PUBLISHING

A CASE AGAINST THE CROWN

Walter Stewart May 11 1987
PUBLISHING

A CASE AGAINST THE CROWN

Walter Stewart May 11 1987

A CASE AGAINST THE CROWN

PUBLISHING

Walter Stewart

In his 11th book, Uneasy Lies the Head: The Truth About Canada’s Crown Corporations, published this week by Collins, Walter Stewart chronicles and analyses what he says are the uncontrolled excesses of public enterprise in Canada. As well, he offers an imaginative set of prescriptions for bringing the Crowns' overseers “to heel. '' Edited extracts:

Crown corporations touch us every day, all day. We awake in the morning to the news brought to us, in many cases, by a federal Crown. The electricity to beam it through our radios is the product of a provincial Crown working hand in hand with a municipal Crown. We brush our teeth in water piped in by another municipal Crown and breakfast on eggs sold through a federal Crown, made toothsome by bread from wheat marketed by the Canadian Wheat Board and butter courtesy of the Canadian Dairy Commission. The jam comes from private enterprise.

All day long we are haunted by Crowns. One of them brings us—or doesn’t, it all depends—the mail, which is moved to us, in its own good time, by Air Canada or CN or even, in the form of floating freight, along the St. Lawrence Seaway. We may fly on a federal Crown or take a provincial bus or take our chances on Via Rail.

If we live in British Columbia, that bastion of free enterprise, we can drive our Crown-insured auto onto a Crown ferry, slip through Crown-run harbor facilities to a Crown-run airport to catch a Crown-owned airplane. Thank God, we tell ourselves, we have beaten back the socialist hordes. We may telephone this thought to a cousin in Manitoba, who will receive the glad tidings through a provincial Crown telephone company.

If we take to drink, a provincial Crown is happy to provide the booze, and when, as a result, we begin to see pink spiders or imagine that we are a poached egg, a psychiatrist will tell us to take it easy; why not take in a film financed by Telefilm Canada or take a stroll up the CN Tower?

By my estimate—there is no firm figure—we own at least 400 Crowns at the federal level and close to 500 more at the provincial level. They are by far our largest corporations. The largest nonfinancial firms in Canada, measured by assets, are Ontario Hydro and HydroQuébec.

Our Crowns are so huge and so numerous that they can, and do, overwhelm governments until, as Auditor General Kenneth Dye has written, “Parliament may not be able to exercise its fundamental responsibility for

Copyright ® 1987 by Shrug Ltd.

overseeing receipts and expenditures of funds.”

That was not just a bureaucrat’s complaint. The Canadian body politic is livid with the welts, and the Canadian pocketbook is flat with the damage, that the Crowns can cause us.

Item: Petro-Canada, the Crown charged with, among other things, developing research in the oil industry, bought into a French company called ISIS in 1984, in a secret deal, for about $17 million. It then hired a subsidiary of ISIS to take over crucial research on offshore oil projects, including the crucial question: how do we get the stuff ashore? The answers will belong to France, although we get a copy of the data.

Then Petro-Canada dismissed or reassigned most of its own offshore oil researchers, breaking up one of the most talented arrays of scientific specialists on earth. One of the contracts with the French company, for $375,000, includes pay rates of $52 an hour for secretaries in France.

Internal memos show, moreover, that the new research is not being carried out the way Petro-Canada directed; the French company has passed the work on to another subsidiary.

And if you want to know if $17 million worth of your money can be spent this way without any questions asked, the answer is yes, if it is done through a Crown. Those details have never been made public—until now.

Item: Two Canadian Crown corporations became involved in a cartel in 1972 to boost the international price of uranium, at the insistence of the federal government. They, in turn, roped four private firms into the arrangement. All four companies were taken to court in the United States, so the Canadian government passed a series of regulations making it a crime punishable by five years in jail to release any information about the combine. It became illegal even to quote statements that had been made in Parliament. The reasoning was that the wicked Yankees were trying to apply their combines law to our firms, so it was arranged to keep the American courts from getting the information they required.

Then, after a complaint by our own director of combines investigations, the six companies were charged with violating Canadian law.

The two Crowns went to court to ars gue that they could not be charged, because they were Crowns and, as a result, immune. They won, too. That left only the private companies they had brought into the plan to face the consequences, so the charges against them were dropped.

When they were in opposition, the Conservatives railed against the gag laws that covered up this mess; after three years in government the regulations are still in place.

