Free Research Paper On Privatization OF Canadian Government Services
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In the last fifteen years, the privatization of Canadian government services has grown. Privatization is the systematic transfer of government functions to the private sectors (Public Interest, 2015). One of the main reasons for privatization is to reduce costs at the same time maintain the quality of services offered. People supporting privatization argue that private sectors provide services more efficiently, and they are less costly than when under government operation. Government operations are at times considered to be ineffective and unresponsive to the demands and needs of the public (John Howard Society, 1998).
Forms of Privatization
There are different forms of privatization proposals and they all suggest ways to lessen the government involvement in a certain activity. The lessened control brings about different degrees of public and private control over an activity, and they leave the control in public and private hands. One form of privatization is divestiture that proposes the government to terminate its formal ownership of an asset. Government ownership of a business makes the government the decision maker on the quantity and quality of goods produced, manner of production, means of distribution and the prices of goods. Selling the business to a nongovernment buyer means elimination of government control over the business. The business remains a subject to applicable rules, and it is expected to respect liability for product defects, constraints on environmental pollution among others. The government can also reduce its authority by relinquishing assets. The sale of assets terminates the government’s control over it. Unlike other forms of privatization, the sale of assets does not significantly affect nature or the amount of government activity. Divestiture can also take the form of abandonment of assets, for instance, the government can give public housing projects back to their tenants. The abandonment of assets can terminate all government control (Cass, 1988).
Contracting is another form of privatization that involves the contractual rearrangement of control over some aspects of an activity. The arrangement can fall into two categories. The first category is the lease of government assets to another party. For instance, the government can lease mineral rights in a government-owned land. Another category is known as contracting out where the government purchases goods and services from another party. For instance, the government can purchase the management services for a government-owned facility such as a prison. Privately owned enterprises perform the services that have been contracted out. The contracting proposals provide for the decision-making responsibility between the government and another contracting party. In one instance, the government could lease property on a long term basis without restricting its use. In another instance, the government could purchase goods and provide the specifications to be used in designing and manufacturing but leaves the mechanics of the production to be contracted out. The contracting proposals may also vary in other dimensions. Privatization would include replacing a service provided on a monopoly by the government with one provided by a private enterprise. Such a proposal would end the monopoly provision of the service (Cass, 1988).
Franchising is also another arrangement used in privatization. It is referred to as a lease or a concession and in this case, the government gives a private enterprise the exclusive right to provide a public service or operate an asset. The private enterprise pays an annual lease charge, and it becomes a subject to meeting the performance expectations by the public sector. Franchise-based privatization may involve the privatization of government assets such as a toll road, water plant or the financing of building and delivering new infrastructure assets (Gilroy, 2010).
User fees are another form of privatization, and it is a variation of franchising and contracting out. In this form of privatization, the consumer pays a set of fee to cover all or part of the service costs. For example, a municipality may charge a set fee per household for trash collection instead of paying for that service out of a general tax pool (Malonis, 1999).
Load shedding is also another form of privatization where the government steps aside entirely. The consumer is the left responsible to decide if they want to use the service, select the provider and the payment of the service. That form of privatization is associated mostly with services such as trash collection (Malonis, 1999).
Goals of Privatization
The government uses privatization to provide public services because of several factors. One of the main reasons is cost saving. Would-be service providers are encouraged due to competition to keep their cost to a minimum since they risk losing their contract to a more efficient competitor. Cost saving can be realized in several ways that include economies of scale, reduced labor costs, better technologies, innovations of different ways to complete the job. Study shows that cost saving ranges between 5 to 50 percent that usually depends on the scope and type of service (Gilroy, 2010).
Competition and Contracting make it easier for the government to control costs by building containment provisions into contracts. Contracting makes it possible for the government to shift major liabilities from itself to the contractor such as budget shortfalls, compliance with federal and state regulations. Consequently, there is an improvement in risk management (Gilroy, 2010).
Privatization also helps the government to accommodate fluctuating peak demands. The change in seasons and economic conditions may cause the staffing needs to fluctuate significantly. Through privatization, the government can obtain additional help when necessary ensuring uninterrupted provision of services (Gilroy, 2010).
