The state as entrepreneur: from CDC to CDIC

Abstract: Focusing upon the case of the Canada Development Corporation, this paper provides a critique of the joint stock company as an instrument of public policy. The corporation’s performance is evaluated against three criteria which emerge from a review of the circumstances leading to the creation of the CDC, namely: contributing to diversified industrial development in Canada; establishing the joint stock company as an accepted medium of private/public cooperation in economic activity; and providing income returns to the government. The CDC’S failure as a governing instrument is attributed to the fact that, in resolving its anomolous status as neither clearly state enterprise nor clearly private enterprise, the corporation was forced to distance itself from its major shareholder (i.e., the state) in order to retain the support of the investment community.

The analysis in the second part of the paper proceeds through three stages: a review of the circumstances in the creation of the Canada Development Investment Corporation (CDIC); identification of its probable rble; and a comparison with two alternative models of the state holding company. While the CDIC is a more tractable governing instrument than was the CDC, the early pattern of the CDIC’S commercial activities suggests a dismal financial future.

Sommaire: Cet article, qui 6tudie le cas de la Corporation de d6veloppement du Canada, presente une critique de la societ6 en commandite en tant qu’instrument dapplication de la politique gouvernementale. Le rendement de la Corporation est 6valu6 a partir des trois critkres suivants, qui d6coulent de l’examen des circonstances ayant conduit a la cr6ation de la CDC : contribuer a la diversification du develop- pement industriel au Canada; faire de la socidte en commandite un moyen r e c o n p de favoriser la coop6ration entre les entreprises publiques et privees dans l’activite 6conomique; et fournir des revenus au gouvernement. L’echec de la CDC en tant qu’instrument de gouvernement est attribue au fait que, compte tenu de son statut ambigu dentreprise mi-publique mi-privee, la Corporation a 6th contrainte i prendre ses distances vis-a-vis de son principal actionnaire (ii savoir YEtat), a h de conserver l’appui des investisseurs.

The author is in the department of political science, Carleton University, Ottawa. This article represents a revised version of a paper delivered at the annual meeting of the Canadian Political Science Association (Vancouver; June 6, 1983). For helpful criticism of that first version I should like to thank Professor Maureen Molot of Carleton University, Professor Jeanne Laux of the University of Ottawa, and Professor Nick Baxter-Moore of Queen’s. In revising that earlier paper the suggestions of Professor John Langford of the University of Victoria, Professor John McDougall of the University of Western Ontario, and, perhaps most importantly, the criticisms of two anonymous referees for this journal are gratefully acknowledged.

STEPHE?; BROOKS

L’analyse presentee dans la seconde partie de l’article se deroule en trois etapes : ktude des circoiistances ayant amen6 la crkation de la CDIC, 011 Corporation de d6veloppement et d’investissement du Canada; identification de son r6le probable; et comparaison avec deux autres motleles possibles de societi H portefeuille contr6lBe par I’Etat. Bien que la CDIC soit un instrument de gouvernement plus souple que ne I’etait la CDC, les premieres conclusions que I’on peut tirer au sujet de ses activites commerciales tont envisager I’avenir financier avec un profond pessimisme.

(The) forin of ptrblic organization sign$cnntly affects the policies they adopt and the k i d of manngemnt they conduct. Any structure for making decisions encourages certain types of choice and discourages others (emphasis added).

Annmarie Hauck Walsh, 1978.

This paper provides a critique of the firm as an instrument of public policy in Canada. In particular, it is the joint stock company which is unsatisfactory as a governing instrument, owing to the instability of the relationship between the state and private equity. The argument is that the tension introduced by the need to reconcile public policy ends with a level of profit sufficient to attract and retain private investment (and thereby maintain the “mixed” character of the enterprise) will be resolved through either a) the passivity of the state, or b) withdrawal of private investment. This is not, however, a necessary relationship, as demonstrated by the case of public authorities in the United States.’ Of course, private participation in financing the activities of these public sector organizations in the United States is achieved through debt instruments (i. e., bonds made attractive by interest deduc- tibility provisions in state tax law) rather than equity investment.

In order to test the proposition that the joint stock company is poorly suited to the pursuit of public policy objectives, the case of the Canada Development Corporation will he reviewed. One of the largest corporations in Canada (ninth by assets, fourteenth by revenue in 1982), the CDC is certainly the best-known Canadian instance of the deliberate creation of a mixed-ownership corporation. Indeed, the CDC is remarkable for having been established ex nihilo, with no past (aside froin the provision, early exercised, for the acquisition of Polymer) and a future unburdened by the weight of previous corporate decisions and an inherited portfolio of holdings.2

The case of the Canada Development Investment Corporation (CDIC), the current repository for the government’s 48 per cent interest in the CDC, is considerably different. The latitude afforded CDIC decision-makers is circumscribed by the previous history and present condition of each of the several

1 See Annmarie Hauck Walsh, Thf Public’s Businesses: The Politics and Practices of Gooernment Corporations (Cambridge, Mass: MIT Press, 1978). 2 The federal government’s Participation in Telesat was, and remains, significantly different in terms of the number of shareholders, the ends of the enterprise, and the rationale behind the choice of the mixed ownership organizational form See Doern and Brothers, “Telesat Canada”, in G. Bruce Doern and A. Tupper (eds.), Public Corporations and Public Policy in Canada (Montreal: IRPP, 1981).