Item: In 1981 Petro-Canada bought out Petrofina Canada Inc., a private company, and Parliament authorized a price tag of $1.7 billion. A furore broke out after Alfredo Campo, Petrofina’s founder, said that the price paid was “so far

beyond what any company would pay for it, or what the market was indicating, that I wonder how it makes any sense.”

Petrofina’s stock price at the time was about $90 a share; Petro-Canada paid $120. Not surprisingly, Auditor General Dye wanted to look into the purchase, but he was blocked by the Liberal government from getting access to the necessary documents.

The then-opposition leader, Brian Mulroney, was outraged and demanded that “the Prime Minister tonight open the books to the auditor general of Canada and to the people of Canada.” Then he became Prime Minister—and refused to open the books. By the time Dye won a court decision to gain at least some of the access he needed, some of the documents were gone. The accounting firm of Ernst & Whinney, which was asked to do a study on the sale for the government, reported that because of “missing or destroyed documents,” it could not properly estimate the exact value of the Petrofina shares before the takeover. When he heard that, Dye remarked, “Something smells, doesn’t it?” But exactly what, we may never know.

Item: Ontario Hydro, Canada’s largest Crown corporation, has contracts with two uranium companies under which it will, by the end of the century, have accumulated $2.8 billion worth of uranium for which it will have no use. Under the contracts, the companies are guaranteed a minimum of $1 billion in profit. They are also guaranteed that the price paid to them for uranium will go on rising no matter what happens to the world price. In 1985 Ontario Hydro paid an average of $80 a pound for uranium when the world spot price averaged $20.

Item: Canadair, the aircraft Crown, sold 25 Challenger jets to Federal Express in the United States for about $4 million (U.S.) each in 1978. But Federal Express cancelled the order for 20 of them; it would take only five. Then it persuaded Canadair to sell four of the five on its behalf, at a profit. In the end Federal paid Canadair $4.4 million for one Challenger and received back $8.4 million as its profit on the four planes the Crown firm sold for it. It netted one free aircraft plus $4 million for not buying the others.

Item: Two federal Crowns, the Canadian Saltfish Corp. and the Freshwater Fish Marketing Corp., collected $190,000 in a single year, 1985, by trading on the incompetence of Canada Post, another Crown. The two companies, instead of transferring income to Ottawa by bank transfer or courier, sent it by mail, which took anywhere from three to 13 days to wend its way to Ottawa. The $190,000 came from collecting interest on the funds while they waited in the bank for the mail to get through.

Canadians may take what comfort they can from the notion that we are not alone in this game. Every nation has government enterprises, whether or not they are called Crowns. In the United States, where there is much public celebration over the fact that the government has avoided the toils of socialism seen north of the border, there are, according to Annmarie Hauck Walsh’s study The Public's Business, 24,000 government enterprises.

New York state has 230 of them, including the Port Authority of New York, which owns the bridges, tunnels and terminals in and around New York City, along with the airports. It also owns and runs its own railway. Pennsylvania has 1,882 enterprises in charge of everything from the

Pennsylvania Turnpike to housing in Philadelphia. The 1982 census of governmental organization turned up 12,536 government firms at the county, municipal and township level, owning everything from 2,189 airports to 5,605 sewer systems, and not a socialist in the bunch.

At the federal level, the Tennessee Valley Authority, a U.S. government firm, is larger than any Canadian Crown, with more than $11 billion in annual revenue. The only larger corporation on the continent is another U.S. government firm, the Post Office.

All that activity does not prevent the Americans from pitying us and all our Crowns.

Curious.

There are many myths surrounding the Crowns, including the myth that they are a part of our history, something that makes us different from the Americans. In fact, until the 1950s the Americans had more government firms than we did.

In 1953 the American federal government was the largest power producer in the land, the largest lender and the largest borrower, the largest landlord and the largest tenant, the largest holder of grazing land, the largest owner of grain, the largest warehouse operator, and the nation’s pre-eminent shipowner and flat-truck operator.

It was only with the onset of McCarthyism, and the suspicion that anything that smacked of government also smacked of communism, that the Americans began to dis-

mantle their government firms, and they did so mainly at the federal level.

In Canadian history, there were few Crowns. Mostly, the thing was done in the good old free-enterprise way, as with the Canadian Pacific Railway, where the government put up the money and the private entrepreneurs used it—quite often, they just ran off with it.