Privatization in Canada
Most of the Canadian privatization has occurred between 1985 and 1995. Most of the privatized entities operate in telecommunications, natural resources or related sectors such as fisheries, mining, oil and gas, transportation that includes shipping, the air, and rail. There are two main methods that the Canadian government uses for privatization namely Direct sale privatization and Share issue privatization. Direct Sale Privatization is a method to sell a government entity to a private sector entity. There are several Crown corporations that were disposed of through DSP including Canadian Arsenals, CN Route, Canadair and Theratronics International. The privatized entities were relatively small, and they operated in niche markets. Their continued survival would have been difficult as stand-alone private sector entities. Most Direct Sale Privatizations took place through privately negotiated sales. Share Issue Privatization involves the sale of shares to the public through public markets. Most large crown corporations in Canada are privatized through Share Issue Privatization including Air-Canada, Co-enerco, Petro-Canada, and CNR. Fishery Products International and Cameco were both jointly owned by the provincial and federal governments, and they privatized in this manner. Most of the corporations privatized in this manner operated in competitive environments, and they were large enough to survive on their own even after the privatization (Boardman & Vining, 2012).
Privatizing Public Services
Between the 1960s and 1970s, government employment increased significantly due to the expansion of the public sector’s participation in the economy and the rise of government spending on goods and services. There was a deterioration in fiscal positions in the 1980s and 90s, and the government started hiring private firms to provide public services. The government finances and provides a framework for delivery of public services when it contracts out. The private organizations act as agents of the government on how they operate and manage the service. The hiring of private enterprises to collect garbage or remove snow, and other local services have been a common practice for many years. The contractual arrangements are expected to reduce government expenditure and also encourage delivery of services efficiently and make the government more flexible to adjust delivery to public needs (Levac & Wooldridge, 1997).
Privatizing Infrastructure Development
Historically, the government of Canada is known to dominate infrastructure development, and their involvement ranges from the subsidization of railway construction to building schools and hospitals. Most of the highways, bridges, airports, canals and municipal sanitation systems are built and maintained using public money. The private ownership and operation of such projects is common in other countries. Today most governments see the need to increase infrastructure investment but do not want to raise taxes or to add debt burdens to finance such projects. Most governments are, therefore, transferring existing infrastructure systems to private entities and allowing them to build and operate public works. Some of the public-private ventures undertaken in Canada include the following. The construction, repair and the upgrading of new schools in New Brunswick and Nova Scotia. New Brunswick and Nova Scotia chose to lease new schools to private firms instead of finance their construction. A toll highway north of Truro in Nova Scotia was also financed by a private enterprise halfway, and the federal and provincial governments contributed the rest. Ontario also contracted a private enterprise to design, build and maintain a highway north of Toronto, but the financing in this case was provided by the province (Levac & Wooldridge, 1997).
Impact of Privatization in Canada
The impact of privatization is explained in terms of growth and investment. Growth can in terms of increase in profits, employment and taxes. For this study, privatized crown corporations were evaluated to determine if the changes in sales before and after privatization. Sales were lower by 90 million dollars in the three years post-privatization than in the three years pre-privatization. Sales then increased. Sales decreased from 1.7 billion per years for about five years before privatization to 1.32 billion in the first year of privatization. Potash Corp had the largest increase in sales from 240 million prior to privatization to 1.6 billion after privatization. Assets decreased to 2 billion dollars in the five years before privatization and increased steadily after privatization. By the 17th year of privatization, study shows that assets averaged over 13 billion which is almost 12 percent increase per annum. In conclusion, the study shows that before privatization, sales and assets were low. After privatization, both sales and assets increased and continued to increase through the 17-year post-privatization period (Boardman & Vining, 2012).