526 CANADIAN PCBLIC ADMINISTRATION

THE STATE AS ENTREPRENEUR

assets it has been assigned. Notwithstanding this limitation, statements by Senator Jack Austin, the minister responsible for the CDIC, and corporation principals point to a future role for the CDIC as an equity banker. In other words, the new corporation has been assigned a function which also was central to the earlier justification for the CDC, viz., to supplement Canada’s capital markets by serving as an additional source of domestic equity. Like the CDC, the CDIC is organized as a holding company. However, in abandoning the joint stock concept for the state holding company, the government is acknowledging its dissatisfaction with the role of silent partner, and opting instead for a more tractable governing instrument.

With the tabling of Bill C-158 in the House of Commons and, perhaps more significantly, the pattern of corporate action over the past several months, some basis is provided for informed speculation upon the likely role and effectiveness of this new state holding company. The current preoccupation of the CDIC with restructing the finances and operations of Canadair and de Havilland does not bode well for the future commercial success of the corporation. Simply put, the circumstances surrounding the creation and early operation of the CDIC are inimical to the commercial viability of the corporation.

The Canada Development Corporation Early assessments

(The) CDC may very well be an early prototype of a model to which all but the most doctrinaire capitalist or socialist economies may turn.

William Dimma, 1974.

As it stands, the only thing public about the CDC is its money. Robert Couzin, 1971.

The prologue to the creation of the CDC has been chronicled e l ~ e w h e r e . ~ William Dimma has shown that the concept of a CDC underwent successive changes from the first inexplicit suggestion of the instrument found in the Report of the Royal Commission on Canada’s Economic Prospects (1957), through the CDC proposal contained in Walter Gordon’s June 1963 budget, to the CDC Act passed in June 1971. At each stage in its development the CDC concept must be understood in the context of an economic nationalism which explained non-Canadian control over important sectors of the economy as a function of shortcomings in Canadian capital markets. A “capital gap” was identified, resulting from inadequate equity investment by individual and institutional Canadian investors. It was not by chance that responsibility for the CDC was assigned to Finance instead of Industry, Trade and Commerce. 3 See William Dimma, “The Canada Development Corporation,’’ (Ph. D. thesis, Harvard: 1974). For a more accessible analysis which conveys well the tenor of the debate surrounding the creation of a CDC, see Robert Couzin’s article entitled, “The Canada Development Corporation; A Comparative Appraisal’’, McGill Law journal (1971). Pp. 405-36.

527 ADMINISTRATION PUBLIQUE DU CANADA

STEPHEN BROOKS

The difference between the CDC proposal put forward in Walter Gordon’s ill-fated 1963 budget and the CDC Act passed in 1971 is instructive. In view of Gordon’s proposal of a 30 per cent tax on the purchase of Canadian companies by foreign buyers, a sdliciently capitalized CDC would have acted as an alternative buyer with a clear advantage over non-Canadian bidders. An unmistakable linkage was envisaged between the treatment of foreign investment and the Canadianizing role of a CDC. No such relationship was considered in the case of the Benson-sponsored CDC. Rather, in proceeding with the CDC before the publication of the Gray Report on foreign direct investment, the Liberal government dissociated the corporation from its policy toward foreign investment, which was embodied in the Foreign Investment Review Act (1973). This separation had two consequences: first, it deprived the government of the opportunity to provide a clear policy signal to guide CDC management; and second, credence was lent to NDP criticism that the fledgling corporation amounted to a symbolic gesture intended to placate economic nationalists, while failing to address the problems which subsequently would be identified by the Gray Report.

The reasoning behind the government’s choice of the mixed-enterprise governing instrument is somewhat obscure. If the intention was simply to provide Canadians with increased opportunities to purchase equity in Canadian-controlled enterprise this could have been done more easily, and perhaps more effectively, through a system of tax incentives. Recent instances of such measures include tax advantages accruing to investors in the Canadian film industry and, more importantly, NEP incentives for Canadian-based corporations to seek out Canadian equity. But in foregoing this choice of governing instrument for the unfamiliar institution of a public/private holding company, the government indicated that its intentions were not limited to an expansion of Canadian equity in Canadian-based corporations.

An understanding of the selection of the mixed-enterprise holding company as a governing instrument must take into consideration the tenor of the first Trudeau government. The rationalism which informed policy- making during that period has been captured in Bruce Doern’s account of the policy philosophy of the Prime M i n i ~ t e r . ~ Reform of both process and institutions distinguished the early years of Trudeau’s tenure as prime minister, and the deliberate choice of a comparatively novel organizationd form is comprehensible against this backdrop of innovation. This is not to suggest a cogency of intent, much less that the government had some grand design for the CDC. The point is this: the very fact that the CDC represented an institutional anomaly was a major factor contributing to its failure as a governing instrument, and furthermore, the corporation’s need to resolve its ambiguous status made inevitable its failure as a large-scale experiment in mixed enterprise. 4 Making in Canada (Toronto: %lacmillan, 1971).

See pages 60-75 in G . Bruce Doern and Peter Aucoin, eds., The Structures of Policy-

528 CANADIAN PUBLIC ADMINISTRATION


To appreciate the anomalous character of the CDC one must recognize that Canadian experience with the mixed-enterprise governing instrument had been extremely limited. Though the creation of Telesat (1969) preceded the CDC by two ye’ars, the case is substantially different. To what extent the government drew upon the Western European experience with mixed- enterprise and state holding companies is difficult to ascertain. In testimony before the Committee on Finance, Trade and Economic Affairs the sponsor- ing minister, Edgar Benson, acknowledged that such cases as Italy’s Zstituto per Ea Ricostruzione Zndustriale, Sweden’s Statsfiretag, and Britain’s Industrial Reorganisation Corporation had been studied by the government, but he refused to release the findings of these inquiries and did nothing to dispel criticism that the CDC was uninformed by instructive experiences in other western jurisdictions.

