The Future of Public Enterprises Perspec

Annals of Public and Cooperative Economics 82:4 2011 pp.
399–419
THE FUTURE OF PUBLIC ENTERPRISES:

PERSPECTIVES FROM THE CANADIAN EXPERIENCE
by
Luc BERNIER∗
École nationale d’administration publique, Université du Québec, Canada
ABSTRACT: Public enterprises have been an integral part of the involvement of

the state in the economy for most of the 20th century. After 1980, privatization has been
the dominant trend until the 2008–2010 economic crisis when new nationalizations
happened. Ownership is only an element of a complex system of relations between
a public enterprise and its institutional environment where the role of the board of
directors, the mechanisms of coordination, the role of senior civil servants, etc. come to
play. Using the Canadian experience with public enterprises, we suggest in this article
that public enterprises could be interesting economic policy instruments in the future as
in the past if such an economic policy exists. In other words, privatization did not solve
the control issue over many large enterprises. Improved corporate governance should
be considered. This article aims at improving the understanding of how by focusing on
various aspects of the governance of public enterprises on their potential use and work.
In Canada, public enterprises have been used to face the recent global crisis but they
also come from a long tradition of intervention in the economy, a tradition closer to the
European than the American. After reviewing recent developments in their governance,
paths for future research are proposed.
El futuro de las empresas públicas: perspectivas a partir de la experiencia

canadiense
Las empresas públicas han sido parte integrante de la implicación del Estado en la
economı́a durante la mayor parte del siglo XX. Después de 1980, la privatización ha sido
la tendencia dominante hasta la actual crisis económica 2008–2010, a partir de la cual
se ha procedido a nuevas nacionalizaciones. La propiedad es sólo un elemento más de
un sistema complejo de relaciones entre una empresa pública y su entorno institucional,
donde el papel del consejo de administración, los mecanismos de coordinación, la misión
de los altos funcionarios, etc., entran en juego. La investigación se basa en la experiencia
de empresas públicas canadienses y pretende mostrar que las mismas podrı́an ser
∗ The author would like to thank Patrick Gauthier and Luc Farinas for their help in
preparing this article that was made possible by a grant of the FQRSC to study the governance
of collective enterprises under the direction of Marie Bouchard of l’UQAM. The comments by the
anonymous reviewers were also very helpful to improve this paper, thanks also to them. Email:
luc.bernier@enap.ca
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Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA, MA 02148, USA
400 LUC BERNIER
interesantes instrumentos de polı́tica económica en el futuro, como lo fueron en el pasado,

si es que existe tal polı́tica económica. En otros términos, la privatización no ha resuelto
la cuestión del control de las grandes empresas. En este sentido, habrá que considerar
la mejora del gobierno corporativo. Este artı́culo trata de facilitar la comprensión del
funcionamiento y de la utilización de las empresas públicas, concentrándose en algunos
aspectos del gobierno de las mismas. En Canadá, las empresas públicas se utilizan para
hacer frente a la reciente crisis financiera mundial, pero las mismas provienen de una
larga tradición de intervención en la economı́a, una tradición más próxima a la europea
que a la americana. Después de haber examinado los desarrollos recientes en su gestión,
se plantean algunas nuevas vı́as de investigación.
Die Zukunft öffentlicher Unternehmen : Perspektiven aus den kanadischen

Erfahrungen
Öffentliche Unternehmen sind im 20. Jahrhundert zumeist ein integraler Bestandteil
des Engagements des Staates in der Wirtschaft gewesen. Nach 1980 war Pri-
vatisierung der dominante Trend, bis zu der Wirtschaftskrise von 2008–2010, als
neue Verstaatlichungen stattfanden. Eigentum ist nur ein Element eines komplexen
Systems von Beziehungen zwischen einem öffentlichen Unternehmen und seinem
institutionellen Umfeld, wo die Rolle des Vorstands, die Mechanismen der Koordination,
die Rolle der leitenden Beamten usw. eine Rolle spielen. Auf der Grundlage der
kanadischen Erfahrungen mit öffentlichen Unternehmen gelangen wir in diesem Beitrag
zu der Auffassung, dass öffentliche Unternehmen in der Vergangenheit wie in der
Zukunft interessante wirtschaftspolitische Instrumente waren und sein können, wenn
eine solche Wirtschaftspolitik existiert. Mit anderen Worten: Privatisierung hat nicht
das Problem der Kontrolle über viele große Unternehmen gelöst. Vielmehr sollte
verbesserte Unternehmensführung angestrebt werden. Dieser Beitrag zielt darauf ab, das
Verständnis der Funktionsweise und der Einsatzmöglichkeit öffentlicher Unternehmen
zu verbessern, indem verschiedene Aspekte der Unternehmensführung öffentlicher
Unternehmen beleuchtet werden. In Kanada sind öffentliche Unternehmen jüngst zur
Bekämpfung der globalen Krise eingesetzt worden, doch haben sie hier eine lange
Tradition der Intervention in die Wirtschaft – eine Tradition, die der europäischen näher
steht als der amerikanischen. Im Anschluss an die Betrachtung neuerer Entwicklungen
auf dem Gebiet der Unternehmensführung öffentlicher Unternehmen werden Pfade für
künftige Forschungsarbeiten aufgezeigt.
L’avenir des entreprises publiques : perspectives à partir de l’expérience