The impact of privatization is also evaluated in terms of employment and employee surplus. Due to social and political reasons, the employment in the crown corporations may have been higher that the maximum profit levels. The elimination of the socio-political pressures increased emphasis on efficiency and profitability which would in turn cause a fall in employment following privatization. The reduced employment would in turn reduce Employee Surplus. Study shows that the number of employees decreased significantly in the five years prior to privatization and continued to decrease even after privatization. On average, the employment decreased from 16,000 people five years before privatization to 7,000 people five years after privatization. After privatization, the companies restructured and started hiring again. The employees then increased to over 12,000 people by the 17th year of privatization. The reductions in employment were in most cases voluntary and would have occurred due to competitive pressures (Boardman & Vining, 2012).
According to Boardman and Vining, impact of privatization is measured using operational efficiency, profitability, dividends and producer surplus. Operational efficiency is measured by sales per employee. As discussed, in the five years after privatization the sales were increasing, and the number of employees was decreasing. The average number of sales per employee was also increasing during that period. Study shows that the average sales per employee was slightly high in the three years after privatization than in the three years after privatization. After that the sale per employee increased almost every year and by the 17th year, it had a 340 percent increase. The corporations’ profitability is measured in terms of ROA and ROS, and it was found to be considerably high after privatization than before. The improvement was because some of the companies had significant write off in the pre-privatization period. The increase in profits and profitability might be expected to result to an increase in dividends. The dividends were said to be low before privatization. For Potash Corp, the average dividends increased to 36 million in the year of privatization and remained on that level about three years.
Government Surplus is a distinct indicator of the corporate taxes paid and can be used to check the impact of privatization on a company. Before the privatization, corporate taxes averaged at about 29 million per year and in the three years after privatization, they rose to 47 million per year and increase at about 18 million per year afterward. By the seventeenth year, the taxes had increased consistently to about 300 million on average.
Debt relative to assets is expected to decrease after privatization because of two reasons. The elimination of government ownership tends to go up as the cost of debt increases. Secondly, after privatization a company can directly access capital markets and easily raise equity. The debt-to-assets ratio may increase as profitability increases, and the risk reduces since banks are more willing to lend money to such entities. Study shows the debt to assets ratio decreased considerably after privatization by 11 percent on average and from 56 percent in the three years before privatization to 45 percent after privatization (Boardman & Vining, 2012).
Future privatization in Canada
The future of privatization in Canada is likely to be dominated by provincial governments. The provinces own a large number of the Crown corporations including some of the largest Canada’s utilities. Some of the industries reserved for provincial Crown corporations are being restructured, and this could lead to partial or full privatization. Many provincially and locally provided services might be contracted out to private entities. Some provinces have started experimenting with provision of non-essential health care services and others with the private operation of prisons. Some municipalities have contracted the management and development of recreational facilities and water treatment systems, and other municipalities may follow suit in a few years (Levac & Wooldridge, 1997).
Canadian privatization has been successful but still much of the Canadian economy remains in the state hands. There still exists many federal and provincial Crown corporations. The government still provides health care, water, sewage treatment and other municipal services which are potential sectors for privatization. There are many barriers to privatization including political and bureaucratic barriers and tax implications (Wilson, 2002). When analyzing the general principles of privatization, it is necessary to categorize businesses into three groups. First would be those that would operate in competitive markets following privatization, those that would have significant power due to privatization and those that would have significant revenue (McDonalds, 2005).
According to Boardman and Vining (2010), the Canadian government has not formulated a framework to guide its privatization regime. The framework should describe the way in which an entity is privatized, the nature of post-privatization regulatory environment, and it might play a role in the social welfare consequences. Some of the recommended rules for the government are as follows:
Crown corporations with multiple businesses should be broken down into separate businesses prior to privatization.
Government should privatize Competitive Businesses.
Any direct or indirect benefits as a result of restrictions and regulations that have been received by Competitive Business before privatization should be removed at the time of privatization.
Market Power Businesses should be managed by private firms under appropriate post-privatization regulatory regime.
Governments, which dispose of businesses through share issues, should sell them at revenue-maximizing prices instead of giving them away or selling them at reduced prices (Boardman and Vining, 2012).