Although the evidence is inconclusive, it appears that the only parts of the federal bureaucracy with a significant hand in the development of the CDC were the Department of Finance, particularly the Capital Markets division, and the Justice Department. The exclusion of both ITW and DREE, and the fact that responsibility for the corporation was lodged with Finance, was consistent with the government’s insistence that the CDC was to be neither a guided instrument of industrial policy nor burdened with a regional development mandate. However, while the CDC was to be free of government direction it was considered to be part of an industrial policy. At the time Bill C-219 was introduced Benson issued a press release in which he stated: “Able and experienced entrepreneurs will direct the corporation’s operations to areas of critical importance in economic development - to high technology industry, to resource utilization, to northern-oriented companies and to industries where Canada has a special competitive advantage.” Clearly the government had expectations, admittedly general, regarding the economic activities in which the CDC would invest. This expression of confidence in the industrial development role of the corporation was not isolated, and was repeated in substance by the finance minister and other government spokes- persons on several occasions, both in the House of Commons and before public audiences. After allowing for a measure of bombast, the government’s expectations for the CDC, in terms of industrial policy, reduced to this: a) the corporation would achieve diversity in its holdings; and b) industrial activities would comprise a major part of CDC’S investments. As is demonstrated in the following section, the corporation has satisfied neither of these conditions.

While it would be insupportable to suggest that the CDC was intended to perform as a national champion after the French fashion, the corporation was intended to advance a long-term policy aim of the government. Stated briefly, the CDC was to make a contribution to the repatriation of economic decision-making power by fostering the development of Canadian decision-

5 This observation is based upon the record of committee proceedings. Refer to House of Commons Standing Committee on Finance, Trade and Economic Affairs, Minutes ofProceedings, for 4, 11, and 25 May, 1971.


STEPHEA BROOKS

makers within an industrial structure which would remain essentially un- changed. This was to occur in the deliberate absence of government control over carporate decision-making. Instead, the end would be a consequence of particular features of the institution being created. Within the organizational parameters set forth in the CDC Act, and given the intervening condition of government non-interference in the management of the corporation, the anticipated outcome was a contribution to the expansion of domestic control over corporate decision-making in Canada.

Evaluation Measured against the criteria of contributing to diversified industrial development in Canada, establishing the mixed-enterprise public company’ as an accepted medium of privatelpublic cooperation in economic activity, and providing income returns to the government, the CDC must be considered a failure on each count. The reason has mainly to do with the anomalous status of the corporation as neither clearly state enterprise nor clearly private enterprise. The CDC began life with the government as the sole shareholder, but with a statutory disclaimer of crown agency status, profuse assurances of non-intervention from the government, and an intention to confirm the “mixed” ownership aspect of the enterprise through a public offering of shares in the corporation at the earliest conceivable date. The commercial viability of the CDC, as expressed in the marketability of its shares, has from the beginning depended upon the corporation being, like Caesar’s wife, above suspicion. Consequently, the relationship between the government and CDC management developed immediately along the lines of corporate independence of the major (and at one time only) shareholder. This pattern of non-intervention, whereby the government systematically has refused to exercise an influence commensurate with its equity in the corporation, has been reinforced by the passage of time, the general disinterest of the government in CDC activities, and a business culture which has been unable to accommodate the concept of mixed enterprise as expressed in the CDC.

Considering first the corporation’s contribution to diversified industrial development in Canada, it is fair to say that the CDC has never outgrown the formative years during which it acquired Polymer (renamed Polysar), a 20 per cent interest in Petrosar, and a 30 per cent interest in TexasgulE8 The 6 Michael Graham has demonstrated that even a massively capitalized CDC would have been incapable of a significant contribution, in total dollar terms (and thereby ignoring the qualitative dimension), to the expansion of domestic control over corporate decision-making in Canada. See %I. Graham, Canada Det;eZopment Corporation. a study conducted for the Royal Commission on Corporate Concentration (1977). 7 The term “public company” is used here in its business law sense, as referring to a corporation which offers its shares for purchase by the public and which is traded on stock exchanges. 8 The CDC holds a further 40 per cent ownership in Petrosar through Polysar, for a combined interest of 60 per cent. Regarding Texasgulf, in June of 1981 the CDC sold its interest in this corporation to Societe Nationale Elf Aquitaine in exchange for SNEA’S 75 per cent interest in Aquitaine Company of Canada Ltd., and the Canadian mining assets of Texasgulf.

530 CANADIAN PL‘BLIC ADMINISTRATION


Texasgulf acquisition was crucial in that it provided the CDC with a large regular base of earnings which enabled the corporation to affirm its financial independence of the government. However, the overwhelming dominance of energy-related and mining investments in the corporation’s balance of assets has been reinforced over time. This is demonstrated by the following figures.

Total Assets by Industry Segment, December 31, 1982.