canadienne
Les entreprises publiques ont été partie intégrante de l’implication de l’État dans
l’économie pendant la majeure partie du XXe siècle. Après 1980, la privatisation a été
la tendance dominante jusqu’à la crise économique de 2008–2010 lorsque de nouveau,
on a procédé à des nationalisations. La propriété est uniquement un élément d’un
système complexe de relations entre une entreprise publique et de son environnement
institutionnel où le rôle du conseil d’administration, les mécanismes de coordination,
le rôle de hauts fonctionnaires, etc. entrent en jeu. En nous basant sur l’expérience des
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THE FUTURE OF PUBLIC ENTERPRISES 401
entreprises publiques canadiennes, nous proposons dans cet article que les entreprises
publiques pourraient être des instruments de politique économique intéressants dans
l’avenir, comme par le passé, s’il existe une telle politique économique. En d’autres
termes, la privatisation n’a pas résolu la question du contrôle des grandes entreprises.
La gouvernance corporative améliorée doit être considérée. Cet article vise à améliorer
la compréhension du fonctionnement et de l’usage des entreprises publiques en se con-
centrant sur les divers aspects de la gouvernance des entreprises publiques. Au Canada,
les entreprises publiques ont été utilisées pour faire face à la récente crise financière
mondiale mais elles proviennent également d’une longue tradition d’intervention dans
l’économie, une tradition plus proche de l’européenne que de l’américaine. Après avoir
examiné les développements récents dans leur gouvernance, des pistes de recherche sont
proposées.
1 Introduction
Public enterprises have existed around the world for most of the 20th century.
In the UK, several nationalizations had occurred between 1919 and 1939 (Middleton
1996: 342). The French government nationalized several enterprises after the end of the
Second World War (Andrieu et al. 1987). Elsewhere in Europe, in Latin America and
everywhere around the world, public enterprises were created. The results achieved by
these enterprises did lead eventually governments to conclude that public enterprises
should be privatized. Over the last quarter of the 20th century, objectives for these
enterprises other than financial were often dropped and the economic performance
of these enterprises improved (Bozec and Breton 2003, Luke 2010). By doing so,
governments had even less reason to maintain ownership when very little differentiated
these enterprises from the private ones. The World Bank considered that public
enterprises had demonstrated to be poor performers in general and that privatization
under various formulas would lead to improvements (Shirley and Nellis 1992). The
‘Washington consensus’ was that bureaucrats should not be in business. After 1980,
privatization has been the dominant trend until the 2008–2010 economic crisis when
new nationalizations happened.
Ownership is only an element of a complex system of relations between an
enterprise and its institutional environment where the role of the board of directors, the
mechanisms of coordination, the role of senior civil servants, etc. come to play. Using
the Canadian experience with public enterprises, we want to suggest in this article
that public enterprises could be interesting economic policy instruments if such a policy
exists. In other words, privatization did not solve the control issue over many large
enterprises. Improved corporate governance might be the solution to maintain these
enterprises in the public sector and hope that they will have other objectives than the
commercial ones. This article aims at improving the understanding of how by focusing
on various aspects of the governance of public enterprises. Governance is defined here
as a configuration of laws, structures, resources, administrative rules and institutional
standards which program and condition state services and regulation (Bernier and
Simard 2007, Lynn et al. 2000). In Canada, public enterprises have been used to face
the recent global crisis but they also come from a long tradition of intervention in the
economy, a tradition closer to the European than the American. After reviewing recent
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402 LUC BERNIER
developments in their governance, paths for research are proposed. What is the future
of public enterprises? Are they instruments of the past or do they have a future?
2 Autonomy and control of public enterprises: a difficult balance
In 1977, an international conference took place that resulted in the book Public
Enterprise and the Public Interest. In his summary of the findings, Gélinas (1978:
14–24) stressed as others before and after him, the importance of balancing, on one
hand, the needs of public enterprises for managerial autonomy to achieve its corporate
objectives with, on the other hand, the obligation to work according to public policies
in favor of the general interest. This has been a central issue concerning public
enterprises since they started to be used by governments and it is still an issue (OECD
2005).
Control is ‘the regulation of activities to ensure the attainment of goals efficiently
and effectively. When goals are clearly stated, the control system is designed to reinforce
the objectives by measuring the level of accomplishment and the costs’ (at least in theory)
(Aharoni 1986: 217). The case for public enterprises has often been difficult to make.
It has been said that in practice, government control, public enterprises managers,
strategic behaviour and goal concentration are weakly correlated (Zif 1983).
Generally, a formula of control involving a board of directors, separate accounts
from those of the ministry to which the enterprise is accountable, distinct responsibility
for an incorporated enterprise has been used. The autonomy granted is supposed to
facilitate flexibility and efficiency for the financial, industrial or commercial activities.
The autonomy granted usually moves the public enterprise beyond the usual scrutiny
of Parliament in the Westminster tradition. The crucial issue for the participants to
the conference, wrote Gélinas (p. 20), was the problem of control. A public enterprise is
accountable to the government, to Parliament, to the law courts but also to various
stakeholders, sometimes consumer associations, the media, environmentalists and
regulatory bodies. There are a priori controls such as policy directives or the approval
of strategic plans and posteriori ones such as audits of accounts. Public enterprises
have consequently more obligations than the private enterprises they compete with.
They have to be more transparent. They might also have financial losses due to projects
they are asked to do by the government. A coherent sectoral policy is not always to be
expected from the ministry (Gélinas, p. 22) but control systems have often been seen
as inefficient and increasingly cumbersome, not the lack of policy from government.
Moreover, very often, public enterprises created subsidiaries that escaped even more
government control.
Often, the huge control apparatus might be seen as too bureaucratic and too
complex and thus an important control remains the capacity of the government to
appoint the members of the board of a public enterprise (Gélinas 1978: 22, Gracey
1978: 31). Boards have been loosely assembled with representatives of the ministry,
experts, consumers, interest groups, etc. There is also a control over their budgets often
also deficient (Gracey 1978: 31–34). The debate over government control remained the
central issue in Canada concerning public enterprises. Stevens (1993) saw them as a
problem of organization design where the circulation of information was problematic
and that the appropriate model had not been found in the provinces studied.
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Cassesse (1981), quoting studies about French public enterprises, estimated that
they would have been more efficient with less controls. He generalized his argument
explaining that too much control and confusion about the role of these enterprises
limited their entrepreneurial capacity. In 1986, in his chapter of the textbook on
public enterprises, Aharoni (p. 253) also concludes that after decades of experiences,
control remains problematic. From research on Canadian, European and Algerian public
enterprises, Hafsi and Koenig (1989) have suggested that the relationship between
the state and a public enterprise follows a pattern. There are three possible modes
of interaction which can be combined into a cycle evolving from mutual dependence
and cooperation to autonomy via an adversarial stage. Hafsi et al. (1987) have written
that ‘four contextual variables shape the state-owned enterprise (SOE)-government
relationship: the SOE’s development of a technical core, the SOE’s financial self-
sufficiency, the structure of government supervision over the SOE, and the agreement
on rules of the political game among external groups. The relationship life cycle is then
linked to five configurations of top management in SOEs, which differ in composition
and structure, performance criteria, and critical tasks.’ More recently, Cornforth and
Edwards (1999) have also argued that board roles depend on a complex interplay of
factors; the system of regulation, sectoral traditions and norms of governance, the way
board members are chosen, board member skill and experience, organizational size and
status, and the way boards are organized and run.
So, the issue of control versus autonomy has remained. In other words, it is
the classical debate about the relation between the principal and the agent. In large
enterprises, generally, it is considered that managers escape the control of dispersed
owners and boards of directors are too weak to control them or too close to them. On the
principal side in the private sector, new institutional investors might have rebalanced
the relation. In the public sector where in theory the principal has control, such control
has also been found lacking. It is perhaps a problem of incentives when, in reality, the
public principal is not so united. There are in practice multiple controlling agencies
and departments as there are different types of public enterprises. On the agent side, if
privatization does not make the manager an owner, there is no change in the relation
between the agent and the principal either (Laffont and Tirolle 1993:655–657).
3 Public enterprises in Canada
By the end of the 1970s, over 50 of the largest industrial corporations outside
the USA were owned by governments. Car manufacturers, oil companies, petrochemical
giants, airline companies were public enterprises capable of competing with the private
sector. They were an important part of the GDP of many countries where postal services
were nationalized firms. For example, they accounted for 8.1 percent of employment
in the UK, 20 percent of investment and 11.1 percent of value added in 1979 (Laux
and Molot 1988: 11–15). Public enterprises have been instruments of economic policy
in Europe throughout the 20th century. In Italy, in France, in Germany, in the UK
and elsewhere, they have been important elements of the intervention of the state in
the economy (Millward 2011). Sometimes, governments intervene for social purposes
but limited economic profitability. The British state bought enterprises in poor shape
or in declining industries. Until the 1980s, the state became involved in several rescue
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acts for manufacturing firms and the nationalization of coal, steel, airlines and the
network utilities. In Italy also, the origins of public enterprise could be found in problems
of finance and entrepreneurship which emerged in the 1930s (Millward, 2011: 2–3)
Following the British example, the former dominions, Canada, Australia, New Zealand,
developed public enterprises. Railways, television, airlines, mining, telephones and
telecommunications were areas where public enterprises were involved.
In Canada, both the national and the provincial governments used public
enterprises to take advantage of their natural resources and develop various industries
that the private sector was not always inclined to create. According to Roberts
(2002:19), the Canadian government lacked a strong regulation capacity and had to rely
heavily on public enterprises. The Canadian National Railways was created to salvage
from bankruptcy the three transcontinental roads in trouble. In 1932, the Canadian
Broadcasting Corporation was created. In 1937, Trans-Canada Airlines followed. During
the Second World War, a number of public enterprises were created. There were 32 of
them by 1951 and 55 in the 1970s. Public enterprises are expected to provide government
and parliament with annual reports and financial statements.
The provinces, without any control over monetary policy or with limited taxation
capacity early on, having thus a limited number of policy instruments to foster regional
economic development, relied even more heavily on public enterprises. In Canada,
the instruments of economic policy are divided between the national and sub-national
governments.1 The federal government controls monetary policy and provides leadership
for fiscal policy and regulation. Among the economic policy instruments available to the
provinces, public enterprises appear to be crucial. Despite their limited powers, the
fact that some of the Canadian provincial states have emerged ‘as mature and complex
institutions having the strengthened capacity to govern in the interests of regional
communities’ (Chandler and Chandler 1979:8) has been defined as province-building.
The provinces have a long tradition of involvement in the development of natural
resources, energy and agriculture. Province-building, the growth of the provincial
governments (in their area of constitutional jurisdiction), institutional capacity at
planning and co-ordination in favour of regional interests also had to rely on public
enterprises. In their critical appraisal of the concept, Young et al. (1984: 796–797)
consider that the use of public enterprises by the provinces indicated a new provincial
activity, particularly in natural resources, but not a dirigiste state. Still, Canada was
closer to the European model than to the American one (Niosi and Faucher 1987: 10).
Nowhere was province-building more far reaching than in Quebec. Of all the provinces,
Quebec has the most clearly developed and comprehensive industrial policy (Laux and
Molot 1988, Haddow 2008).
1 The Canadian constitution gives the responsibility over health, education, natural resources
and local affairs to the provinces. The federal government is in charge of defense, national economic
policy, areas such as airlines and television that did not exist in 1867 when Confederation
began. Some domains are shared such as agriculture, economic affairs and justice where the
criminal affairs are federal and civil law is provincial with a different tradition in Quebec with the
Napoleonic Code. The literature on constitutional issues in Canada is vast. A good summary is in
Stevenson G., 2004, Unfulfilled Union: Canadian federalism and national unity, 4th ed., Montreal:
McGill-Queen’s University Press.
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At the end of the 1970s, 233 public enterprises had been created by the provinces
(Vining and Botterell, 1983: 363). 76% of them have been created after 1960 when
province-building became a reality. After the creation or nationalizations of hydro-
electric companies in Ontario, Manitoba, British Columbia or Quebec, phone companies
in many provinces, the provinces created public enterprises in forest products, in mining
such as the Potash Corporation in Saskatchewan.
After the election of Margaret Thatcher in 1979, governments around the
world sold many of their public enterprises. Complete economic sectors such as
telecommunications were transferred to the private sector. Privatized airlines companies
such as British Airways were given as examples that the private sector is better than
the public to manage large enterprises. The World Bank published books, articles and
working papers celebrating the virtues of privatization. A vast body of literature has
concluded that privatization was the thing to do (see Meggison and Netter 2001). But,
it could be said that privatization has been oversold. First, the benefits of privatizing
have not been as great as the proponents of privatization suggested, there were also
huge transfers of benefits in societies such as the UK from one class to another, there
were social costs and regulation was needed to control the privatized companies (Florio
2004, Bernier and Hafsi 2005). Second, ‘the financial performance of SOEs improves
significantly when firms are corporatized. Therefore, the main difference in the financial
performance is cause by the difference in the objective of the firm, not the property or
some dubious political activities’ (Bozec and Breton 2003: 27). Third, many governments,
and it was the case in Canada, still needed these enterprises for public policy purposes.
In Canada, the federal government has remodelled its network of public enter-
prises. The traditional railway has been privatized but the passenger system, Via Rail,
has remained a public enterprise. Teleglobe, the highly profitable telecommunication
system, and Air Canada have been privatized. Similarly, the oil company, Petro-
Canada, has also been privatized. The public enterprises that still exist are ore financial
institutions such as the Canadian Development Corporation or the Development Bank
of Canada (Bernier and Farinas, 2010:407). Initially, the provinces did not privatize as
much as the federal government (Stanbury 1994). Again, the nature of the intervention
has changed. For example, in the province of Quebec (2010), the recent merger of
Investissement Québec and of the Société générale de financement illustrates that the
state will not compete anymore with the private sector but will make loans or participate
with it in some ventures.
The reaction to the 2008–2010 economic crisis is an indication that the provinces
still rely on their public enterprises when they need to do so. We did a review of the
provinces excepted Newfoundland where the use of public enterprises has always been
different and where there was no new activity and in the very small Prince Edward
Island. In the history of province-building as described by Young et al. (1984), these
Atlantic provinces did not have over the last fifty years the capacity to act independently
of the federal government. We have conducted a literature review in both scientific
journals and newspapers to understand how the provinces have reacted to the same
crisis as Katzenstein (1978) suggested studying the impact of national institutions
on the reaction of various governments to the 1970s oil crisis. Excluding Haddow
(2008), the use of Google Scholar and ProQuest has not allowed us to find any recent
scientific publication on province-building as if the topic vanished in the early 1980s.
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The method for this research has been using the data bank Canadian Newstand. This
data bank allows access to 21 newspapers across Canada.2 Canadian news are not
much covered outside Canada and provincial news are not well covered outside each
province in the others. So we used the databank available that offers the best coverage
of news in every Canadian province and the national newspapers such as the Globe
and Mail. We analyzed newspapers from August 2008 until August 2010 although most
provinces experienced the impact of the world economic crisis only in November 2008.
This research was done using the key words economic crisis, economic policy, Crown
Corporation, economic stimulus, innovation, throne speech, economic development and
stimulus measure with the province’s name. Second, when there were indications of the
use of public enterprises, we searched government websites for additional information.
Annual reports, strategic plans and throne speeches have been thus also used. The
newspapers gave indications of activities and also comments but we wanted the
information directly from the government websites to validate the information found.
The results of our research are the following:
In British Columbia, the BC Renaissance Capital Fund has been created in April
2008 to attract new investments and venture capital. There have been no new
government agencies if we exclude the Wood Innovation and Design Center that
will be affiliated with the University of Northern British Columbia but the existing
network remains very important.
In Alberta, one public enterprise has been created, the Alberta Investment
Management Corporation in 2008 and lost 10% on its investment in 2009. Some
analysts have suggested to reactivate the Alberta Energy Corporation that would
explore new projects and would replace the investments that have not been done
by the international enterprises in the industry that explains 30% of the jobs in
Alberta. Also, ten research centres or institutes working on innovation have been
consolidated in an effort to get results faster and improved accountability.
In Saskatchewan, both the previous NDP government and the more pro-business
current government have privatized government assets but also maintained
the involvement of the state in the economy where it has been important
since the 1940s. Two public agencies have been created to face the crisis.
Enterprise Saskatchewan will be in charge of coordinating the government agencies
involved in economic development. Innovation Saskatchewan will be the funding
agency for research and development and could replace the previous Investment
Saskatchewan. While new government agencies are created and a ‘Saskatchewan
first’ policy is adopted so that the public enterprises will have to invest first
in the province. The former public enterprise Potash Corporation has faced a
hostile takeover. The federal government intervened to stop the sale. It is now
the largest potash producer in the world. The argument could be made that the
business has blossomed since it has been privatized. In Saskatchewan, there is
a holding company for 12 subsidiary commercial Crown corporations, the Crown
2 Calgary Herald (ALB), Daily News (N.S.), Edmonton Journal (ALB), Financial Post (Ont),
The Gazette(QC), The Globe and Mail (Ont), Guardian (P.E.I.) Kingston Whig (Ont), Leader Post
(Sas), National Post (Ont), The Ottawa Citizen (Ont), The Province (B.C.), Star –Phoenix (Sas),
Sudbury Star (Ont), Telegram (N.L), Telegraph-Journal (N.B), Times – Colonist (B.C.), Toronto
Star (Ont), The Vancouver Sun (B.C.), The Windsor Star (Ont) and Winnipeg Free Press (Man)
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Investments Corporation (CIC), that has the responsibility to establish a general

