend payments upon the
    decision of the Board of Directors

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
  • used portfolio investment both to generate
    revenues and to serve the goal of regional
    economic development

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
  • This is particularly so in the small business
  • FBDB,SOC- -- lender of last resort 
  • Acquire good or Service
  • The subsidiary investment of a wholly owned crown

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.

Towards and Investment Strategy
  • The Canadian Development Investment Corporation
  • 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

  • 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
  • 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

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

  • 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
  • Created the Alberta Heritage Savings and Trust
  • The strategy was based on the govt commitment to
    free enterprise
  • It was designed to reduce dependence on oil and
  • The government could have simply used the revenue
    to reduce the level of taxation, but chose to
    become an investor

  • Could invest in
  • (1) capital projects that would provide
    long-term economic or social benefits, but not
  • (2) loans to other governments
  • (3) those that strengthen and diversity the
    economy, while giving a reasonable return on
  • (4) investment in debt instruments such as bonds
    and blue chip corporations
  • No equity investment at the start, but this would
  • 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
  • Cabinet set guidelines that restricted the
    shareholdings to 5 percent of any company, they
    would not seek membership on the boards of

Joint Ventures
  • Joint Ventures
  • Joint Ventures are a particular type of state
  • 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.

Joint Ventures
  • The joint venture has a strong appeal
  • It looks like a good way to promote economic
  • 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.

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.

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

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

  • 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

  • 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.

  •  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
  •  Despite being mismatched, the government ordered
    them merged into a new company called CAMECO
    which was created in Oct 1988.

  • 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
  • The late 1980s was a bad time to sell as uranium
    was a the bottom of the cycle.

  • 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
  •  Crown ownership and effective taxation and
    regulation were two parts of the same coin.
  •  Another factor was the unique situation of
    uranium production itself.

  • 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.

  • 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
  • It is logical to focus on vehicles other than
    traditional state enterprises which ties up
    capital and has statutory limits on activities
    and investments.