Oil and gas 2,918.4 Petrochemicals 2,271.8 30.2 Mining 1,415.3 18.8 Office Information products 689.5 Industrial automation 38.7 Life sciences 108.6 1.4 Venture and expansion capital 38.8 .5 Fisheries 24.6 . 3 CDC Corporate 20.2 . 3

Total 7,525.9 100.0

($ millions)

38.8 } 69. o } 87,

.5 11.6 9.2 1

Revenue Distribution ($ millions) (%I

Oil and gas 567.0 54.1 l4.O} 68.11 76, Pe trochem icals 2,168.2 Mining 322.1 8.0 Office Information products 636.2 15.9 Industrial automation 30.2 0 .8) 20.1

Interest and Life sciences 139.5 3.5

other income 148.1 3.7

Total 4,011.3 100.0

Contribution to Net Income

Oil and gas Petrochemicals

Office Information

Life sciences 3.9 Venture and expansion capital - Fisheries -. 7.1

($ millions)

- - 38.6 14.4\

(% of net income loss)

“”) 71.8 Mining - 37.3

products - 10.3 Industrial automation - 5.81 9.7

CDC Corporate - 16.2

Net Income -125.8


STEPHES BROOKS

The CDC’S asset picture is dominated by energy-related investments, which accounted for 42.1 per cent of the net income loss which the corporation incurred in 1982. Polysar sells to both the European and North hmerican markets, while Petrosar relies entirely upon the North American market. Consequently, their perfonnance and CDC’S earnings hinge npon market conditions for petrochemical products. Including lnining activities, the natural resource extraction and processing component of the corporation accounts for 87.8 per cent of total assets. By comparison, the manufacturing/ high technology segment of CDC activities, comprising office information products, industrial automation systems, life sciences and venture capital, constitutes 11.8 per cent of the corporation’s assets. In view of the preponderance of energy-related and mining activities, it must be questioned whether the corporation has made the contribution to diversified industrial development in Canada which was expected of it.

If there is nothing about the CIX’S balance of investment activities which distinguishes it from such other large industrial holding companies as Noranda Mines and Power Corporation, one might at least expect that the corporation’s shareholder population will differ from that of its wholly private enterprise counterparts. ‘This expectation is based upon the government’s argument that a Canada Development Corporation would constitute “people’s capitalism,” providing ordinary citizens with an opportunity to invest directly in Canada’s economic development. However, the government was thwarted by the opposition o f investment dealers to share marketing through the chartered banks. In consequence, the CDC’S first public offering of shares in the autumn of 1975 was handled entirely by investment dealers, thereby imposing the usual limitations on the range of persons likely to be aware of and disposed to purchase the share ofl‘ering. By contrast, the first public offering of shares in the British Columbia Resources Investment Corporation (BCRIC), in May and lune of 1979, was marketed through a range of financial institutions comprising the banks, trust companies, credit unions and investment dealerships. The distribution of sales in the BCKIC case demonstrates the crucial role of’ the more “democratic” intermediaries in providing access to a wider investing public:

($ millions) (%I Chartered banks 274.3 56.3 Credit unions 51.0 10.5 71.1 Trust companies 21.0 3.3 Investment dealers 111.0 28.9 Total 487.5 100.0

This figure of almost half a billion dollars represented direct investment by just under 170,000 Canadians of British Columbia residence. In comparison, the initial issue of CDC shares was purchased by approximately 20,000 Canadian investors.



In terms of such distributional characteristics of the CDC shareholding population as geographic location, annual income, investment holdings, and socio-economic status, the corporation’s shareholders were typical of that stratum of the population which invests directly in corporation stock. Most revealing was the investment holdings profile of CDC shareholders.

Size of Portfolio* Under $2,500 2,500- 5,000 5,000 - 10,000

10,000 - 15,000 15,000 - 20,000 20,000 - 30,000 30,000 - 50,000 Over $50,000 No reswnse

Number of Shareholders 412 392 530 416 340 407 521

1334 114

Percentage of Shareholders 9.5 9.0

12.2 9.6 7.8

30.7 -

Total 4466 100.0 *Excludes tangible property like real estate and businesses. Adapted from Dr. R. F.

Kelly, Shareholder Survey (Vancouver, 1976).

Clearly, the CDC did not succeed in attracting the savings of Canadians who typically would not be given to direct equity investment. In fact, 80 per cent of CDC shareholders were holders of common shares in other companies, with an equal proportion owning preferred shares of one or more corporations. This compared to a figure of under 10 per cent for the population as a whole. These features of the corporation’s shareholder population have persisted over time.

Because the CDC represents an organizational anomaly in the Canadian political economy, the corporation has from the beginning been concerned with how the public, and particularly the investment community, perceives the relationship between the CDC and the government. As Eckel and Vining demonstrate, there is an unmistakable correlation between the market value of CDC shares and perceptions regarding the likelihood of government intervention in the management of the corporation. lo Management’s recognition of this relationship has resulted in regular avowals of corporate autonomy, and periodic assurances &om the government (usually timed to coincide with a public share offering) that it will abstain from exercising its legitimate rights as the corporation’s largest shareholder. Notwithstanding the regularity of attempts to clarif>l the role of the CDC and its relationship, or non-relationship, to public policy, confusion has persisted. A survey of CDC shareholders showed that this uncertainty was not restricted to the general population.

9 This analysis draws upon the information compiled by Dr. R.F. Kelly, from a survey of shareholders which he carried out for the CDC in 1976. 10 C. Eckel and A. Vining, “Toward a Positive Theory of Joint Enterprise,” in W.T. Stanbury and F. Thompson, eds., Managing Public Enterprises (New York: Praeger, 1982), especially pp. 217-18.