strategy, effective governance and performance management and more generally
to foster the economic development of the province.
In Manitoba, excluding the creation of The Manitoba Innovation Council, the
efforts to face the crisis have been more through existing government agencies
such as Manitoba Hydro.
In Ontario, there has been also the establishment of the Ontario Capital Growth
Corporation (OCGC) with manages the Ontario Venture Capital Fund LP (OVCF)
and the Ontario Emerging Technologies Fund (OETF).
In Nova Scotia, with the new NDP government, a new economic policy document
has been made public. The report recommends setting up a $50 million venture
capital fund and to lower taxes. The economic development policy is articulated
around one department and five crown corporations. A Crown Corporation in
charge of economic development, Nova Scotia Business Inc, has also a New
Brunswick equivalent, the NB Business Inc which is seen as less innovation
oriented.
From these examples, we can conclude that public enterprises remain after thirty
years of privatization the instruments of policy Canadian governments rely upon as other
governments around the world have nationalized car makers and banks facing the same
global crisis. We can also draw the conclusion that these public enterprises are financial
institutions that compete with the private sector when the private sector is active. Very
often in Canada, private capital has not been available for regional development. Recent
Canadian experiments of governance are presented in the next section before we come
back to perspective for the future.
4 The changing governance of public enterprises in Canada
4.1 The federal community
In 2010, there are 46 federal public enterprises according to the Treasury Board of
Canada. And they behave at arm’s length as in the past. Atomic Energy of Canada has
been an illustration of the autonomy of the Crowns as they are known in Canada when
the public enterprise decided to close one of its aging nuclear power facilities where
medical isotopes are produced. They are established by either a special Act of Parliament
or by articles of incorporation under the Canada Business Corporations Act. They are
active in trade, regional development, agriculture, investment, economic development,
mortgages, postal service, etc. Their governance framework has been revised in 2005 by
the Treasury Board.3 31 measures were introduced that were to clarify the relationship
between ministers and the Crowns, strengthen their accountability and audit regimes,
make the appointment process and operations more transparent. They have to produce
strategic plans, their top managers are accountable to standing committees, they now
have chairman of the board distinct from the CEOs, the auditor general is now the
auditor for all of them, etc. The strategic objectives mentioned in their reports are a mix
3 The Review of the Governance Framework for Canada’s Crown Corporations, see
http://www2.parl.gc.ca/Content/LOP/ResearchPublications/prb0580-e.htm
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408 LUC BERNIER
of commercial and policy objectives as one would expect. The top-down accountability
framework in Ottawa is relatively strong and the public enterprises are responsible for
several polices and regulations concerning salaries, equity, languages, future managers
(la Relève) and the Access to Information Act.
The successive Auditors General have repeatedly written in their reports about
the Crowns. Repeated comments have been made about the relations between the public
enterprises and the departments. The Auditor considers that there has not been enough
feedback about strategic plans and annual reports. Other comments are about the lack
of measurable indicators of their performance, poor benchmarking and lack of risk
management (Bernier and Farinas, 2011). On the topic of governance, there is an
interesting paradox in these reports. Although the Auditor considers that the public
enterprises should be closer to the departments, it is suggested that deputy-ministers
(the Canadian permanent secretaries) should not be members of their boards of directors
to maintain their autonomy.
The most interesting development of the last decade concerning the public
enterprises of the government of Canada has been the creation of the Community of
Federal Agencies among whom 12 public enterprises are included on a voluntary basis.
Officially, they are to share information and best practices. The Community of Federal
Agencies collectively:4
represents and promotes the needs and challenges of its member agencies to the
central agencies, with a focus on the needs of the small agencies; creates and benefits
from innovative partnerships and solutions to these challenges; and offers central
agencies the opportunity to consult with a broad community, and to build on the
‘horizontality’ already achieved.
They have been grouped to become a more effective lobby vis-à-vis their own
government. This community is organized so that the agencies improve their relations
with their main stakeholders. It has been considered that while the deputy-ministers
have a very good access to the ministers and central agencies and are cohesive,
the autonomous agencies did not have a voice when needed. The hoped cohesion, at
least administratively, is something lacking at the provincial level. In a comparative
perspective, it could be interesting to compare how various governments coordinate
their public enterprises.
4.2 The Ontario potential conglomerate
The Ontario government faces a huge deficit and considers privatizing some
public enterprises. Similarly, New Brunswick is considering selling public enterprises.
In March 2010, the Throne speech indicated that the government has ‘initiated a
review of its business enterprises’.5 The Ontario government is reportedly considering
4 From http://www.cfa-cof.gc.ca/about apropos eng.asp