Benefits of Privatization
Privatization of some of the public services leads to improved efficiency. Private companies can cut costs and be more efficient due to competition. The interest of a private company is to make the profit and it more likely to cut cost and make it operations more efficient than an industry owned by the government would. Since privatization, companies such as Canadair have become highly profitable (Nichols, 2010).
Economics argues that governments make poor economic managers. The privatization of public services reduces the political interference on a corporation that tends to increase its efficiency and profit margins. For instance, a government-owned company might employ excess personnel that is inefficient. The government may hesitate dismissing the excess employees due to the negative publicity that come with job losses (Pettinger, 2011).
The increase in competition among private companies may result to an improvement in efficiency. Policies created while privatization of services allow more private companies to enter the industry making the market more competitive. Privatization does not necessarily increase competition it usually depends with the nature of the market. For example, the rail industry has very little competition even if privatized (Gilroy, 2013).
Disadvantages of Privatization
One of the most raised concern about privatization is the maintaining of public interest. Privatization of certain important public services such as healthcare, education, and transport should not have profit as the primary objective of firms and industries. For instance, in privatizing health-care services it is feared that the patient care will no longer be a priority and instead making profits will be (Pettinger, 2011).
Privatization may also require a company or industry to be fragmented. The fragmentation will lead to areas where it is unclear who has responsibility on certain areas. For instance, the privatization of the rail industry in the UK led to breaking up the rail network into infrastructure and operating companies which made it unclear who had what responsibilities (We Own It, 2015).
Boardman, A. E., & Vining, A. R. (2012). A Review and Assessment of Privatization in Canada. The School of Public Policy Research Papers, 5(4), 1-32. Retrieved from http://www.policyschool.ucalgary.ca/sites/default/files/research/boardman-vining-privatization.pdf
Cass, R. A. (1988). Privatization: Politics, Law and Theory. Marquette Law Review,7(449), 450-522. Retrieved from http://scholarship.law.marquette.edu/cgi/viewcontent.cgi?article=1804&context=mulr
Gilroy, L. (2010, March 16). Local Government Privatization 101. Retrieved from http://reason.org/news/show/local-government-privatization-101
Gilroy, L., & Moore, A. (2013, June). Privatization of Government Programs Benefits the Economy. Retrieved from http://www.ncpa.org/sub/dpd/index.php?Article_ID=23240
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Johnson, D. (2014. May 19). The Privatization Scam: Five Government Outsourcing Horror Stories. Retrieved from http://ourfuture.org/20140519/the-privatization-scam-5-horror-stories-of-govt-outsourcing-to-greedy
Levac, M., & Wooldridge, P. (1997). The Fiscal Impact of Privatization in Canada. Bank of Canada Review, 25-40. Retrieved from http://www.bankofcanada.ca/wp-content/uploads/2010/06/r973a.pdf
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McDonald, D. A., & Ruiters, G. (2005). Rethinking Privatization: Towards a Critical Theoretical Perspective. Retrieved from http://www.municipalservicesproject.org/sites/default/files/Rethinking%20Privatization%20Towards%20a%20Critical%20Theoretical%20Perspective.pdf
Nichols, R. (2010, December). The Pros and Cons of Privatizing Government Functions. Retrieved from http://www.governing.com/topics/mgmt/pros-cons-privatizing-government-functions.html
Pettinger, T. (2011, May 12). Advantages and Problems of Privatization. Retrieved from http://www.economicshelp.org/blog/501/economics/advantages-of-privatisation/
Pettinger, T. (2011). Arguments for Privatization. Retrieved from http://www.economicshelp.org/macroeconomics/privatisation/arguments-privatisation/
Public Interest. (2015). Privatization 101. Retrieved from http://www.inthepublicinterest.org/privatization-101
We Own It. (2015). 5 Reasons Why Privatization is Bad for You. Retrieved from http://weownit.org.uk/privatisation
Wilson, D. (2002). Privatization of the Canadian Health Care System. Retrieved from https://www.uow.edu.au/~bmartin/dissent/documents/health/privat_canada.html
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