STEPHEN BROOKS

Shareholders‘ Perceptions Concerning the CDC

Statqments concerning the CDC .+gee nor disagree Disagree The CDC is designed to I J U ~ back Canada from foreign 40.7 29.3 30.0 investors. The CDC is no different than any 16.7 23.2 60.1 other financial institution.

Adapted from Kelly, Shareholder Srircey.

Neither agree

Evidently, the CDC was not entirely successful in laying to rest the perception that i t was intended to be an instrument for the repatriation of economic decision-making. Only 30 per cent of the respondents disagreed with the suggestion that the CDC was intended to play a Canadianizing role, and fd ly 60 per cent of the surveyed shareholders considered that the corporation was somehow different from other financial institutions. At the same time a majority of respondents listed “Safe Investment” as either their first or second reason (from a list of nine alternative reasons) for investing in the CDC, a greater proportion than for any other investment rationale. The fact of widespread confidence in the soundness of the CDC as an investment, coincident with shareholder division on whether the CDC was intended to play a Canadianizing role, and with general agreement with the proposition that the CDC was somehow different from other financial institutions, is squared by consideration of two facts attendant upon the 1975 public share offering. First of all, the government’s public assurance of non-involvement in the management of the corporation featured prominently in the share marketing. Second, and probably of greater significance, were the generous terms of the equity issue itself. These included a competitive dividend yield, buy-back and bonus share provisions, and an instalment purchase plan. These conditions were sufficient to allay- any uncertainty regarding the relationship between the corporation and the government.

While current information 011 shareholders’ perceptions is not available, certain other indicators suggest that the tensions engendered by the CDC’S mixed enterprise form continue unresolved. The negative correlation between the public’s perception of increased government intervention in the CDC and the market value of the corporation’s stock, documented by Eckel and Vining, demonstrates the qualified character of the CDC’S acceptance by the investment community. This was made especially clear during late 1980 when rumours (denied by the government, but since confirmed by CDC management) circulated to the effect that the government wished to see the corporation invest in the financially ailing Massey-Ferguson Ltd. This was followed, in April and May of 1981, by an abortive attempt by the government to replace CDC chairman, Frederick Sellers, with Maurice Strong. As a result of investment community perceptions that the government intended to play a more active role in the direction of the CDC, the value of the corporation’s shares dropped 8 per cent during May 1981.

534 C4\ 4DI4\ PL BLIC 4DMIhlSTRATIOS


Judged a failure against the criteria of making a contribution to diversified industrial development in Canada and establishing the mixed-enterprise public company as an accepted medium of public/private cooperation in economic activity, there remains the test of the CDC as an actionnariat de Pe‘tat. On this count also the corporation has proven a failure, as the government has never received dividend income from its equity in the CDC. The government’s 48 per cent equity consists entirely of common shares, of which the government holds 86.6 per cent of all shares in this category. The 51.8 per cent of private equity is concentrated in the preferred share classes, which yield regular annual dividends. In the absence of dividend payments the government’s only means of receiving an income return from its investment is through divestiture. However, the currently depressed market value of CDC shares renders this option untenable. At the current (July 22, 1983) market value of $9.50 for CDC common shares, the government would receive a return of $292 million if it was able to find purchasers for all of the 30,711,990 common shares it holds. This must be considered against the fact of an initial government investment of $250 million, in 1971 dollars.

One additional aspect of this question must be considered. This involves the transfer in 1972 of Polymer Corporation Limited, previously a crown corporation, to the CDC in exchange for $72 million worth of common shares. Whether this represented the true market value of Polymer is moot, but it is worth noting that financial analysts were of the opinion that this was an unrealistically low transfer price. However, even if one assumes that the Canadian public received fair value in what amounted to the privatization of a crown corporation, there remains the fact of future income foregone through the transfer of Polymer (renamed Polysar), a commercially successful operation throughout most of its history. The present and future value of the corporation, as realizable through dividend payments and/or appreciation in the market valuation of Polysar’s operations, was lost to the general public (in exchange for $72 million of CDC shares which have never paid a dividend, and which have depreciated over time) and acquired by an incomparably smaller segment of the population which benefits through dividend payments from the contribution which Polysar makes to the CDC’S profitability.ll Understood from the standpoint of opportunity cost, the transfer of Polymer represented a loss to taxpayers, not less real for its difficulty of precise measurement.

The mixed enterprise as governing instrument

The failure of the CDC as a governing instrument= suggests a paradox which

11 The CDC’S consolidated loss of $125.8 million in 1982 represented the first annual loss in the corporation’s history. 12 A fuller theoretical treatment of the mixed enterprise as a governing instrument, ap- proached from a comparative perspective, is contained in the author’s unpublished paper entitled, “Mixed Enterprise” (1983).


STEPHEN BROOK5

would seem to prejudice the viability of the mixed-enterprise public company in Canada: viz., the likelihood of the state playing an active role in the affairs of the corporation is inversely related to the size of its equity holding. In other words, where the state possesses a controlling interest in a public company it will forego the assertion of control in order to reassure an investment community which associates government direction with unbusinesslike decision-making. Obviously, if future recourse to the private equity market is of little or no concern to i;t government with dirigiste designs, this hypothesis will not obtain.