5 From Weir E., ‘Privatization a bad deal for Ontarian; short term gain from a partial sale
of assets more than offset by long term revenue loss’, The Toronto Star, Toronto, 10 March 2010
p. A-19. Also, anonymous, ‘Super-corporation has halllmarks of a trial balloon’, The Toronto Star,
9 March p. b-3. Willis A. and Howlett K., ‘Ontario eyes sale of asset pool’, The Globe and Mail,
17December 2009, p. B-1.
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combining its public enterprises in a conglomerate (or ‘super corporation’ and selling a
minority stake to private investors. Goldman Sachs and the Canadian Imperial Bank
of Commerce have received mandates to evaluate such possibilities. The conglomerate
would include Ontario Lottery and Gaming, the Liquor Control Board, Hydro One and
Ontario Power Generation. Their value could be estimated at 50–60 billion dollars. It
could possibly be a trial balloon but Throne speeches are in the Canadian tradition one
of the best indication we have of the policies ahead with the budget that usually follows.
Selling a part of these enterprises could generate instant revenues of an estimated 16 to
17 billion and give revenues of 4.3 billion last year. These are not small businesses. The
Liquor Board is the largest alcohol retailer in the world. Hydro One had revenues of 4.6
billion last year. In Ontario, the idea of selling the public enterprises comes from the
need to erase the huge deficit accumulated to fight the 2008–2009 economic crisis. One
could argue that controlling gaming and alcohol is not exactly a social enterprise but
these generate revenues necessary in Ontario and other provinces to balance budgets.
And with the difficulties that lie ahead with the nuclear industry which is important
in the province, the Ontario government might want to have a direct control on energy
production.
These public enterprises provide a steady stream of revenue and control important
assets. Selling a part of the equity is the closest a provincial government could achieve
without losing votes in Ontario. Governance-wise, as for the federal community, this
is an interesting experiment. One of the difficulties in Canada’s two largest provinces,
Ontario and Quebec, as well for the federal government, has been the coordination
of their public enterprises. There is no central agency in charge of coordinating their
activities. Sometimes, they are even in competition. Investissement Quebec and the
Société Générale de Financement (SGF) before their 2011 merger have been prospecting
the same potential investors for example. As it has been the case in the past, control
is lacking in the various departments or ministries in charge of supervising the SOEs.
In earlier times, there were attempts to use interlocking directorates to coordinate
them. The practice has vanished (Bernier and Burlone, 1998). Time will tell whether a
conglomerate is the proper way to coordinate public enterprises.
4.3 The Quebec law on the governance of public enterprises of 2006
In Quebec, public enterprises have been used as policy instruments since the
1960s but the economic policies were written later in the 1970s. Quebec’s successive
governments have chosen this form of intervention because of the lag between
interventionist volition and the weaknesses of the resources, particularly human
resources. Acknowledging this discrepancy but willing to act quickly, the state chose to
delegate responsibilities to autonomous organizations which were to achieve important
parts of economic policy. They were created to avoid having to establish coherent and
comprehensive policies (Parenteau 1980:195).
Because of the haphazard mode of creation of these instruments, several waves
of rationalization in their governance have been necessary. The most important one
is a governance framework for 24 major public enterprises and related organizations
(Bernier and Pelletier 2008). In this law that followed a white paper on the topic,
accountability was to be improved. The government decided that every public enterprise
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should have a president of the board different from the chief operating officer and three
committees: ethics and governance, human resources and audit. Two thirds of board
members have to be independent. It is added to the obligation to make public an annual
report and to present strategic plans and results in front of a standing committee of
the Quebec parliament. The law was written following the principles of the Toronto
Stock Exchange and rules followed by large institutional investors such as Calpers.
The responsibility of the Auditor general has also been increased. This law followed an
international movement after the Enron and Worldcom scandals. In Quebec, it followed
the poor management of a public-private partnership between the Université du Québec
à Montréal and a private company when the board of directors was mislead by the
management of the University and various problems with the governance of the Société
des alcools and the Caisse de dépôt.
Although boards are to be evaluated, the nominations to the boards have remained
politically oriented. Also, the crucial link between CEOs and ministers or, in some cases,
between the prime minister and the CEOs have remained, bypassing the presidents of
the boards according to interviews done with managers in these public enterprises.6
At hearings by standing committees, the CEOs continue to be the focus. Nevertheless,
the framework has been useful to organize boards and make members more cautious
about strategic decisions. Training has also been improved for board members. During
interviews, Ontario civil servants said that they would not write such a policy covering
all departments. Ministers would not like such an encompassing policy. But in the
French tradition of the province of Quebec, this law was well accepted. Most managers
interviewed did not complain about it except at Hydro-Quebec, often seen as a state
within the state (Bernier and Pelletier 2008).
4.4 The Hydro-Quebec-New Brunswick failed deal
In 2009, the Quebec and New Brunswick governments announced that the second
one was selling to the first one its public enterprise in the electricity domain. The
already mentioned Hydro-Québec was to own New Brunswick Energy, its distribution
and production equipment. New Brunswick sells electricity to another province, Prince
Edward Island and also has a long border with the USA. In Quebec, the government
promoted the idea that the deal would open markets in the USA although looking at any
map of North America, it is difficult to understand the gain. The difficulty in Quebec has
to do with the growing difficulty to build power lines to get to the US border. It might
have been easier through New Brunswick.
Provincial nationalism erupted in New Brunswick and has forced the
government to reconsider and finally to end the deal with Quebec. The reputation of
Hydro-Quebec in the Atlantic provinces is not very good because of a contract struck
in the 1960s with another province, Newfoundland, for 65 years. Hydro-Quebec buys
at a fixed cost the electricity produced in Labrador, a part of Newfoundland on the
mainland, and is able to sell it on the American market at market prices. Nevertheless,
Prince Edward Island, the smallest Canadian province has recently made public that
it would be interested in buying Quebec’s electricity. And the economic problems that
6 For the methodology used, see Bernier and Pelletier (2008).