The First World War and the Depression pushed Canada reluctantly into forming a Bank of Canada, a national airline and a national broadcasting system. We already had a national railway, but by default; the government took over the collapsing pieces of private railways to prevent bankruptcy.

The real explosion in Crowns began about 1961; it was never planned or supervised, it just happened, mostly by one Crown creating a lot of other little Crowns to help out.

When Petro-Canada started up in 1976 it began with three men in a Calgary hotel room and an expense account for cabs. Now it has $9 billion in assets, two mammoth office towers and 83 subsidiaries. If it had been suggested, while the enabling legislation was being discussed, that one company would become 84 companies in less than a decade, no one would have believed it.

But that is how the Crowns grew, from modest and accidental beginnings early in the century to a mushrooming— dark but fruitful—in the 1960s and 1970s.

It is their silent, secret growth that makes the Crowns so frightening. They are getting out of control, and the only way we seem to be able to deal with them is to sell them, which is often no solution at all. We even have a federal cabinet minister, Barbara McDougall, in charge of privatization, which sounds like something consenting adults do in the dark.

“Privatize” means sell. Actually, it usually means sell at

a huge loss, as we did when we swallowed over $1 billion in debt from Canadair and then sold the remains for $120 million. The aircraft company showed assets at the time of the sale of $478 million.

But if we are going to sell the Crowns—and that is certainly a solution for some of them, starting with PetroCanada—we face two questions. In the first place, who can afford to buy them, with accumulated assets, at the federal level alone, topping $77 billion? And in the second, if we are selling the Crowns, which ones will find a ready market: the smoothly functioning profit-turning Crowns or the clunkers that cause most of the trouble? Would you buy shares in Canada Post? Via Rail?

But there are solutions to the vexing problems of our Crowns, and three years of study have caused me to draw up a list of Seven Rules that will, if applied soon and rigorously, help us out of the morass.

1. Let There Be Light

The key rule is to open the Crowns to greater public access. For one thing, we should move at once to appoint the auditor general of Canada as auditor for every federal Crown and the provincial auditors general as auditors of the provincial Crowns. Many of our major Crowns hire private firms to look over the books, which is expensive and dangerous. The auditor general is not responsible to the government but to Parliament; he has a big shiny whistle, and he loves to blow it. There is nothing like a squealer on the premises to promote virtue, and the auditor general is a squealer par excellence.

2. Sort and Prune

Almost every legislative jurisdiction in the country either now has, or shortly will have, a minister responsible for privatization, and he or she ought to make it part of his

or her business to recatalogue all the Crowns. It would be nice to have a central register somewhere, with a complete listing. At both federal and provincial levels, we also need a reworking of the rules governing the formation of Crowns and a common definition of what is a Crown.

Currently there are three types of Crowns: departmental Crowns, which operate much as if they were part of a government department—the Agricultural Stabilization Board, for example; agency Crowns, which are “quasi-commercial,” such as Canada Post; and proprietary or “commercial” Crowns such as Air Canada. The definitions are hopelessly out of date. The CBC is a proprietary Crown, which means it is “ordinarily required to conduct its operations” without extra money from Parliament, although if it were to attempt to do so, all we would get on the CBC would be Hymns Ancient and Modern, and tips on how to redecorate your den.

Then there are the “others,” a great gaggle of uncatalogued Crowns including the Bank of Canada and Via Rail. There are no firm rules for either forming or controlling those. When one Crown can quietly whistle up five subsidiaries without leaking a word to Parliament, as the Canada Lands Co. did, there is something wrong. It ought not to be beyond the mind of man to come up with a set of standard rules to define what constitutes a Crown; I can’t help feeling that much of the confusion is deliberate, just another way of escaping legitimate control.

3. Unmix the Crowns

Government enterprises in Canada are allowed to own a share of private corporations, as the Canada Development Corp. does. (It owns, among other things, all or part of a petrochemical company, a life sciences company, an energy corporation and an office automation firm, all of which are controlled by private enterprise.) That is not permitted in the United States, for good reason. It produces the worst of all hybrids: a firm with access to public funds but beyond public control. That is not merely confusing, but dangerous. In a recent report to Parliament, the auditor general cited 13 cases in which “financial and other information available to Parliament is fragmented and incomplete.”

If governments want to operate in the commercial sector—and in most cases, they ought not to—they should do so as governments. If they want to support private companies, they ought to do so by way of grants, subsidies, loans or guarantees, all subject to the inspection and control of legislatures. If the loans crash and they wind up owning

something they did not intend to own, they ought to get rid of it.