Like the more common case of wholly state-owned enterprise, the range of factors contributing to the choice of the mixed-enterprise governing instrument is diverse. The foregoing detailed consideration of the CDC ought not to be allowed to obscure this fact. Indeed, the holding company organizational form is not typical of mixed enterprise in Canada, a more common class of mixed enterprise being subsidiary companies in which commercially oriented crown corporations hold equity. Excluding this latter category on the grounds that this does not involve deliberate selection by the state of the mixed-enterprise governing instrument in order to further a public policy end (rather, the considerations usually will be identical to those which inform an investment decision taken by a private sector corporation), an analytical inventory can be drawn up which covers the major instances of mixed enterprise in Canada. The first five categories apply equally well to the more general case of state enterprise, while the sixth category represents a use which is peculiar to mixed enterprise.

Mixed Enterprise: an Analytical Inventory Primary Objectice Examples 1. Sector building

2. Job maintenance

3. Community development

Suncor (vertically integrated petrochemical company: Ontario); Alberta Energy Company Massey-Ferguson (non-voting preferred shares, held by the federal government through the CDIC)* Caisse de depijt et placement (major equity investments held by this holding company: Quebec); Societe g6nerale de financement du Quebec (industrial investment company: Quebec) -relesat (satellite communications: Canada) Canada Development Corporation

4. Regulation/control 5. Inadequacies in domestic

private equity markets 6. Privatization British Columbia Resources Investment

Corporation *This category includes the wide variety of corporations in which the federal and provincial

governments take what is intended to be a short-term equity position, in order to maintain struggling companies and the jobs which would otherwise be lost.

Clearly, the list of examples provided above is not exhaustive. The intention is simply to suggest the flexibility of the mixed-enterprise organizational form through identification of the range of objectives which existing high-



profile mixed enterprises have been designed to serve. A fuller typology would have to address, inter aha, the crucial question of the degree of state participation in the direction of each corporation.

The Canada Development Investment Corporation

The origins of the CDIC cannot be considered apart from the inability of the government to exercise even a minimal level of control over the investment activities of the CDC. Whereas the state denied itself an active role in the management of the CDC from the inception of the corporation (a condition which was at least partly responsible for the categorical opposition registered by CDC management and private shareholders in the face of the government’s 1980-81 intervention attempts), and the corporation has never wavered from its private enterprise posture, the CDIC is beginning life along a very different public policy course which is bound to influence its future commercial performance. If the commercial success of the CDC was achieved, in part, at the cost of its failure as a governing instrument, the reverse is a likely prognosis for the CDIC. The new investment holding company is a crown corporation, 13 and therefore more amenable to government control than is the CDC (which, by statute, is not an agent of the crown). However, the early pattern of the CDIC’S commercial activities suggests a dismal financial future.

This discussion should be understood as a modest attempt to clear away some of the brush of ideology and ill-founded hyperbole which has charac- terized much of the early assessment of the fledgling corporation. To this end, the analysis will proceed through three stages: a review of the circumstances of CDIC’S creation; identification of its probable role; and a comparison with two alternative models for state holding companies, described as a political accountability type and industrial policy type, respectively.

CDIC: May 1982 to August 1983 The first reference to the CDIC was contained in the May 27, 1982, exchange of letters between Senator Jack Austin, Minister of State for Social Develop- ment, and Anthony Hampson, president of the CDC. Acknowledging the government’s intention to divest itself of its interest in the CDC, Austin stated that this would be accomplished through the vehicle of a new corporation, owned wholly by the government. The possibility of additional functions being assigned to the new holding company was foreseen, though their nature was left unspecified.

13 The fact that the government intends the CDIC to be a tractable governing instrument is evident from several sections of the proposed CDIC Act. In addition to the directive provision, s.22(1), the legislation contains a number of reporting and approval requirements in respect of such matters as, inter aha, borrowing and loan guarantees, capital investments and annual corporate plans.


STEPHES BROOKS

Further developments occurred in the autumn of 1982. Both Senator Austin and Maurice Strong, the newly appointed chairman of the CDIC, suggested that the new corporation could play a role in managing the government’s commercially oriented crown corporations. The possibility became an accomplished fact when in November the CDIC was assigned responsibility for the following assets and crown corporations:

- the government’s $125 million equity in Massey-Ferguson Limited - Canadair Limited (assets, $1,118 million: 1981) - de Havilland Aircrdt of Canada Limited (assets, $493 million: 1982) - Eldorado Nuclear Limited (assets, $876 million: 1982) - Teleglobe Canada (assets, S448 million: 1982)

Together with the CDIC’S 48 per cent interest in the CDC, the new corporation has been assigned the management of several billion dollars in assets which, broken down, comprise two money-losing crown corporations in the aircraft industry; the government’s non-voting interest in a producer of farm machinery which, in 1982, declared the second-largest corporate loss in Canadian history ($413 million); a crown corporation in the mining sector which, owing to weakness in the world market for uranium, incurred a small loss in 1982; controlling interest in one of Canada’s largest holding companies which, with a portfolio dominated by energy-related investments, experienced a loss of $125 million in 1982; and a highly profitable crown corporation in the telecommunications field. These holdings have two features in common: they are all commercially oriented operations, and they are all candidates for eventual privatization (whether partial or complete). Inter- estingly, all of the public enterprises assigned to the CDIC were targeted for privatization by the short-lived Clark government.