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initially led to the Quebec-New Brunswick deal might surface again and a new version
more properly presented to the public could surface again. Such an agreement to have
a public enterprise crossing borders is the first attempt in Canada to do what, for
example, Électricité de France has done in Europe. It is the first time that the evolution
of the industry led to a deal to have a provincial public enterprise becoming the owner
in another province. The previously state-owned telephone enterprises in the various
Canadian provinces have long done so but this was the first public enterprise to do so.
There had been international ventures in Latin America but not from one province to
the next. Although it failed, it will be interesting to follow on the longer run.
4.5 Three cases from Québec
The particular situation of the province of Quebec, that has not been discussed thus
far, could be used as an example of governance transformation without privatization (see
Bernier and Simard 2007).
The modern Hydro-Québec was created after a general election on the topic
in 1962 although the equivalent in the neighbouring province, Ontario, had been
created in 1907. A more turbulent era in the history of the public utility starts in the
1980s when the government hoped for more economic than engineering rationality
for the organization. One important change in the governance of Hydro-Québec has
been the creation in 1997 of an autonomous regulatory body, the Régie de l’énergie,
that authorizes the strategic planning of Hydro and the rates it can charge to its
various customers, encourages citizens participation in debates and builds a counter-
expertise. The new rules of the game imply for Hydro-Québec a restructuring of its
activities in three semi-independent entities. Hydro-Quebec has had to reinvent its
governance because environmental groups have been able to challenge its credibility.
The composition of the board of directors has been adapted. Also, competition has been
introduced for production and private companies are able to compete and sell their
production. These transformations has made possible for Hydro-Quebec also to adapt
to the North American market and become a trader on it (Lanoue and Hafsi 2010).
The Caisse de Dépot et Placement (CDP) is responsible for investing public pension
money and securing pension money. It always had a dual mandate of managing the
assets and of economic development. In the 1960s and 1970s its administrators were
rather cautious in their investments. At its peak, the CDP managed 250 billion Canadian
dollars. Initially it became an important purchaser of Quebec government bonds thus
reducing the government’s dependence on English speaking institutions (McRoberts
1993: 135). It has had over the years an excellent record on returns on investment on
the assets it managed. This, until the technology bubble ended and September 11 created
turmoil on the market. It undertook then a review of its governance, changing the length
of the mandate of its CEO and who is nominated to its board. A new governance system
was established but the financial results have been very poor since then. The last chief
executive officer was selected in turmoil and financial results remain bad. The CDP
could be seen as an example that reforming corporate governance has still a long way to
go. In the end, the role of the board of directors was reconsidered and the independence
of the members strengthened.
The SGF was, from the start in 1962, a conglomerate built to strengthen the
small French-Canadian industrial sector (McRoberts 1993; 133). It has oscillated since
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then between traditional industrial sectors and the willingness to launch new ones in
promising technologies. Its evolution has been iterative from one investment to the next.
Investments have been grouped in the recent years in chemistry, energy environment,
mining metallurgy, forest products, biology, agriculture and transformation and
communications. The smaller public enterprises that existed in the past in these sectors
(forest, mining, food) have become subsidiaries of the SGF. As explained in its annual
report of 2003 dated June 30, 2004, the SGF is an instrument of industrial policy that
is to improve the competitiveness of the Quebec economy. Poor strategic planning that
has been the problem and the incapacity to maintain an arm’s length relation with the
government. In 2011, the SGF has been merged with Investissement Québec, another
financial public enterprise. The last merger is a way to coordinate public enterprises
activities.
Reforms of the governance of these public enterprises were required. Often, they
are considered impossible by advocates of privatization but the three cases presented
here illustrate that radical change is possible: Integration of environmental groups in
the governance, reassessment of the board of directors and staff in the second and
crafting of a strategic plan in the third one. In the three cases, these transformations
were to improve corporate governance. The specific problems of the three enterprises
were addressed. Some of the difficulties public enterprises ran into over the last few
years could have been avoided by stronger boards or more efficient mechanisms of
control. Despite the difficulties, these cases showed that instead of privatizing public
enterprises, governments can reform their governance. Corporate governance can be
improved but also strategic planning and organizational structures as well as the
regulatory framework around public enterprises in order to adapt to international
agreements and other changes in their environment.
Corporate governance has become an important topic because both public and
private firms needed to improve their legitimacy among their stakeholders and
the public in general. ‘In many instances, SOE boards are not granted the full
responsibility generally accorded to boards of joint stock companies in terms of strategic
guidance, monitoring of management and disclosure’ (OECD, 2005: 138). One of the
issues has been to nominate directors on boards that would be independent from the
management. But board involvement in strategy depends also on the heterogeneity
of interests represented on a board (Ravasi and Zattoni, 2006) among institutional
pressures, systems of regulation, traditions and norms (Cornforth and Edwards, 1999).
In the case of the Quebec public enterprises, reforms made possible to adopt the
appropriate practices.
5 The governance of public enterprises today?
Governments that nationalize private banks and car manufacturers recently to

