Privatization policy

Curtailing the size of the state

For the most of the past half century, governments allowed the size of the state to grow unchecked. In the face of an increasingly competitive global market and the vast body of evidence supporting the benefits of smaller government, most provincial governments in Canada have begun to cut back on their expenditures. One means of cutting expenditures is through privatization. Broadly speaking, privatization results in the transfer of ownership and control of state services and enterprises to private interests (Adam Smith Institute 1986). In doing so, government is able to free scarce resources and allow free markets to influence the allocation of economic resources.

The benefits of privatization

Theoretically, the desirability of privatization is rooted in the efficiency gains that result in transferring control of a publicly owned and operated enterprise or public service to the private sector. Research suggests that in most areas the private sector is more capable of delivering goods and services to the public efficiently than the public sector is. For instance, private operators face incentives distinctly different from those influencing public-sector bureaucrats (Hanke 1987). While private managers are concerned with maximizing profits in order to remain in business, the bottom line is of little consequence to government officials, who are far less concerned with ensuring profitable operations than they are in conforming to the wishes of their political masters. In fact, government-run services and enterprises are likely to receive grants and subsidies from the state if they are incapable of supporting themselves. Whereas private entities face competition for the delivery of a particular good or service, government enterprises and services maintain a monopoly over their operations. As a consequence, there is no incentive for public-sector bureaucrats to improve the quality of service. Gwartney and Stroup correctly suggest that private entities must continuously innovate and provide quality services at reasonable prices to consumers in order to remain competitive and in business (Gwartney and Stroup 1993).

Madsen Pirie found that public-sector entities employ capital far less efficiently than do private firms in the same industry. Pirie concluded that given the inflexibility of workplace rules in the public sector, public firms are hindered in their ability to innovate and test new methods of production (Pirie 1988). In addition, numerous studies conducted on public enterprises before and after privatization conclude that privatization is successful in enhancing productivity. For instance, a study conducted by Professor D.G. McFetridge of the department of Economics, Carlton University, concluded that evidence from around the world shows that the benefits of privatization are largely positive (C.D. Howe Institute 1997). For example, private garbage collection employs fewer employees per vehicle and uses each vehicle more intensively than public-sector garbage collection (McDavid 1988). Similarly, the privatization of the Alberta Liquor Control Board yielded better customer service and improved product choice (West 1997).

A study commissioned by the World Bank concluded that 60 companies from around the world showed, when privatized, efficiency gains of 11 percent, a 45 percent increase in profits, a 27 percent increase in output, and a growth in investments in plants and equipment of 44 percent. Given efficiency gains such as these, it should come as no surprise that in 1996 governments around the globe privatized almost $86 billion of state-run services (National Centre for Policy Analysis 1997). Competition leads to innovation, efficiency gains, better product quality, and superior customer service. Government-controlled services, on the other hand, impede innovation, yield fewer efficiency gains, and force consumers to bear the brunt of high costs. In short, privatization is the perfect prescription for making chronically inefficient and costly government services work better.

Maintaining the status quo
in British Columbia

Despite a growing body of evidence pointing to the benefits of privatizing government services, the government has opted to continue with the expansion of government departments. Between 1991 and 1996, the number of people employed by the government of British Columbia increased by almost 7 percent (see figure 23) whereas, during the same period, total employment in the public sector decreased by 6 percent throughout Canada (Statistics Canada 1998a). Further, between fiscal 1994/95 and 1995/96, the cost of running the government of British Columbia increased by almost 10 percent and, according to the British Columbia government's 1998 Budget, those costs are projected to continue rising (BCMinFinCorpRel 1998a).

The finances of Crown corporations have grown steadily worse since the NDP government came to power in 1991. Figure 24 shows how the total debt of Crown corporations in British Columbia has increased since 1995: the total debt load will increase to almost $23 billion by 1999--a 20 percent increase since 1995--all guaranteed by the provincial government (BCMinFinCorpRel 1998a).1

Vaughn Palmer, columnist at the Vancouver Sun, recently illustrated the huge inefficiencies and mismanagement that have plagued the British Columbia Ferry Corporation. The Ferry Corporation lost $137 million over the past two years and its fast ferry program has been dogged by continuous delays and increased expenses (Palmer 1998). In addition, fares during the peak season have increased by over 60 percent since 1992 (Hildebrand 1998). British Columbia Transit has fared no better. The operating cost per passenger increased by 3.2 percent while operating cost per service hour increased by 5.7 percent in 1996/1997 (British Columbia Transit Annual Report 1996/97).2 In short, the government's maintenance of the status quo has meant a bigger, more inefficient, and costly bureaucracy.

Recommendations

The government of British Columbia should, therefore, stop increasing the size of government and begin to privatize many of the services and Crown corporations it currently controls or operates. To provide British Columbians with more choice, relatively less expensive and better services, we suggest that the British Columbia government consider privatizing the following Crown corporations:

• Insurance Corporation of British Columbia
• British Columbia Hydro3
• British Columbia Liquor Distribution Branch
• British Columbia Railway Company
• British Columbia Ferry Corporation
• British Columbia Transit
• British Columbia Steamship Company
• Duke Point Development

This is only a start. The privatization of these highly visible Crown corporations will, at the very least, establish a clear commitment on the part of the government of British Columbia to offer its citizens more choice at lower costs for many goods and services. There are, however, numerous other services currently owned or operated by the province of British Columbia that could be contracted-out to the private sector through a competitive bidding process. For example, government publications could be produced by private firms instead of the government press.

Conclusion

The desirability of privatization is based on the efficiency gains from turning over to the private sector control of a publicly owned and operated government enterprise or service. There is a great deal of evidence to suggest that the private sector is more capable of delivering services to consumers efficiently. In short, competition leads to innovation, greater efficiency gains, quality products, and customer satisfaction.

However, the government of British Columbia has opted for a bigger role for the government in delivering services to the public. For failing to put a stop to the growth of the state in this province and ignoring the importance of privatizing government services and Crown corporations, the British Columbia government deserves an F for its privatization policies.

1. Please note that these figures refer to Crown corporations whose debt is supported by taxpayers.
2. These costs refer to the Vancouver Regional Transit System.
3. Studies show that privatizing British Columbia Hydro would result in efficiency gains, reduce the provincial debt by $12.2 billion, and give consumers more choice and access to cheaper forms of electricity, all without compromising the safety of British Columbians or adversely effecting the environment. Please see Howe and Klassen 1996.

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Last Modified: Wednesday, October 20, 1999.