Aside from the fact that it is inheriting a number of monumentally unprofit- able companies, much of the adverse comment which CDIC has received at the hands of the business press can be attributed to the choice of personnel who have been assigned the direction of the corporation’s affairs. Both Jack Austin, the minister responsible for the CDIC, and Maurice Strong, chairman of the corporation, are perceived as being disposed toward more systematic government intervention in the economy. The CDIC’S president and CEO, Joel Bell, is associated with the development of the National Energy Program and the activities of PetroCanada, as well as involvement in the work of the Task Force on Foreign Direct Investment in Canada. While the choice of personnel cannot be dismissed as of no consequence, it is a desperately weak reed upon which to base suggestions that the CDIC is somehow analogous to PetroCanada, and that it is part of a policy to “NEP’’ the industrial sector. l4

14 This argument is put forward by Peter Foster, “Battle of the Sectors,“ in Saturday Night; (March. 1983L and Alexander Ross, “Strong Medicine,” in Cunudiun Business; (April, 1983). While his rnain concern is with the alleged subversion of Parliament, suggestions of a similar concern are found in Michael Valpy’s five-part series on the CIXC, which appeared in the Globe cind Muil during February 1983.


Finally, the months subsequent to the tabling of Bill C-158 (the CDIC Act) in the House of Commons on May 25, 1983, have been remarkable for the preoccupation of CDIC principals with the future of the corporation’s aerospace holdings. Senator Austin and CDIC president Joel Bell appeared before the House of Commons Standing Committee on Finance, Trade and Economic AfFairs on two occasions in June, and once before the Committee on Public Accounts during the same month; each time in relation to the financial requirements and future operations of Canadair and de Havilland. At the same time, the CDIC has undertaken a review of the Canadian aerospace industry and world markets, ostensibly to provide guidance in the restructuring of production by the corporation’s aerospace holdings. Given the sunk costs represented by both Canadair‘s Challenger program and de Havilland’s STOL commuter aircraft program, the CDIC’S flexibility in ration- alizing the operations of these companies remains an open question.

The probable role of the CDIC In speculating upon the CDIC’S probable role, one is not left to rely exclusively upon the public statements of key decision-makers and the terms of the corporation’s enabling legislation. The developments described in the previous section provide an additional guide to the government‘s intentions. The portfolio of holdings which has been assigned to the corporation is particularly instructive, both from the standpoint of what has been included and what has been excluded. Moreover, the circumstances of the CDIC’s birth, and the fact that the government is proceeding along another front (notably, Bill C-153) in respect of the accountability of crown corporations, are suggestive of the role which the holding company is intended to play.

The CDIC was formed for the initial limited purpose of facilitating the eventual divestiture of the government’s equity in the CDC. In agreeing to the creation of the new corporation (the CDIC was, in legal fact, born as a subsidiary of the CDC then transferred to the government), the government abandoned any last hope that a madus vivendi could be arranged with the management ofthe CDC, enabling the government to influence its investment policy while not compromising the private enterprise orientation of the firm. The privatization dimension of the CDIC has been reinforced by the character of the assets which have been assigned to the corporation. Conspicuously absent are firms of a public utility or public work character, and corporations with a protected market position. Included .in the CDIC group are commercially oriented corporations which either have been considered previously for privatization or indeed have operated as private sector corporations. The current marketability of CDIC assets varies widely, from Teleglobe and Eldorado at the investor-attractive end to Canadair, de Havilland and the government’s equity in Massey-Ferguson at the opposite end of the spectrum.

5.39 ADMINISTRATION PUBLJQUE DU CANADA

STEPHEN BROOKS

Public statements by Senator Austin and Messrs. Strong and Bell15 suggest that the creation of the CDIC was inspired by three factors: the immediate need to resolve the question of government’s relationship to the CDC: a recognition of the limitations of the government department in effectively managing commercially oriented assets (i.e., ensuring a competitive return on invested capital); and the fact that the government response to a corporation’s short-term difficulty (frequently a need for additional equity capital) often has involved the government in a long-term commitment, due to the unsystematic treatment of state investment activities. In addressing this set of problems, the CDIC is intended to perform two main functions: first, the corporation will operate as a central forum for review of the government’s commercial investments, and the consideration of trade- offs between alternative opportunities for the deployment of this capital; and second, the CDIC will institutionalize the government’s role as equity banker for ailing large corporations,16 and thereby replace ad hoc responses to corporate crises with a systematic regime intended to avoid unnecessary long-term commitments of capital. Various additional roles of a subsidiary sort have been suggested for the CDIC. These include acting as a catalyst for industrial reorganization, and providing in-house investment advice to government departments with commercially oriented assets.

Notwithstanding the short operating history of the CDIC, a confident appraisal of the corporation’s Commercial prospects is possible. Indeed, in an informal audit of the CDIC’S financial statements for the period from May 26, 1982 to March 31, 1983, the accounting firm of Peat, Marwick, Mitchell & Company remarked upon the corporation’s indebtedness and the operating losses of its subsidiaries, concluding that, “This raises questions about the corporation’s ability to continue as a going concern.” In view of the holdings assigned by the government to the CDIC, this assessment is not surprising. And given the difficulties faced by both Canadair and de Havilland, improvement in the short term is unlikely. CDIC president, Joel Bell, has suggested that preferential state procurement policies represent a necessary, if not sufficient, condition for the revitalization of the crown corporation’s aerospace companies. Currently (1982 figures), 94 per cent and 87 per cent of the total sales of de Havilland and Canadair, respectively, are accounted for through exports. Preferential government procurement policies would reduce the export-dependence of these companies, but would contribute nothing toward their genuine commercial rehabilitation. The protected

15 See, especially, Maurice Strong, “Government-Private Sector Relations in Canada - The Federal Government as Investor in Business,” an address delivered at York University on 23 March, 1983. 16 Presumably, other forms of assistance are available for smaller enterprises, particularly under the Industrial and Regional Development Program administered by DRIE.