face the economic crisis have argued that they were doing so only temporarily. The
Swedish management of the bank system has been given as an example. At the height
of the crisis in the 1990s, the Swedish government owned 22% of the assets of the banking
system. Two banks were nationalized in 1992 and by 1996, the government support was
ended (Went 2009). A decade later, it has been able to sell them back to the private sector.
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The lesson would be that nationalizations should be temporary measures. Time will tell
if governments confronted by enormous deficits will not be tempted to re-privatize them
quickly at bargain prices as is the case in Ontario. Perhaps, they should effectively
remain in the public sector for short periods of time. This could be an area of research on
a question that was never much considered. Managing modern states is complex enough
without large portfolios of enterprises in sectors where there is no strategic issue for
the state (Molz and Hafsi 1997). Privatizations are a way to correct the involvement
of the state in economic sectors where it should not have gone, asbestos mining for
example. The long and impressive literature review by Meggison and Netter (2001) has
led to conclude that privatization has been an important phenomenon: the State-Owned
Enterprise (SOE) share of ‘global GDP’ has declined by 4%. State involvement in the
economy through the use of public enterprises should be regularly evaluated in light of
the evolution of economic policy. This would imply that some public enterprises would
be sold and new ones created in changing conglomerates. It is a new way of looking at
these enterprises.
The instruments of yesterday might not be the proper ones for tomorrow. According
to authors who wrote shortly before the economic crisis, the modern network economy
was supposed to be more market and less state-oriented than ever (Haddow 2008: 255).
But do public enterprises have to only support as financial institutions the activities of
the private sector or should they become competitive as they were in the past? It could
also be said that if no policy objective is pursued, there is no point for a government
to maintain a public enterprise. Public enterprises still existing today now work in a
very different world than the one in which they were created. Public enterprises that
were not privatized are asked to make profits almost as if they were in the private
sector. As the Quebec-New Brunswick case illustrates, the borders respected in the past
might disappear. The first issue is thus to wonder if governments have economic policies
to pursue and then see if public enterprises could be used to do so or as in the New
Zealand case, too many changes of policy (Luke 2010: 151). What are the policies to be
implemented by the available instruments is an important issue that was problematic
in Quebec in the 1960s but might still exist today. Do governments that go back to
public enterprises to rescue car makers and banks have clear policies or only temporary
measures as previously discussed?
One of the things that have changed is the desire to better coordinate these
public enterprises. The issue is no longer to privatize them but to reorganize
networks of public enterprises to make sure that their action is better coordinated.
The Canadian experiences in this regard are thus far limited but their evolution
might be interesting to study. Governments in the Canadian tradition have ne-
glected to create the agencies to coordinate their public enterprises. Creating the
instrument was often the objective as discussed over the Quebec case. Also, as
the Canadian government community of agencies illustrates, work can be done on
the coordination of public enterprises. In some countries, to improve the coordination of
public enterprises, they are centralized under the supervision of one department. Such
a move also corresponds to a transformation in the use of public enterprise from sectoral
industrial policy toward framework oriented and market liberalization policies (OECD,
2005: 43–45). In other, a dual ministry model is used. Some of the Canadian provinces,
Quebec and British Columbia have the lead, are also working on defining governance
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frameworks to insure that their public enterprises will respect core administrative
policies (Bernier and Pelletier 2008).
The next issue is the issue of state capacity. The distance with politics, by
comparison with ministries, allows creating islands of autonomy in the public sector
that could be used to pursue public interest objectives. Public enterprises could be such
organizations. Even in weak states, there could be islands of autonomy (Skocpol and
Finegold 1982). The Canadian provinces that have limited instruments to choose from
have reacted to the economic crisis by using the existing SOEs or launching new ones.
They went to use the most autonomous type of instrument available. Province-building
as such has not been studied for a long time, as already said, and would be an interesting
topic in a comparative perspective. How autonomous are the Canadian provinces under
the North American Free Trade Agreement by comparison with the small European
states in the European Union? It would be interesting to see how, by comparison,
European states have used nationalization or the creation of public enterprises to face
the crisis.
Autonomy and capacity have to exist for public entrepreneurship to develop. But
the behaviour and the role of public enterprises has not been a topic well covered over
the last decades while privatization had the spotlight. A study of the strategic objectives
of the managers would be interesting to see first if they differ from what government
wants them to do. It would be a research in the practice of the principal-agent relation.
Control of public enterprises might not be that important contrary to the old debate
than nominating the proper managers at the head of these enterprises. Such research
has been done more than 20 years ago in Canada (Bernier 1989) and recently in New
Zealand (Luke, 2010) but in the current context, it would be interesting to see what the
agents think and want to achieve in more countries.
Most economic studies have argued that privatizations brought benefits. There are
also nevertheless some critics that argue that privatization does not deliver. The precise
impact of privatization is drowned in an ocean of potential intervening variables (Bernier
and Hafsi 2005). Ownership is part of a more complex explanation of performance. It
could also be argued that economic performance comes from competition rather than
ownership (Borins and Boothman 1985, Aharoni 1986). Although it could be the topic
of another paper, studies on the privatizations in the UK have developed the argument
that privatization improved the performance of the companies when after privatization,
the companies became in competition in their sector (Vickers and Yarrow 1989).7 To use
Canadian examples, for a long time the public enterprises Canadian National Railways
or Air Canada before privatization had results that were comparable to the private
competitors or to American enterprises in the same industries (Borins and Boothman
1985). We have to pursue theses analyses of the comparative performance of public
and private enterprises. Too often, the samples were questionable and results biased
(Bernier and Hafsi 2005). ‘A general case against the efficiency of public enterprise
is therefore not supported by either theory or empirical investigation’ (Bognetti and
Obermann 2008: 468).
One variable that could be of interest in the future to understand the performance
of public enterprises would be to consider the difference of performance between
7 For a more inclusive theory of privatization grounded in economic theory, see chapter two
of Florio (2004).
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nationalized enterprises and the ones created by the state. When governments
nationalize, they often inherit private enterprises in difficulty. When they create new
entities from almost scratch, they might have less problems despite the liability of
newness. In the long run, do these enterprises have different performances?
We also need a sophisticated model of government-SOE relations and governance
(Luke 2010: 155). As already presented, Hafsi and Koenig (1989) have explained
that the relation between the state and the SOE follows a pattern. Initially, there is
cooperation. The objectives are shared by the managers and the people in the public
sector who together worked to create the new organization. Then a more conflicting
relation develops. People in government still want the SOE to be a policy instrument
but increasingly the managers of the SOE are concerned by the technological core of
the organization. If the technology is complex enough or if the SOE does not need the
financial support from the government, it is possible that it will become autonomous.
The cycle studied by Hafsi has to be integrated in a longer time frame that includes the
initial event where public enterprises are initiated and ends with the second one which
recreates some liability of newness. Privatization of surrounding public enterprises
creates such conditions and pushes managers to cooperate with the state (Bernier 1989).
The cycle is not deterministic: the stability of the cycle varies with the nature and state
of the outside coalition and the degree of resource dependence of the public enterprise.
It is possible to reorganize governance in order to improve cooperation. And, control is
only lacking on a portion of the cycle.
And the governance of public enterprises is not worse than the governance of
private enterprises. There would be no gain in this regard in privatization. The evolution
of the governance of SOEs in Quebec has illustrated that the best practices of governance
can be developed in the public sector. The OECD considers that its principles of
governance are sound but that their effective implementation could be improved as
the 2008 financial crisis has illustrated:
The governance of the remuneration process can be improved;

