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Ian Madsen Reports, studies and analyses show that the essential character of state-owned enterprises, including Canadian Crown corporations, makes it impossible for them to have true independence or real profitability.

These operations have inherent goals counter to the normal private sector pursuit of profit maximization. In the private sector, return on investment rewards shareholders for the risk and opportunity cost involved in their investment.

State-owned enterprises are founded for specific public policy reasons, whether created organically, force-fed or built up by buying or expropriating firms or assets of firms.

It follows that they either fulfil a function no private sector firms are doing – seldom the case – or are an aggregation of commercial enterprises that weren’t performing well or profitably.

They may be single firms or the synthesis of several profitable firms, perhaps even ones that were lavishly profitable. That may be why many governments covet their cash flow, assets, and power and influence.

Canadians pay the price for unnecessary Crown corporations by Ian Madsen

Creating a firm to fill a role no private firms do is unlikely to be profitable – unless it receives legal waivers, favourable regulations, concessional financing, monopoly status or a combination. If such firms are profitable at all, it’s only through contrived means. Even meagre profitability is inauthentic and unsustainable.

Look at the case of a firm that combines zombie or underperforming companies or similarly unattractive corporate assets. It doesn’t seem likely that simply installing new managers or specialists will put the revamped entity on a trajectory where positive cash flow is even faintly possible.

The market for corporate control is quite vigorous, evident by the abundant mergers, acquisitions and bankruptcies. Replacement of managers and restructuring would have already occurred. Managers at firms that governments take over are often replaced, but that rarely seems to help the firm.

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Several scenarios can play out when lucrative firms are taken over by government. The firm can stay much the same, but incentives to management and directors decline as they can’t be compensated through share awards or stock options. The government sucks the firm dry by withdrawing dividends, royalties or taxes to subsidize the rest of its activities or favoured groups.

Or profitability is subordinated to other goals that are deemed more politically important. That, too, means viability and profitability are in jeopardy because state actors aren’t profit-motivated or even conversant in such a pursuit.

Governance of these state firms may seem to be key. If the directors have the necessary knowledge and experience, the firms can at least be effective and sufficiently profitable. Cash injections from taxpayers will not be required and the firm might even return profits for the government.

However, such hope is nearly always in vain. It’s hard for these firms to attract high-performance professionals. Remuneration usually falls short at state-owned firms, narrowing the potential talent pool of managers and directors. And directors, top managers and other employees at Crown corporations can’t be rewarded by stock options.

It’s often not in the interest of politicians to appoint effective, imaginative and dynamic managers and directors. Instead, such positions are often used to reward favoured supporters and former politicians and political staff.

Change of governance standards to require better profitability, higher return on capital, evaluation of performance, and more appropriate and remunerative rewards to managers could improve financial conditions in some special cases.

But the fundamental problem remains. State ownership means subservience of profitability to public policy aims and political ideology. The taxpayers who are, supposedly, the ultimate shareholders have no real influence.

Managers and directors of government corporations will always be beholden to their political masters and never truly independent. The only real way to improve performance is to sell the firms to investors who have a vital stake in their success. Any other measures will fall far short.

Crown corporations – and state-owned enterprises more generally – are a bad idea and should be sold off.

Ian Madsen is a research associate with the Frontier Centre for Public Policy.

Ian is a Troy Media contributor. For interview requests, click here.

The views, opinions and positions expressed by columnists and contributors are the authors’ alone. They do not inherently or expressly reflect the views, opinions and/or positions of our publication.

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