540 C.4NADIAN P U B L I C ADMINISTRATION


arrangement of production by the state for purchase by the state would not prepare these companies for eventual privatization, an expressed objective of the CDIC.

In summary, the initial portfolio of assets assigned to the new crown corporation, together with the repeated emphasis on privatization and the CDIC as a hture source of equity capital for private sector firms in temporary distress, suggest that this fledgling holding company is intended as a vehicle for the competitive rehabilitation of firms experiencing financing difficulties. No doubt time will prove this an over-simplified characterization of the CDIC. However, comparison with two alternative models of the state holding company supports this appraisal.

Three models of the state holding company

The following typology is by no means exhaustive. Certain variations have been subsumed under one or another theme for economy of analysis. Moreover, the respective categories do not possess sharply defined boundaries. Instances can be cited of state holding companies which bear certain features of each of the three ideal types identified below. As with any analytical typology, these shortcomings must be weighed against the ability of the typology to generate insights into particular cases.

~~ ~ ~~~~ ~~ ~

State Holding Companies

TYPE I: Political TYPE zr: Convalies- TYPE 111: Industrial accountability model cenziario model* policy model

Main - To facilitate gov’t - The competitive - To shape the direction purpose control of public rehabilitation of corn- and volume of economic

enterprise mercially oriented activity and, generally, enterprises, whether operate as a major and public or private, deliberate instrument in and the return of industrial development. these corporations Various additional objec- to the private sector. tives may be assigned to

the holding company, such as the promotion of regional development or national leadership in labourlmanagement relations.


STEPHEN BROOKS

State Holding Companies (cont.)

Veans - h i organizational - Equity investment structure with clear in large enterprises lines of accountability unable to acquire running from the adequate financing cabinet, through the from private capital holding company to markets. Privatiza- the management of tion, complete or public enterprises. The partial, is the anti- review and approval of cipated outcome corporation budgets is where the com- a main tool used in mercial viability of a holding publicenterprise corporation has been politically accountable. restored. .ho ther device is cross- membership, linking the cabinet. the board of directors of the

- The investment activities of state enterprise, embracing both corporations owned wholly by the gov’t arid those in which it is the dominant shareholder, are informed by an industrial strategy. This strategy may assume a number offorms, ranging from a “national plan” to an economic development strategy developed within the holding company.

holding company, and the discrete operating companies.

Exaniples - Crown Inwstnients - CDIC; - IRI, 1950s-middle 1960s; Corporation (Sask. ) IRI, 1933-37 (It&) Statsforetag (Sweden)

* Xlussolini described Italy’s Istitrito per la Recostruzione Induytriale ( [HI) as a convaliescenziario: a clinic for firms temporarily iii trochle

As a type 11 state holding company, the CDIC shares with the type 111 model an emphasis upon commercial considerations; specifically, the com- petitiveness of national industry. This distinguishes both type 11 and type III state holding companies from the political accountability model, the latter being concerned primarily with effective political control over public enterprise. Although the distinction is not neat, a type I state holding company is chiefly an instrument of administrative policy, while type 11 and type 111 governing instruments fall more squarely under the heading of economic policy. For this reason the inclusiveness of the type I state holding company is greatest, embracing within its accountability regime the full range of public enterprises, and not simply those having a commercial orientation.

In view of these differences, the most appropriate comparison is between the CDIC as a type 11 state holding company and type 111 cases. Measured against the more ambitious scope of the industrial policy model, the CDIC must be considered a comparatively circumscribed intervention by the state into the business life of the nation. In the absence of a grand industrial strategy within which the corporation is to carry out its investment activities, and given the insistence of CDIC principals upon the provisional nature of the corporation’s projected participation in equity financing, the CDIC does

5.12 CANADl.4N PVBLIC 4DMINISTRATION


not represent a challenge to the view that direct participation by the state in business activity is of dubious legitimacy. Of course this may change with time, and the CDIC’S early pattern of investment and divestiture decisions will prove crucial in determining the role which it eventually comes to play.

In suggesting that the CDIC will evolve into a corporate leviathan, encroaching upon private decision-making in the industrial sector of the economy, the critics of the fledgling corporation ignore a more probable scenario. This involves the bail-out trap whereby the political pressures to maintain employment and support economic activity in comparatively depressed regions of the country supersede commercial considerations in determining the corporation’s investment policy. Consequently, instead of operating as a convaliescenziarw , meeting the temporary equity needs of firms which are capable of eventual self-sufficiency, the holding company becomes burdened with long-term commitments to chronic money losers. The case of Italy’s Gestioni e Partecipazione Industriab (GEPI) is instructive. Considered a financial agency rather than a state holding company, GEPI was established in 1971 for the ostensible purpose of restoring temporarily distressed firms to financial self-s&ciency and, in doing so, to relieve the pressure for the incorporation of these firms into the public sector. According to Romano Prodi, currently director of IN, the original intention was soon subverted and GEPI became for hundreds of firms an escape from corporate bankruptcy and a haven from the competitive pressures of the market. l7 This scenario will not be realized in respect of the CDIC if the corporation limits its activities to the provisional (i. e., avoiding open-ended commitments) equity banker role identified by the government and CDIC principals.

17 Harvard University Press, 1974), pp. 49-50.

Romano Prodi, “Italy,” in R. Vernon, ed., Big Business and the State (Cambridge, Mass:


The state as entrepreneur: from CDC to CDIC

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