Risk management has been a failure in the crisis;
Board practices in the private sector have been inadequate;
Shareholder rights are poorly protected and not very effective.8
These four elements illustrate that many things have to be considered as the theory
developed by Hafsi et al. also suggested. The implementation of the proper governance
system can only be iterative and take time because of the number of variables at play.
The federal Canadian government reform of 2005 and the Quebec one of 2006 are good
examples. The proper balance has to be found between the various elements. Stronger
boards of directors are required but also that ministers accept to let the managers
manage. Strategic plans have to be in line with government policy. Directors should be
independent of the management but should they be experts in the field or representatives
of stakeholders?
8 From OECD, Directorate for financial and enterprise affairs Steering group on corporate
governance, ‘Corporate governance and the financial crisis, key findings and main messages’, April
2009.
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6 Conclusion
This paper has presented through the Canadian experience how governance could
present new perspectives for future research on public enterprises and should be the
topic of more research. In light of the theory presented, the case can be made that the
number of factors at play offers a wealth of possibilities to government to transform the
governance of public enterprises instead of privatizing them. If we reverse the usual ar-
gument, and now ask the privatization advocates what in the governance mechanisms is
so different in the private than the public sector? Is the change important enough to jus-
tify the reduction of jobs and the transfer of wealth experienced in the UK (Florio 2004)?
This article has suggested questions for future research on public enterprises.
Public enterprises have not become obsolescent policy instruments. As governments
in Europe have relinquished control over monetary policy and governments in North
America have less capacity to use subsidies and other instruments to intervene in the
economy because of international agreements, public enterprises might be again useful
as the recent wave of bank nationalizations has illustrated. But nationalization does not
mean much if the governance of these companies is not reorganized in line with some
sense of general interest (Monnier and Thiry 1997).
There are two domains of study on governance. The first one, more micro, looks at
corporate governance. The micro perspective looks at elements such as the management,
the board of directors and how strategic planning is done. A more macro or regulatory
governance could also be considered that create conditions for the public enterprises to
play a more cohesive role in economic policy. Both perspectives are useful here. Public
enterprises have to be coordinated and their corporate governance has to be organized
to take into account essential stakeholders. The governments mentioned thus far have
worked on both corporate and social governance, integrating various stakeholders in the
strategic planning process surrounding their public enterprises and reforming the role
of boards among other elements. But is it enough?
Governance is made of the old mechanisms of control but also of an acknowl-
edgement that enterprises, both public and private, are open systems that have
stakeholders to take into account. Governance is the interface between stakeholders and
the management of an enterprise. It thus includes the upper management, the board
of directors and the interface with the minister responsible. That includes strategic
planning, capacity to innovate, boards of directors, guidelines for government relations,
performance planning and reporting and executive compensation and labour relations.
When competition is suboptimal, governments can regulate as often in the USA or can
use public enterprises as has happened more often in Canada. Market signals then
become relatively less important and the general interest can re-surface.
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The Future of Public Enterprises Perspec

