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Time to privatize: Governments should begin selling off assets

Appeared in the Financial Post
Authors:
Release Date: April 3, 2009

While many Canadians were undoubtedly dismayed by the federal government’s 2009 budget and its about-face regarding the state’s role in the economy, one positive may yet result from the massive spending spree. In an effort to control ballooning deficits, the federal government has initiated a review of its “corporate assets” with an eye to privatization.

Potentially up for sale are assets such as Canada Post, Via Rail and the Canadian Air Transport Security Authority. Property such as the CN Tower and others held by Canada Lands could also be sold. The fact is Canadians would benefit tremendously from sweeping privatization of Crown assets.

The benefits of privatization are well established in the academic literature. Overwhelmingly, research finds that privatization improves the economic and service performance of divested state-owned enterprises.

Renowned privatization experts, Professors William Megginson and Jeffry Netter, provided the most comprehensive review of worldwide privatizations in a 2001 study published in the prestigious Journal of Economic Literature. They found both short- and long-term benefits to economies undertaking privatizations. In the short term, taxpayers gained through one-time revenues from the sale of government assets. In the longer term, privatization improved firm performance and increased economic growth.

Megginson and Netter concluded their extensive review by stressing that “privatization ‘works,’ in the sense that divested firms almost always become more efficient, more profitable, financially healthier and increase their capital investment spending.”

There is a host of academic work that buttresses the Megginson and Netter study.

Most recently, in a 2009 study published in the Journal of Banking & Finance, Narjess Boubakri and colleagues analyzed the impact of privatization on the performance of 189 state-owned enterprises operating in 39 countries. Overall, they found that “privatization is associated with significant improvements in profitability, operating efficiency and capital expenditures.”

Canadian-based research finds much of the same: privatization would improve the performance of Crown corporations.

In a comprehensive study, University of British Columbia Professor Anthony Boardman and colleagues analyzed the performance of major Canadian Crown corporations that were privatized between 1985 and 1996, including Air Canada, CN Railway, Petro-Canada, Fishery Products International, Potash Corporation of Saskatchewan, Eldorado Nuclear Limited and Saskatchewan Mining Development Corporation (now Cameco), Alberta Government Telephones (now Telus), Suncor and Nova Scotia Power. The results showed that privatized firms increased profitability, efficiency and dividends while reducing debt ratios. Privatization also had a positive impact on capital expenditures.

Industry-specific research also points to significant benefits from privatization.

Consider the postal services industry. The Mail Monopoly, a seminal in-depth analysis of Canada’s postal service, found that the Crown failed to provide Canadians with expedient and reliable services. A more recent study by University of Toronto Professor Edward Iacobucci and colleagues concluded that privatizing Canada Post would produce efficiency gains and improvements in service quality. Evidence of postal deregulation in other countries shows that companies increased service quality, adapted products and services to demand, introduced several mail-related innovations, reduced employment and improved labour performance after deregulation.

The benefits of privatization result from key differences between how the private and public sectors behave, and the incentives each faces.

For example, the public sector generally uses less capital and is more labour intensive than the private sector. As a result, state-owned enterprises tend to be less productive.

Another essential difference is that governments are preoccupied with fulfilling political goals rather than pursuing economic or business objectives. Instead of allocating capital where it garners the highest economic return, governments typically allocate capital to areas that maximize their chances for re-election.

In addition, government businesses usually operate in a state-provided monopoly shielded from competitive discipline. This means they are not required to constantly update their technologies and production processes and/or offer innovative products and services to their customers. In the private sector, competition forces firms to regularly invest in new capital and meet consumer demand in order to survive and grow profitably.

Finally, government budgets are “soft” since it is impossible for them to go broke. Private sector businesses, however, face “hard” budget constraints. If they incur sustained losses the decline of capital will push them into bankruptcy. The private sector must therefore provide its customers with the quality goods and services they demand, in a timely manner, and at affordable prices. The public sector simply does not face the same pressures.

While some might balk at selling assets in a weak economy, preferring to wait for a more ideal environment, reports from Canada’s Auditor General repeatedly highlight that the government has a difficult time performing the most routine tasks efficiently: issuing checks (as was the case in the heating expense relief program), managing databases (SINs, Firearm Registry) and using (misusing) credit cards (RCMP). Waiting for an “ideal environment” could mean waiting forever.

Moreover, it will take time to decide what assets will be sold, to prepare them for sale, and then to actually sell them. Associated time lags may see Canada in recovery by the time sales actually occur.

The sooner assets are sold, the sooner Canadians will see benefits. Privatized assets will be more efficient and productive. They will provide citizens with higher quality goods and services. Most importantly, privatizations would generate more economic activity through increased investment, a welcome undertaking in these tough economic times.



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