February 16, 2004
MTS and Crown Corporation Folklore
Manitoba is generally regarded as a great place to live. But with regard to government involvement in the economy, we are in the Dark Ages. This harsh assessment sums up the lingering mythology that permeates much of our thinking about Crown corporations.
Witness the emerging discussion around MTS, the former Crown corporation known to old-timers as the Manitoba Telephone System. “MTS bid may cost province millions” hailed a recent headline in the Winnipeg Free Press. The article dealt with the company’s planned re-organization into something called an income trust, a move that would cost the Province $30 million in tax revenue. The story explored whether MTS should have been privatized in the first place and reported some old chestnuts about more expensive private services. A residential phone line that used to cost $11 now retails at $25, according to the seniors’ lobby.
These outrageous prices are supposedly the price of privatization because, as a private company, MTS now has to pay taxes. In fact, the new structure would partly repair that. The business now suffers from double taxation, first when earnings are hit through corporate taxes and once again when shareholder dividends (less a partial tax credit) are declared as income.
Contrary to our aging Crown corporation folklore, the controversial sale of MTS was the previous government’s most successful policy initiative. Massive technological change -- the Internet, wireless mobile phones and satellites -- effectively ended the government’s ability to monopolize telecommunications. Plummeting long distance prices effectively removed the corporation’s ability to maintain subsidies on residential rates. The sale got the government out of a capital-intensive, competitive business dominated by more sophisticated, better funded private companies. It provided over $900 million for the Province’s “rainy day” fund, which has kept our finances in the black since then.
The private Manitoba Telecom Services brought us much lower prices when long distance is bundled into the mix. The company is spending about $200 million a year in technical upgrades and rural customers have benefited from a $300 million investment in high-speed Internet service. All without a penny of government money.
The belief that we save money because a government entity does not have to pay taxes is the biggest fallacy in Crown corporation thinking. Extend the thought. Why not lower food prices by having a government food agency own the grocery stores? Cheaper clothes from government factories and a state clothing bureau? Economical computers through provincial manufacture? A Canadian Computer Board? The logical end is a Marxist paradise where the government owns everything and we all benefit from lower prices.
This is obviously nonsense. But it exposes the main problem with the model. The exemption of government-owned enterprises from taxation effectively creates a hidden subsidy paid for by the broader community. If the government still needs to collect taxes to operate, where does it find those revenues? In Manitoba, the money comes courtesy of equalization payments paid for by Alberta and Ontario taxpayers and, more painfully, from higher taxes imposed throughout the Manitoba economy. The latter are paid by the same people who think they are getting lower prices because the government exempts certain enterprises from taxation.
Cheaper car insurance? Electricity? No problem. Just exempt the car insurance and Hydro monopolies from tax. Want to make them even cheaper? Give them access to subsidized capital and never take a dividend, so the capital is “free” or way below the cost paid by commercial operators in the real economy. But these actions have unintended consequences. Per capita, Manitobans consume the most power in the world because these subsidies artificially underprice its cost. According to the Fraser Institute, car accident rates are higher because we subsidize insurance for particular groups. More broadly, we distort the economy because these free rides unduly favour state provision of activities that might be more effectively delivered in the private sector.
This is precisely why Australia and New Zealand generally do not follow our looming practice of exempting local government services from the GST. This will give a 7% operating cost advantage to in-house providers because all private companies have to pay the tax.
From an efficiency perspective, the government needs to embrace neutrality and transparency in the tax treatment and capital financing of public services. Make the Crowns pay tax and market rates for capital and discover then, as many countries have, that there are no savings.
Perhaps then, in the warm light of transparency, admit a fact so articulately communicated by New Zealand’s Sir Richard Prebble in a recent Frontier Centre interview. The point man for the Labour government’s massive privatization of public companies in the 1980s, Prebble says “the government should acknowledge that the private sector and the private enterprise system, for all its faults, is still the best way of producing goods and services, and what we should do is try to use that to the maximum possible.”
Heresy for many, but the key to ending Manitoba’s backwater policy model and moving forward as a dynamic and self-sustaining player in the world economy.
The Frontier Centre for Public Policy
is an independent public policy think tank whose mission is "to broaden the debate on our future through public policy research and education and to explore positive changes within our public institutions that support economic growth and opportunity."