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Annals of Public and Cooperative Economics 82:4 2011 pp.

THE FUTURE OF PUBLIC ENTERPRISES:

ABSTRACT: Public enterprises have been an integral part of the involvement of

El futuro de las empresas públicas: perspectivas a partir de la experiencia

interesantes instrumentos de polı́tica económica en el futuro, como lo fueron en el pasado,

Die Zukunft öffentlicher Unternehmen : Perspektiven aus den kanadischen

L’avenir des entreprises publiques : perspectives à partir de l’expérience

2 Autonomy and control of public enterprises: a difficult balance

3 Public enterprises in Canada

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The results of our research are the following:

Investments Corporation (CIC), that has the responsibility to establish a general

4 The changing governance of public enterprises in Canada

4.1 The federal community

4.2 The Ontario potential conglomerate

4 From http://www.cfa-cof.gc.ca/about apropos eng.asp

4.3 The Quebec law on the governance of public enterprises of 2006

4.4 The Hydro-Quebec-New Brunswick failed deal

6 For the methodology used, see Bernier and Pelletier (2008).

4.5 Three cases from Québec

5 The governance of public enterprises today?

Governments that nationalize private banks and car manufacturers recently to

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The governance of the remuneration process can be improved;

AHARONI Y., 1986, The Evolution and Management of State-Owned Enterprises,

AUDITOR GENERAL, VERIFICATEUR GENERAL DU QUEBEC, 2004, «Rapport de

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