4. Don’t Give Us Salvation, Just Understanding

Half of the problem with Crowns comes from a misunderstanding of their function. They are political animals. That is what they are for. Politics, like sex, represents primal shame in Canada, but that has not substantially interfered with either function —only with our understanding of it. It is a perfectly legitimate role of government to decide to invest money for political and social reasons; for example, to promote jobs in an unemployment-stricken area. A Crown corporation is one way to do that. Creating the Cape Breton Development Corp. in Nova Scotia made sense; it was done to keep the coal business from disappearing, along with thousands of jobs. It also made sense to turn the Sydney Steel Corp. into a Crown. What does not make sense is, having taken those

political steps, to try to pretend that what was involved was hardheaded economics and that, as a result, everything can be hidden from the public on the grounds that this is, after all, a commercial operation.

If it is commercial, let it pay for itself. If it cannot pay for itself, then it must abide by the rules of the public sector, which means, first and foremost, full disclosure. Full disclosure, it is always argued, will hurt the firm competitively. Too bad; it is the necessary price of government support.

5. Establish the Presumption of Guilt

You don’t have to be a cynic, merely a reader, to form the assumption that, left to themselves, the Crowns will be up to every kind of deviltry, with the aid of government funds. As well, history has shown us that, because they are Crowns, they are often in a difficult position when it comes to bargaining with unions. The pit is pretty well bottomless. If a tough strike can be mounted against a Crown, it will always be easier to settle at whatever price than to face the flak in Parliament because the country has been brought to a standstill. We pay heavily for strikes in the post office, on the Crown railroads or on the Seaway.

Those things being so, it ought to be very difficult for anyone to create or maintain a Crown. We have enough, too many, far, far too many, and anybody who wants to form another one ought to have to comply with the most rigorous rules under the Financial Administration Act, or a provincial equivalent, and in the teeth of a strong presumption that there is likely to be waste and wickedness afoot.

6. Privatization if Necessary, But Not Etc.

There are a large number of Crowns now operating in the public sector that properly belong in the private sector. But—and it is a large but—the movement in that direction ought to be taken with care.

We no longer need a government airline to fly the routes from Toronto and Ottawa to Montreal, or from Calgary and Edmonton to Vancouver. But we do need, and will always need, an airline to fly from, say, Moose Jaw to Thompson, Man. Again, what we want to do is to privatize—at a big fat profit—the part that will support itself commercially, and keep the rest in a Crown.

We own dozens of Crowns, with hundreds and hundreds of subsidiaries, that either never had or have lost the need to be Crowns, but it does not follow that we ought to privatize them all, even if we could get a market to absorb them all.

Many should simply be written off or gradually allowed to atrophy; many should be absorbed back into government departments (frankly, I do not see why the Royal Canadian Mint should not be run out of the department of finance), and some should remain as they are, with stricter accountability and control.

It is foolish, in my mind, to talk of selling off the Canadian Broadcasting Corp., although God knows it could be redrawn without any harm done. The Canadian Wheat Board has run well for decades and ought to be governed by the if-it-isn’tbroke-don’t-fix-it rule. Privatization may provide fast funds

for beleaguered governments, but it is at best only a partial solution for some of our Crowns. We will certainly come to regret having sold Teleglobe Canada, with its monopoly on overseas electronic communications, to the private sector.

7. A Sunset Law

The history of government enterprises—not only our own, but all over the world—shows that they all tend to follow the same pattern. A Crown created for sound policy and social reasons becomes, over time, nothing more than an entrenched bureaucratic corporation defending itself against all comers with guile, evasion and secrecy. What we need, then, is a periodic review of each Crown before a parliamentary committee. Most would not need to be looked at more than once a decade, and they would only need to respond to two questions: why were you incorporated and what have you been up to?

Comparing the original legislation or regulations with current performance would allow us to dispense with many of them, reform others and keep a salutary eye on the rest.

All seven of my points are really one—an argument that in any nation there will always be social, political and mixed social-political-and-economic goals that can best be achieved through government enterprise. In a limited number of cases, a separate corporation is more effective than, say, a departmental organization, or simply slipping subsidies to a private firm. Like the poor, Crowns will be always with us. At the same time, cruel experience has taught us that there is a constant danger that self-perpetuating, self-aggrandizing, self-promoting Crowns will always try to shake off the shackles of control and go forth to be fruitful and multiply. That is an argument to control Crowns, not an argument to reject the concept of government enterprises.^